CICC 2025 transport exhibition outlook: Wait and see, and act accordingly.

CICC released a research report stating that as of early 2024 to date (December 13th), the transportation sector as a whole has seen a 16% increase. Among them, infrastructure assets such as highways, railways, and ports, as well as the aviation, express delivery, low-altitude economy sectors have significantly outperformed, while the aviation airports and logistics sectors have underperformed. Considering macroeconomic, policy, fundamentals, and valuation factors, we are optimistic about: 1) Pro-cyclical sectors benefiting from improved demand and high profit elasticity, such as aviation, shipping, and logistics subsectors following the improvement in downstream business conditions; 2) Supply-side structural improvements leading to sustained growth in profits and reasonable, even undervalued valuations, such as express delivery, internet-related logistics; 3) High-quality companies with low valuations, such as state-owned enterprises trading below book value, and private enterprises with high cash reserves and dividend payout ratios. CICC's main points are as follows: Aviation: A pro-cyclical high-elasticity variety with supply and demand fundamentals, magnifying elasticity with falling oil prices The supply and demand structure of the aviation industry continues to improve, with the sharp decline in oil prices greatly easing cost pressures. Ticket prices are expected to bottom out and rebound, leading to a significant turning point in profitability. Historically, airlines have shown high profit elasticity and stock price elasticity, providing significant excess returns compared to market indexes. Tightening supply and demand fundamentals lay the foundation for the cycle: The bank estimates an average annual compound growth rate of around 1.5% for the total effective fleet size of the industry over the next three years, with a potential annualized growth rate of over 6% in passenger turnover rates; when combined with the ongoing recovery of international flights and the redirection of domestic capacity, the industry is moving towards a situation of supply shortages, leading to increasing passenger load factors, rising ticket prices, and potentially significant improvements in profitability. Oil price volatility and decline are expected to lead to a substantial improvement in profitability: Since the second half of 2024, international oil prices have fluctuated downwards. Additionally, with the United States embarking on a rate-cutting cycle and reduced pressure on RMB exchange rates, the external environment is becoming more favorable for lowering costs within the aviation sector. If a trend of falling oil prices and strengthening exchange rates emerges, it could drive industry profits to rise before fundamentals catch up. Airlines have high operating leverage (with high fixed costs), huge profit elasticity, and stock price elasticity: The high operating leverage inherent in their business models led airlines to incur significant losses during the pandemic, but also sets them up for substantial profit elasticity. During periods of economic recovery, increased load factors or rising ticket prices lead to sizable profit growth. Furthermore, airlines' profits are significantly impacted by oil prices, with falling prices helping to alleviate cost pressures. In historical A-share bull markets, airline stocks have demonstrated clear excess returns and high stock price elasticity. Airports: Waiting for commercial recovery Benefitting from the recovery in air travel passenger volumes, the sector's operational leverage will continue to be demonstrated in 2025, but attention should be paid to trends in commercial operations and the launch of new capacity. In October 2024, major listed airports saw a 17% year-on-year increase in passenger throughput, recovering to 98% of 2019 levels, with domestic and international routes growing by 10% and 52% respectively, reaching 105% and 81% of 2019 levels, respectively. The bank expects the industry's travel volume to achieve high single-digit growth next year, with airports with a higher proportion of international routes experiencing faster growth. As air travel passenger volumes increase, leading to higher aviation-related business revenue and relatively stable operating costs, the sector's operational leverage will continue to manifest. The bank advises attention to the following factors during the sector's recovery: changes in commercial contracts, changes in duty-free average spending, and progress on major capital expenditures and the corresponding short-term cost impacts. Shipping: Oil transport and dry bulk expected to benefit from improving demand, focus on dividend-paying value in the container shipping and port sectors The supply side will remain the main driver of the cyclical direction of various shipping segments in 2025. With current shipyard capacity remaining tight and delivery schedules extending for new orders, the future growth in supply for different sectors in the upcoming years will primarily depend on the current order backlog, leading to differing positions in the cycle for each segment. Demand is highly influenced by cycles, with shipping demand closely tied to the global trade environment and geopolitical factors, including the implications of US tariffs, events in the Red Sea, and the production levels of major energy-producing countries in 2025. Looking ahead to 2025, there is considerable uncertainty in global trade patterns and geopolitics, affecting shipping demand in terms of volume and distance. The bank recommends closely monitoring three key points: 1) The potential scope and pace of US tariffs against China; 2) Changes in events in Ukraine and the Red Sea; 3) Changes in production volumes from major energy-exporting countries. The oil transport market sees continued prosperity in the cyclical period, with strong shareholder returns over the long term: Looking ahead to next year, the economic cycle is expected to continue to rise, with the potential for significant elasticity driven by the demand side. As supply-demand gaps accumulate, the oil transport cycle is expected to continue its upward trajectory. Additionally, next year could bring about catalytic factors for demand: 1) Changes in China's oil consumption and import demand. Due to weak domestic demand this year, crude oil import demand was low. An improvement in demand next year could boost crude oil import demand. 2) Changes in output levels from OPEC+ and American countries. If constraints on production are eased next year, it could benefit global maritime demand. 3) Demand for oil product replenishment in China and Europe. If demand catalyzes next year, the industry may experience a strong upward cyclical period, and it is recommended to take advantage of positioning opportunities in the long-term oil transport cycle. The dry bulk shipping cycle is approaching, take advantage of positioning opportunities on the left side: In 2024, dry bulk freight rates improved year on year, with the BDI/BCI/BSI price indices averaging 43%/63 %/29% higher compared to the same period last year as of November 21st, and the BDI index fluctuating within the range of 1,500-2,000 since the beginning of the year, reflecting a relatively balanced supply-demand situation. Considering the current order backlog (10.3%) and the proportion of ships over 20 years old (9%), the logic suggests that the supply side of the dry bulk shipping industry will gradually strengthen over the next three years, opening up a period of upward cyclical growth. Container shipping industry cycle is bottoming out, focus on well-capitalized companies with high dividend levels for value allocation: The container shipping sector faces significant supply pressure in 2025, potentially bottoming out in the cycle. However, companies in the container shipping sector accumulated a large amount of cash reserves during the previous cycle; those with high dividend levels will offer value in dividend allocation. In the short term, next year's pre-tariff rush behavior from the United States to China could provide some support for shipping rates, depending on the extent and pace of tariff increases. Reviewing the previous round of trade frictions, analyzing the window from the US's announcement of tariff policy implementationThe phenomenon of rush transportation has led to an increase in both cargo volume and freight rates. After 2025, there will be a resurgence in rush transportation demand due to increased tariffs, but the specific cargo volume and support for freight rates will depend on the pace and extent of the tariffs. The bank recommends monitoring the subsequent changes in trans-Pacific freight rates and cargo volumes.Ports: Bullish on profitable and stable cash flow targets Next year, the throughput of foreign trade goods at ports may come under pressure. It is recommended to focus on port core investment targets under the two main themes of growth and stability. With domestic and international demand expected to support port throughput growth by 2025, there is potential for further growth. However, due to the high base this year, the growth rate may be limited, especially with the decline in foreign trade volume year-on-year against the backdrop of tariffs. Therefore, next year, overall port sector profitability may be under pressure, especially for port companies with a high proportion of profits from foreign trade container volume. Express Delivery: Double-digit growth in parcel volume, bullish on industry leaders and flexible targets Parcel volume is expected to achieve moderate to high-speed growth, with high-quality development remaining a long-term trend. It is estimated that the growth rate of express parcel volume for the full year 2024 will be around 20%, with the potential to maintain double-digit growth in 2025. According to data from the State Post Bureau, the express delivery industry's business volume in January-October 2024 increased by 22% year-on-year (new calibre), maintaining high growth on the basis of 19% for the full year 2023 (old calibre). The high growth of express parcel volume in 2024 is mainly due to the parcelization of light and small items, the development of live e-commerce, and the improvement of return rates. Considering that these three trends are expected to continue next year, the industry predicts that the volume of express deliveries in 2025 will still maintain double-digit growth. Since 2018, the core growth has been contributed by Pinduoduo and live e-commerce with lower unit prices, which indirectly reflects the sensitivity of incremental businesses to the prices of express delivery. Therefore, it is recommended to pay attention to changes in regional competition in the off-season next year in the short term. However, in the long term, regulation will continue to guide the industry towards high-quality development, and the service and cost of express delivery companies will jointly determine profits. With the industrys development becoming more mature and the State Post Bureau emphasizing high-quality development, competition will focus on cost, efficiency, service, and other dimensions in the long term, testing the comprehensive strength of express delivery networks, including headquarters, franchisees, and end couriers, in terms of their own services (and thus pricing) and costs to achieve reasonable profits. Logistics: Following the trend Outlook for 2025: Referring to macro baseline assumptions (domestic demand may be recovering while external demand is stable), the investment logic for non-express logistics lies in finding flexible targets, with the core profit elasticity lying in price elasticity. The recommended order for sectors by the bank is bulk supply chain (quantity and price rise together) > chemical logistics (quantity increase leading to price increase) > express delivery (quantity increases, price elasticity not significant); Referring to macro risk assumptions (weak domestic demand while external demand faces obstacles), the investment opportunities lie more in: 1) opting for industry leaders with a clearer market structure, 2) entering cross-border logistics targets at the right time. Looking back at the last round of trade friction, the market tends to overreact to the negative effects of trade policies, thus there may be opportunities for low-level allocation. Bulk Supply Chain: Industry may see quantity and price rise together, fundamentals are expected to marginally improve Looking ahead to next year, the industry is expected to see marginal improvement after the policy effects become apparent. According to the Ministry of Commerce and the Logistics Purchasing Federation, the total commodity price index rebounded by 2.0% month-on-month in October, with a year-on-year decline narrowing to -2.7%, following the gradual manifestation of macro policy effects and the continuous recovery of enterprise production, the bulk supply chain industry's volume and price are expected to gradually recover next year, and industry sentiment may bottom out and rebound. In the long term, market concentration remains low, with the bank estimating the industry CR5 in 2023 at around 5.5%. In the future, top-tier enterprises are expected to continue gaining market share based on scale advantages, risk management, and financial advantages. Express Delivery: Focus on the profit elasticity of direct express deliveries, franchise express delivery concentration may increase further Looking ahead to 2025, changes in the landscape and strategic decisions of industry leaders remain the main investment trends in the express delivery industry. The bank expects the competitive situation in the express delivery industry to continue in 2024, and concentration may increase further. In the baseline macroeconomic assumption (domestic demand may recover), major industry leaders are expected to maintain current pricing levels while continuing to promote product differentiation and service capacity building; in 2025, the year-on-year growth rate of revenues for direct and franchise express delivery leaders may fall in the 10-15% range, while profit growth rates may fall in the 15-25% range. Cross-border Logistics: Trade policy uncertainty, bullish on logistics leaders going global in the medium to long term Looking ahead to 2025, the Trump administration's trade policy brings significant uncertainty to cross-border logistics investments. Looking back at the last round of trade friction, the market tends to overreact to the negative effects of trade policies, thus there may be opportunities for low-level allocation. The bank recommends continuing to focus on two main trends in logistics going global: Tight supply, strong demand. Air cargo has multiple barriers such as flight rights and schedules, route network coverage, and full freighter assets, and in recent years, major aircraft manufacturers have been limited by strikes, supply chain issues, etc., with limited wide-body freighter deliveries. The bank expects the tight supply trend in the air cargo industry to continue in 2025. On the demand side, the booming trend in e-commerce going global may continue, boosting demand for long-term contracts and charter flights in 2025. Comprehensive logistics leaders, promoting global end-to-end service construction. Freight forwarding leaders have relatively balanced route layouts, and the impact of U.S. tariff policies on their cargo volume may be limited (e.g. Sinotrans Limited's 2019 maritime and air cargo volume increased by +1% and -5% respectively); also, for freight forwarders whose main profit model is service fees, the impact of fluctuations in shipping prices on single-box profits is relatively small, and with the lengthening of the service chain in the medium to long term, there is significant room for single-box profit improvement. Major cross-border logistics leaders have increased dividends and guaranteed returns in recent years. For example, Sinotrans Limited distributed 54% of its profit in 1H24, CTS International Logistics Corporation plans to distribute dividends at a rate of no less than 60% from 2023 to 2025, and Eastern Air Logistics plans to distribute dividends at a rate between 30-50% from 2024 to 2026. Road and Rail: Certainty amid uncertainty Looking ahead to next year, the short-term holding of high-dividend road and rail targets remains a superior strategy: Highways may benefit from the issuance of the Highway Management Regulations. On April 8, 2024, six departments issued the "Infrastructure"According to the Regulations on the Administration of Utility Franchise Operations, the maximum franchise period has been extended to 40 years. In addition, the Ministry of Transport announced the "Legislative Work Plan of the Ministry of Transport for 2024" on May 22, 2024, specifying the main tasks of transportation legislation in 2024, including the revision of the Regulations on the Management of Toll Roads. The banking sector expects to benefit from the extension of toll periods, maintenance at expiration, and related compensation, while the railway sector is also expected to benefit from the progress of railway reform.The new government policies of the United States presidential election have a certain level of uncertainty, while China's comprehensive economic policies will take some time to be implemented. The market still has a lot of uncertainties, but the performance of dividend assets such as highways and railways will be relatively more certain. If the bank sees signals of marginal improvement in the economy in the medium term and the impact of the new US government policies is settled, then growth strategies will be favored over dividend strategies. Risk warning: Economic growth falls below expectations: The transportation sector, including aviation, shipping, and logistics, are all cyclical industries. If economic growth falls below expectations, it may have a negative impact on their profits. Significant fluctuations in fuel and labor costs: Fuel and labor costs are major costs for companies in the transportation sector, and they can fluctuate significantly. If fuel and labor costs increase significantly, it may have a negative impact on the profitability of companies in the industry.