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Disclosures & Disclaimer
This report must be read with the disclosures and the analyst certifications in
the Disclosure appendix, and with the Disclaimer, which forms part of it.
Issuer of report: The Hongkong and Shanghai Banking Corporation Limited
View HSBC Global Research at:
https://www.research.hsbc.com
2H16 recurring profit was up 2% vs 1H16 but 2% lower y-o-y
and 6% below our estimate on higher operating costs
2017 offers stable profit growth with higher yield from a low
base of 2016 which management believes had several one-offs
We cut 2017-18e earnings by 3% but raise TP to HKD12.6
(from HKD12.2) on higher peer mutliple and roll forward
2H16 recurring profit was up 2% h-o-h but down 2% y-o-y and 6% below our
forecast. EBIT was 5% below our estimate and 11% below consensus. We attribute
the weaker than expected results to Apex integration costs (US freight forwarder
acquired in June 2016), higher freight costs due to higher fuel prices, and disruptions
caused by Hanjin Shipping’s (not listed) bankrutpcy. 2016 EBIT was up just 1% y-o-y
also partly due to USD appreciation eroding the growth in local currencies (figure 6-7).
Management was positive on 2017 outlook: During the analyst briefing, KLN guided
that with Apex related integration costs mostly charged in 2016, it should realise
synergies and benefit from first full year contribution in 2017. Similarly one-off events
such as fewer working days (typhoons and holidays) in Taiwan, lower sugar exports in
Thailand and effects of demonetisation in India (since November 2016) should set a
low base for recovery in 2017. Hong Kong warehouse occupancy improved to 95% (vs
93% in 1H16) and KLN expects stable margins. KLN said that it is acquiring a
controlling stake in a freight forwarder which has operations in nine CIS countries.
KLN expects to complete the deal in May 2017, albeit we do not model this yet.
Dividend uplift: KLN’s dividend pay-out increased to 29% in 2016 vs 26% in 2015
and therefore we model a higher 30% pay-out 2017 onwards (vs 25% earlier). KLN is
also disposing its 15% stake in Asia Airfreight Terminal (AAT), which should result in a
HKD175m profit and management guided that it will likely be distributed as special
dividend this year. This implies an overall yield of close to 3% in 2017 (including higher
pay-out assumption). KLN reiterated its commitment to divest non-core assets (c10%
of assets) over the next five years which could further lift dividends and improve ROE.
We cut 2017-18e profit estimates by 3%, to reflect higher freight forwarding
revenues but offset by lower margins and associate income, and higher interst costs.
We expect 10% profit CAGR in 2016-19e; 15-16% below consensus in 2017-18e.
Reiterate Buy with higher TP of HKD12.6 (from HKD12.2) despite lower earnings
on higher peer mutliple and valuation roll forward. We roll forward and base our
valuation on average of 2017-18e EPS (vs 2017e previously) and value KLN at 18.6x
PE (from 18.1x 2017e PE) based on a market cap weighted average PE of
comparable peers. Since the Brexit vote (24 June 2016), KLN’s share price has
underperformed the Hang Seng index by 18% and its closest peer Sinotrans (598 HK,
Hold, TP: HKD3.6, CMP: HKD3.74) by 16%. We prefer KLN to Sinotrans on better
earnings visibility driven by operating business. We recently downgraded Sinotrans to
Hold (from Buy) in our report of 23 March 2017, Lacks catalysts after weak 2016.
24 March 2017
MAINTAIN BUY
TARGET PRICE (HKD) PREVIOUS TARGET (HKD)
12.60 12.20
SHARE PRICE (HKD) UPSIDE/DOWNSIDE
10.60 +18.9% (as of 23 Mar 2017)
MARKET DATA Market cap (HKDm) 17,971 Free float 33%
Market cap (USDm) 2,314 BBG 636 HK
3m ADTV (USDm) 1 RIC 0636.HK
FINANCIALS AND RATIOS (HKD) Year to 12/2016a 12/2017e 12/2018e 12/2019e
HSBC EPS 0.59 0.65 0.71 0.76
HSBC EPS (prev) 0.61 0.67 0.73 -
Change (%) -3.2 -3.3 -3.2 -
Consensus EPS 0.73 0.76 0.82 -
PE (x) 17.9 16.3 15.0 14.0 Dividend yield (%) 1.8 2.9 2.0 2.2
EV/EBITDA (x) 10.1 7.7 6.7 5.9
ROE (%) 6.5 7.0 7.3 7.4
52-WEEK PRICE (HKD)
Source: Thomson Reuters IBES, HSBC estimates
Parash Jain* Head of Transport Research, Asia-Pacific
The Hongkong and Shanghai Banking Corporation Limited
+852 2996 6717
Jack Xu* Analyst
The Hongkong and Shanghai Banking Corporation Limited
+852 2996 6566
Louis Pang* Associate
The Hongkong and Shanghai Banking Corporation Limited
+852 2914 9934
Deepak Maurya* Associate
* Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations
Kerry Logistics Network (636 HK)
EQUITIES AIR FREIGHT & LOGISTICS
Hong Kong
9.20
11.10
13.00
03/16 09/16 03/17
Target price: 12 .60 High: 11.60 Low: 9.61 Current: 10.60
Buy: 2017 offers stable profit growth with higher yield
EQUITIES ● AIR FREIGHT & LOGISTICS
24 March 2017
2
Financial statements
Year to 12/2016a 12/2017e 12/2018e 12/2019e
Profit & loss summary (HKDm)
Revenue 24,036 27,490 28,574 29,770
EBITDA 2,304 2,571 2,790 2,957
Depreciation & amortisation -556 -618 -644 -661
Operating profit/EBIT 1,749 1,953 2,147 2,296
Net interest -96 -99 -84 -65
PBT 2,633 2,126 2,149 2,321
HSBC PBT 1,763 1,951 2,149 2,321
Taxation -398 -438 -508 -560
Net profit 1,877 1,279 1,198 1,285
HSBC net profit 1,004 1,104 1,198 1,285
Cash flow summary (HKDm)
Cash flow from operations 552 1,719 1,574 1,609
Capex -978 -1,025 -525 -525
Cash flow from investment -2,594 -414 -308 -299
Dividends -297 -544 -345 -373
Change in net debt 2,115 -1,066 -1,272 -1,330
FCF equity 369 1,119 1,693 1,809
Balance sheet summary (HKDm)
Intangible fixed assets 3,225 3,151 3,078 3,005
Tangible fixed assets 17,267 17,747 17,701 17,639
Current assets 9,598 9,902 10,193 10,563
Cash & others 3,335 3,801 4,073 4,403
Total assets 31,965 32,210 32,301 32,451
Operating liabilities 6,307 6,307 6,426 6,535
Gross debt 6,933 6,333 5,333 4,333
Net debt 3,598 2,532 1,259 -71
Shareholders' funds 15,300 16,035 16,888 17,801
Invested capital 20,447 20,693 20,473 20,268
Ratio, growth and per share analysis
Year to 12/2016a 12/2017e 12/2018e 12/2019e
Y-o-y % change
Revenue 14.0 14.4 3.9 4.2
EBITDA 4.0 11.6 8.5 6.0
Operating profit 1.2 11.7 9.9 6.9
PBT 3.4 -19.3 1.1 8.0
HSBC EPS -2.0 10.0 8.5 7.3
Ratios (%)
Revenue/IC (x) 1.2 1.3 1.4 1.5
ROIC 7.6 7.5 8.0 8.6
ROE 6.5 7.0 7.3 7.4
ROA 7.8 5.6 5.4 5.7
EBITDA margin 9.6 9.4 9.8 9.9
Operating profit margin 7.3 7.1 7.5 7.7
EBITDA/net interest (x) 24.1 26.1 33.1 45.5
Net debt/equity 19.9 13.4 6.3 -0.3
Net debt/EBITDA (x) 1.6 1.0 0.5 0.0
CF from operations/net debt 15.3 67.9 125.0
Per share data (HKD)
EPS Rep (diluted) 1.11 0.75 0.71 0.76
HSBC EPS (diluted) 0.59 0.65 0.71 0.76
DPS 0.19 0.31 0.22 0.23
Book value 9.23 9.68 10.19 10.74
Valuation data
Year to 12/2016a 12/2017e 12/2018e 12/2019e
EV/sales 1.0 0.7 0.7 0.6
EV/EBITDA 10.1 7.7 6.7 5.9
EV/IC 1.1 1.0 0.9 0.9
PE* 17.9 16.3 15.0 14.0
PB 1.1 1.1 1.0 1.0
FCF yield (%) 1.9 6.5 9.8 10.4
Dividend yield (%) 1.8 2.9 2.0 2.2
* Based on HSBC EPS (diluted)
Issuer information
Share price (HKD) 10.60 Free float 33%
Target price (HKD) 12.60 Sector Air Freight & Logistics
Reuters (Equity) 0636.HK Country Hong Kong
Bloomberg (Equity) 636 HK Analyst Parash Jain
Market cap (USDm) 2,314 Contact +852 2996 6717
Price relative
Source: HSBC Note: Priced at close of 23 Mar 2017
8.90
9.90
10.90
11.90
12.90
13.90
14.90
8.90
9.90
10.90
11.90
12.90
13.90
14.90
2015 2016 2017
Kerry Logistics Network Rel to HANG SENG INDEX
Financials & valuation: Kerry Logistics Network Buy
3
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017
1. KLN: 2016 results summary
(HKDm) 2H16 2H15 vs. 2H15 1H16 vs. 1H16 2H16e vs. 2H16e 2016 2015 vs. 2015 2016e vs. 2016e Remarks (2016)
Revenues 13,575 10,945 24% 10,461 30% 12,793 6% 24,036 21,079 14% 23,254 3% Revenues were higher y-o-y and vs forecasts mainly due to higher freight rates in 2H16
Operating costs (12,401) (9,835) 26% (9,330) 33% (11,583) 7% (21,731) (18,865) 15% (20,913) 4% But higher freight rates also meant higher transport costs offsetting the revenue growth
EBITDA 1,174 1,110 6% 1,131 4% 1,211 -3% 2,304 2,215 4% 2,341 -2% Depreciation and amortisation (291) (252) 15% (265) 10% (286) 2% (556) (487) 14% (551) 1% EBIT 883 857 3% 865 2% 925 -5% 1,749 1,727 1% 1,791 -2% While operating profits marginally improved,
margins declined. Overall in line with our forecast
Share of profits/(losses) from associates
47 47 0% 54 -13% 53 -12% 101 103 -2% 107 -6% Associate and JV income was slightly below expectations
Net interest expenses (36) (35) 3% (50) -28% (42) -13% (87) (84) 4% (92) -5% Finance costs were lower sequentially in 2H16 despite higher loan balances
Other non-recurring 660 586 13% 211 213% 0 NM 870 799 9% 210 314% Includes fair value gains on investment properties and gains on disposal of subsidiaries
Reported PBT 1,553 1,455 7% 1,080 44% 937 66% 2,633 2,546 3% 2,016 31% HSBC Recurring PBT 894 869 3% 869 3% 937 -5% 1,763 1,747 1% 1,806 -2% Flat y-o-y Taxes (220) (189) 16% (178) 24% (196) 12% (398) (401) -1% (374) 6% Reported PAT 1,334 1,266 5% 902 48% 741 80% 2,236 2,145 4% 1,643 36% HSBC Recurring PAT 674 686 -2% 691 -2% 741 -9% 1,365 1,366 0% 1,432 -5% Non-controlling interests (166) (162) 2% (193) -14% (201) -18% (358) (341) 5% (394) -9% Reported PAT to equity holders 1,168 1,103 6% 709 65% 540 116% 1,877 1,804 4% 1,249 50% Higher vs our forecast as we do not factor in
the FV gains on investment properties HSBC Recurring PAT to equity holders
507 518 -2% 497 2% 540 -6% 1,004 1,026 -2% 1,037 -3% In line with our forecast
Diluted EPS (HKD) 0.69 0.65 6% 0.42 65% 0.32 116% 1.11 1.06 4% 0.74 50% HSBC Recurring EPS (HKD) 0.30 0.30 -2% 0.29 2% 0.32 -6% 0.59 0.60 -2% 0.61 -3% DPS (HKD) 0.12 0.10 20% 0.07 71% 0.09 33% 0.19 0.16 19% 0.16 18% Final dividend of HKD12cents per share implies
2.3% annualised yield and 2016 total pay-out stands at 29% (vs 26% in 2015)
Key ratios EBITDA margin (%) EBIT margin (%) 8.6% 10.1% -1.5ppt 10.8% -2.2ppt 9.5% -0.8ppt 9.6% 10.5% -0.9ppt 10.1% -0.5ppt Annualised ROE (%) 6.5% 7.8% -1.3ppt 8.3% -1.8ppt 7.2% -0.7ppt 7.3% 8.2% -0.9ppt 7.7% -0.4ppt Tax rate (%) 6.7% 6.8% -0.1ppt 6.5% 0.2ppt 7.0% -0.4ppt 6.5% 6.8% -0.3ppt 6.7% -0.1ppt
Source: Company data, HSBC estimates
EQUITIES ● AIR FREIGHT & LOGISTICS
24 March 2017
4
Kerry Logistics – Key charts (1)
2. KLN: Revenue breakdown by business segment (2016)
3. KLN: Segment results breakdown (2016)
Note: Revenue includes intersegment revenues Source: Company data, HSBC
Source: Company data, HSBC
4. KLN: Operating results breakdown by region (2016)
5. KLN: Recurring profit breakdown by business segment (2016)
Source: Company data, HSBC estimates Note: Terminals includes KLN’s associates AAT and CCT, and Thailand SIAM Seaport Source: Company data, HSBC estimates
6. KLN: Segment profit growth impacted by currency (2016 vs 2015)
7. KLN: Currency impact on segment profit growth by region (2016 vs 2015)
Source: Company data, HSBC Source: Company data, HSBC
Logistics operations,
43%
Hong Kong warehouse,
4%
Inter'l freight
forwarding, 54%
Logistics operations,
54%Hong Kong warehouse,
25%
Inter'l freight
forwarding, 21%
Mainland China, 22%
Europe, 1%
South & South East Asia, 16%Hong
Kong, 35%
Others, 6%
Taiwan, 19%
Logistics, 13%
HK Warehouse
, 41%
Freight forwarding,
24%
Terminals, 22%
1,997
2,101
26
48 6 12
19
73
42
1,950
2,000
2,050
2,100
2,150
2,200
4.9%
0.4%1.0%
10.7%
1.6%
3.4%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
Mainland China Taiwan South & SE Asia
HKD (in reporting) Base currency
5
EQUITIES ● AIR FREIGHT & LOGISTICS
24 March 2017
Kerry Logistics – Key charts (2)
8. KLN: Logistics operations segment margins(2016)
9. Contract logistics operating margins – KLN vs. peers (2016)
Source: Company data, HSBC estimates Source: Company data, HSBC
10. KLN: International freight forwarding segment margins by region (2016)
11. Freight forwarding operating margins – KLN vs. peers (2016)
Source: Company data, HSBC Note: Operating margin for Panalpina is for Asia-Pacific region; For KNIN and DSV FF margins are excluding Road and Rail Source: Company data, HSBC
12. KLN: Consensus 12M-forward PB-ROE band chart
13. KLN: Consensus 12M-forward PE band chart
Source: Thomson Reuters Datastream Source: Thomson Reuters Datastream
2%6% 6% 7%
14% 17%
40%
60%
10.3%
9.7%
0%
10%
20%
30%
40%
50%
60%
70%
HK
- T
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&S
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HK
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Tha
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Chi
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rop
Logi
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s-C
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10.3%9.7%
4.5% 4.1% 4.0% 3.9%2.9%
0%
2%
4%
6%
8%
10%
12%
KLN
KLN
ex-
Por
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vt. P
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Sin
otra
ns
DH
L
DS
V
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KN
IN
5.0%
4.2%3.8%
3.2% 3.1%
1.1%
3.3%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%6.7%
4.7%
3.6%3.3%
2.7%2.1% 2.1%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
DS
V
KN
IN
Pee
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vg.
KLN
Pan
alpi
na
DH
L
Sin
otra
ns
8.1
0.98x
1.06x
0.8x
1.0x
1.2x
1.4x
1.6x
1.8x
2.0x
6.8
7.0
7.2
7.4
7.6
7.8
8.0
8.2
Jan-
14
Apr
-14
Jul-1
4
Oct
-14
Jan-
15
Apr
-15
Jul-1
5
Oct
-15
Jan-
16
Apr
-16
Jul-1
6
Oct
-16
Jan-
17
ROE (%), LH PB
13.3x 13.1x
13.7x
Avg PE since IPO,
16.5x
12x
14x
16x
18x
20x
22x
24x
26x
Dec
-13
Mar
-14
Jun-
14
Sep
-14
Dec
-14
Mar
-15
Jun-
15
Sep
-15
Dec
-15
Mar
-16
Jun-
16
Sep
-16
Dec
-16
Mar
-17
EQUITIES ● AIR FREIGHT & LOGISTICS
24 March 2017
6
2H16 operating profts grew 2% vs 1H16 but down 2% y-o-y
2H16 recurring profit was up 2% h-o-h but down 2% y-o-y and 6% below our forecast. Operating
profits were 5% below our estimate and 11% below consensus. We attribute the weaker than
expected results to Apex integration costs (US freight forwarder acquired in June 2016), higher
freight costs due to higher fuel prices, and disruptions caused by Hanjin Shipping’s (not listed)
bankrutpcy.
Hong Kong warehouse profits turned around in 2H16 with 14% growth h-o-h on higher
occupancy levels (95% vs 93% in 1H16) and management expects margins in this segment to
remain stable.
Freight forwarding profits increased in absolute terms in 2H16 mainly on APEX integration,
although margins declined by 0.9ppt. Regionally contributions from China and Europe slowed
sharply in 2H16. While the slowdown in China could partly be due to seasonality (weaker 2H vs
1H), in Europe where 2H usually tends to be stronger, profits declined 45% h-o-h while margins
declined to below 1% due to FX impact and restructuring. KLN management expects freight
forwarding division to be the profit growth driver in 2017 driven by synergies and first full year
contribution from Apex integration and also due to a low base of 2016 when the integration
related costs were charged.
In the logistics segment, Hong Kong continued with its strong contribution (margin improved
1.1ppt h-o-h to 8.5% in 2H16), although margins in Taiwan eroded 4ppt to 15.2% in 2H16, partly
due to fewer working days (typhoons and holidays) and higher wage expenses. Management
expects the logistics segment profits to stabilize in 2017 following a low base of 2016 which was
marked by one-off adverse events such as fewer working days in Taiwan, lower sugar exports in
Thailand and effects of demonetisation in India (since November 2016).
USD appreciation eroded profit growth in local currencies in China, Thailand, Taiwan and India
which, collectively contributed to approximately 54% of the group’s segment profit. Excluding the FX
impact, operating profits would have been 2% or HKD42m higher in 2016 (figure 6). HSBC FX
strategists expect USD strength against EM currencies to soften in 2017 (see Emerging Markets FX
Roadmap: Forecasts – soothing and smoothing, 21 March 2017 and Global Economics Quarterly –
Drivers and riders, 23 March 2017). While HSBC FX strategists forecast the USD to strengthen 6%
y-o-y on average vs. RMB and 0.8% vs THB in 2017, they expect the USD to weaken vs the INR
and TWD. This should also help with the profit recovery for KLN.
14. USD vs select key currencies to which KLN is exposed (2017 average vs 2016 average)
Source: HSBC estimates
6.1%
0.8%
-0.7%
-3.0%-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
USD-RMB USD-THB USD-INR USD-TWD
Stronger USD
Weaker USD
7
EQUITIES ● AIR FREIGHT & LOGISTICS
24 March 2017
Earnings forecast changes
We cut our 2017-18e profit estimates by 3%, to reflect higher freight forwarding revenues but
offset by lower margins, and higher borrowing cost and lower associate income (sale of Asia
Airfreight Terminal). In this note we introduce our 2019 estimates for KLN. Our revised estimates
for KLN imply a 10% growth in profit in 2017e and 9% earnings CAGR in 2016-19e.
We also lift our dividend pay-out assumptions to 30% 2017 onwards (vs 25% previously)
following the increase by the company in 2016 to 29% (vs 26% in 2015). During the analyst
briefing, the company guided that it would likely distribute as dividends the one-off profit of
HKD175m on the sale of its 15% stake in Asia Airfreight Terminal. This special dividend coupled
with our assumption of higher pay-out implies yield of close to 3% in 2017e.
15. KLN: Earnings forecast revisions, 2017-19e
____________New___________ ____________Old___________ _________Difference________
Year to Dec (HKDm) 2017e 2018e 2019e 2017e 2018e 2019e 2017e 2018e 2019e
Revenues 27,490 28,574 29,770 25,858 26,953 NA 6.3% 6.0% NA EBITDA 2,571 2,790 2,957 2,607 2,827 NA -1.4% -1.3% NA EBIT 1,953 2,147 2,296 2,000 2,195 NA -2.4% -2.2% NA HSBC net profit 1,104 1,198 1,285 1,142 1,238 NA -3.3% -3.2% NA HSBC EPS (HKD) 0.65 0.71 0.76 0.67 0.73 NA -3.3% -3.2% NA Margins EBITDA margin 9.4% 9.8% 9.9% 10.1% 10.5% NA -0.7ppt -0.7ppt NA EBIT margin 7.1% 7.5% 7.7% 7.7% 8.1% NA -0.6ppt -0.6ppt NA
Source: HSBC estimates
HSBC vs. Consensus
Our revised recurring profit estimates are now 15-16% below consensus, although we note that
the variance could be due to the fact that we consider other operating income (profit on asset
disposals and fair value gains on investment properties) as non-recurring. At the EBIT level, we
are 1% below consensus estimates in 2017e. Consensus for 2019 is not available.
16. KLN: HSBC estimates vs. Bloomberg consensus
_________________EBIT___________________ ______________Recurring earnings___________
(HKDm) HSBC Consenus Difference HSBC Consenus Difference
2017e 1,953 1,970 -0.9% 1,104 1,321 -16.4% 2018e 2,147 2,090 2.7% 1,198 1,407 -14.9%
Source: Bloomberg consensus, HSBC estimates
Valuation and risks
We continue to value KLN based on a market cap weighted average PE of comparable peers.
Despite slightly lower earnings we increase our target price to HKD12.6 (from HKD12.2) on
higher peer mutliple and valuation roll forward.
We roll forward and base our valuation on average of 2017-18e EPS (vs. 2017e previously) and
value the stock at 18.6x PE (from 18.1x 2017e PE) based on a market cap weighted average PE
of comparable peers. Our target PE multiple includes an unchanged 10% discount to reflect
slower growth and relative higher exposure to emerging market currencies vs peers.
Our revised target price of HKD12.6 implies upside of 18.9% from the current share price. We
reiterate our Buy rating on KLN shares following recent share price underperformance and our
expectations of a strong rebound in earnings during 2017e.
EQUITIES ● AIR FREIGHT & LOGISTICS
24 March 2017
8
Since the Brexit vote (24 June 2016), KLN’s share price increased just 2% vs 20% increase in
the Hang Seng Index and sharply underperforming its closest peer Sinotrans (598 HK, Hold, TP:
HKD3.6, CMP: HKD3.74) which increased 18% during this period. At the current price, KLN is
trading at 16.3x FY17e PE and 1.1x PB with an ROE of 7% in 2017e, close to trough valuations.
Global logistics peers have traded at an average of 19.2x (range: 11-23x) since the global
financial crisis for an average 12-month forward earnings growth rate of 6%.
Key downside risks: Lower-than-expected growth in global trade; higher-than-expected
competition, inability to identify suitable acquisition targets and integrate them with existing
operations, aggressive M&A at expensive valuations; higher trade barriers and failure or delays
in commencement of regional free trade agreements; loss of key clients; lack of new contract
wins or renewals, and potential regulatory barriers to foreign logistics operators in China.
Prefer KLN to Sinotrans
In the logistics sector, we prefer KLN over Sinotrans on better earnings visibility driven by
operating business. While Sinotrans is to a large extent dependent on the dividend contribution
from its DHL-JV (46% of 2016 recurring profit), KLN has controlling stakes in its operations which
provide better earnings visibilty.
17. Logistics: 12-month forward PE trading range
Note: Logistics sector PE is simple average of Kuehne & Nagel, Panalpina, DSV A/S, Expeditors Intl., CH Robinson and Sinotrans; Priced as of 23 March 2017 Source: Thomson Reuters Datastream, HSBC
Valuation and risks: Sinotrans (598 HK, HKD3.74, Hold, HKD3.60)
We value Sinotrans’ shares based on 11x PE applied to the average of 2017-18e EPS. Our
target multiple of 11x PE is based on the the three-year average of Sinotrans’ past trading
range. Our target price of HKD3.6 implies 3.7% downside from the current share price. We have
a Hold rating on the stock.
Key downside risks include a weak macro environment; slower-than-expected growth at the
logistics unit; and margin erosion at the DHL-JV caused by higher oil prices/stronger EUR vs.
RMB. Key upside risks include a faster-than-expected and sizeable potential asset integration
with China Merchants Logistics; a rebound in trade growth; and a weaker EUR vs. RMB.
14.7x
21.7x 20.6x
Avg. post Lehman crisis, 19.2x
Avg. since 2014, 20.2x
8.0x
10.0x
12.0x
14.0x
16.0x
18.0x
20.0x
22.0x
24.0x
26.0x
Jan-
02Ju
n-02
Nov
-02
Apr
-03
Sep
-03
Feb-
04Ju
l-04
Dec
-04
May
-05
Oct
-05
Mar
-06
Aug
-06
Jan-
07Ju
n-07
Nov
-07
Apr
-08
Sep
-08
Feb-
09Ju
l-09
Dec
-09
May
-10
Oct
-10
Mar
-11
Aug
-11
Jan-
12
Jun-
12
Nov
-12
Apr
-13
Sep
-13
Feb-
14Ju
l-14
Dec
-14
May
-15
Oct
-15
Mar
-16
Aug
-16
Jan-
17
12-month forward PE Avg. post Lehman crisis Avg. since 2014
9
EQUITIES ● AIR FREIGHT & LOGISTICS
24 March 2017
Disclosure appendix
Analyst Certification
The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the
opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their
personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific
recommendation(s) or views contained in this research report: Parash Jain, Jack Xu and Louis Pang
Important disclosures
Equities: Stock ratings and basis for financial analysis
HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's
existing holdings, risk tolerance and other considerations and that investors utilise various disciplines and investment horizons
when making investment decisions. Ratings should not be used or relied on in isolation as investment advice. Different
securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations and
therefore investors should carefully read the definitions of the ratings used in each research report. Further, investors should
carefully read the entire research report and not infer its contents from the rating because research reports contain more
complete information concerning the analysts' views and the basis for the rating.
From 23rd March 2015 HSBC has assigned ratings on the following basis:
The target price is based on the analyst’s assessment of the stock’s actual current value, although we expect it to take six to 12
months for the market price to reflect this. When the target price is more than 20% above the current share price, the stock will
be classified as a Buy; when it is between 5% and 20% above the current share price, the stock may be classified as a Buy or a
Hold; when it is between 5% below and 5% above the current share price, the stock will be classified as a Hold; when it is
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Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation or resumption of coverage,
change in target price or estimates).
Upside/Downside is the percentage difference between the target price and the share price.
Prior to this date, HSBC’s rating structure was applied on the following basis:
For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate,
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*A stock was classified as volatile if its historical volatility had exceeded 40%, if the stock had been listed for less than 12
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past month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating,
however, volatility had to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.
EQUITIES ● AIR FREIGHT & LOGISTICS
24 March 2017
10
Rating distribution for long-term investment opportunities
As of 23 March 2017, the distribution of all independent ratings published by HSBC is as follows:
For the purposes of the distribution above the following mapping structure is used during the transition from the previous to
current rating models: under our previous model, Overweight = Buy, Neutral = Hold and Underweight = Sell; under our current
model Buy = Buy, Hold = Hold and Reduce = Sell. For rating definitions under both models, please see “Stock ratings and basis
for financial analysis” above.
For the distribution of non-independent ratings published by HSBC, please see the disclosure page available at
http://www.hsbcnet.com/gbm/financial-regulation/investment-recommendations-disclosures.
Share price and rating changes for long-term investment opportunities
Kerry Logistics Network (0636.HK) share price
performance HKD Vs HSBC rating history
Rating & target price history
From To Date Analyst
Underweight (V) Neutral (V) 11 Dec 2014 Parash Jain Neutral (V) Hold 27 Mar 2015 Parash Jain Hold Buy 25 Aug 2015 Parash Jain Buy Hold 03 Nov 2015 Parash Jain Hold Buy 28 Nov 2016 Parash Jain
Target price Value Date Analyst
Price 1 12.80 11 Dec 2014 Parash Jain Price 2 12.00 25 Aug 2015 Parash Jain Price 3 13.00 03 Nov 2015 Parash Jain Price 4 10.70 22 Jan 2016 Parash Jain Price 5 12.20 23 Mar 2016 Parash Jain
Source: HSBC
Source: HSBC
Sinotrans (0598.HK) share price performance HKD Vs
HSBC rating history
Rating & target price history
From To Date Analyst
N/A Buy 10 Nov 2015 Aric Hui Buy Reduce 03 May 2016 Parash Jain Reduce Buy 27 Jun 2016 Parash Jain Buy Hold 23 Mar 2017 Parash Jain
Target price Value Date Analyst
Price 1 6.00 10 Nov 2015 Aric Hui Price 2 4.70 27 Jan 2016 Aric Hui Price 3 4.30 23 Mar 2016 Parash Jain Price 4 3.10 03 May 2016 Parash Jain Price 5 4.00 27 Jun 2016 Parash Jain Price 6 4.40 24 Aug 2016 Parash Jain Price 7 3.60 23 Mar 2017 Parash Jain
Source: HSBC
Source: HSBC
To view a list of all the independent fundamental ratings disseminated by HSBC during the preceding 12-month period, please
use the following links to access the disclosure page:
Clients of Global Research and Global Banking and Markets: www.research.hsbc.com/A/Disclosures
Clients of HSBC Private Banking: www.research.privatebank.hsbc.com/Disclosures
9
10
11
12
13
14
15
Mar
-12
Mar
-13
Mar
-14
Mar
-15
Mar
-16
Mar
-17
0
1
2
3
4
5
6
7
Mar
-12
Mar
-13
Mar
-14
Mar
-15
Mar
-16
Mar
-17
Buy 45% ( 25% of these provided with Investment Banking Services )
Hold 40% ( 26% of these provided with Investment Banking Services )
Sell 15% ( 18% of these provided with Investment Banking Services )
11
EQUITIES ● AIR FREIGHT & LOGISTICS
24 March 2017
HSBC & Analyst disclosures
Disclosure checklist
Company Ticker Recent price Price date Disclosure
KERRY LOGISTICS NETWORK 0636.HK 10.60 23 Mar 2017 7 SINOTRANS 0598.HK 3.74 23 Mar 2017 4, 6
Source: HSBC
1 HSBC has managed or co-managed a public offering of securities for this company within the past 12 months.
2 HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next 3
months.
3 At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this
company.
4 As of 28 February 2017 HSBC beneficially owned 1% or more of a class of common equity securities of this company.
5 As of 31 January 2017, this company was a client of HSBC or had during the preceding 12 month period been a client of
and/or paid compensation to HSBC in respect of investment banking services.
6 As of 31 January 2017, this company was a client of HSBC or had during the preceding 12 month period been a client of
and/or paid compensation to HSBC in respect of non-investment banking securities-related services.
7 As of 31 January 2017, this company was a client of HSBC or had during the preceding 12 month period been a client of
and/or paid compensation to HSBC in respect of non-securities services.
8 A covering analyst/s has received compensation from this company in the past 12 months.
9 A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as
detailed below.
10 A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this
company, as detailed below.
11 At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company and/or in
securities in respect of this company
12 As of 20 March 2017, HSBC beneficially held a net long position of more than 0.5% of this company’s total issued share
capital, calculated according to the SSR methodology.
13 As of 20 March 2017, HSBC beneficially held a net short position of more than 0.5% of this company’s total issued share
capital, calculated according to the SSR methodology. HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments, both equity and debt
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Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment
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Whether, or in what time frame, an update of this analysis will be published is not determined in advance.
Economic sanctions imposed by the EU and OFAC prohibit transacting or dealing in new debt or equity of Russian SSI entities.
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EQUITIES ● AIR FREIGHT & LOGISTICS
24 March 2017
12
Additional disclosures
1. This report is dated as at 24 March 2017.
2. All market data included in this report are dated as at close 23 March 2017, unless a different date and/or a specific time of
day is indicated in the report.
3. HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its
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Production & distribution disclosures
1. This report was produced and signed off by the author on 23 Mar 2017 15:09 GMT.
2. In order to see when this report was first disseminated please see the disclosure page available at
https://www.research.hsbc.com/R/34/DX6ST6V
13
EQUITIES ● AIR FREIGHT & LOGISTICS
24 March 2017
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[594301]
Industrials
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