On May 7, the China Federation of Logistics and Purchasing announced that in April, China's logistics industry sentiment index increased 0.9 percentage points month-on-month to 52.4%. Among the various sub-indices, the Total Business Volume Index, the New Orders Index, and the Equipment Utilization Index all achieved continuous growth. Also, in April, the expected index of business activity in the logistics industry was 55.7%, up 0.4 percentage points from the previous month, and was in a high boom range for three consecutive months.

The prosperity of the logistics industry continues to rise, but it is still common for the industry to increase revenue without increasing profits. In April, the profit index of the main business of logistics companies fell 0.2 percentage points from month to month.

Focusing on the capital market, in this context, logistics companies with continuously improving profitability are naturally more worthy of investors' attention. Currently, companies are announcing first-quarter results one after another, which probably just gave us a window to observe the leading companies and explore more definitive investment opportunities from them.

Among them, Eneng Logistics (9956.HK), which recently released its first-quarter results, is quite prominent. Let us further explore the fundamentals and future prospects of Eneng Logistics through this report card.

1. Adjusted net profit surged 173.9% year on year, and a high-quality growth trend was determined

Overall, after returning to the growth channel last year, Eneng Logistics continued high-quality growth in the first quarter of this year.

According to the company's latest performance announcement, Eneng Logistics achieved revenue of 2,378 billion yuan (unit: RMB, same below) in the first quarter, an increase of 15.2% over the previous year. Adjusted net profit was $209 million, up 173.9% year over year.

The core data all achieved growth that exceeded expectations. In particular, the sharp increase in profitability gave investors some surprises. In the first quarter, Aneng Logistics's gross profit reached 382 million yuan, an increase of 77.6% year on year, and gross margin increased 5.7 percentage points year over year to 16.1%, the highest level in history.

Photo Source: Public Information

Eneng Logistics's ability to achieve today's high-quality growth stems from taking the lead in initiating “quality and profit as the core” active transformation in the industry starting in the second half of 2022. The author believes that the results achieved by this profound transformation can be viewed specifically from the three aspects of business structure, cost reduction, and efficiency gain.

In the field of road freight, there is a common phenomenon: the heavier the unit weight of the goods, the lower the profit margin. As a result, Eneng Logistics actively adjusted its business structure and actively embraced a more profitable business. According to the data, the volume of mini tickets and LTL tickets increased by 24.8% and 20.8%, respectively; after falling to 93 kg in 2023, the average ticket weight dropped further to 91 kg in the first quarter of '24.

However, adjusting the business structure alone is not enough to explain the excellent performance of Eneng Logistics in doubling its profit level. More importantly, Eneng Logistics has made sufficient efforts to reduce costs.

As can be seen, the operating costs of dismantling Eneng Logistics are mainly divided into four major parts: trunk line transportation, distribution centers, value-added services, and delivery services. Among them, transportation and distribution costs account for more than 65% of total costs. In the first quarter, Eneng Logistics achieved significant cost reduction in these two major links. The cost per unit trunk line decreased by 8% to 310 yuan/ton, and the unit distribution center cost was 151 yuan/ton, a sharp drop of 27.1% over the previous year.

Why cut costs?

According to the author, logistics costs are not only related to product pricing strategies, but also to the speed of response and overall competitiveness of enterprises in the face of market fluctuations, and directly affects the profit level of enterprises. In particular, in an environment of economic decline and increased competition in the industry, whether logistics costs can be effectively reduced has even become a key factor in whether enterprises can survive and develop.

However, Eneng Logistics's efforts to reduce costs are not simply reducing individual costs, but rather allowing it to target users through service, quality, and timeliness on the basis that other platforms are not disadvantaged in terms of price, that is, increase efficiency.

As can be seen from the quarterly report, all of the company's indicators have been significantly optimized. In terms of timeliness, the average shipping time in March 2024 was further shortened from 76 hours in the first quarter of last year to less than 70 hours; in terms of quality, by the end of March, the company's loss rate (number of items lost per 100,000 items) had dropped to 0.06, and the damage rate (number of damaged items per 100,000 pieces) had dropped to 8.67; in terms of service, Eneng Logistics actively promoted the intelligence of the number of outlets, and optimized the assessment mechanism.

Prices go down, quality rises, and a higher price-quality ratio equals a better user experience. The simultaneous year-on-year double-digit increase in total freight volume and total number of tickets is the best proof of the increase in user recognition. In the first quarter, the total freight volume of Eneng Logistics reached 2.88 million tons, an increase of 21.7% over the previous year. The total number of votes also increased significantly by 25.3% year over year to 31.57 million.

2. Looking to the future, how do you correctly view the company's value?

The rapid growth of Eneng Logistics is not only reflected in financial reporting, but is also reflected in the capital market.

Since February of this year, Eneng Logistics's stock price has fluctuated upward. As of May 22, Eneng Logistics's stock price has accumulated a cumulative increase of more than 80% since its previous low. On the one hand, capital is returning to China's core assets; more importantly, the company's fundamentals continue to improve, continuously raising the market's expectations for the company's future.

Although the stock price has risen sharply from its lowest point, due to recent market fluctuations and adjustments, the current valuation of Eneng Logistics is still very attractive. If leading domestic express delivery and express delivery companies are selected based on the 2023 financial data, a horizontal comparison will show that Eneng Logistics's PE is far below average.

Data source: Open Internet

However, considering that the company has the largest volume of goods in the franchise express industry, in the context of rapid integration of domestic LTL Express, Eneng Logistics is one of the few leaders to continuously improve management capabilities, improve operational efficiency, and enhance product competitiveness through new strategies. Scarce value is prominent, and should enjoy a certain premium.

The brokerage research report also confirmed this view. CICC stated in the research report that the company's cost reduction exceeded expectations, and the scale growth logic was strongly implemented. Based on optimism for the company's long-term share growth and rising profit margins, the target price was raised by 13.3% to HK$8.5; GF Securities also gave Aneng Logistics a “buy” rating based on the growth and profit level of Eneng Logistics, with a target price of HK$7.27.

Looking further, whether it is the potential energy unleashed by the company's internal reforms or the market space on the racetrack it is located in, it has provided a “fertile ground” for Eneng Logistics to realize its value.

At present, the industry has entered a stage of high-quality development. Insufficient service capacity has led to a decline in network stability of late enterprises, while the effects of the previous practice of relying on industrial financing to obtain market share with a low price strategy are gradually weakening. In this context, it has also created opportunities for leading companies represented by Eneng Logistics, so that they can gradually encroach on the market share of less competitive tail companies.

Eneng Logistics focuses on the “Five Greatest” strategy, leading the industry in service quality and building differentiated competitive barriers. Naturally, while improving profit levels, it can use its service capabilities to squeeze the market share of tail companies, thereby achieving scale growth in the process of clearing the industry.

Judging from the industry pattern, the overall concentration of the LTL industry is still low, but the market capacity continues to grow steadily. According to third-party agency forecasts, the LTL freight market is expected to rise from 1.62 trillion yuan in 2022 to 1.81 trillion yuan in 2027. At the same time, there is a clear trend of market share gradually being concentrated in leading companies. As the competitive advantage of leading companies continues to increase, there is still plenty of room for improvement in the overall scale of leading enterprises in the industry.

The trend of concentration of leaders in the LTL industry is obvious

Image source: GF Securities

According to data from the Transport Union think tank, in 2022, Eneng Logistics's market share reached 15.7%, ranking first in the industry. From this perspective, in the context of increased industrial concentration, Eneng Logistics, which has a stable leading position, will undoubtedly be the biggest dividend beneficiary.

In addition to this, Eneng Logistics's integration of dedicated lines has given it a significant advantage in the field of express network scale. Through its freight partner platform model, the company has successfully built the largest express network in the country and firmly occupied the position of an industry leader.

The logic behind this isn't hard to understand. Compared with regional networks and dedicated line companies, full-network express has obvious advantages in terms of scale effect, standardized management, and service stability. It has the logic of long-term penetration, and is ahead of the market in growth.

Looking at the longer cycle, the upgrading of the industrial structure can also promote the upgrading and development of the express delivery industry. Take Old Dominion Freight Line, a leading US express shipping company, as an example. Most of its downstream customers come from the energy industry, chemical industry, and high-end manufacturing. Meanwhile, China's LTL demand mainly consists of ordinary consumer goods and industrial products. As a result, the unit income level of Chinese express companies is still quite far from the level of leading US express delivery companies.

The 2024 government work report proposed implementing manufacturing technology transformation and upgrading projects, cultivating and expanding advanced manufacturing clusters, creating a new national industrialization demonstration zone, and promoting the high-end, intelligent and green transformation of traditional industries. Under these circumstances, the industrial structure upgrade is expected to open up growth space for China Express.

From this perspective, with the growth opportunities brought by Eneng Logistics's own stable infrastructure and the transformation and upgrading of the industry, the certainty that Eneng Logistics's future performance will continue to grow is getting higher and higher, thus significantly increasing the company's long-term investment appeal.

III. Concluding Remarks

In summary, as a leading enterprise in the express shipping industry, Eneng Logistics has promoted the company to rapidly enter a high-quality development stage with both revenue and profit growth through its strong market competitiveness and strategic execution capabilities.

Continuously improving performance is the most effective way to gain market recognition. In particular, in the context of the current recovery trend in the global economy and the reallocation of assets by international capital in the Asia-Pacific region, companies with abundant internal vitality and rapid development on the racetrack, such as Eneng Logistics, are more likely to be recognized and sought after by capital. For Eneng Logistics, the path of revaluing its value is probably just beginning.