Results have been growing steadily in '23, and earnings have improved quarterly since 4Q23

Shentong Express announced its 2023 and 1Q24 results: 1) Achieved net profit of 40.92 billion yuan/340 million yuan in 23, with a year-on-year increase of 21.5%/18.4%, of which 4Q23 achieved net profit to mother of 120 million yuan, an increase of 55.9% year-on-year, a significant improvement over the previous month; 2) 1Q24 achieved net profit to mother of 190 million yuan, an increase of 43.2%/59.0% year-on-year. In '23, the company achieved share growth and effective cost control through improved service capabilities and refined management, and achieved year-on-year growth in revenue and profit. Since the fourth quarter of '23, profits have improved quarter-on-quarter. Looking ahead to 24 years, industry prices are still facing downward pressure, but we are optimistic that the company will continue to improve quality and efficiency, and profits are expected to continue to improve. We lowered our 2024/2025 net profit forecast by 8%/4% to 81/1.13 billion yuan, adding 1.45 billion yuan to the 2026 net profit forecast; lowered the target price by 8.7% to 11.6 yuan, corresponding to 22x 2024E PE (comparable company Wind's consistent forecast of 12.3x. The valuation premium is mainly due to the fact that the company's express delivery volume is expected to maintain a high increase and the performance is highly flexible) to maintain “buying”.

The “price-for-volume” strategy is remarkable. The volume has maintained rapid growth, and the share has increased significantly. In terms of volume, the express delivery industry completed 132.07 billion units in '23, an increase of 19.4% over the previous year, corresponding to a CAGR of +10.4% in 22-23. The year-on-year growth performance was impressive under a low base in '22, and the compound growth rate was steady for two years. The company completed 17.51 billion pieces in 23, an increase of 35.2% over the previous year. The corresponding CAGR for 22-23 was +25.7%. The volume growth rate was impressive, significantly higher than the industry. Among them, 4Q23's express delivery volume was +43.3% YoY/+12.8% month-on-month. In terms of price, the average price of Shentong's 23-year item was 2.23 yuan, -11.3% year-on-year (average price for domestic items: -

4.5%). The company's market share was +1.5pct to 13.3% year on year (Yuantong/Yunda: +0.2/-1.6pct). The company's price-for-volume strategy had remarkable results, and the market share increased the most among A-share e-commerce express delivery companies in '23. (Data source: State Post Office, company announcement) The cost of a single ticket fell significantly in '23. The gross margin is expected to rise in '23. The cost of a single ticket for the company's express delivery business fell 10.9% year-on-year to 2.15 yuan. The significant decline was mainly due to the company increasing the number of automated sorting equipment, improving sorting efficiency and reducing damage rate; expanding the size of its own fleet, optimizing transportation routes, and improving mainline transportation efficiency. In '23, the gross margin of the company's express delivery business fell 0.2 pct to 4.2% year on year. The main reason was that the company chose a price reduction strategy in a new round of price competition to compete for share, and the decline in single ticket revenue suppressed the gross margin level. In '24, we are optimistic about increasing the company's share and enhancing economies of scale, compounding the cost of refined operation and optimization, which is expected to offset price pressure and increase the level of profit margins.

The volume of 1Q items maintained high growth, and economies of scale are expected to continue to improve in 1Q24. The company completed 4.59 billion packages, an increase of 36.7% year on year; the average price of each item fell 12.4% year on year to 2.17 yuan (flat 4Q23). 1Q24 is a traditional low season. The company achieved a significant increase in package volume through a competitive strategy of price reduction. In the medium to long term, we are optimistic that through route integration and operation management, we will gradually expand market share, enhance economies of scale, and achieve continuous improvement in profitability.

Risk warning: The volume growth rate is lower than expected; the cost reduction effect is lower than expected; price competition worsens.