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

<a href="https://www.smartkarma.com/entities/dada-nexus-ltd" target="_blank" data-smartkarma-citation="entities:28961:1" rel="noopener">Dada Nexus Ltd (DADA US)</a> recently reported Q2 results that showed strong YoY revenue growth at its two main business units and solid progress on raising margins. Still, Dada posted a net loss of 457 mn RMB on revenue of 1.32 bn RMB, and its shares in the US have fallen since it reported. An examination of average revenue per order in its Dada Now business line suggests the company actually handles little 'real' on-demand traffic. Instead, by volume it appears Dada Now mostly handles last-mile delivery duties for JD Logistics and traditional (2-4 day) express delivery firms. In this note we remind readers there is more to Dada than its hyped on-demand retail and on-demand delivery -- and less, too. We say this because Dada still appears to have substantial exposure to traditional eCommerce fulfillment, which features slower growth, entrenched rivals, and thin margins.

Dada Nexus Ltd (DADA US) recently reported Q2 results that showed strong YoY revenue growth at its two main business units and solid progress on raising margins. Still, Dada posted a net loss of 457 mn RMB on revenue of 1.32 bn RMB, and its shares in the US have fallen since it reported. An examination of average revenue per order in its Dada Now business line suggests the company actually handles little 'real' on-demand traffic. Instead, by volume it appears Dada Now mostly handles last-mile delivery duties for JD Logistics and traditional (2-4 day) express delivery firms. In this note we remind readers there is more to Dada than its hyped on-demand retail and on-demand delivery -- and less, too. We say this because Dada still appears to have substantial exposure to traditional eCommerce fulfillment, which features slower growth, entrenched rivals, and thin margins. 

Dada-Nexus: More -- And Less -- Than Meets the Eye

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...

Meituan-Dianping's headline Q2 numbers (out Friday August 21st) looked good, with reported Operating Profit rising 96% YoY on Covid19-hit Revenue growth of just 9%. These numbers suggest extremely strong operating leverage in the period.
However, adjusting Q2 OP for non-cash and non-recurring items reveals lackluster operating leverage for the entity as a whole.
Besides analyzing the company's operating leverage, we also identified several unusual items and trends in the period, some of them positive, some negative. 
Finally, we identify three areas to watch in coming quarters. We believe these areas will largely determine the pace of earnings growth over the next few quarters.

Meituan-Dianping's headline Q2 numbers (out Friday August 21st) looked good, with reported Operating Profit rising 96% YoY on Covid19-hit Revenue growth of just 9%. These numbers suggest extremely strong operating leverage in the period.
However, adjusting Q2 OP for non-cash and non-recurring items reveals lackluster operating leverage for the entity as a whole.
Besides analyzing the company's operating leverage, we also identified several unusual items and trends in the period, some of them positive, some negative. 
Finally, we identify three areas to watch in coming quarters. We believe these areas will largely determine the pace of earnings growth over the next few quarters. 

Meituan-Dianping: Cleaning up Q2 Results Reveals Lackluster Operating Leverage, Other Challenges

<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

ZTO Express (Cayman) Inc. operates as an express delivery company. The Company provides express delivery service through their nationwide network, as well as other value-added logistics services. ZTO Express serves customers globally.

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ZTO Express Cayman (ZTO US)

Dada-Nexus: More -- And Less -- Than Meets the Eye

Point 1:

Tracking Traffic

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

Meituan-Dianping: Cleaning up Q2 Results Reveals Lackluster Operating Leverage, Other Challenges

Meituan-Dianping's headline Q2 numbers (out Friday August 21st) looked good, with reported Operating Profit rising 96% YoY on Covid19-hit Revenue...

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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