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

ZTO Express Cayman  / Equity Capital Markets

We've been bearish on <a href="https://www.smartkarma.com/entities/zto-express" target="_blank" data-smartkarma-citation="entities:23628:1" rel="noopener">ZTO Express (ZTO US)</a> for some time now. In addition to accounting issues the company has been unable to explain, we have long expected heavy downward pressure on profit margins and Operating Cash flow, as seen clearly in the company's weak Q220 results. We appreciate the rationale for seeking a second listing in Hong Kong, though we admit we are surprised by the relatively large scale of the issue, rumored to be around US$2 bn (implying about 8% dilution). Given the continued deterioration of conditions in China's express sector, ZTO may be opportunistically raising a large sum on the expectation that doing so later will prove difficult.In Q220, ZTO posted parcel volume growth of 48% -- well ahead of market growth -- yet EPS grew by only 6%. We believe such poor "conversion" will remain the norm for ZTO in the medium term, and we do not believe such a performance warrants a PER multiple of over 34 times. Retain SELL.

We've been bearish on ZTO Express (ZTO US) for some time now. In addition to accounting issues the company has been unable to explain, we have long expected heavy downward pressure on profit margins and Operating Cash flow, as seen clearly in the company's weak Q220 results. We appreciate the rationale for seeking a second listing in Hong Kong, though we admit we are surprised by the relatively large scale of the issue, rumored to be around US$2 bn (implying about 8% dilution). Given the continued deterioration of conditions in China's express sector, ZTO may be opportunistically raising a large sum on the expectation that doing so later will prove difficult.In Q220, ZTO posted parcel volume growth of 48% -- well ahead of market growth -- yet EPS grew by only 6%. We believe such poor "conversion" will remain the norm for ZTO in the medium term, and we do not believe such a performance warrants a PER multiple of over 34 times. Retain SELL.

Thoughts on ZTO Express' HK Listing: Expensive & Struggling to Maintain Margins & Cash Flow

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.

<a href="https://www.smartkarma.com/entities/zto-express" target="_blank" data-smartkarma-citation="entities:23628:1" rel="noopener">ZTO Express (ZTO US)</a> is the leading express delivery company in China with a 19.1% market share of China’s express delivery service market as measured by total parcel volume, according to iResearch. ZTO Express passed its Hong Kong listing committee hearing last week and could raise up to $2 billion through a secondary listing, according to press reports. <div class="content-highlight">ZTO joins the wave of Hong Kong secondary listings set to hit the screens in the coming months. We think that ZTO is an attractive equity story as it is a best-in-class logistics player which can capitalize on the opportunities presented by China’s relatively fragmented logistics industry, in our view. </div>

ZTO Express (ZTO US) is the leading express delivery company in China with a 19.1% market share of China’s express delivery service market as measured by total parcel volume, according to iResearch. ZTO Express passed its Hong Kong listing committee hearing last week and could raise up to $2 billion through a secondary listing, according to press reports. ZTO joins the wave of Hong Kong secondary listings set to hit the screens in the coming months. We think that ZTO is an attractive equity story as it is a best-in-class logistics player which can capitalize on the opportunities presented by China’s relatively fragmented logistics industry, in our view. 

ZTO Express Secondary Listing: Home Delivery

Equity Bottom-Up

Q2 results for China's six listed express companies are finally in, and while most companies continued to report depressed profitability, outcomes varied significantly. Several firms pursued volume growth aggressively in the period, sacrificing pricing in order to maximize the number of parcels flowing through their networks; others appeared to do just the opposite. In the Q2 numbers, there is little evidence either approach actually worked consistently well. 
Looking at the volume versus pricing 'tradeoff' over the last two years, there is also little evidence that using pricing to boost volumes actually increases profitability. Indeed, most of the six express companies we track reported Q220 gross profits at or below Q218 levels, despite the companies more than doubling parcel volumes during the period. 
In our view, most Chinese express companies are 'price takers' that offer commodity-like services which are hard to differentiate from what their peers offer. In the long-run, we believe attempts to control pricing by pursuing only select cargoes are unlikely to succeed, and that companies should focus almost purely on securing greater volume and beating down unit costs. Alas, even this approach is likely to result in significantly lower margins over time, in our view.
In this note we review Q220 results, then look back farther to see individual company performance in terms of volume growth, pricing change, and change in gross profit. We also note growing CapEx demands and show how each company's shares have performed so far in 2020. In the medium-term, we expect profitability and cash flow at most express companies to continue to suffer. 
Under the scenario we describe in this note, <a href="https://www.smartkarma.com/entities/maanshan-dingtai-rare-a" target="_blank" data-smartkarma-citation="entities:4128:1" rel="noopener">S.F. Holding (002352 CH)</a> continues to stand out. SF's time-definite products and its offerings in cold-chain, international, and local on-demand express truly differentiate it from the other five listed express companies. We believe SF can continue to increase its share of express sector profits and retain our BUY rating.

Q2 results for China's six listed express companies are finally in, and while most companies continued to report depressed profitability, outcomes varied significantly. Several firms pursued volume growth aggressively in the period, sacrificing pricing in order to maximize the number of parcels flowing through their networks; others appeared to do just the opposite. In the Q2 numbers, there is little evidence either approach actually worked consistently well. 
Looking at the volume versus pricing 'tradeoff' over the last two years, there is also little evidence that using pricing to boost volumes actually increases profitability. Indeed, most of the six express companies we track reported Q220 gross profits at or below Q218 levels, despite the companies more than doubling parcel volumes during the period. 
In our view, most Chinese express companies are 'price takers' that offer commodity-like services which are hard to differentiate from what their peers offer. In the long-run, we believe attempts to control pricing by pursuing only select cargoes are unlikely to succeed, and that companies should focus almost purely on securing greater volume and beating down unit costs. Alas, even this approach is likely to result in significantly lower margins over time, in our view.
In this note we review Q220 results, then look back farther to see individual company performance in terms of volume growth, pricing change, and change in gross profit. We also note growing CapEx demands and show how each company's shares have performed so far in 2020. In the medium-term, we expect profitability and cash flow at most express companies to continue to suffer. 
Under the scenario we describe in this note, S.F. Holding (002352 CH) continues to stand out. SF's time-definite products and its offerings in cold-chain, international, and local on-demand express truly differentiate it from the other five listed express companies. We believe SF can continue to increase its share of express sector profits and retain our BUY rating. 

A Price Vs. Volume Tradeoff? Not For Firms Offering Commodity-Like Chinese Express Services

Event-Driven

<a href="https://www.smartkarma.com/entities/alibaba-group-holding-ltd" target="_blank" data-smartkarma-citation="entities:787:1" rel="noopener">Alibaba Group (BABA US)</a> and <a href="https://www.smartkarma.com/entities/yto-express" target="_blank" data-smartkarma-citation="entities:20319:1" rel="noopener">YTO Express (600233 CH)</a> announced the former will increase its stake in the latter, from around 10.5% to 22.5%. BABA will purchase shares from YTO's co-founders, who will retain a controlling stake in the express company.
Although YTO's Q2 earnings results were slightly better than we expected, core margins remain depressed, and we do not believe the company's current level of profitability can sustain its medium-term investment plans. 
YTO has performed well over the past week or so on surprisingly firm Q2 results and it rose another 10% on the latest news regarding investment from BABA. However, given ongoing pressure on profitability, and the performance of rival <a href="https://www.smartkarma.com/entities/zhejiang-idc-fluid-control-co-ltd" target="_blank" data-smartkarma-citation="entities:18695:1" rel="noopener">Sto Express (002468 CH)</a> after it announced increased investment by BABA in early 2019, we would take advantage of recent strength to SHORT YTO. Within China's express segment, we continue to favor the fundamentals of <a href="https://www.smartkarma.com/entities/maanshan-dingtai-rare-a" target="_blank" data-smartkarma-citation="entities:4128:1" rel="noopener">S.F. Holding (002352 CH)</a>; a LONG SF Holding / SHORT YTO pair makes sense to us here.

Alibaba Group (BABA US) and YTO Express (600233 CH) announced the former will increase its stake in the latter, from around 10.5% to 22.5%. BABA will purchase shares from YTO's co-founders, who will retain a controlling stake in the express company.
Although YTO's Q2 earnings results were slightly better than we expected, core margins remain depressed, and we do not believe the company's current level of profitability can sustain its medium-term investment plans. 
YTO has performed well over the past week or so on surprisingly firm Q2 results and it rose another 10% on the latest news regarding investment from BABA. However, given ongoing pressure on profitability, and the performance of rival Sto Express (002468 CH) after it announced increased investment by BABA in early 2019, we would take advantage of recent strength to SHORT YTO. Within China's express segment, we continue to favor the fundamentals of S.F. Holding (002352 CH); a LONG SF Holding / SHORT YTO pair makes sense to us here.

Increased Investment from Alibaba a Blessing for YTO Express? Revisit STO Express & Think Again...

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/154/486/original/BANNER-LOGISTICS.png?1598199804" class="editor-image img-responsive" data-smartkarma-image-id="154486"></figure>
Headline express parcel volume growth remained firm in July, but the pace of growth moderated compared to May-June. Flooding in some regions may have contributed to the slowdown. 
On all the metrics we follow, most Chinese express companies continue to experience dramatic declines in pricing, which are hurting top-line growth and, of course, profitability. 
Disappointing Q2 results from <a href="https://www.smartkarma.com/entities/zto-express" target="_blank" data-smartkarma-citation="entities:23628:1" rel="noopener">ZTO Express (ZTO US)</a> and <a href="https://www.smartkarma.com/entities/best-inc" target="_blank" data-smartkarma-citation="entities:25494:1" rel="noopener">BEST Inc (BEST US)</a> show the stark choice companies face between capturing volume share and holding onto margins. Under current conditions, neither approach is likely to satisfy investors. 
Conclusion: within Chiina's express delivery sector, we continue to favor SF Holding. We expect growth and profitability of the rest of the sector to continue eroding in the medium-term.


Headline express parcel volume growth remained firm in July, but the pace of growth moderated compared to May-June. Flooding in some regions may have contributed to the slowdown. 
On all the metrics we follow, most Chinese express companies continue to experience dramatic declines in pricing, which are hurting top-line growth and, of course, profitability. 
Disappointing Q2 results from ZTO Express (ZTO US) and BEST Inc (BEST US) show the stark choice companies face between capturing volume share and holding onto margins. Under current conditions, neither approach is likely to satisfy investors. 
Conclusion: within Chiina's express delivery sector, we continue to favor SF Holding. We expect growth and profitability of the rest of the sector to continue eroding in the medium-term. 

TRACKING TRAFFIC/Chinese Express: July Growth Slows | Q2 Results Show Margin Vs Volume Tradeoff

China

Yunda Holding Co Ltd operates as a holding company. The Company, through its subsidiaries, provides industrial investment, enterprise management, business consulting, car rental, technical development, information technology, and advertising services. Yunda Holding serves customers in China.

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Yunda Holding (002120 CH)

Thoughts on ZTO Express' HK Listing: Expensive & Struggling to Maintain Margins & Cash Flow

We've been bearish on ZTO Express (ZTO US) for some time now. Beyond some accout

Tracking Traffic

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Tracking Traffic

TRACKING TRAFFIC/Chinese Express: July Growth Slows | Q2 Results Show Margin Vs Volume Tradeoff

Headline express parcel volume growth remained firm in July, but the pace of growth moderated compared to May-June. Flooding in some regions may...

Tracking Traffic

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