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We recently invited management of ANE (Cayman) Inc to an offline non- deal roadshow, where managers of the firm spoke with investors about their business strategy, competitive landscape in the sector, and cost reduction plans. In our view, the firm enjoys strong competitiveness and flexibility in pricing thanks to its cost reduction efforts. Meanwhile, we believe the franchised express delivery industry may become increasingly concentrated towards leading players. We expect ANE's freight volume to continue growing rapidly, and its valuation remains attractive.

Comments

Notable cost optimization in 2023; further cost reduction likely in 2024 driven by improving economies of scale.

We expect costs to continue to decline notably YoY in 1H24. The firm began to consolidate its 55 distribution centers in May 2023, and thus the reduction in distribution and transportation costs was mainly reflected in 2H23. In 2H23, its distribution and transportation costs per kilogram fell Rmb0.02 and Rmb0.016 YoY, down Rmb0.032 and Rmb0.017 QoQ. We expect the firm's costs to decline markedly YoY in 1H24, due to its cost reduction efforts and base effect.

Further cost reduction likely thanks to effective measures. The firm has continued to take measures to improve operating efficiency in 2024. These measures include planning transportation lines in an intelligent manner, implementing digital automation, and optimizing personnel productivity. As freight volume grows, we expect economies of scale in distribution and transportation to improve. Assuming that per-kilogram cost of distribution and transportation each drops by Rmb0.01, we estimate such reduction would contribute incremental gross profit of about Rmb241mn.

Strong pricing competitiveness thanks to cost advantage; freight volume to regain rapid growth. The firm's freight volume has shown strong growth momentum since 4Q23, with average daily freight volume rising 10-20% YoY in November-December 2023. Given the firm's clear cost advantages and increasingly competitive pricing power, as well as the accelerated industry concentration towards leading franchised express delivery companies, we estimate that ANE' average daily freight volume grew over 20% YoY in 1Q24.

Leading franchised express delivery companies becoming stronger; watch market share gains of top players. We note three signs indicating accelerated concentration of franchised express delivery companies:

Franchised express delivery companies need to increase their freight volume to over 10mnt to stay profitable. We think that large-scale companies have embarked on a healthy journey of seeking earnings growth, expansion, and cost reduction. We believe the gap between large-scale companies and small-scale ones is widening.

Sector-wide freight volume growth has slowed due to weak demand since 2022. Meanwhile, we think the capital market has become more rational towards the sector. As a result, there have not been any large fundraising activities in the franchised express delivery industry since 2022.

Leading companies enjoy greater advantages in pricing and franchise management mechanism. For example, ANE has cancelled the penalty for failing to pass the freight volume assessment at its outlets, and implemented incentive plans for incremental freight volume starting from June 2023.

Overall, we think leading companies in the sector are strengthening their advantages in costs, pricing power and product competitiveness. We are upbeat on their continued market share gains.

Financials and valuation

We maintain our 2024 and 2025 earnings forecasts. The stock is trading at 7.8x 2024e and 6.2x 2025e recurring P/E. We maintain an OUTPERFORM rating and our target price of HK$7.50, implying 10.7x 2024e and 8.4x 2025e recurring P/E, offering 36.9% upside.

Risks

Disappointing economic growth; sharper-than-expected increase in fuel costs; disappointing cost control.