Preannounced adjusted net profit no less than Rmb0.5bn, beating our forecast

ANE (Cayman) Inc (ANE) estimates that its non-HKFRS adjusted net profit was no less than Rmb0.5bn in 2023 (vs. a loss of Rmb218mn in 2022).

The firm estimates revenue rose 6% YoY to about Rmb10bn, gross profit grew at least 70% YoY to Rmb1.24bn, and operating profit totaled at least Rmb565mn (vs. a net operating loss of Rmb171mn in 2022).

The firm’s preannounced 2023 earnings beat our forecast. The firm announced that its earnings improved significantly, thanks to effective strategic transformation to improve efficiency and quality, reduced costs due to optimization of sorting center network, enhanced lean management, as well as an improving franchisee network ecosystem.

Trends to watch

Based on the firm's preannouncement, we estimate the lower-end of its 2H23 earnings: Revenue grew about 3% YoY in 2H23 and gross profit rose about 51% YoY. Non-HKFRS adjusted net profit was no less than about Rmb270mn, turning around YoY.

Freight volume: We estimate that freight volume may remain flat YoY in 2H23, but still grow 26% HoH compared with the slack season in 1H23, given booming manufacturing and retail industries related to express delivery.

Cost: Based on the firm’s preannouncement, we estimate the firm's GM at about 13% in 2023, up 4.7ppt YoY. We attribute the marked improvement in operating efficiency to the optimization of its sorting center network and enhancements to personnel and warehouses.

The firm has been streamlining its delivery routes and consolidating sorting centers since end-May. The number of sorting centers has decreased from 136 in 2022 to 94 as of June 2023.

We estimate that costs for trunk lines and distribution fell 11% and 9% YoY or 11% and 15% HoH in 2H23. We think per-tonne costs for value-added and delivery services (both charged on a per-parcel basis) may continue to rise, due to the rising proportion of small- parcel cargoes.

Prices: The firm had largely optimized its product mix and pricing mechanism in 1H23. Based on the cost-based pricing policy, assuming that unit gross profit stabilizes HoH, and considering weak industry demand, we estimate that the unit price may fall 5% HoH or rise 5% YoY in 2H23.

We suggest watching for potential industry consolidation. We note

that franchised express delivery companies need to increase their freight volume to over 10mnt to stay profitable. Moreover, we think the capital market has become more rational in recent years. We believe that leading companies such as ANE are improving their pricing power by leveraging their cost advantages. We suggest that investors watch for the possible exit of smaller-scale companies and potential industry consolidation.

Financials and valuation

As the firm's cost reduction measures are more effective than expected, we raise our 2023 and 2024 net profit forecasts 71% and 71% to Rmb410mn and Rmb625mn. We introduce our 2025 net profit forecast of Rmb780mn (up 25% YoY). We raise our 2023 and 2024 non-HKFRS net profit forecasts 18% and 30% to Rmb510mn and Rmb725mn. We introduce our 2025 non-HKFRS net profit forecast of Rmb880mn (up 21.5% YoY). The stock is trading at 6.1x 2024e and 5.0x 2025e P/E.

Given uncertainties in industry demand, we maintain OUTPERFORM and our target price of HK$7.50. Our TP implies 9.9x 2024e and 8.1x 2025e non-HKFRS P/E, offering 62% upside.

Risks

Economic growth disappoints; sharper-than-expected increase in fuel costs; disappointing cost control.