3Q17 results in line with expectation

Sinotrans Air announced 3Q17 results: revenue rose 24% YoY toRmb1.62bn, operating costs increased 21% YoY, gross profit rose 81%YoY to Rmb140mn, and net profit attributable to shareholders grew49% YoY to Rmb340mn （Rmb0.37/sh）。 Excluding one-off items,earnings increased 38% YoY Rmb250mn in 3Q17 and 11% YoY in 1–3Q17, in line with our forecasts.

We mainly attribute earnings growth to two factors: 1） Strongimprovement in DHL-Sinotrans earnings: investment returnsincreased 20% YoY, much faster than the flat YoY growth in 1H17. Webelieve that locking in US dollar costs have gradually started takingeffect; 2） Faster growth in main operations: in 3Q17, revenueincreased 24% YoY, vs. 19% YoY in 1H17. Gross margin grew a modest0.2ppt from 1H17 to 8.4% in 3Q17. Excluding investment returns, weestimate that the main operations contributed net profit ofRmb23mn in 3Q17 （9% of operating net profit）， much better than aloss of Rmb9mn in 3Q16.

Trends to watch

Earnings at DHL-Sinotrans to continue improving in 4Q17.

Controlling shareholder’s acquisition of China MerchantsLogistics approved at the general meeting of shareholders.

Earnings forecast

We raise our 2017 earnings forecast 6% from Rmb1.3 to Rmb1.38per share, mainly on the higher assumptions for available-for-salefinancial assets.

Valuation and recommendation

The stock is trading at 13.4x 2018e P/E. We maintain our BUY ratingand Rmb23.30 TP, implying 23.09% upside from the current price.Notably, the share price suffered discount to its historical SOTPvaluation, as Sinotrans Air’s earnings relied on DHL-Sinotrans, whilethe main operations made zero or negative contributions to earnings.We believe valuation will recover, as the main operations have startedgrowing and have made a positive contribution. Risks: Renminbidepreciates sharply against the US dollar.