Earnings in the annual report fell short of expectations; in the early days of operation of the Cold Chain Logistics Park, profit forecasts and ratings were lowered. In 2020, Tielong Logistics achieved revenue of 15.2 billion yuan (-7.3% YoY) and net profit of 401 million yuan (-11.9% year-on-year) (announcement 4/8); Guimu's net profit fell short of our expectations of 11.5%. The company's railway freight and port logistics, special container, supply chain, and real estate businesses accounted for 54%, 30%, 11%, and 4% of the company's gross profit in 2020, respectively. Apart from the increase in gross profit of railway freight and port logistics, the gross profit of other businesses declined to varying degrees, mainly dragged down by the epidemic. We expect EPS to be 0.33/0.34/0.35 yuan in 2021-2023, and adjust the target price to 6.25 yuan. The Dalian Cold Chain Logistics Park is in the early stages of operation, and the food cold chain is still affected by the epidemic, so it was downgraded to the “increase in holdings” rating.
The freight volume of the Shaba Line increased dramatically. Railway freight and port logistics contributed to the increase in gross margin of the company's operations in 2020. Among the company's various businesses, railway freight and port logistics performed the best. Their gross profit increased 15.7%/14.6% year-on-year in 1H20/2H20, and the annual gross margin increased 0.9pp to 16.4%. As the Shaba Railway undertook the return flow of “public to rail” and increased supply, the number of shipments arriving in 2020 increased 19% year on year, while the national railway freight volume increased only 3.2% year on year during the same period (China Railway Administration). The company's commissioned processing trade business expanded into a commodity supply chain business, and sales categories expanded from steel to iron ore and coal. Supply chain gross profit decreased 47%/76% year on year in 1H20/2H20, and annual gross margin decreased by 1.1 pp to 0.8%, mainly because of implementing the new revenue guidelines in 2020, freight and miscellaneous expenses were shown from sales expenses to operating costs. If this factor is taken into account, we believe that the gross profit is basically the same as year over year.
The volume and price of special boxes was dragged down by the epidemic, the year-on-year decline in the scale of real estate delivery was affected by the epidemic. Transportation demand in the logistics industry slowed. The company's special box delivery volume in 2020 decreased 12.4% year-on-year, 1H20/2H20 gross profit fell 31%/21% year on year, and annual gross margin fell 1.7 pp to 16.6%. China Railway Group's container delivery volume increased 36.7% year-on-year in 2020. There was a divergence between the company's special containers and China Railway's container operating performance. This may be due to differences in transportation types. The dry bulk container type accounts for 72% of the company's total special container holdings and 88% of total shipments (2019). Its main types are coal, sulfur, phosphate fertilizer, cement, clinker, etc. The company's railway passenger transportation contributed 2.8% of gross profit in 2020, and all had expired and withdrawn by the end of 2020. Affected by the epidemic, the company's existing property sales progress slowed. In 2020, real estate gross profit fell 55% year-on-year, and gross margin fell 3.5pp to 17.4%.
The Dalian Cold Chain Logistics Park was launched. It was affected by the epidemic in the short term. Profit forecasts and ratings were lowered. The Cold Chain Logistics Park was put into operation in October 2020. The total project investment was about 860 million yuan, and production capacity climbed in the early stages of opening. At the same time, the food cold chain was greatly affected by the epidemic, and we expect it to have a slight drag on profits.
Considering the decline in the special container business volume and the initial operation of the cold chain logistics park, we lowered the return net profit forecast for 2021/2022 to 434.4 billion yuan (previous time 5308 million yuan). We adjusted the target price to 6.25 yuan (previous 19x 2020PE; 2021/2022 EPE weighted by market value for the railway industry was 20.1x/19.6x), and adjusted the target price to 6.25 yuan (6.59 yuan the previous time). Downgraded to “increase holdings” rating.
Risk warning: The development of special boxes fell short of expectations, the rental rate of cold chain logistics parks was low, and the Shaba Line fell short of expectations.