High international freight rates declined, and the freight forwarding business was under short-term pressure; the integrated logistics business boom picked up, and Kerry Logistics announced 2022 results: 1) Revenue increased 9.7% year over year to HK$86.65 billion; 2) Net profit of HK$3.57 billion was deducted, up 10.9% year on year. Among them, 2H22 deducted non-net profit of HK$1.2 billion, a decrease of 49.4% over the previous month, mainly due to falling high international freight rates. Looking ahead to 2023, due to the sharp decline in international freight rates, we expect the company's freight forwarding business profits to decline year over year. On the other hand, benefiting from post-epidemic recovery and collaboration with SF Holdings, the company's integrated logistics business is booming. We lowered our 2023/2024 net profit forecast by 26%/20% to $2.79 billion/HK$3.07 billion to reflect the drag of falling freight charges; we added a net profit forecast of $3.28 billion for 2025. The target price was lowered 14% to HK$18.4 to maintain the “buy” rating based on 11.9x 2023E PE (the company's historical PE average for the past three years).
2H22 International freight forwarding business profit declined month-on-month
Since 2H22, the high level of international shipping and air freight rates has declined sharply, mainly due to weak external demand compounded by the easing of supply chain disturbances, and the gradual restoration of capacity supply. In 2022 as a whole, the freight forwarding business achieved operating profit of HK$4.70 billion, contributing 90% of the company's profit. Among them, 2H22's operating profit was HK$1.31 billion, a year-on-year decrease of 61.6%. Looking ahead to 2023, we expect 1H23 international freight rates to remain under pressure; 2H23 earnings are expected to pick up month-on-month. We forecast the company's international freight forwarding business operating profit of HK$3.51 billion in 2023, a year-on-year decrease of 25.3%.
Post-pandemic recovery boosts recovery in integrated logistics business
The integrated logistics business in 2022 benefited from the relaxation of overseas epidemic control, the reopening of cross-border business, and a recovery in industry sentiment. In 2022 as a whole, the company's integrated logistics business achieved operating profit of HK$1.38 billion, an increase of 28.1% over the previous year. Among them, 2H22's operating profit was HK$660 million, a decrease of 8.2% over the previous month. The month-on-month decline in profits was mainly due to the impact of the 4Q22 pandemic. Looking ahead to 2023, we believe that with post-pandemic recovery, a recovery in manufacturing will boost demand for integrated logistics. We expect the company's integrated logistics operating profit to be HK$1.56 billion in 2023, an increase of 13.6% over the previous year.
The collaborative development with SF Express will help Kerry Logistics, the company's air cargo and integrated logistics business, become a subsidiary of SF Holdings. It will benefit from SF Express's leading technology in air cargo fleet and supply chain management to help develop the company's cross-border air cargo and integrated logistics business. On the other hand, thanks to the huge number of Chinese corporate clients owned by SF Holdings, Kerry Logistics is expected to further expand the number of integrated logistics customers and business scale.
Risk warning: global economic recession; freight rate growth lower than expected; air cargo business development progress is lower than expected; political risk.