Investment advice

This report is the second in the Logistics Outbound series. We sorted out the scale, pattern, and evolutionary variables of cross-border e-commerce logistics and explored investment leads in the first report “E-commerce Platforms Shine Overseas” on December 4. In the second report, we will focus on Sinotrans, the largest freight forwarder in China's cross-border logistics market. Under the impetus of the increase in cross-border e-commerce platforms, we believe there is room for revaluation of China's foreign transport.

rationales

The market underestimated the value of Sinotrans DHL. 1) High-profit and high-growth assets: In 2013-22, Sinotrans DHL's revenue and net profit CAGR were 10.4%/12.1%, respectively, and the average ROE/ROA level was 79.0%/42.8%. Over the past 10 years, we estimate that Sinotrans DHL accounted for 5% of DHL Express's total assets, contributing 10.5% of DHL Express's revenue and 18.6% EBIT. 2) The biggest difference with the market is that we believe that Sinotrans DHL may resume growth next year, mainly due to the fact that Sinotrans DHL Express's pricing mechanism (basic price adjusted every year+fuel surcharge+emergency surcharge, etc.) is combined with cross-border e-commerce business volume catalyst. We expect Sinotrans DHL's operating profit to be $16.4/1.77 billion in 2023/24, -12.0%/+7.5% YoY.

The company's freight forwarding business is more stable than the market thought: 1) Shipping and shipping agents are the ballast stone of the freight forwarding business (accounting for about 55% of the total operating profit of the freight forwarding business in 2022), and unit profit is rising steadily as service provision increases, and there is little correlation with shipping freight rates; 2) The profits of air freight agents and railway agents fluctuate to a certain extent, but the impact is not significant. If the unit profit of air freight forwarders and railway freight forwarders falls back to pre-2020 levels next year (about 17% lower than our assumption next year), the total impact on overall operating profit will be -1.1%.

The current valuation of Sinotrans is at least 20% compared to competitive discounts. The current P/E of the company's 2023/24 A share is 9.4x/8.4x, with a discount of at least 20% for both domestic and international freight forwarders. Furthermore, the market only values the traditional CPE for Sinotrans DHL, while the three major international express delivery companies currently have an average P/E of 15.7x/14.0x for 2023/24, which is higher than the current valuation of Sinotrans > 60%; we believe that the valuation may be repaired after the market fully appreciates the CFD DHL and the company's freight forwarding business.

Profit forecasting and valuation

Keeping the company's profit forecast basically unchanged, we expect net profit to be 38.8/4.34 billion yuan in 2023/24, a year-on-year growth rate of -4.7%/11.9%. The current P/E for A-shares in 2023/24 is 9.4x/8.4x, and the current price P/E for H shares is 5.0x/4.5x. We maintain the outperforming industry rating, maintaining a target price of 6.2 yuan for A-shares, corresponding to the 2023/24 P/E of 11.7x/10.4x, with an upward space of 24.7%; the target price for H shares is 4.06 HKD, corresponding to the 2023/24 P/E of 7.0x/6.3x, with an upward space of 37.2%. The company's dividend ratio increased from 31.7% in 2019 to 48.4% in 1H23. Currently, the dividend yield for A-shares in 2023/24 is 5.2%/5.8%; H-shares are 9.5%/10.7%.

risks

Air freight rates fell sharply, cross-border e-commerce GMV fell short of expectations, and import and export trade fell short of expectations.