GMTEight Exclusive | What happened with the inflow of funds into SF INTRA-CITY (09699)?

Yesterday, SF INTRA-CITY (09699) rose by more than 10.05%, reaching HKD 8.98, with a trading volume of HKD 10.79 million and a total market value of HKD 8.38 billion. It exhibits obvious characteristics of "small capital with big gains". On the news front, according to the National Post Bureau's announcement on November 12th, from November 1st to 11th, the national postal and express companies collected a total of 5.264 billion parcels, a year-on-year increase of 23.22%, with a daily business volume 1.4 times higher than usual. SF INTRA-CITY's instant delivery service delivered more than 120 million orders during last year's Double Eleven promotion. During Double Eleven, SF INTRA-CITY's delivery volume for retail categories such as supermarkets and fresh produce increased by over 100% compared to the same period last year. In terms of fund flows, the stock has experienced a sustained net inflow phenomenon this month. In the past 20 days, the top 5 brokerage firms that increased their holdings were China International Finance Hong Kong Securities, Bank of China (Hong Kong), HSBC Hong Kong, Futu Securities International (Hong Kong), and China International Capital Corporation. It is worth noting that China International Finance Hong Kong Securities is the second-largest shareholder of the stock, accounting for 19.09%. This means that it may be a major shareholder of SF INTRA-CITY. On September 19th, SF INTRA-CITY announced that the board of directors had decided to exercise the share repurchase authorization, planning to use no more than HKD 200 million to repurchase H-shares on the open market, depending on market conditions. SF INTRA-CITY is the first instant logistics profitable stock. According to the financial report released on August 28th, SF INTRA-CITY achieved a revenue of RMB 5.749 billion in the first half of 2023, a year-on-year increase of 28.8%; the gross profit margin increased to 6.7%, with a gross profit of approximately RMB 383 million and a net profit of RMB 30 million, turning a profit for the first time and reaching a new historical high. The company's profit optimization is mainly due to two reasons: First, the scale effect has led to a continuous reduction in per-package fulfillment costs. SF INTRA-CITY maintains high-speed growth in terms of parcel volume, resulting in a significant decrease in per-package costs, further releasing profit margins. Second, cost control is evident, with downward rate adjustments. The company continuously optimizes its cost structure through the ROI cost management system, especially by excluding listing expenses and share-based compensation expenses in 2022, resulting in a further decrease in the expense ratio. Compared with the same industry, the company's main advantages include: (1) Capturing the industry dividend, with great potential in B-side business. Currently, in the instant delivery industry, the consumer scene is becoming more diversified, and the privatization of merchants is evident. This aligns well with SF INTRA-CITY's high-quality service, strong fulfillment capabilities, and independent third-party role. Among them, the diversification of consumer scenes also means that instant delivery services are extending from standardized to non-standardized demands, which sets higher standards for the fulfillment capabilities of delivery companies. At the same time, the privatization of merchants provides market demand for independent third-party delivery companies. Considering the increased orders brought by cooperation with platforms such as Douyin, as well as the industry prospects (it is expected that the order size in the instant delivery industry in China will have a CAGR of approximately 25.9% from 2022 to 2026, as shown in the chart below), SF INTRA-CITY, as the leading high-quality independent third-party delivery company, will benefit the most in the long-term development of B-side business. According to Analysys, in the "Insight Report on China's Instant Delivery Economy Market in 2023," it is predicted that the order volume of instant delivery services will reach 95.78 billion by 2026. It is estimated that by 2030, the order volume of the instant delivery industry will exceed 200 billion, reaching the scale of the express delivery industry. It is worth mentioning that being a third-party platform is not a disadvantage for SF INTRA-CITY, but an advantage. As a third-party platform, SF INTRA-CITY does not compete with platforms like Douyin and Kuaishou for traffic, so it can cooperate extensively and provide them with worry-free services. In addition, SF INTRA-CITY prices its services based on logistics pricing, rather than deducting a percentage from the overall order value. This allows businesses to have more profit margins and allows for more brand and merchant connections. Compared to traditional e-commerce delivery and warehousing logistics, the localized business model of instant delivery requires instant delivery enterprises to take more initiative in deepening consumer scenes, focusing on fulfillment-related processes, and providing diversified services. The significant opportunity here is that initially, it only provides transportation, which is point-to-point delivery. But in the mid-to-late stages, with the consolidation and demonstration of SF INTRA-CITY's capabilities, it gradually establishes the ability to provide solutions, mainly solving problems between both ends - this is a significant leap because it can enter the client's system and create greater value. In other words, in the future, SF INTRA-CITY will be able to deliver much more than what most people can imagine. From the financial report, it can be seen that 2B intra-city delivery is the largest source of revenue for SF INTRA-CITY (nearly 42%). According to the mid-term performance disclosure, in the diversified traffic trend, the company ranks first in terms of its share, depth, and breadth in connecting upstream participants. As of the end of June 2023, the platform had a scale of 380,000 active merchants, a year-on-year increase of 27.2%. Currently, the company has established partnerships with private-owned brands such as Luckin Coffee (typical examples of its delivery cases), McDonald's, Yum Brands, comprehensive traffic platforms such as Douyin and WeChat, and vertical platforms such as Dingdong Maicai and Dingdang Kuaiyao. (2) Errand service - SF INTRA-CITY leads its competitors in network construction and business layout. China's errand industry is currently in the early stages of development, with a market size of just over RMB 10 billion in 2021. The market demand has not fully formed yet, but in the long run, the industry has considerable development potential. It is expected to exceed RMB 60 billion by 2025. In the years 2022-The CAGR of running errands orders will reach 31.8% in the next 25 years. At the current stage, capturing user mindshare is crucial. SF INTRA-CITY is already ahead of other players in terms of network coverage and business layout, possessing clear advantages.For example, Shunfeng Pharmaceutical Distribution Solutions can comprehensively cover two core medical consumption scenarios: pharmaceutical retail and internet hospitals. On one hand, after receiving a delivery order in the background, SF INTRA-CITY will intelligently allocate couriers to nearby warehouses or pharmacies based on the recipient's location and other information, helping pharmaceutical retail enterprises achieve more precise overall operation. On the other hand, by opening internet hospital services, patients can receive more convenient and efficient medical experiences through "online consultation + medicine delivery" services. It can also directly connect to the online diagnosis and treatment platform of hospitals, realizing "online follow-up consultation + express medication" one-stop service with the shortest links. Users can place orders with one click, couriers respond promptly, and the medications are directly delivered from the hospital pharmacy to the patients. The last mile delivery business of SF INTRA-CITY emphasizes high coordination with the group, and its future income is expected to increase. SF INTRA-CITY's last mile delivery business mainly relies on the synergy with SF Express. For SF Express, it can smooth out peak loads and supplement capacity. For SF INTRA-CITY, the last mile delivery business can provide income increments, share costs, and increase courier income. Currently, the proportion of the company's last mile delivery business in S.F. Holding's business volume is not high, and it is expected to have a high growth potential in the future. Looking ahead to the second half of the year, although delivery costs have slightly increased, business volume continues to grow steadily. BOCOM INTL predicts an adjusted net profit of RMB 18 million in the second half of the year, a positive annual profit of RMB 48 million (profit margin of 0.4%), reaching RMB 180 million in 2024, and a profit margin of 1.1%. The long-term goal is to reach a profit margin of 2-3%, which is in line with industry performance. BOCOM INTL believes that there is a large incremental demand in the instant delivery industry, and the company should be able to continue gaining market share in the face of personalized and diversified delivery demands. BOCOM INTL believes that compared with the average market-to-sales ratio of the logistics industry (0.5 times), SF INTRA-CITY's stock price has room for recovery. It maintains a target price of HKD 11.7 for SF INTRA-CITY and reiterates a buy rating. Compared with competitors in the same industry, SF INTRA-CITY is also clearly undervalued. If the same-city delivery business is estimated based on a PE ratio of 0.68 in 2023, it corresponds to a valuation of RMB 5.556 billion; the last mile delivery business is calculated based on a PE ratio of 0.62 for general express delivery companies, corresponding to a market value of RMB 3.057 billion. Adding them together, the reasonable valuation for SF INTRA-CITY in 2023 is HKD 9.231 billion. Zheshang stated that with the dilution of costs due to economies of scale, it is expected that the company will achieve a net profit attributable to the parent of RMB 59 million, RMB 145 million, and RMB 237 million. SF INTRA-CITY is positioned in the mid-to-high-end market and benefits from the high prosperity of the instant delivery industry and the privatization of consumption. As an industry leader, it has high growth and certainty of performance, and possesses both beta and alpha, thus maintaining a "buy" rating.