CTS INTERNATIONAL LOGISTICS(603128)：SOLID EARNINGS FOR INTEGRATED LOGISTICS BUSINESS DESPITE INDUSTRY DOWNTURN

　　2022 results in line with market expectations
　　CTS International Logistics (CTS) announced its 2022 results: Revenue fell 10.5% YoY to Rmb22.07bn, gross profit fell 5.2% YoY to Rmb2.35bn, and net profit attributable to shareholders rose 5.2% YoY to Rmb890mn (adjusted). The results were in line with market expectations. In 4Q22, revenue dropped 48.7% YoY and 25.1% QoQ to Rmb4.14bn, gross profit fell 32.8% YoY and 23.4% QoQ to Rmb470mn, and net profit attributable to shareholders slid 7.9% YoY and 39.5% QoQ to Rmb150mn. The 4Q22 earnings were under short-term pressure due to the impact of COVID-19 resurgence.
　　Trends to watch
　　Traditional freight forwarding: Business structure continues to improve; solid earnings of integrated logistics services.
　　1) Freight volume was under pressure in the near term, but business structure continues to improve: In 2022, the freight volume of the firm’s sea transportation business fell 25% YoY to 772,469 TEUs as CTS abandoned low-value-added businesses such as cargo space booking. The freight volume of the firm’s air transportation business fell 15% YoY to 302,898 t in 2022, mainly due to COVID-19 conditions and tight transportation capacity. The firm's integrated logistics services (a high-margin business) as a percentage of its air and sea freight volume rose to 78% and 60% in 2H22 (vs. 66% and 44% in 1H21).
　　2) Earnings of integrated logistics business remained solid; direct-customer strategy taking effect: In 2H22, industry freight rates declined significantly (the Shanghai Containerized Freight Index fell 47% HoH and the Export Air Freight Index of Pudong, Shanghai [tracked by TAC Index] fell 19% HoH). However, unit gross profit of the firm's integrated logistics business slid only 1% and 6% HoH for its air and sea transportation, and overall gross profit per container for air and sea transportation fell 1% and 4% HoH, showing solid earnings of direct-customer and full-chain services.
　　Emerging businesses: Cross-border e-commerce logistics under short-term pressure; contract logistics business growing steadily. In 2022, the firm’s cross-border e-commerce logistics business registered 70,500t of airfreight volume (+14% YoY) and 15,824 TEU of sea freight volume (flat YoY). Due to price competition in the industry and mismatch between shipping capacity and demand, revenue and gross profit of the cross-border e-commerce logistics segment declined 9% and 38.5% YoY in 2022. The firm’s contract logistics business maintained steady growth, with gross profit rising 7% YoY in 2022. Specifically, revenue and gross profit of international engineering logistics increased by Rmb116mn and Rmb62mn YoY, with GM at 19%.
　　Ample cash flow; we suggest watching the firm's efforts to integrate transportation resources and build a global network. In 2022, net operating cash inflow soared 468% YoY to Rmb1.45bn, and monetary capital rose 55% YoY to Rmb2.58bn at end-2022 as the firm stepped up efforts to collect accounts receivable (the balance of accounts receivable fell 35% YoY at end-2022). According to its annual report, the firm targets its turnover at more than Rmb60bn in 2025, and plans to strengthen the integration of transportation resources and to improve its network through M&As and self-construction. We are upbeat on the firm's market share gains and improving capabilities thanks to potential expansion.
　　Financials and valuation
　　As overseas demand may decline amid increasing uncertainties in the international environment, we lower our 2023 earnings forecast 10.8% to Rmb1.04bn and introduce our 2024 earnings forecast at Rmb1.21bn. The stock is trading at 11.8x 2023 and 10.1x 2024 P/E. We maintain OUTPERFORM and lower our TP 9.6% to Rmb12.20 (15.4x 2023 P/E and 13.2x 2024 P/E), offering 30.8% upside.
　　Risks
　　Weaker-than-expected international trade demand; growing uncertainties in international environment; slower-than-expected expansion of direct customers.
【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。

   【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。