Freetrade Science & Technology is a state-owned liquid warehousing leading enterprise in China, with obvious location advantages, focused on the Yangtze River Delta (YRD) region. We expect the Company's production capacity accounted for 50% and 26% of the total capacity of liquid tanks and dry bulk warehouses in the Zhangjiagang Free Trade Zone by the end of 2022, respectively. The short-term impacts of litigation and the pandemic over the past three years might have been cleared, while the Company accelerated the introduction of management rejuvenation.

Driven by both traditional logistics and intelligent logistics, we estimate the Company's net profit CAGR in the next two years to be 38% under strong endogenous growth. The liquid storage tank industry is relatively decentralized, and according to the hazardous chemicals logistics branch of the China Federation of Logistics & Purchasing, tank operators with tank storage capacity of more than 300,000cbm accounted for only 20% or so of total. Considering the strong regulatory restrictions on supply expansion, external mergers and acquisitions might be the best development path. We expect that the removal of litigation impacts may promote the landing of external expansion, and given that the Company's cash flow, book cash, and gearing ratio are better than comparable companies, also backed by state-owned shareholders and smooth financing channels, its pursuit of external mergers and acquisitions may accelerate its growth. We calculate that in 2025, assuming the CAGR of the tank capacity expansion of Yangtze River International is 25%, 30%, 35%, 40% under different working conditions, the incremental net profit of the Company would be Rmb96mn/136mn/185mn/247mn, respectively corresponding to a CAGR of 23.4%, 31.8%, 41.7% and 53.0%. We assign 30x 2023E PE to derive a target price of Rmb6.2 for 2023 and initiate coverage with a "BUY" rating.

Freetrade Science & Technology is a leading liquid warehousing SOE in China and boasts obvious location advantages with a focus on the YRD region. We expect external expansion to accelerate growth.

An innovative integrated logistic service provider, the Company has built presence in terminal warehousing business, intelligent logistics services and supply chain financial services. By the end of 2022, it had 214 self-owned storage tanks, with a tank capacity of 1,108,000 sqm, and 166,000 sqm of dry bulk warehouses. According to our calculation, they accounted for 50% and 26% of storage tanks and dry bulk warehouses in the Zhangjiagang Free Trade Zone. The Company is the only listed SOE in the field of liquefaction storage, and the actual controller is Zhangjiagang Free Trade Zone Administrative Committee. Excluding the impact of the pandemic, we expect the terminal warehousing (liquefaction) contributed more than 80% of profit.

The short-term impacts of litigations and the pandemic in the past three years may have been cleared, while the Company accelerated the rejuvenation of management. We estimate the Company's net profit CAGR to be 38% in the next two years against the background of endogenous growth, driven by traditional logistics and intelligent logistics. The Company’s continuous efforts to enhance the effectiveness of resource integration may help it increase the tank market share and utilization rate, which can be transmitted to the profit side, while the lifting of litigation restrictions may boost external expansion.

Multiple factors lead to the industry’s strict supply, and downstream demand recovery may improve tank utilization.

The occurrence of major safety accidents (years ago) has led to strengthened environmental protection supervision, with multiple policies introduced and strict control over the chemical warehousing projects, with hardly any new projects in recent years. The new tank capacity involves environmental impact assessment, land resources approval and other aspects, which often takes more than 5 years to build. We expect the future industry supply will continue to face strong constraints. Scarce assets create high returns. According to the annual reports of relevant companies, we estimate the liquid storage business of A-share chemical warehousing enterprises in 2022 had average gross profit margin of 51.2%, significantly higher than that of the hazardous chemicals water transportation and land transportation enterprises. The industry has strong geographical features. According to the data of the hazardous chemicals logistics branch of the China Federation of Logistics & Purchasing, the tank capacity in Jiangsu accounted for 29.6% of the national tank capacity.

The Company is poised to significantly benefit from its deep roots in the YRD.

Considering the accelerated recovery in 2H23, downstream demand is likely to further recover. Based on data from the General Administration of Customs and the National Bureau of Statistics, China's crude oil imports and processing volume in 1H23 was 282.3mt and 363.5mt, respectively, an increase of 11.8% and 9.4% YoY. In future, with the gradual release of ethylene glycol and polyester production capacity, we expect the tank utilization rate to further improve and benefit the profit of operators.

Multiple factors drive the Company's endogenous growth, and external expansion will jointly improve the efficiency.

The Company's warehouses are located along the lower reaches of the Yangtze River, accurately docking the chemical storage needs of Shanghai and Southern Jiangsu, and deeply binding companies in the Zhangjiagang warehouse area and even chemical enterprises in the lower reaches of the Yangtze River. The Company’s subsidiary Yangtze River International has become the leading liquefaction storage provider in East China. According to the Company’s 2022 annual report, its ethylene glycol handling volume accounted for 35% of the national import market in 2022. The rejuvenation and specialization of the management team of the new board of directors will facilitate the optimization of management efficiency and long-term strategy execution. In 2022, the Company's terminal storage (liquefaction) gross margin improved 6.7ppts YoY, and we expect the gross profit of terminal storage (liquefaction) to increase by 24% YoY in 2023. The industry is relatively decentralized, and based on the data of the hazardous chemicals logistics branch of the China Federation of Logistics & Purchasing, tank operators with tank storage capacity of more than 300,000cbm accounted for only 20% or so of total. External mergers and acquisitions may be the best path to development. With abundant cash on hand and healthy balance sheet, the Company has the conditions for external expansion. We calculate that in 2025, assuming the CAGR of the tank capacity expansion of Yangtze River International is 25%, 30%, 35%, 40% under different working conditions, the incremental net profit of the Company would be Rmb96mn/136mn/185mn/247mn, respectively, corresponding to a CAGR of 23.4%, 31.8%, 41.7% and 53.0%. We expect external mergers and

acquisitions to accelerate the Company's growth.

The Company has been focusing on online delivery of chemicals, continuously optimizing business structure and tapping new increment in solid warehouse business.

Aiming at the pain point of complicated offline delivery procedures and low penetration rate of online delivery of chemicals, the Company has made great efforts in online delivery of chemicals and explored intelligent logistics business, providing online delivery, fund clearing and financing services for customers. Since 2015, the intelligent logistics business has been growing in an orderly manner following the logic of attracting traffic - monetization - realizing added value, and has formed Intelligent Logistics 3.0, providing incremental performance through the mode of services & value-added. The Company's business structure continues to optimize, the revenue proportion of chemical trading in 2022 fell rapidly by 19ppts, and the overall gross margin increased significantly by 12.9ppts to 25.0%. We expect that the Company will continue to optimize the product structure in 2023, while actively tapping the incremental volume in the solid warehouse sphere, etc. We expect increasing PTA warehouse demand and the formation of the new business to form a synergy, driving the revenue of the foreign investment services subsidiary in Zhangjiagang back to the growth track (we expect the subsidiary to contribute revenue of Rmb50mn in 2023, +15.0% YoY).

Potential risks: A sharp decline in the economy growth rate; a sharp downturn in the petrochemical industry boom; the occurrence of petrochemical safety accidents; integration after mergers and acquisitions missing expectations; intensified competition in the industry.

Investment recommendation: Freetrade Science & Technology is a leading liquid warehousing SOE in China and boasts obvious location advantages, focused on the YRD region.

The short-term impacts of litigation and the pandemic over the past three years might have been cleared, while the Company accelerated the introduction of management rejuvenation. Driven by both traditional logistics and intelligent logistics, we estimate the Company's net profit CAGR in the next two years to be 38% under endogenous growth. The Company continuously enhances the effectiveness of resource integration to expand the tank market share and utilization rate, which will be transmitted to the profit side, while the lifting of litigation restrictions can boost external expansion. The youthful and professionalized management team of the new board of directors will bring new opportunities for the Company to improve management efficiency and long-term strategy execution, and we expect the Company's growth to be accelerated by external mergers and acquisitions ahead. Not considering the impact of mergers and acquisitions, we predict 2023E/24E/25E EPS to be Rmb0.21/0.25/0.30. With comps valuations as references (around 30x of average PE (TTM) in the last 3 years for Guangdong Great River Smarter Logistics (002930.SZ), and Zhuhai Winbase International Chemical Tank Terminal (002492.SZ)), and considering that the Company is to benefit from endogenous drive and external growth going forward, we assign 30x 2023E PE to derive a target price of Rmb6.2 for 2023 and initiate coverage with a "BUY" rating.