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Sinotrans Summary

Core Content

Sinotrans (598 HK) is a Hong Kong-based transport company with a current share price of HKD3.62 and a market capitalization of USD2.0B. The company's target price has been raised to HKD4.15, representing a 15% increase, due to its potential for stronger earnings from its 3PL (Third-Party Logistics) business and the possibility of exiting the marine transportation business. The report highlights the company's growth prospects, strategic moves, and financial performance, reinforcing a "BUY" rating.

Main Points

• Company Visit and Strategy: The recent company visit reaffirmed the "BUY" rating. Management is confident in selling the marine transportation business in FY14, which will enhance book value and profit. The entrusted management of parent assets is expected to provide synergies and may lead to an acquisition before the agreement expires in December 2016.

• Synergies from Entrusted Management: While the entrusted management fee is modest, the arrangement reduces intra-group competition and allows Sinotrans to expand its service offerings, particularly in rail and car logistics.

• Marine Transportation: The marine transportation division has shown improvement, with a reduced loss forecast for FY13 to CNY43m from CNY62m. Management believes the division will continue to improve, potentially leading to a positive contribution to earnings.

• 3PL Business Growth: Sinotrans is optimistic about its 3PL business, which is expected to grow at an average of 20-30% annually. The company is investing in logistics centers and specialized vehicles to support this growth. It also plans to report the 3PL segment separately, providing clearer visibility into its performance.

• Logistics E-Commercialisation: Sinotrans is expanding its market share through e-commerce platforms, including the launch of y2t.cn in Guangdong and the www.esinotrans.com platform by its subsidiary Sinoair. These initiatives aim to enhance its logistics services and integrate with e-commerce operators.

• Financial Outlook: The report forecasts a 25% CAGR for recurrent earnings from FY14 to FY15. The company is expected to post record earnings in FY14 with an ROE of 9.1%, the highest since FY05. The current valuation (11.4x PE and 1.0x PB for FY14F) is considered undemanding compared to peers like Kerry Logistics Network (21x FY14F PE).

Key Financial Information

Key Data

• 52-week high/low: HKD3.81 / HKD1.37
• Free float: 42.1%
• Issued shares (m): 4,249
• Market Capitalization: HKD15.4B
• Major Shareholders:
  • Sinotrans & CSC Group: 58%
  • Deutsche Post AG: 13%
  • Brandes Investment Partners LP: 8%

Valuation and Earnings

• Target Price: HKD4.15
• Valuation Method: 12-month forward SOTP (Sum of the Parts) valuation
• Recurrent Earnings CAGR: 25% for FY14-15
• ROE: 9.1% in FY14, the highest since FY05
• Peer Comparison: Sinotrans is undervalued compared to peers like Kerry Logistics Network, which trades at 21x FY14F PE.

Conclusion

Sinotrans is positioned for solid growth in FY14-15, driven by its 3PL business expansion, the potential exit of the marine transportation segment, and strategic initiatives in logistics e-commercialisation. The company's current valuation is seen as attractive, and the management's confidence in its business model and strategic direction supports the "BUY" recommendation.