3Q24 earnings miss our expectations

CTS International Logistics announced its 3Q24 results: Revenue rose 52% YoY and 23% QoQ to Rmb5.82bn, gross profit grew 4% YoY and 14% QoQ to Rmb556mn, and attributable net profit fell 21% YoY and grew 24% QoQ to Rmb169mn. The firm's 3Q24 profit slightly missed our expectations, mainly due to: 1) Volatile ocean freight rates and pressure on earnings from agency business; 2) investment costs and expenses increased in the early stage due to the firm's efforts to expand overseas network; and, 3) the firm generated a high base related to investment income, as it sold a 25% stake in JCEX International Logistics in 3Q23.

Trends to watch

Direct-customer strategy continues; overseas expansion well on track. 1) Since 2024, the firm has established and operated overseas outlets in Kazakhstan, Brazil, Chile, Colombia, and Nigeria to strengthen its local service capabilities. 2) The firm continues to enhance the stability of its products and widen product coverage. For marine transportation, it cooperated with contractors, while for air transportation, it consolidates core capacity for European and American routes to improve its product mix.

If container freight rates stabilize, we expect the firm's unit earnings to recover. As the firm provides full-process logistics services for some clients, the sharp fluctuations in container freight rates since 2024 have increased the firm's costs in the short term. Since July, SCFI freight rates have gradually fallen (as of October 18, SCFI US west coast routes and European routes have fallen 42% and 64% from the highs in early July). If container shipping rates stabilize in the future, we expect the firm to improve its pricing and cost management capabilities, and its earnings per container will likely recover.

The firm promises a dividend payout ratio of no less than 60%, and its dividend yield provides underlying income. According to the firm's previous announcement, dividends for each year over 2023–2025 should be no less than 60% of the distributable profit of the year. If there are no major capital expenditure arrangements in the current year, the proportion of cash dividends in profit should be at least 80%. Assuming a dividend payout ratio of 60%, we estimate the firm's dividend yield at 4.4% in 2024, supporting the firm's shareholder returns.

Financials and valuation

We cut our 2024 net profit forecast 38.6% to Rmb592mn, and introduce our 2025 net profit forecast of Rmb661mn, as freight rates have been more volatile in recent years and the firm's overseas expansion boosted costs. The stock is trading at 13.6x and 12.2x 2024e and 2025e P/E. We maintain an OUTPERFORM rating. Due to the aforementioned reasons, we cut our TP 28% to Rmb7.20 (implying 15.9x 2024e P/E and 14.3x 2025e P/E), offering 17.1% upside.

Risks

Lower-than-expected revenue from direct-customer business; international trade friction; disappointing overseas demand.