2023 and 1Q24 results in line with our expectations

Deppon Logistics announced its 2023 and 1Q24 results: 2023 revenue rose 16% YoY to Rmb36.3bn, net profit attributable to shareholders grew 15% YoY to Rmb746mn, and recurring net profit grew 82% YoY to Rmb568mn. After excluding the impact of losses from fair value changes (Rmb95mn), we estimate a net profit of Rmb841mn for 2023, representing a 28% YoY increase. The firm maintained solid growth in 1Q24: Revenue rose 25% YoY to Rmb9.3bn and net profit grew 28% YoY to Rmb93mn. This firm's 1Q24 results were in line with our expectations. In 1Q24, government subsidies decreased Rmb34mn YoY. However, the firm's profit growth still outpaced the industry average, attributed to the contribution of network integration to profits and the firm's reduction of labor and distribution costs.

Orderly integration with JD Express and organic product development are likely to drive rapid growth in the express delivery business. In early 2024, the firm adjusted its business scope to concentrate on the core business of express shipping, specifically targeting parcels weighing more than 10kg. During 1Q24, revenue from express shipping increased 30% YoY to Rmb8.4bn. We estimate that network integration contributed 15% of the total revenue.

Lean management practices persisted, resulting in marginal improvements in labor and distribution cost ratios. In 1Q24, the labor cost ratio decreased 7.5ppt YoY, while the distribution cost ratio fell by 0.2ppt YoY. These improvements were primarily attributed to the reduction of organic business outlets, distribution channels, and staff. As of end-2023, the number of couriers decreased about 9% YoY, with the number of directly operated outlets decreasing 1% and the number of organic distribution centers decreasing 17%.

Transportation costs likely have notable room for reduction. In 1Q24, transportation costs increased 73% YoY, with the percentage of revenue rising by 11.3ppt YoY. This increase was primarily due to transportation capacity related to network integration, which initially relied on external fleets, and short-term fuel price hikes resulting in a structural increase in transportation costs. We expect that the firm will reduce transportation costs as it optimizes its fleet and network structure.

Trends to watch

We suggest watching industry demand and marginal improvement in the firm's network structure.

1) Less-than-truckload (LTL) express shipping caters to consumer demands in production and trade, but its stability is subject to uncertainties arising from fluctuations in manufacturing and retail demand. China's road freight volume increased 5% YoY in 1Q24, which was 2.7ppt lower than the growth observed in January to February, possibly due to a high base in the previous year. iResearch estimates that the size of the express shipping industry may grow by 8.6% in 2024.

2) Organic cost reduction is crucial for the firm's earnings in 2024, and we recommend watching the optimization of its network structure. Currently, the firm operates 190 distribution centers (including 81 network-integrated distribution lines) and 3,916 trunk lines (including 1,659 network-integrated lines), indicating notable potential for cost reduction. We suggest monitoring the firm's progress in consolidating its distribution and network.

Financials and valuation

We cut our 2024 and 2025 net profit forecasts 4.8% and 3.7% to Rmb1.10bn and Rmb1.45bn, as demand in the express shipping industry is affected by the macro economy and faces short-term uncertainties. The stock is trading at 15.5x 2024e and 11.8x 2025e P/E. As we are optimistic about the firm's long-term growth, we maintain our ratings and target price, implying 18.7x 2024e and 14.1x 2025e P/E, offering 20.3% upside.

Risks

Worsening price competition; economic downturn; sharp rise in fuel costs.