1H23 Net profit and operating cash flow were adjusted for the first time
SF Express Co., Ltd. disclosed its 2023 annual report. Continued operations achieved revenue of 5.75 billion yuan (+28.8% year on year); net profit due to parent reached 30 million yuan, turning loss into profit, in line with performance forecasts (7/7); net cash from operating activities reached 34 million yuan, positive year on year. The company turned a loss into a profit because: 1) last-mile distribution revenue grew faster; 2) increased order density promoted economies of scale; 3) operating chassis management was more efficient. Considering that the company's profit margin is increasing and the strategy is more profit-oriented, we raised the net profit forecast for 2023/24/25 from -0.20/+1.33/+324 million yuan to 0.45/188/334 million yuan. Due to declining valuations of comparable companies and fluctuations in the RMB exchange rate, we lowered the target price by 27.5% to HK$12.4 based on segment PS valuations. Same-city delivery/last-mile delivery services are based on 0.9/0.7 x 2023E PS, respectively (previous value: 1.1/0.9x; take the median of comparable companies). Maintain the “buy”.
Distribution in the same city: The TOB business structure was adjusted, and TOC maintained a relatively rapid growth rate of 1H23. The company's same-city distribution revenue to merchants tob/consumers increased by 12/ 25% year on year to 2.42 billion/970 million yuan, accounting for 42/ 17% of total revenue. Since 2H22, the company has adjusted its merchant structure, focused more on effective customers, and placed more emphasis on profit orientation, making 1H23 to B revenue growth lower than ToC. Thanks to the penetration of instant delivery into same-city express delivery and the development of user habits, the company's TOC same-city delivery revenue has maintained a relatively rapid growth. The company's ability to acquire customers and some product segments are still interesting. 1H23 tea distribution revenue increased 80% year over year, while distribution revenue for retail categories such as pharmaceuticals, beauty, mother and baby, pets, and jewelry exceeded 100% year on year. 1H23's annual active merchants and consumers increased by 27/ 50% year-on-year, both higher than TOB/toC's same-city distribution revenue growth rate. The growth potential of the two businesses is yet to be unleashed.
Last mile delivery: The new scenario generates revenue, increasing the penetration rate of express delivery in the same city. The company's 1H23 last-mile delivery revenue increased 54% year-on-year to 2.36 billion yuan, contributing 41% of total revenue. 1H23 The national express delivery business volume increased 16% year-on-year (Wind), benefiting from a recovery in consumption. As the end of express delivery, last-mile delivery is mainly due to: 1) the increase in cooperation scenarios with express delivery: the company undertakes diversified forwarding and door-to-door delivery services such as express receipt, half-day delivery, and hourly delivery; 2) consumption recovery since this year has boosted business volume during peak order periods such as the Spring Festival and 618.
Gross margin and expense ratio are gradually improving, and working capital control is better
1H23's gross margin increased 2.7pct year-on-year to 6.7%. The main reasons for the improvement in gross margin are: 1) technology-driven operating chassis is more efficient, capacity integration and rider scheduling and fine management; 2) revenue growth increases the scale effect. 1H23's annual active riders increased 23% year over year. The supply of flexible employment has been relatively relaxed since this year. The annual increase in active riders is lower than the increase in the company's total revenue, which shows the increase in riders' efficiency.
The company's sales expenses, R&D expenses, and management expenses increased by 13%, 19%, and 6% year-on-year. The increases were all lower than the increase in total revenue, reflecting a year-on-year decline in the expense ratio. Overall, the company turned net profit into profit in 1H23; at the same time, by controlling working capital, the company also achieved a positive cash flow from operating activities.
Risk warning: Increased labor costs, increased competition, failure to complete orders efficiently, and outdated algorithms.