1H23 performance falls short of market expectations
The company announced 1H23 results: revenue for the first half of the year fell 47% year on year to HK$25.3 billion, core net profit fell 85% year on year to HK$370 million, up about 10% from 1H19; 2Q23 profit increased more than 30% month-on-month. Performance fell short of market expectations. Mainly the freight forwarding business faced pain due to the decline in freight prices and demand, and the e-commerce express delivery business continued to lose money.
Main business segments:
International freight forwarder profits are facing short-term pain, and we are waiting for an inflection point in demand. 1H23 freight forwarder achieved operating profit of HK$6.2 billion, -82% year-on-year, and +22% year-on-year growth rate compared to 1H19. Freight forwarding profits year on year were mainly due to weak overseas demand and a decline in air and sea freight volume and prices. 80% of the company's freight forwarding business was on the trans-Pacific route. In the first half of the year, the route's traffic volume fell 22% year-on-year. The company is focusing on maintaining customer share while actively laying out new routes; waiting for an inflection point in the market, the company expects to achieve greater flexibility with its leading market share.
The profit of integrated logistics is relatively stable, partly affected by the decline in demand for epidemic prevention materials. The operating profit of 1H23 integrated logistics was HK$7.2 billion, the same as the previous year, and 8% from the annualized growth rate of 1H19. Affected by the resumption of work and production, operating profit in mainland China/Southeast Asia was +44%/+22% year-on-year; however, due to falling demand for epidemic prevention materials, operating profit in Hong Kong, China fell 27%.
E-commerce express delivery losses continue, and SF Express integrates and collaborates to relieve some of the pressure. 1H23 lost HK$5.1 million in operating profit. The loss margin increased by 28.5% year-on-year. Competition is still fierce. The company announced on July 25 that it will sell its e-commerce express delivery business other than the US, India, and Thailand to SF Express, which will help the company optimize cash flow and relieve operating pressure. Given that SF Express and Thai Express are further promoting collaboration, and with the gradual clarification of market stratification, the company expects Thai Express's profit to stabilize in 4Q24.
Development trends
Looking ahead to the whole year, we expect the second half of the year to be accompanied by the arrival of the peak freight season, and freight forwarder profits may recover month-on-month. According to the company's forecast, the profit of the freight forwarding division in 2023 will achieve a low double-digit CAGR compared to the profit of the comparable segment in 2019; integrated logistics is relatively stable, and segment profit will achieve a single-digit CAGR compared to the comparison in 2019; while e-commerce express delivery will still face losses in 2023, and profits are expected to resume within 2024.
Profit forecasting and valuation
Due to short-term pressure on the volume and price of the freight forwarding business and the profit of Thai express delivery still to be repaired, we lowered our net profit for 2023/2024 by 50.5%/49.8% to HK$1,003 million/HK$1,291 billion. The current stock price corresponds to the price-earnings ratio of 13.8 times/10.7 times of 2023/2024. We maintain our outperforming industry rating, but due to the above reasons, we lowered our target price by 45.5% to HK$9.00, corresponding to 16.2 times the 2023 price-earnings ratio and 12.6 times the 2024 price-earnings ratio, which has 17.3% room for improvement from the current stock price.
risks
International trade demand fell short of expectations, uncertainty about the international situation increased, and express delivery competition in Southeast Asia worsened.