Investment positives

We initiate coverage on Yongtaiyun Chemical Logistics with an OUTPERFORM rating and a target price of Rmb52.80, implying 18.2x 2023e and 13.9x 2024e P/E (based on DCF valuation methodology). The company is a leader in cross-border logistics supply chain services for hazardous chemicals.

Export volume of hazardous chemicals to maintain rapid growth; large growth potential in cross-border logistics supply chain services for hazardous chemicals. China is the world's largest producer and consumer of chemicals, and its chemical imports and exports rank among the top three in the world. We believe that China's hazardous chemical imports and exports will continue to grow, driven by the recovery of the domestic chemical industry, growing overseas demand (especially from ASEAN countries), and increasing domestic chemical production capacity, thereby creating broad demand for cross-border hazardous chemical logistics supply chain services.

Tightening of industry regulations to boost market share of leading companies; sharp decline in ocean freight rates to accelerate industry integration. The concentration ratio of the chemical logistics industry is low, with CR5 (i.e., combined market share of the top five firms) at only 3.3% in 2021. As a result, we believe the process of industry integration will be an important growth driver for leading companies. China continues its efforts to establish and enhance a multi-tiered regulatory system for chemical logistics, fostering an environment where strict regulations favor market share gains by leading companies that prioritize safety and compliance and have solid qualifications. In addition, as ocean freight rates decline, supply chain services have emerged as a critical capability in the industry. We believe leading companies with high-quality supply chain services are likely to rapidly gain market share.

With its core logistics resources, high-quality supply chain service capabilities and resource advantages, the company is able to differentiate itself amid growing industry demand and accelerating industry integration. The company has clear geographical advantages, and its major chemical production bases are located along ports, enabling it to enjoy abundant cargo resources. In addition, the company has its own warehouse and fleet for logistics, and efficiently integrates its own resources with external resources to provide high-quality supply chain services needed by the industry. The company has accumulated rich customer and shipowner resources after years of operation, and we believe that strong bilateral network effects may help it gain further market share.

How do we differ from the market? We believe the market slightly underestimates the progress of industry integration and the company's market share gains.

Potential catalysts: Rapid growth in export volume of fine chemicals; industry integration accelerates amid falling ocean freight rates.

Financials and valuation

Our 2023 and 2024 EPS forecasts are Rmb2.9 and Rmb3.8, with a CAGR of 15.8%. The stock is trading at 13.7x 2023e and 10.5x 2024e P/E. We initiate coverage on Yongtaiyun Chemical Logistics with an OUTPERFORM rating and a target price of Rmb52.8 (based on DCF valuation methodology), implying 18.2x 2023e and 13.9x 2024e P/E, offering 32.4% upside.

Risks

Slowing export growth of hazardous chemicals; disappointing market share expansion; slower-than-expected progress in cross-regional expansion.