3Q24 results beating our expectations

The firm announced its 3Q24 results: Revenue rose 31.4% YoY and 5.3% QoQ to Rmb6.38bn; gross profit grew 72.5% YoY or fell 0.5% QoQ to Rmb1.28bn; attributable net profit grew 101% YoY or 14.7% QoQ to Rmb790mn; recurring net profit rose 89% YoY or 10.8% QoQ to Rmb742mn.

The firm's 3Q24 net profit beat our expectations, mainly because: 1) it continued to focus on cross-border e-commerce, and earnings from its integrated logistics business grew rapidly; 2) other income rose markedly YoY and QoQ as the firm received Rmb72.02mn in government subsidies such as corporate support payments and fiscal subsidies; and 3) the firm's financial expenses fell 93% YoY in 3Q24 due to the falling exchange rate of the US dollar against the renminbi.

Trends to watch

Continuing to focus on special businesses such as cross-border e- commerce logistics; efforts to transform into an integrated aviation logistics service provider have paid off. In 3Q24, revenue from air express, integrated logistics, and ground services rose 18%, 48%, and 10.2% YoY to Rmb2.27bn, Rmb3.47bn, and Rmb642mn; and their gross profit came to Rmb484mn (+90% YoY), Rmb547mn (+200% YoY), and Rmb249mn (-7% YoY).

The integrated logistics business has surpassed air express to become the firm's largest source of gross profit, as the firm makes full use of Pudong Airport's port and trunk line resources to improve its full- chain services. In recent years, cross-border e-commerce has imposed higher requirements on cross-border logistics services, and we expect the firm to maintain strong growth on the back of its core node resources and service capabilities.

Airfreight business remained strong despite off-season in 3Q24; upbeat on rising sales volume and prices in 4Q24. The growth of cross-border e-commerce platforms boosts demand. Airfreight exports were strong in 3Q24 despite the off-season. TAC Shanghai Pudong airfreight index rose 33% YoY in 3Q24. According to Flight Master, the firm's all-cargo flight volume rose 10% YoY. As the peak season for cross- border e-commerce (e.g., Black Friday) approaches in 4Q24, we expect industry-wide freight rates to rise QoQ. We also see an upside in the utilization rate of the firm's fleet. We are upbeat on rising sales volume and prices in the peak season.

In 2025, we expect cross-border airfreight to remain strong, given limited deliveries of wide-body all-cargo aircraft, orderly recovery of international passenger aircraft's belly-hold capacity, and steady growth of cross-border e-commerce airfreight volume.

The firm is strengthening shareholder returns and plans to pay a dividend ratio of 30-50% over 2024-2026. The firm announced its shareholder dividend plan for 2024-2026 and plans to pay 30-50% of its attributable net profit each year if conditions for cash dividends are met. Assuming a dividend payout ratio of 30% and 50%, we estimate the firm's dividend yields in 2024 will be 3.5% and 5.8%.

Financials and valuation

We keep our 2024 and 2025 earnings forecasts unchanged. The stock is trading at 8.9x 2024e and 6.8x 2025e P/E. We maintain an OUTPERFORM rating and our target price of Rmb22.10, implying 11.7x 2024e and 9.0x 2025e P/E and offering 30.9% upside.

Risks

Disappointing introduction of all-cargo aircraft; changes in international trade policies; weaker-than-expected demand for cross-border e- commerce.