2023 net profit of main businesses estimated at Rmb0.84bn

Deppon Logistics preannounced its 2023 results: The firm estimates its revenue rose 16% YoY to Rmb36.3bn and net profit attributable to shareholders grew 13% YoY to Rmb0.74bn in 2023. The firm recognized a loss of Rmb95mn from fair value changes in 2023, mainly due to the fair value loss in its stake in Inceptio (an autonomous driving company).

Excluding the impact of fair value changes, we estimate the firm's net profit at about Rmb0.84bn in 2023 (up 28% YoY), and we think operations of the firm's main businesses are in line with our expectations. The firm's preannounced 2023 results imply that its revenue rose 26% YoY and 11% QoQ to Rmb10.8bn, and net profit attributable to shareholders fell 15% YoY but grew 20% QoQ to Rmb0.27bn in 4Q23. Excluding gains and losses from fair value changes, we estimate the firm's net profit rose 15% YoY and 62% QoQ to Rmb0.37bn in 4Q23.

Trends to watch

Integration with JD's express freight service network: The year 2023 is the initial stage of the firm's integration with JD's express freight service network, and we expect network integration to further boost growth of the firm's business volume and profit in 2024.

Revenue: The firm estimates connected-party transaction revenue from JD at about Rmb3.64bn in 2023, and we estimate about Rmb2.8bn of the revenue came from network integration. The firm expects revenue from connected-party transactions with JD to rise 114% YoY to Rmb7.8bn and account for about 18% of the firm's total revenue in 2024.

Operations: The firm has 116 self-operated distribution centers and has acquired 83 distribution centers through the integration with JD's express freight service network. As the firm's integration of businesses matures, we expect its distribution centers to be merged or streamlined, thereby optimizing routes and improving efficiency for the firm. We think the firm could also reduce costs by using its own trunk-line vehicles in network integration projects.

Cost: We expect economies of scale brought by freight volume growth to accelerate in 2024 as the firm continues to make progress in network integration. We think the optimization of routes could effectively reduce transportation costs, and we expect transportation costs as a percentage of revenue to fall 0.7ppt. Meanwhile, we believe efforts to streamline distribution centers could also reduce rental costs.

Outlook for the express freight service industry. According to the 2024 government work report1, efforts should be made to build a unified national market. We believe such efforts could help to further remove regional barriers for the logistics service industry and express freight services are likely to expand their presence in traditional less-than-truckload (LTL) service markets at a faster pace. Meanwhile, the government work report also mentioned efforts to reduce logistics service costs. We expect leading logistics service companies with economies of scale and cost advantages to gain market shares.

Overall, we think companies in the express freight service industry will focus on expanding market shares in niche markets and improving products and services in 2024, and we expect the competitive landscape to remain stable for directly operated express freight services. We suggest paying attention to the progress of Deppon's network integration, cost reduction, and efficiency improvement.

Financials and valuation

We keep our 2023 and 2024 earnings forecasts unchanged, and we introduce our 2025 earnings forecast of Rmb1,509mn (implying 30.5% YoY growth). The stock is trading at 12.5x 2024e and 9.5x 2025e P/E. We maintain OUTPERFORM rating and target price of Rmb20, implying 17.8x 2024e and 13.6x 2025e P/E, offering 42.7% upside.

Risks

Intensifying price competition; economic downturn; disappointing earnings contribution from network integration.