Fri, 11 Jul 2014
E qu i t y Res e arc h
Lo g is t ic s / C h in a
Bruce Yeung
+852 2135 0214
bruce.yeung@oriental-patron.com.hk
China Logistics
E-commerce Enablers in China

Warehousing – a low risk proxy for e-commerce boom in China: China
e-commerce is expected to record over 20% CAGR in gross merchandise
value (GMV) in the next few years due to change in consumer patterns and
penetration in 3rd – 4th tier cities. We believe e-commerce related logistics
will drive a robust need in warehousing space, especially for the high-end
modern warehouses in 1st – 2nd tier cities. Given lower valuation and lower
operation risks than e-commerce listed companies, we believe investing in
warehouse owners would be a low risk proxy to enjoy the e-commerce boom
in China.

Cold Chain Logistics - giving a “blue ocean” for e-commerce: Driven by
the increasing disposable income and food safety concerns of the middle
class in China, we believe the consumption boom in fresh products will
create a “blue ocean” for the e-commerce industry under currently keen
competition. Cold chain logistics is the key to enable high value added
products and services for the express delivery companies and the
e-commerce online shops to create margin expansion. We believe
companies with cold chain logistics facilities deserve a premium in the
logistics sector.

Third Party Logistics (3PLs) – robust growth driven by industry
optimization: Due to high transportation and fuel costs, China logistics cost
to GDP was 18% in 2012, which was much higher than in developed
countries, such as USA (8.5%) and Japan (8.5%). Outsourcing logistics
operations to 3PLs would reduce costs by better resources utilization and
operations efficiency. We believe companies with integrated logistics
expertise will capture the huge business demand in logistics cost savings.

Recommendations: We initiate with 3 new BUY ratings on Beijing
Properties (925 HK), Sinotrans (598 HK), Shenzhen Int’l (152 HK) and ASR
Logistics (1803 HK) as they are well positioned to capture the e-commerce
boom and the growing 3PLs outsourcing to drive their strong earnings
growth in near future. Moreover, SOE reforms would also unlock their assets
value given by strong support from their parents. Our sector top pick is
Beijing Properties (925 HK) since the company owns scarce warehouse
resources in prime locations as well as promising cold chain logistics
facilities. We also like Sinotrans (598 HK) since the company will have
continuous margin expansion driven by growth in 3PLs business. Shenzhen
International (152 HK) is tripling their logistics land bank by developing
integrated logistics projects, which we think the deep value will be unlocked.
Sector Report
E x h i b i t 1: R e c o m m e n d a t i o n s s u m m a r y
Company
Stock code
Beijing Properties
Sinotrans
Shenzhen International
ASR Logistics
Source: Bloomberg, OP Research
925
598
152
1803
HK
HK
HK
HK
Rating Target Price
BUY
BUY
BUY
BUY
HK$1.2
HK$6.5
HK$13
HK$1.9
Closed Price
Upside
HK$0.84
HK$5.34
HK$9.51
HK$1.42
43%
22%
37%
34%
Fri, 11 Jul 2014
China Logistics
Investment Summary
Investing in logistics sector –
enablers in e-commerce will yield
better return with lower risk
Buy the E-commerce Enablers: With over 20% CAGR, China will become the
largest online shopping market in the world. Since logistics play a crucial role in
making e-commerce succeed, the robust growth of online shopping in China will
lead to huge demands and opportunities in investing in the modern logistics
sector.
“During the gold rush it’s a good time to be in the pick and shovel business.” by
Mark Twain.
Due to keen competition between e-commerce operators for market share, there
is huge earning volatility and uncertainty for the B2C online shops. However,
e-commerce has a completely different set of logistics flows, which requires lots
of warehousing space, cold chain logistics and 3PLs service. We believe
investing in the e-commerce enablers will be a low risk proxy to enjoy the high
growth and return of e-commerce in China.
Major B2C e-commerce operators and related express delivery companies, such
as JD.com, Amazon.cn, Best Logistics and Deppon, are aggressively setting up
their logistics networks to expand their business coverage and to improve
operating efficiency, which drives a huge demand for warehousing space.
Our top pick is Beijing Properties
(925 HK) – a hidden gem with
logistics properties in prime
locations
Our top pick is Beijing Properties (925 HK), which is a hidden gem with logistics
properties in prime locations. We believe the company will enjoy a high growth
phrase in logistics properties development by continuous value accretive
acquisitions to increase the rentable area by 300% to four million square metres
in four years.
Besides, due to rising food safety concerns and increasing disposal income, we
believe fresh food products will be a blue ocean for B2C e-commerce. As cold
chain logistics is a must to fresh food e-commerce, Beijing Properties (925 HK)
is well positioned to secure a cold chain logistics network to enjoy the impending
high demand.
We also like Sinotrans (598 HK),
Shenzhen International (152 HK)
and ASR Logistics (1803 HK)
We also like Sinotrans (598 HK) as one of the largest integrated logistics service
providers to enjoy the 3PL boom in China by offering a complete range of
specialized logistics services.
We believe the deep value in Shenzhen International (152 HK) will be unlocked
by focusing on logistics business, and tripling logistics land bank to over 3 million
square metres to establish “China Urban Integrated Logistics Hubs” in at least 6
cities.
ASR Logistics (1803 HK) is one of the few asset light air freight solution
providers to enjoy fast growing market in China.
Investment Summary – E-commerce Enablers
Company
Stock Code
Beijing Properties
Sinotrans
Shenzhen Int’l
ASR Logistics
925 HK
598 HK
152 HK
1803 HK
Warehousing
***
*
**
Cold Chain Logistics 3PLs Logistics
***
***
*
***
Source: OP Research
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Table of Contents
Investment Summary ................................................................................................................................... 2
Table of Contents ......................................................................................................................................... 3
E-commerce – The gold rush in China ......................................................................................................... 4
Logistics revolution ...................................................................................................................................... 9
E-commerce enablers – Pick and shovel for gold rush ................................................................................23
Warehousing ...............................................................................................................................................26
Cold Chain Logistics ...................................................................................................................................33
Integrated Logistics Services Providers ......................................................................................................38
Beijing Properties (925 HK) – A Hidden Gem with Prime Locations Logistics Properties .............................42
Sinotrans (598 HK) – A Leading 3PL Provider .............................................................................................72
Shenzhen International (152 HK) – A Single Stock for Multiple Catalysts ....................................................83
ASR Logistics (1803 HK) – Asset-Light Air Freight Solution Provider ..........................................................99
Appendix ...................................................................................................................................................105
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China Logistics
E-commerce – The gold rush in China
China e-commerce GMV is
expected to have a 21.5% CAGR
in 2013-2017
China's e-commerce is one of the fastest growth markets in the world with CAGR
of 28.8% in 2009-2013. The gross merchandise value (GMV) of the e-commerce
market increased 21.3% in 2013 to Rmb9.9 trillion, and expected to grow more
than double to Rmb21.6 trillion by 2017.
E-commerce drives
transformation in supply chain
management
To meet rapid volume growth and higher consumer satisfaction standards, we
have seen e-commerce accelerating transformation of supply chain management
in China where corporates tend to use open platforms for transport and inventory
controls without putting heavy investments into self-owned logistics operations.
Exhibit 2: China E-commerce market GMV 2011-2017
(Rmb tn)
28.1%
30
27.9%
25
30%
25%
21.6%
21.3%
19.4%
18.5
20
21.6
16.8%
20%
15.5
15
15%
12.7
9.9
10
10%
8.2
6.4
5
5%
0
0%
2011
2012
2013
2014E
GMV
2015E
2016E
2017E
% Growth rate
Source: iResearch, OP Research
Exhibit 3: China e-commerce GMV forecast
Category
Sub-category
Online Shopping
Total
PC
Mobile
O2O
Online Travel
B2B
Total
SME's B2B
B2B of enterprises above designated size
Total
2013 GMV
(RMB mn)
1,850,000
1,693,600
156,400
119,380
225,860
7,754,250
5,147,400
2,606,850
9,949,490
2017 GMV
CAGR
(RMB mn) (2013-17)
4,140,000
3,145,400
994,600
524,500
484,000
16,435,500
12,370,200
4,065,300
21,584,000
22%
17%
59%
45%
21%
21%
25%
12%
21%
Source: iResearch, OP Research
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Reasons for the huge growth
According to iResearch, B2B for SME ranks first by GMV with some 52% of the
total in 2013. This segment GMV is expected to maintain CAGR of 25% to reach
Rmb12.37 trillion by 2017, staying on as one of the key drivers for further growth
in China's e-commerce.
Exhibit 4: Share of China E-commerce market segments 2013
Online travel
2.3%
O2O
1.2%
Online shopping
18.6%
B2B of enterprises
above designated
size
26.2%
SME's B2B
51.7%
Source: iResearch, OP Research
Value-added services in B2B e-commerce will increase 3PL demand
B2B Platforms: A cost effective
way for SMEs
On payment of a non-onerous membership fee, SMEs can quickly tie-up with
potential domestic and foreign partners through e-commerce platforms. Lower
entry barriers mean SME B2B operators can expand in cost effective ways.
SMEs can also improve operational efficiency by leveraging on value added
services provided by B2B platforms, such as pay-for-performance model (word
search), financial guarantee services, import/export services and big data
sharing.
Value-added services of BPO will
increase 3PLs demand in China
Alibaba is promoting its one-stop import and export business process outsourcing
(BPO) service for SMEs through OneTouch, which centralizes foreign trade
resources like customs clearance, transportation and financing to reduce overall
expenditure and to improve the efficiency of the whole process. Sinotrans (598
HK), a leading integrated logistics services provider in China, has also launched
an e-commerce platform to facilitate cargo space reservations and cross-border
e-commerce logistics services. We believe the innovation in B2B e-commerce
value added services will drive more third party logistics (3PLs) demand in China
in coming years, with Sinotrans (598 HK), SITC (1308 HK) and Kerry Logisitcs
(636 HK) benefiting.
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China Logistics
Exhibit 5: Alibaba’s 1-Touch
Source: Company, OP Research
Exhibit 6: Sinotrans (598 HK) e-commerce system
Source: Company, OP Research
Online shopping will drive higher demand in logistics services
Online shopping becomes one of
the major contributions to
e-commerce, driving higher needs
in logistics services
In the past e-commerce GMV was dominated by B2B segments due to much
higher average ticket size. But in Taobao's success in the C2C market, we have
seen online shopping more than doubling the contribution of total e-commerce
GMV, from 7.3% in 2009 to 18.2% in 2013. As China's GDP focus is shifting from
manufacturing to consumption, we believe the growth in online shopping will
outpace B2B markets and the share of total GMV will increase to 19.8% by
2016e.
Tmall's dedicated “November 11” promotion to popularize online shopping totted
up Rmb35 billion GMV in one day, up 83% yoy. However, as online shopping
depends heavily on express delivery, the jump in online shopping volume creates
significant pressure on supply chains to avoid problems like slow response. More
and more e-commerce companies are investing in their logistics services,
creating extraordinary investment opportunities for the industry to capture and
share the boom. Logistics facilities providers, such as Beijing Properties (925 HK)
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China Logistics
and Shenzhen Int’l (152 HK) will benefit from higher demands generated by
delivery volumes.
Exhibit 7: China E-commerce market segments 2009-2016
100%
1.7%
7.3%
2.0%
9.6%
2.1%
12.3%
2.1%
2.2%
2.3%
2.4%
2.4%
16.0%
18.2%
19.5%
19.8%
19.8%
80%
39.8%
35.6%
31.6%
28.3%
25.5%
23.2%
21.4%
20.0%
51.2%
52.8%
53.8%
53.3%
53.8%
54.7%
56.1%
57.4%
2009
2010
2011
2012
2013
2014E
2015E
2016E
60%
40%
20%
0%
SME's B2B
B2B of enterprises above designated size
Online shopping
Online travel booking
Online group buying
Source: iResearch, OP Research
Online shopping will have 22%
CAGR under multiple drivers
China online shopping GMV recorded 58.7% CAGR in 2010-2013, hitting
Rmb1.841 trillion in 2013, surpassing US to become the largest online shopping
country in the world. In 2003 online shopping GMV accounted for only 1.7% of
total retail sales of consumer goods in China. However, after 10 years of
development, online shopping in China has recorded an amazing 7.9% share in
total retail sales of consumer goods, just 2.1% behind the US total. Online
shopping GMV is expected to maintain 22% CAGR to Rmb4.14 trillion or 12.4%
of retail sales in 2017, providing an attractive investment counter. The growth of
online shopping would be supported by (1) higher penetration in 3th – 4th tier
cities and major cities in Western China, (2) gradual perfection of the mobile
infrastructure behind such shopping, and (3) more traditional retailers investing in
and getting into B2C online business.
Thus, despite rampant development of e-commerce in China during last decade,
online shopping, especially B2C e-commerce, would maintain robust growth in
the next few years. We believe 3PL outsourcing and modern logistics facilities are
essential parts to enable the success of e-commerce, where Beijing Properties
(925 HK), Sinotrans (598 HK), Shenzhen Int’l (152 HK), SITC (1308 HK), Haier
(1169 HK) and Kerry Logistics (636 HK) are HK-listed companies with this
attractive exposure.
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China Logistics
Exhibit 8: China online shopping market GMV 2010-2017
(tn Yuan)
75.3%
5,000
70.2%
80%
4,450.0
68.3%
3,790.0
4,000
60%
Online shopping hits 7.9% of total
rental sales of consumer goods in
2013
3,119.0
3,000
39.4%
1,841.0
2,000
2,420.0
31.5%
40%
28.9%
21.5%
1,320.3
1,000
784.5
461.0
2.9%
4.3%
2010
2011
17.4%
6.3%
7.9%
9.1%
10.4%
2012
2013
2014E
2015E
11.5%
2016E
20%
12.4%
0
0%
GMV
% Growth rate
2017E
% Share in the total retail sales of consumer googs
Source: iResearch, OP Research
Exhibit 9: GMV of online shop in China vs. in USA 2009-2016
4,000
3,600
3,000
3,030
China becomes the largest online
shopping country in the world by
GMV
2,000
1,841
1,108
984
1,226
1,409
2,450
2,044
2,275
1,822
1,609
1,303
1,000
784
0
263
461
2009
2010
2011
2012
Online shopping GMV in USA
2013
2014E
2015E
2016E
Online shopping GMV in China
Source: iResearch, OP Research
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Logistics revolution
B2C e-commerce has price
competitiveness because of lower
channel costs
In the traditional brick and mortar retail sales business model, retailers depend
heavily on the physical presence of shoppers to visit the stores and buy directly.
However, e-commerce revolutionised the logistics industry by creating a totally
different set of supply chain management that greatly lowered channel costs,
especially in China.
In the past suppliers tailored output to response at trade fairs held two to four
times each year. Suppliers then sold their products to main distributors at a
certain discount and credit period as incentives for channel owners. The main
distributors then passed the products through layer upon layer of sub-distributors.
Normally, a product would be pushed through three to six layers of distributors
from manufacturer to point of sales (POS). The layers would be set at regional
(northern/eastern/southern China), provincial, city and county levels. Suppliers
would be rid of capital intensive investments, skirting local laws and relationships
to build up their nationwide sales networks very quickly with their own distributor
models. Suppliers can focus on production efficiency and brand advertising by
outsourcing channel expansion, achieving great success in the past when
consumer information flow in China was insufficient without the internet.
Traditional suppliers have little
information on end users and the
channel
However, this distributor model takes a long period (usually nine to twelve months)
for a product to appear on the market from the design stage. Consumer
preference for 3C products changes very quickly with new technology and the
extensive range of fluctuations, within months, in electronic component costs.
For apparel products the prevailing weather plays a significant role with, at most,
a fortnight's notice. Thus a long production to market lead time is a big cost
disadvantage against competition. Besides, as suppliers do not have end
customer data (such as consumer background, usage preferences and product
quality feedback), there is a big hurdle to improving marketing by cross-selling
and building up brand loyalty. Additionally, the many layers of distributors and
suppliers make for difficult adjustments to production and quick inventory
clearance due to their lack of power to collect data or force selling at retail
promotions. This was the main cause of the “channel stuffing” in China's
sportswear market.
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Exhibit 10: Traditional logistics
Suppliers
Consumers
Regional
distributors
Province
sub-distributors
Country
sub-distributors
POS
Channel inventory
Long lead time to end customers
Source: OP Research
Change in logistics
Advances in e-commerce have ensured that customers always place orders to
B2C online shops directly in online transactions. Online shops can offer sales
services directly to customers by creating a website and mobile apps, which can
be dispersed through the internet at very low costs. Operating costs are reduced
as no capital expenditure, rental or staff costs are required to draw in foot traffic
with storefront visibility and attractive store designs. Besides, with higher internet
penetration in China, online shops can be accessed by customers anytime,
anywhere – without spending to acquire physical space in shopping malls. Thus,
online shops usually have price competitiveness against a physical presence for
the same products under the new supply chain model.
Efficient supply chain
management in e-commerce
gives strong advantage over
physical shops
This new supply chain model requires procurement warehouses, distribution
centers and delivery services to fulfill customers’ orders. With direct consumer
orders, online shops will procure directly from suppliers. The products will be
centralized in the modern warehouse for barcode, sorting, storage and inventory
control. At the time of delivery, the products are transferred to different distribution
centers and delivered by express service or picked-up at collection points in the
cities. With a full picture and control of channel inventory, online shops can
always effectively provide more stock keeping units (SKUs) to customers. For
example, JD.com, the second largest B2C e-commerce shop in China, can
provide 40.2 million SKUs as of March, 2014, increased from 1.5 million SKUs in
2011, which is a great difference to the maximum of 20k – 80k SKUs provided in a
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China Logistics
physical shop.
Due to explosive growth in recent years, it would be cost effective and
time-saving to outsource part of the asset heavy logistics operations to third party
logistics (3PLs) expertise. In contrast to old model distributors, 3PLs do not make
money by taking up inventory, but they serve different online shops to save
transportation costs by higher utilization. For example, over half of the trucks are
empty in trials for the return trip, ensuring that toll fees will most certainly increase
transportation costs without 3PLs centralizing logistics demand from different
areas. Additionally, express delivery involves a lot of human activity, while an
online shop would be very inefficient if it had to hire its own delivery staff for its
online business, which focuses on brand building and whole logistics
management.
Huge growth in 3PLs outsourcing
and logistics facilities expected
We expect the boom in e-commerce to lead to a new age in 3PLs outsourcing
and demand growth in logistics facilities due to cost savings from division of work
and new consumption behaviors. We believe Beijing Properties (925 HK) and
Shenzhen Int’l (152 HK) will enjoy the high demand growth in modern
warehousing, with Sinotrans (598 HK), SITC (1308 HK) and Kerry Logistics (636
HK) benefiting from more 3PL outsourcing in China.
Exhibit 11: JD.com (B2C e-commerce) logistics flow
Direct order though B2C channels
Customers
order
JD.com
3PL
Suppliers
XXX
Distributor
centre
Delivery
stations
3PL
3PL
3PL
(express
Delivery)
Express
Delivery
Distributor
centre
Regional logistics
centers
Distributor
centre
Customers
Service
centers
•Procurement
• Re-stocking
• Manufacturing
• Brand building
• Storage
• Barcode
• Sorting
• Inventory
• Platform
• Promotion
• Online traffic
• Assorted to different
distribution centers
• Delivery
• Confirm collection
Source: OP Research
Exhibit 12: Major China B2C e-commerce delivery services
Logistics operation type
Coverage
Remarks
Tmall.com
JD.com
Suning.com
Amazon.com
3PL
Self-owned
Self-owned + 3PL
Self-owned + 3PL
Nationwide
Nationwide
Nationwide
Nationwide
Dangdang.com
Self-owned + 3PL
Nationwide
Delivery protection
1 – 2 days delivery
Half day delivery
1 – 2 days delivery
(include night time)
1 days delivery
Source: OP Research
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Express delivery – riding on e-commerce growth
Express delivery is one of the
3PLs benefiting from e-commerce
boom
Revenues of sizeable express delivery companies have grown at a 25% CAGR to
Rmb144.2 billion in 2013, which is over six times that of 2005. It is expected that
revenue will record another 30% growth in 2014e to Rmb187.5 billion with
increase in e-commerce penetration. According to some market research, over
50% of the express delivery demand is generated by B2C and C2C e-commerce
transactions, which usually focus on small parcels of relatively low value
(Rmb100 – Rmb500). Major express delivery companies in China handled 9.19
billion parcels in 2013, a very impressive 61.6% growth. We believe this strong
growth will be maintained as some B2C companies, such as JD.com, have
successfully ramped up to a critical mass to become profitable. This will lead to
higher efficiency in logistics operations as well as better price competitiveness to
capture retail sales penetration. For 2014, it is expected the delivery volume will
be further increased by 30% to 11.95 billion parcels. Thus, Haier (1169 HK) will
certainty capture the industry growth by their “last mile” delivery capacity for large
items in rural area.
Exhibit 13: China sizable express delivery companies revenue
(bn)
200
187.50
50%
39.2%
160
120
19.2%
20.0%
17.3%
14.3%
23.97
36.6%
30.1%
30%
105.53
25.0%
80
40
40%
144.17
31.9%
29.97
34.26
2006
2007
40.84
47.90
75.80
20%
57.46
10%
0
0%
2005
2008
2009
Revenue
2010
2011
2012
2013
2014E
Growth rate
Source: Enfodesk, State Post Bureau of PRC
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Exhibit 14: China sizable express delivery companies volume
(100 mn)
14
70%
56.8%
12
61.5%
11.947
60%
55.0%
10
50%
9.19
8
40%
25.8%
6
21.8%
5.69
25.8%
30%
3.67
4
2
23.2%
30%
13.2%
1.06
1.20
1.51
1.86
0.87
2005
2006
2007
2008
2009
20%
2.34
10%
0
0%
2010
2011
Express delivery volume (bn pieces)
2012
2013
2014E
Growth rate
Source: Enfodesk, State Post Bureau of PRC
Express delivery is a competitive
market
Although there are thousands of express delivery companies the seven largest
players combined take up more than 80% of the market. The data above shows
that average revenue per parcel was only a tiny sum of Rmb15.7 with the profit
margin for the industry dropping to below 5%, making economy of scale very
significant in such a highly competitive market. Besides, over half of the parcel
deliveries are intercity, further increasing operating costs for small local
companies that only have a network in one province. Thus, we believe the
express delivery will be further consolidated in the future.
EMS and SF Express target
mid-high end market
EMS, founded by China Post Group, is the largest integrated express and
logistics services provider with the longest history in business operations.
Meanwhile, SF Express, founded in 1993, is the largest privately owned express
delivery company with a nationwide network, owning 14 aircraft, 10,000 vehicles
and over 7,800 service centers in China. Both EMS and SF Express target the
mid-high end express market and nearly half of their revenues come from the
business segment.
Shentong, Yuantong, Zhongtong,
Best Express and Yunda target
low end market
For cost savings and time insensitive delivery market in C2C e-commerce,
Shentong, Yuantong, Zhongtong, Best Express and Yunda have captured 54.5%
of the e-commerce delivery outsourcing in 2012. Their low costs are driven by a
high level of franchising, with over 50% of their business from franchisees.
However, the low level of control in service quality of franchisees has led to ever
more scandals like toxic deliveries and parcel thefts. We believe the low end
market will become less competitive since B2C operators tend to increase
customers satisfaction by offering better and faster logistics services.
Express delivery drives fast
growing demand in logistics
facilities
Due to fast growing demand of express delivery companies, it creates a huge
demand in logistics facilities across different locations in China. Shenzhen Int’l
(152 HK) has made a strategic cooperation agreement with Shentong Express,
the second largest courier in China, for in-depth cooperation in integrated
logistics and cross border e-commerce. They will share customer and data
resources to accelerate the development of nationwide logistics network as well
as co-operation in express delivery business. We believe the growth in express
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delivery industry will benefit companies with rentable warehouses resources,
such as Beijing Properties (925 HK), Sinotrans (598 HK), SITC (1308 HK) and
Kerry Logistics (636 HK).
Exhibit 15: Market share of express delivery
Others, 19%
EMS, 25%
Zhongtong, 6%
Yunda, 8%
SF Express, 20%
Yuantong,
10%
Shentong,
12%
Source: OP Research
Exhibit 16: Market share of express delivery in B2C e-commerce
Others, 11.6% EMS, 15.5%
Yunda, 7.7%
TTK Express,
8.0%
Sheuntong, 15.2%
Zhongtong, 9.2%
Yuantong, 12.9%
Best Express,
9.5% SF Express,
10.3%
Source: EnfoDesk
Increasing investments in logistics facilities by e-commerce
Increasing logistics facilities
demand by investments from B2C
e-commerce operators
We have seen increasing investments by B2C operators to build their own
logistics network in order to secure higher customer satisfaction. Currently, major
B2C online shops aim to provide one to two deliveries per day in 1st – 2nd tier
cities, which is a clear competitive edge over small C2C online shops with
delivery time of three to four days. Besides, as most of the B2C e-commerce
operators have less than 1 million square metres of warehouse space, most are
planning to build more distribution centers in different regions to capture the
growing business.
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Exhibit 17: China B2C e-commerce operators logistics facilities
Company
Warehouse size
Remarks
JD
Suning
100+ million sqm
12 warehouses in China
Amazon.cn
Yixun
700k+ sqm
230k sqm
Yihaodian
280k sqm
6 mega size logistics hub and warehouses in 27 cities
Nanjing, Beijing, Shanghai, Guangzhou, Shenyang,
Chengdu, Wuhan, Xian, Hangzhou, Shenzhen
11 logistics facilities
Shanghai, Suzhou, Hangzhou, Yangzhou, Shenzhen,
Beijing
7 logistics centres in Shanghai, Beijing, Guangzhou,
Chengdu and Wuhan
Source: 100EC.cn
JD.com aims to spend bulk of IPO
proceeds on logistics network
JD.com has set itself apart from other e-commerce shops with greater logistics
coverage, better efficiency and higher express delivery service standards. The
company has aggressively increased its storage area to over 1 million square
metres at the end of 2013 to fulfill the demand of over 1 million orders per day.
Their self-owned express service has handled more than 100k daily orders. Their
network consists of 6 mega-sized logistics centres, 27 city storage centres and
1,620 delivery stations covering nearly 500 cities. Recently JD.com became the
first on the market to offer “3-hours” express delivery service. JD.com aims to use
70% of their IPO proceeds, over Rmb 7 billion, to build a logistics network. JD has
completed their “Asia Number One” logistics center in Shanghai with an
operational area of more than 100k square metres. They plan to build similar
facilities in Beijing, Guangzhou, Wuhan and other cities.
Sunning Logistics Cloud –
Investing Rmb20 billion
Sunning will spend Rmb20 billion over the next three years on a logistics network
under their “Logistics Cloud”. By 2015, Sunning aims to build 60 logistics bases
and 12 automatic warehouses. 16 logistics bases in Beijing, Nanjing, Chengdu,
Shenyang, Hangzhou, Qingdao, Xiamen, Tianjin, Chongqing and etc. have been
in operation, with automatic warehouses in Nanjing and Guangzhou specifically
to meet e-commerce needs. The company is expected to invest in last mile
services as they have secured express delivery licences in 22 provinces.
Cainiao – Rmb100 billion
investment in five to eight years
Cainiao – China Smart Logistic Network (CSN) was launched by Alibaba
Group jointly with eight other companies on 28 May, 2013. It promised to support
Rmb30 billion worth of daily online sales with delivery within 24 hours to
anywhere in China. In the first phase, the company will invest Rmb100 billion to
set up the logistics network to stimulate the growth of current logistics
infrastructures investment, such as highways, railways and airports. Total
investments will eventually increase to Rmb300 billion.
Exhibit 18: Shareholders of Cainiao network
Company
Background
Alibaba
Intime
Fosun
Forchn
Shunfeng
STO
YTO
ZTO
Yunda
E-Commerce
Retailer
Conglomerate - property investment
3PL
Express
Express
Express
Express
Express
Stake
43%
32%
10%
10%
1%
1%
1%
1%
1%
Source: Company, OP Research
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Goodaymart – Integrated “last
mile” service
Goodaymart logistics is targeted by Alibaba for their integrated channel service,
which has the ability to deliver large items with integrated installation service
across rural China. With over 6,000 points of service, Goodaymart is offering “last
mile” service to deliver the items to over 1,500 counties within 24 hours. Alibaba
Group announced a HK$2.82 billion investment to secure a maximum of 34%
stake in Goodaymart in December 2013.
Exhibit 19: Haier e-commerce “last mile” service
IT system to allocate
orders to regional
logistics centers
Consumers
87
logistics
centres
Delivery, installation, cross selling
After sales services
Source: Company, OP Research
Exhibit 20: Alibaba investment in Haier and Goodaymart Logistics
2.0% stake
HK$1.316
billion
3.59% in Haier
9.9% stake
or
24.1% in
Goodaymart
Logistics
66% stake
Source: Company, OP Research
International express companies, such as UPS and Fedex have been granted
operating licenses in some cities in China. Although they only have 3% market
shares in China, we believe they will drive the demand in high end logistics
facilities since international express companies are targeting the premium parcels
market as more cities are opened to international express companies.
Huge investments from
e-commerce on logistics facilities
will benefit companies with
projects in pipeline
By having investments from different parties to improve logistics efficiency, we
strongly believe the demand for modern high-end logistics facilities will see a
growth phase to fulfill needs from the e-commerce boom. Due to the limited
supply of land in 1st – 2nd tier cities, we think the value of logistics assets in
prime locations will see an appreciation in value. Beijing Properties (925 HK) and
Shenzhen Int’l (152 HK) have strong logistics facilities development in the
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China Logistics
pipeline in prime locations which, we believe, will yield exceptional returns in the
near future.
Increasing outsourcing to integrated logistics services providers
In addition to the increasing demands for logistics facilities, we believe the
e-commerce boom will introduce more logistics operations outsourcing to third
party logistics (3PLs) in China to save costs and improve efficiency.
Very high logistics cost to GDP in
China
According to Armstrong & Associates, China has one of the highest logistics
costs to GDP countries in the world. Total logistics cost to GDP in China reached
18% in 2012, which is more than double those of developed countries, such as
8.5% in US, 8.8% in Germany and 8.5% in Japan. The data showed that China
would be even more inefficient in logistics than other developing countries, such
as 13% in India, 11.6% in Brazil and 12% in Mexico. We believe the major
reasons for the extremely high logistics costs in China are the low level of
logistics outsourcing, redundant logistics operations in old supply chains and
mismatching resources geographic distribution with economic activities locations.
Exhibit 21: Total Logistics Costs to GDP
20%
18.0%
Developeing
countries
Developed countries
15%
13.0%
11.6% 11.6%
10%
9.0% 8.5% 9.5% 8.8%
9.7%
10.5%
8.8%
8.5% 9.0%
5%
0%
Source: Armstrong & Associates, OP Research
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Exhibit 22: 3PL Revenue in Total Logistics Costs
15%
Developed countries
10.2% 10.6% 10.5% 10.5% 10.6% 10.5% 10.2% 10.5%
Developingcountries
11.1%
10%
9.0%
8.2%
8.0%
7.0%
5%
0%
Source: Armstrong & Associates, OP Research
3PL outsourcing can achieve cost
savings by utilizing “big data” in
e-commerce
In developed countries, such as US, Germany, UK, Japan and South Korea, 3PL
revenue contributed over 10% of total logistics costs, indicating a higher level of
outsourcing. By utilizing integrated logistics services offered by 3PL, local
companies can focus on optimizing core competencies and reducing capital
expenditures to build their own logistics facilities. Besides, by serving diversified
clients in different segments, 3PL companies can improve asset profitability with
higher utilization and more in-depth IT systems developments. For example,
many companies are used to having their own trucking operations to transport
materials for processing. However, as production processes are in one-direction,
over half of the trucks in China run empty on return trips, which greatly increase
toll fees and fuel costs. 3PL companies, however, can share transportation
power with multiple clients in many locations from data analyses, thus improving
assets utilization and reducing wastage. So we believe 3PL outsourcing demands
will be on an upward trajectory in China as more in-depth IT systems of 3PL will
allow for e-commerce “big data” analyses, which offer real-time cargo monitoring
for logistics management to achieve cost savings from higher utilization and
economies of scale.
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Exhibit 23: Total logistics costs breakdown by different functions
100%
12%
80%
5%
4%
33%
35%
63%
61%
US
Japan
35%
60%
40%
52%
20%
0%
China
Transportation
Storage
Management
Source: CFLP, OP Research
As shown below, although total logistics costs to GDP in China is on a downward
trend, the speed of costs reduction is still very slow. Over a decade, total cost to
GDP only dropped by 1 ppt from 18.9% to 17.9% in 2013, which means that there
was minimal structural change in the supply chain management and the revenue
growth in the logistics segment was driven only by the robust GDP expansion in
China, not industry upgrading. We believe the reluctance to make changes in
logistics services is because investments in logistics facilities in the past were
based on speculation on asset price inflation, where fixed assets, such as
warehouses, can be sold at higher prices at a later date. However, we believe
that when China GDP growth slows down, investments tend to improve asset
quality to generate higher profitability by value added services in the future. As a
result, logistics facilities will be upgraded for better utilization and the total
logistics costs to GDP will be lowered to the level of developed countries in the
long run. (US has a stable total logistics cost to GDP at a range between 8%-9%)
Exhibit 24: Total Logistics Costs in China
Total logistics cost (RMB bn)
2013
2012
2011
2010
2009
2008
2007
2006
2005
0
2004
0
2003
5
2002
2,000
2001
10
2000
4,000
1999
15
1998
6,000
1997
20
1996
8,000
1995
25
1994
10,000
1993
30
1992
12,000
1991
Total logistics costs to GDP in
China will decrease as more
industries upgrade while GDP
growth slows down
% of GDP
Source: CFLP, OP Research
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China Logistics
Exhibit 25: Total Logistics Cost
US$ Bn)
1,600
World total: 8,350.60
1,480.90
1,334.60
1,400
Developed countries
Developeing
countries
1,200
1,000
800
506.9
600
400
200
163.7
247.6
299.7
195.4 213.9 161.8
237.1 277.9
103.9
0
Source: Armstrong & Associates, OP Research
3PL revenue will grow as
consumer preference leads to
higher supply chain complexity
With increasing internet and e-commerce penetration, consumer behavior tends
to be more and more impulsive. For example, in fast fashion, apparel retailers
need to offer more SKUs to customers for shorter periods. Traditional fashion
designs have only four seasons a year, whereas fast fashion designs have eight
to ten seasons. To limit inventory risks each SKU comes in smaller quantities in
the channel. This creates greater pressure on the supply chain management to
ensure inventory refills can be made with more SKUs at a quicker pace to the
market. Online shoppers are becoming more aware of delivery times after some
delivery delay complaints at major promotion events, such as “November 11”. To
secure customer satisfaction under keen competition, many B2C online shops
aim for two or three deliveries per day to guarantee delivery to end-user within 24
hours of closing online transactions. It will certainly increase the complexity of the
whole supply chain and more 3PL outsourcing will be adopted to sustain this fast
growing business.
We believe 3PL companies with strong domestic distribution networks in China,
such as Sinotrans (598 HK), SITC (1308 HK) and Kerry Logistics (636 HK), will
benefit since they can provide shorter origin-to-delivery cycle times by utilizing
alternative transportation modes to allow better routings.
th
12 Five-year plan on 3PL market
According to Armstrong & Associates, 3PL revenue in the Greater China region
will have a higher than average CAGR of 8% in 2012-2015. China 3PL revenue in
total logistics costs would have 1 to 2 ppt increment with support from
government. China’s 12th Five-Year plan approved the following objectives for
third-party logistics market:
1. To improve logistics efficiency and reduce logistics costs by accelerating
establishment of modern logistics system, developing 3PL, prioritizing the
integration of logistics resources and linking-up the logistics infrastructure
2. To optimize the development of regional distribution systems and the orderly
development of logistics parks
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3. To promote the development of modern logistics management to increase the
standardization of logistics
4. To promote development of logistics in agricultural, bulk mineral and
industrial products
Exhibit 26: Revenue of 3PL companies in China
(RMB bn)
1,200
10%
9.2%
1,000
9%
8.5%
7.9%
800
8%
7.4%
600
7.0%
7.0%
7%
400
6%
200
0
5%
2010
2011
2012
3PL revenue
2013
2014E
2015E
as % of total logistics cost
Source: Armstrong & Associates, CFLP, OP Research
Exhibit 27: 3PL revenue growth (CAGR by major region)
20%
18.8%
15%
10%
13.3%
9.5%
8.0%
6.3%
4.8%
3.6%
5%
4.0% 4.2%
1.5%
1.0%
0%
-1.7%
-5%
Greater China Asia Pacific South AmericaNorth America
(ex. Greater
China and
Japan)
2007-2012
Japan
Europe
2012-2015E
Source: Armstrong & Associates, OP Research
There are over 10,000 3PL companies operating in China. However, the average
profit margin of Chinese logistics enterprises was 5.59% in 2011, according to a
survey by the NDRA and Nankai University. The poor profitability of this logistics
industry in China is a result of the highly fragmented market, where the top 10
logistics firms only have a 13% market share, compared to the 30% - 40% in US
and Europe. As China’s 3PL market continues to develop, we anticipate more
M&A activity for 3PL market consolidation since small logistics enterprises without
economies of scale will find it difficult to fight the heavy tax burden, high toll fees,
expensive fuel costs and rising salary costs. It would provide expansion
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opportunities for leading 3PL companies, such as Sinotrans (598 HK), SITC
(1308 HK) and Kerry Logistics (636 HK).
Exhibit 28: Profit margins of Chinese logistics enterprises
(% of surveyed enterprises)
50
40
30
20
10
0
2007
2008
2009
2010
2011
Profit margin: <0%
Profit margin: 0-5%
Profit margin: 5-10%
Profit margin: >10%
Source: NDRC, Nankai University, OP Research
Exhibit 29: Market share of top-10 logistics firms
(% of total market share)
50%
40%
40%
34%
30%
20%
13%
10%
0%
China
USA
Europe
Source: CFLP, AT Keaney
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E-commerce enablers – Pick and shovel for
gold rush
“During the gold rush it’s a good time to be in the pick and shovel
business.” – Mark Twain
High revenue growth, but high
operational risks
Although many e-commerce operators are enjoying explosive growth in revenue
under the boom in China, many of them are still operating at a loss or barely
breaking even.
For the newly listed JD.com, revenue has jumped three-fold from Rmb21.1 billion
in 2011 to Rmb69.3 billion in 2013. However, the company remains a
loss-operator with a net margin of around - 4% in the past 5 years. JD.com barely
broke even in 2013 only because of non-core incomes, such as income from
interests and government grants. General consensus estimates the company will
not record meaningful earnings until 2017 with a net margin of 0.13%.
We believe the poor profitability of B2C e-commerce operators is due to intensive
price wars between different online shops as they aim to capture majority market
share to achieve economy of scale. VIPS is one of the few e-commerce operators
to be profitable with improving margin. This is due to VIPS unique positioning in
channeling discounted off-season apparels and cosmetic products, forming a
mutually beneficial relationship with brand suppliers. Due to aggressive growth in
B2C business, operators tend to build up inventories quickly, an approach fraught
with potential risks. For example, electronics products and home appliances
accounted for over 60% of JD.com GMV in 2013. Since electronic products fade
out with the seasons, slow moving inventories carry potential write-offs if revenue
growth slows and sales promotions find no response. Thus, investing in
e-commerce operators may not be the best choice during a boom, not unlike the
fortunes of a gold miner during a gold rush, where there is no guarantee that he
will finally dig up enough gold to achieve a high return.
Exhibit 30: Gross margin
30
25
20
15
10
5
0
2009
2010
2011
2012
JD
2013
VIPS
2014E
2015E
2016E
DANG
Source: Bloomberg, OP Research
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China Logistics
Exhibit 31: Net margin
10
5
0
(5)
(10)
.
.
.
.
.
(15)
(-50)
2009
2010
2011
2012
JD
2013
VIPS
2014E
2015E
2016E
2017E
DANG
Source: Bloomberg, OP Research
Exhibit 32: Inventory day
250
200
150
100
50
0
2009
2010
2011
JD
VIPS
2012
2013
DANG
Source: Bloomberg, OP Research
Demanding valuation for Alibaba
Group IPO
For the well-known Alibaba Group in e-commerce, the company has recorded
over US$4.2 billion net profit in FY13, an increase of 200% over last fiscal year.
The company achieved a very high gross margin of 78% from focusing on
third-party platform business without holding lots of inventory. However, the IPO
of Alibaba Group is said to be valued at a range of US$109 billion to US$200
billion, which would be quite a demanding valuation of over 30x PE.
Investing enablers: A ‘Pick-And-Shovel Play’ in gold rush
Investing enablers of e-commerce
would yield higher risk reward
ratio
Except investing directly in e-commerce operators, we believe there are huge
opportunities arising from different industries in the ecosystem, which are
essential to enable e-commerce to succeed. For example, the robust growths in
express delivery set out are typical examples of e-commerce enablers who make
sure products are physically delivered from sellers to end users.
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China Logistics
We highlight warehousing, cold chain logistics and integrated logistics service
providers as our top picks for the e-commerce enablers investment as they act
like “pick and shovel” in the gold rush that are needed in e-commerce operations.
With robust growth in the e-commerce market, they will generate huge demands
for warehouse, cold chain logistics and 3PL services. We believe investing in
enablers will yield better risk reward ratio as enablers are service providers that
do not involve operational risks in e-commerce, but enjoy the benefits of the
industry's boom.
Exhibit 33: E-commerce enablers exposure
Rating
Warehousing
Beijing Properties (925 HK)
BUY
Sinotrans (598 HK)
SITC (1308 HK)
BUY
NR
Shenzhen Intl (152 HK)
BUY
Haier (1169 HK)
ASR (1803 HK)
Chu Kong Shipping (560 HK)
NR
BUY
NR
Kerry Logistics (636 HK)
NR
Mega projects in prime locations, Tianjin and Quzhou projects in
such as Beijing inland port, pipeline
Shanghai FTZ and Tianjin Airport
Across Greater China
Leading 3PL provider in China
Smart Logistics Park JVs in
Focus intra-Asia sea freight routes
Qingdao
Mainly in Shenzhen, nationwide
integrated logistics hubs in
pipeline
Last mile service by Goodaymart
Asset light air freight solution provider
Tuen Mun warehouse and
Nansha bonded area
Across Greater China
Leading 3PL provider in China
Cold chain logistics
Integrated logistics services
Source: OP Research
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China Logistics
Warehousing
A Low Risk Proxy for e-Commerce Boom
Modern logistics facilities are in
very limited supply in China
According to CAWS, total market supply of logistics facilities in China amounted
to 550 million square metres in 2010, which was far below the demand for over
700 million square meters. Over 80% of the warehouses in China are poorly
constructed or converted from factories with insufficient clearance height, lack of
loading docks, restricted vehicle accessibility and lack of office space. Including
facilities owned for self-use by small to midsize developers, the total modern
warehouses in China amounted to only about 100 million square meters or 18%
of the supply. For major providers in 11 cities, there were only 13 million square
meters (or 2.4% of the total stock) of modern logistics facilities built for leasing out,
indicating significant scarcity in the high-end warehousing market.
Exhibit 34: Modern logistics facilities account for 15-20% of total supply;
market is fragmented
(mn sqm)
550.0
100.0
13.0
Major providers
Modern logistics facilites
Total market supply of logistics
facilites
Source: GLP, JLL report
We believe this under-supply of logistics facilities in China is driven by multiple
factors. Over a decade, land costs in China have been climbing up a lot in prime
locations, such as first tier cities. The higher costs to acquire industrial land may
not justify investment returns if the developer does not have the expertise to
generate higher rental income by building high-end logistics facilities. Besides,
local governments tend to assign lands for commercial and residential uses since
they would generate higher tax revenues and create jobs, which further reduce
the supply of logistics land. On the other hand, the amount of industrial lands
which are poorly developed for low-end warehouses because of land squatting
for the purpose of profiting from selling the land at a higher price after asset price
inflation. We believe government is planning changes to land policies to increase
land supply for logistics facilities to support their growth. From July 2014,
Shanghai will take the first step to lower lease terms of industrial land not
exceeding 20 years, down from 50 years, with lower land premiums.
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China Logistics
High demand in modern logistics facilities in China
High organic growth of logistics
space in China is expected in the
next 15 years
Meanwhile, research also shows that the high logistics costs to GDP in China
(18% in China vs 8% in US) is related to the lack of average warehouse stock
since existing warehouses on the market are too small or obsolete. Average
warehouse stock in China is 0.41 square metres per capita, which is only one
twelfth or 8% of US. Given the strong demand for modern logistics facilities from
e-commerce boom, it is expected the total warehouse supply will be 4 times
bigger to 2.4 billion square metres in 2029. The average logistics space per
capita in China will hit 1/3rd of the US or 1.74 square metres, representing a
US$2.5 trillion market.
Exhibit 35: Current supply of logistics facilites in the US is ~12 times that of
China
Warehose stock: total area (sqm) per capita
6
5.06
5
4
12x
3
2
1
0.41
0
China
US
Source: GLP, CAWS, CB Richard Ellis estimates, CIA The World Factbook
Exhibit 36: Logistics space per capita is 1/3rd of the US by 2029
Source: GLP, CAWS, CB Richard Ellis estimates, CIA The World Factbook
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China Logistics
Modern facilities generate higher
rental income
In order to handle the fast order flow and the short duration to market in
e-commerce, the requirements in standards of logistics facilities have got much
higher, which traditional low-mid end warehouses cannot fulfill. Modern logistics
facilities are usually large-sized with sizeable floor areas for leasing to premium
3PL operators, but there are few suppliers in the market. The high ceilings, high
load tolerance, wide column spacing and elevators with large capacity will enable
vehicle accessibility in modern warehouses. Besides, wide truck yard, ramp ways
and elevated berths will facilitate loading and unloading activities with the trucking
in an efficient manner. These modern facilities can allow automated inventory
management for cost savings in supply chain management.
With improvements in efficiency, the average rental rate of modern facilities can
yield over 40% more than traditional warehouses. However, due to complexity in
design and higher capital investments, there are only a few providers in a market
dominated by Global Logistics Properties (GLP) holding more than half of the
shares in the 7.4 million square metres of net rentable area of completed modern
logistics facilities. With less competition from second tier players, we believe
there are huge opportunities for small companies like Beijing Properties (925 HK)
and Shenzhen Int’l (152 HK) to become one of the leading players by completing
their scalable projects on hand and securing new projects.
Exhibit 37: Existing facilities not built to modern standards
Existing logistics facilities
Modern logistics facilities
Owned by users
Small-sized and old facilities
Fragmented market
Leased spaces, largely to 3PL operators
Large-sized modern facilities
Few players of scale
Source: GLP
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China Logistics
Exhibit 38: Limited supply of modern logistics facilities in China
Interior
Exterior
Characteristics
Modern
Wide column spacing
Large floor plates
High ceilings
Modern loading docks, enhanced safety systems and other
value-added features
Middle
Some converted from factories
Insufficient clear height and lack of loading docks
Lack of office space
Low-end
Poorly constructed
Restricted vehicle accessibility
Source: GLP
Exhibit 39: Various features of modern logistics facilities
Large floor area
10,000 sqm or more
High ceilings
5.5 m or more
High load tolerance
1.5 t/sqm or more
Wide column spacing
Wide truck yard
Elevated berths
Dock leveler
Ramp ways
Elevator with large capacity
Source: GLP
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China Logistics
Exhibit 40: Average rental rate of modern and traditional facilities
(RMB/m2 per day)
1.4
1.2
1.2
1.0
0.8
0.8
0.8
0.7
0.6
0.6
0.5
0.4
0.2
0.0
1st-tier cities
2nd-tier cities
Modern logistics facilites
3rd-tier cities
Traditional facilities
Source: OP Research
Exhibit 41: Completed modern logistics projects in China by net rental area
South
Logistics, 2%
China Merchants
Logistics, 5%
CB Investor, 5%
Zenith, 1%
Yupei, 3%
Prologis, 6%
Mapletree, 7%
GLP, 52%
Goodman,
8%
Blogis, 11%
Source: Prologis Research
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China Logistics
Exhibit 42: Modern warehouse providers in China
(mm sqm)
7.6
GLP stake: 19.9%
1.1
1.0
GLP stake: 53.1%
0.8
0.7
0.4
GLP stake: 90.95%
0.4
0.4
0.2
0.1
Source: GLP
GLP enjoys fast development from e-commerce boom
Global Logistics Properties (GLP)
is the leading modern logistics
facilities provider in China
Global Logistics Properties (GLP) was listed on the Main Board of Singapore
Stock Exchange in October 2010 through the largest real estate IPO ever globally.
With the strong demand in logistics and ample cash raised by IPO, the company
has recorded 25% CAGR in the total GFA of completed properties, reaching 14.8
million square metres in China, Japan and Brazil as of March 2014. It has
projects located in 34 cities across China with 9.5 million square metres
completed and 9.3 million square metres in the development pipeline to meet the
growing needs of e-commerce clients.
Exhibit 43: GLP logistics property portfolio in China
As at Mar
31, 2014
China portfolio
Completed and stabilized
Completed and pre-stabilized
Other facilites
Properties under development or
being repositioned
Land held for future development
Tptal area Pro-rata area
(sqm mn)
(sqm mn)
Total valuation
(US$ mn)
18.7
7.4
1.3
0.8
13.8
6.1
1.1
0.4
8,224
5,147
900
207
6,249
4,148
692
110
3.6
2.3
787
541
5.7
3.9
1,184
759
Source: GLP
E-commerce is the core driver for
modern logistics facilities in
China
25% of GLP’s total leased area in China have been signed up by e-commerce
clients such as Amazon, Vipshop, JD.com and Goodaymart Logistics.
E-commerce companies prefer modern logistics facilities as they can build up
automated and complex inventory control systems in the warehouses to lower
storage costs with real-time information. Besides, modern logistics facilities can
also draw tenants from e-commerce related businesses, such as 3PL and
express delivery, since the warehouses are mostly located in prime locations.
Deppon is a good example of how a delivery company can save logistics costs
and improve service quality by integrating first tier storage facilities.
In the first quarter of 2014, GLP achieved record new leases in China with 1
million square metres, up 123% yoy. E-commerce represents 45% of the new
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Fri, 11 Jul 2014
China Logistics
lease due to fast expansion of their business. We believe e-commerce boom is
the core driver for the robust demand of modern logistics facilities in China as
e-commerce and 3PL are increasing their share in the tenants mix. Except GLP,
companies with modern logistics development projects in the pipeline, such as
Beijing Properties (925 HK) and Shenzhen Int’l (152 HK), will capture the need for
impressive returns in coming years.
Exhibit 44: Top 10 tenants in China (March 2014)
Rank
Name
Industry
1
2
3
4
5
6
7
8
9
10
Amazon*
Deppon
Vipshop*
Nice Talent
Best Logisitcs
DHL
Schneker
Toll warehouse
JD.com (360buy)*
Goodaymart Logistics*
Total
* E-commerce related customers
% leased area
Retailer
3PL
Retailer
3PL
3PL
3PL
3PL
3PL
Retailer
3PL
4.1%
4.1%
3.1%
2.8%
2.6%
1.6%
1.5%
1.4%
1.3%
1.2%
23.7%
Source: GLP
Exhibit 45: Composition of China new leases - 4Q FY2014
New customers,
29%
Existing
customers, 71%
Pharma & Medical
instruments, 1%
Auto & Parts, 3%
Others, 5%
Electronics/
High-tech, 6%
FMCG, 11%
Retail/Fast food
chain, 50%
General logistics
services, 23%
Source: GLP
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Fri, 11 Jul 2014
China Logistics
Cold Chain Logistics
A Blue Ocean in e-Commerce
Cold chain logistics is a blue
ocean in e-commerce
The e-commerce market in China is becoming more and more competitive, with
B2C online shops offering similar products with similar channels. Since B2C
e-commerce operators do not involve themselves in products manufacturing,
major online shops are offering homogeneous products where consumers’
decisions are based mainly on pricing, not other value added services. It leads to
large scale price wars as happened before when online shops tried to capture a
majority of market share to lower costs by economy of scale. So far, only Vipshop
is profitable by uniquely positioning itself in discounted off-season apparel and
cosmetic products by bonding strong mutually beneficial ties with brand suppliers.
However, JD.com is still making losses in the price war as consumers can easily
find another e-commerce channel to acquire the same 3C products offered even
though the price is not the lowest in the market. Thus, we believe low profitability
may be sustainable if e-commerce operators are still in this red sea.
Exhibit 46: Cold warehouse in Tianjin Smart Logistics Park
Source: OP Research
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Fri, 11 Jul 2014
China Logistics
o
Exhibit 47: Frozen fish and juice in cold warehouse at below -19 C
Source: OP Research
Increasing middle class in China
will drive fresh food demand in
e-commerce as rising food safety
concerns mount
On the other hand, cold chain logistics are making a blue ocean in e-commerce
latest development. Different from electronic and textile products, fresh food,
such as fruits, vegetables, meats and aquatic products are perishable, requiring
to be transported and stored in low temperature. Due to limited supply of cold
storage facilities and refrigerated, insulated trucks in China, very few companies
are able to deliver fresh products. Without keen competition as freshness is
difficult to replicate, we expect cold chain logistics to create a high margin
premium market in e-commerce in the near future. As the middle class population
in China grows, we believe increasingly disposable income and rising food safety
concerns will drive a huge demand for fresh foods in e-commerce as well as for
the enabler – cold chain logistics.
Exhibit 48: Middle class population in Asia (number of people in mn)
(mn)
2,000
1,794
1,500
1,066
1,000
696
500
607
390
346
179
123 127 122
China
Japan
23
201
0
Asia
2000
2010
Rest or Asia
2020
Source: Armstrong & Associates
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Fri, 11 Jul 2014
China Logistics
Cold chain logistics will become hot investment item
More companies are stepping into
cold chain logistics
Shunfeng Express has provided an outstanding example of how to use their cold
supply chain capacity. In May 2012, SF Express launched SFBest.com (順豐優
選), which focuses on offering B2C e-commerce fresh products and timely direct
deliveries from origins, such as choice lychees from Lingnan and Peking ducks
from Quanjude. Without any solid cold chain logistics, fresh foods delivery is
difficult to achieve. Based on their strong cold chain logistics network, SF Express
has found its niche in e-commerce business as an express delivery company. As
shown in the table below, some A-shares listed Chinese companies are also
investing in this area to grab a share of the boom. We believe companies with
cold chain logistics exposure, such as Beijing Properties (925 HK), deserve a
premium since cold chain logistics most certainly will be a hot investment item in
the next few years.
Exhibit 49: SFBest.com
Source: Company, OP Research
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Fri, 11 Jul 2014
China Logistics
Exhibit 50: List of cold chain developments by A-shares listcos
Name
Stock code
YUD
Yangtze
River 600119 CH
Investment Industry
Shanghai Jinjiang Int'l
600650 CH
CMST Development
600787 CH
Shenzhen
Haupengfei 300350 CH
Modern Logistics
Shanghai Haibo
600708 CH
Event
Become qualified cold chain logistics provider for
Yihaodian and Tmall in 2013
Completed over 400,000 cold delivery in 2013
Modified 11,000 tons normal warehouse into cold
warehouse
Developed valued cold chain transportation business
Acquired cold chain company for pharmaceutical segment
Invested over Rmb1 billion into West Hong Qiao cold chain
logistics park project
Acquired 51% stake in 962360.com 菜管家
Acquired 70% of Creative Giant - food logistics company
though subsidiary
Source: OP Research
Policy targets to double cold chain logistics capacity
Policy favors cold chain logistics
development
According to NDRC, China has around 400 million tons of fresh products in
circulation every year. However, the cold chain circulation rates of fruit and
vegetables, meats and aquatic products were only 5%, 15% and 23%
respectively in 2010 – a very low level compared to the near 100% in developed
countries.
Low cold chain circulation rate leads to high loss rate and decay of the fresh
products during transportation. The loss rate of fruit and vegetables, meats and
aquatic products were 25%, 12% and 15% respectively in 2010, which, as a
result, increased the average logistics costs. The Chinese Government has,
therefore, unveiled the Development Plan for Cold Chain Logistics of Agricultural
Products (農產品冷鏈物流發展規劃) in the 12th Five-Year Plan in order to boost
the country’s cold storage capacity development to improve food safety by
raising cold chain circulation rates. The plan aims to triple the number of
refrigerated and insulated trucks to 60,000 by 2015 from 20,000 in 2010. Due to
lack of cold chain capacity, NDRC also began to promote development of cold
storage capacity to 18.8 million tons by 2015 from 8.8 million tons in 2010. As a
result, the cold chain circulation rates of fruit and vegetables, meats and aquatic
products will be increased to 20%, 30% and 36% respectively by 2015 and to
lower wastage rates to 15%, 8% and 10% respectively.
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China Logistics
Exhibit 51: China's cold-storage capacity by main types of products (2011)
Dairy products,
1%
Other, 1%
Meat, 11%
Aquatic
products, 13%
Mixed, 47%
Fruit &
vegetables, 27%
Source: CAWS
th
Exhibit 52: 12 Five-Year Plan cold chain logistics target
Category
2010
2015
Total cold storage capacity (m tonnes)
Total number of refrigerated and insulated trucks (1,000 units)
Circulation rate of fruit and vegetables
Circulation rate of meats
Circulation rate of aquatic products
Wastage rate of fruit and vegetables
Wastage rate of meats
Wastage rate of aquatic products
8.8
20
5%
15%
23%
25%
12%
15%
18.8
60
20%
30%
36%
15%
8%
10%
Source: NDRC, OP Research
Page 37 of 111
Fri, 11 Jul 2014
China Logistics
Integrated Logistics Services Providers
Enabling simple business model in complex business flow
Third party logistics providers
enable simpler business model
for fast expansion and JIT supply
chain
Logistics services are an asset heavy industry, involving warehousing,
transportation and inventory management. In order to expand logistics capacity to
support the business growth, traditional 1PL companies with in-house logistics
operations are needed to invest intensive capital to acquire lands to build
warehouses as well as to buy their own trucking teams. It will certainly increase
their operational risks and asset heavy companies find it difficult to change their
business model to cope with adverse market conditions.
Some manufacturers and retailers will outsource the freight transportation to
individual 2PL carriers to move their goods between factories, distributors and
points of sales. However, it will create lots of inefficiency in the supply chain since
they do not have the expertise of IT management for inventory control. Moreover,
when the manufacturing process involves multiple countries within a region, the
administrative costs of preparing and processing customs and other local
requirements in international shipments become a huge burden in operations. For
example, there are over 20,000 parts in the manufacture of a passenger car.
Under JIT manufacturing process, the transportation of parts are frequent and in
small quantities. Without outsourcing logistics operations to freight forwarder,
there will be plenty of wastage as there will be low utilization in transportation
power. Thus, 3PL is enabling more profitable business models for different
industries. Sinotrans (598 HK), SITC (1308 HK) and Kerry Logistics (636 HK)
have strong growth in 3PL business since they have integrated their freight
forwarding service with land based logistics to offer a simple solution for
manufacturers to maintain a smooth supply chain.
Exhibit 53: Layers of logistics services
Actors
Services
1PL
Manuf acturing, Retailing
Carriers
2PL
Transportation
Logistics service
providers
3PL
Lead logistics providers
& consultants
Service integration
Cargo owners
4PL
Logistics
Supply chain
management
Supply chain integration
Source: cerasis.com, OP Research
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China Logistics
Exhibit 54: Freight forwarding –B2B 3PL service
Customs clearance
Transportation
Storage
Insurance
All services in
import and export
trade……
Port
Foreign exchange
Tax reimbursement
Source: Company, OP Research
3PL becomes more important in
the complex logistics flow in
e-commerce
Under the explosive expansion of e-commerce business, 3PL has become an
essential part of the supply chain. With increasing internet penetration and speed
of information flow, consumer behaviors are fast changing and product cycles are
very short. Time to market is a key to success in e-commerce. Since e-commerce
is a very scalable business, where a B2C online shops can offer thousands of
branded products and millions of SKUs to customers. For example, JD.com has
over 40 million product SKUs with its own inventory. To avoid creating significant
inventory risks, JD.com needs to focus on top level supply chain management by
adopting high level of logistics outsourcing to maintain a low level of inventory.
Besides, time and quality of delivery is the key to securing consumer satisfaction
for online shoppers. Goodaymart under Haier (1169 HK) has unique strength in
distributing large items across rural areas of China within 48 hours of making
online transactions. They have experienced strong demand for their last mile
logistics channel services when they opened it to third party e-commerce
operators, which is the main reason for the Alibaba investment.
Exhibit 55: 3PL in e-commerce
1
Orders shipped
direct to 3PL
3PL
2
4
5
3
Customer order
Received & checked
Submitted to 3PL for
fulfillment
Product stocked for
fulfillment
6
Order packaged
for shipment
7
Order delivered to
shipper for delivery
Source: rosspw.com , OP Research
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China Logistics
Cross border e-commerce has higher complexity in logistics
Haitao, cross border e-commerce,
will drive more 3PL outsourcing
as more complex international
transportation
With higher disposal incomes and higher consumption of mid-high end products,
China's middle class population is driving a fast growth in cross border
e-commerce (Haitao). The cross border e-commerce market increased nearly
60% to Rmb76.7 billion in 2013 and is expected to double in 2014. Since Haitao
involves cross border express delivery logistics, it would further increase
complexity in e-commerce logistics as logistics facilities, such as warehouses are
required in foreign countries. Thus, we believe 3PL companies with strong
domestic distribution networks in China as well as international freight forwarding
expertise will benefit since they can capture the demand at a lower cost by using
alternative transportation modes to allow more cost effective routings. Sinotrans
(598 HK) has demonstrated its ability to utilize their air express delivery arm to
offer integrated service for Haitao's development.
Exhibit 56: Cross border e-commerce market
(bn)
200
155
150
100
77
48
50
27
5
12
0
2009
2010
2011
2012
2013
2014E
Source: 100EC.cn, OP Research
Exhibit 57: Sinotrans (598 HK)’s “Sunshine Haitao” service
Source: Company, OP Research
B2B2C haitao service: Centralize e-commerce operators cross border orders.
Freight transportation to the warehouses in bonded area in China. Express
delivery service combined together with customs process to save operational
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Fri, 11 Jul 2014
China Logistics
costs.
Exhibit 58: B2B2C Haitao service
Source: Company
B2C haitao service: Collection of the freight in foreign country and international
express delivery service to China for individual orders.
Exhibit 59: B2C Haitao service
Source: Company
Page 41 of 111
Fri, 11 Jul 2014
China Logistics
Beijing Properties (925 HK) – A Hidden Gem
with Prime Locations Logistics Properties
Initial Coverage

Beijing Properties (BJP) has refined itself into a promising modern
logistics facilities provider in China with a series of prime logistics
assets acquisitions

BJP aims to build the second largest nationwide network of logistics
properties in China with 4 million square metres rentable area, behind
only the well-known GLP

BJP has an unique exposure in cold chain logistics to capture the high
demand from fresh products e-commerce in the near future
BUY
Close price: HK$0.84
Target Price: HK$1.2 (+43%)
Ke y Data
HKEx code
925
12 Months High
(HK$)
1.06
12 Month Low
(HK$)
0.50
3M Avg Dail Vol.
(mn)
6.54
Issue Share
(mn)
6,749.99
Market Cap
(HK$mn)
5,669.99
Fiscal Year
12/2013
Major shareholder (s)
Beijing Ent. Gourp (67.41%)
Source: Company data, Bloomberg, OP Research
Closing price are as of 10/7/2014
Price Chart
925 HK
HK$
1.2
MSCI CHINA
1.0
0.8
0.6
0.4
0.2
Jul/13
Oct/13
Jan/14
Apr/14
0.0
Jul/14
1mth
3mth
6mth
Absolute %
12.0
-4.5
52.7
Rel. MSCI CHINA %
11.9
-6.4
50.8
Aggressive acquisitions: BJP has spent a huge capex of nearly HK$3billion in
the past 18 months to expand their development pipeline to over 1 million square
metres planned GFA of strategic logistics facilities in prime locations, such as
Beijing Inland Port, Shanghai Free Trade Zone and Tianjin Airport Bonded Area.
We believe the company is well positioned to become the second largest modern
logistics facilities providers in China with more than 4 million square meters
rentable areas of logistics facilities in the coming four years.
Strong competitive edge from prime locations: BJP will be able to generate
considerable rental income after completion of major logistics facilities in 2016.
BJP can achieve above average daily rental rates due to prime locations of
logistics facilities, which we believe is a key to securing first tier clients, such as
B2C e-commerce giants, express delivery companies and 3PL providers.
Cold chain logistics: We believe BJP deserves a premium valuation as the
company has tapped into the cold warehousing facilities in 2013. We expect
BJP’s cold chain logistics to enjoy a high demand due to higher entry barrier and
robust growth in fresh products e-commerce.
Compan y Profile
Beijing Properties is a logistics property
development company in China, which
focuses in building and operating logistics
facilities and cold chain warehouses in prime
locations. Beijing Properties also has an
investment portfolio of commercial properties
in Beijing and Guangzhou.
Initial BUY: We estimate BJP will record over 30% CAGR in rental income in the
next five years to over HK$500mn in 2019E. Our target price implies 10%
discount to NAV and 43% upside to current price.
E x h i b i t 6 0: F o r e c a s t a n d Va l u a t i o n
Year to Dec (HK$ mn)
FY12A
FY13A
FY14E
FY15E
FY16E
Revenue
Growth (%)
Net Profit
Growth (%)
11.0
(99.3)
(97.8)
(180.8)
35.8
225.7
701.0
(817.0)
146.4
308.3
160.0
(77.2)
198.4
35.5
(53.1)
(133.2)
341.4
72.1
(7.1)
(86.7)
Diluted EPS (HK$)
EPS growth (%)
Change to previous EPS (%)
Consensus EPS (HK$)
(0.015)
(185.5)
0.101
(778.0)
0.019
(81.3)
0.0
N/A
(0.006)
(133.2)
0.0
N/A
(0.001)
(86.7)
0.0
N/A
(8.2)
(56.3)
2.8
0.0
0.000
30.6
8.3
1.5
0.0
0.000
4.3
42.8
1.4
0.0
0.000
(1.4)
(129.2)
1.4
0.0
0.000
(0.2)
(969.8)
1.4
0.0
0.000
ROE (%)
P/E (x)
P/B (x)
Yield (%)
DPS (HK$)
Source: Bloomberg, OP Research
Page 42 of 111
Fri, 11 Jul 2014
China Logistics
Investment Thesis
A hidden gem for the second largest nationwide logistics network
China’s second largest logistics
property network in the making
Beijing Properties (BJP) has been reinventing itself from property developer into a
promising logistics facilities provider with a series of low-profile investments and
acquisitions of logistics assets. The company aims to own at least total 4 million
square meters in total of rentable areas of modern high-end warehouses and cold
chain warehouses in the next four years. This would make BJP the second
largest logistics facilities provider in China, just behind the famed
Singapore-listed Global Logistics Properties (GLP).
BJP has spent nearly HK$ 3 billion capex in the past 18 months to build up over 1
million square metres planned GFA of logistics assets under its current
development pipeline. It acquired an extra 24% stake in Beijing Inland Port, which
is developing the Majuqiao Logistics Base in Beijing with over 600k square
metres planned rentable area. BJP also acquired 212k square metres of
warehouses within the Shanghai Free Trade Zone and 27k square metres of
customs warehouses in Tianjin Airport Bonded Area. Including the investment on
construction of 80k square metres of cold chain warehouse in the Tianjin Marine
Economic Area, BJP is set to secure top-tier logistics assets in prime locations,
which will give it a strong competitive edge in capturing the robust demand for
logistics facilities from e-commerce boom in China.
To expand the high-end warehouses network rentable area to 3 million square
metres in four years, BJP will continue to identify suitable partners for logistics
development projects in western and southern cities such as Chengdu,
Chongqing, Dalian and Guangzhou. As e-commerce of fresh products is driving
the high demand growth in cold storage, BJP aims to develop 1 million square
metres of cold storage facilities in the next four years, starting with preliminary
negotiations in major rapidly growing key first-tier cities like Beijing and Shanghai.
A hidden gem of first tier logistics
assets in prime locations
We believe BJP is a hidden gem in the logistics sector as it owns first tier logistics
assets in prime locations, which would generate meaningful rental income and
trigger a consensus re-rating when construction is completed.
Exhibit 61: Major acquisitions
Announce
9-Jun-2014
2-Jun-2014
8-Apr-2014
24-Jan-2014
29-Nov-2013
18-Oct-2013
10-Sep-2013
8-Aug-2013
20-Jun-2013
7-Mar-2013
7-Mar-2013
16-Jan-2013
24-Dec-2012
24-Dec-2012
13-Jul-2011
Event
Disposal of Haikou Project for 17.9% of Cell Aquaculture
Acquisition of 21.85% of Genvon Group (2389 HK)
Acquisition of Lugang Receivables
Acquisition of Guangzhou Guangming Receivables
Investment Cold Storage Warehouse
Acquisition 99.9% of Oriental Union (owns 80% GZ Guangming)
Acquisition of 75% of Holiday Inn Downtown Beijing
Acquisition of Phoenix Real Estate (Wai Gao Qiao)
Acquisition 40% of Haikou Peace Base Industry
Acquisition 70% of High Church (TYWL)
Acquisition 70% of Tianjian Transwell (WSL)
Acquisition of land use rights by Quzhou Tongcheng
Acquisition 24% of Beijing Inland Port (from 52%)
Transfer land of Lugang for fully control
Establishment of JV (Beijing Inland Port)
Consideration
AUD 24,900,000
HKD 472,500,000
HKD 46,950,929
HKD 292,853,953
CNY 82,500,000
HKD 50,372,040
CNY 415,620,300
USD 143,888,734
CNY 40,000,000
CNY 32,955,767
CNY 101,500,000
CNY 15,401,100
HKD 47,156,006
CNY 2,000,000,000
Source: Company, OP Research
Page 43 of 111
Fri, 11 Jul 2014
China Logistics
Prime Locations Warehouse Network
Solid demand in first tier cities
E-commerce drives solid demand
for logistics property in first tier
cities
Due to the explosive growth in e-commerce China has experienced rapid
development in logistics supply chain. According to Colliers International
(“Colliers”) China’s logistics industry is still in relatively early development with
growing demand and strong fundamentals. Under the new supply chain of
e-commerce products are no longer sold and stored by individual distributors, but
B2C e-commerce giants tend to build or rent their own mega distribution centers
in major cities, such as Beijing, Shanghai and Guangzhou, which are closer to the
customers for shorter delivery time and lower transportation costs. Greater
urbanisation, with higher disposable income, has seen domestic consumption
soar and demand for modern storage facilities in first-tier cities outpacing other
property assets. Due to tight supply of industrial lands in major cities, the vacancy
rate of logistics property remains low as new warehouses in Beijing and Shanghai
are quickly snapped up.
Exhibit 62: Logistics properties new supply and demand in Beijing and
Shanghai
(sq.m.)
350,000
30%
300,000
25%
250,000
20%
200,000
15%
150,000
10%
100,000
5%
50,000
0%
0
(50,000)
2009
2010
2011
2012
2013
2014E
(100,000)
-5%
-10%
Beijing new supply
Shanghai new supply
Beijing net take-up
Shanghai net take-up
Beijing vacancy rate
Shanghai vacancy rate
Source: Colliers International Research, OP Research
Logistics properties are a low risk
proxy for e-commerce boom
As shown in Exhibit 62, the rental rate of logistics property in major cities is
growing at a steady rate of 5% - 10% per annum driven by (1) demand and
supply imbalance and (2) modernization of warehouse facilities for higher yields.
With over 10% internal return rate (IRR), we believe logistics properties in major
cities, especially in prime locations, are a low risk proxy for getting the exposure
of e-commerce boom. Besides, the average rental rates of logistics properties are
still undemanding compared to other popular logistics hubs in Asia. For example,
the average rental rate in Beijing, Shanghai and Guangzhou is around 70% lower
than in Hong Kong, Tokyo and Singapore. We believe the rental rate of logistics
properties in major cities of China will be on par with developed cities in Asia in
the long run by improvements in efficiency and completion of urbanization
process.
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Fri, 11 Jul 2014
China Logistics
Exhibit 63: Logistics properties rental rate
(RMB/sq.m./day)
1.4
25%
1.2
20%
15%
1.0
10%
0.8
5%
0.6
0%
0.4
-5%
0.2
-10%
0.0
-15%
2009
2010
2011
2012
2013
2014E
Beijing rents
Shanghai rents
Beijing rent growth
Shanghai rent growth
Source: Colliers International Research, OP Research
Exhibit 61: Warehouse rental rate in Asia
(US$/SF/YR)
(YoY change)
25
25%
20
20%
15
15%
10.1%
10
10%
5.0%
5.0%
5.0%
4.0%
5
2.6%
5%
0.0%
0
0%
Hong Kong Singapore
Tokyo
Delhi
Shanghai
Dec 2012 prime warehouse rent
Beijing
Guangzhou
2013 forecast
Source: Colliers International Research, OP Research
Page 45 of 111
Fri, 11 Jul 2014
China Logistics
Beijing Properties (925 HK) prime locations are simply the cream
Beijing Properties (925 HK)
already has a strong collection of
over 1 million sqm of logistics
properties in prime locations in
China
Strategic acquisitions over the past years have given Beijing Properties (925 HK)
multiple modern warehouse facilities in prime locations in first tier cities like
Beijing, Shanghai and Tianjin. BJP currently owns over 200k square metres of
completed rentable area, which would fully consolidate the rental income to BJP
in 2014. Although some of the projects are not yet developed, we expected the
rentable area will ramp up quickly to over 1 million square metres as the
development cycle of modern logistics facilities is relative short.
As multi-storey warehouse would take up 12 – 18 months to be built, we expect
Majuqiao Logistics Base will start to commerce in 2016 if the construction starts in
2H14. By 2016, we believe the rental income would jump significantly due to the
completion of this project and BJP would become one of the major logistics
facilities provide in China in near future given the secured development pipeline.
Exhibit 62: Beijing Properties development pipeline
Project
Ownership
Land Area
Planned
(sqm) Rentable Area (sqm)
Logistics Properties
Majuqiao Logistics Base*
Shanghai Phoenix WGQ
WSL Logistics (Tianjin)
TYWL (Tianjin)
Chaoyang Inland Port**
76.00%
100.00%
70.00%
70.00%
82.24%
474,300
192,670
45,551
47,317
161,499
539,400
211,918
27,494
35,766
18,155
Cold Chain Properties
Tianjin Zhongyu
Quzhou Tongcheng
60.00%
100.00%
85,638
56,667
150,000
58,716
75.00%
79.92%
7,057
59,093
27,570
41,818
27,570
41,818
1,063,642
859,012
1,041,449
829,791
257,567
246,094
Commercial Properties
Holiday Inn Downtown Beijing
Guangzhou Guangming
Gross Logisitics Area
Attributable Logisitics Area
Newly developed rentable area (sqm)
FY14
FY15
FY16
FY17
Existing
239,400
150,000
FY18
150,000
211,918
27,494
11,766
24,000
18,155
(18,155)
67,986
58,716
269,333
254,331
420,035
370,638
82,014
641,280
537,652
873,294 1,023,294
700,860 814,860
*Majuqiao Logistics Base is planned to construct warehouse area and office area of 450,000 and 89,400 square metres respectively
**Chaoyang Inland Port business will be migrated to Majuqiao Logisitcs Base in 2016E
Source: OP Research
Exhibit 63: Beijing Properties rentable area growth
1,200,000
1,000,000
800,000
600,000
400,000
200,000
0
FY13
FY14
FY15
Gross Logisitics Area
FY16
FY17
FY18
Attributable Logisitics Area
Source: OP Research
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Exhibit 64: Modern logistics facilities development timeline
Various
3-6 Months
Project Identification /
Acquisition
Pre-Development
 City / submarket identification
 Site selection
 Negotiation with government
 Customer demand analysis
 Bidding process
 Project design
 Building permitting
 Government approvals
 Pre-marketing
 Construction financing
Tianjin TEDA Park – Pre-Construction
6-12 Months*
3-9 Months
Construction
 Contracting
 Foundation
 Base-building
 Substantial completion
Lease-Up
 Marketing
 Customer relationships
 Lease contracts – negotiation and drafting
 Tenant fit-out
Tianjin TEDA Park – Completed
A typical development takes ~21 months from site acquisition to lease-up
* Typical construction period for single-storey warehouses. Multi-storey warehouses will take about 18 months to be built
Source: GLP, OP Research
China's second largest high-end warehouse provider in the making
More strategic acquisitions to
drive growth are expected
Beijing Properties have shown rapid development in its logistics segment since
most of the projects mentioned above were acquired and developed in 2013. As
the company aims to expand its high-end warehouse network's rentable area to 3
million square metres in four years, we believe BJP will continue to identify
suitable partners to seek potential logistics development projects in western and
southern cities such as Chengdu, Chongqing, Dalian and Guangzhou.
Besides, due to strong demand in e-commerce, cold storage and food safety
related logistics segment, BJP aims to develop 1 million square metres of cold
storage facilities in the next four years by starting preliminary negotiations in
major rapidly growing first-tier cities like Beijing and Shanghai.
Based on the strong SOE background, we believe BJP can maintain the high
speed of expansion in the next few years. With 4 million square metres rentable
area, it is over 50% of the current GLP portfolio to become the second largest
logistics facilities provider in China.
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Exhibit 65: Beijing Properties aims to become the second largest logistics
facilities provider in China with 4 million square metres rental area (3 mn
sqm in modern warehouse and 1mn sqm in cold chain logistics)
(mm sqm)
7.6
4.0
1.1
1.0
0.8
0.7
0.4
0.4
0.4
0.1
Source: OP Research
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Exhibit 66: Company Structure
Beijing Enterprises Group
Company Limited
As at 28 March 2014
100%
北京北控置業有限責任公司
(Beijing Enterprises Group
Real-Estate Co., Ltd.*)
100%
Beijing Enterprises
Real Estate (HK) Limited
100%
38.69%
Brilliant Bright Holdings
Limited
24.94%
Beijing Properties (Holdings) Limited
Stock Code: 925
100%
100%
BPHL Real Estate
(Holdings) Limited
75%
假日飯店
有限公司
(Holiday
Inn
Downtown
Beijing
Company
Limited*)^
100%
北京北建
物流有限
公司
(Beijing
Beijian
Logistics
Co., Ltd.*)
100%
China Logistics
Infrastructures
(Holdings) Limited
82.24%
北京
陸港國際流
有限公司
(Beijing
Inland
Port
International
Logistics
Co. Ltd.*)
75.4%
北京北建
通成國際
物流有限
0.6%
公司**
(Beijing
Inland
Port
Co., Ltd.*)
70%
天津
萬士隆國
際物流
有限公司
(Tianjin
Transwell
International
Logistics
Co., Ltd.)
70%
天域
萬隆物流
（天津）
有限公司
(Transwealth
Logistics
(Tianjin)
Co., Ltd.)
79.92%
Elite Horizon Investments
Limited+
100%
上海凡宜
和倉儲
有限公司
(Shanghai
Phoenix
Real
Estate
Fund
Warehousing
Co. Ltd.)
100%
衢州
通成國際
物流
有限公司
(Quzhou
Tongcheng
International
Logistics
Co., Ltd.*)
60%-68.2%
天津中漁
置業有限
公司
(Tianjiu
Zhongyn
Properties
Co. Ltd.*)^
廣州光明房產建
設有限公司**
(Guangzhou
Guangming
Property
Construction
Co. Ltd.*)
40%
海口安基實業發
展有限公司***
(Haikou Peace
Base Industry
Development
Co., Ltd.*)
100%
北京北建
陸港國際
物流有限
公司
(Beijing
Beijian
Lugang
International
Logistics
Co., Ltd.*)
* for identification purpose only
** Joint Venture Company
*** Associate Company
^ Transaction not yet completed
+ Subject to the approval of the relevant authority of the place of incorporation, the company will be renamed to China Hui Ying Cold andAgriculture (Holdings)
Limited( 中國匯盈冷凍及農業（ 控股）有限公司* )
Source: Company, OP Research
(1) Beijing Inland Port – Majuqiao Logistics Base
Majuqiao Logistics Base is one of
the largest inland ports in Beijing
Beijing Inland Port (BIPL) is a JV set up by Beijing Properties, Beijing Lugang,
Kerry Logistics and Hutchison Port in 2011 with a maximum investment of Rmb
20 billion. By acquiring 24% stake from Hutchison Port, Beijing Properties
currently owns 76% stake in BIPL, which will perform as investor, developer and
operator of the Majuqiao Logistics Base (馬駒橋物流基地), that is located in the
Fu Ma Village (駙馬莊) of the Tongzhou District (通州區), about 20 km from CBD,
Beijing.
Majuqiao Logistics Base is one of four approved by the government for the
strategic inland port development in Beijing City. Since Majuqiao Logistics Base is
next to the intersection of Jinghu Expressway and South 6th Ring Road, it has
effective transport connections to multiple highways to other cities. Cargo
between Beijing and Tianjin will be centralized in this inland port for customs,
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inspection and sorting out completion.
It has a land area of 474,300 square metres for logistics facilities and related
offices, with total construction area over 637,000 square metres. On completion,
the warehouse and office areas set aside for rental will be about 450,000 and
89,400 square metres respectively.
Majuqiao is expected to
contribute rental income in 2016
BJP aims to start construction in 2H14 after finalizing the design and layout with
local government. With 18 months construction period, Majuqiao Logistics Base
is expected to start operations in 2016, and generate remarkable rental income
as we expect occupancy will ramp up quickly due to its prime location.
Exhibit 67: Majuqiao Logistics Base strategic location
Source: amap.com, OP Research
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Exhibit 68: Majuqiao Logistics Base floor plan
Source: Company, OP Research
Exhibit 69: Majuqiao Logistics Base design outlook
Source: Company, OP Research
(2) Shanghai Free Trade Zone – Waigaoqiao Free Trade Zone
Beijing Properties has secured
scarce warehouses in Shanghai
Free Trade Zone
BJP acquired the entire Shanghai Phoenix Real Estate Fund Warehousing
(Phoenix WGQ Group) in November, 2013, giving the company total control over
scarce warehouse assets within the Shanghai Free Trade Zone.
The Shanghai Free Trade Zone is the first such entity in mainland China,
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integrating four existing bonded zones in Pudong district, namely Waigaoqiao
Free Trade Zone (where Phoenix WGQ is located), Waigaoqiao Free Trade
Logistics Park, Yangshan Free Trade Port Area and Pudong Airport
Comprehensive Free Trade Zone.
The warehouse comprises a total of 23 warehouse units within a 1- to 2-storey
warehouse building with a total gross floor area of 211,985 square metres in
Shanghai Waigaoqiao Logistics Centre. The occupancy rate of the warehouses
was high, near 80%, at the end of 2013 as it is close to the CBD of Shanghai city.
With strong official support for the first free-trade zone in China, more enterprises
are setting up business units within the zone, pushing up the asset price. As a
result, BJP has recorded significant bargains on purchases at the end of 2013 or
two months after the acquisition was completed.
We believe the prime location of Shanghai WGQ warehouse will keep the
occupancy rate high at first tier rental rates. Although Phoenix WGQ only had
two months income contribution in 2013, we think it would provide a stable rental
income for BJP in 2014 and afterwards.
Exhibit 70: Shanghai Phoenix WGQ location
Source: amap.com, OP Research
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Exhibit 71: Shanghai Phoenix WGQ outlook
Source: Company, OP Research
(3) Tianjin Airport Economic Area (International Logistics Zone)
Unique Custom Warehouse in
Tianjin Binhai International
Airport
Beijing Properties (925 HK) have extended their logistics properties network by
acquiring 70% interests in Tianjin Transwell International Logistics (WSL Logistics)
and 70% interests in Transwealth Logistics (Tianjin) (TYWL) in 3Q13, which
would enhance the synergy with the Majuqiao Logistics Base in future.
WSL Logistics owns the sole blocked warehouse of the Customs of the Tianjin
Binhai International Airport (Customs Warehouse), which has been in operation
since 2003 with a rentable area of some 25,000 square metres. Due to its unique
location in a bonded area of a first tier airport, the occupancy of WSL Logistics
warehouses and offices was 87.55% at the end of 2013. Thus, the acquisition of
WSL Logistics can ensure satisfactory income contribution for BJP in the future.
Besides, TYWL holds a parcel of land with an area of some 47,300 square metres,
just next to the Customs Warehouse on WSL Logistics land. Phase II will develop
it into a new warehouse complex with a total gross floor area of approximately
35,000 square metres, of which some 11,800 square metres have been
substantially completed. We believe rental income from TYWL will start to
contribute in 2H14 and will gradually increase on completion of the project.
Tianjin Airport Economic Area serves as a connection point to the Beijing Airport,
thus promoting the integration of Beijing Properties logistics assets in northern
China to form a logistics platform with land, sea and air freight transportation
capability. With guaranteed operating income of Rmb14 million in the next 3 years,
we believe the acquisitions of WSL Logistics and TYWL would be one of the
earning drivers for Beijing Properties.
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Exhibit 72: Beijing Properties’ development in Tianjin Airport Economic
Area
Source: Company, OP Research
Exhibit 73: Custom warehouse in Tianjin Airport
Source: Company, OP Research
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(4) Chaoyang Inland Port
Chaoyang Inland Port will be
migrated to Majuqiao Logistics
Base
Beijing Properties (925 HK) currently owns 82.24% of Beijing Inland Port
International Logistics (Lugang), which is the operator of Chaoyang Inland Port in
Beijing. The property comprises four parcels of industrial land with a total area of
161,500 square metres. It has only 18,000 square metres of rentable warehouse,
office and utility areas. According to the arrangement set out by the government,
the entire existing function and business of this port will be migrated to Majuqiao
Logistics Base for further expansion in the future.
Since the lands are located in the 4th Ring of Beijing, very close to the city centre
(Dongshihuan Nanlu, Chaoyang District), we believe the land may be
re-developed into other uses for better economic value. Even assuming
Rmb20,000 per square metre land price after re-development, it will be a huge
gain for Beijing Properties when that eventuates.
Exhibit 74: Chaoyang Inland Port location
Source:amap.com, OP Research
(5) Haikou Integrated Free Trade Zone
Haikou Project focuses on
jewellery, diamond trading and
warehousing in Haikou Integrated
Free Trade Zone
Beijing Properties aim to build a nationwide logistics network with access points
in different bonded areas across China. With plans of Hainan Island being
developed into an International Tourist Island in mind BJP stepped into southern
China by acquiring a 40% stake in Haikou Peace Base.
Haikou Peace Base has a piece of land of some 53,000 square metres in the
Haikou Integrated Free Trade Zone, which is well connected to Haikou Port,
Haikou Meilan International Airport, highway and railway. Haikou Peace Base will
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develop a complex of exhibition centre, bonded warehouse and planted areas of
25,000 square metres, 40,000 square metres and 10,000 square metres
respectively. The project will primarily target trading and warehousing of luxury
products, such as jewellery and diamond, within the Zone to take advantage of
Hainan's tourism policy.
Because of taxation policies there is a high price difference for luxury items
between domestic and foreign markets in China. The free trade zone offers
duty-free items for the outbound tourists in search of luxury goods in China. The
jewellery and diamond processing centres in Haikou FTZ targets the rising local
consumption demand for luxury items. We believe Haikou Peace Base would be
a strategic investment for Beijing Properties.
In June 2014, BJP announced it would inject Haikou Peace Base into its Cell
Aquaculture Limited (CAQ AU), an ASX listed company, at a valuation of A$24.9
million. BJP will hold 166 million shares of CAQ or 17.9% of the enlarged share
capital on completion. Although Haikou Peace Base is making fast development
progress in the luxury industry in the free trade zone, the whole construction cost
would be about Rmb240 million, which far exceeds the registered capital of
Rmb60 million of the Haikou Peace Base. Thus, in order to focus the capex in
port related logistics segment and cold chain logistics segment, BJP decided to
inject Haikou Peace Base into an ASX listed company, which would create wider
variety and easier ways to raise funds for future development at a lower cost.
By doing this BJP expects to record a gain of around HK$88 million based on the
difference between the value of the consideration shares and the NAV of the 40%
stake in Haikou Peace Base.
Exhibit 75: Haikou Project design
Source: Company, OP Research
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Cold Chain Logistics - A Blue Ocean in
e-Commerce
Cold warehouses are hot investments
Cold chain logistics will
experience a higher growth
B2C e-commerce has been a total departure from seller-buyer relations where
intangibles mattered as 3C products and apparels are indifferent to which online
shop puts them up for sale. Consumers decide entirely on the basis of price and
discount, leading to extensive price wars between online shops to capture market
shares. However, with wages rising and growing concern over food safety in
China, consumers are more willing to pay a premium for high quality fresh food
and consumables. Food, such as meat and seafood, are highly perishable and
incur a high loss rate during transportation without proper refrigeration. As
freshness cannot be easily replicated, we believe more B2C e-commerce
operators will tap into cold chain logistics to capture the blue ocean market. With
the policy to promote higher capacity of cold circulation, we expect a high
demand in cold chain logistics and cold chain will be a hot investment topic.
Exhibit 76: Tmall’s ice cream sales with quality assurance in cold logistics
Source: Tmall, OP Research
In spite of increasing demands, the cold chain logistics infrastructure in China is
underdeveloped; average cold storage capacity per capita in China is only 7
kilograms, far below the 200 to 500 kilograms in developed countries. Besides,
the current cold storage equipment is old and inefficient as nearly half of the
country's cold storage warehouses are over 30 years'old. Thus, NDRC has
planned to double the cold storage capacity to 18.8 million tonnes by 2015, which
requires construction of a group of efficient, large and sophisticated cold chain
logistics and distribution centres. Given the significant undersupply of cold chain
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logistics industry in China, it brings great business development opportunities to
Beijing Properties, which has secured a cold chain logistics project to develop
cold warehouse and distribution centres to serve multiple regions.
Exhibit 77: Worldwide cold storage capacity per capita
Country
Netherlands
Finland
Denmark
Norway
Ireland
Australia
USA
Japan
Canada
litres per capita
Volume (m3)
550.9
344.1
330.2
325.3
320
293.3
231.1
217.2
208.9
9
1.8
1.8
1.5
1.3
6
69
27.7
6
The IIR has calculated the refrigerated-warehouse capacity per capita by country, based on IARW
-International Association of Refrigerated Warehouses- list of public refrigerated capacity in 2006.
Source: fluorocarbons.org
Beijing Properties cold chain logistics projects:
Beijing Properties has an
aggressive expansion drive for
cold chain logistics
BJP aims to own 1 million square metres of cold warehouses by 2018 as driven
by the high industry demand and support from government policy. BJP currently
owns two cold chain logistics projects located in Tianjin and Quzhou.
(6) Tianjin Marine Economic Area
Tianjin Zhongyu will offer 150,000
square metres cold warehouse in
the future
Tianjin Marine Economic Area is a newly developed economic zone with a land
area of 10 square kilometres and a marine area of 8 square kilometres. The area
has been developed by the Tianjin government as the largest logistics, trading
and processing centre of aquatic products in northern China.
Beijing Properties agreed to inject Rmb82.5 million into Tianjin Zhongyu
Properties, a domestic company to develop a cold chain logistics distribution
centre of aquatic products within the Marine Area, during 4Q13. After the capital
increase, BPJ owns 60% - 68.2% of Zhongyu depending on the availability of
government grant to support the project. Zhongyu will use the capital to construct
a cold storage warehouse with a gross floor area of 150,000 square metres and
carrying capacity of 80,000 tonnes of frozen aquatic products. About 68,000
square metres of cold warehouse will be built in Phase I and commence
operations in 3Q15. The remaining portion of the land will be developed as Phase
II, depending on the progress of Phase I.
Because of its strategic position Tianjin acts as a major port of frozen food for
Beijing. Within 400 km of Tianjin, the cold chain circulation volume will reach 15 to
18 million tonnes by 2015. With current capacity of only 3.9 million tonnes, the
construction of a new cold warehouse in the Tianjin Marine Economic Area will
allow BJP to capture the rising demand in the region. Besides, this cold
warehouse would act as a pilot project, where valuable experience in developing
modern cold warehouse facilities can be leveraged in future projects.
To ensure a sustainable income and profit after the commencement of operations,
the cold storage warehouse will be entirely rented out to one original shareholder
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when construction is completed. The original shareholders of Zhongyu Properties
are highly knowledgeable about the actual demands of members of the China
Aquatic Production Chamber of Commerce, who can utilize their experience,
abundant resources and extensive customer network in aquatic product industry
to secure high quality tenants.
Exhibit 78: Location of Tianjin Marine Economic Area
Source: http://yg.bh.gov.cn/, OP Research
Exhibit 79: Tianjin Zhongyu location
Source: Company, OP Research
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Exhibit 80: Tianjin Zhongyu design ()
2#冷藏库
1#冷藏库
Source: Company, OP Research
(7) Quzhou Cold Chain Logistics Park
Quzhou project will be built as
cold warehouses for agriculture
products as well connected to
other four provinces
Beijing Properties acquired a parcel of land of about 57,000 square metres in
Quzhou City in January 2013 to develop the Quzhou Cold Chain Logistic Park
project. Quzhou is located in the western part of Zhejiang Province, which is well
connected to four provinces in Zhejiang, Fujian, Jiangxi and Anhui. Through
highways, cargo can be transported to major cities in the four provinces within 2
hours, making it a strategic location for logistics development.
The size of the logistics park is about 321,000 square metres, with 58,700 square
metres in phase I for a cold storage warehouse and the remaining 264,000
square metres in phase II for a normal warehouse.
As Quzhou is a major production base for agricultural products, the Quzhou
project is the major focus of the local government to promote the development of
warehousing and cold chain logistics. It is expected that Beijing Properties will
develop Quzhou into a mega logistics hub to provide a trading platform for
agricultural products of the four provinces. Besides, BJP may also utilize their
cold chain logistics expertise to offer professional, standardized and high
efficiency cold chain logistics service in agriculture products in the Quzhou
project.
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Exhibit 81: Quzhou project location
Source: Company, OP Research
Exhibit 82: Quzhou project design (Phase 1 & 2)
Source: Company, OP Research
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Commercial Properties
To develop through another listed company
Genvon Group (2389 HK) is
expected to become commercial
properties development platform
for Beijing Properties
Beijing Properties commercial properties portfolios are located in prime areas
which are expected to contribute a stable rental income in future. However, since
BJP is focusing its resources on logistics business development, BJP declared its
plans to develop commercial properties business through a listed company called
Genvon Group (2389 HK) to enhance the cash inflows contribution to the logistics
business.
In June 2014, Beijing Properties announced its acquisition of 21.85% of the
issued share capital of Genvon Group for HK$472.5 million. BJP will become the
single largest shareholder of Genvon Group to lead its development after the
acquisition. Using Genvon Group as a platform for commercial properties
development would enhance orderly management by (1) ensuring sound
corporate governance, (2) providing a wider choice of fund raising ways in the
capital market and (3) paying additional incentives to retain expertise to
strengthen the management team.
Thus, we believe this acquisition would diversify BJP operational risks since it
would leave BJP as a purely logistics company with warehousing and cold chain
exposure. By separating different platforms for commercial properties
development, BJP can utilize capital market for fund raising in different segments
as well as generate greater cash flow for core business development.
Ultimately, we believe the commercial properties will be centralized into a listed
platform for better management and capital use in the future, which would be a
win-win situation for BJP and Genvon.
Beijing Properties commercial properties projects
(8) Holiday Inn Downtown Beijing
Acquisition of Holiday Inn
Downtown Beijing will be
completed in 2H14, which may be
re-developed in 2017
Beijing Properties announced plans to acquire 75% of Holiday Inn Downtown
Beijing Company for about Rmb415.6mn in Oct 2013. This hotel is located at Li
Shi Road North, Xi Cheng District of Beijing, with land area of around 4,300
square metres. Currently, the hotel is in operation with a complex accommodating
a total of 346 guest rooms, restaurants and other facilities. As it is in No. 2 Ring of
Beijing, the location is in the urban core area, just within a few minutes’ walking
distance of Financial Street. Since the deal is waiting for approval of the
government, it is expected the transaction will only be completed in 2H14.
Besides, as the land use right is expiring on 24 March 2017, we believe BJP will
apply for renewal of a further term of 40 years with approximately Rmb1.56
million land premium each year. Due to its prime location, we believe there may
be appreciation of land prices and property value if there is any increase in plot
ratio for the redevelopment after the renewal of land use right.
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Exhibit 83: Outlook of Holiday Inn Downtown Beijing
Source: Company, OP Research
Exhibit 84: Location of Holiday Inn Downtown Beijing
Source: google.com, OP Research
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(9) Guangzhou Metro Mall
Acquisition of receivables from
parent by share issuance is
expected to integrate the debt
ownership for developing in a
listed platform in the future
Beijing Properties acquired 79.92% of Guangzhou Guangming at the end of 2013,
which owned Guangzhou Metro Mall, a 10-storey shopping mall on Xihu Road,
Yuexiu District in Guangzhou. The construction area of Metro Mall is about
59,000 square metres, which would generate reasonable rental income for the
Group. BJP also announced acquisition of receivables of Guangzhou Guangming
from its parent company by issuing shares. It would integrate the equity rights and
restructure the debt of the project for better future development.
Exhibit 85: Outlook of Guangzhou Metro Mall
Source: Company, OP Research
Exhibit 86: Location of Guangzhou Metro Mall
Source: google.com, OP Research
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(10) Chaoyang Inland Port
As mentioned in the logistics section, for Chaoyang Inland Port, the logistics
business will be migrated to Majuqiao project after the constructions complete in
2016. We expect the land will be re-developed into commercial properties given
the close distant to CBD of Beijing and high value of the land. If the
re-development of the land is approved, we believe it will be a value accretive to
the commercial properties development of BJP.
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Significant Investment from Big Name Investor
An early bird signal
PAG subscribed CB of US$80
million
PAG, a well known alternative investment fund management group, subscribed
US$80 million 5-years convertible bonds from Beijing Properties in February
2014. The initial conversion price is HK$0.74 per share and the full conversion
represents 13.43% of the issued share capital. The interest rate of the CB is 4%
and it can be redeemed at 117.25% on the maturity date.
BJP would enhance its working capital and strengthen its financial position by the
issuing the CB without immediate dilution effect. The net proceeds are intended
to fuel the possible future investments as well as working capital for current
development.
We believe the investment from PAG, a big name institutional investor with
extensive experience, would be an early bird signal for a hidden gem company.
With such significant investment size, it would increase the market confidence on
the logistics business development of BJP although it has no strong track record
in its past. Besides, with the capital injected, it would accelerate BJP’s future
development and acquisitions for building up a critical mass of the property
portfolio, which would drive a re-rating in long run.
Exhibit 87: Major shareholders list
Name of shareholder
Beijing Enterprises Group Company Limited
PAG Holdings Limited*
Kerry Group Limited
Number of
shares
4,495,519,975
838,573,244
354,400,000
% to issued % to fully diluted
shares
shares
67.15
13.42
5.68
53.59
10.00
4.22
* by Convertible Bonds
Source: Company
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Valuation
NAV Model
12-month target price HK$1.2 or
43% upside
Given its property development business nature in logistics, cold chain and
commercial segments, we use NAV-based methodology to derive the 12-month
target price of HK$1.2 for Beijing Properties or 43% upside to the current price.
We use weighted average cost of capital (WACC) of 7.8%, based on these
assumptions (1) risk free rate of 3%, (2) market risk premium of 9%, (3) beta of 1
to reflect the sector’s volatility relative to the benchmark and (4) 3% long term
growth rate to the land use right expiration, a conservative approach relative to
inflation rate in China.
Our target price is set at 10% discount to NAV, which is inline with peers, such as
Global Logistics Properties (GLP), since Beijing Properties owns top tier logistics
facilities projects in prime locations. We expect a lower discount to NAV in
logistics properties than residential properties as logistics facilities have robust
demand and more stable income cashflow.
Exhibit 84: NAV calculation
Business segment
Logistics
Cold Chain
Commercial
Others
Net debt at the end of FY14E
Total NAV
NAV per share (HK$)
NAV (HK$ mn)
HK$6,567
HK$1,025
HK$3,062
HK$235
(HK$1,876)
HK$9,013
HK$1.34
Source: OP Research
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Key risks

Delay in Beijing Inland Port project
Although Beijing Properties aims to start construction of the Majuqiao Logistics
Base in 2H14, delay of government final approval and longer than expected
construction period may delay the project to start business later than expected.
As a mega size project, any delay could have a sizeable impact on BJP future
earnings.

Insufficient capital for future commitment
The company had outstanding contracted capital commitment of over HK$2
billion for various projects on hand. Given only HK$468 million cash in hand at the
end of 2013, future fund raising may be needed for the capital to develop the
outstanding projects.

Failure in future acquisitions
Although BJP is looking for logistics development projects and cold chain logistics
projects in other major cities in China, the acquisition may not be secured to drive
the project pipeline and the growth in the future.

Competition in logistics facilities for new supply
As strong demand in the logistics facilities in China, more developers are entering
the industry segment given the high returns. The new investment may result in
more new supplies in the future, which would incur competition in rental rates,
especially in non-prime area.
Page 68 of 111
Fri, 11 Jul 2014
China Logistics
Management background
MR. YU LI, Vice Chairman: Aged 50, Mr. Yu is the chairman and an executive
director of the Beijing Enterprises Group Real-Estate Co., Ltd (“BE Real Estate”).
Mr. Yu obtained an Executive MBA degree from the Peking University. Mr. Yu has
extensive experience in corporate management. Mr. Yu joined the Group in
January 2011.
MR. QIAN XU, Chief Executive Officer: Aged 50, Mr. Qian is the general
manager and an executive director of the BE Real Estate. Mr. Qian graduated
from the Economics and Management Faculty of the Beijing Industrial University
with a Bachelor’s degree in economics and has obtained his EMBA degree from
Tsinghua University. Mr. Qian has extensive experience in mergers and
acquisitions, corporate restructuring and financial management. Mr. Qian joined
the Group in July 2009.
MR. SIU KIN WAI, Chief Financial Officer and Company Secretary: Aged 45,
Mr. Siu graduated from the City University of Hong Kong with a Bachelor’s degree
in Accountancy and is a fellow member of the Association of Chartered Certified
Accountants and members of the Hong Kong Institute of Certified Public
Accountants and Institute of Chartered Accountants in England and Wales. Mr.
Siu has extensive experience in financial management and corporate advisory
and assurance. Mr. Siu joined the Group in July 2009.
Page 69 of 111
Fri, 11 Jul 2014
China Logistics
Financial Summary – Beijing Properties (925 HK)
Year to Dec
FY12A
Income Statement (HK$ mn)
Properties business
3
Logistics business
8
Others
0
Turnover
11
YoY%
(99)
COGS
(4)
Gross profit
7
Gross margin
66.1%
Other income
71
Selling & distribution
(1)
Admin
(86)
R&D
0
Other opex
(24)
Total opex
(111)
Operating profit (EBIT)
(33)
Operating margin
-297.8%
Provisions
26
Finance costs
(91)
Profit after financing costs
(98)
Associated companies & JVs
(15)
Pre-tax profit
(113)
Tax
(1)
Profit
from
discontinued
business
6
Minority interests
11
Net profit
(98)
YoY%
(181)
Net margin
-888.2%
EBITDA
(31)
EBITDA margin
-277.5%
EPS (HK$)
(0.015)
YoY%
(185)
DPS (HK$)
0.000
Year to Dec
Cash Flow (HK$ mn)
EBITDA
Chg in working cap
Others
Operating cash
Interests paid
Tax
Net cash from operations
Capex
Investments
Dividends received
Sales of assets
Interests received
Others
Investing cash
FCF
Issue of shares
Buy-back
Minority interests
Dividends paid
Net change in bank loans
Others
Financing cash
FY13A FY14E FY15E FY16E
0
36
0
36
226
(4)
32
89.1%
68
(1)
(116)
0
(10)
(127)
(27)
-76.4%
859
(38)
794
(18)
776
(53)
0
(22)
701
(817)
1955.4%
(25)
-70.1%
0.101
(778)
0.000
0
341
0
341
72
(59)
283
82.8%
4
(10)
(119)
0
(22)
(150)
136
39.9%
0
(123)
13
(18)
(5)
(2)
Year to Dec
Ratios
Gross margin (%)
Operating margin (%)
Net margin (%)
Selling & dist'n exp/Sales (%)
Admin exp/Sales (%)
Payout ratio (%)
Effective tax (%)
Total debt/equity (%)
Net debt/equity (%)
Current ratio (x)
Quick ratio (x)
Inventory T/O (days)
AR T/O (days)
AP T/O (days)
Cash conversion cycle (days)
Asset turnover (x)
Financial leverage (x)
EBIT margin (%)
Interest burden (x)
Tax burden (x)
Return on equity (%)
ROIC (%)
0
0
0
(5)
1
(0)
160
(53)
(7)
(77)
(133)
(87)
109.3% -26.8% -2.1%
39
67
141
26.4% 33.9% 41.4%
0.019 (0.006) (0.001)
(81)
(133)
(87)
0.000 0.000 0.000
Year to Dec
Balance Sheet (HK$ mn)
Fixed assets
Investment properties
Intangible assets & goodwill
Associated companies & JVs
Long-term investments
Other non-current assets
Non-current assets
0
146
0
146
308
(9)
137
93.8%
17
(4)
(103)
0
(12)
(119)
36
24.3%
260
(80)
216
(18)
198
(32)
0
198
0
198
36
(16)
183
92.1%
13
(6)
(110)
0
(16)
(132)
63
31.9%
0
(106)
(42)
(18)
(61)
6
FY12A FY13A FY14E FY15E FY16E
(31)
(97)
(28)
(155)
0
(0)
(155)
(25)
0
2
(24)
0
(4)
(28)
39
(47)
0
(8)
0
(3)
(11)
67
(5)
0
63
0
(32)
30
141
(7)
0
134
0
6
140
(1)
(9)
(7)
(313) (1,530) (1,070)
0
0
0
(247)
13
0
71
29
(80)
0
0
0
(490) (1,497) (1,157)
(646) (1,524) (1,168)
0
0
340
0
0
0
0
0
0
0
0
0
(131)
128
724
(322)
80
0
(452)
208 1,064
(10)
(544)
0
0
(106)
0
(659)
(629)
0
0
0
0
500
0
500
(17)
(584)
0
0
(123)
0
(724)
(584)
0
0
0
0
300
0
300
Net change in cash
Exchange rate or other Adj
Opening cash
Closing cash
(1,098) (1,316)
(6)
15
2,873 1,769
1,769
468
(104)
0
468
364
(129)
0
364
235
(284)
0
235
(49)
CFPS (HK$)
(0.024) (0.004) (0.001)
0.004
0.017
FY12A FY13A FY14E FY15E FY16E
66.1
89.1
(297.8) (76.4)
(888.2) 1,955.4
7.7
2.8
780.4 324.2
0.0
0.0
(0.6)
6.7
142.3
44.2
Net cash
30.5
1.2
1.2
1.2
1.2
0
0
8
164
22
62
(14)
103
0.0
0.0
3.0
1.9
(297.8) (76.4)
3.5 (28.3)
0.9
0.9
(8.2)
30.6
(4.7)
(3.0)
93.8
24.3
109.3
2.8
70.5
0.0
15.0
57.0
47.7
1.1
1.1
0
40
75
(35)
0.0
1.6
24.3
5.6
0.8
4.3
(0.2)
92.1
31.9
(26.8)
2.8
55.7
0.0
15.0
70.7
64.6
1.0
1.0
0
40
70
(30)
0.0
1.8
31.9
(1.0)
0.9
(1.4)
0.9
82.8
39.9
(2.1)
2.8
34.7
0.0
15.0
78.5
79.8
0.6
0.6
0
40
70
(30)
0.0
1.9
39.9
(0.0)
1.5
(0.2)
1.7
FY12A FY13A FY14E FY15E FY16E
255
170
150
359
15
0
950
285
2,919
150
997
268
0
4,619
303
4,234
150
979
268
0
5,935
329
4,758
150
961
268
0
6,467
375
5,308
150
943
268
0
7,045
Inventories
AR
Prepayments & deposits
Other current assets
Cash
Current assets
0
0
50
323
1,769
2,143
0
16
33
312
468
829
0
16
29
312
364
721
0
22
40
312
235
608
0
37
68
312
(49)
368
AP
Tax
Accruals & other payables
Bank loans & leases
CB & other debts
Other current liabilities
Current liabilities
0
0
30
32
1,580
207
1,850
1
3
81
208
373
0
665
2
32
29
208
373
0
644
3
(6)
40
208
373
0
617
11
2
68
208
373
0
662
35
0
66
(15)
86
935
0
350
67
1,353
1,035
624
350
73
2,082
1,535
624
350
72
2,581
1,835
624
350
72
2,881
Total net assets
1,157
3,430
3,930
3,877
3,870
Shareholder's equity
Share capital
Reserves
1,157
384
773
3,430
624
2,806
3,930
624
3,305
3,877
624
3,252
3,870
624
3,245
0.30
0.55
0.58
0.57
0.57
1,647
1,515
2,239
2,739
3,039
Bank loans & leases
CB & other debts
Deferred tax & others
MI
Non-current liabilities
BVPS (HK$)
Total debts
Source: Company, OP Research
Page 70 of 111
Fri, 11 Jul 2014
China Logistics
Exhibit 88: Peer Group Comparison
3-mth
Company
Beijing Properti
Mkt cap
avg t/o PER Hist
Ticker
Price
(US$m)
(US$m)
925 HK
0.84
732
0.7
Div
yld
yld
P/B
P/B
Hist
FY1
Hist
FY1 Ebitda Ebitda
PEG (x)
(%)
(%)
(x)
(120.2)
(0.36)
0.0
0.0
1.47
1.39 (243.0)
EPS
EPS
FY2
FY1
FY2
3-Yr EPS
(x)
YoY% YoY%
Cagr (%)
42.8 (129.2)
(81.3) (133.2)
(x) PER FY1 (x)
8.0
Div
PER
Net Gross
(x)
EV/
Net
EV/ gearing margin margin
Hist Cur Yr
189.9
Hist
Hist
Hist
(%)
(%)
(%)
30.5
89.1 1,955.4
ROE
Sh px
Sh px
ROE
1-mth
3-mth
(%) FY1 (%)
%
%
(4.5)
Hist
30.6
4.3
12.0
HSI
23,238.99
10.9
10.8
9.9
0.3
8.8
6.2
1.75
3.9
3.7
1.38
1.29
12.7
12.0
(0.3)
0.2
HSCEI
10,368.13
7.6
7.2
6.7
5.0
8.8
7.8
0.92
4.2
4.4
1.16
1.07
15.3
14.8
(1.4)
(0.5)
CSI300
2,142.85
(5.8)
Adjusted sector avg*
Sinotrans Ltd-H
8.6
7.5
14.2
15.3
15.1
0.57
2.6
2.9
1.40
1.27
14.2
14.7
(0.9)
16.2
14.0
11.1
17.5
12.1
0.99
3.3
3.1
2.46
2.44
12.2
10.2
21.2
30.4
12.3
17.5
16.9
(0.5)
4.0
21.4
16.8
13.9
27.5
20.8
22.3
0.75
1.2
1.5
1.66
1.54
12.9
10.6
0.0
N/A
1.8
7.9
9.4
9.2
31.9
10.4
598 HK
5.34
2,928
Kerry Logistics
636 HK
12.70
2,770
3.2
9.1
21.2
18.7
(57.2)
13.2
(18.6)
N/A
0.9
1.0
1.57
1.46
13.2
12.0
1.2
N/A
9.2
16.8
7.1
5.0
Haier Electronic
1169 HK
21.40
7,400
10.3
21.4
18.7
15.4
14.5
21.0
16.2
1.15
0.5
0.6
5.71
4.27
14.7
12.0
0.0
14.7
3.3
30.7
25.6
5.4
10.5
Shenz Intl Hldg
152 HK
9.51
2,100
3.2
9.5
7.2
7.8
31.9
(7.3)
13.7
0.53
3.9
4.9
1.13
0.95
9.0
8.7
50.7
49.3
27.5
12.3
14.3
(0.3)
(3.0)
Sitc
1308 HK
3.28
1,094
0.6
9.7
8.1
6.4
19.5
26.9
21.0
0.39
7.6
5.0
1.47
1.32
10.0
5.8
0.0
11.3
8.9
15.5
17.0
(2.4)
(11.8)
Asr Logistics
1803 HK
1.42
147
0.1
12.2
10.9
9.5
11.8
15.4
19.8
0.55
13.8
3.6
3.80
4.58
7.8
7.0
0.0
26.6
11.5
34.6
37.4
2.2
0.9
China South
1668 HK
3.96
3,879
13.2
7.1
6.9
5.4
2.5
28.9
23.2
0.30
2.5
4.6
1.37
1.19
6.9
4.7
23.7
48.6
25.9
19.5
18.3
3.4
10.0
Wuzhou Internati
1369 HK
1.68
1,009
2.7
5.4
9.1
6.3
(41.2)
44.9
15.0
0.61
2.1
2.8
1.79
N/A
9.5
N/A
71.6
43.7
25.2
42.3
12.1
10.5
11.3
Hydoo Internatio
1396 HK
2.39
1,238
2.9
4.7
3.6
2.7
31.0
30.9
20.9
0.17
8.2
8.5
1.74
1.35
1.7
1.2
0.0
61.6
24.8
N/A
41.7
(11.5)
(28.7)
Zall Development
2098 HK
2.74
1,237
0.7
4.9
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
1.22
N/A
36.1
N/A
69.9
42.0
100.2
28.3
N/A
0.0
3.4
Global Logistic
GLP SP
2.68
10,433
26.1
15.7
33.2
28.8
(52.6)
15.4
(13.7)
N/A
1.5
1.7
1.17
1.14
35.7
26.7
11.1
N/A
116.1
8.0
3.4
(2.9)
3.5
Mapletree Log Tr
MLT SP
1.16
2,293
3.2
9.7
15.3
15.1
(36.7)
1.3
(13.0)
N/A
6.3
6.4
1.19
1.15
18.1
18.2
49.1
N/A
96.0
13.1
7.7
0.0
9.4
Goodman Group
GMG AU
5.14
8,318
26.7
53.5
14.8
13.9
261.5
6.9
60.6
0.24
4.0
4.0
1.56
1.46
34.8
16.4
27.5
N/A
18.7
3.0
10.8
0.6
4.9
PLD US
41.05
20,517
94.8
63.2
129.1
85.9
(51.1)
50.3
0.9
149.36
3.0
3.2
1.52
1.26
30.9
25.1
60.1
N/A
19.6
0.4
1.9
(0.2)
1.5
DPW GR
25.88
42,618
73.6
15.0
15.3
13.7
(2.3)
11.6
6.0
2.53
3.1
3.3
3.16
2.87
8.1
7.6
16.9
N/A
3.8
21.9
20.3
(4.9)
(3.1)
Kuehne & Nagel-R
KNIN VX
114.90
15,459
14.7
23.1
21.2
19.5
8.9
8.6
8.7
2.43
5.1
3.9
5.23
5.51
13.1
12.3
0.0
36.4
3.5
23.6
25.7
(6.1)
(5.9)
Panalpina We-Reg
PWTN SW
136.40
3,632
3.0
272.8
29.8
22.3
814.0
33.6
151.6
0.20
1.6
1.9
4.54
4.30
16.1
13.7
0.0
23.1
0.2
2.1
15.1
(6.1)
3.8
UPS US
102.98
94,674
255.6
22.1
20.2
17.5
9.4
16.0
11.8
1.71
2.5
2.6 15.15
15.52
11.2
10.4
87.3
25.5
7.9
82.6
69.0
0.1
6.6
EXPD US
44.88
8,858
64.8
26.6
23.8
21.2
11.7
12.1
10.5
2.27
1.4
1.5
4.70
12.7
11.7
0.0
13.2
5.7
17.3
19.3
(1.5)
15.5
Prologis Inc
Deutsche Post-Rg
United Parcel-B
Expeditors Intl
6.5
9.9
18.6
4.52
* Outliners and "N/A" entries are in red and excl. from the calculation of averages
Source: Bloomberg, OP Research
Page 71 of 111
Fri, 11 Jul 2014
China Logistics
Sinotrans (598 HK) – A Leading 3PL Provider
Initial Coverage

Sinotrans (598.hk) is one of the largest integrated logistics service
providers to enjoy the 3PL boom in China by offering a complete range
of specialized logistics services

Sinotrans is improving its
restructures with the parent

The growth in 3PL and asset restructures will drive Sinotrans earnings
at a 26% CAGR in the next three years

Initiate coverage with a BUY rating and TP of HK$6.5 or 22% upside
BUY
Close price: HK$5.34
Target Price: HK$6.50 (+22%)
Ke y Data
HKEx code
profitability
by
undertaking
asset
598
12 Months High
(HK$)
5.47
12 Month Low
(HK$)
1.39
3M Avg Dail Vol.
(mn)
11.52
Issue Share
(mn)
1,787.41
Market Cap
(HK$mn)
22,689.67
Fiscal Year
12/2013
Sinotrans & CSC
Group Company
(57.93%)
Source: Company data, Bloomberg, OP Research
Closing price are as of 10/7/2014
Major shareholder (s)
Riding on 3PL boom in China: Logistics cost to GDP was much higher in China
than in developed countries because of lower utilization in logistics assets. With
industry optimization and the rise in e-commerce, more and more enterprises in
China are tending to outsource logistics functions to 3PL providers in order to
lower total costs. We believe Sinotrans will capture the huge business demand
growth in logistics cost savings by their leading position in 3PL and extensive
experience and expertise in integrated logistics services.
Price Chart
598 HK
HK$
6.0
MSCI CHINA
5.0
4.0
3.0
2.0
1.0
Jul/13
Oct/13
Jan/14
Apr/14
0.0
Jul/14
1mth
3mth
6mth
Absolute %
9.2
34.6
74.5
Rel. MSCI CHINA %
9.1
32.8
72.5
PE
20
Asset restructures with parent to become a logistics services platform for
the group: To minimize potential competition between Sinotrans and the rest of
the parent group, Sinotrans aims to integrate most of the logistics businesses and
subsidiaries from the parent by both entrusted management agreement and
acquisitions. We believe the overall efficiency and earnings can be improved by
consolidation of logistics resources and enhancement of integrated operations.
Disposal of marine transportation business: Marine transportation has been
reporting losses over a long period of time due to keen market competition and
high volatility of the business. The loss-making marine transportation unit will be
disposed of to the parent and sister company, allowing Sinotrans to focus on
developing the high value-added core integrated logistics services business.
Forward P/E Ratio
15
10
+1std.
Initial BUY: Our target price of HK$6.5 implies 22% upside and 15.8x FY15E PE.
avg.
-1std.
5
E x h i b i t 8 9: F o r e c a s t a n d Va l u a t i o n
Year to Dec (RMB mn)
0
Dec/08 Dec/09 Dec/10 Dec/11 Dec/12 Dec/13
Compan y Profile
Sinotrans Limited provides integrated
logistics services with core service of sea,
air, rail and road freight forwarding, express
services and shipping agency services. The
company also provides support services of
storage and terminal services, trucking and
marine transportation services.
FY12A
FY13A
FY14E
FY15E
FY16E
47,482.0
8.5
649.1
1.0
47,768.9
0.6
844.5
30.1
48,987.9
2.6
1,144.9
35.6
50,875.4
3.9
1,395.1
21.9
54,999.7
8.1
1,706.2
22.3
Diluted EPS (HK$)
EPS growth (%)
Change to previous EPS (%)
Consensus EPS (HK$)
0.191
1.0
0.248
30.1
0.337
35.6
0.0
0.319
0.410
21.9
0.0
0.385
0.502
22.3
0.0
0.458
ROE (%)
P/E (x)
P/B (x)
Yield (%)
DPS (HK$)
5.3
28.0
1.8
0.7
0.037
6.5
21.5
1.7
1.2
0.063
8.1
16.2
1.6
1.6
0.086
9.0
13.3
1.4
2.0
0.104
9.9
10.8
1.3
2.4
0.128
Revenue
Growth (%)
Net Profit
Growth (%)
Source: Bloomberg, OP Research
Page 72 of 111
Fri, 11 Jul 2014
China Logistics
Strong Earnings Growth Driven by Third Party
Logistics (3PL) Development
26% earnings CAGR by 3PL boom in China
Sinotrans is the largest freight
forwarder in China to capture 3PL
market
Sinotrans is the largest freight forwarder by revenue in China with 12%-13%
market share. The company is well positioned to capture and consolidate the fast
developing third party logistics (3PL) market in China as specialized logistics
services have already contributed over 50% operating profits in freight forwarding
segment in FY13. Specialized logistics service is an integrated logistics service
offering to first tier clients (such as BMW, Samsung, GE, CNPC and Huawei) in
specified areas (like contract logistics, project logistics, energy logistics and
chemical logistics). Management believes the specialized logistics will still
maintain over 15%+ growth in FY14E even if China's economic growth slows
down.
3PL is still at an early stage of development in China since the participation rate
of 3PL is relative low. According to Armstrong & Associates, 3PL firms only
account for 8% market share of the total logistics costs in China, which is far
lower than the 10%-14% in developed countries. It is expected that 3PL will enjoy
above average growth in Greater China and market leaders, such as Sinotrans,
will be the primary beneficiaries of the boom.
Together with the reduced losses from the disposal of the marine transportation
unit, we expect Sinotrans will record a 26% CAGR in net profit in the coming
years, driven by the robust growth of 3PL business in freight forwarding.
Exhibit 90: Strong growth in 3PL business drives 26% earnings CAGR
2,000
1,500
1,000
500
0
(500)
FY11
FY12
FY13
FY14E FY15E FY16E FY17E FY18E
Freight f orwarding
Shipping agency
Marine transportation
Storage and terminal services
Other services
Source: OP Research
Page 73 of 111
Fri, 11 Jul 2014
China Logistics
3PL is the major growth driver for Sinotrans
Sinotrans has an operating
margin uptrend as driven by 3PL
business growth
A s 3PL is a specialized and custom made logistics solution, 3PL usually achieves
higher margin than standard freight forwarding as foreign players and asset-light
industries are willing to pay the premium for 3PL solutions. (5-6% in 3PL Vs 2% in
standard freight forwarding). Since logistics is an asset heavy industry, owning
self-operated logistics unit would hinder the business growth of foreign
enterprises to further penetrate into lower tier cities due to complexities in local
laws and regulations. Besides, self-owned logistics operations would be
unfeasible to asset-light companies, such as e-commerce operators, as it is a
different set of management (labor intensive vs information intensive) and too
much investment in fixed assets for distribution would limit the high growth nature
of asset-light businesses. Thus, we expect an increasing contribution from 3PL
business in Sinotrans would be the main driver of the EBIT margin uptrend. We
estimate the EBIT margin of Sinotrans will increase over 2ppt by 2017 from 2.2%
in 2013 and 3PL profit will surpass standard freight forward profits in FY14E.
Exhibit 91: EBIT margin uptrend as 3PL business growth
EBIT Margin
6
5
4
3
2
1
0
FY11
FY12
FY13
FY14E FY15E FY16E
EBIT Margin
FY17E
FY18E
Source: OP Research
Exhibit 92: Segment margin
Segment Margin
EBIT Margin
Freight forwarding
Shipping agency
Marine transportation
Storage and terminal services
Other services
FY11
FY12
2.0
1.4
FY13 FY14E FY15E FY16E FY17E FY18E
2.2
2.8
3.4
3.8
4.3
4.8
1.9
44.4
(8.4)
18.7
0.4
1.4
27.4
(6.8)
17.9
(0.3)
1.8
42.7
(1.1)
17.2
1.0
2.0
44.5
0.2
17.0
3.3
2.2
46.1
(0.9)
15.9
5.5
2.5
47.7
(0.9)
15.4
7.5
2.8
49.3
(0.9)
15.7
9.4
3.1
50.8
(0.9)
16.5
11.2
Source: OP Research
Page 74 of 111
Fri, 11 Jul 2014
China Logistics
Exhibit 93: Freight forwarding profit contribution (3PL Vs Standard)
1,600
* 3PL prof it surpass standard
f reight f orwading prof it
1,200
800
400
0
FY11
FY12
FY13
FY14E FY15E FY16E FY17E FY18E
Standard f reight f orwarding
Specialized Logistic (3PL)
Source: OP Research
Exhibit 94: 3PL drives freight forwarding segment margin upward
10.0
8.0
6.0
4.0
2.0
0.0
FY11
FY12
FY13
FY14E
Freight f orwarding margin
FY15E
FY16E
FY17E
FY18E
Standard f reight f orwarding
Specialized Logistic (3PL)
Source: OP Research
Details in contract logistics
Sinotrans has top tier clients in
contract logistics
Contract logistics in 3PL serve different industries such as consumer, FMCG and
electronic products. 3PL providers will build warehouses and distribution centers
near department stores where their owners can centralize and pack the products
in a container box to save transportation costs during the import / export. Besides,
due to low value per unit weight of FMCG products, long distribution distances
would significantly impact manufacturer's margin. Thus, effective distribution
system would be crucial to a company like Tingyi. In FMCG, Sinotrans has
secured first tier customers, such as P&G, Kimberly Clark and Coca Cola for their
3PL business. IT equipment usually require high quality air transport for timely
delivery since electronic products are time sensitive and fragile. Sinotrans has
Page 75 of 111
Fri, 11 Jul 2014
China Logistics
provided logistics services to Samsung, Huawei and Lenovo for their electronic
products.
For energy and chemical logistics, service providers are required to have the
necessary expertise to handle hazardous chemical and explosive oil products.
Due to several previous safety issues, there are strict regulations in chemical and
energy logistics, creating a high entry barrier for small service providers.
Sinotrans is the market leader in chemical and energy logistics with clients such
as Dow Chemical, Du Pont and Bayer.
For project logistics, Sinotrans has fast growth as Chinese E&C and equipment
companies are expanding the overseas market due to strong infrastructure
demands in South-East Asia and Africa.
Exhibit 95: 3PL sub-segment profit contribution
Chemical
Logistic
8%
Project
Logistic
9%
Energy
Logistic
8%
Contract
Logistic
75%
Impact from marine transportation business disposal
We expect some Rmb99 million annual earnings enhancement from the disposal
of loss-making marine transportation unit due to lower fuel costs, rental expenses
and transportation charges. By this disposal, we estimate near 90% lower fuel
costs and near 50% lower and rental expenses can be achieved in FY15E. As a
result, the net profit of Sinotrans will see 7.4% improvement in FY14E.
Exhibit 96: Impact from disposing loss-making marine unit
Sales dropped by Marine disposal (HK$ mn)
Total cost saving by Marine disposal (HK$ mn)
Cumulative earnings enhancement (HK$ mn)
% to net profit
FY14E
FY15E
(1,388.4)
1,475.8
87.4
8.3%
(1,666.1)
1,677.1
98.5
7.6%
Source: OP Research
Page 76 of 111
Fri, 11 Jul 2014
China Logistics
Asset injections from parent
Sinotrans has entered an Entrusted Management Agreement with the parent co
to manage and consolidate the parent’s logistics assets by charging a fixed
management fee of Rmb6.75m-9m per annum. We believe this entrusted
management agreement will bring considerable benefits to the listco by (1)
eliminating the existing competition between Sinotrans and the parent for the
overlapping businesses (2) enlarging Sinotrans geographical coverage as the
managed companies are located in the border areas adjacent to Russia, Vietnam
and Mongolia as well as central and western China, (3) opening up asset injection
opportunities from raising operational efficiency of subsidiaries through transfers
of key management personnel.
Sinotrans also announced plans to acquire 11 companies under the parent group
at a consideration of Rmb901 million. The target companies have freight
forwarding, shipping agency, containers lease, warehousing storage and customs
declaration operations in Beijing, Shandong, Guangxi, Fujian, Jiangsu, Hong
Kong, Japan and South Korea. We believe the acquisitions as a whole will bring
synergy to Sinotrans since it will integrate parent logistics business and expand
Sinotrans business geographic coverage to inland China and Northeast Asia.
The total attributable profit of the target companies was Rmb72.5 million and
Rmb80.6 million in FY12 and FY13 respectively with NAV of Rmb841 million.
With total consideration of Rmb901 million, the acquisitions will be made at a
valuation of 11.2x historical PE and 1.07x PB, which is 46% discount on the
current Sinotrans valuation. By consolidating logistics resources with the parent,
the enhanced capability will reinforce and strengthen Sinotrans leading market
position in China. As the deal is expected to be completed in 4Q14, we believe
the acquisitions make full year contribution in FY15 to some 5% earnings
enhancement to Sinotrans. Besides, the extended customer bases in the
acquired companies will bring more multinational clients to Sinotrans to develop
their high value-added 3PL business.
Page 77 of 111
Fri, 11 Jul 2014
China Logistics
Exhibit 97: Sinotrans acquisitions detail
Equity interests
acquired
(%)
Net asset value as at
31 Dec 2013 (Note 2)
RMB ('000)
100
100
55
100
100
100
100
6,540
392,354
15,143
64,978
40,090
19,665
27,255
381
37,155
(274)
3,115
(998)
20,807
4,755
472
42,056
77
3,115
297
17,784
3,726
236
37,143
(274)
1,250
(801)
11,002
3,288
378
42,045
77
1,949
286
10,054
2,752
Majority-owned target:
Sinotrans Wuzhou
70
77,390
10,628
12,159
7,857
8,956
JV targets:
Sinotrans Nissin
Sinotrans Yantai (Note 1)
50
50
52,243
1,483
11,778
(38)
15,169
(46)
8,608
(38)
11,034
(46)
Other:
Zhonglian
32
144,678
48,703
48,736
33,620
35,353
Wholly-owned targets:
Fujian Ningde
Wide Shine
International Cargo (Note 3)
Jiangsu Fuchang
Jiangsu Jinmao
Sinotrans Japan
Sinotrans Korea
Net profits before taxation
FY12
FY13
RMB('000)
RMB('000)
Net profits after taxation
FY12
FY13
RMB('000)
RMB('000)
Notes:
1. Sinotrans Yantai is currently owned as to 50% by a wholly-owned subsidiary of the Company.
2. The net asset value attributable to the Target Shares as at 31 December 2013 (calculated as the aggregate of the net asset value as at 31 December
3. The remaining 45% of International Cargo is currently owned by Wide Shine. Therefore, upon completion of the Acquisition, the Company will (as a result of
direct and indirect holdings through Wide Shine) own 100% equity interest of International Cargo.
Source: Company, OP Research
Page 78 of 111
Fri, 11 Jul 2014
China Logistics
Valuation
PER model
Our target price of HK$6.5 is
based on 15.8x of FY15E PE
We derive our 12-month target price of HK$6.5 or 22% upside from a PER based
methodology. The 2015E P/E multiple is 15.8x, based on par value to the sector
average on back of (1) Sinotrans is one of the largest freight forwarders in the
world, (2) Sinotrans has above average growth from 3PL boom in China, and (3)
profitability enhancement from assets restructure with parent.
Exhibit 98: Major shareholders
Shareholder name
Sinotrans & CSC Holdings
Deutsche Post AG
Brandes Investment Partners
Free float
No. of shares (mn) % of all shares
2,549.6
237.5
124.8
1,337.1
60.0%
5.6%
2.9%
31.5%
% of H shares
4.9%
13.3%
7.0%
74.8%
Source: OP Research
Key risks
(1) Delay in asset restructure with the parent group (2) Lower demand/margin in
freight forward business. (3) Worse than expected return in warehouse and
storage business during capex up-cycle. (4) Less than expected shipping activity
for agency business.
Page 79 of 111
Fri, 11 Jul 2014
China Logistics
Management profile
Zhao Huxiang, age 59, executive director and the chairman: Mr. Zhao
graduated with a MBA degree from University of Louisville, USA, and carries the
professional title of “Senior Engineer”. He used to work in the Marine Shipping
Bureau of the Ministry of Communications. In December 2005, Mr. Zhao became
the Director and President of Sinotrans Group Company. In December 2008, Mr.
Zhao became the Vice Chairman and president of SINOTRANS & CSC. From
January 2011, Mr. Zhao was appointed the Chairman of SINOTRANS & CSC. Mr.
Zhao is also the chairman of DHL-Sinotrans. Mr. Zhao was elected as the
chairman of China International Freight Forwarders Association in February 2007,
and was appointed Senior Vice Chairman of International Federation of Freight
Forwarders Association (FIATA) in October 2013. In March 2006, Mr. Zhao was
appointed Executive Director and the Chairman of the Company.
Zhang Jianwei, age 57, executive director. Mr. Zhang has been employed by
Sinotrans Group Company since 1980 with experience in Sinotrans Group
Company’s Finance Department, Overseas Enterprises Management
Department and Chartering Department. From December 2008, Mr. Zhang
became the Director of SINOTRANS & CSC. Mr. Zhang is also the Chairman of
Sinoair and Grandstar Cargo International Airlines Co., Ltd. at present, he is also
the Vice Chairman of China Federation of Logistics & Purchasing (CFLP). Mr.
Zhang graduated from University of International Business and Economics in
1980 and obtained his Master of Business Administration degree from China
Europe International Business School in 1998. Mr. Zhang was appointed
Executive Director of the Company in November 2002.
Tao Suyun, age 60, executive director. Ms. Tao has worked for Sinotrans
Group Company since 1979. From December 2008, Ms. Tao became the Vice
President of SINOTRANS & CSC. At present, she is also the vice chairman of
China Association To Customs and Vice President of Association for Shipping
Exchanges across the Taiwan Strait. Ms. Tao graduated from University of
International Business and Economics in 1979 and obtained her Master of
Business Administration degree from China Europe International Business
School in 2002. Ms. Tao was appointed Executive Director of the Company in
November 2002.
Li Jianzhang, age 58, executive director. During Mr. Li’s career, he has worked
in various governmental departments. Mr. Li started working for Sinotrans Group
Company in May 2001. Mr. Li graduated from Beijing Normal University in 1981.
Mr. Li is also the Chairman of Hong Kong Solar Company Limited. Mr. Li was
appointed Executive Director of the Company in June 2003.
Page 80 of 111
Fri, 11 Jul 2014
China Logistics
Financial Summary – Sinotrans (598 HK)
Year to Dec
FY12A
Income Statement (RMB mn)
Freight forwarding
39,449
Shipping agency
1,018
Marine transportation
3,809
Storage
and
terminal
services
1,898
Other services
1,308
Turnover
47,482
YoY%
9
Other income
148
Business tax and other
surcharges
(267)
Transportation and related
charges
(39,625)
Staff costs
(2,725)
Depreciation & Amortisation
(475)
Repairs and maintenance
(193)
Fuel
(1,503)
Travel
and
promotional
expenses
(372)
Office and communication
expenses
(202)
Rental expenses
(989)
Other opex
(578)
Total opex
(46,929)
Other losses, net
(19)
Operating profit (EBIT)
683
Operating margin
1.4%
Interest Income
Finance costs
Profit after financing costs
Associated companies & JVs
Pre-tax profit
Tax
Minority interests
Net profit
YoY%
Net margin
EBITDA
EBITDA margin
EPS (RMB)
YoY%
DPS (HK$)
126
(322)
487
746
1,233
(322)
(262)
649
1
1.4%
1,158
2.4%
0.153
1
0.037
FY13A FY14E FY15E FY16E
40,382 42,664 45,801 49,455
649
688
730
775
3,471 2,083
417
417
Year to Dec
Ratios
Gross margin (%)
Operating margin (%)
Net margin (%)
1,870 2,046 2,299 2,595
1,397 1,508 1,628 1,759
47,769 48,988 50,875 55,000
1
3
4
8
161
165
172
185
Selling & dist'n exp/Sales (%)
Admin exp/Sales (%)
Payout ratio (%)
Effective tax (%)
Total debt/equity (%)
(102)
(105)
(109)
(118)
(39,846) (41,858) (44,628) (47,948)
(2,925) (2,469) (1,964) (2,125)
(513)
(589)
(740)
(905)
(197)
(202)
(210)
(227)
(1,341)
(799)
(160)
(160)
n.a.
1.4
1.4
n.a.
2.2
1.8
n.a.
2.8
2.3
n.a.
3.4
2.7
n.a.
3.8
3.1
5.7
0.4
19.4
66.2
46.0
6.1
0.4
25.4
40.3
44.2
5.0
0.4
25.4
35.0
40.2
3.9
0.4
25.4
35.0
36.4
3.9
0.4
25.4
30.0
32.5
Net cash Net cash Net cash
0.0
Net cash
Current ratio (x)
Quick ratio (x)
Inventory T/O (days)
AR T/O (days)
AP T/O (days)
1.2
1.2
(0)
62
(44)
1.3
1.3
(0)
60
(45)
1.3
1.3
(0)
60
(45)
1.2
1.2
(0)
60
(45)
1.2
1.2
(0)
60
(45)
(363)
(372)
(386)
(418)
Cash conversion cycle (days)
105
104
104
104
104
(184)
(908)
(434)
(189)
(739)
(445)
(196)
(469)
(462)
(212)
(493)
(499)
Asset turnover (x)
Financial leverage (x)
EBIT margin (%)
Interest burden (x)
Tax burden (x)
Return on equity (%)
ROIC (%)
1.7
2.3
1.4
1.8
0.5
5.3
1.3
1.6
2.3
2.2
1.4
0.6
6.5
4.5
1.6
2.2
2.8
1.4
0.6
8.1
6.2
1.6
2.1
3.4
1.4
0.6
9.0
7.0
1.6
2.0
3.8
1.4
0.6
9.9
8.3
(46,812) (47,766) (49,323) (53,103)
(90)
1,028
2.2%
(13)
1,374
2.8%
(13)
1,711
3.4%
(13)
2,069
3.8%
104
(300)
833
654
1,486
(336)
(306)
844
30
1.8%
1,541
3.2%
0.199
30
0.063
101
(332)
1,143
784
1,927
(400)
(382)
1,145
36
2.3%
1,963
4.0%
0.269
36
0.086
98
(332)
1,477
900
2,377
(517)
(465)
1,395
22
2.7%
2,451
4.8%
0.328
22
0.104
99
(332)
1,836
990
2,826
(551)
(569)
1,706
22
3.1%
2,974
5.4%
0.402
22
0.128
Year to Dec
Cash Flow (RMB mn)
EBITDA
Chg in working cap
Others
Operating cash
Interests paid
Tax
Net cash from operations
FY12A FY13A FY14E FY15E FY16E
Capex
Investments
Dividends received
Sales of assets
Interests received
Others
Investing cash
FCF
Issue of shares
Buy-back
Minority interests
Dividends paid
Net change in bank loans
Others
Financing cash
(1,316) (1,387) (1,707) (1,773) (1,917)
(564)
(532)
(820)
(838)
(877)
570
766
784
900
990
131
84
84
84
84
128
58
101
98
99
(139)
(208)
0
0
0
(1,190) (1,220) (1,559) (1,529) (1,622)
(809)
93
267
540
877
0
0
0
0
0
0
0
0
0
0
(69)
(73)
0
0
0
(42)
(127)
(212)
(291)
(355)
1,473
86
0
0
0
(472)
(274)
(332)
(332)
(332)
890
(389)
(544)
(623)
(687)
1,158
(572)
105
690
0
(309)
381
Net debt/equity (%)
FY12A FY13A FY14E FY15E FY16E
1,541
52
71
1,665
0
(352)
1,313
1,963
12
0
1,975
0
(149)
1,826
2,451
19
0
2,470
0
(400)
2,070
2,974
41
0
3,016
0
(517)
2,499
Net change in cash
Exchange rate or other Adj
Opening cash
Closing cash
81
(7)
5,521
5,595
(296)
(23)
5,595
5,276
(277)
0
5,276
4,999
(83)
0
4,999
4,916
190
0
4,916
5,106
CFPS (HK$)
0.112
0.386
0.537
0.609
0.735
Year to Dec
Balance Sheet (RMB mn)
Fixed assets
Intangible assets & goodwill
Associated companies & JVs
Long-term investments
Other non-current assets
Non-current assets
FY12A FY13A FY14E FY15E FY16E
Inventories
AR
Prepayments & deposits
Other current assets
Cash
Current assets
53
60
62
64
69
8,019 7,866 8,066 8,377 9,056
1,073 1,139 1,168 1,213 1,311
778 1,005 1,005 1,005 1,005
5,595 5,276 4,999 4,916 5,106
15,518 15,346 15,300 15,576 16,548
AP
Tax
Accruals & other payables
Bank loans & leases
CB & other debts
Other current liabilities
Current liabilities
5,687 5,841 5,990 6,221 6,725
147
145
400
517
551
1,932 2,014 2,065 2,145 2,319
810
855
855
855
855
2,023
548
548
548
548
2,715 2,279 2,322 2,388 2,534
13,313 11,682 12,180 12,674 13,531
Bank loans & leases
CB & other debts
Deferred tax & others
MI
Non-current liabilities
8,794 9,773 11,299 12,758 14,234
97
110
98
85
73
3,348 3,305 3,617 3,929 4,240
1,407 1,158 1,187 1,216 1,245
124
203
203
203
203
13,770 14,549 16,403 18,191 19,996
301
2,544
402
2,365
5,613
346
3,999
451
2,493
7,288
346
3,999
447
2,874
7,666
346
3,999
447
3,339
8,131
346
3,999
447
3,908
8,700
Total net assets
10,362 10,925 11,857 12,961 14,313
Shareholder's equity
Share capital
Reserves
10,362 10,925 11,857 12,961 14,313
4,249 4,249 4,249 4,249 4,249
6,113 6,676 7,608 8,712 10,064
BVPS (HK$)
Total debts
Net cash/(debts)
3.05
3.21
3.49
3.81
4.21
5,851
522
5,928
353
5,928
76
5,928
(7)
5,928
184
Source: Company, OP Research
Page 81 of 111
Fri, 11 Jul 2014
China Logistics
Exhibit 99: Peer Group Comparison
3-mth
Company
Sinotrans Ltd-H
Mkt cap
avg t/o PER Hist
PER
EPS
EPS
PER FY1
FY2
FY1
FY2
3-Yr EPS
YoY% YoY%
Cagr (%)
Div
Div
yld
yld
P/B
P/B
Gross
Hist
FY1
Hist
FY1 Ebitda Ebitda
PEG (x)
(%)
(%)
(x)
(x)
Ticker
Price
(US$m)
(US$m)
(x)
(x)
(x)
598 HK
5.34
2,928
6.5
21.5
15.9
13.0
35.6
21.9
26.4
0.60
1.2
1.6
1.66
1.53
EV/
EV/
Net
Net margin margin
ROE
ROE
Sh px Sh px
gearing
Hist
Hist
Hist
FY1
1-mth 3-mth
Hist Cur Yr Hist (%)
(%)
(%)
(%)
(%)
%
%
14.5
n.a
1.8
6.5
8.1
9.2
31.9
11.5 Net cash
HSI
23,238.99
10.9
10.8
9.9
0.3
8.8
6.2
1.75
3.9
3.7
1.38
1.29
12.7
12.0
(0.3)
0.2
HSCEI
10,368.13
7.6
7.2
6.7
5.0
8.8
7.8
0.92
4.2
4.4
1.16
1.07
15.3
14.8
(1.4)
(0.5)
CSI300
2,142.85
(5.8)
Adjusted sector avg*
9.9
8.6
7.5
14.2
15.3
15.1
0.57
2.6
2.9
1.40
1.27
14.2
14.7
(0.9)
22.4
19.9
17.2
9.0
14.5
10.2
1.59
2.3
1.9
3.70
3.44
12.2
10.1
12.1
19.8
11.3
19.6
18.7
(1.3)
3.4
13.2
(18.6)
N/A
0.9
1.0
1.57
1.46
13.2
12.0
1.2
N/A
9.2
16.8
7.1
5.0
10.4
Kerry Logistics
636 HK
12.70
2,770
3.2
9.1
21.2
18.7
(57.2)
Haier Electronic
1169 HK
21.40
7,400
10.3
21.4
18.7
15.4
14.5
21.0
16.2
1.15
0.5
0.6
5.71
4.27
14.7
12.0
0.0
14.7
3.3
30.7
25.6
5.4
10.5
Shenz Intl Hldg
152 HK
9.51
2,100
3.2
9.5
7.2
7.8
31.9
(7.3)
13.7
0.53
3.9
4.9
1.13
0.95
9.0
8.7
50.7
49.3
27.5
12.3
14.3
(0.3)
(3.0)
1308 HK
3.28
1,094
0.6
9.7
8.1
6.4
19.5
26.9
21.0
0.39
7.6
5.0
1.47
1.32
10.0
5.8
0.0
11.3
925 HK
0.84
732
0.7
7.5
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
1.53
N/A
(81.0)
N/A
24.2
Asr Logistics
1803 HK
1.42
147
0.1
12.2
10.9
9.5
11.8
15.4
19.8
0.55
13.8
3.6
3.80
4.58
7.8
7.0
Deutsche Post-Rg
DPW GR
25.89
42,635
73.6
15.0
15.3
13.7
(2.3)
11.6
6.0
2.53
3.1
3.3
3.16
2.87
8.1
United Parcel-B
UPS US
102.98
94,674
255.6
22.1
20.2
17.5
9.4
16.0
11.8
1.71
2.5
2.6 15.15
15.52
Fedex Corp
FDX US
151.32
43,484
252.7
22.2
17.2
14.2
29.2
21.0
22.5
0.76
0.4
0.5
2.85
2.65
Kuehne & Nagel-R
KNIN VX
114.90
15,457
14.7
23.1
21.2
19.5
8.9
8.6
8.7
2.43
5.1
3.9
5.23
Panalpina We-Reg
PWTN SW
136.40
3,632
3.0
272.8
29.8
22.3
814.0
33.6
151.6
0.20
1.6
1.9
4.54
TNTE NA
6.43
4,779
7.0
N/A
19.5
14.1
N/A
38.9
(234.6)
N/A
0.7
2.0
Expeditors Intl
EXPD US
44.88
8,858
64.8
26.6
23.8
21.2
11.7
12.1
10.5
2.27
1.4
Ch Robinson
CHRW US
64.00
9,500
95.6
24.2
22.4
20.3
7.8
10.1
9.0
2.50
2.2
POST AV
35.21
3,239
1.2
19.3
15.5
15.2
25.1
2.0
8.3
1.86
Dsv A/S
DSV DC
173.30
5,602
14.0
19.5
16.8
15.2
15.7
10.7
12.4
Bollore
BOL FP
443.30
16,547
7.4
40.3
32.1
27.0
25.6
18.8
19.4
Sitc
Beijing Properti
Tnt Express
Oesterreich.Post
8.9
15.5
17.0
(2.4) (11.8)
89.1 1,955.4
30.6
N/A
12.0
0.0
26.6
11.5
34.6
37.4
2.2
0.9
7.6
16.9
N/A
3.8
21.9
20.3
(4.9)
(3.0)
11.2
10.4
87.3
25.5
7.9
82.6
69.0
0.1
6.6
7.5
6.5
12.0
20.6
4.6
12.8
15.3
5.2
14.6
5.51
13.1
12.3
0.0
36.4
3.5
23.6
25.7
(6.1)
(5.9)
4.30
16.1
13.7
0.0
23.1
0.2
2.1
15.1
(6.1)
3.8
1.45
1.42
6.5
7.3
0.0
N/A
(1.9)
(10.3)
6.4
(2.3)
(5.6)
1.5
4.52
4.70
12.7
11.7
0.0
13.2
5.7
17.3
19.3
(1.5)
15.5
2.2
9.68
9.69
14.0
13.5
83.2
7.9
3.3
32.8
43.9
3.7
19.0
5.4
5.6
3.21
3.29
6.1
7.3
0.0
N/A
5.2
16.1
21.1
(2.9)
(3.5)
1.36
0.9
1.0
5.08
4.58
12.0
11.5
95.2
21.9
3.5
24.0
26.8
(6.1)
0.4
1.66
0.7
0.7
1.41
1.51
16.5
14.7
19.3
N/A
2.5
4.0
6.1
(5.9)
(0.3)
3.0
(4.5)
Hunt (Jb) Trans
JBHT US
74.14
8,694
61.2
25.4
23.5
19.4
8.2
20.7
13.8
1.71
0.9
1.0
8.14
7.11
11.4
10.3
69.4
13.0
6.1
34.7
33.8
(3.7)
Nippon Express
9062 JP
491.00
5,149
12.7
19.2
15.8
14.2
21.3
10.9
11.9
1.32
2.0
2.0
1.02
0.96
8.1
7.4
37.1
7.1
1.5
5.2
6.2
(3.3)
1.4
Yamato Holdings
9064 JP
2,058.00
9,237
34.6
25.0
21.4
19.7
16.9
8.9
11.6
1.84
1.2
1.2
1.56
1.52
7.9
7.1
0.0
7.3
2.5
6.4
7.1
(5.6)
(4.6)
Blue Dart Expres
BDE IN
4,035.00
1,596
0.5
78.1
60.7
49.9
28.7
21.7
N/A
N/A
2.6
1.1 14.89
10.80
54.4
44.5
0.0
N/A
6.3
18.8
19.5
1.6
11.4
Singapore Post
SPOST SP
1.73
2,673
11.1
25.6
24.0
21.9
6.7
9.7
9.7
2.48
3.6
3.6
9.50
4.94
15.8
15.9
0.0
N/A
17.4
42.9
22.4
3.3
26.3
Global Logistic
GLP SP
2.68
10,432
26.1
15.7
33.2
28.8
(52.6)
15.4
(13.7)
N/A
1.5
1.7
1.17
1.14
35.7
26.7
11.1
N/A
116.1
8.0
3.4
(2.9)
3.5
* Outliners and "N/A" entries are in red and excl. from the calculation of averages
Source: Bloomberg, OP Research
Page 82 of 111
Fri, 11 Jul 2014
China Logistics
Shenzhen International (152 HK) – A Single
Stock for Multiple Catalysts
Initial Coverage

SZI is focusing on logistics business by tripling logistics land bank to
over 3 million square metres for setting up “China Urban Integrated
Logistics Hubs” in at least 6 cities in China

Redevelopment of the land in Qianhai and the possible securitization
of Shenzhen Airlines may unlock the bonus value inside SZI

Initiate BUY with TP HK$13 or 37% upside
BUY
Close price: HK$9.51
Target Price: HK$13 (+37%)
Ke y Data
HKEx code
152
12 Months High
(HK$)
10.90
12 Month Low
(HK$)
8.16
3M Avg Dail Vol.
(mn)
2.67
Issue Share
(mn)
1,711.32
Market Cap
(HK$mn)
16,274.67
Fiscal Year
12/2013
Shenzhen Investment
Holdings Company
Limited (48.59%)
Source: Company data, Bloomberg, OP Research
Closing price are as of 10/7/2014
Major shareholder (s)
Price Chart
152 HK
HK$
12.0
MSCI CHINA
10.0
8.0
Diversified portfolio, but refocusing on logistics: Even though logistics only
contributes 12% of total earnings in FY13, SZI will spend bulk of future capex to
build a nationwide logistics network by setting up integrated logistics hubs in
major cities, such as Shenyang, Tianjin, Shijiazhuang, Wuxi and Wuhan. SZI will
spend around Rmb1.3bn each year, 64% of the total capex in FY14E, to ramp up
their operational area from 1 million sqm to near 3 million sqm by 2017. From
then on earnings generated by logistics business are expected to make up a
significant portion of SZI profits.
Solid financial strength for development: The existing well developed toll road
business would generate strong and stable cashflow for SZI to develop logistics
business. Besides, SZI has generated exceptional investment cash returns by
continuous disposal of non-core investments.
6.0
4.0
2.0
Jul/13
Oct/13
Jan/14
Apr/14
0.0
Jul/14
1mth
3mth
6mth
Absolute %
-0.3
3.0
-0.6
Rel. MSCI CHINA %
-0.5
1.1
-2.6
PE
12
Forward P/E Ratio
10
+1std.
8
avg.
6
-1std.
Unlocking value from investments: SZI owns 380k sqm of land in Qianhai
through the western logistics park in Shenzhen. With average auction price of
Rmb20,000 per sqm, SZI would unlock the land redevelopment value by
changing the land use rights once government plans are firmed up. Besides,
investment in Shenzhen Airlines is generating considerable dividend income and
profit contribution to SZI, the true value of SZ Airlines would be unlocked by
spin-off or disposal.
Initial BUY: We initiate BUY with a 12-months target price of HK$13 or 37%
upside by SOTP valuation for the SZI business portfolio.
4
E x h i b i t 1 0 0: F o r e c a s t a n d Va l u a t i o n
2
Year to Dec (HK$ mn)
FY12A
FY13A
FY14E
FY15E
FY16E
Revenue
Growth (%)
Net Profit
Growth (%)
5,739.5
5,962.8
3.9
1,641.0
(12.6)
6,154.7
3.2
1,811.7
10.4
6,568.2
6.7
1,997.0
10.2
7,193.8
9.5
2,234.1
11.9
0
Dec/08 Dec/09 Dec/10 Dec/11 Dec/12 Dec/13
Compan y Profile
Shenzhen International Holdings Limited is
involved in investments, construction and
operation of logistic infrastructure facilities,
such as toll roads, integrated logistics hubs
and ports. The company also offers logistics
services to customers by utilizing its
infrastructure facilities. The company also
has a passive investment in Shenzhen
Airlines and property development of the
land in Qianhai.
1,878.3
Diluted EPS (HK$)
EPS growth (%)
Change to previous EPS (%)
Consensus EPS (HK$)
1.147
0.982
(14.4)
1.084
10.4
0.0
1.319
1.195
10.2
0.0
1.223
1.336
11.9
0.0
1.468
ROE (%)
P/E (x)
P/B (x)
Yield (%)
DPS (HK$)
10.1
8.3
1.2
3.9
0.374
12.3
9.7
1.1
3.9
0.374
12.4
8.8
1.0
4.3
0.413
12.6
8.0
1.0
4.8
0.455
13.0
7.2
0.9
5.3
0.509
Source: Bloomberg, OP Research
Page 83 of 111
Fri, 11 Jul 2014
China Logistics
Focusing on Logistics Business
Expanding Across the Country
SZI aims to become a leading
logistics infrastructure company
in China
SZI has three core business segments, namely logistics business, toll road
business and head office (meaning other investments). With a long history of
development, the toll roads business has contributed over half of the earnings in
FY13, with stable growth and strong cash flow. SZI has spun-off the major part of
the toll roads portfolio to a listed platform, Shenzhen Expressway (548 HK, NR),
to better utilize the fund-raising capacity of the capital market for future
development.
Exhibit 101: Segment EBIT breakdown
Logistic
business
199
12%
Toll roads
836
51%
Head office
606
37%
Source: Company
SZI is building a nationwide
network of logistics hubs in China
To become a leading logistics infrastructure company in China, SZI plans to
aggressively increase investments in this sector to build a nationwide network of
“China Urban Integrated Logistics Hub” in major logistic gateway cities in China.
SZI is currently operating 6 logistic parks with total land area and operating area
of 1.3 million square metres and 670k square metres respectively. Although the
current facilities are mainly located in the well-developed Shenzhen City, SZI has
managed to increase the operating area of Shenzhen South China Logistics Park
by 125k square metres to 322k square metres.
Expansion of Shenzhen South
China Logistics Park drives
segment earnings in FY13 and
FY14
Although the new area only started operations in 4Q13, all additional working
areas were leased out due to robust demand for these facilities in first tier cities
like Shenzhen. By maintaining a high overall occupancy rate of 96%, better
economy of scale and stringent cost management, SZI has managed to increase
the logistics park profit contribution by 25.6% to HK$157 million in FY13. We
believe profits from logistics parks will further grow by 19% to HK$187 million in
FY14E due to full year contributions from the additional operating areas.
Besides, with the increase in operating capacity of port business, organic growth
of logistics services and the launch of China Urban Integrated Logistics Hub
Page 84 of 111
Fri, 11 Jul 2014
China Logistics
projects, we believe SZI’s logistics business will grow at over 20% CAGR and
make a significant contribution in the next few years.
Exhibit 102: SZI logistics business profit growth
Logistics business profit
600
500
400
300
200
100
0
FY13
FY14E
Logistics Business Profit
FY15E
FY16E
Logisitic Park
FY17E
Logisitic Services
FY18E
Port
Source: Company, OP Research
China Urban Integrated Logistics Hub
Integrated logistics hub will
provide warehousing function as
well as other value-added
services, such as customs
clearance and cross-border cargo
transfers
Since 2012, SZI has signed investment agreements with more than 10 gateway
cities for 1.81 million square metres of land to develop integrated hubs to provide
high end logistics services in China. The projects are strategically located in
Shenyang, Tianjin, Wuxi, Wuhan and Shijiazhuang, covering the northern and
eastern parts of China. In addition to warehousing services, these hubs are
enhanced logistics park business models that also provide full-spectrum facilities,
such as offices, logistic information centers, distribution centers and e-commerce
transportation platforms to SZI’s customers and their business partners.
Exhibit 103: Logistics parks signed in 2012-2013
Integrated logistic hub
Shenyang project
Tianjin project
Wuxi project
Wuhan project
Shijiazhuang project
Total
Planned area (sqm)
700,000
300,000
350,000
130,000
330,000
1,810,000
Source: Company
By integrating different value-added services, SZI expects its one-stop public
logistics service platform to generate at least an extra 25% value-added service
income and over 15% ROE of mature status.
SZI acquired 240k million square metres of land area for the development of the
first phase of Shenzhen International Shenyang Integrated Logistics Hub in FY13,
which is expected to commence operations in 2H15. We believe another 1.51
million square metres of logistic hubs in other cities will begin operations in
2016-2018, which will push the total operating area of logistics business to nearly
Page 85 of 111
Fri, 11 Jul 2014
China Logistics
2.5 million square metres in 2018 or 39% CAGR in the coming 4 years.
Exhibit 104: China Urban Integrated Logistics Hub design
E-commerce
Transportation Platform
Operation Centre
Warehousing
Integrated Ancillary
Service Centre
Urban Distribution
Centre
Logistic Information
Centre
Logistic Consolidation
Centre
Source: Company, OP Research
Exhibit 105: SZI logistics parks total operating area (‘000 sqm)
Operating Area ('000 sqm)
3,000
2,500
2,000
1,500
1,000
500
0
FY13
FY14E
FY15E
FY16E
FY17E
FY18E
Operating Area ('000 sqm)
Source: Company, OP Research
Page 86 of 111
Fri, 11 Jul 2014
China Logistics
Exhibit 106: SZI logistics parks operating area breakdown (‘000 sqm)
(sqm '000)
FY13
FY14E
FY15E
FY16E
FY17E
FY18E
South China Logisctic Park
Western Logistic Park
HTY Logistic Center
Nanjing Chemical Industrial Park
Shandong Booming Total Logistic Park
SZ Airport Express Center
Shenyang Logistic Park
Tianjin Binhai New Area Logistic Park
Wuxi Logistic Park
Wuhan Logistic Park
Shijiazhuang Logistic Park
322
111
130
48
26
28
322
111
130
48
26
28
322
111
130
48
26
28
240
322
111
130
48
26
28
500
300
350
322
111
130
48
26
28
600
300
350
130
330
322
111
130
48
26
28
700
300
350
130
330
Total
yoy
CAGR (FY14E - FY18E)
665
665
0%
39%
905
36%
1,815
101%
2,375
31%
2,475
4%
Source: Company
Riding on tier 1 clients
To leverage on its modernized logistics hub services, SZI has made a strategic
cooperation agreement with Shentong Express, the second largest courier in
China, for in-depth cooperation in integrated logistics and cross-border
e-commerce. They will share customer and data resources to accelerate the
development of a nationwide logistics network as well as co-operation in express
delivery business. After Shentong, the company expects to secure more tier 1
logistics/express companies in the future through similar strategic cooperation
based on their exceptional asset qualities.
Meanwhile, SZI is looking into signing up more investment agreements in other
cities, such as Guangzhou, Xian, Nanjing, Chongqing and Chengdu. Given SOE
background, it will not be a surprise if SZI secures more projects in near future.
We believe SZI will have very high growth in the logistics segment, which will
certainly trigger a re-rating once critical mass is achieved in 2-3 years.
Port business
Ninjina Xiba Port has the advantage of a 70,000-tonnage berthing capacity to
service large vessels. With more large vessels berthing in 2013, the segment
recorded over 60% growth in profits to HK$20 million. With the construction of
three new berths for vessels of 50,000 to 70,000 tonnage to be completed in
2014, it is expected the business will be extremely sound from 2015 onwards.
The business of logistics services
Logistics service is a third party business for logistics and transportation
outsourcing. SZI is expected to maintain solid operations in this segment with
increasing demand from existing customers and cost controls.
Page 87 of 111
Fri, 11 Jul 2014
China Logistics
Exhibit 107: SZI logistics parks development pipeline
Shenzhen International Shenyang Modern
Integrated Logistics Hub

Located in Shenyang city; an
important transportation gateway
city in Northeast China
Total planned land area of 700K
sqm; first phase project area of
200K sqm
Started construction on Dec 2013.

Northeastern
Shandong Booming
Total Logistic Park
Land Area: 70K sqm
GFA: 50K sqm

Shenyang
Shenzhen International Tianjin Modern
Integrated Logistics Hub
Tianjin
Yantai
Shijiazhuang

Northern
Nanjing
Northwestern
Nanjing Chemical Industrial
Park Logistic
Land Area: 95K sqm
GFA: 48K sqm

Xi’an
Shenzhen International Shijiazhuang Modern
Wuxi
Chengdu
Central
Wuhan
Southwestern
Integrated Logistics Hub

Eastern

Guangdong
Shenzhen Airport
Express Center
Land Area: 32K sqm
GFA: 28K sqm
Southern
Integrated Logistics Hub

Integrated Logistics Hub

Shenzhen South
China Logistic Park
Land Area: 611K sqm
GFA: 399K sqm
Shenzhen HTY
Logistic Centre
Land Area: 116K sqm
GFA: 133K sqm

Located in Wuhan Dongxihu
District, an important strategic
foothold in Central region of China
Total planned land area of 130K
sqm, expected to construct in 2015
Located in Shijiazhuang Zhengding
county, to strengthen the strategic
position in the Northern China
region
Total planned land area of 270K
sqm, expected to construct in 2015
Shenzhen International Wuxi Modern
Shenzhen International Wuhan Moder
Shenzhen Western
Logistic Park
Land Area: 380K sqm
GFA: 420K sqm
Located in Tianjin Binhai New Area,
an important strategic node in
Northern China
Total planned land area of 300K
sqm, expected to construct in
2H2014

Located in Wuxi Huishan District,
an important strategic node in
Eastern China
Total planned land area of 350K
sqm, expected to construct in
2H2014
Source: Company, OP Research
Page 88 of 111
Fri, 11 Jul 2014
China Logistics
Growth fueled by ample cash flow from toll
roads business
Shifting capex from toll roads to logistics
SZI operates 15 toll roads with a combined total of over 500km in 5 provinces.
SZI holds the toll roads indirectly through 50.89% owned listed subsidiary
Shenzhen Expressway (548.hk), which contributes 58% profits in its toll road
segment. SZI directly holds around 90% of Longda Expressway and 45% of
Wuhuang Expressway, which contribute 34% and 8% of the toll road segment
profits. Although SZI is expected to spend Rmb600mn capex for toll road
business in FY14, the company expects the capex will be minimal after 2015
since they intend to focus on more attractive logistics business developments.
64% of the capex will be spent on
logistics segment in FY14,
increased from 25% n FY13
Given the stable HK$1 billion-plus cash flow from the toll road business every
year, SZI can invest in higher returns projects on the financial strength of its toll
roads business. With the increasing demand in logistics facilities in China, SZI
aims to capture the logistics market by reinvesting in integrated logistics hubs
across China. SZI will spend HK$1.536 billion capex or 64% of the budget in
logistics development, which is 3 times larger than the HK$365 million in FY13.
We believe it would benefit SZI in the long run since logistics facilities are
experiencing higher demand driven by the boom in e-commerce. Logistics
facilities are still an undeveloped market, where it would be crucial to capture the
leading position when the competition is not yet keen. By redirecting the
investment into logistics segment, SZI expects to build up critical mass to put it in
a leading position within a few years.
Page 89 of 111
Fri, 11 Jul 2014
China Logistics
Exhibit 108: Shenzhen Int’l corporate structure
Logistic Business
Logistic
Parks
Logistic
Services
Shenzhen
International
Holdings Limited
Port
100%
Shenzhen South China Logistic Park
100%
Shenzhen Western Logistic Park
100%
Nanjing Chemical Industrial Logistic Centre
55.39%
Shandong Booming Total Logistic Park
51%
Shenzhen HTY Logistic Centre
50%
Shenzhen Airport Express Center
100%
China Urban Integrated Logistics Hub
100%
Third Party Logistic Service
68.54%
Logistic Information Service
70%
Nanjing Xiba Port
Toll Road Business
50.889%
Shenzhen Expressway Company Limited (600548.SS/ 00548.HK)
45%
Hubei Wuhuang Expressway
89.93%
Shenzhen Longda Expressway
55%
Other Investment
49%
Shenzhen Airlines Company Limited
5.87%
CSG Holding Company Limited (000012.SZ)
Source: Company, OP Research
Page 90 of 111
Fri, 11 Jul 2014
China Logistics
Exhibit 109: Shenzhen International toll roads portfolio
Location
Toll road
Interests
controlled
by the Group
Held directly
Shenzhen
1 Longda Expressway
Hubei
2 Wuhuang Expressway
Held indirectly through Shenzhen Expressway
1 Meiguan Expressway
2 Jihe West
3 Yanpai Expressway
4 Yanba Expressway
Shenzhen
5 Nanguang Expressway
6 Jihe East
7 Shuiguan Expressway
8 Shuiguan Extension
9 Yangmao Expressway
10 Guangwu Porject
Guangdong
11 Jiangzhong Porject
12 GZ W2 Expressway
13 Qinglian Expressway
Hubei
14 Wuhuang Expressway
Hunan
15 Changsha Ring Road
Jiangsu
16 Nanjing Third Bridge Note(2)
Length
by toll
(km)
Concession Remaining No. of
period concession lane(s)
(Year. Month) as of 2014
2013 Ave. daily
2013
mixed traffic
Ave.
volume daily toll
(vehicle/thousands) revenue
(HK$'000)
89.93%
45%
28 2005.10 - 2027.10
70.3 1997.09 - 2022.09
13
8
6
4
88
39
1,713
1,314
100%
100%
100%
100%
100%
100%
40%
40%
25%
30%
25%
25%
76.37%
55%
51%
25%
5.4
21.8
15.6
29.1
31
23.7
20
6.3
79.8
37.9
39.6
40.2
216
70.3
34.7
15.6
13
13
13
19
13
11
11
13
13
13
16
20
8
15
16
6/8
6
6
6
6
6
10
6
4
4
4
6
4
4
4
6
130
123
50
31
775
150
155
39
31
27
89
42
28
39
14
29
1,014
1,323
683
561
994
1,678
1,639
222
1,855
908
1,167
1,042
2,460
1,314
182
1,476
1995.05 - 2027.03
1999.05 - 2027.03
2006.05 - 2027.03
(Note)
2008.01 - 2033.01
1997.10 - 2027.03
2002.02 - 2025.12
2005.10 - 2025.12
2004.11 - 2027.07
2004.12 - 2027.11
2005.11 - 2027.08
2006.12 - 2030.12
2009.07 - 2034.07
1997.09 - 2022.09
1999.11 - 2029.12
2005.10 - 2030.10
Note: Section A, B and C of Yanba commenced operation in April 2001, June 2003 and March 2010 respectively; concession period of Yanba Expressway is 25
years
Source: Company, OP Research
Exhibit 110: Shifting capex from toll road to logistics park
2014 Capex estimate: HK$2,400m (RMB1,900m)
Port
6%
2013 Actual: HK$1,458m (RMB1,138m)
Port
18%
Logistic Park
25%
Toll Road
30%
Logistic Park
64%
Toll Road
57%
Source: Company, OP Research
Page 91 of 111
Fri, 11 Jul 2014
China Logistics
Unlocking value from investments
Land in Qianhai
The land in Qianhai would bring a
huge fortune to SZI by rezoning
development
At the Western Logistics Park in Shenzhen, SZI owns 380k sqm of land in
Qianhai, which government plans to develop into a new economic zone with
preferential policies to support future development. As a result, thousands of
enterprises have been attracted to Qianhai, pushing up the average auction land
price to Rmb20,000 per square metre in 2013.
To benefit from the growing scarcity of land in Qianhai, SZI maintained close
communications with the authorities to change the land use rights and to push
forward the first phase land project in Qianhai. The company has already
established a JV company with Shenzhen Invest (604.hk), which is owned by
Shum Yip, so that a professional team can design and develop the Qianhai land
bank once government approval is secured. SZI has also signed MOUs with
several well-known large-scale enterprises to enter cross-border bilateral RMB
loan agreements with a total of Rmb700 million facility for future construction and
business developments in Qianhai. We believe the value of SZI’s Qianhai land
bank will soon be unlocked once government plans are firmed up.
Exhibit 111: SZI land in Qianhai
Source: Company, OP Research
Other investments
Exceptional return from Shenzhen
Airlines investment
SZI bought 49% stake of Shenzhen Airlines during 2010 to 2011 at a total cost of
HK$1.4 billion as the former-head Li of SZA has been jailed for misappropriation
of Rmb20 billion. SZI treats SZ Airlines as a passive investment as Air China
(753.hk), which owns 51% of SZA, has a professional management team in the
airlines industry. SZ Airlines contributed HK$480mn profit and HK$140mn cash
dividend to SZI in FY13, which is a fair return for SZI as SZ Airlines has above
average profitability by focusing on domestic routes. SZ Airlines would bring a
huge fortune to SZI whenever it goes public or introduces other professional
investors since SZI bought it at a relatively low price. (Current attributable NAV of
SZ Airlines is over HK$2,769 million, which is far above acquisition costs.)
Page 92 of 111
Fri, 11 Jul 2014
China Logistics
Exhibit 112: Shenzhen Airlines operating statistics
(RMB mn)
Transportation revenue#
Of which: Passenger revenue
Transportation costs#
Passenger load factor
Number of flight routes
Of which: Domestic routes
Total no. of aircraft in service
2013
2012
Increase/ (Decrease)
21,019
18,412
17,715
21,597
19,428
17,942
(3%)
(5%)
(1%)
81.6%
180,023
172,728
132
80.55%
167,784
160,769
116
1.05%*
7%
7%
14%
#Extracted from audited financial statements of Shenzhen Airlines
*Change in % point
Source: Company, OP Research
Besides, SZI holds over 121.83 million shares or 5.87% of issued share capital of
CSG (000012.CH), an A-share listed company from previous investment. SZI has
been unloading this holding year by year to generate some additional income and
cash returns. SZI disposed of 11.34 million shares of CSG at an average selling
price of Rmb11.14 (HK$14.07) per share. The disposal generated a realized gain
after tax of HK$106 million in 2013. Given the low book cost (HK$1.54 by OP
estimate Vs current price of Rmb6.87), it is expected that disposal of CSG shares
will be one of the major income sources for SZI in the future. Last but not least,
SZI has also disposed of 2.33% equity interest in Shenzhen Capital Group and
recorded a gain after tax of HK$130 million. We believe the capital raised by
disposing of passive investments would give SZI more resources to develop the
logistics business, which also shows efficient capital management of SZI.
Exhibit 113: Disposal gain of CSG shares since 2009
Year
Stake disposed
Net gain
2009
2010
2011
2012
2013
29.31mn shares
28.70mn shares
14.62mn shares
11.34mn shares
HK$283mn
HK$2334mn
HK$263mn
HK$106mn
Source: Company, OP Research
Page 93 of 111
Fri, 11 Jul 2014
China Logistics
Valuation
Sum of the parts (SOTP) estimate
We use SOTP to valuate SZI and
our TP is HK$13 or 37% upside
We use sum of the parts (SOTP) estimate for the valuation of SZI, since SZI is a
holding company structure with toll roads, logistics and investments business.
We used 10x FY14E PE to valuate toll roads, logistics services and port business
because of stable business nature with low-teen growth outlook.
Given fast development and aggressive investment from SZI in integrated
logistics hubs, we use 1x FY14E PEG or 22.9x FY14E PE for logistics parks
business. Due to robust demand and promising industry outlook, peers in
logistics facilities sector are trading at high valuation, where our target PE has
over 30% discount to GLP, a market leader in logistics facilities, due to the much
smaller scale.
Although Shenzhen Airlines has better profitability by focusing on domestic routes,
industry peers such as China Southern Air, recorded earnings decline in 1Q14
due to exchange losses from depreciation of Rmb. Thus, it would be better to
value the segment by 1x FY14E PB instead on earnings.
As CSG is a publicly traded share, we directly use market value excluding profit
gain tax for the valuation.
For the land in Qianhai, since the land premium to be paid for redevelopment is
still unknown, with the market value of commercial land at around Rmb20,000 per
square metre, we assume Rmb8,000 per square metre or 60% discount in the
valuation.
Exhibit 114: Sum of the parts (SOTP) valuation
Valuation method
Valuation methodology
Toll Roads
Logistics Business
Logistics Parks
Logistics Services
Port
Shenzhen Airlines
CSG (000012 CH)
Land in Qianhai
10x FY14E PE
9,611
1x FY14E PEG
10x FY14E PE
10x FY14E PE
1x FY14E PB
4,278
201
234
2,769
832
3,800
21,724
13
37%
Total
Target price (HK$)
Upside
Market value (after tax)
Rmb8,000 per sqm
HK$ mn
Source: OP Research
Page 94 of 111
Fri, 11 Jul 2014
China Logistics
Key risks
1.
Less than expected demand in logistic hubs.
2.
Delay in logistics hub construction.
3.
Higher than expected construction costs.
4.
Unflavorable toll road policies.
5.
Lower profitability in Shenzhen Airlines.
6.
Failure to divest available-for-sales assets.
7.
Lower than expected returns in Qianhai land bank re-development.
Page 95 of 111
Fri, 11 Jul 2014
China Logistics
Management profile
Mr. Gao Lei, Chairman: Mr. Gao, aged 54, was appointed in September 2012 as
the Chairman of the board of directors of the Company. Mr. Gao has extensive
experience in finance, investment, corporate management and administration. Mr.
Gao is responsible for devising the Group’s overall development strategy and
important systems, as well as supervising the implementation of resolutions of the
general meetings and the board. Mr. Gao holds a master degree in money and
banking from Xi’an Jiaotong University and is a senior economist.
Mr. Li Jing Qi, Chief Executive Officer: Mr. Li, aged 57, was appointed in March
2000 as an Executive Director and Vice President of the Company, and was
appointed in August 2006 as the Chief Executive Officer of the Company. Mr. Li is
responsible for the overall daily operations of the Group and the implementation
of the Group’s development strategies and the resolutions of the general
meetings and the board. Mr. Li is a graduate of Shanghai International Studies
University with a Bachelor of Arts degree. He has over 20 years of experience in
international banking and corporate management.
Mr. Tse Yat Hong, Chief Financial Officer: Mr. Tse, aged 44, joined the Group
as Chief Financial Officer in June 2000. Mr. Tse is responsible for the Group’s
financial management and planning and coordinating the Group’s major
transactions. Mr. Tse graduated from Monash University in Australia with a
bachelor’s degree in accounting and computer science. He is a Fellow of the
Hong Kong Institute of Certified Public Accountants and a FCPA of CPA Australia.
Prior to joining the Company, Mr. Tse worked in the audit profession in one of the
international accounting firms for years. Mr. Tse has extensive experience in
accounting, finance and corporate governance matters of listed companies and
has broad knowledge in accounting and financial rules and regulations in Hong
Kong and China.
Page 96 of 111
Fri, 11 Jul 2014
China Logistics
Financial Summary – Shenzhen International (152 HK)
Year to Dec
FY12A FY13A FY14E FY15E FY16E
Income Statement (HK$ mn)
Toll roads
4,817 4,934 4,999 5,274 5,548
Logistics business
922 1,029 1,156 1,294 1,646
Head Office
0
0
0
0
0
Turnover
5,740 5,963 6,155 6,568 7,194
YoY%
4
3
7
10
COGS
(3,102) (3,025) (2,893) (2,918) (3,043)
Gross profit
2,638 2,937 3,262 3,651 4,151
Gross margin
46.0% 49.3% 53.0% 55.6% 57.7%
Other income
80
42
72
72
72
Selling & distribution
(43)
(64)
(67)
(70)
(72)
Admin
(337)
(331)
(347)
(358)
(369)
R&D
0
0
0
0
0
Other opex
0
0
0
0
0
Total opex
(379)
(395)
(414)
(428)
(442)
Operating profit (EBIT)
2,339 2,584 2,920 3,295 3,782
Operating margin
40.7% 43.3% 47.4% 50.2% 52.6%
Provisions
0
0
0
0
0
Interest Income
73
77
91
116
141
Finance costs
(928)
(816)
(795)
(792)
(789)
Profit after financing costs
1,484 1,845 2,216 2,619 3,134
Associated companies & JVs
1,291
792
792
792
792
Pre-tax profit
2,775 2,637 3,008 3,411 3,926
Tax
(479)
(531)
(638)
(753)
(902)
Minority interests
(417)
(465)
(559)
(660)
(790)
Net profit
1,878 1,641 1,812 1,997 2,234
YoY%
(13)
10
10
12
Net margin
32.7% 27.5% 29.4% 30.4% 31.1%
EBITDA
2,628 2,884 4,192 4,571 5,116
EBITDA margin
45.8% 48.4% 68.1% 69.6% 71.1%
EPS (HK$)
1.147 0.982 1.084 1.195 1.336
YoY%
(14)
10
10
12
DPS (HK$)
0.374 0.374 0.413 0.455 0.509
Year to Dec
Cash Flow (HK$ mn)
EBITDA
Chg in working cap
Others
Operating cash
Interests paid
Tax
Net cash from operations
FY12A FY13A FY14E FY15E FY16E
Capex
Investments
Dividends received
Sales of assets
Interests received
Others
Investing cash
FCF
Issue of shares
Buy-back
Minority interests
Dividends paid
Net change in bank loans
Others
Financing cash
(1,318) (1,319) (1,362) (1,453) (1,591)
(97)
(86)
0
0
0
112
480
480
480
480
45
385
0
0
0
71
81
91
116
141
40
35
0
0
0
(1,147)
(425)
(790)
(857)
(970)
782 1,911 2,289 2,165 2,482
0
84
0
0
0
0
0
0
0
0
177
97
0
0
0
(782)
(776)
(620)
(684)
(754)
957 (1,229)
0
0
0
7
(4)
0
0
0
360 (1,828)
(620)
(684)
(754)
2,628
(131)
842
3,339
(768)
(642)
1,929
2,884
(280)
1,105
3,709
(881)
(493)
2,336
4,192
(107)
0
4,084
(831)
(173)
3,080
4,571
(81)
0
4,490
(831)
(638)
3,022
5,116
(80)
0
5,036
(831)
(753)
3,452
Net change in cash
Exchange rate or other Adj
Opening cash
Closing cash
1,142
0
3,724
4,866
82
2
4,866
4,950
1,670
0
4,950
6,620
1,481
0
6,620
8,101
1,728
0
8,101
9,828
CFPS (HK$)
1.178
1.397
1.842
1.808
2.065
Year to Dec
Ratios
Gross margin (%)
Operating margin (%)
Net margin (%)
Selling & dist'n exp/Sales (%)
Admin exp/Sales (%)
Payout ratio (%)
Effective tax (%)
Total debt/equity (%)
Net debt/equity (%)
Current ratio (x)
Quick ratio (x)
Inventory T/O (days)
AR T/O (days)
AP T/O (days)
Cash conversion cycle (days)
Asset turnover (x)
Financial leverage (x)
EBIT margin (%)
Interest burden (x)
Tax burden (x)
Return on equity (%)
ROIC (%)
FY12A FY13A FY14E FY15E FY16E
Year to Dec
Balance Sheet (HK$ mn)
Fixed assets
Intangible assets & goodwill
Associated companies & JVs
Long-term investments
Other non-current assets
Non-current assets
FY12A FY13A FY14E FY15E FY16E
46.0
40.7
32.7
0.7
5.9
32.6
32.3
147.3
108.8
1.2
1.2
1
74
245
(170)
0.2
1.8
40.7
1.2
0.7
10.1
7.6
49.3
43.3
27.5
1.1
5.5
38.1
28.8
127.0
91.5
1.8
1.7
54
82
231
(96)
0.1
3.2
43.3
1.0
0.6
12.3
5.3
53.0
47.4
29.4
1.1
5.6
38.1
28.8
117.0
73.3
2.0
1.9
54
82
231
(96)
0.1
3.0
47.4
1.0
0.6
12.4
5.9
55.6
50.2
30.4
1.1
5.5
38.1
28.8
107.7
58.5
2.2
2.1
54
82
231
(96)
0.1
2.9
50.2
1.0
0.6
12.6
6.6
57.7
52.6
31.1
1.0
5.1
38.1
28.8
98.8
44.1
2.5
2.4
54
82
231
(96)
0.1
2.8
52.6
1.0
0.6
13.0
7.5
4,951 5,257 5,854 6,464 7,101
24,189 23,618 23,147 22,753 22,415
5,339 5,842 6,154 6,465 6,777
38
103
103
103
103
178
389
389
389
389
34,694 35,209 35,647 36,174 36,785
Inventories
AR
Prepayments & deposits
Other current assets
Cash
Current assets
9
1,165
0
1,649
4,866
7,689
447
1,340
0
1,278
4,950
8,014
427
431
449
1,383 1,476 1,616
0
0
0
1,278 1,278 1,278
6,620 8,101 9,828
9,707 11,284 13,171
AP
Tax
Accruals & other payables
Bank loans & leases
CB & other debts
Other current liabilities
Current liabilities
2,082
123
0
3,898
377
15
6,496
1,918
173
0
2,297
135
32
4,555
1,834
638
0
2,297
135
32
4,935
1,850
753
0
2,297
135
32
5,067
1,929
902
0
2,297
135
32
5,294
Bank loans & leases
CB & other debts
Deferred tax & others
MI
Non-current liabilities
14,108 15,034 15,034 15,034 15,034
244
294
294
294
294
1,548 1,432 1,432 1,432 1,432
7,343 7,918 8,477 9,137 9,928
23,242 24,678 25,237 25,897 26,688
Total net assets
12,645 13,990 15,182 16,494 17,974
Shareholder's equity
Share capital
Reserves
12,645 13,990 15,182 16,494 17,974
4,952 5,100 5,100 5,100 5,100
7,693 8,890 10,081 11,394 12,874
BVPS (HK$)
Total debts
Net cash/(debts)
7.72
8.44
9.16
9.95
10.85
18,627 17,760 17,760 17,760 17,760
(13,758) (12,803) (11,134) (9,653) (7,925)
Source: Company, OP Research
Page 97 of 111
Fri, 11 Jul 2014
China Logistics
Exhibit 115: Peer Group Comparison
3-mth
Company
Shenz Intl Hldg
Mkt cap
avg t/o PER Hist
Ticker
Price
(US$m)
(US$m)
152 HK
9.51
2,100
3.2
PER
EPS
EPS
FY2
FY1
FY2
3-Yr EPS
YoY% YoY%
Cagr (%)
Div
Div
yld
yld
P/B
P/B
Net
Hist
FY1
Hist
FY1 Ebitda Ebitda
PEG (x)
(%)
(%)
(x)
(x)
(x) PER FY1 (x)
(x)
9.7
8.8
8.0
10.4
10.2
10.8
0.82
3.9
4.3
1.13
1.04
EV/
Hist Cur Yr
9.9
Gross
Net
EV/ gearing margin margin
6.4
Hist
Hist
Hist
(%)
(%)
(%)
91.5
49.3
27.5
ROE
Sh px
Sh px
ROE
1-mth
3-mth
(%) FY1 (%)
%
%
(3.0)
Hist
12.3
12.4
(0.3)
HSI
23,238.99
10.9
10.8
9.9
0.3
8.8
6.2
1.75
3.9
3.7
1.38
1.29
12.7
12.0
(0.3)
0.2
HSCEI
10,368.13
7.6
7.2
6.7
5.0
8.8
7.8
0.92
4.2
4.4
1.16
1.07
15.3
14.8
(1.4)
(0.5)
CSI300
2,142.85
Adjusted sector avg*
9.9
8.6
7.5
14.2
15.3
15.1
0.57
2.6
2.9
1.40
1.27
14.9
14.0
12.5
7.1
18.8
11.0
1.36
3.4
3.0
2.11
2.03
9.7
8.4
14.2
14.7
(0.9)
(5.8)
25.6
29.1
11.5
13.1
13.4
0.7
3.0
4.7
5.2
4.9
3.01
4.6
4.8
1.85
1.71
7.9
100.6 (31.9)
14.5
0.36
4.6
5.5
0.75
0.67
6.9
7.6
0.0
36.9
24.3
11.9
12.0
9.4
19.4
6.4
74.0
51.8
22.8
7.4
13.3
11.7
16.8
Toll Roads
Zhejiang Express
576 HK
8.49
4,758
3.2
15.5
14.8
14.0
Shenzhen Expre-H
548 HK
4.30
1,256
1.1
10.4
5.2
7.6
Anhui Express-H
995 HK
4.74
1,130
0.8
7.5
7.5
7.0
(0.2)
7.5
2.0
3.74
5.8
6.0
0.88
0.83
5.1
4.6
27.5
39.3
24.7
12.2
11.1
0.6
11.0
Jiangsu Expres-H
177 HK
9.67
5,031
4.3
14.4
13.6
12.7
5.9
7.0
7.1
1.92
4.9
5.3
1.99
1.91
7.8
7.3
20.2
50.2
36.5
14.1
14.3
5.7
4.7
Hopewell Infr
737 HK
3.96
1,575
0.7
16.0
16.6
15.3
(3.3)
8.4
5.1
3.28
9.3
5.9
1.34
1.40
6.6
5.6
73.1
N/A
24.2
8.1
8.3
1.5
5.3
1052 HK
4.92
1,062
0.6
11.9
8.9
7.9
33.7
12.2
18.4
0.48
5.3
6.9
0.80
0.77
9.6
8.2
39.5
66.8
31.6
6.8
8.8
13.1
25.8
107 HK
2.52
1,232
1.0
6.1
6.0
5.6
1.5
7.7
2.4
2.44
3.9
3.9
0.56
0.54
7.4
7.0
70.2
20.9
11.8
9.6
9.1
5.9
1.6
Cathay Pac Air
293 HK
14.22
7,218
6.5
21.4
14.7
10.2
45.6
43.3
37.6
0.39
1.5
2.4
0.89
0.85
7.7
7.2
64.9
N/A
2.6
4.4
5.9
(2.2)
(8.3)
Air China Ltd-H
753 HK
4.61
7,275
4.5
13.9
13.7
9.8
1.7
40.0
18.2
0.75
1.2
1.5
0.90
0.83
9.1
6.6
168.3
N/A
3.4
6.3
6.2
(1.5)
(5.1)
China East Air-H
670 HK
2.47
4,508
1.0
9.9
11.6
7.8
(15.0)
49.4
15.5
0.75
N/A
0.1
0.93
0.88
9.0
6.9
251.0
N/A
2.7
10.1
6.8
(2.0)
(9.2)
China Southern-H
1055 HK
2.40
3,481
3.7
9.6
11.5
6.5
(16.5)
77.8
21.5
0.53
2.1
1.5
0.55
0.55
7.1
5.8
190.2
N/A
2.0
5.9
4.7
(0.4)
(7.0)
Yuexiu Transport
Sichuan Exp-H
Airlines
Integrated Logistics
Sinotrans Ltd-H
598 HK
5.34
2,928
6.5
21.4
16.8
13.9
27.5
20.8
22.3
0.75
1.2
1.5
1.66
1.54
12.9
10.6
0.0
N/A
1.8
7.9
9.4
9.2
31.9
Kerry Logistics
636 HK
12.70
2,770
3.2
9.1
21.2
18.7
(57.2)
13.2
(18.6)
N/A
0.9
1.0
1.57
1.46
13.2
12.0
1.2
N/A
9.2
16.8
7.1
5.0
10.4
Haier Electronic
1169 HK
21.40
7,400
10.3
21.4
18.7
15.4
14.5
21.0
16.2
1.15
0.5
0.6
5.71
4.27
14.7
12.0
0.0
14.7
3.3
30.7
25.6
5.4
10.5
Sitc
1308 HK
3.28
1,094
0.6
9.7
8.1
6.4
19.5
26.9
21.0
0.39
7.6
5.0
1.47
1.32
10.0
5.8
0.0
11.3
8.9
15.5
17.0
(2.4)
(11.8)
Asr Logistics
1803 HK
1.42
147
0.1
12.2
10.9
9.5
11.8
15.4
19.8
0.55
13.8
3.6
3.80
4.58
7.8
7.0
0.0
26.6
11.5
34.6
37.4
2.2
0.9
Global Logistic
GLP SP
2.68
10,432
26.1
15.7
33.2
28.8
(52.6)
15.4
(13.7)
N/A
1.5
1.7
1.17
1.14
35.7
26.7
11.1
N/A
116.1
8.0
3.4
(2.9)
3.5
Deutsche Post-Rg
DPW GR
25.87
42,610
73.6
15.0
15.3
13.7
(2.3)
11.6
6.0
2.53
3.1
3.3
3.16
2.87
8.1
7.6
16.9
N/A
3.8
21.9
20.3
(4.9)
(3.1)
Kuehne & Nagel-R
KNIN VX
114.90
15,459
14.7
23.1
21.2
19.5
8.9
8.6
8.7
2.43
5.1
3.9
5.23
5.51
13.1
12.3
0.0
36.4
3.5
23.6
25.7
(6.1)
(5.9)
Panalpina We-Reg
PWTN SW
136.40
3,632
3.0
272.8
29.8
22.3
814.0
33.6
151.6
0.20
1.6
1.9
4.54
4.30
16.1
13.7
0.0
23.1
0.2
2.1
15.1
(6.1)
3.8
UPS US
102.98
94,674
255.6
22.1
20.2
17.5
9.4
16.0
11.8
1.71
2.5
2.6 15.15
15.52
11.2
10.4
87.3
25.5
7.9
82.6
69.0
0.1
6.6
EXPD US
44.88
8,858
64.8
26.6
23.8
21.2
11.7
12.1
10.5
2.27
1.4
1.5
4.70
12.7
11.7
0.0
13.2
5.7
17.3
19.3
(1.5)
15.5
United Parcel-B
Expeditors Intl
4.52
* Outliners and "N/A" entries are in red and excl. from the calculation of averages
Source: Bloomberg, OP Research
Page 98 of 111
Fri, 11 Jul 2014
China Logistics
ASR Logistics (1803 HK) – Asset-Light Air
Freight Solution Provider
Company Update

ASR is well positioned to leverage on the increasing intra-Asia Pacific
air freight forwarding demand to drive its solid earnings growth.

Targeting to increase representative offices from 29 in FY13 to 44 in
FY14E, mainly to gear up for the intra-Asia Pacific recovery and
launching of e-booking platform.

Maintain BUY with TP HK$1.90 unchanged, representing 15x FY14E
PE.
BUY
Close price: HK$1.42
Target Price: HK$1.90 (+34%)
Ke y Data
HKEx code
1803
12 Months High
(HK$)
1.58
12 Month Low
(HK$)
0.50
3M Avg Dail Vol.
(mn)
0.54
Issue Share
(mn)
800.00
Market Cap
(HK$mn)
1,136.00
Fiscal Year
12/2013
ASR Victory Ltd
(64.5%)
Yu Ho Yuen Sunny
(8.5%)
Source: Company data, Bloomberg, OP Research
Closing price are as of 10/7/2014
Major shareholder (s)
Price Chart
1803 HK
Jul/13
Oct/13
MSCI CHINA
Jan/14
Apr/14
HK$
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
Jul/14
1mth
3mth
6mth
Absolute %
6.8
2.2
5.5
Rel. MSCI CHINA %
3.8
0.6
1.9
Forward P/E Ratio
10
+1std.
8
avg.
6
-1std.
4
E x h i b i t 1 1 6: F o r e c a s t a n d Va l u a t i o n
Year to Dec (HK$ mn)
2
0
Apr/12
E-booking platform launched in early 2014 together with well-established
network likely yield promising earnings growth from 2015 onwards. 2 years
after its debut on HKEx, ASR is gradually developing its sales representative
offices covering Asia-Pacific region in-line with what it planned during IPO. We
believe the past two years' efforts are due for harvesting in FY15E, thanks to
increasing B2B and B2C popularity and the rapid growth of China's e-commerce
industry. We believe the recent launch of E-booking platform is likely to support
ASR to better utilize its airline portfolio and cargo capacity without rapidly
increasing its operating costs i.e. labor. Although 2014 air cargo freight outlook
remains foggy, we expect the synergies together with economies of scale to show
enough bouyancy from FY15E to support 20% earnings CAGR in 2013 – 2016.
Maintain BUY: We maintain our BUY rating with TP HK$1.90 unchanged,
representing 15x FY14E PE.
PE
12
Reaping the booming intra-Asia Pacific air cargo market. ASR listed on HKEx
Jan 2012 with IPO price of HK$0.47, up 200% since its listing or 32% since our
initial coverage. As a leading asset light 3PL service company focusing on the
wholesale market, we believe ASR is able to (1) maintain its healthy net cash
position or ~HK$0.13 p.s. after distributing HK$120mn special dividend in May
2014 and (2) leveraging on its well-established point of sales network (from 16 to
29 offices by FY13, targeting 44 by FY14E) and comprehensive airline portfolio to
reap the upcoming recovery in air cargo freight market from FY15E onwards.
Oct/12
Apr/13
Oct/13
Apr/14
Compan y Profile
ASR is a non-asset based third party logistic
(3PL) service provider, headquarter in HK, in
that they do not own any physical freight
distribution assets, but leverage their over 20
years accumulated freight industry expertise
to source air cargo space and on-sell it to
over 1,000 freight forwarders
FY12A
FY13A
FY14E
FY15E
FY16E
Revenue
Growth (%)
Net Profit
Growth (%)
674.2
11.7
89.9
(7.6)
806.7
19.7
93.1
3.5
932.4
15.6
103.0
10.7
1,150.4
23.4
124.7
21.0
1,362.2
18.4
162.2
30.1
Diluted EPS (HK$)
EPS growth (%)
Change to previous EPS (%)
Consensus EPS (HK$)
0.112
(7.6)
0.116
3.5
0.129
10.7
1.4
0.130
0.156
21.0
1.9
0.150
0.203
30.1
1.4
0.200
ROE (%)
P/E (x)
P/B (x)
Yield (%)
DPS (HK$)
51.0
12.6
2.4
2.4
0.034
34.6
12.2
3.8
13.8
0.196
37.2
11.0
4.5
2.3
0.032
41.2
9.1
3.2
2.7
0.039
39.2
7.0
2.4
3.6
0.051
Source: Bloomberg, OP Research
Page 99 of 111
Fri, 11 Jul 2014
China Logistics
Exhibit 117: New offices to be establised in 2014 (China)
Head office
 Hong Kong
Branch Offices
 Beijing
 Chengdu
 Dongguan
 Foshan
 Guangzhou
 Hangzhou
 Kunming
 Macau
 Nanchang
 Shanghai
 Shenzhen
 Tianjin
 Xiamen
 Zhengzhou
 Zhongshan
Beijing (2)
Tianjin
Zhengzhou
Chengdu (new)
Chengdu
Qingdao
Shanghai (2)
Hangzhou
Wuhan
Nanchang
Chongqing
Existing offices
Offices to be established by 2014
Xiamen
Kunming
Guangzhou (3)
Dongguan
Fushan
Shenzhen (3)
Zhongshan
HK
Macau
Source: Company, OP Research
Exhibit 118: New offices to be establised in 2014 (Asia/Europe)
Head office
 Hong Kong
Branch Offices
 Helsinki
 Kuala Lumpur
 New Delhi
 Osaka
 Singapore
 Taipei
 Tokyo
Existing offices
Offices to be established by 2014
Helsinki
Frankfurt
Tokyo
Osaka
Taipei
New Dehli Bangladesh
Yanggon Vietnam
Bombay
Cambodia
Bangkok
Manali
Kaula Lumpur
Singapore
Source: Company, OP Research
Page 100 of 111
Fri, 11 Jul 2014
China Logistics
Exhibit 119: Number of ASR Logisitcs airline appointments
60
Number of airline appointments
50
40
30
20
10
Over
31
Over
45
Over
52
2011
2012
2013
0
Source: Company, OP Research
Exhibit 120: Number of ASR Logisitcs office locations
35
Number of office locations
30
25
20
15
10
5
16
21
29
2011
2012
2013
0
Source: Company, OP Research
Page 101 of 111
Fri, 11 Jul 2014
China Logistics
Exhibit 121: ASR e-booking platform (website: asr-e.com.hk)
Source: Company, OP Research
Exhibit 122: ASR e-booking platform (mobile application)
Source: Company, OP Research
Page 102 of 111
Fri, 11 Jul 2014
China Logistics
Financial Summary – ASR Logistics (1803 HK)
Year to Dec
FY12A FY13A FY14E FY15E FY16E
Income Statement (HK$ mn)
Europe
151
124
131
137
144
America
73
83
132
257
398
Asia-Pacific
373
506
577
663
726
Africa
78
93
93
93
93
Turnover
674
807
932 1,150 1,362
YoY%
12
20
16
23
18
COGS
(489)
(592)
(685)
(856) (1,004)
Gross profit
185
215
248
295
358
Gross margin
27.4% 26.6% 26.5% 25.6% 26.3%
Other income
(1)
(1)
0
0
0
Selling & distribution
0
0
0
0
0
Admin
(78)
(103)
(125)
(146)
(165)
R&D
0
0
0
0
0
Other opex
0
0
0
0
0
Total opex
(78)
(103)
(125)
(146)
(165)
Operating profit (EBIT)
106
111
123
149
193
Operating margin
15.8% 13.7% 13.2% 12.9% 14.2%
Provisions
0
0
0
0
0
Interest Income
0.5
0.6
0.6
0.8
1.1
Finance costs
(0)
(0)
0
0
0
Profit after financing costs
107
111
123
149
194
Associated companies & JVs
0
0
0
0
0
Pre-tax profit
107
111
123
149
194
Tax
(17)
(18)
(20)
(25)
(32)
Minority interests
(0)
0
0
0
0
Net profit
90
93
103
125
162
YoY%
(8)
3
11
21
30
Net margin
13.3% 11.5% 11.1% 10.8% 11.9%
EBITDA
109
112
125
151
197
EBITDA margin
16.1% 13.9% 13.4% 13.2% 14.5%
EPS (HK$)
0.112 0.116 0.129 0.156 0.203
YoY%
(8)
3
11
21
30
DPS (HK$)
0.034 0.196 0.032 0.039 0.051
Year to Dec
Cash Flow (HK$ mn)
EBITDA
Chg in working cap
Others
Operating cash
FY12A FY13A FY14E FY15E FY16E
109
(27)
(2)
80
112
(2)
0
110
125
55
0
179
151
10
0
161
197
7
0
204
Tax
Net cash from operations
(23)
58
(14)
96
(16)
164
(20)
141
(25)
179
Capex
Investments
Dividends received
Sales of assets
Interests received
Others
Investing cash
FCF
Issue of shares
Buy-back
Minority interests
Dividends paid
Net change in bank loans
Others
Financing cash
(3)
0
0
1
1
7
6
64
0
0
0
(42)
(0)
76
35
(1)
0
0
0
1
0
(0)
96
0
0
0
(36)
0
0
(36)
(7)
0
0
0
1
0
(7)
157
0
0
0
(147)
0
0
(147)
(9)
0
0
0
1
0
(8)
133
0
0
0
(28)
0
0
(28)
(11)
0
0
0
1
0
(10)
170
0
0
0
(36)
0
0
(36)
Net change in cash
Exchange rate or other Adj
Opening cash
Closing cash
99
1
94
193
60
0
193
253
10
0
253
262
104
0
262
366
134
0
366
500
0.072
0.120
0.205
0.176
0.224
CFPS (HK$)
Year to Dec
Ratios
Gross margin (%)
Operating margin (%)
Net margin (%)
Selling & dist'n exp/Sales (%)
Admin exp/Sales (%)
Payout ratio (%)
Effective tax (%)
Total debt/equity (%)
Net debt/equity (%)
Current ratio (x)
Quick ratio (x)
Inventory T/O (days)
AR T/O (days)
AP T/O (days)
Cash conversion cycle (days)
Asset turnover (x)
Financial leverage (x)
EBIT margin (%)
Interest burden (x)
Tax burden (x)
Return on equity (%)
ROIC (%)
FY12A FY13A FY14E FY15E FY16E
Year to Dec
Balance Sheet (HK$ mn)
Fixed assets
Intangible assets & goodwill
Associated companies & JVs
Long-term investments
Other non-current assets
Non-current assets
FY12A FY13A FY14E FY15E FY16E
27
16
13
0
12
30
16
0
27
14
12
0
13
169
17
0
27
13
11
0
13
25
17
0
26
13
11
0
13
25
17
0
26
14
12
0
12
25
17
0
Net cash Net cash Net cash Net cash Net cash
3.3
3.3
0.0
56.2
50.9
5.3
2.4
1.6
15.8
1.0
0.8
51.0
253.7
3.1
3.1
0.0
60.4
55.3
5.2
2.1
1.5
13.7
1.0
0.8
34.6
192.1
2.5
2.6
2.9
2.5
2.6
2.9
0.0
0.0
0.0
38.0
38.0
38.0
55.3
55.3
55.3
(17.3) (17.3) (17.3)
2.2
2.4
2.1
1.5
1.6
1.5
13.2
12.9
14.2
1.0
1.0
1.0
0.8
0.8
0.8
37.2
41.2
39.2
495.9 (1,208.6) (902.4)
8
1
0
0
1
10
7
1
0
1
8
17
13
1
0
1
8
22
19
1
0
1
8
29
26
1
0
1
8
36
Inventories
AR
Prepayments & deposits
Other current assets
Cash
Current assets
0
104
10
28
193
335
0
134
7
29
253
422
0
97
8
29
262
396
0
120
10
29
366
525
0
142
12
29
500
682
AP
Tax
Accruals & other payables
Bank loans & leases
CB & other debts
Other current liabilities
Current liabilities
68
14
20
0
0
0
102
90
16
32
0
0
0
137
104
20
37
0
0
0
161
130
25
46
0
0
0
200
152
32
54
0
0
0
238
0
0
1
2
3
0
0
1
1
3
0
0
1
1
3
0
0
1
1
3
0
0
1
1
3
Total net assets
240
299
255
351
477
Shareholder's equity
Share capital
Reserves
240
4
236
299
4
295
255
4
251
351
4
347
477
4
473
BVPS (HK$)
0.60
0.37
0.32
0.44
0.60
Total debts
Net cash/(debts)
0
193
0
253
0
262
0
366
0
500
Bank loans & leases
CB & other debts
Deferred tax & others
MI
Non-current liabilities
Source: Company, OP Research
Page 103 of 111
Fri, 11 Jul 2014
China Logistics
Exhibit 123: Peer Group Comparison
3-mth
PER
PER
PER
FY1
FY2 EPS FY1
(US$m) (US$m) Hist (x)
(x)
(x)
Mkt cap
Company
Asr Logistics
Ticker
1803 HK
Price
1.42
147
avg t/o
0.1
Div
Div
yld
yld
P/B
EV/
Hist
FY1
Hist
P/B Ebitda Ebitda
EPS FY2
3-Yr EPS
YoY%
YoY%
Cagr (%)
PEG (x)
(%)
(%)
Gross
(x) FY1 (x)
EV/
gearing
Hist
Hist Cur Yr Hist (%)
(%)
7.0 Net cash
26.6
Sh px
Sh px
ROE
1-mth
3-mth
(%) Hist (%) FY1 (%)
%
%
0.9
Hist
11.5
ROE
12.2
11.0
9.1
10.7
21.0
20.4
0.54
13.8
2.3
3.80
4.46
34.6
37.2
2.2
HSI
23,238.99
10.9
10.8
9.9
0.3
8.8
6.2
1.75
3.9
3.7
1.38
1.29
12.7
12.0
(0.3)
0.2
HSCEI
10,368.13
7.6
7.2
6.7
5.0
8.8
7.8
0.92
4.2
4.4
1.16
1.07
15.3
14.8
(1.4)
(0.5)
CSI300
2,142.85
(5.8)
Adjusted sector avg*
7.9
Net
Net margin margin
9.9
8.6
7.5
14.2
15.3
15.1
0.57
2.6
2.9
1.40
1.27
14.2
14.7
(0.9)
N/A
20.6
18.2
13.7
18.1
11.3
1.68
1.4
1.4
3.59
3.89
N/A
N/A
32.6
20.3
3.1
13.3
17.4
(0.3)
5.4
22.4
20.3
7.8
10.1
9.0
2.50
2.2
2.2
9.68
9.69
14.0
13.5
83.2
7.9
3.3
32.8
43.9
3.7
19.0
Ch Robinson
CHRW US
64.00
9,500
95.6
24.2
Expeditors Intl
EXPD US
44.88
8,858
64.8
26.6
23.8
21.2
11.7
12.1
10.5
2.27
1.4
1.5
4.52
4.70
12.7
11.7
0.0
13.2
5.7
17.3
19.3
(1.5)
15.5
Uti Worldwide
UTIW US
9.92
1,045
15.9
N/A
152.6
22.6
N/A
573.8
(201.0)
N/A
0.6
0.6
1.48
1.52
16.7
10.5
49.3
13.2
(1.7)
(14.3)
2.1
(1.6)
(5.7)
Radiant Logistic
RLGT US
3.07
105
0.2
27.9
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
2.67
N/A
10.6
8.5
106.7
27.2
1.2
18.4
N/A
(1.3)
2.3
Silver Eagle Acq
EAGL US
9.78
397
0.2
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
0.3
1.0
Forward Air Corp
FWRD US
47.54
1,483
5.7
26.3
22.4
19.3
17.0
16.5
16.8
1.34
0.9
1.0
3.25
2.95
13.4
10.5
0.0
25.0
8.3
12.9
13.0
4.6
5.2
Hub Group-A
HUBG US
50.19
1,881
16.0
26.7
24.7
20.7
8.3
19.3
13.0
1.89
N/A
N/A
3.28
3.03
13.5
13.7
0.0
6.8
2.0
12.1
13.0
3.1
24.5
Landstar System
LSTR US
64.46
2,898
20.1
20.3
22.3
19.7
(8.6)
12.7
3.9
5.72
0.7
0.4
6.54
6.02
14.1
11.9
0.0
22.1
5.5
34.5
27.7
(0.5)
9.3
Pacer Intl Inc
PACR US
N/A
N/A
N/A
N/A
23.4
18.9
66.5
24.0
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
0.0
23.1
0.8
6.4
10.4
N/A
N/A
Echo Global Logi
13.6
ECHO US
19.55
459
3.2
31.5
26.7
20.4
17.9
31.1
23.4
1.14
N/A
0.0
2.77
2.75
12.3
10.2
0.0
16.4
1.6
8.9
12.4
2.4
United Parcel-B
UPS US
102.98
94,674
255.6
22.1
20.2
17.5
9.4
16.0
11.8
1.71
2.5
2.6
15.15
15.52
11.2
10.4
87.3
25.5
7.9
82.6
69.0
0.1
6.6
Fedex Corp
FDX US
151.32
43,484
252.7
22.2
17.2
14.2
29.2
21.0
22.5
0.76
0.4
0.5
2.85
2.65
7.5
6.5
12.0
20.6
4.6
12.8
15.3
5.2
14.6
(3.1)
Deutsche Post-Rg
DPW GR
25.87
42,635
73.5
15.0
15.3
13.7
(2.3)
11.6
6.0
2.53
3.1
3.3
3.16
2.87
8.1
7.6
16.9
N/A
3.8
21.9
20.3
(4.9)
Panalpina We-Reg
PWTN SW
136.30
3,632
3.0
272.6
29.8
22.3
814.0
33.6
151.6
0.20
1.6
1.9
4.54
4.29
16.1
13.7
0.0
23.1
0.2
2.1
15.1
(6.1)
3.7
Kuehne & Nagel-R
KNIN VX
114.90
15,470
14.7
23.1
21.2
19.5
8.9
8.6
8.7
2.43
5.1
3.9
5.23
5.51
13.1
12.3
0.0
36.4
3.5
23.6
25.7
(6.1)
(5.9)
Air Transport Se
ATSG US
8.25
536
1.6
N/A
15.4
11.8
N/A
31.0
N/A
N/A
N/A
N/A
1.42
N/A
5.6
5.1
95.6
26.8
(3.4)
(6.3)
N/A
(9.6)
7.7
Atlas Air Worldw
Aaww US
35.54
897
9.4
9.7
11.0
10.3
(12.0)
7.1
(1.6)
N/A
N/A
N/A
0.68
0.64
8.9
8.6
103.2
28.1
5.7
6.3
8.5
(7.6)
2.4
Park Ohio Hldgs
Pkoh US
59.43
739
2.2
16.3
13.1
11.3
24.1
16.4
N/A
N/A
0.2
N/A
4.34
N/A
9.7
7.9
200.2
17.5
3.6
30.7
N/A
1.9
2.4
Airt US
12.58
30
0.1
20.6
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
1.09
N/A
7.0
N/A
0.0
14.7
1.5
5.3
N/A
3.5
2.9
Air T Inc
* Outliners and "N/A" entries are in red and excl. from the calculation of averages
Source: Bloomberg, OP Research
Page 104 of 111
Fri, 11 Jul 2014
China Logistics
Appendix
Drivers for online shopping growth
Increase in internet adoption will
further increase online shopping
China's 600 million internet-linked population, or 45.8% penetration in 2013, still
lags far behind the US total of over 80% in 2013. China is undertaking heavy
infrastructure investment in optical fiber broadband, with the aim of pushing the
internet coverage to over 70% by 2020. This increase in internet adoption will
provide continuous support for online shopping growth.
Exhibit 124: Internet population and penetration rate in China
(mn)
700
80%
618
564
600
513
500
400
60%
457
384
45.8%
42.1%
38.3%
34.3%
300
40%
28.9%
200
20%
100
0
0%
2009
2010
2011
Internet population
2012
2013
Internet penetration rate
Source: Statistical Survey Report on Internet Development in China, OP Research
rd
th
3 – 4 tier cities and major cities
in Western China will increase
internet shopping penetration
Some 49% or 300mn internet users have made a purchase online which is similar
to the world average of 40%. Since China's online shoppers are concentrated in
the first and second tier cities, there is a huge potential to explore in the 3rd – 4th
tier cities as well as major cities in Western China. Online shoppers are expected
to further increase by 26% to over 380mn in 2014. We believe e-commerce
penetration in China will keep growing to match the 70%-80% level of developed
countries like UK, Germany and Japan in the long run.
Exhibit 125: User base of China online shopping market 2011-2017
(mn)
800
52.3%
53.2%
53.7%
54.1%
60%
48.9%
600
50%
42.9%
37.8%
400
24.8%
242
194
24.7%
350
301.9
15.9%
389
460
40%
30%
20%
11.1%
200
424
9.0%
8.5%
0
10%
0%
2011
2012
2013
Number of e-shopping
2014E
2015E
% Growth rate
2016E
2017E
% Share in Internet users
Source: iResearch, OP Research
Page 105 of 111
Fri, 11 Jul 2014
China Logistics
Exhibit 126: Global ecommerce penetration by country: 2013
UK
Germany
Japan
France
Sweden
Australia
Netherlands
South Korea
Canada
Spain
China
Argnetina
Italy
US
Worldwide
Russia
Brazil
India
Mexico
87.2%
80.8%
78.3%
78.1%
76.3%
76.2%
74.6%
71.1%
63.1%
54.5%
49.3%
45.7%
44.1%
43.0%
40.4%
39.7%
36.0%
23.5%
20.4%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Source: eMarketer, OP Research
Mobile shopping will have 59%
CAGR as driven by mobile
internet (4G) penetration and
smart devices adoption
Remarkably, mobile internet has begun to penetrate the e-commerce market. The
development of 4G networks account for this. With higher adoption of smart
devices (smartphones and tablets), mobile shopping GMV has doubled to
Rmb169 billion in 2013, to give a mobile shopping penetration rate of 9.2%, up
from 4.8% a year ago. Mobile devices are small and easy to carry, so they can be
used anywhere, anytime, especially during leisure time breaks. Hence, mobile
shopping is gaining popularity, snatching traffic flow from PC online shoppers as
well as offline shoppers. It is expected that mobile shopping will chalk up an
impressive 59% CAGR in the next 4 years and tot up a breathtaking Rmb994
billion GMV by 2017.
Exhibit 127: Mobile internet population and penetration rate in China
(mn)
600
100%
81.0%
500
74.5%
66.2%
400
60.8%
69.3%
356
80%
500
420
60%
302
300
233
40%
200
20%
100
0
0%
2009
2010
2011
Number of mobile internet users
2012
2013
Mobile internet penetration rate
Source: Statistical survey report on internet development in China, OP Research
Page 106 of 111
Fri, 11 Jul 2014
China Logistics
Exhibit 128: Share of GMV of PC-based online shopping and mobile
shopping 2011-2017
100%
1.5%
4.8%
9.2%
13.4%
16.8%
20.5%
24.2%
83.2%
79.5%
75.8%
2015E
2016E
2017E
80%
60%
98.5%
95.2%
90.8%
40%
86.6%
20%
0%
2011
2012
2013
2014E
Share of PC-based online shopping GMV
Share of mobile shopping GMV
Source: iResearch, OP Research
B2C market growth will outpace
C2C market
Taobao dominated the C2C market with 96.5% share in 2013, with Paipai on
3.4% share in second place. Although C2C market was the major channel for
online shopping in the past, B2C has become the main driving force of the market,
which takes up nearly 40% share of the online shopping market by GMV in 1Q14.
The growth in B2C market is attributed to (1) better after sales services and (2)
more promotions by major online stores. China Consumer Association received
nearly 13,000 complaints about online shopping in 2013. Since most of the C2C
online shops are operated by small enterprises or individuals, they may be
involved in fake products, poor services and slow delivery due to low brand
awareness.
B2C operators put building brand loyalty as one of their top priorities, making
them to invest more in their own logistics facilities to ensure consumer
satisfaction. With better financial strength B2C operators spend hugely on
promotion to win market share and create critical mass. This enormous price war
will drive online shopping penetration as well as the B2C market share. The
B2C market is expected to exceed C2C market by 52.7% by 2017. Thus, by
riding on the fast growing B2C market leaders, such as Tmall, JD, VIPS, Amazon
and Sunning, high end logistics facilities will have better than market growth in
near future. Beijing Properties (925 HK) and Shenzhen Int’l (152 HK) have a
sizeable modern warehouse development project in the pipeline which, we
believe, will be the key beneficiary from B2C e-commerce growth.
Page 107 of 111
Fri, 11 Jul 2014
China Logistics
Exhibit 129: Share of China online shopping B2C and C2C websites
2010-2017
100%
80%
60%
74.7%
69.5%
63.8%
59.5%
54.8%
50.4%
47.3%
49.6%
52.7%
2016E
2017E
86.3%
40%
20%
25.3%
30.5%
36.2%
40.5%
45.2%
13.7%
0%
2010
2011
2012
2013
% Share of B2C websites
2014E
2015E
% share of C2C websites
Source: iResearch, OP Research
Exhibit 130: China C2C e-commerce market shares in 2013
Paipai
3.4%
ebay
0.1%
Taobao
96.5%
Source: 100EC.cn, OP Research
Page 108 of 111
Fri, 11 Jul 2014
China Logistics
Exhibit 131: Market share of China B2C websites by GMV in Q1 2014
Gome.com.cn,
1.7%
Yihaodian.com,
1.9%
Vancl.com,
0.5%
Others B2C
websites, 10.4%
Dangdang.com,
2.0%
Suning.com, 2.0%
Amazon.cn, 2.1%
Yixun.com, 2.6%
Tmall.com, 50.6%
Vip.com, 3.0%
JD.com, 23.3%
Source: iResearch, OP Research
Warehouse data in China
Exhibit 132: Warehouse supply and demand in China
City
Beijing
Tianjin
Shanghai
Guangzhou
Shenzhen
Chengdu
Wuhan
Shenyang
Xi'an
Xiamen
Warehouse demand
1,655.90
960.30
1,715.30
1,176.80
1,645.40
477.00
524.90
605.40
322.90
305.00
Warehouse supply Supply/demand ratio
1,462.50
913.50
1,522.80
1,084.50
1,413.00
447.50
455.00
455.00
297.50
292.00
0.883
0.951
0.888
0.922
0.86
0.938
0.869
0.752
0.921
0.957
Source: CFLP
Page 109 of 111
Fri, 11 Jul 2014
China Logistics
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