Core views:

China Master Logistics (CML) is China’s third-largest private logistics provider by revenue in 2021 to offer integrated cross-border logistics services targeting container and dry bulk shipping in domestic coastal ports. Committed to the strategy of “one core and two wings”, CML has maximized its resource superiority to drive internal business operations and expand its service network. While securing revenue from cross-border container logistics, a key cashflow contributor, CML also focuses on the cold chain business and expansion into Southeast Asian countries. As CML restructures the freight forwarding business, which contributes more than 80% of the cross-border container logistics, to minimize cyclical freight rate fluctuations, we expect cross-border container logistics to register steady profit growth of 10%-15% in the next three years. In addition, we expect the intelligent cold chain business to contribute nearly 20% of the Company’s profit in 2024. By developing logistics services for new energy engineering in the fast-growing wind power installation industry, CML may deliver robust growth of 30%-35% in this segment in the next three years. Powered by digital transformation, CML will promote logistics integration with the potential to offer industry-leading solutions. We forecast a 2022E-24E earnings CAGR of over 20% in the next three years. By assigning 17x 2023E PE to derive a target price of Rmb15, we initiate coverage with a “BUY” rating.

Abstract:

With integrated cross-border logistics services, the Qingdao-based CML has expanded its network to include 10 ports north of Ningbo, coming third by revenue in 2021 among private logistics players. Committed to the strategy of “one core, two wings”, CML provides integrated cross-border logistics services-the “one core”-targeting container and dry bulk shipping in more than ten domestic coastal ports north of Ningbo while spreading its “two wings” in intelligent cold chain logistics and renewable energy logistics solutions. CML has maximized its resource superiority to drive internal business operations and expand its service network. While securing revenue from cross-border container logistics, CML focuses on the cold chain business and expansion into Southeast Asian countries. As the third-largest private logistics provider by revenue in 2021, CML has registered continuous growth in operating revenue from 2019 to 2021, with a revenue CAGR of 84.8% from the freight forwarding business. By expanding the service network and extending the supply chain, CML has built better experience for customers, and the ratio of direct customers in 1H22 grew to 10%. Powered by digital transformation and integrated cross-border logistics services, CML will attract more direct customers to minimize cyclical freight rate fluctuations while developing cold chain and renewable energy logistics solutions.

As CML restructures the freight forwarding business, which contributes more than 80% of the cross-border container logistics, to minimize cyclical freight rate fluctuations, we expect cross-border container logistics to grow its gross profit margin to 3% and register steady profit growth of 10%-15% over the next three years. Moving forward, CML will continue to extend its presence along the supply chain and expand the service network to accommodate cyclical fluctuations. Specifically, CML may develop the freight forwarding and shipping agency business to underpin cross-border container logistics and expand its footprint to more container yards. The proportion of low gross margin business will likely decline from 55% in 2018 to 20% in 2024, and the ratio of direct customers may continue to grow. We forecast the 2022E/23E/24E gross profit margin of the freight forwarding business to be 2.3%/2.6%/3%. CML has equipped its freight forwarding and shipping agency business with industry-leading information systems, and digital transformation is yielding results. Taking into account the Company's future development in market share and digital capabilities as well as the growing ratio of direct customers to 15% in 2024, we expect the cross-border container logistics to register steady profit growth of 10%-15% over the next three years.

Since most of CML’s cold storage facilities will start operation next year, we forecast the intelligent cold chain business to contribute nearly 20% profit in 2024, with a 2022E-25E revenue CAGR of 65%. By developing logistics services for new energy engineering in the fast-growing wind power installation industry, CML is likely to maintain high revenue growth of 30%-35% in this segment in the next three years. Considering favorable policies for cold chain logistics, CML has moved quickly since 2021 to invest in and build intelligent cold storage plants with 245,000 TEUs and a capacity of 1.35mn cubic meters in Tianjin, Qingdao, Shanghai, and Ningbo, the four major portals for imported frozen food. As most of its cold storage plants will start operation next year, we forecast the intelligent cold chain business to contribute to nearly 20% of the Company’s profit in 2024, with a 2022E-25E revenue CAGR of 65%. CML is a first mover in the logistics service for new energy engineering including offshore wind power installation. We forecast the 2022E-25E CAGR to arrive at c.16% for domestic wind power installation, and over 30% for offshore wind power installation. Driven by the robust demand and the Company’s ambitious expansion, we expect the revenue from logistics for new energy engineering to grow at a rate of 30%-35% over the next three years.

Powered by digital transformation, CML will promote logistics resource integration with the potential to offer industry-leading solutions. Going digital has been a core competence of the Company, which assembles in-house information technology teams to build digital management platforms for each business unit. With logistics resource integration driven by digital transformation, CML focuses on the cold chain business and expansion into Southeast Asian countries, while securing revenue from cross-border container logistics. Excluding the major push of rising freight rate to the 2021 revenue, per capita revenue in 2020 rose 29.8% from that in 2016, a strong evidence of CML’s digital competence. Commitment to digital development brings internal management and external services to a high level, and CML is leading the industry with high-standard information applications.

Potential risks: Economic slowdown globally; earlier-than-expected destocking in the US; less-than-expected cold chain demand growth; weaker-than-expected demand for new energy installation; expansion of the freight forwarding business missing expectations; growth of direct customers missing expectations.

Investment recommendation: With integrated cross-border logistics services, the Qingdao-based CML has expanded its network to include 10 ports north of Ningbo. While securing steady cash flow from cross-border container logistics, CML also expands its presence to intelligent cold chain and renewable energy logistics solutions. While securing revenue from cross-border container logistics, a key cashflow contributor, CML also focuses on the cold chain business and expansion into Southeast Asian countries. As CML restructures the freight forwarding business, which contributes more than 80% of the cross-border container logistics, to minimize cyclical freight rate fluctuations, we expect cross-border container logistics to grow its gross profit margin to 3% and register steady profit growth of 10%-15% in the next three years. Since most of its cold storage plants will start operation next year, the intelligent cold chain business will likely embrace rapid growth. We forecast the business to contribute nearly 20% of the Company’s profit in 2024. By developing logistics services for new energy engineering in the fast-growing wind power installation industry, CML may deliver robust growth of 30%-35% in this segment in the next three years. Powered by digital transformation, CML will promote logistics integration with the potential to offer industry-leading solutions. We forecast a 2022E-24E earnings CAGR of more than 20% in the next three years. We put our 2022E/23E/24E ANP forecasts at Rmb250mn/310mn/370mn for the Company, corresponding to EPS forecast of Rmb0.72/0.90/1.07. Using the Company's historical mean PE of 18x over the past three years as reference, we apply 17x 2023E PE out of caution to arrive at a target price of Rmb15 and initiate coverage with a “BUY” rating.