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 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...

Overseas Chinese Equities, Aequitas Research

Ming Lu

Overseas Chinese Equities

IPOs and Placements coverage across Asia Pacific

Aequitas Research

We cover all listing across the Asia Pacific along with follow-up placements. As of Dec 2020, our team had covered 539 IPOs with a hit rate of 73.5% and 685 placements with a hit rate of 66.8%.

We combine fundamental bottom-up views with our proprietary quantitative framework to provide a holistic coverage across new listings and placements. Our coverage includes pre-IPO notes before the deal is launched, follow-up analysis once the deal is live and post-listing trading analysis as well.

<ul class="">
<li>PDD’s stock price plunged as the growth rate of its operating data slowed down in 2Q20.</li>
<li>However, the financial performance improved for both top line and bottom line.</li>
<li>We believe PDD’s expansion strategy does not work in the weak economy.</li>
<li>The recent trials of strategy changes are not successful.</li>
</ul>


PDD’s stock price plunged as the growth rate of its operating data slowed down in 2Q20.
However, the financial performance improved for both top line and bottom line.
We believe PDD’s expansion strategy does not work in the weak economy.
The recent trials of strategy changes are not successful.


Pinduoduo (PDD): Least Loss Since IPO, But Market Just Needs an Excuse to Leave the Strategy

Equity Analyst, LightStream Research

Oshadhi Kumarasiri

Equity Analyst

Long-Short Analysis on Japan, Asia and the World

LightStream Research

LightStream conducts quantitatively rigorous and data-driven analysis with a focus on Japan and Asia.

We consistently cover the Tech, Consumer and Industrial sectors, and provide ECM and Events coverage more broadly.

We supplement traditional qualitative insights from company relationships with a robust quantitative foundation that examines as much historical data as is available.
We further refine the accuracy of our insights and calls through the use of alternative data to flesh out current trends, and through a valuation framework that emphasises non-superficial peer group selection and a proper attempt to understand the metrics and changes that have driven security valuations in the past.

<a href="https://www.smartkarma.com/entities/gome-retail-holdings-ltd" target="_blank" data-smartkarma-citation="entities:170:1" rel="noopener">Gome Electrical Appliances (493 HK)</a> is one of China’s largest electronic retailers with a Gross Merchandise Value (GMV) of CNY 136.1 billion. Revenue has declined at an annual compound rate of 8.1% over the past three years as the company’s traditional retail store model has lost out to E-commerce competition.The company is currently on a restructuring phase, transitioning away from the traditional brick and mortar electronics retail model. The new initiatives are encouraging with over 100% GMV growth across many of the new business models. These growth avenues have captured the eye of the Chinese E-commerce giants, <a href="https://www.smartkarma.com/entities/pinduoduo-inc" target="_blank" data-smartkarma-citation="entities:27250:1" rel="noopener">Pinduoduo (PDD US)</a> and <a href="https://www.smartkarma.com/entities/jd-com-inc-adr" target="_blank" data-smartkarma-citation="entities:446:1" rel="noopener">JD.com Inc (ADR) (JD US)</a>. In April 2020, Pinduoduo invested $200 million in 3-year 5% coupon convertible bonds (CBs) at a conversion price of HKD 1.215 per share. JD.com followed with a $100 million investment in 3-year 5% coupon convertible bonds (CBs) at a conversion price of HKD 1.255 per share.We discuss Gome Retail's new initiatives below.

Gome Electrical Appliances (493 HK) is one of China’s largest electronic retailers with a Gross Merchandise Value (GMV) of CNY 136.1 billion. Revenue has declined at an annual compound rate of 8.1% over the past three years as the company’s traditional retail store model has lost out to E-commerce competition.The company is currently on a restructuring phase, transitioning away from the traditional brick and mortar electronics retail model. The new initiatives are encouraging with over 100% GMV growth across many of the new business models. These growth avenues have captured the eye of the Chinese E-commerce giants, Pinduoduo (PDD US) and JD.com Inc (ADR) (JD US). In April 2020, Pinduoduo invested $200 million in 3-year 5% coupon convertible bonds (CBs) at a conversion price of HKD 1.215 per share. JD.com followed with a $100 million investment in 3-year 5% coupon convertible bonds (CBs) at a conversion price of HKD 1.255 per share.We discuss Gome Retail's new initiatives below. 

Gome Retail: Comprehensive Transformation in Process, Too Early to Call Success/Failure

Global TMT analyst with Asia ex-Japan focus.

Mitchell Kim

Alibaba Group Holding  / Equity Bottom-Up

<ul>
<li>
<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> is the largest online marketplace platform in the world with a GMV (Gross Merchandise Value) at nearly two and a half times the size of Amazon, yet, the shares trade at a 75% discount to Amazon shares on FY21 P/E.  Despite the gargantuan size, the company is still able to generate 34% revenue growth even with the overall online retail spending growth in China slowing to 15% in 2Q20. </li>
<li>
If there was any doubt about Alibaba’s growth slowing with the overall China online spending, Alibaba beat consensus expectations resoundingly in 2Q20 with 34% growth YoY.  Despite the solid results, the ADRs are up only 22% YTD modestly underperforming NASDAQ. </li>
<li>
Two factors holding the stock back, in our view:  1) concerns that Trump administration could target Alibaba like Tencent <a href="https://www.smartkarma.com/entities/tencent-holdings-ltd" target="_blank" data-smartkarma-citation="entities:26:1" rel="noopener">Tencent Holdings (700 HK)</a> and Tik Tok; and 2) the ultra-high margin of its marketplace platform is diluted by losses from its other business segments. </li>
<li>
This one chart makes us feel good about the improving profitability (see Figure 3) .  Alibaba’s loss-making business segments turning profitable will be a catalyst, in our view.  In 2Q20, other commerce segment EBITA loss margins narrowed as the supermarket continued to grow and Ele.me rebounded. </li>
<li>
Alibaba is the cheapest on P/E among the large e-commerce platforms (excluding <a href="https://www.smartkarma.com/entities/vipshop-holdings-ltd-adr" target="_blank" data-smartkarma-citation="entities:1088:1" rel="noopener">Vipshop Holdings (VIPS US)</a>). Our sum of the parts analysis shows Alibaba's potential upside to be greater than what the market is pricing in.   </li>
</ul>



Alibaba Group (BABA US) is the largest online marketplace platform in the world with a GMV (Gross Merchandise Value) at nearly two and a half times the size of Amazon, yet, the shares trade at a 75% discount to Amazon shares on FY21 P/E.  Despite the gargantuan size, the company is still able to generate 34% revenue growth even with the overall online retail spending growth in China slowing to 15% in 2Q20. 

If there was any doubt about Alibaba’s growth slowing with the overall China online spending, Alibaba beat consensus expectations resoundingly in 2Q20 with 34% growth YoY.  Despite the solid results, the ADRs are up only 22% YTD modestly underperforming NASDAQ. 

Two factors holding the stock back, in our view:  1) concerns that Trump administration could target Alibaba like Tencent Tencent Holdings (700 HK) and Tik Tok; and 2) the ultra-high margin of its marketplace platform is diluted by losses from its other business segments. 

This one chart makes us feel good about the improving profitability (see Figure 3) .  Alibaba’s loss-making business segments turning profitable will be a catalyst, in our view.  In 2Q20, other commerce segment EBITA loss margins narrowed as the supermarket continued to grow and Ele.me rebounded. 

Alibaba is the cheapest on P/E among the large e-commerce platforms (excluding Vipshop Holdings (VIPS US)). Our sum of the parts analysis shows Alibaba's potential upside to be greater than what the market is pricing in.   


Alibaba (BABA US):  Look at One Chart that Signals More Profit Is On the Way

China

PDD Holdings Inc. is a multinational commerce group that owns and operates a portfolio of businesses. The Company focuses on digital economy so that local communities and small businesses can benefit from the increased productivity and new opportunities. PDD Holdings has built a network of sourcing, logistics, and fulfillment capabilities for its underlying businesses.

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PDD Holdings (PDD US)

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

Results varied Which approach worked? Market is rewa

Tracking Traffic

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

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...

Tracking Traffic

Pinduoduo (PDD): Least Loss Since IPO, But Market Just Needs an Excuse to Leave the Strategy

PDD’s stock price plunged as the growth rate of its operating data slowed down in 2Q20. However, the financial performance improved for both top...

Ming Lu

Gome Retail: Comprehensive Transformation in Process, Too Early to Call Success/Failure

Gome Electrical Appliances (493 HK) is one of China’s largest electronic retailers with a Gross Merchandise Value (GMV) of CNY 136.1 billion....

Oshadhi Kumarasiri

Alibaba (BABA US): Look at One Chart that Signals More Profit Is On the Way

Alibaba Group (BABA US) is the largest online marketplace platform in the world with a GMV (Gross Merchandise Value) at nearly two and a half...

Mitchell Kim

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