EASTERN AIR LOGISTICS(601156)：LOGISTICS INDUSTRY GOING GLOBAL(III)：ANSWERS TO THREE QUESTIONS ABOUT EAL

　　Action
　　In our first “Logistics industry going global” report issued on December 4, we analyzed the market size, industry landscape and supply chain transformation of cross-border e-commerce logistics, and noted that trunk- line logistics companies such as Eastern Air Logistics (EAL) may have been undervalued.
　　This report is the third in our series on the logistics industry going global. In this report, we focus on Eastern Air Logistics, and answer the three major questions that the market is most concerned with. We see limited downside in 2024 freight rates, and suggest paying close attention to the signing of long-term contracts and temporary changes in supply and demand conditions.
　　Leveraging its strong asset portfolio (i.e., wide-body aircrafts and cargo terminals), we think EAL is well poised to benefit from the e-commerce boom in the near term, and to expedite its transformation towards an integrated logistics provider in the long term.
　　Reasoning
Question No.1: What are the prospects for airfreight capacity and demand? Under base-case scenario, we estimate domestic capacity and demand for airfreight of exported goods may rise about 19% and 13–20% YoY in 2024. Given the rapid overseas expansion of China’s e-commerce platforms, we think the possibility that freight rates will tumble in 2024 is low.
　　We suggest investors watch the pace of business expansion at e- commerce platforms, and of the recovery in supply of international passenger flights. We think short-term tightening of airfreight capacity, caused by factors like faster-than-expected scale-up of cross-border e- commerce and geopolitical conflicts, may drive up freight rates YoY. We suggest paying attention to the signing of long-term contracts.
　　Question No.2: How might EAL benefit from the boom in cross- border e-commerce? In the short term, we think the boom in cross- border e-commerce in 2024 should boost air cargo demand, and drive up the prices of long-term contracts and spot freight rates. It may also contribute to growth in EAL’s earnings from all-cargo aircrafts. In the　　medium to long term, as cross-border e-commerce companies deepen cooperation with major logistics providers, we think EAL may expand its market share in the direct customer business, and strengthen full-chain capabilities. This should speed up the firm’s transformation towards an integrated air logistics services provider.
　　Question No.3: How EAL should be valued? - we suggest a SOTP valuation methodology. Over half of the company’s profit is contributed by all-cargo aircrafts. We think EAL will benefit from potential market share expansion and freight rate hikes. In addition, its other businesses such as ground services also boast growth resilience.
　　Considering factors like sector freight rates and the firm’s capacity expansion, we assign 10x 2024e P/E for the all-cargo aircrafts business, 5x P/E for the bellyhold business, 12x P/E for integrated logistics excluding trunk-line logistics, and 15x P/E for ground services.
　　Financials and valuation
　　We keep our 2023 earnings forecast unchanged. Given the stronger-than- expected boom in cross-border e-commerce, we raise our 2024 earnings forecast 6% to Rmb2.55bn, and introduce a 2025 earnings forecast of Rmb2.98bn, implying YoY growth of 13% and 17%.
　　The stock is now trading at 10.3x 2023e, 9.1x 2024e, and 7.8x 2025e P/E. We maintain OUTPERFORM. We switch from a P/E valuation to a SOTP valuation, and lift our 2024e target price 19% to Rmb18.5 (mainly reflecting our optimism for e-commerce sector prospects), implying 11.5x 2024e and 9.8x 2025e P/E, offering 27% upside.
　　Risks
　　Freight rates drop more than expected; trade friction; EAL’s transformation into an integrated logistics company disappoints.
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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。