HK/China Equity Long-Short

Osbert Tang, CFA

Equity Capital Markets

<p>We think the 72.7% YoY plunge in gross profit at <a href="https://www.smartkarma.com/entities/jd-logistics" target="_blank" data-smartkarma-citation="entities:31500:1" rel="noopener">JD Logistics (JDL HK)</a> in 1Q21 reflects that it lacks pricing power, even though it is the largest player in the integrated supply chain logistics services industry. Meanwhile, the express industry witnessed an overall YoY contraction in unit revenue and profitability in 1Q21, continuing a structural declining trend. With a market share of 2.7%, JDL is not expected to see material change in its profitability even if this is doubled as the industry stays fragmented and it will still be susceptible to industry price competition, in our view.</p><p>Instead, we see <a href="https://www.smartkarma.com/entities/jd-com-inc" target="_blank" data-smartkarma-citation="entities:29043:1" rel="noopener">JD.com Inc. (9618 HK)</a> the beneficiary of JDL's significant capital investment in logistics infrastructure over the near-to-medium term. In fact, there are other more attractive pure logistics options like <a href="https://www.smartkarma.com/entities/sinotrans-limited-h" target="_blank" data-smartkarma-citation="entities:1321:1" rel="noopener">Sinotrans (598 HK)</a> and <a href="https://www.smartkarma.com/entities/kerry-logistics-network-ltd" target="_blank" data-smartkarma-citation="entities:367:1" rel="noopener">Kerry Logistics Network (636 HK)</a> which have longer track record, better profitability and higher dividend yield. Fundamentally, we are not a big fan of JDL at its proposed valuations.</p>

We think the 72.7% YoY plunge in gross profit at JD Logistics (JDL HK) in 1Q21 reflects that it lacks pricing power, even though it is the largest player in the integrated supply chain logistics services industry. Meanwhile, the express industry witnessed an overall YoY contraction in unit revenue and profitability in 1Q21, continuing a structural declining trend. With a market share of 2.7%, JDL is not expected to see material change in its profitability even if this is doubled as the industry stays fragmented and it will still be susceptible to industry price competition, in our view.Instead, we see JD.com Inc. (9618 HK) the beneficiary of JDL's significant capital investment in logistics infrastructure over the near-to-medium term. In fact, there are other more attractive pure logistics options like Sinotrans (598 HK) and Kerry Logistics Network (636 HK) which have longer track record, better profitability and higher dividend yield. Fundamentally, we are not a big fan of JDL at its proposed valuations.

JD Logistics IPO: We Play Devil's Advocate

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.

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<p><a href="https://www.smartkarma.com/entities/jd-logistics" target="_blank" data-smartkarma-citation="entities:31500:1" rel="noopener">JD Logistics (JDL HK)</a> is the largest player in China’s integrated supply chain logistics services market, with a 2.2% revenue market share in 2019, according to CIC. JD Logistics was founded with the formation of <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>’s in-house logistics department in 2007.</p>
<p>JD Logistics is seeking to raise up to $3-4 billion at a $40 billion valuation, according to press reports. Merrill Lynch and Haitong, which are part of the syndicate, have valued JD Logistics at $30.0-45.4 billion and $42.4-44.3 billion, respectively, <a href="https://www.thestandard.com.hk/section-news/section/2/229859/JD-Logistics-gets-ball-rolling-for-US%244b-IPO" target="_blank" rel="noopener">according to press reports</a>. </p>
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<p>In <a href="https://www.smartkarma.com/insights/jd-logistics-ipo-initiation-the-flow-of-things" target="_blank" data-smartkarma-citation="insights:48279" rel="noopener">JD Logistics IPO Initiation: The Flow of Things</a>, we stated that JD Logistics is an indirect play on the shift of some customer behaviour permanently to online shopping, particularly in fast-moving consumer goods. We concluded that JD Logistics fundamentals are attractive and it remains well-placed to address consumers demand faster and more flexible supply chain logistics services.</p>
<p>In <a href="https://www.smartkarma.com/insights/jd-logistics-ipo-prioritizing-market-share-gains-over-margins" target="_blank" data-smartkarma-citation="insights:50976" rel="noopener">JD Logistics IPO: Prioritizing Market Share Gains over Margins</a>,  we noted that the PHIP which discloses the 2020 results and recent developments underscore the positives which are strong growth, rising margin and cash generation. However, the outlook is mixed as JD Logistics cautions that it will pursue market share gains at the cost of profitability over the medium term. We opined that JD Logistics has the right ingredients to ride out the industry’s current price-competitive dynamics and deliver good shareholder returns over the medium term. </p>
</div><div><div><div class="content-highlight"><p>In this note, we update our forecasts and valuation presented in <a href="https://www.smartkarma.com/insights/jd-logistics-ipo-valuation-first-look" target="_blank" data-smartkarma-citation="insights:48384" rel="noopener">JD Logistics IPO: Valuation First Look</a> for the latest set of results and the margin guidance. Overall, based on valuation analysis, we think that the rumoured $40 billion valuation target is fair, particularly in the context of JD Logistics' positioning and higher than peers forecasted growth. </p></div></div></div>


JD Logistics (JDL HK) is the largest player in China’s integrated supply chain logistics services market, with a 2.2% revenue market share in 2019, according to CIC. JD Logistics was founded with the formation of JD.com Inc (ADR) (JD US)’s in-house logistics department in 2007.
JD Logistics is seeking to raise up to $3-4 billion at a $40 billion valuation, according to press reports. Merrill Lynch and Haitong, which are part of the syndicate, have valued JD Logistics at $30.0-45.4 billion and $42.4-44.3 billion, respectively, according to press reports. 

In JD Logistics IPO Initiation: The Flow of Things, we stated that JD Logistics is an indirect play on the shift of some customer behaviour permanently to online shopping, particularly in fast-moving consumer goods. We concluded that JD Logistics fundamentals are attractive and it remains well-placed to address consumers demand faster and more flexible supply chain logistics services.
In JD Logistics IPO: Prioritizing Market Share Gains over Margins,  we noted that the PHIP which discloses the 2020 results and recent developments underscore the positives which are strong growth, rising margin and cash generation. However, the outlook is mixed as JD Logistics cautions that it will pursue market share gains at the cost of profitability over the medium term. We opined that JD Logistics has the right ingredients to ride out the industry’s current price-competitive dynamics and deliver good shareholder returns over the medium term. 
In this note, we update our forecasts and valuation presented in JD Logistics IPO: Valuation First Look for the latest set of results and the margin guidance. Overall, based on valuation analysis, we think that the rumoured $40 billion valuation target is fair, particularly in the context of JD Logistics' positioning and higher than peers forecasted growth. 

JD Logistics IPO: Valuation and Forecast Update

Equity Bottom-Up

<p>The encouraging 1Q21 result of <a href="https://www.smartkarma.com/entities/sinotrans-limited-h" target="_blank" data-smartkarma-citation="entities:1321:1" rel="noopener">Sinotrans (598 HK)</a> affirms that FY21 will be a decent year for the company. Recurring profit grew by 323.4% YoY and 43.2% QoQ on the back of excellent strengths in revenue growth and selling and administrative cost control.  Volume for various segments has seen double-digit YoY increase which underpinned the revenue momentum.</p><p>We expect Sinotrans to stay as a beneficiary of the positive trade picture, growth in demand for cross-border e-commerce services, sea and air freight forwarding and full-fledged recovery in logistics segment. We believe it should easily achieve our projected 16% recurring earnings growth in FY21, making its 7x PER and 0.68x P/B inexpensive, and its 4.6% dividend yield is also attractive.</p>

The encouraging 1Q21 result of Sinotrans (598 HK) affirms that FY21 will be a decent year for the company. Recurring profit grew by 323.4% YoY and 43.2% QoQ on the back of excellent strengths in revenue growth and selling and administrative cost control.  Volume for various segments has seen double-digit YoY increase which underpinned the revenue momentum.We expect Sinotrans to stay as a beneficiary of the positive trade picture, growth in demand for cross-border e-commerce services, sea and air freight forwarding and full-fledged recovery in logistics segment. We believe it should easily achieve our projected 16% recurring earnings growth in FY21, making its 7x PER and 0.68x P/B inexpensive, and its 4.6% dividend yield is also attractive.

Sinotrans (598 HK): Good 1Q21, Outlook Stays Very Decent

Thematic (Sector/Industry)

<p>The appreciation of Rmb against the USD by 6.5% in 2020 has led to many companies recording exchange losses in their FY20 accounts. However, with the Rmb depreciating against USD so far by 0.2% YTD, we believe it is time to look at the victims in last year and see how they will be affected by a weaker Rmb in this year should the trend sustain.</p><p>Within our coverage, <a href="https://www.smartkarma.com/entities/sinotrans-limited-h" target="_blank" data-smartkarma-citation="entities:1321:1" rel="noopener">Sinotrans (598 HK)</a>, <a href="https://www.smartkarma.com/entities/china-communications-construction-co-ltd" target="_blank" data-smartkarma-citation="entities:265:1" rel="noopener">China Communications Construction (1800 HK)</a>, <a href="https://www.smartkarma.com/entities/shenzhen-intl-holdings" target="_blank" data-smartkarma-citation="entities:9:1" rel="noopener">Shenzhen Intl (152 HK)</a> and <a href="https://www.smartkarma.com/entities/cosco-shipping-energy-tran-h" target="_blank" data-smartkarma-citation="entities:646:1" rel="noopener">Cosco Shipping Energy Transportation Co. Ltd. (H) (1138 HK)</a> are the key victims in last year with their exchange losses amounting to 5-11% of FY20 profit. Except <a href="https://www.smartkarma.com/entities/shenzhen-intl-holdings" target="_blank" data-smartkarma-citation="entities:9:1" rel="noopener">Shenzhen Intl (152 HK)</a>, we believe the remaining three names will be the beneficiaries under a scenario of weaker Rmb/USD exchange rate. </p>

The appreciation of Rmb against the USD by 6.5% in 2020 has led to many companies recording exchange losses in their FY20 accounts. However, with the Rmb depreciating against USD so far by 0.2% YTD, we believe it is time to look at the victims in last year and see how they will be affected by a weaker Rmb in this year should the trend sustain.Within our coverage, Sinotrans (598 HK), China Communications Construction (1800 HK), Shenzhen Intl (152 HK) and Cosco Shipping Energy Transportation Co. Ltd. (H) (1138 HK) are the key victims in last year with their exchange losses amounting to 5-11% of FY20 profit. Except Shenzhen Intl (152 HK), we believe the remaining three names will be the beneficiaries under a scenario of weaker Rmb/USD exchange rate. 

A Look on Some Victims of Rmb Appreciation in FY20: How Will They Fare in FY21 if Rmb Stays Weak?

<p>We think the market should focus on the exciting positive profit alert for 1Q21 at <a href="https://www.smartkarma.com/entities/sinotrans-limited-h" target="_blank" data-smartkarma-citation="entities:1321:1" rel="noopener">Sinotrans (598 HK)</a>, instead of the headline result for FY20. The company's guidance of recurring earnings of Rmb761-797m in 1Q21 is very encouraging - this represents a 3.15x to 3.35x YoY increase, and more importantly, <strong>a 56-64% growth vs. 1Q19</strong>, suggesting that the momentum does not just come from a low base in last year.</p><p>While it reported a 1.8% decline in FY20 profit, this is masked by non-recurring items. In fact, the recurring profit for 4Q20 surged an adorable 143.7% YoY, reflecting an impressive sequential improvement from 33.7% YoY growth in 3Q20. We still see its undervalued at 0.6x P/B and 5.9x PER for FY21, yet ROE is set to reach 10-10.5% in the next two years with basically no net debt on its book.</p>

We think the market should focus on the exciting positive profit alert for 1Q21 at Sinotrans (598 HK), instead of the headline result for FY20. The company's guidance of recurring earnings of Rmb761-797m in 1Q21 is very encouraging - this represents a 3.15x to 3.35x YoY increase, and more importantly, a 56-64% growth vs. 1Q19, suggesting that the momentum does not just come from a low base in last year.While it reported a 1.8% decline in FY20 profit, this is masked by non-recurring items. In fact, the recurring profit for 4Q20 surged an adorable 143.7% YoY, reflecting an impressive sequential improvement from 33.7% YoY growth in 3Q20. We still see its undervalued at 0.6x P/B and 5.9x PER for FY21, yet ROE is set to reach 10-10.5% in the next two years with basically no net debt on its book.

Sinotrans (598 HK): Quick Take on the Good Underlying 4Q20 and Positive Profit Alert for 1Q21

China

Sinotrans Limited provides integrated logistics services with core service of sea, air, rail and road freight forwarding, express services and shipping agency services.  The Company also provides support services of storage and terminal services, trucking and marine transportation services.

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Sinotrans (598 HK)

JD Logistics IPO: We Play Devil's Advocate

We think the weak 1Q21 gross profit and margin at JDL reflect its lack of pricing power in the industry despite its largest market share position....

Osbert Tang, CFA

JD Logistics IPO: Valuation and Forecast Update

JD Logistics is set to launch its IPO to raise $3-4 bn in May. The rumoured $40 bn valuation is fair, particularly in the context of its...

Arun George

Sinotrans (598 HK): Good 1Q21, Outlook Stays Very Decent

1Q21 is decent with impressive recurring net profit recovery. We expect growth to remain encouraging, and FY21 will be another good year. Despite...

Osbert Tang, CFA

A Look on Some Victims of Rmb Appreciation in FY20: How Will They Fare in FY21 if Rmb Stays Weak?

We expect Sinotrans, CCCC and CSET to be the beneficiaries of weaker Rmb against USD in this year. However, due to its ownership in Shenzhen...

Osbert Tang, CFA

Sinotrans (598 HK): Quick Take on the Good Underlying 4Q20 and Positive Profit Alert for 1Q21

Following impressive recurring profit acceleration with a 143.7% YoY growth in 4Q20 (vs 33.7% in 3Q20), Sinotrans issued an exciting 1Q21 positive...

Osbert Tang, CFA

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