Investment positives

We resume coverage on Milkyway Chemical Supply Chain Service (Milkyway) with an OUTPERFORM rating and a target price of Rmb79.14, implying 19.5x 2025e and 17.0x 2026e P/E.

Why an OUTPERFORM ratingAs an industry leader, Milkyway is likely to consolidate the sizable chemical logistics market. The chemical logistics market is

sizable (Rmb2.4trn in 2024) and has a fragmented competitive landscape (top 100 companies accounted for 3.6% of total business turnover in 2023-2024). We believe as an industry leader offering comprehensive chemical logistics services in China, Milkyway is likely to consolidate the market thanks to the following factors: 1) This industry has high barriers to entry and tighter market regulations, while the company boasts strong capabilities to ensure professional, safe operations. 2) Local firms generally lack competitiveness, while those that can provide nationwide services are reluctant to further expand their business.

Chemical industry is likely to turn around in the near future, signaling an earnings rally for Milkyway’s integrated warehousing and transportation business. The chemical industry

has been in a downward cycle for about three years since the beginning of 2H22, and listed petrochemical companies’ capex has been experiencing negative growth for six quarters since 4Q23.

Meanwhile, China has announced measures to tackle “involution-

style” competition. The CICC Research chemicals team believes the industry may turn around in the near future.

Over 2021-2024, the company’s self-owned warehousing area for hazardous chemicals more than doubled, but the gross profit of its integrated warehousing and transportation business stayed flat due to price declines. We expect earnings of the company’s core business to recover as positive signals from the chemical industry increase.

Milkyway is entering a new chapter of growth. 1) At present, the

company has built a more balanced business structure that consists of freight forwarding, integrated warehousing and transportation, as well as distribution. Its customer base is increasingly diversified - we expect customers from non-chemical industries to account for 40% of the company’s total revenue by end-2025. It has also transformed into a more asset-light business model - providing project management services instead of asset-heavy expansion. 2) We believe the company’s capex has peaked, given that the pace of acquisition has slowed since 2024, and it has ample backlog projects.

How do we differ from the marketThe market believes that Milkyway’s business performance is strongly correlated with the chemical industry’s cyclical changes. However, the company has moved beyond single- industry swings by reshaping its client base and business mix in 2022- 2024.

Potential catalysts: Rising PPI in the chemical industry; higher warehousing and transportation prices thanks to a new round of tenders.

Financials and valuation

We forecast Milkyway’s attributable net profit at Rmb643mn and Rmb736mn in 2025 and 2026, with EPS forecasts at Rmb4.06 and Rmb4.66, implying a CAGR of 14.1% over 2024-2026. The stock is trading at 16.1x 2025e and 14.1x 2026e P/E. We adopt the relative valuation methodology and assign Milkyway 17.0x 2026e P/E (average sector valuation multiple), corresponding to a target price of Rmb79.14, offering 20.9% upside. We resume our coverage on the company with an OUTPERFORM rating.

Risks

Further decline in transportation and warehousing prices; goodwill impairment; irregular business operations.