2023 results in line with preannounced range and our expectations

ANE (Cayman) Inc announced its 2023 results: Revenue rose 6% YoY to Rmb9.92bn, and gross profit grew 74% YoY to Rmb1.27bn. Adjusted pre-tax profit was Rmb654mn (vs. a loss of Rmb90mn in 2022).

Attributable net profit was Rmb392mn (vs. a net loss of Rmb400mn in 2022). Adjusted net profit was Rmb510mn (vs. a loss of Rmb209mn in 2022). The firm's 2023 results were in line with its preannounced range, and our expectations. The firm entered an in-depth strategic transformation in 2023, and its GM reached the highest level since its IPO thanks to product mix adjustment, cost reduction, and efficiency enhancement. We suggest watching the firm's efforts to leverage its cost advantages and expand its market share and earnings by leveraging its competitive products.

Trends to watch

In 2023, the firm implemented three measures to optimize its product and earnings structure, leading to a turnaround in earnings.

Firstly, it optimized the structure of goods sources and pricing mechanism. In 2023, the firm's total LTL freight volume fell 1% YoY. However, its parcel volume increased 13% YoY, while the average parcel weight decreased 12% YoY. This increase in parcel volume was primarily due to a 9% YoY rise in the volume of high-priced 0-70kg mini-parcels. Additionally, the firm streamlined the cost structure of different transportation routes and implemented a precise pricing system based on transportation costs. These measures drove the ASP of its LTL services to increase 7% YoY.

Secondly, the company has simplified its network structure by abolishing distribution centers to reduce costs and enhance efficiency. As the company's freight volume continues to grow, it is prepared to further streamline its distribution centers. In 2023, the company reduced its distribution centers by a net total of 55.

The firm has straightened related transportation lines to reduce freight transfer frequency and transportation costs. The firm's per-tonne cost of parcel transportation and distribution of trunk lines fell Rmb3/t and Rmb8/t YoY in 2023, and the optimization was more substantial in 2H23 (down Rmb17/t and Rmb32/t YoY).

In 2023, the company implemented fewer cargo transfer operations to improve timeliness and reduce the loss and damage rate. As a result, the company's average delivery time decreased to less than 72 hours, an 8-hour improvement YoY. Furthermore, the number of lost and damaged parcels per 100,000 parcels decreased 83% and 34% YoY.

Thirdly, the firm has improved the franchisee ecosystem and developed relationships with large clients to create new opportunities for freight volume growth. In June 2023, the company took the lead in canceling penalties for freight volume assessment and rewarding incremental freight volume, and cooperated with leading e-commerce platforms to explore incremental growth. According to the firm's results conference, its cost and product competitiveness have gradually emerged since 2H23, with average daily freight volume rising 10-20% YoY in November-December.

We are cautiously optimistic about the growth of the express delivery industry in 2024, and suggest watching industry consolidation opportunities. We suggest watching market share gains by leading firms in the industry thanks to their cost and service advantages.

Financials and valuation

We maintain our 2024 and 2025 earnings forecasts. The stock is trading at 8.2x 2024e and 6.3x 2025e P/E. We maintain an OUTPERFORM rating and our target price of HK$7.50, implying 12.4x 2024e and 9.5x 2025e P/E, and offering 51.5% upside.

Risks

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