Just as Pinduoduo (PDD.US) doubled its revenue performance, Eneng Logistics (09956) 2024Q1 also exceeded the expectations of the market and even the company itself.

Judging from performance data, in the first quarter of 2024, Eneng Logistics's revenue was 2,378 billion yuan, up 15.2% year on year; total LTL freight volume reached 2.88 million tons, up 21.7% year on year; gross profit reached 382 million yuan, up 77.6% year on year; and adjusted net profit was 209 million yuan, up 173.9% year on year.

This is the first voluntary quarterly report disclosed by Eneng Logistics since its launch. It is also one of the few logistics companies that voluntarily disclose quarterly reports. Eneng Logistics is also the number one partner for logistics cooperation on the TEMU platform (a cross-border e-commerce platform owned by Pinduoduo), which embodies many Internet and technology genes.

According to the Zhitong Finance App, Eneng Logistics's performance is mainly due to two points: industry-leading cost control; industry-leading prices — supported by the industry's most intimate outlets and high-quality services. The ever-widening scissor gap between the two is driving the energy industry on a highway of rapid growth in revenue and net profit.

It is easy to understand and difficult to act. The achievement behind it is that strategic changes centered on “quality and profit” over the past year have awakened the combat power of the entire business chain, thus always reaching a new continent of profit in the face of losses.

More importantly, in terms of many excellent indicators such as net profit growth rate, gross profit margin, net interest rate, cash flow, and debt ratio, Eneng Logistics is still accelerating. This is where the market values its rising — Eneng Logistics's stock price has almost doubled in the past three months.

Judging from macro data, in April, the manufacturing purchasing managers' index (PMI) was 50.4%. The effects of the country's economic stabilization policies and measures in the expansion range for two consecutive months were further evident. Coupled with the recovery of real estate, consumer and other industries, logistics was one of the industries directly benefiting.

However, judging from the external situation, US inflation is still high, and exports are not yet optimistic. As a result, it may be transmitted to the domestic truck transport industry through production. Therefore, whether pessimistic or optimistic, by analyzing Eneng Logistics's 2024Q1 financial report using a scalpel method, we can get a glimpse of its trend throughout 2024.

The first understanding is that freight volume grew rapidly in Q1 and maintained a relatively rapid growth rate in Q2

According to the data, Eneng Logistics achieved a total LTL freight volume of 2.88 million tons in the first quarter, an increase of 21.7% over the previous year; the total number of express tickets reached 31.57 million, an increase of 25.3% over the previous year.

Looking at the cargo weight structure, the volume of mini small tickets (70 kg or less), small ticket less than 70 kg (70 to 500 kg), and large parcel (500 kg or more) increased by 24.8%, 20.8%, and 20.9%, respectively, which led to a year-on-year increase in total freight volume.

The causes behind the analysis are mainly due to the optimization of the network structure and the increase in average cargo volume.

Looking at outlets, by the end of the first quarter of 2024, Eneng's total number of freight partners and freight forwarders had exceeded 29,500; of these, the number of freight partners increased by 542 over the same period last year, with 481 more than the previous month. This data has been at the top of the Express Network for many years. Even in Tibet, Eneng has achieved full coverage.

While network density is increasing, Eneng Logistics optimizes route planning to improve transit efficiency and improve service quality and timeliness. In the first quarter of this year, the loss rate (number of items lost per 100,000 items) dropped to 0.06, the damage rate (number of damaged items per 100,000 items) dropped to 8.67, and the average shipping time in March was shortened to less than 70 hours.

The perfect network and excellent service quality have also led to a significant year-on-year increase in Aneng Logistics's cargo volume. An Eneng Logistics executive said that the company achieved rapid growth in the first quarter and maintained a relatively rapid increase in the current second quarter.

Second, gross margin and net profit reached record highs. Net profit for half a year may be equivalent to the full year of 2023

In 2024Q1, Aneng Logistics's gross margin reached 16.1%, an increase of 5.7 percentage points over the previous year, the highest level in history, and this figure has doubled from 8.82% in 2022.

Climbing the mountain of high gross margins is mainly due to the transformation over the past year or so. Eneng Logistics no longer pursues large-scale growth, but is paying more attention to healthy, high-quality growth, which has led to an increase in gross margin.

This transformation strategy is reflected in the company's active adjustment of the cargo weight structure, using high-margin businesses to replace previously low profit margins and negative gross profit parts. Judging from financial data, this adjustment has already achieved remarkable results. Judging from the situation in the first quarter of this year, this adjustment continues.

Specifically, the cargo weight structure of Eneng Logistics continues to improve. Both mini tickets and small ticket LTL volumes achieved double-digit growth. This increase not only drove a 25.3% year-on-year increase in total tickets, but also significantly increased revenue from value-added services.

However, due to the adjustment of the cargo weight structure, the average ticket weight dropped from 94 kg in the first quarter of last year to 91 kg as of the first quarter of this year.

Although the average weight of tickets has declined due to the adjustment of the cargo weight structure, Aneng Logistics executives said that currently the main focus is on the 3-300 kg segment. The company will continue to follow the strategy of “small load as gross profit and zero cost” and maintain a reasonable balance of cargo weight structure and ratio to achieve continuous high-quality profits.

In addition to the adjustment of the cargo weight structure, Eneng Logistics has also carried out positive changes in other areas. Last year, the company carried out a series of actions such as business transformation, adjustment of pricing strategies, and optimization of the distribution structure. These changes had a positive impact on the first quarter of this year, driving down fixed costs. At the same time, the company has also launched a series of lean operation projects to reduce variable costs on the distribution and transportation side. Furthermore, with the expansion of scale and channel expansion, Eneng Logistics has further diluted some of the costs and expenses, thereby increasing profits.

In terms of net profit, net profit of 209 million yuan has reached a record high, and is likely to increase net profit for the second year in a row after last year in 2024. According to the current growth rate, the 2023 interim report may exceed the net profit level of 407 million yuan for the full year of 2023.

Xu Hao, chief financial officer of Eneng Logistics, told the Zhitong Finance App at the earnings conference that the company is very confident in 2024, more confident than two months ago, but it also sees that challenges and opportunities in the LTL market coexist, and the outlook for the whole year is currently unchanged.

Third, understand that cost control capabilities continue to lead the industry

Judging from the unit economic benefits disclosed in financial reports, in the first quarter of 2024, the unit price of transportation services of Eneng Logistics fell 10.7% year on year, and the unit price of delivery services fell 4.4% year on year. The unit price of value-added services alone increased 4.4% year on year. Taken together, the total service unit price was 827 yuan/ton, a decrease of 5.4% year on year.

Compared with previous quarters, the total service unit price for the first quarter of 2023 was 874 yuan/ton, and the following three quarters were 838 yuan/ton, 798 yuan/ton, and 802 yuan/ton, respectively.

Senior management of the company pointed out at the performance exchange meeting that the decline in unit prices was the result of active price release policies and high base figures. In the first quarter of 2023, Eneng Logistics optimized the cost-based pricing system, making the price level higher. However, as costs continue to fall, the company will continue to implement the savings strategy for the next nine months of 2024.

Judging from the company's strategy, Eneng Logistics is improving profitability through a series of cost optimization measures.

First, on the transportation side, Eneng Logistics reduces transportation costs through measures such as increasing loading rate, saving capacity for unilateral transportation, optimizing high-speed routes, and improving vehicle trailer utilization. These measures help improve transportation efficiency, thereby reducing unit transportation costs.

Second, at the distribution side, Eneng Logistics improves operational efficiency by improving personnel efficiency, lean and reasonable scheduling, optimizing service ratios, lean planning in storage areas, and sorting automated equipment for trial operation. These efforts help reduce unit allocation centre costs.

In 2023, Eneng Logistics had a net reduction of 55 small distribution centers throughout the year. This benefit began to be reflected in the second half of 2023 and continued to be released in the first quarter of 2024.

According to performance data, the unit trunk line transportation cost was 310 yuan/ton, down 8% year on year, the unit distribution center cost was 151 yuan/ton, down 27.1% year on year, unit delivery service cost decreased 3.4% year on year, while unit cost of value-added service increased 6.5% year on year. Taken together, the unit operating cost was 694 yuan/ton, a year-on-year decrease of 11.3%.

Finally, one of the “five biggest goals” of Eneng Logistics is to achieve the highest network coverage. This not only means a reduction in the service radius, but also represents an increase in cost control and service response speed. This strategy has been recognized and supported by outlets.

At present, Eneng Logistics has become the number one partner in logistics cooperation on the TEMU platform. According to the Zhitong Finance App, Eneng has set up a dedicated general e-commerce department. In addition to Pinduoduo TEMU, Eneng Logistics has also signed cooperation agreements with 1688 and Douyin TIKTOK, and is actively promoting cooperation with Cainiao International.

In a highly competitive order source market, prices are the focus, and logistics companies' ability to control hidden costs has become critical.

The fourth understanding focuses on the main business. In the future, capacity building such as capacity and digitalization will be strengthened

The future development blueprint for Eneng Logistics has been clarified. It is planned that within the next 2 to 3 years, capital expenditure will mainly focus on three aspects: self-operated fleets, automated assembly line equipment, and digital investment.

First, the capacity of the self-operated vehicle fleet will be the focus of capital expenditure. As vehicles enter the renewal cycle, from 2026, Eneng Logistics will face a more concentrated demand for vehicle replacement. This involves not only the expansion of the fleet size, but also the improvement of vehicle performance to meet growing transportation needs and improve transportation efficiency.

Second, investment in automated assembly line equipment is also part of the company's strategic plan. These devices can intelligently determine the sorting port the goods enter through bar code scanning, height detection, and shape recognition, thereby speeding up cargo processing and reducing human error. In addition, there are plans to promote new energy and intelligent driving pilot projects, which will further improve logistics efficiency and environmental performance.

Third, digital investment will be at the core of the company's innovation strategy. This includes using technologies such as 5G, big data, artificial intelligence, and blockchain to improve network operation efficiency and service efficiency. The company has invested a lot of energy in the development of digital capabilities, including integrating multi-dimensional data information and scenario-based customized development to strengthen the operation team system in various regions.

In terms of strategic planning, Eneng Logistics will continue to focus on the high-margin kilogram segment, and “effective scale growth” has become the latest focus of Eneng Logistics. The company is no longer simply seeking to expand in scale, but is paying more attention to the quality and efficiency of growth.

The fifth thing to know about the valuation of companies

Beginning in February, Eneng Logistics's stock price began to rise from the HK$3 range. As of May 28, it reached HK$6.34, an increase of nearly doubled, and the company's market value also rose to HK$7.371 billion.

According to data, Eneng Logistics was established in June 2010 and mainly focuses on the LTL express delivery market in China. According to the “2023 LTL Logistics Top 30 List” published by Yunlian Think Tank in 2023, Eneng Logistics ranked fourth.

As a cost pioneer in the logistics industry, Eneng Logistics executives told the Zhitong Finance App that the company's transportation and distribution costs continued to decline in the first quarter of this year, and the savings strategy will continue to be implemented in an orderly manner over the next 9 months of 2024. “On the basis of our growth in scale and volume of goods, we are reducing our costs through various operational improvement measures, and we hope to achieve the lowest cost in the entire network.”

If such a cost strategy is followed, combined with higher service prices, Eneng Logistics's profit will continue to grow rapidly in the second half of the year, and there is even an opportunity to expand the total profit to more than 800 million — doubling from 2023.

This is highly sought after by the capital market. Eneng Logistics has been showing a net buying situation over the past several trading days. As of May 27, there was a net inflow of $78,8401 million over the past 60 trading days, particularly the net inflow of $394.757 billion over the past 5 trading days; Hong Kong Stock Connect's shareholding ratio also rose to 5.91%, up 0.7 percentage points from 5.2% in February.

A number of brokerage firms have also recently published research reports favorable to Eneng Logistics.

CICC said that it is expected that, driven by the 24-year scale effect, the company will still have “bullets” to reduce costs, and it will also simultaneously provide strong pricing competitiveness, leading to rapid growth in goods volume and a continued increase in market share. The current valuation is still attractive.

GF Securities said in its first covered research report that the company reduced costs by 11% by optimizing the weight of single tickets. In the context of product homogenization in the express shipping industry, low cost has become the key to attracting traffic, and Eneng Logistics's market share is expected to increase. The research report also predicted that the market value of Eneng Logistics will reach 14 times the PE valuation in 24 years, giving a “buy” rating.

Meanwhile, Haitong International issued a forecast announcement on May 27. Aneng's gross margin will achieve steady growth in 2024-2026. Using the PE valuation method, referring to comparable company valuations, the company will be given 14 times PE in 2024, and the target price is HK$8.95. Maintain an “better than the market” rating.

Currently, the dynamic price-earnings ratio of Eneng Logistics is 11.94 times. Referring to the market values of JD Logistics and SF Express, which are also logistics giants, there is still huge room for improvement in their valuation.

Qin Xinghua, founder, CEO and president of Eneng Logistics, is optimistic about the future growth of the company. He said that the express delivery market was the express delivery market ten years ago; in the current stock era, industrial concentration will accelerate. Aneng has prepared for this accelerated concentration a year and a half to two years in advance. “The changes we have made are all in preparation for accelerated concentration. In the next three to five years, the winners of the market will be king.”