SF Express's net interest rate has continued to rise since 2022, and the 24Q2 performance has exceeded expectations, but unlike profit expansion, the company's valuation has declined since '22. We think the reflection behind this is market concerns about whether net interest rates can continue to rise. Based on the breakdown of net interest rates, we discussed the three dimensions of cost, revenue, and international business.

Three cost questions: Can cost reduction be sustainable? Shouldn't the cost reduction effect be valued? The obvious and hidden costs of courier boys. 1. How to understand the underlying logic of SF Express's cost reduction? 1) Looking at the results: Cost reduction achieved sustainable results.

The cost reductions brought about by the company's promotion of multi-network integration in 21-23 were more than 0.6 billion, 0.8 billion, and 1.1 billion, respectively, and 24H1 achieved a cost reduction of about 0.6 billion yuan. Net interest rates for 24H1's express and bulky goods divisions increased to 5%, while 22H1 and 23H1 increased to 2.7% and 4.6% respectively. 2) We expect major operating model changes to support the sustainability of cost reduction.

We believe that behind the company's cost reduction is the support for major operating model changes. It is divided into “1+3”: “1” is multi-network integration, system transformation, and “3” is optimization of capacity, transit, and terminal links. We have sorted out 4 major projects, 10 links, and 21 measures. We believe that major changes in the company's operating model will continue to contribute. This is not simply driven by control, contraction, and reduction at one time, but rather consolidating the operating chassis. When future revenue shows high growth, it will lead to the release of superimposed profit margins. Therefore, the profits released in this portion should be given a matching valuation. We use the application of cage trucks as an example to explain the model, principles, and potential of operating changes at the company's terminal outlets. 2. Are labor costs rising for couriers? Invisible assets are shifting towards explicit transformation, and costs are shifting to revenue. 1) The courier boy confronted the customer and stood at the forefront of the company's word-of-mouth achievements. 2) The company promotes the management awareness of all employees, stimulates the enthusiasm of couriers. The cost center shifts to a new stage of revenue expansion, and is also a new driver for the transformation of invisible assets to visibility.

Revenue Q: Is time-sensitive express delivery the same as a regular cycle? 1. Demand for time-efficient express delivery is resilient. 1) The company's time-sensitive express delivery revenue maintained a “GDP+” growth rate. In 2022, 2023 and 24H1, the company's time-efficient express delivery revenue growth rates were 6.8%, 9.2%, and 5.6% respectively, all exceeding the GDP growth rate. 2) Our analysis of resilience mainly includes three aspects: first, the company has the highest market share of time-sensitive express delivery, which drives incremental demand; the second category extension opens up demand space; and its three-product delivery plan, which accelerates industry penetration.

In the first half of 2020, the company had 2.24 million monthly settlement customers, an increase of 18% over the previous year, the highest growth rate since 2020. 2. We discuss the four main components of time-sensitive express delivery, the driving factors and life cycle separately, and believe that time-sensitive express delivery still has potential.

Three international questions: Is international business a good track? Is there enough competitive advantage? Are profits bottoming out? 1. International business is a dividend of the times. 1) Looking at UPS experience: International business is a high-profit margin business. 2) Dividends of the times: Production capacity to go overseas/brands need global logistics service providers to go overseas. First, China's industrial upgrading is a big opportunity for Chinese brands to go overseas; the boom in cross-border e-commerce has accelerated the process of brands going overseas; second, China's industrial upgrading requires integrated logistics service providers to drive production capacity overseas. The Asian logistics market has large space, and SF Express has a local advantage. 2. Build a nest and attract phoenix in three steps: significant advantages. Step 1: Building the largest domestic freighter fleet and core competitiveness in international business (as of 24H1, the company has 99 freighters).

Step 2: Accelerate the development of international routes; Step 3: Continuously improve international service capacity building. 3. Accompanying going overseas: Targeted and integrated resources can avoid losses caused by investing ahead of schedule and waiting for demand to be released.

4. We anticipate that the profit of the international business segment may move on an upward channel.

Investment advice: 1. Profit forecast: We maintain profit forecasts. We expect to achieve net profit of 98.6, 117.1, and 13.91 billion yuan in 24-26, corresponding PE of 18, 15, and 13 times, respectively. 2. Investment advice: We expect a continuous increase in net interest rates. First, we believe that the company's core time-sensitive express delivery demand is resilient. Under certain pressure from macroeconomic growth, it can still maintain a “GDP+” growth rate. At the same time, the transformation from selling products to selling industry solutions will also help the company accelerate penetration in the service industry. Second, we believe that the underlying logic of the company's cost reduction is based on major operating model changes and can support the sustainability of cost reduction. Third, we believe that international business is a dividend of the times, and judging from overseas experience, it is a high-profit margin business. We expect the profits of the international business segment to move up the upward path. As a result, rising revenue, falling costs, and rising international business profits will jointly build a continuous increase in core net interest rates. 3. Shareholder return: In 2023, the company raised the dividend ratio from 20% in the past to 35%, and made it clear that the 2024-2028 dividend ratio will increase steadily. 4. Target price: We maintain a segmented valuation. According to the 24-year forecast, we gave a target market value of about 239.1 billion yuan and a target price of 49.7 yuan. We expect 37% of the space compared to the current price, and maintain a “strong” rating.

Risk warning: The economy has declined, the growth rate of the time-sensitive parts business falls short of expectations, and cost investment has exceeded expectations.