We organized a 2018 results luncheon with investors for the company on April 9.
The company's 2018 performance for the first time shows the performance of the international express and other small parcels that the parent company Yuantong Express has mainly developed since it entered the company. In 2018, the company's revenue increased by 21.6% compared with the same period last year, traditional freight forwarder business increased by 17.9%, and international express delivery and small parcel business increased by 172.7%. Excluding one-time profits and losses, recurrent profits grew by 27.8% in 2018 compared with the same period last year.
Considering the continuous improvement of the company's ability to integrate domestic customers and overseas network resources as well as fully connected business, we estimate that the company will be able to maintain profit growth of no less than 20% in 2019. The company's shares are currently trading at 12 times 2019 earnings. Considering that the business development path of the company is becoming more and more clear, we suggest that investors start to pay attention to Yuantong Express International again.
The 2018 results showed for the first time the performance of the international express delivery and other small parcels business. The company's total revenue in 2018 increased by 21.6% compared with the same period last year. Revenue from the traditional cargo business (including air freight and shipping) rose 17.9 per cent in 2018 from a year earlier, while revenue from its new international express and small parcel services grew 172.7 per cent year-on-year. However, due to increased competition and narrowed profit margins in the freight forwarding business, gross profit margin fell 2.2 percentage points to 13.3% year-on-year in 2018. The gross margin of the new international express business has expanded as a result of improved income mix and economies of scale. The company saved administrative and management expenses, and its operating profit margin fell by only 0.5 percentage point year-on-year to 3.0%. Excluding the proceeds from one-time sales, the company's recurrent net profit increased by 27.8% compared with the same period last year.
Freight forwarding business is expected to remain generally stable
Freight forwarding accounts for 89 per cent of total revenue and 84 per cent of total gross profit in 2018. The company is cautiously optimistic about this business growth outlook, but is expected to remain basically stable in 2019. Uncertainty about US business growth remains because: 1) some freight forwarders shipped in advance in 2018 to avoid the impact of tariff increases in 2019; and 2) no agreement has been reached in the Sino-US trade negotiations. As for the EU market, the slowdown should hamper the company's freight growth from 2019. However, due to the construction of the company's overseas network and the increase in customer resources of the parent company, the company should be able to seize the following structural growth opportunities: 1) increased freight volume from China to ASEAN; 2) increased freight volume from ASEAN to the United States and the European Union.
The driving force for growth is the business of international express delivery and small parcels.
The profit growth potential of the international express business should be greater than that of the freight business, mainly due to: 1) a relatively low base (accounting for 6% of total revenue in 2018); and 2) accelerated growth in cross-border e-commerce logistics demand. Its parent company, 600233CH, has successfully outpaced its main rivals in overseas expansion by acquiring overseas business platforms to build overseas networks.
As the only overseas business platform for Yuantong Express, the company should be the main beneficiary of: 1) the rising demand for import logistics from China's cross-border e-commerce; 2) the growth of China's exports to emerging markets such as ASEAN and the Middle East. With the support of the parent company, the company will further integrate domestic and foreign logistics resources and enhance its full-chain service capacity in order to seize the growth opportunities of the target terminal market.
The valuation is not high
The share price is up 23.4% year-to-date due to improved confidence in the company's overseas business in 2019 and beyond. According to our earnings forecast, the stock currently trades at 12.0 times 2019 earnings, and earnings growth is expected to exceed 20% in 2019. In addition, the share price is lower than the parent company's previous offer price of HK $4.07. As its business expansion path is becoming more and more clear, we recommend that investors refocus on the stock.