2023 results miss market expectations

Yongtaiyun Chemical Logistics announced its 2023 results: Revenue fell 27% YoY to Rmb2.20bn. Gross profit fell 35% YoY to Rmb334mn. GM fell 1.8ppt YoY to 15.2%. Attributable net profit fell 49% YoY to around Rmb150mn, and attributable net margin fell 2.9ppt YoY to 6.8%.

In 4Q23, revenue fell 44% QoQ or 41% YoY to Rmb356mn. Gross profit fell 24% QoQ or 34% YoY to Rmb70mn, and GM rose 5.3ppt QoQ or 2ppt YoY to 19.5%. Attributable net profit fell 79% QoQ or 83% YoY to Rmb8mn, while attributable net margin dropped 3.8ppt QoQ or 5.8ppt YoY to 2.3%. This missed market expectations, mainly due to: 1) falling container shipping rates affecting the firm's per-container profitability; 2) pressure on industry demand; and 3) an increase in the G&A expense ratio resulting from expanded management staff amid M&As.

Trends to watch

Industry demand has remained under pressure YTD; however, we expect the firm's container volume to maintain YoY growth due to the acquisition of high-quality assets. Due to weak overseas demand, the export value of organic and inorganic chemicals (in Rmb terms) fell 17% YoY in 2023 and 19% YoY over January-February 2024. We believe that the recovery in industry demand is still underway. In 2023, the firm's total container volume increased 35% YoY. The cross-border chemical logistics supply chain services business rose 27% YoY, the warehousing and storage business increased 21% YoY, and the transportation business surged by 91% YoY, all of which outperformed the industry. We attribute this growth to the firm's integration of high-quality assets, such as Hunan Hongsheng Shipping and Hunan Xinhong Sheng Chemical. Additionally, the firm added about 170,000sqm of warehousing space in 2023. Looking ahead to 2024, we expect the firm's container volume to maintain YoY growth that exceeds the industry average. This is thanks to the capacity ramp-up of high-quality acquired assets, such as Yongtaiyun (Tianjin).

Ocean freight rates rose in 1Q24 due to tensions in the Red Sea, which we believe will support the firm's earnings improvement. In 2023, ocean freight rates declined notably due to weak supply and demand (CCFI fell 66% YoY in 2023 and 47% YoY in 4Q23). However, the pressure on marine transportation supply eased because of the Red Sea tensions, leading to a rise in marine freight rates in 1Q24 (CCFI rose 19% YoY in　1Q24). We expect that this may boost the firm's earnings per container in 1Q24. While the Red Sea tensions remain uncertain, we believe that earnings improvement in 1Q24 and effective expense control will bolster the firm's full-year earnings recovery.

Financials and valuation

As industry demand recovery is still on the way, we lower our 2024 revenue forecast 30.7% to Rmb2.71bn and attributable net profit 46.9% to Rmb210mn. We introduce our 2025 revenue forecast of Rmb3.45bn and attributable net profit forecast of Rmb271mn. The stock is trading at 13.6x 2024e and 10.5x 2025e P/E. We maintain OUTPERFORM rating and cut our target price 35.8% to Rmb33.9, implying 17.0x 2024e and 13.1x 2025e P/E, offering 23.5% upside.

Risks

Sharp decline in container shipping rates; weak demand for hazardous chemicals; progress of new projects disappoints.