SF HOLDING(002352)：PLANS TO SELL FENGWANG EXPRESS TO J&T EXPRESS;STRATEGIC FOCUS ON MID-RANGE AND HIGH-END BUSINESSES

　　What's new
　　After the market closed on May 12, SF Holding (SF) announced a plan to transfer all of its equity interests in Shenzhen Fengwang Express Co Ltd (Fengwang Express) to J&T Express for a consideration of Rmb1.183bn.
　　Target company: Shenzhen Fengwang Information Technology Co Ltd (Fengwang Information) holds a 100% stake in Fengwang Express, an economy express delivery business operator under a franchise model. SF indirectly holds a 63.75% stake in Fengwang Information through its subsidiary Shenzhen Fengwang Holdings Co Ltd (Fengwang Holdings).
　　Consideration and transferee: Fengwang Holdings plans to transfer 100% equity interests in Fengwang Information for Rmb1.183bn to J&T Express (Shenzhen) Supply Chain Co Ltd, a wholly-owned subsidiary of J&T Express in China.
　　Prerequisites for the deal: SF shall complete a Rmb2.35bn capital increase in Fengwang Information (net assets to turn positive to Rmb0.94bn after the capital increase). The transaction is also subject to the examination of concentrations of undertakings by the State Administration for Market Regulation.
　　Profit and loss during the transition period: SF bears the profit and loss of Fengwang Information from March 31, 2023 to the completion date of the equity transfer.
　　Comments
　　We believe the disposal of Fengwang Express, a loss-making economy express delivery company under franchise-based operations, will likely boost the firm's profits: 1) Fengwang Information (i.e., Fengwang Express) continued to record losses, accounting for 1.13% and 1.22% of SF’s total revenue in 1Q23 and 2022. Its net profit was -Rmb143mn and -Rmb747mn in 1Q23 and 2022, contributing -Rmb91mn and -Rmb476mn to SF’s net profit attributable to shareholders. 2) According to the firm's announcement, SF expects equity investment income from this transaction to contribute about Rmb0.15bn to its attributable net profit.
　　We believe the firm will focus on its core businesses and maintain healthy and solid operations. We believe SF will continue to focus on the development of core businesses such as domestic mid-range and high-end express delivery, international express delivery, global supply chain services, and digital supply chain services.
　　We also think it will continue to develop e-commerce-based express delivery products. We note that its main “e-commerce standard express” product is growing steadily, and can meet customers' diversified needs in the mid-range and high-end economy express delivery market. In addition, the firm may continue to improve its profit margin through integration of multiple networks and cost control.
　　Looking ahead, we believe the firm will continue to improve its business quality and efficiency, boosting earnings of each business line. In the long term, we suggest paying attention to three aspects:
　　Product stratification and customer grouping: We believe express delivery firms could focus on new value growth drivers when competing with each other. SF Holding started its business transformation earlier than its peers. As such, we think it is more likely to succeed when it comes to multi-tiered management of brand customers and taking advantage of opportunities from emerging market segments (e.g., manufacturing upgrades).
　　Ezhou Huahu Airport (launched the first international cargo flight in April): We expect the hub-and-spoke model for transfer and collection at the Ezhou Huahu Airport to help reduce SF’s per-parcel cost, enhance its delivery efficiency of time-sensitive delivery products, and expand the coverage of its time-definite delivery services. In addition, we think this model could also help the firm expand its supply chain and global businesses.
　　Global business: We expect SF’s air cargo transportation capability to improve further as the newly built Ezhou Huahu Airport ramps up. Furthermore, Kerry Logistics, in which SF holds a controlling stake, specializes in freight forwarding and controls cargo sources. It serves many multinationals and offers express delivery service in Southeast Asia. We expect effective synergies between the two parties.
　　Financials and valuation
　　We leave our earnings forecasts unchanged. The stock is trading at 27x 2023e and 22x 2024e P/E (29x and 23x based on recurring earnings). We maintain OUTPERFORM rating and our target price, implying 36x 2023e and 29x 2024e P/E (38x and 30x based on recurring earnings), offering 31% upside.
　　Risks
　　Disappointing business volume growth due to weak demand; sharp rise in costs.
【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。