Yuantong Express (600233 CH) and Xindar International Logistics held an investor meeting in Hong Kong on July 13 to give more details on the strategic cooperation agreement between the two sides. According to the previous announcement, Yuantong Express proposed to acquire a 61.87 per cent stake in Xinda International Logistics for a total consideration of HK $1.041 billion, or HK $4.07 per share. After taking control, Yuantong Express will make a full offer to the rest of the shareholders at the same price of HK $4.07 per share, at a total consideration of about HK $1.7 billion. At the meeting, Yuantong Express management told investors that the deal was expected to obtain the necessary approval from the government by the end of the third quarter of 2017. As pointed out in our last report, the deal is likely to be a win-win strategic cooperation for the two companies, especially it will help Yuantong Express expand its overseas business. The positive news from the meeting is that Yuantong Express seems to be more confident that the deal will get all relevant government approvals in the third quarter. In addition to helping future earnings growth, the company's shareholders can also record a 10 per cent increase in share price two months later if the company's shareholders accept the offer.

Yuantong Express is shifting its focus to overseas markets. Over the past decade, the annual business growth of China's five largest express delivery companies has reached more than 50%, mainly due to the rapid development of China's e-commerce industry. However, key growth drivers have shifted to overseas markets. We believe that China's Belt and Road Initiative trade development and the growing cross-border e-commerce market will bring huge demand for overseas logistics and express delivery services. The central government is promoting the Belt and Road Initiative strategy to encourage enterprises to invest in infrastructure and promote local economic development in Belt and Road Initiative to stimulate the development of regional trade. In China's cross-border e-commerce market, both B2B and B2C have opportunities for rapid growth. More and more Chinese companies are using online channels to promote their products and brands to overseas customers. At the same time, due to the increase in income, Chinese consumers are also buying more imported goods. More and more consumers buy goods directly from overseas online channels. Yuantong Express estimates that logistics demand in the cross-border e-commerce market will grow by more than 30% in the next 2-3 years.

Yuantong Express expects the growth of the cross-border e-commerce logistics market to be higher than the industry average. Yuantong Express's cross-border e-commerce logistics business is expected to achieve higher-than-average growth, and have the opportunity to gain more market share. The logistics industry in China's cross-border e-commerce market is composed of three-tier industry participants. At the top are three global logistics companies, Fedex, DHL and UPS, which together hold 10 per cent of the market. The second tier is Post EMS, which controls 60% of the market share. The third tier includes hundreds of small logistics companies that provide specialized delivery services on certain routes. They have a share of about 20 per cent. Yuantong Express targets the second and third tiers of the market. Management is confident that this market segment can be developed through appropriate products, services and pricing. The company has rich customer resources to help it carry out cross-border logistics services. The company's delivery service should be more efficient than the postal service. Yuantong Express can charge lower prices for cross-border logistics services than existing third-tier market companies. Overall, Yuantong Express estimates that the total share of express companies, including Yuantong Express, is expected to rise from the current low base to 40%.

Sunda International Logistics will develop into an overseas business platform for Yuantong Express. After the transaction is completed in the third quarter, Sunda International Logistics will be renamed Yuantong International. Upon completion of the deal, the founder of Sunda International Logistics will have a 10 per cent stake. Yuantong Express retains its existing management team and will also consider issuing stock options to the management of Xindar International Logistics. With the current A-share platform of Yuantong Express, Funda International Logistics will eventually represent the entire overseas business of Yuantong Express. After carefully examining the business scope and sales network of Xindar International Logistics, Yuantong Express will first begin to design products and services. Sunda International Logistics has set up teams and offices in several overseas markets, including ASEAN, Europe, the United States and so on. Yuantong Express can quickly enter the overseas logistics market with the help of Sunda's international logistics network and expertise in various places. At the same time, Yuantong Express will expand its sales network and enrich its cross-border logistics services. Yuantong Express is also considering inviting strategic investors to help it develop an international logistics platform to develop overseas business. Yuantong Express plans to acquire some logistics companies to help expand its sales network or enrich its services in the cross-border logistics market.

Valuation: due to the uncertainty of the transaction, the share price of Xindar International Logistics has not changed much since the deal was announced. But now, Yuantong Express seems optimistic about the implementation of the deal. It is too early to quantify the profit impact of Yuantong Express's overseas expansion. But the risk should be low, especially given that the share price has the potential to rise by a further 10% in two months' time if the offer is accepted.