CTS INTERNATIONAL LOGISTICS(603128)：DIRECT CUSTOMER STRATEGY ADVANCES STEADILY;3Q22 NET PROFIT UP 30% YOY DESPITE HEADWINDS

　　3Q22 results in line with our forecast
　　CTS International Logistics (CTS International) announced that in 3Q22, revenue dropped 18.6% YoY and 9.7% QoQ to Rmb5.52bn, mainly as a result of falling freight rates of the firm shrinking its low value-added business. Net profit attributable to shareholders rose 30.1% YoY and 11.1% QoQ to Rmb254mn; and gross profit fell 2.3% YoY but rose 3.1% QoQ to Rmb614mn, largely in line with our expectations. The firm’s revenue and net profit attributable to shareholders grew 8.0% YoY and 9.7% YoY in 1-3Q22.
　　Earnings remained stable despite industry downturn. Since 3Q22, air freight and marine shipping rates have been falling amid weak overseas demand and recovering capacity. Specifically, the Shanghai Containerized Freight Index fell 24.0% YoY and 22.1% QoQ in 3Q22; the Export Air Freight Index of Pudong, Shanghai dropped 0.4% YoY and 11.6% QoQ in 3Q22; international air traffic rose 7.8% YoY in 3Q22; and container throughput at coastal ports grew 6.7% YoY in July-August, 2022. The firm’s 3Q22 gross margin rose 1.86ppt YoY and 1.39ppt QoQ to 11.1%; attributable net margin increased 1.72ppt YoY and 0.86ppt QoQ to 4.6%. As for expenses, the firm’s financial expenses totaled -Rmb29.90mn in 3Q22, of which we estimate -Rmb38.13mn was contributed by exchange gains due to USD appreciation (vs. -Rmb56.22mn in 1H22). The firm’s G&A expense ratio fell 0.18ppt YoY and 0.61ppt QoQ to 2.0% in 3Q22.
　　Trends to watch
　　Amid falling freight rates, freight forwarders are shifting their profit model, with the focus of competition transitioning from freight space to direct customers. We think that freight rates will continue to decline given recovering freight capacity. As freight forwarding is essentially a service industry, freight forwarders traditionally competed for freight space to obtain a large price spread amid high freight rates. Amid lower freights rates, freight forwarders boasting high-quality service capabilities and solid client resources are typically able to maintain stable earnings growth. With falling freight rates, the supply-demand mismatch of freight capacity is easing, giving the company greater opportunities to secure freight space. We think that stable freight capacity may help the firm build more reliable comprehensive logistics products, so as to gain more market share among direct customers.
　　Direct customer strategy advances steadily; we expect the firm’s mid- to long-term capabilities and market share to grow. The firm has actively optimized its client structure, enhancing marketing efforts in key segments such as technology, health care and automobile. It has established relationships with Xiaomi, Canadian Solar, BYD and Xiamen C&D, focusing on leading clients in various industries. We note the firm’s comprehensive global business model, solid liner resources, and effective marketing team and incentive mechanism. While accumulating experience in comprehensive logistics services, CTS International will likely provide a growing number of service segments for direct customers, in our view. We also think it will also provide an established service model to other businesses, likely resulting in a virtuous cycle whereby both the firm’s service capabilities and market share grow.
　　Financials and valuation
　　We keep our 2022 and 2023 earnings forecasts unchanged. The stock is trading at 14.7x 2022e and 12.6x 2023e P/E. We maintain OUTPERFORM and a target price of Rmb13.50 (17.6x 2022 P/E and 15.2x 2023 P/E), offering 20.3% upside.
　　Risks
　　Escalation of US-China trade friction; persistence of COVID-19 pandemic; international transportation disruptions.
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   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。