We like SF’s long-term strategy to consolidate its networks, strengthen its position in the time-definite business, boost the supply chain solution business and expand overseas (through the acquisition of Kerry Logistics [636 HK, NR]). That said, we believe continuous spending and fierce competition will put pressure on the near-term profitability. We slash our earnings forecast in 2021E/22E by 48%/45%, after the latest management comments that SF will accept lower profit margin over the coming 1-2 years in return for long-term sustainable growth. We downgrade SF to HOLD from Buy with new TP of RMB77, and suggest that investors should wait for a better entry point.
- What’s changed? SF unexpectedly released a profit warning last week stating that it will report a net loss of RMB0.9-1.1bn in 1Q21, versus net profit of RMB0.9bn in 1Q20, due to higher cost as well as increase in spending on new businesses such as integrated logistics and supply chain solution. This is far below expectations as SF’s parcel volume / revenue grew 54% / 32% in 2M21. During the shareholders meeting last Friday, WANG Wei (the Chairman) revealed that SF will be profitable in 2Q21E but the full year earnings will be unlikely to return to the level in 2020.
- Network integration to improve operating efficiency. SF is in progress to streamline its network, including the consolidation of the infrastructure and resources for the four networks, namely the main network, Fengwang (network partner model), freight and warehouse. The integration will help improve the operating efficiency over the coming quarters. On the other hand, SF will continue to enhance the product segmentation.
- Valuation. We roll over our target base year to 2022E as earnings in 2021E is distorted by 1Q net loss. We maintain our target P/E (55x, 38% above historical average) as we believe SF deserves a valuation premium, due to its scarcity value in infrastructure and network, diversifying revenue stream and increasing data/technology-driven business model. Our new TP is set at RMB77.
Upside risks: (1) Better-than-expected profit in 2H21E; (2) recovery of parcel shipment ASP. Downside risks: (1) prolonged price war; (2) further increase in operating cost; (3) delay of new business development.
