DEPPON LOGISTICS(603056)：PREANNOUNCED 2Q23 RECURRING NET PROFIT UP 20–49% YOY IN LINE WITH OUR EXPECTATIONS

　　Preannouncement: 2Q23 recurring net profit up 20–49% YoY
　　Deppon Logistics preannounced its 1H23 results, estimating that attributable net profit grew 177–209% YoY to Rmb227–253mn （after retrospective restatement） and recurring net profit rose 258–295% YoY to Rmb112–138mn （after retrospective restatement）。 We estimate 2Q23 attributable net profit at Rmb155–181mn and recurring net profit at Rmb108–134mn, up 20–49% YoY. The preannounced 1H23 results are in line with our expectations.
　　Trends to watch
　　We attribute the preannounced earnings growth to the following factors: 1） Revenue: Increased product competitiveness. 2） Cost: The firm’s efforts to improve the efficiency of personnel and vehicles, and reduce costs through optimizing routes and centralized procurement. 3） Expenses: The firm’s efforts to improve organizational structure and management efficiency to lower expense ratios.
　　Consolidation of JD Logistics’ express freight assets beat market expectations. Deppon announced on June 30 its plans to acquire some assets from JD Logistics and the latter’s subsidiaries’ 83 sorting hubs for Rmb106mn1.
　　Stronger endogenous earnings recovery in 2Q23: Given the upfront investment in sorting hub integration, we think the consolidation may create certain costs and expenses. Excluding this, and considering the high base for investment income in 2Q22 （Rmb49.46mn of dividend income from Eastern Air Logistics shares it held）， earnings of the firm's own main business may improve more notably in 2Q23.
　　Upbeat on long-term synergies with JD Logistics to improve operating efficiency. In our report Upgrade to OUTPERFORM on improving competitive landscape and low share price, published on July 6, we think the deal shows the two firms have begun to consolidate their resources for road freight services, and we expect improvements in operating efficiency and profits driven by asset injections or a boost to parcel volume, as well as route optimization　　and profit efficiency enhancement. We expect Deppon to continue to optimize and reconstruct sorting hubs and routes in the next three to four quarters, and synergies in earnings may gradually emerge after 2H24. We are upbeat on long-term efficiency improvement from synergies in resources and logistics properties.
　　We expect the firm's better product mix to drive healthy earnings growth and its online penetration to be promising. According to the firm, orders from e-commerce platforms now account for less than one- third of its revenue, and online revenue has grown much faster than offline revenue in recent years. Given the strategic transformation of the firm's large parcel express delivery business, we think the period of transformation investment weighing on earnings has largely ended. We are upbeat about its healthy long-term earnings growth thanks to its efforts to refine management, optimize product mix, and increase online penetration.
　　Financials and valuation
　　We maintain our 2023 and 2024 earnings forecasts. The stock is trading at 17.8x 2023e and 14.2x 2024e P/E. We maintain OUTPERFORM rating and TP of Rmb20.00 （22.8x 2023e and 18.1x 2024e P/E）， offering 28.0% upside.
　　Risks
　　Progress in the integration with JD Logistics disappoints; 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。