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1、Disclosures&Disclaimer:This report must be read with the disclosures and the analyst certifications inthe Disclosure appendix,and with the Disclaimer,which forms part of it.Title of reportMonth 20 xxEquities/SubcategoryBy:David Wu(S1700518110001)China LogisticsWhat common prosperity means for the in
2、dustryRising labour costs threaten the razor-thin margins of Chinas giant logistics industryWe detail how logistics players can absorb or reduce the cost pressureand focus on new drivers for the on-demand delivery sector.Initiate on leader SF Intra-city with a Buy rating;maintain Buys on YTO Express
3、 and Yunda Future TransportEquity Research RFebruary 2022ChinaThematic research 1 Future Transport Equities 25 February 2022 Why now?Chinas giant logistics industry has long relied on cheap labour who works long hours under pressure and often without social security.Thats coming to an end as common
4、prosperity aims to improve livelihoods,especially for vulnerable workers like delivery couriers.The logistics industry relies on razor-thin margins and labour accounts for as much as 95%of costs for some companies according to our estimate.We take a deep dive into what higher salaries,increased soci
5、al insurance payments and other welfare expenses mean and why the long-term outlook isnt too gloomy.How will companies cope?We provide sensitivity analysis around increased social security expenses.The impact of increased injury insurance payments on earnings is less than 10%for most players.But inc
6、reased compliance and social security payments(like pension contributions)could lower earnings by 15-35%in the short term(till 2025),and the impact is even greater for small and medium-sized logistics enterprises in the long run.Still,big logistics companies have various methods to absorb or reduce
7、cost pressures,like cutting operating costs by increasing investments in automation equipment and accelerating last-mile delivery innovation.We also look around the world for similar experiences.In Japan,Yamato Holdings(9064 JP,JPY2192,not rated)coped with higher wages by hiring more part-time emplo
8、yees.In the US and Europe,Doordash(DASH US,USD93.17,not rated)and Deliveroo(ROO GB,GBP127.95,not rated)reduced operating costs per order by 15%-40%thanks to algorithm optimisation(source:Doordash,Deliveroo).We look closely at on-demand delivery.This booming corner of the logistics industry-where goo
9、ds are delivered within the hour in cities-is the most labour-intensive segment of all.Its also a key area for new policies aimed at better protecting the legal rights and interests of workers.We analyse new drivers like the local lifestyle service market(such as laundry delivery)and the rise of thi
10、rd-party service providers.New drivers of this segment include:1)structural price increase for delivery,and 2)rapid growth in orders.We believe this can alleviate or even offset the rising labour cost pressure and contribute increasingly to earnings.Initiate coverage of SF Intra-city at Buy;TP of HK
11、D21.00 implying 85%upside.SF Intra-city is a leading independent third-party on-demand delivery company in China.Were bullish given its broad exposure to the local lifestyle service market which generates higher prices and potential higher margins,synergies with parent SF Holdings express delivery b
12、usiness,and as it benefits from SFs established brand name.We forecast positive net profit in 2023e and a revenue CAGR of 48%in 2020-25e.Based on a two-stage DCF model,we derive our target price of HKD21.00,implying 85%upside.We initiate coverage of SF Intra-city with a Buy.Our target price implies
13、a 1.3x 2022e PS ratio,which is similar to the 1.3x forward PS level of Chinas on-demand delivery service provider Dada Nexus(DADA US,USD9.12,not rated)under the same revenue calculation method.Why read this report?Rising labour costs threaten the razor-thin margins of Chinas giant logistics industry
14、 We detail how logistics players can absorb or reduce the cost pressure and focus on new drivers for the on-demand delivery sector.Initiate on leader SF Intra-city with a Buy rating;maintain Buys on YTO Express and Yunda David Wu*(S1700518110001)Head,A-share Transportation&Logistics Research HSBC Qi
15、anhai Securities Limited +86 21 6081 3802 *Employed by a non-US affiliate of HSBC Securities(USA)Inc,and is not registered/qualified pursuant to FINRA regulations Future Transport Equities 25 February 2022 2 Why read this report?1 Investment summary 3 The earnings impact from common prosperity 9 Fiv
16、e reasons not to worry about rising labor costs 17 On-demand delivery takes off 29 Company section 36 SF Intra-city(9699 HK)37 SF Holding(002352 CH)52 A quick recap of franchised express delivery players 56 YTO Express(600233 CH,Buy,TP RMB22.50)57 Yunda(002120 CH,Buy,TP RMB26.60)58 Appendix:The back
17、ground to common prosperity 60 Disclosure appendix 68 Disclaimer 72 Contents 3 Future Transport Equities 25 February 2022 Rising costs+changing demographics There are few sectors in China that have benefited more from the surplus of low-cost workers in recent decades than logistics.The industry is p
18、owered by an army of drivers,porters and couriers that number over 50m today and deliver over 100bn parcels a year(source:State Post Bureau).But they earn low salaries,are often excluded from social security and frequently face challenging,and even dangerous,working conditions.As a result,there are
19、few sectors more in the line of fire from Beijings new common prosperity push which seeks to improve living standards.A further hindrance is that Chinas population growth is stagnating with the industry set to face labour shortages later this decade,according to JD Logistics Research.Putting this al
20、l together,we expect logistics companies to have to pay higher salaries,rising expenses for compliance given the stricter employment regulations,and provide more social insurance and welfare payments.So whats the impact?Limited in short-term,significant long-term The push for common prosperity is pa
21、rticularly relevant for logistic companies as new policies include improving injury insurance,reducing working hours and improving working conditions.In this note we conduct sensitivity analysis by applying a range of social security expenses that companies may need to start paying to see the impact
22、 on earnings for logistics companies.We find full coverage of injury insurance payments have only a limited impact as they will decrease earnings by less than 10%.For on-demand delivery platforms,we find the impact on earnings from paying for work-injury insurance for riders is approximately 2-6%,wh
23、ich is manageable.For franchisees of a leading express delivery brand in Guangdong,contributing employee work-injury insurance only reduce earnings by 2-3%.Increased compliance and improvement of social security could decrease earnings by c35%in the short term(before 2025e),which is controllable,but
24、 may have a larger impact on most small and medium-sized logistics enterprises earnings in the long run due to the rising calculating bases.We take a franchisee of a leading express company in Guangdong as an example and find earnings would decrease 79-87%of earnings if the franchisee contributes em
25、ployee social Investment summary Common prosperity is approaching;demographic dividend is fading We delve into on-demand delivery in cities,a niche but fast-growing sector;structural ASP increase to alleviate or even offset the cost pressure Initiate on SF Intra-city with a Buy rating and target pri
26、ce of HKD21.00;maintain Buy rantings for YTO Express and Yunda Future Transport Equities 25 February 2022 4 insurance locally.However,social insurance can be contributed in some special economic zoom to alleviate the impact on earning to 33%before 2025e.Despite the long-term trend of rising social s
27、ecurity expenses,we believe there is still room under the new policies to determine labour relations,which is the prerequisite for paying social security for employees,as the government has also taken the current economic situation and the affordability into consideration.Meanwhile,the new policy al
28、so requires the social insurance scheme for urban and rural residents shall be used as the underpinning plan,which has the lower payment and will ease the negative impact on the corporate earnings to c15%.Exhibit 1.Summary of the impact of new policies on logistics enterprises earnings Pay injury in
29、surance Improve social insurance Reduce work intensity Raise salaries Impact on corporate earnings Limited Controllable in short term(before 2025e),significant in long term Controllable Controllable Expected range 10%15-35%in the short term,80-90%in the long term N/A High single-digit CAGR Source:HS
30、BC Qianhai Securities We focus on a niche segment with new drivers A large focus of this report is on intra-city on-demand delivery which brings consumers everything on demand,from food to flowers,and frequently within the hour or quicker.This corner of the logistics industry is booming.The problem
31、is it is particularly labour intensive,with staffing costs accounting for more than 90%of costs according to our estimate,and therefor also sensitive to new policies on protecting the rights and interests of workers.While food orders currently take up the bulk of orders we expect other types of deli
32、very to increase such as local retail,e-commerce and services(see exhibit below for examples)and become the new growth driver for the industry.These local lifestyle services have much higher prices than food delivery so we expect the ASP for on-demand delivery industry to climb structurally and alle
33、viate or even offset the rising labour cost pressure.We also detail the emergence of third-party on-demand delivery players like SF Intra-city,and initiate on this company(see below).Exhibit 2.Chinas on-demand delivery service industry Local food Local retail Local e-commerce Local service Typical g
34、oods and services Food,drinks Fresh food,cake,groceries,medicines Digital products,cosmetics&skincare,apparel,maternity&baby products Laundry collection&delivery,personal item collection&delivery Delivery distance Shopping mall Intra-city/Shopping mall Intra-city/Shopping mall Intra-city/Shopping ma
35、ll Stage of development Maturity Rapid growth Early stage Early stage Characteristics High-frequency/Strong timeliness Relatively-high-frequency/round-the-clock High-value delivery item Personalised/customised Source:SF Intra-city,HSBC Qianhai Securities Still,rising prices arent the only way to cop
36、e with rising labour costs as we also detail four other ways:1)optimise the employee structure by employing outsourced workers,2)invest more in automated equipment,3)optimise order assignments and 4)accelerate the construction of last-mile public service stations.5 Future Transport Equities 25 Febru
37、ary 2022 and detail our views on the industry and other corners of it For Chinas overall logistics industry,we expect its revenue growth to slow to a revenue CAGR of c4%in 2020-23e,from a CAGR of 6.7%in 2015-20,according to Wind data,as Chinas economy slows.The other corner of the industry thats als
38、o labour-intensive is express delivery.Given sluggish consumer demand and the crackdown on the monopoly of e-commerce platforms,we believe demand for online retail and express delivery will be negatively affected.Therefore,we expect Chinas express parcel CAGR to fall to 20%in 2020-23e.On the positiv
39、e side,we expect industry concentration to go up as tier-two express delivery companies exit and Best Inc.is consolidated by J&T Express.We expect the prices of express delivery to rebound given the governments regulations aimed at easing the intense competition which has led to a price war.Initiate
40、 on SF Intra-city SF Intra-city(9699 HK,Buy,TP HKD21.00)Founded in 2019 and listed in December 2021,SF Intra-city is the biggest independent third party on-demand delivery service platform in China.While it is yet to make a profit,it is growing rapidly.Its partnered with more than 2,000 brands,serve
41、d more than 530,000 merchants and has 7.5m active consumers.It emerged out of SF Holding,which not only remains its controlling shareholder but also contributes c33%of its revenue in 2020.Unlike other delivery platforms that focus on food takeaway,SF Intra-city is positioned as an independent third-
42、party on-demand delivery platform with an 11%market share among third-party platforms(2020).We see three main drivers of growth and profits:A push into the fast-growing and high-priced local lifestyle services market,which can also smooth out order peaks and troughs and lower fulfilment costs;Thanks
43、 to growth in SF Holdings express delivery volumes,we estimate SFs Intra-citys last-mile delivery revenue CAGR will reach 50%in 2020-25e.Riders delivering parcels in non-peak hours increase their income and lower their work intensity during the peak hours;The SF brand helps SF Intra-city gain custom
44、ers trust,builds up a customer mix across various types of business and enables it to diversify its risks.We expect its 2020-25e revenue CAGR to be 48%.We project the firms gross profit margin to be close to breakeven(-0.5%)in 2021,and achieve net profit in 2023e.We value the stock using a two-stage
45、 DCF model and derive a TP of HKD21.00,implying 85%upside.We initiate coverage at a Buy rating.The stock is currently trading at a 2022e 0.7x PS ratio,lower than the 1.3x forward PS ratio for Chinas on-demand delivery service provider Dada Nexus(DADA US,USD9.12,not rated)under the same revenue calcu
46、lation method,and also lower than the 1.0 x and 1.0 x 2022e PS of its European peers Deliveroo and Just Eat Takeaway(TKWY NA,EUR37.68,latest report).Therefore,the current valuation of SF Intra-city is attractive.Potential share price catalysts:Local lifestyle service orders as well as last-mile deli
47、very orders are greater-than-expected,innovations in intra-city express delivery.For our investment views on SF Holding,see our standalone chapter.For our views on YTO Express and Yunda,see our chapter on other logistic players.Future Transport Equities 25 February 2022 6 Where we are different from
48、 consensus SF Intra-city:We are above consensus on net profit for 2021e,as we are optimistic on SF Intra-citys order mix improvement.Our 2022-23e net profit estimates are RMB19m-60m below consensus,but the numbers are relatively minor compared with its revenue level,so our estimates are basically in
49、-line with market consensus.We are confident about SF Intra-citys profitability in the long term.SF Holding:We are above consensus on revenue for 2021-23e for SF Holding,as we have consolidated Kerry Logistics Networks (636 HK,HKD19.98,latest report)financial data.Our 2021e net profit estimate is ab
50、ove market consensus,as we factor in the positive impact of the asset disposal.Our 2022-23e net profit estimates are below consensus,as we factor in the cost hike and product mix deterioration,and we think it takes time for recovery.Yunda and YTO:We are above consensus on Yunda and YTOs net profits