DEPPON LOGISTICS(603056)：UPGRADE TO OUTPERFORM ON IMPROVING COMPETITIVE LANDSCAPE AND LOW SHARE PRICE

　　Action
We upgrade Deppon Logistics from NEUTRAL to OUTPERFORM.
　　What’s changed?
　　Unit prices to improve steadily along with stabilizing competitive landscape for self-operated road freight services. Following JD　Logistics’ acquisition of Deppon in August 2022, the competitive landscape in the self-operated road freight service market features two strong players. The strategic focus of sector leaders is transitioning from freight volume to profit and quality and they are refining their pricing systems.
　　Deppon’s prices are rising steadily, with unit revenue of its large-parcel express delivery business down 5% YoY in 1H22 and up 2% in 2H22, and per-kg revenue of road freight services up 9% and 3% YoY. Meanwhile, SF Freight’s large-parcel business turned profitable and generated earnings of Rmb28mn in 2022. We expect the pricing system in the self-operated road freight service market to stabilize, and do not expect to see fierce price competition. We believe leading firms will focus on refining their operations and growing long-term profit.
　　Earnings pressure from strategic transformation likely over; significant boost to growth from efforts to cut cost and enhance　efficiency. Deppon has been transitioning to the new large-parcel express delivery business since 2018, and front-loaded investment in human resources and equipment has weighed on its profit margin. As the volume of its large-parcel express delivery business starts to grow steadily, the firm has begun to further optimize its human resources and asset portfolio according to its business structure.
　　This has contributed to economies of scale and earnings turnaround.The firm’s operating profit margin rose 2.8ppt in 4Q22 and 2.6ppt YoY in 1Q23, and its attributable net margin improved 2.4ppt and 2.1ppt.We think the pressure from its strategic business transformation is largely over, and see a notable boost to growth from its efforts to cut costs and enhance efficiency. We foresee sustained earnings growth.
　　Low share prices highlight long-term investment value. Deppon’s　share price has declined 34% YTD in 2023. We think its share price　has fully factored in short-term earnings expectations, but fails to fully reflect the long-term synergy with JD Logistics, or the earnings upside from an economic recovery.
　　Synergy with JD Logistics: On June 30, Deppon announced plans to acquire some assets from JD Logistics and the latter’s subsidiaries’ 83 sorting hubs for Rmb106mn. We expect the synergy with JD Logistics to improve Deppon’s operating efficiency in the long term.
　　Potential earnings upside: China has recently unveiled targeted policy measures to boost household consumption. We believe the firm will likely benefit from rising business volume and prices on the back of a strong economic recovery. Based on its business volume in 2022, we estimate a Rmb0.01/kg rise in prices may enhance the firm’s earnings by Rmb97mn (assuming an income tax rate of 25%).
　　How do we differ from the market? We think the market has not fully factored in the firm’s long-term synergy with JD Logistics, and potential profit upside from the sector’s improving competitive landscape and an economic recovery.
　　Potential catalysts: Upside surprises in integration with JD Logistics and/or rises in business volume and prices.
　　Financials and valuation
We maintain our 2023 and 2024 earnings forecasts. The stock is trading　at 17.6x 2023e and 14.0x 2024e P/E. Considering the sector’s improving competitive landscape and the firm’s long-term synergy with JD Logistics,　we upgrade the stock to OUTPERFORM and lift our target price 5% to　Rmb20.0 (22.8x 2023e and 18.1x 2024e P/E with 30% upside).
　　Risks
　　Sharp rises in oil prices; macroeconomic downturn; intensifying price competition.
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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。