SF Holding announced financial results for FY19. Revenue and adjusted net income were in line with expectations. We believe that the Company's strategy to leverage on e-commerce parcels to achieve economies of scale has leveled off. As price war escalates, the Company's self-operation model will weigh on its profit margins. We adjust TP up to RMB 47.79. The Company is currently trading at 33.6x 2020E P/E, higher than peers. Downgrade to HOLD.
- FY19 revenue and adjusted net income in line. In 4Q19, parcel volume increased 49.0% YoY, 26.2ppt above industry average. Annual parcel volume increased 25.1% YoY to 4.8bn, capturing a market share of 7.6%, flat YoY. For FY19, revenue increased 23.4% YoY to RMB 122.2bn, in line with expectations. Adjusted net income increased 27.2% YoY to RMB 5.8bn, in line with expectations. Adjusted EPS increased 66.3% YoY to RMB 1.31. Net cash generated by operating activities increased 68.1% YoY to RMB 9.1bn.
- The surge in parcel volume caused decline in profit margin. The Company's gross profit in FY19 was RMB 19.5bn, with a gross profit margin of 17.42%, a decrease of 0.50ppt YoY. As percent of revenue, labor cost increased 0.41ppt YoY, transportation cost increased 0.20ppt YoY, and other operating costs decreased 0.10ppt YoY. We believe that the Company's strategy to leverage on e-commerce parcels to achieve economies of scale has leveled off. As price war escalates, the Company's self-operation model will weigh on its profit margins.
- Catalysts. (1) Increasing revenue contribution of freight and supply chain businesses. In FY19, the Company's freight business recorded revenue of RMB 12.7bn, an increase of 57.2% YoY, and issued convertible bonds of US$ 300mn. With independent financing capability, the Company's freight business will develop rapidly. Revenue of the Company's supply chain business increased 11 times YoY due to consolidation of SF DHL since Mar. (2) Release of consumption demand as domestic epidemic eases. (3) Decline in oil prices.
- Valuation. For FY20E, we expect the Company’s parcel volume will increase 25% YoY, 5ppt above industry average. ASP will decrease 7% YoY and GPM will decrease 0.3ppt YoY. We forecast 2020E adj. EPS to increase 3.9% YoY to RMB 1.37. We adjust TP up to RMB 47.79. Our TP corresponds to 35x 2020E P/E. The Company is currently trading at 33.6x 2020E P/E, higher than peers. Downgrade to HOLD.
