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 rating?

As an industry leader, Milkyway is likely to consolidate thesizable chemical logistics market. The chemical logistics market issizable (Rmb2.4trn in 2024) and has a fragmented competitivelandscape (top 100 companies accounted for 3.6% of total businessturnover in 2023–2024). We believe as an industry leader offeringcomprehensive chemical logistics services in China, Milkyway is likelyto consolidate the market thanks to the following factors: 1) Thisindustry 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, whilethose that can provide nationwide services are reluctant to furtherexpand their business.

Chemical industry is likely to turn around in the near future,signaling an earnings rally for Milkyway’s integratedwarehousing and transportation business. The chemical industryhas been in a downward cycle for about three years since thebeginning of 2H22, and the capex of listed petrochemical companieshas been experiencing negative growth for six quarters since 4Q23.

Meanwhile, China has announced measures to tackle “involutionstyle”competition. The CICC Research chemicals team believes theindustry may turn around in the near future.

Over 2021–2024, the company’s self-owned warehousing area forhazardous chemicals more than doubled, but the gross profit of itsintegrated warehousing and transportation business stayed flat due toprice declines. We expect earnings of the company’s core business torecover as positive signals from the chemical industry increase.

Milkyway is entering a new chapter of growth. 1) At present, thecompany has built a more balanced business structure that consistsof freight forwarding, integrated warehousing, and transportation, aswell as distribution. Its customer base is increasingly diversified – weexpect customers from non-chemical industries to account for 40% ofthe company’s total revenue by end-2025. It has also transformedinto a more asset-light business model – providing project

management services instead of asset-heavy expansion. 2) Webelieve the company’s capex has peaked, given that the pace ofacquisition has slowed since 2024, and it has ample backlog projects.

How do we differ from the market? The market believes that Milkyway’sbusiness performance is strongly correlated with the chemical industry’scyclical changes. However, the company has moved beyond single-industryswings by reshaping its client base and business mix in 2022–2024.

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

Financials and valuation

We forecast Milkyway’s attributable net profit at Rmb643mn andRmb736mn in 2025 and 2026, with EPS forecasts at Rmb4.06 andRmb4.66, implying a CAGR of 14.1% over 2024–2026. The stock istrading at 16.1x 2025e and 14.1x 2026e P/E. We adopt the relativevaluation methodology and assign Milkyway 17.0x 2026e P/E (averagesector valuation multiple), corresponding to a target price of Rmb79.14,offering 20.9% upside. We resume our coverage on the company with anOUTPERFORM rating.

Risks

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