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

We are upgrading <a href="https://www.smartkarma.com/entities/best-inc" target="_blank" data-smartkarma-citation="entities:25494:1" rel="noopener">BEST Inc (BEST US)</a> from HOLD to BUY on the expectation of Chinese express sector consolidation in the coming 12-18 months. Note that we do not expect sector fundamentals to improve in the near-term, nor do we expect Best to erase its losses in the next few quarters. 
While we concede we may be early in rating Best BUY, we believe conditions are developing in ways that make sector M&amp;A more likely in the medium-term. Given its size, its depressed valuation and its relationship to <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>, Best could become an acquisition target. 
We view Best as a cheap option on sector consolidation. At a 20% discount to peers on [EV/Revenue] and [EV/Parcel], we believe Best's express operation alone is worth US$5.05 per ADS -- investors effectively get the rest of its businesses for free. BUY below US$3 for ~70% upside.

We are upgrading BEST Inc (BEST US) from HOLD to BUY on the expectation of Chinese express sector consolidation in the coming 12-18 months. Note that we do not expect sector fundamentals to improve in the near-term, nor do we expect Best to erase its losses in the next few quarters. 
While we concede we may be early in rating Best BUY, we believe conditions are developing in ways that make sector M&amp;A more likely in the medium-term. Given its size, its depressed valuation and its relationship to Alibaba Group (BABA US), Best could become an acquisition target. 
We view Best as a cheap option on sector consolidation. At a 20% discount to peers on [EV/Revenue] and [EV/Parcel], we believe Best's express operation alone is worth US$5.05 per ADS -- investors effectively get the rest of its businesses for free. BUY below US$3 for ~70% upside. 

Upgrading Best Inc To Speculative BUY on Expectation of Express Sector Consolidation

Event-Driven

The objectives of this report are to examine what express sector consolidation may look like over the next few years, and to offer investors guidance about how to play this trend when the dominoes begin to fall, most likely in 2021-22. We organize the report into six parts as follows:
<ol>
<li>How things used to work in China's express sector</li>
<li>How the sector has begun changing in ways that may force consolidation</li>
<li>The 'Why?' &amp; 'How?' of Chinese express sector consolidation</li>
<li>Alibaba's critical role in potential M&amp;A activity</li>
<li>Some thoughts about the timing of expected changes</li>
<li>Conclusions</li>
</ol>

The objectives of this report are to examine what express sector consolidation may look like over the next few years, and to offer investors guidance about how to play this trend when the dominoes begin to fall, most likely in 2021-22. We organize the report into six parts as follows:

How things used to work in China's express sector
How the sector has begun changing in ways that may force consolidation
The 'Why?' &amp; 'How?' of Chinese express sector consolidation
Alibaba's critical role in potential M&amp;A activity
Some thoughts about the timing of expected changes
Conclusions


Pressure Building: How Consolidation in China's Express Sector Might Look Over the Next Two Years

The express sector's big news is that <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 seeking an IPO in Hong Kong, as many large Chinese tech companies have done in recent months. We understand the rationale for this move, but still dislike the company's deteriorating fundamentals and rich valuation. 
In August, express sector volume growth remained firm (+36.5% YoY), but revenue growth slowed (+17.9%, slowest since March) as average unit pricing tumbled. We believe the current price war will continue in the medium-term, eating into express companies' margins and cash flow.
Outside of China, <a href="https://www.smartkarma.com/entities/kerry-express-thailand" target="_blank" data-smartkarma-citation="entities:29253:1" rel="noopener">Kerry Express Thailand (KEX TB)</a> has filed IPO documents. We believe this offering is worth watching, as KEX may be the only public 'pure play' on eCommerce logistics in SE Asia. A successful IPO should also boost sentiment toward <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>.
Conclusion: Owning independent market leader <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> against short positions in any of the listed express companies aligned with <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> has been a winning strategy in 2020, and we see no reason to change course in the near-term.

The express sector's big news is that ZTO Express (ZTO US) is seeking an IPO in Hong Kong, as many large Chinese tech companies have done in recent months. We understand the rationale for this move, but still dislike the company's deteriorating fundamentals and rich valuation. 
In August, express sector volume growth remained firm (+36.5% YoY), but revenue growth slowed (+17.9%, slowest since March) as average unit pricing tumbled. We believe the current price war will continue in the medium-term, eating into express companies' margins and cash flow.
Outside of China, Kerry Express Thailand (KEX TB) has filed IPO documents. We believe this offering is worth watching, as KEX may be the only public 'pure play' on eCommerce logistics in SE Asia. A successful IPO should also boost sentiment toward Kerry Logistics Network (636 HK).
Conclusion: Owning independent market leader S.F. Holding (002352 CH) against short positions in any of the listed express companies aligned with Alibaba Group (BABA US) has been a winning strategy in 2020, and we see no reason to change course in the near-term. 

TRACKING TRAFFIC/Chinese Express: ZTO HK Listing | August Pricing Still Weak | KEX IPO in Bangkok

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

China

YTO Express Group Co., Ltd. provides global express services. The Company also provides general cargo warehousing, domestic air transport agency, car rental, supply chain management, and other related services throughout China..

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YTO Express (600233 CH)

Upgrading Best Inc To Speculative BUY on Expectation of Express Sector Consolidation

What is rationale? What are catalysts? Why Best and not other potential targets? Price target?

Tracking Traffic

Pressure Building: How Consolidation in China's Express Sector Might Look Over the Next Two Years

Objective of this note: How things used to work How the sector has begun changing

Tracking Traffic

TRACKING TRAFFIC/Chinese Express: ZTO HK Listing | August Pricing Still Weak | KEX IPO in Bangkok

Big news is ZTO Express (ZTO US) launching

Tracking Traffic

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

ZTO Express Secondary Listing: Home Delivery

$zto eZTO is the leading express delivery company in China with a 19.1% market share of China’s express delivery service market as measured by...

Arun George

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