While price reduction along with continuous cost control is a long-term trajectory in the express delivery industry, we do not expect the cutthroat price war at present to be sustainable. We expect the pricing to stabilize which will serve as near-term share price catalyst. In the long-term, we see huge room of industry consolidation and we prefer winners in the respective playing fields. We like SF Holding (002352 CH, BUY), the winner in the premium market, and ZTO Express (2057 HK / ZTO US, BUY), the cost leader in the mid-to-low end market.
- War for market share - It’s not the beginning of the end. China’s express delivery industry has long been fragmented, with the top three players accounting for only 52% of the total market (1H20). We see substantial room of consolidation in China express delivery industry, driven not only by price competition but also M&A activities over the coming years. Taking Japan express delivery sector as reference, the market share of the top three players increased from 82% in FY04 (Mar year-end) to 94% in FY20.
- But it’s, perhaps, the end of the beginning. The express delivery companies have been fighting harder than ever for market share since early this year, due to (1) fast expansion of J&T Express, (2) growth strategy taken by SF and ZTO, and (3) strong balance sheet for most players. For the industry as a whole, the parcel delivery fee dropped 9% YoY in 8M20, while major players cut price more than the industry average. That said, we do not expect such head-to-head battle to sustain as (1) even large players are running at loss at the gross profit level, and (2) latest investment by Alibaba (9988 HK, BABA US, BUY, covered by Sophie Huang) in YTO (600233 CH, NR) and STO (002468 CH, NR) sent a clear signal to the industry that cutthroat price war will become a less effective way to gain market share. We expect the pricing to stabilize in the foreseeable future.
- Positive to China express delivery demand growth. We forecast parcel shipment volume growth to reach 26% in 2020E, driven by higher penetration rate of ecommerce. We expect a 16%/18% shipment growth in 2021/22E, on the back of a recovery of retail consumption with a stable penetration rate.
- ZTO Express. On the back of proven track record of market share gain, strong operational efficiency and superior cost advantage, ZTO is not only able to mitigate the impact of price war, but also capable to take the opportunity to achieve further share gain and stand out as a long-term winner, in our view. We forecast ZTO to deliver 34%/25% core earnings growth in 2021E/22E. We resume coverage on ZTO US with a BUY rating and TP of US$38.3, based on 33x 2021E P/E. Initiate coverage on ZTO (2057 HK) with a BUY rating and TP of HK$297, based on 33x 2021E P/E.
- SF Holding. We resume coverage on SF Holding with a BUY rating and TP of RMB114, based on 55x 2021E P/E. We like SF solid position in the premium time-definite express segment, as well as the effective strategy to enter the mid-to-low end segment, which successfully boosted market share and raised utilization rate. We believe SF will continue to be least affected by the price war. We forecast SF to deliver core earnings growth of 46%/28%/26% in 2020E/21E/22E. In the longer term, we expect the commencement of Ezhou Airport to further enhance its core competitiveness in the time-definite business.
