3Q23 results in line with our expectations CTS International Logistics announced its 3Q23 results: Revenue fell 30% YoY and rose 6% QoQ to Rmb3.8bn. Gross profit dropped 13% YoY and grew 22% QoQ to Rmb536mn. Net profit attributable to shareholders decreased 16% YoY and increased 64% QoQ to Rmb213mn. Recurring net profit fell 26% YoY and rose 45% QoQ to Rmb186mn.The results were largely in line with our expectations, and the YoY decline was mainly due to high base of 3Q22 caused by high FX gains. In 3Q23, the firm generated non-recurring income of Rmb27.25mn, which we think was mainly contributed by the transfer of 25%stake in JCEX International Logistics.

Trends to watch Shareholder dividend plans for 2023-2025 issued; target dividend payout ratio raised to 60%, implying attractive dividend yield.

After fully reserving surplus reserves, the company shall distribute no less than 60% of the distributable profits to shareholders as dividends. The dividend payout ratios for 2020-2022 were 60%, 35% and 50%. Assuming target payout ratio of 60%, we estimate the current stock price implies dividend yield of 4.5% in 2023 and 5.8% in 2024.

Air and sea freight rates hit bottom; watch overseas restocking and recovery in e-commerce consumption. Shanghai Pudong Export Air

Freight Index fell 47% YoY and 6% QoQ in 3Q23. SCFI freight rates for European and West-US routes dropped 83% and 64% YoY, and fell 9% and rose 33% MoM, The marginal decline in air and ocean freight rates narrowed, and freight rates for some routes increased in peak season backed by supply conntrol. 4Q23 outlook: Demand for marine and traditional freight transport may improve marginally driven by restocking. CICC macro team expects the US economy to remain resilient in the coming months, and the US manufacturing sector to start a new round of restocking in 4Q23. For airfreight, 4Q is the peak season for shipments of electronic products and cross-border e-commerce. In October, Shanghai export airfreight index rose 15% MoM. We suggest watching marginal boost from e-commerce platforms going global to airfreight volume and prices.

Transformation towards integrated full-chain logistics continued; upbeat on commodity logistics becoming a new growth driver. Th firm signed an Rmb60mn freight forwarding contract with Anta in September to provide door-to-door full-process freight forwarding services (e.g., loading, customs declaration, home delivery, and door-to-door pickup). Moreover, the company established a logistics joint venture with Xiamen C&D to provide cross-border logistics services for commodities.

We are upbeat that the firm will seize the growth potential in the commodity logistics market by leveraging its advantages in network coverage. The expansion of incremental business will also improve the efficiency of overseas outlets, thereby creating a new growth driver.

Financials and valuation

As the international freight forwarding industry is still affected by cyclical fluctuations in international trade and value chain transfer, we lower our 2023 and 2024 net profit forecasts 8.9% and 8.3% to Rmb737mn and Rmb963mn. The stock is now trading at 13.5x 2023e and 10.3x 2024e P/E. We maintain OUTPERFORM and cut our target price 9.1% to Rmb10.00, implying 17.9x 2023e and 13.7x 2024e P/E, offering 33.0% upside.

Risks

Falling international trade demand; disappointing development of commodity logistics business and/or direct-customer transformation