Investment positives

We initiate coverage on S.F. Holding with an OUTPERFORM rating and a target price of HK$50.37. We resume coverage of SF Holding’s A-shares (002352) with an OUTPERFORM rating and a target price of Rmb51.87 (based on 7.7x 2025e EV/EBITDA). We initiate coverage of its H-shares (06936) with an OUTPERFORM rating and a target price of Rmb50.37 (based on 7.0x 2025e EV/EBITDA).

We are upbeat on the firm's efforts to integrate resources to reduce costs and enhance efficiency on the back of its improving network. We expect SF Holding’s improving business operation to drive revenue growth. In addition, we think domestic demand for logistics services may improve driven by supportive policies for consumer spending, thereby creating new growth potential for SF Holding.

Why an OUTPERFORM rating?

Asia is the world's largest and fastest growing logistics market. According to Frost & Sullivan, Asia is the world's largest logistics market (accounting for 46% in 2023), and its fastest growing. As measured by revenue in 2023, SF Holding ranks No.1 in Asia in submarkets for express delivery, less-than-truckload (LTL) freight, third-party intra-city delivery, and international logistics. We expect SF Holding to continue winning customers in various industries, different consumption scenarios, as well as regions worldwide, by leveraging its well-established logistics network, direct-operation model, high-end brand, and diversified product portfolio. In our view, the firm could help its clients reduce logistics costs and improve supply chain efficiency.

Operating leverage gradually emerging: With the improvement of logistics network and more precise control over the pace of investment, the company's capex-to-revenue ratio has been declining from 13.9% in 2021 to 3.8% in 2024 while maintaining product competitiveness and revenue growth. Consequently, its capacity utilization rate has improved, and its earnings become more visible.

Under the base-case scenario, we expect revenue of the firm's three major business segments - express and freight, global supply chain, and intra-city delivery - to grow at CAGRs of 9%, 3% (being cautious due to factors such as tariffs) and 19% over 2024-2026, and its gross margin to rise by an average 0.4ppt per year. The firm continues to improve the timeliness of its products (e.g., launching and expanding the regional coverage of half-day delivery products), and is enhancing employee incentives. With the introduction of supportive policies for domestic demand, we expect SF Holding to benefit if domestic demand continues to improve.

How do we differ from the market? We attribute historical fluctuations in SF Holding's business operations and earnings to the mismatch between its capacity investment cycle and market demand cycles. The firm's efforts in the construction of logistics network have started to pay off. We expect its cyclical fluctuations to decline sharply, assuming no large-scale asset- heavy investment or lump-sum acquisitions of overseas targets.

Potential catalysts: Enhancement in operating efficiency; steady improvements in free cash flow; rises in normalized dividend payout ratio to 40% in 2024; upside potential in total shareholder returns (including dividends and share buybacks).

Financials and valuation

Our EPS forecast is Rmb2.35 and Rmb 2.74 in 2025-2026, implying a CAGR of 16%. We forecast its EBITDA of Rmb36.2bn, and Rmb40.4bn in 2025- 2026. The firm’s H-shares are trading at 5.5x 2025e EV/EBITDA. Given the average 7.1x of comparable overseas peers (UPS, FedEx, and DHL), we assign 7.0x to the firm’s H-shares and set a target price of HK$50.37, offering 30% upside. The firm’s A-shares are trading at 6.5x 2025e EBITDA. Given the relatively higher risk appetite for A-shares, we assign 7.7x and a target price of Rmb51.87 to the A-shares, offering 20% upside.

Risks

Demand for logistics services lower than expected; changes in competitive landscape; surge in fuel and labor costs; overseas policy risk; service disruption.