Asian Equities Analyst, Logistics & Transport, Tracking Traffic

Daniel Hellberg

Asian Equities Analyst, Logistics & Transport

Tracking Traffic

Focusing on Asian logistics, transportation, and travel companies

Equity Capital Markets

J&T Global Express  / Equity Capital Markets

<ul>
<li>In this insight, we examine <a href="https://www.smartkarma.com/entities/j-t-global-express-co-ltd" target="_blank" data-smartkarma-citation="entities:36819:1" rel="noopener">J&amp;T Global Express (1936374D CH)</a>'s operation in SE Asia, where it's the region's dominant player, with market share of 22.5% by volume </li>
<li>We profile SE Asian demand and supply and compare these to the development of China's express industry, acknowledging the key role <a href="https://www.smartkarma.com/entities/alibaba-group-holding-ltd" target="_blank" data-smartkarma-citation="entities:787:1" rel="noopener">Alibaba (ADR) (BABA US)</a> has played there</li>
<li>We also present a framework for estimating the value of J&amp;T's SE Asian operation by identifying the most appropriate comps and EV valuation multiples</li>
</ul>


In this insight, we examine J&amp;T Global Express (1936374D CH)'s operation in SE Asia, where it's the region's dominant player, with market share of 22.5% by volume 
We profile SE Asian demand and supply and compare these to the development of China's express industry, acknowledging the key role Alibaba (ADR) (BABA US) has played there
We also present a framework for estimating the value of J&amp;T's SE Asian operation by identifying the most appropriate comps and EV valuation multiples


J&T Global Express Pre-IPO, Part 2: SE Asia Operation | Demand, Supply Profiles | Valuation Approach

Independent and original Asian investment research

Aletheia Capital

Aletheia Capital (HK) Ltd. (previously known as Asianomics) combines the extensive knowledge of its experienced team with technology and regulatory changes to disrupt Global Markets business in Asia. The firm is completely independent with no conflicts of interest either on Investment Banking advisory or Capital Markets execution.

Equity Bottom-Up

<h2>Growth of low end driven by Pinduoduo</h2>
<p>The growth of <a href="https://www.smartkarma.com/entities/pinduoduo-inc" target="_blank" data-smartkarma-citation="entities:27250:1" rel="noopener">Pinduoduo (PDD US)</a> has spurred growth in China’s express market over the last two years, accounting for 60% or more of incremental growth in parcel volume in 2018. PDD’s emergence has boosted parcel volume growth, but this gift has come at a price: to win business from the merchants operating on PDD’s platform, express companies must offer rock-bottom pricing.</p>
<h2>Volume growth a nice gift, but it comes with a price</h2>
<p>PDD’s emergence offers strong volume growth, accompanied by downward pressure on pricing and margins. To combat these pressures, express companies must aggressively pursue parcel volume share in order to reduce unit costs (and thereby limit margin erosion). With most small express players squeezed out, we believe price competition among the remaining express firms is intensifying, with average parcel pricing down by 12-16% YoY in recent months.</p>
<h2>At high end of express &amp; logistics, less competition</h2>
<p>Away from intensifying competition at the low-end of the express sector, the high-end of China’s express segment features pockets of growth with muted competition. In time-definite (i.e., ‘overnight’) express, international express, supply chain management, and cold-chain logistics, providers tend to compete based on service levels, and their customers tend to be less price-sensitive than those at the low-end of the market. Underlying demand for these services is powered by a gradual ‘consumption upgrade’, helping merchants move high-value goods faster and more reliably compared to mainstream express products. We believe these segments offer shelter from the price competition that has emerged at the low-end of the express sector.</p>
<h2>Express market is bifurcating</h2>
<p>We see two distinct segments developing within express. At the low end, most of the listed express companies are aggressively pursuing volume share gains in order to reduce costs so they can profitably handle the low-priced parcels that are driving sector growth. Meanwhile, at the high end, SF Holding is successfully courting customers who value speed and reliability ahead of low prices. We expect profitability in this latter segment to remain fairly stable, while at the low end we expect profitability to continue eroding.</p>
<h2>Low-end pressure adds to rising capex demand, sliding returns</h2>
<p>The development of a bifurcated market comes at the same time most Chinese express companies are already facing pressures on cash flow and profitability. We believe most of the listed express companies are increasing capital expenditures in order to expand ‘last mile’ service and to build out needed infrastructure in smaller cities and rural areas. We suspect initial returns on these types of investments will be low, compounding downward pressure on margins related to PDD’s rise.</p>
<h2>Focus on high end should produce better results going forward</h2>
<p>Strong downward pressures on margins will make it increasingly difficult for most express companies to convert strong top-line growth into attractive earnings growth. In the medium-term, we believe companies with limited exposure to low-end parcel volumes are more likely to generate attractive strongest earnings growth. </p>

Growth of low end driven by Pinduoduo
The growth of Pinduoduo (PDD US) has spurred growth in China’s express market over the last two years, accounting for 60% or more of incremental growth in parcel volume in 2018. PDD’s emergence has boosted parcel volume growth, but this gift has come at a price: to win business from the merchants operating on PDD’s platform, express companies must offer rock-bottom pricing.
Volume growth a nice gift, but it comes with a price
PDD’s emergence offers strong volume growth, accompanied by downward pressure on pricing and margins. To combat these pressures, express companies must aggressively pursue parcel volume share in order to reduce unit costs (and thereby limit margin erosion). With most small express players squeezed out, we believe price competition among the remaining express firms is intensifying, with average parcel pricing down by 12-16% YoY in recent months.
At high end of express &amp; logistics, less competition
Away from intensifying competition at the low-end of the express sector, the high-end of China’s express segment features pockets of growth with muted competition. In time-definite (i.e., ‘overnight’) express, international express, supply chain management, and cold-chain logistics, providers tend to compete based on service levels, and their customers tend to be less price-sensitive than those at the low-end of the market. Underlying demand for these services is powered by a gradual ‘consumption upgrade’, helping merchants move high-value goods faster and more reliably compared to mainstream express products. We believe these segments offer shelter from the price competition that has emerged at the low-end of the express sector.
Express market is bifurcating
We see two distinct segments developing within express. At the low end, most of the listed express companies are aggressively pursuing volume share gains in order to reduce costs so they can profitably handle the low-priced parcels that are driving sector growth. Meanwhile, at the high end, SF Holding is successfully courting customers who value speed and reliability ahead of low prices. We expect profitability in this latter segment to remain fairly stable, while at the low end we expect profitability to continue eroding.
Low-end pressure adds to rising capex demand, sliding returns
The development of a bifurcated market comes at the same time most Chinese express companies are already facing pressures on cash flow and profitability. We believe most of the listed express companies are increasing capital expenditures in order to expand ‘last mile’ service and to build out needed infrastructure in smaller cities and rural areas. We suspect initial returns on these types of investments will be low, compounding downward pressure on margins related to PDD’s rise.
Focus on high end should produce better results going forward
Strong downward pressures on margins will make it increasingly difficult for most express companies to convert strong top-line growth into attractive earnings growth. In the medium-term, we believe companies with limited exposure to low-end parcel volumes are more likely to generate attractive strongest earnings growth. 

Bifurcated Chinese Express Market Developing

Thematic (Sector/Industry)

<ul>
<li>Update on the US postage fraud case we reported on earlier: it's far more expansive than previously reported, and last week the judge ordered that the trial begin in August</li>
<li>A new report from the US Congress attacks Temu, SHEIN on two fronts: Xinjiang-made goods and <em>de minimus</em> imports; tighter enforcement or new legislation could soon follow</li>
<li>It's unclear how the postage fraud case and growing Congressional concerns will play out; worst-case, both could dramatically undermine the direct-to-US consumer business model</li>
</ul>


Update on the US postage fraud case we reported on earlier: it's far more expansive than previously reported, and last week the judge ordered that the trial begin in August
A new report from the US Congress attacks Temu, SHEIN on two fronts: Xinjiang-made goods and de minimus imports; tighter enforcement or new legislation could soon follow
It's unclear how the postage fraud case and growing Congressional concerns will play out; worst-case, both could dramatically undermine the direct-to-US consumer business model


New Developments in Postage Fraud Case and US Congress Could Create Big Obstacles for Temu, SHEIN

<ul>
<li>ZTO Express reported another set of weak results after the US close on November 19</li>
<li>Although Q3 unit prices rose slightly, unit costs increased by much more, crushing margins</li>
<li>On both sides of the price-volume tradeoff, ZTO continues to lose profitability | AVOID</li>
</ul>


ZTO Express reported another set of weak results after the US close on November 19
Although Q3 unit prices rose slightly, unit costs increased by much more, crushing margins
On both sides of the price-volume tradeoff, ZTO continues to lose profitability | AVOID


ZTO Express Q325 Results | Revenue, ASPs Both Up Y/Y | But Earnings, Margins Both Down | AVOID

IPOs and Catalysts/Events, Global Equity Research Ltd

Arun George

IPOs and Catalysts/Events

Uncompromised, Independent, Conflict-Free Research

Global Equity Research Ltd

Global Equity Research was started in 2017 by a group of experienced research professionals. It was founded on a passionate belief in the importance and the need for uncompromised, independent, conflict-free research. We aim to provide differentiated and actionable primary and bottom up fundamental research.

Event-Driven

<ul>
<li>
<a href="https://www.smartkarma.com/entities/ane-cayman-inc" target="_blank" data-smartkarma-citation="entities:35025:1" rel="noopener">ANE Cayman Inc (9956 HK)</a> is on a halt “<em>pending the release of an announcement pursuant to the Code on Takeovers and Mergers which contains inside information of the Company.</em>” </li>
<li>I expect the halt is related to a potential privatisation bid from either a trade buyer, such as one of the Tongda operators, or an MBO sponsored by Centurium Capital.</li>
<li>I use several methods to triangulate the likely offer price, which suggests a range of HK$11.34-11.80 per share, with an average of HK$11.55, a 14% premium to the last close.</li>
</ul>



ANE Cayman Inc (9956 HK) is on a halt “pending the release of an announcement pursuant to the Code on Takeovers and Mergers which contains inside information of the Company.” 
I expect the halt is related to a potential privatisation bid from either a trade buyer, such as one of the Tongda operators, or an MBO sponsored by Centurium Capital.
I use several methods to triangulate the likely offer price, which suggests a range of HK$11.34-11.80 per share, with an average of HK$11.55, a 14% premium to the last close.


ANE Cayman (9956 HK): Trade Buyer or Centurium Capital to Launch a Privatisation Offer?

China

STO Express Co Ltd. develops, manufactures and markets valves, pipe fittings and plumbing equipment. The Company's business encompasses the    development, manufacturing, sales and servicing of plumbing equipment, valves,  pipe fittings, metal construction materials, home automation, environmental protection and energy control systems.

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STO Express (002468 CH)

J&T Global Express Pre-IPO, Part 2: SE Asia Operation | Demand, Supply Profiles | Valuation Approach

We're pulling this insight out of the archives in light of J&T's updated filing and its decision to begin pushing forward with its IPO in Hong Kong...

Tracking Traffic

Bifurcated Chinese Express Market Developing

We will write more about SF Holding soon as the company prepares to seek a secondary listing in Hong Kong. But we believe some of the themes we...

Daniel Hellberg

New Developments in Postage Fraud Case and US Congress Could Create Big Obstacles for Temu, SHEIN

We offer an update on a fascinating criminal case set to go to trial next month, plus we outline big risks posed by criticisms of Temu and SHEIN by...

Tracking Traffic

ZTO Express Q325 Results | Revenue, ASPs Both Up Y/Y | But Earnings, Margins Both Down | AVOID

ZTO reported another weak set of results on Wednesday, as margins collapsed in Q3 despite modest pricing improvement. Oh, and management cut volume...

Tracking Traffic

ANE Cayman (9956 HK): Trade Buyer or Centurium Capital to Launch a Privatisation Offer?

On 17 September, the Board received a conditional privatisation proposal from Centurium Capital and Temasek. No price was disclosed. Nearly a month...

Arun George

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