Disclosures & Disclaimer
This report must be read with the disclosures and the analyst certifications in
the Disclosure appendix, and with the Disclaimer, which forms part of it.
Issuer of report: The Hongkong and Shanghai Banking Corporation Limited
View HSBC Global Research at:
https://www.research.hsbc.com
2H16 recurring profit was up 2% vs 1H16 but 2% lower y-o-y
and 6% below our estimate on higher operating costs
2017 offers stable profit growth with higher yield from a low
base of 2016 which management believes had several one-offs
We cut 2017-18e earnings by 3% but raise TP to HKD12.6
(from HKD12.2) on higher peer mutliple and roll forward
2H16 recurring profit was up 2% h-o-h but down 2% y-o-y and 6% below our
forecast. EBIT was 5% below our estimate and 11% below consensus. We attribute
the weaker than expected results to Apex integration costs (US freight forwarder
acquired in June 2016), higher freight costs due to higher fuel prices, and disruptions
caused by Hanjin Shipping’s (not listed) bankrutpcy. 2016 EBIT was up just 1% y-o-y
also partly due to USD appreciation eroding the growth in local currencies (figure 6-7).
Management was positive on 2017 outlook: During the analyst briefing, KLN guided
that with Apex related integration costs mostly charged in 2016, it should realise
synergies and benefit from first full year contribution in 2017. Similarly one-off events
such as fewer working days (typhoons and holidays) in Taiwan, lower sugar exports in
Thailand and effects of demonetisation in India (since November 2016) should set a
low base for recovery in 2017. Hong Kong warehouse occupancy improved to 95% (vs
93% in 1H16) and KLN expects stable margins. KLN said that it is acquiring a
controlling stake in a freight forwarder which has operations in nine CIS countries.
KLN expects to complete the deal in May 2017, albeit we do not model this yet.
Dividend uplift: KLN’s dividend pay-out increased to 29% in 2016 vs 26% in 2015
and therefore we model a higher 30% pay-out 2017 onwards (vs 25% earlier). KLN is
also disposing its 15% stake in Asia Airfreight Terminal (AAT), which should result in a
HKD175m profit and management guided that it will likely be distributed as special
dividend this year. This implies an overall yield of close to 3% in 2017 (including higher
pay-out assumption). KLN reiterated its commitment to divest non-core assets (c10%
of assets) over the next five years which could further lift dividends and improve ROE.
We cut 2017-18e profit estimates by 3%, to reflect higher freight forwarding
revenues but offset by lower margins and associate income, and higher interst costs.
We expect 10% profit CAGR in 2016-19e; 15-16% below consensus in 2017-18e.
Reiterate Buy with higher TP of HKD12.6 (from HKD12.2) despite lower earnings
on higher peer mutliple and valuation roll forward. We roll forward and base our
valuation on average of 2017-18e EPS (vs 2017e previously) and value KLN at 18.6x
PE (from 18.1x 2017e PE) based on a market cap weighted average PE of
comparable peers. Since the Brexit vote (24 June 2016), KLN’s share price has
underperformed the Hang Seng index by 18% and its closest peer Sinotrans (598 HK,
Hold, TP: HKD3.6, CMP: HKD3.74) by 16%. We prefer KLN to Sinotrans on better
earnings visibility driven by operating business. We recently downgraded Sinotrans to
Hold (from Buy) in our report of 23 March 2017, Lacks catalysts after weak 2016.
24 March 2017
MAINTAIN BUY
TARGET PRICE (HKD) PREVIOUS TARGET (HKD)
12.60 12.20
SHARE PRICE (HKD) UPSIDE/DOWNSIDE
10.60 +18.9% (as of 23 Mar 2017)
MARKET DATA Market cap (HKDm) 17,971 Free float 33%
Market cap (USDm) 2,314 BBG 636 HK
3m ADTV (USDm) 1 RIC 0636.HK
FINANCIALS AND RATIOS (HKD) Year to 12/2016a 12/2017e 12/2018e 12/2019e
HSBC EPS 0.59 0.65 0.71 0.76
HSBC EPS (prev) 0.61 0.67 0.73 -
Change (%) -3.2 -3.3 -3.2 -
Consensus EPS 0.73 0.76 0.82 -
PE (x) 17.9 16.3 15.0 14.0 Dividend yield (%) 1.8 2.9 2.0 2.2
EV/EBITDA (x) 10.1 7.7 6.7 5.9
ROE (%) 6.5 7.0 7.3 7.4
52-WEEK PRICE (HKD)
Source: Thomson Reuters IBES, HSBC estimates
Parash Jain* Head of Transport Research, Asia-Pacific
The Hongkong and Shanghai Banking Corporation Limited
+852 2996 6717
Jack Xu* Analyst
The Hongkong and Shanghai Banking Corporation Limited
+852 2996 6566
Louis Pang* Associate
The Hongkong and Shanghai Banking Corporation Limited
+852 2914 9934
Deepak Maurya* Associate
* Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations
Kerry Logistics Network (636 HK)
EQUITIES AIR FREIGHT & LOGISTICS
Hong Kong
9.20
11.10
13.00
03/16 09/16 03/17
Target price: 12 .60 High: 11.60 Low: 9.61 Current: 10.60
Buy: 2017 offers stable profit growth with higher yield
EQUITIES ● AIR FREIGHT & LOGISTICS
24 March 2017
2
Financial statements
Year to 12/2016a 12/2017e 12/2018e 12/2019e
Profit & loss summary (HKDm)
Revenue 24,036 27,490 28,574 29,770
EBITDA 2,304 2,571 2,790 2,957
Depreciation & amortisation -556 -618 -644 -661
Operating profit/EBIT 1,749 1,953 2,147 2,296
Net interest -96 -99 -84 -65
PBT 2,633 2,126 2,149 2,321
HSBC PBT 1,763 1,951 2,149 2,321
Taxation -398 -438 -508 -560
Net profit 1,877 1,279 1,198 1,285
HSBC net profit 1,004 1,104 1,198 1,285
Cash flow summary (HKDm)
Cash flow from operations 552 1,719 1,574 1,609
Capex -978 -1,025 -525 -525
Cash flow from investment -2,594 -414 -308 -299
Dividends -297 -544 -345 -373
Change in net debt 2,115 -1,066 -1,272 -1,330
FCF equity 369 1,119 1,693 1,809
Balance sheet summary (HKDm)
Intangible fixed assets 3,225 3,151 3,078 3,005
Tangible fixed assets 17,267 17,747 17,701 17,639
Current assets 9,598 9,902 10,193 10,563
Cash & others 3,335 3,801 4,073 4,403
Total assets 31,965 32,210 32,301 32,451
Operating liabilities 6,307 6,307 6,426 6,535
Gross debt 6,933 6,333 5,333 4,333
Net debt 3,598 2,532 1,259 -71
Shareholders' funds 15,300 16,035 16,888 17,801
Invested capital 20,447 20,693 20,473 20,268
Ratio, growth and per share analysis
Year to 12/2016a 12/2017e 12/2018e 12/2019e
Y-o-y % change
Revenue 14.0 14.4 3.9 4.2
EBITDA 4.0 11.6 8.5 6.0
Operating profit 1.2 11.7 9.9 6.9
PBT 3.4 -19.3 1.1 8.0
HSBC EPS -2.0 10.0 8.5 7.3
Ratios (%)
Revenue/IC (x) 1.2 1.3 1.4 1.5
ROIC 7.6 7.5 8.0 8.6
ROE 6.5 7.0 7.3 7.4
ROA 7.8 5.6 5.4 5.7
EBITDA margin 9.6 9.4 9.8 9.9
Operating profit margin 7.3 7.1 7.5 7.7
EBITDA/net interest (x) 24.1 26.1 33.1 45.5
Net debt/equity 19.9 13.4 6.3 -0.3
Net debt/EBITDA (x) 1.6 1.0 0.5 0.0
CF from operations/net debt 15.3 67.9 125.0
Per share data (HKD)
EPS Rep (diluted) 1.11 0.75 0.71 0.76
HSBC EPS (diluted) 0.59 0.65 0.71 0.76
DPS 0.19 0.31 0.22 0.23
Book value 9.23 9.68 10.19 10.74
Valuation data
Year to 12/2016a 12/2017e 12/2018e 12/2019e
EV/sales 1.0 0.7 0.7 0.6
EV/EBITDA 10.1 7.7 6.7 5.9
EV/IC 1.1 1.0 0.9 0.9
PE* 17.9 16.3 15.0 14.0
PB 1.1 1.1 1.0 1.0
FCF yield (%) 1.9 6.5 9.8 10.4
Dividend yield (%) 1.8 2.9 2.0 2.2
* Based on HSBC EPS (diluted)
Issuer information
Share price (HKD) 10.60 Free float 33%
Target price (HKD) 12.60 Sector Air Freight & Logistics
Reuters (Equity) 0636.HK Country Hong Kong
Bloomberg (Equity) 636 HK Analyst Parash Jain
Market cap (USDm) 2,314 Contact +852 2996 6717
Price relative
Source: HSBC Note: Priced at close of 23 Mar 2017
8.90
9.90
10.90
11.90
12.90
13.90
14.90
8.90
9.90
10.90
11.90
12.90
13.90
14.90
2015 2016 2017
Kerry Logistics Network Rel to HANG SENG INDEX
Financials & valuation: Kerry Logistics Network Buy
3
EQ
UIT
IES
● A
IR F
RE
IGH
T &
LO
GIS
TIC
S
24 M
arc
h 2
017
1. KLN: 2016 results summary
(HKDm) 2H16 2H15 vs. 2H15 1H16 vs. 1H16 2H16e vs. 2H16e 2016 2015 vs. 2015 2016e vs. 2016e Remarks (2016)
Revenues 13,575 10,945 24% 10,461 30% 12,793 6% 24,036 21,079 14% 23,254 3% Revenues were higher y-o-y and vs forecasts mainly due to higher freight rates in 2H16
Operating costs (12,401) (9,835) 26% (9,330) 33% (11,583) 7% (21,731) (18,865) 15% (20,913) 4% But higher freight rates also meant higher transport costs offsetting the revenue growth
EBITDA 1,174 1,110 6% 1,131 4% 1,211 -3% 2,304 2,215 4% 2,341 -2% Depreciation and amortisation (291) (252) 15% (265) 10% (286) 2% (556) (487) 14% (551) 1% EBIT 883 857 3% 865 2% 925 -5% 1,749 1,727 1% 1,791 -2% While operating profits marginally improved,
margins declined. Overall in line with our forecast
Share of profits/(losses) from associates
47 47 0% 54 -13% 53 -12% 101 103 -2% 107 -6% Associate and JV income was slightly below expectations
Net interest expenses (36) (35) 3% (50) -28% (42) -13% (87) (84) 4% (92) -5% Finance costs were lower sequentially in 2H16 despite higher loan balances
Other non-recurring 660 586 13% 211 213% 0 NM 870 799 9% 210 314% Includes fair value gains on investment properties and gains on disposal of subsidiaries
Reported PBT 1,553 1,455 7% 1,080 44% 937 66% 2,633 2,546 3% 2,016 31% HSBC Recurring PBT 894 869 3% 869 3% 937 -5% 1,763 1,747 1% 1,806 -2% Flat y-o-y Taxes (220) (189) 16% (178) 24% (196) 12% (398) (401) -1% (374) 6% Reported PAT 1,334 1,266 5% 902 48% 741 80% 2,236 2,145 4% 1,643 36% HSBC Recurring PAT 674 686 -2% 691 -2% 741 -9% 1,365 1,366 0% 1,432 -5% Non-controlling interests (166) (162) 2% (193) -14% (201) -18% (358) (341) 5% (394) -9% Reported PAT to equity holders 1,168 1,103 6% 709 65% 540 116% 1,877 1,804 4% 1,249 50% Higher vs our forecast as we do not factor in
the FV gains on investment properties HSBC Recurring PAT to equity holders
507 518 -2% 497 2% 540 -6% 1,004 1,026 -2% 1,037 -3% In line with our forecast
Diluted EPS (HKD) 0.69 0.65 6% 0.42 65% 0.32 116% 1.11 1.06 4% 0.74 50% HSBC Recurring EPS (HKD) 0.30 0.30 -2% 0.29 2% 0.32 -6% 0.59 0.60 -2% 0.61 -3% DPS (HKD) 0.12 0.10 20% 0.07 71% 0.09 33% 0.19 0.16 19% 0.16 18% Final dividend of HKD12cents per share implies
2.3% annualised yield and 2016 total pay-out stands at 29% (vs 26% in 2015)
Key ratios EBITDA margin (%) EBIT margin (%) 8.6% 10.1% -1.5ppt 10.8% -2.2ppt 9.5% -0.8ppt 9.6% 10.5% -0.9ppt 10.1% -0.5ppt Annualised ROE (%) 6.5% 7.8% -1.3ppt 8.3% -1.8ppt 7.2% -0.7ppt 7.3% 8.2% -0.9ppt 7.7% -0.4ppt Tax rate (%) 6.7% 6.8% -0.1ppt 6.5% 0.2ppt 7.0% -0.4ppt 6.5% 6.8% -0.3ppt 6.7% -0.1ppt
Source: Company data, HSBC estimates
EQUITIES ● AIR FREIGHT & LOGISTICS
24 March 2017
4
Kerry Logistics – Key charts (1)
2. KLN: Revenue breakdown by business segment (2016)
3. KLN: Segment results breakdown (2016)
Note: Revenue includes intersegment revenues Source: Company data, HSBC
Source: Company data, HSBC
4. KLN: Operating results breakdown by region (2016)
5. KLN: Recurring profit breakdown by business segment (2016)
Source: Company data, HSBC estimates Note: Terminals includes KLN’s associates AAT and CCT, and Thailand SIAM Seaport Source: Company data, HSBC estimates
6. KLN: Segment profit growth impacted by currency (2016 vs 2015)
7. KLN: Currency impact on segment profit growth by region (2016 vs 2015)
Source: Company data, HSBC Source: Company data, HSBC
Logistics operations,
43%
Hong Kong warehouse,
4%
Inter'l freight
forwarding, 54%
Logistics operations,
54%Hong Kong warehouse,
25%
Inter'l freight
forwarding, 21%
Mainland China, 22%
Europe, 1%
South & South East Asia, 16%Hong
Kong, 35%
Others, 6%
Taiwan, 19%
Logistics, 13%
HK Warehouse
, 41%
Freight forwarding,
24%
Terminals, 22%
1,997
2,101
26
48 6 12
19
73
42
1,950
2,000
2,050
2,100
2,150
2,200
4.9%
0.4%1.0%
10.7%
1.6%
3.4%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
Mainland China Taiwan South & SE Asia
HKD (in reporting) Base currency
5
EQUITIES ● AIR FREIGHT & LOGISTICS
24 March 2017
Kerry Logistics – Key charts (2)
8. KLN: Logistics operations segment margins(2016)
9. Contract logistics operating margins – KLN vs. peers (2016)
Source: Company data, HSBC estimates Source: Company data, HSBC
10. KLN: International freight forwarding segment margins by region (2016)
11. Freight forwarding operating margins – KLN vs. peers (2016)
Source: Company data, HSBC Note: Operating margin for Panalpina is for Asia-Pacific region; For KNIN and DSV FF margins are excluding Road and Rail Source: Company data, HSBC
12. KLN: Consensus 12M-forward PB-ROE band chart
13. KLN: Consensus 12M-forward PE band chart
Source: Thomson Reuters Datastream Source: Thomson Reuters Datastream
2%6% 6% 7%
14% 17%
40%
60%
10.3%
9.7%
0%
10%
20%
30%
40%
50%
60%
70%
HK
- T
radi
ng
Oth
er S
&S
E A
sia
Chi
na lo
gist
ics
Oth
ers
HK
- L
ogis
tics
Tai
wan
-Ker
ry T
J
Tha
iland
Sia
m P
ort
Chi
na In
v. P
rop
Logi
stic
s
Logi
stic
s-C
lean
10.3%9.7%
4.5% 4.1% 4.0% 3.9%2.9%
0%
2%
4%
6%
8%
10%
12%
KLN
KLN
ex-
Por
tan
d In
vt. P
rop)
Sin
otra
ns
DH
L
DS
V
Pee
rs A
vg.
KN
IN
5.0%
4.2%3.8%
3.2% 3.1%
1.1%
3.3%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%6.7%
4.7%
3.6%3.3%
2.7%2.1% 2.1%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
DS
V
KN
IN
Pee
rs A
vg.
KLN
Pan
alpi
na
DH
L
Sin
otra
ns
8.1
0.98x
1.06x
0.8x
1.0x
1.2x
1.4x
1.6x
1.8x
2.0x
6.8
7.0
7.2
7.4
7.6
7.8
8.0
8.2
Jan-
14
Apr
-14
Jul-1
4
Oct
-14
Jan-
15
Apr
-15
Jul-1
5
Oct
-15
Jan-
16
Apr
-16
Jul-1
6
Oct
-16
Jan-
17
ROE (%), LH PB
13.3x 13.1x
13.7x
Avg PE since IPO,
16.5x
12x
14x
16x
18x
20x
22x
24x
26x
Dec
-13
Mar
-14
Jun-
14
Sep
-14
Dec
-14
Mar
-15
Jun-
15
Sep
-15
Dec
-15
Mar
-16
Jun-
16
Sep
-16
Dec
-16
Mar
-17
EQUITIES ● AIR FREIGHT & LOGISTICS
24 March 2017
6
2H16 operating profts grew 2% vs 1H16 but down 2% y-o-y
2H16 recurring profit was up 2% h-o-h but down 2% y-o-y and 6% below our forecast. Operating
profits were 5% below our estimate and 11% below consensus. We attribute the weaker than
expected results to Apex integration costs (US freight forwarder acquired in June 2016), higher
freight costs due to higher fuel prices, and disruptions caused by Hanjin Shipping’s (not listed)
bankrutpcy.
Hong Kong warehouse profits turned around in 2H16 with 14% growth h-o-h on higher
occupancy levels (95% vs 93% in 1H16) and management expects margins in this segment to
remain stable.
Freight forwarding profits increased in absolute terms in 2H16 mainly on APEX integration,
although margins declined by 0.9ppt. Regionally contributions from China and Europe slowed
sharply in 2H16. While the slowdown in China could partly be due to seasonality (weaker 2H vs
1H), in Europe where 2H usually tends to be stronger, profits declined 45% h-o-h while margins
declined to below 1% due to FX impact and restructuring. KLN management expects freight
forwarding division to be the profit growth driver in 2017 driven by synergies and first full year
contribution from Apex integration and also due to a low base of 2016 when the integration
related costs were charged.
In the logistics segment, Hong Kong continued with its strong contribution (margin improved
1.1ppt h-o-h to 8.5% in 2H16), although margins in Taiwan eroded 4ppt to 15.2% in 2H16, partly
due to fewer working days (typhoons and holidays) and higher wage expenses. Management
expects the logistics segment profits to stabilize in 2017 following a low base of 2016 which was
marked by one-off adverse events such as fewer working days in Taiwan, lower sugar exports in
Thailand and effects of demonetisation in India (since November 2016).
USD appreciation eroded profit growth in local currencies in China, Thailand, Taiwan and India
which, collectively contributed to approximately 54% of the group’s segment profit. Excluding the FX
impact, operating profits would have been 2% or HKD42m higher in 2016 (figure 6). HSBC FX
strategists expect USD strength against EM currencies to soften in 2017 (see Emerging Markets FX
Roadmap: Forecasts – soothing and smoothing, 21 March 2017 and Global Economics Quarterly –
Drivers and riders, 23 March 2017). While HSBC FX strategists forecast the USD to strengthen 6%
y-o-y on average vs. RMB and 0.8% vs THB in 2017, they expect the USD to weaken vs the INR
and TWD. This should also help with the profit recovery for KLN.
14. USD vs select key currencies to which KLN is exposed (2017 average vs 2016 average)
Source: HSBC estimates
6.1%
0.8%
-0.7%
-3.0%-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
USD-RMB USD-THB USD-INR USD-TWD
Stronger USD
Weaker USD
7
EQUITIES ● AIR FREIGHT & LOGISTICS
24 March 2017
Earnings forecast changes
We cut our 2017-18e profit estimates by 3%, to reflect higher freight forwarding revenues but
offset by lower margins, and higher borrowing cost and lower associate income (sale of Asia
Airfreight Terminal). In this note we introduce our 2019 estimates for KLN. Our revised estimates
for KLN imply a 10% growth in profit in 2017e and 9% earnings CAGR in 2016-19e.
We also lift our dividend pay-out assumptions to 30% 2017 onwards (vs 25% previously)
following the increase by the company in 2016 to 29% (vs 26% in 2015). During the analyst
briefing, the company guided that it would likely distribute as dividends the one-off profit of
HKD175m on the sale of its 15% stake in Asia Airfreight Terminal. This special dividend coupled
with our assumption of higher pay-out implies yield of close to 3% in 2017e.
15. KLN: Earnings forecast revisions, 2017-19e
____________New___________ ____________Old___________ _________Difference________
Year to Dec (HKDm) 2017e 2018e 2019e 2017e 2018e 2019e 2017e 2018e 2019e
Revenues 27,490 28,574 29,770 25,858 26,953 NA 6.3% 6.0% NA EBITDA 2,571 2,790 2,957 2,607 2,827 NA -1.4% -1.3% NA EBIT 1,953 2,147 2,296 2,000 2,195 NA -2.4% -2.2% NA HSBC net profit 1,104 1,198 1,285 1,142 1,238 NA -3.3% -3.2% NA HSBC EPS (HKD) 0.65 0.71 0.76 0.67 0.73 NA -3.3% -3.2% NA Margins EBITDA margin 9.4% 9.8% 9.9% 10.1% 10.5% NA -0.7ppt -0.7ppt NA EBIT margin 7.1% 7.5% 7.7% 7.7% 8.1% NA -0.6ppt -0.6ppt NA
Source: HSBC estimates
HSBC vs. Consensus
Our revised recurring profit estimates are now 15-16% below consensus, although we note that
the variance could be due to the fact that we consider other operating income (profit on asset
disposals and fair value gains on investment properties) as non-recurring. At the EBIT level, we
are 1% below consensus estimates in 2017e. Consensus for 2019 is not available.
16. KLN: HSBC estimates vs. Bloomberg consensus
_________________EBIT___________________ ______________Recurring earnings___________
(HKDm) HSBC Consenus Difference HSBC Consenus Difference
2017e 1,953 1,970 -0.9% 1,104 1,321 -16.4% 2018e 2,147 2,090 2.7% 1,198 1,407 -14.9%
Source: Bloomberg consensus, HSBC estimates
Valuation and risks
We continue to value KLN based on a market cap weighted average PE of comparable peers.
Despite slightly lower earnings we increase our target price to HKD12.6 (from HKD12.2) on
higher peer mutliple and valuation roll forward.
We roll forward and base our valuation on average of 2017-18e EPS (vs. 2017e previously) and
value the stock at 18.6x PE (from 18.1x 2017e PE) based on a market cap weighted average PE
of comparable peers. Our target PE multiple includes an unchanged 10% discount to reflect
slower growth and relative higher exposure to emerging market currencies vs peers.
Our revised target price of HKD12.6 implies upside of 18.9% from the current share price. We
reiterate our Buy rating on KLN shares following recent share price underperformance and our
expectations of a strong rebound in earnings during 2017e.
EQUITIES ● AIR FREIGHT & LOGISTICS
24 March 2017
8
Since the Brexit vote (24 June 2016), KLN’s share price increased just 2% vs 20% increase in
the Hang Seng Index and sharply underperforming its closest peer Sinotrans (598 HK, Hold, TP:
HKD3.6, CMP: HKD3.74) which increased 18% during this period. At the current price, KLN is
trading at 16.3x FY17e PE and 1.1x PB with an ROE of 7% in 2017e, close to trough valuations.
Global logistics peers have traded at an average of 19.2x (range: 11-23x) since the global
financial crisis for an average 12-month forward earnings growth rate of 6%.
Key downside risks: Lower-than-expected growth in global trade; higher-than-expected
competition, inability to identify suitable acquisition targets and integrate them with existing
operations, aggressive M&A at expensive valuations; higher trade barriers and failure or delays
in commencement of regional free trade agreements; loss of key clients; lack of new contract
wins or renewals, and potential regulatory barriers to foreign logistics operators in China.
Prefer KLN to Sinotrans
In the logistics sector, we prefer KLN over Sinotrans on better earnings visibility driven by
operating business. While Sinotrans is to a large extent dependent on the dividend contribution
from its DHL-JV (46% of 2016 recurring profit), KLN has controlling stakes in its operations which
provide better earnings visibilty.
17. Logistics: 12-month forward PE trading range
Note: Logistics sector PE is simple average of Kuehne & Nagel, Panalpina, DSV A/S, Expeditors Intl., CH Robinson and Sinotrans; Priced as of 23 March 2017 Source: Thomson Reuters Datastream, HSBC
Valuation and risks: Sinotrans (598 HK, HKD3.74, Hold, HKD3.60)
We value Sinotrans’ shares based on 11x PE applied to the average of 2017-18e EPS. Our
target multiple of 11x PE is based on the the three-year average of Sinotrans’ past trading
range. Our target price of HKD3.6 implies 3.7% downside from the current share price. We have
a Hold rating on the stock.
Key downside risks include a weak macro environment; slower-than-expected growth at the
logistics unit; and margin erosion at the DHL-JV caused by higher oil prices/stronger EUR vs.
RMB. Key upside risks include a faster-than-expected and sizeable potential asset integration
with China Merchants Logistics; a rebound in trade growth; and a weaker EUR vs. RMB.
14.7x
21.7x 20.6x
Avg. post Lehman crisis, 19.2x
Avg. since 2014, 20.2x
8.0x
10.0x
12.0x
14.0x
16.0x
18.0x
20.0x
22.0x
24.0x
26.0x
Jan-
02Ju
n-02
Nov
-02
Apr
-03
Sep
-03
Feb-
04Ju
l-04
Dec
-04
May
-05
Oct
-05
Mar
-06
Aug
-06
Jan-
07Ju
n-07
Nov
-07
Apr
-08
Sep
-08
Feb-
09Ju
l-09
Dec
-09
May
-10
Oct
-10
Mar
-11
Aug
-11
Jan-
12
Jun-
12
Nov
-12
Apr
-13
Sep
-13
Feb-
14Ju
l-14
Dec
-14
May
-15
Oct
-15
Mar
-16
Aug
-16
Jan-
17
12-month forward PE Avg. post Lehman crisis Avg. since 2014
9
EQUITIES ● AIR FREIGHT & LOGISTICS
24 March 2017
Disclosure appendix
Analyst Certification
The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the
opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their
personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific
recommendation(s) or views contained in this research report: Parash Jain, Jack Xu and Louis Pang
Important disclosures
Equities: Stock ratings and basis for financial analysis
HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's
existing holdings, risk tolerance and other considerations and that investors utilise various disciplines and investment horizons
when making investment decisions. Ratings should not be used or relied on in isolation as investment advice. Different
securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations and
therefore investors should carefully read the definitions of the ratings used in each research report. Further, investors should
carefully read the entire research report and not infer its contents from the rating because research reports contain more
complete information concerning the analysts' views and the basis for the rating.
From 23rd March 2015 HSBC has assigned ratings on the following basis:
The target price is based on the analyst’s assessment of the stock’s actual current value, although we expect it to take six to 12
months for the market price to reflect this. When the target price is more than 20% above the current share price, the stock will
be classified as a Buy; when it is between 5% and 20% above the current share price, the stock may be classified as a Buy or a
Hold; when it is between 5% below and 5% above the current share price, the stock will be classified as a Hold; when it is
between 5% and 20% below the current share price, the stock may be classified as a Hold or a Reduce; and when it is more
than 20% below the current share price, the stock will be classified as a Reduce.
Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation or resumption of coverage,
change in target price or estimates).
Upside/Downside is the percentage difference between the target price and the share price.
Prior to this date, HSBC’s rating structure was applied on the following basis:
For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate,
regional market established by our strategy team. The target price for a stock represented the value the analyst expected the
stock to reach over our performance horizon. The performance horizon was 12 months. For a stock to be classified as
Overweight, the potential return, which equals the percentage difference between the current share price and the target price,
including the forecast dividend yield when indicated, had to exceed the required return by at least 5 percentage points over the
succeeding 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight,
the stock was expected to underperform its required return by at least 5 percentage points over the succeeding 12 months (or
10 percentage points for a stock classified as Volatile*). Stocks between these bands were classified as Neutral.
*A stock was classified as volatile if its historical volatility had exceeded 40%, if the stock had been listed for less than 12
months (unless it was in an industry or sector where volatility is low) or if the analyst expected significant volatility. However,
stocks which we did not consider volatile may in fact also have behaved in such a way. Historical volatility was defined as the
past month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating,
however, volatility had to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.
EQUITIES ● AIR FREIGHT & LOGISTICS
24 March 2017
10
Rating distribution for long-term investment opportunities
As of 23 March 2017, the distribution of all independent ratings published by HSBC is as follows:
For the purposes of the distribution above the following mapping structure is used during the transition from the previous to
current rating models: under our previous model, Overweight = Buy, Neutral = Hold and Underweight = Sell; under our current
model Buy = Buy, Hold = Hold and Reduce = Sell. For rating definitions under both models, please see “Stock ratings and basis
for financial analysis” above.
For the distribution of non-independent ratings published by HSBC, please see the disclosure page available at
http://www.hsbcnet.com/gbm/financial-regulation/investment-recommendations-disclosures.
Share price and rating changes for long-term investment opportunities
Kerry Logistics Network (0636.HK) share price
performance HKD Vs HSBC rating history
Rating & target price history
From To Date Analyst
Underweight (V) Neutral (V) 11 Dec 2014 Parash Jain Neutral (V) Hold 27 Mar 2015 Parash Jain Hold Buy 25 Aug 2015 Parash Jain Buy Hold 03 Nov 2015 Parash Jain Hold Buy 28 Nov 2016 Parash Jain
Target price Value Date Analyst
Price 1 12.80 11 Dec 2014 Parash Jain Price 2 12.00 25 Aug 2015 Parash Jain Price 3 13.00 03 Nov 2015 Parash Jain Price 4 10.70 22 Jan 2016 Parash Jain Price 5 12.20 23 Mar 2016 Parash Jain
Source: HSBC
Source: HSBC
Sinotrans (0598.HK) share price performance HKD Vs
HSBC rating history
Rating & target price history
From To Date Analyst
N/A Buy 10 Nov 2015 Aric Hui Buy Reduce 03 May 2016 Parash Jain Reduce Buy 27 Jun 2016 Parash Jain Buy Hold 23 Mar 2017 Parash Jain
Target price Value Date Analyst
Price 1 6.00 10 Nov 2015 Aric Hui Price 2 4.70 27 Jan 2016 Aric Hui Price 3 4.30 23 Mar 2016 Parash Jain Price 4 3.10 03 May 2016 Parash Jain Price 5 4.00 27 Jun 2016 Parash Jain Price 6 4.40 24 Aug 2016 Parash Jain Price 7 3.60 23 Mar 2017 Parash Jain
Source: HSBC
Source: HSBC
To view a list of all the independent fundamental ratings disseminated by HSBC during the preceding 12-month period, please
use the following links to access the disclosure page:
Clients of Global Research and Global Banking and Markets: www.research.hsbc.com/A/Disclosures
Clients of HSBC Private Banking: www.research.privatebank.hsbc.com/Disclosures
9
10
11
12
13
14
15
Mar
-12
Mar
-13
Mar
-14
Mar
-15
Mar
-16
Mar
-17
0
1
2
3
4
5
6
7
Mar
-12
Mar
-13
Mar
-14
Mar
-15
Mar
-16
Mar
-17
Buy 45% ( 25% of these provided with Investment Banking Services )
Hold 40% ( 26% of these provided with Investment Banking Services )
Sell 15% ( 18% of these provided with Investment Banking Services )
11
EQUITIES ● AIR FREIGHT & LOGISTICS
24 March 2017
HSBC & Analyst disclosures
Disclosure checklist
Company Ticker Recent price Price date Disclosure
KERRY LOGISTICS NETWORK 0636.HK 10.60 23 Mar 2017 7 SINOTRANS 0598.HK 3.74 23 Mar 2017 4, 6
Source: HSBC
1 HSBC has managed or co-managed a public offering of securities for this company within the past 12 months.
2 HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next 3
months.
3 At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this
company.
4 As of 28 February 2017 HSBC beneficially owned 1% or more of a class of common equity securities of this company.
5 As of 31 January 2017, this company was a client of HSBC or had during the preceding 12 month period been a client of
and/or paid compensation to HSBC in respect of investment banking services.
6 As of 31 January 2017, this company was a client of HSBC or had during the preceding 12 month period been a client of
and/or paid compensation to HSBC in respect of non-investment banking securities-related services.
7 As of 31 January 2017, this company was a client of HSBC or had during the preceding 12 month period been a client of
and/or paid compensation to HSBC in respect of non-securities services.
8 A covering analyst/s has received compensation from this company in the past 12 months.
9 A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as
detailed below.
10 A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this
company, as detailed below.
11 At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company and/or in
securities in respect of this company
12 As of 20 March 2017, HSBC beneficially held a net long position of more than 0.5% of this company’s total issued share
capital, calculated according to the SSR methodology.
13 As of 20 March 2017, HSBC beneficially held a net short position of more than 0.5% of this company’s total issued share
capital, calculated according to the SSR methodology. HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments, both equity and debt
(including derivatives) of companies covered in HSBC Research on a principal or agency basis.
Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment
banking, sales & trading, and principal trading revenues.
Whether, or in what time frame, an update of this analysis will be published is not determined in advance.
Economic sanctions imposed by the EU and OFAC prohibit transacting or dealing in new debt or equity of Russian SSI entities.
This report does not constitute advice in relation to any securities issued by Russian SSI entities on or after July 16 2014 and as
such, this report should not be construed as an inducement to transact in any sanctioned securities.
For disclosures in respect of any company mentioned in this report, please see the most recently published report on that
company available at www.hsbcnet.com/research. HSBC Private Banking clients should contact their Relationship Manager for
queries regarding other research reports. In order to find out more about the proprietary models used to produce this report,
please contact the authoring analyst.
EQUITIES ● AIR FREIGHT & LOGISTICS
24 March 2017
12
Additional disclosures
1. This report is dated as at 24 March 2017.
2. All market data included in this report are dated as at close 23 March 2017, unless a different date and/or a specific time of
day is indicated in the report.
3. HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its
Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research
operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier
procedures are in place between the Investment Banking, Principal Trading, and Research businesses to ensure that any
confidential and/or price sensitive information is handled in an appropriate manner.
4. You are not permitted to use, for reference, any data in this document for the purpose of (i) determining the interest
payable, or other sums due, under loan agreements or under other financial contracts or instruments, (ii) determining the
price at which a financial instrument may be bought or sold or traded or redeemed, or the value of a financial instrument,
and/or (iii) measuring the performance of a financial instrument.
Production & distribution disclosures
1. This report was produced and signed off by the author on 23 Mar 2017 15:09 GMT.
2. In order to see when this report was first disseminated please see the disclosure page available at
https://www.research.hsbc.com/R/34/DX6ST6V
13
EQUITIES ● AIR FREIGHT & LOGISTICS
24 March 2017
Disclaimer Legal entities as at 1 July 2016
‘UAE’ HSBC Bank Middle East Limited, Dubai; ‘HK’ The Hongkong and Shanghai Banking Corporation Limited, Hong
Kong; ‘TW’ HSBC Securities (Taiwan) Corporation Limited; 'CA' HSBC Securities (Canada) Inc.; HSBC Bank, Paris
Branch; HSBC France; ‘DE’ HSBC Trinkaus & Burkhardt AG, Düsseldorf; 000 HSBC Bank (RR), Moscow; ‘IN’ HSBC
Securities and Capital Markets (India) Private Limited, Mumbai; ‘JP’ HSBC Securities (Japan) Limited, Tokyo; ‘EG’ HSBC
Securities Egypt SAE, Cairo; ‘CN’ HSBC Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and
Shanghai Banking Corporation Limited, Singapore Branch; The Hongkong and Shanghai Banking Corporation Limited,
Seoul Securities Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch; HSBC Securities
(South Africa) (Pty) Ltd, Johannesburg; HSBC Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv; ‘US’ HSBC
Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler AS, Istanbul; HSBC México, SA, Institución de Banca
Múltiple, Grupo Financiero HSBC; HSBC Bank Australia Limited; HSBC Bank Argentina SA; HSBC Saudi Arabia Limited;
The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR; The
Hongkong and Shanghai Banking Corporation Limited, Bangkok Branch
Issuer of report
The Hongkong and Shanghai Banking Corporation
Limited
Level 19, 1 Queen’s Road Central
Hong Kong SAR
Telephone: +852 2843 9111
Fax: +852 2596 0200
Website: www.research.hsbc.com
This document has been issued by The Hongkong and Shanghai Banking Corporation Limited (“HSBC”) in the conduct of its Hong Kong regulated business for the information of its institutional
and professional investor (as defined by Securities and Future Ordinance (Chapter 571)) customers; it is not intended for and should not be distributed to retail customers in Hong Kong. The
Hongkong and Shanghai Banking Corporation Limited is regulated by the Hong Kong Monetary Authority. All enquires by recipients in Hong Kong must be directed to your HSBC contact in
Hong Kong. If it is received by a customer of an affiliate of HSBC, its provision to the recipient is subject to the terms of business in place between the recipient and such affiliate. This
document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. HSBC has based this document on information
obtained from sources it believes to be reliable but which it has not independently verified; HSBC makes no guarantee, representation or warranty and accepts no responsibility or liability as to
its accuracy or completeness. Expressions of opinion are those of the Research Division of HSBC only and are subject to change without notice. From time to time research analysts conduct
site visits of covered issuers. HSBC policies prohibit research analysts from accepting payment or reimbursement for travel expenses from the issuer for such visits. HSBC and its affiliates
and/or their officers, directors and employees may have positions in any securities mentioned in this document (or in any related investment) and may from time to time add to or dispose of any
such securities (or investment). HSBC and its affiliates may act as market maker or have assumed an underwriting commitment in the securities of companies discussed in this document (or in
related investments), may sell them to or buy them from customers on a principal basis and may also perform or seek to perform investment banking or underwriting services for or relating to
those companies.
HSBC Securities (USA) Inc. accepts responsibility for the content of this research report prepared by its non-US foreign affiliate. All U.S. persons receiving and/or accessing this report and
wishing to effect transactions in any security discussed herein should do so with HSBC Securities (USA) Inc. in the United States and not with its non-US foreign affiliate, the issuer of this
report.
In the UK this report may only be distributed to persons of a kind described in Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005. The protections
afforded by the UK regulatory regime are available only to those dealing with a representative of HSBC Bank plc in the UK. In Singapore, this publication is distributed by The Hongkong and
Shanghai Banking Corporation Limited, Singapore Branch for the general information of institutional investors or other persons specified in Sections 274 and 304 of the Securities and Futures
Act (Chapter 289) (“SFA”) and accredited investors and other persons in accordance with the conditions specified in Sections 275 and 305 of the SFA. This publication is not a prospectus as
defined in the SFA. It may not be further distributed in whole or in part for any purpose. The Hongkong and Shanghai Banking Corporation Limited Singapore Branch is regulated by the
Monetary Authority of Singapore. Recipients in Singapore should contact a "Hongkong and Shanghai Banking Corporation Limited, Singapore Branch" representative in respect of any matters
arising from, or in connection with this report. In Australia, this publication has been distributed by The Hongkong and Shanghai Banking Corporation Limited (ABN 65 117 925 970, AFSL
301737) for the general information of its “wholesale” customers (as defined in the Corporations Act 2001). Where distributed to retail customers, this research is distributed by HSBC Bank
Australia Limited (AFSL No. 232595). These respective entities make no representations that the products or services mentioned in this document are available to persons in Australia or are
necessarily suitable for any particular person or appropriate in accordance with local law. No consideration has been given to the particular investment objectives, financial situation or particular
needs of any recipient. This publication is distributed in New Zealand by The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR.
In Japan, this publication has been distributed by HSBC Securities (Japan) Limited. It may not be further distributed in whole or in part for any purpose. In Korea, this publication is distributed
by The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch ("HBAP SLS") for the general information of professional investors specified in Article 9 of the Financial
Investment Services and Capital Markets Act (“FSCMA”). This publication is not a prospectus as defined in the FSCMA. It may not be further distributed in whole or in part for any purpose.
HBAP SLS is regulated by the Financial Services Commission and the Financial Supervisory Service of Korea.
In Canada, this document has been distributed by HSBC Securities (Canada) Inc. (member IIROC), and/or its affiliates. The information contained herein is under no circumstances to be
construed as investment advice in any province or territory of Canada and is not tailored to the needs of the recipient. No securities commission or similar regulatory authority in Canada has
reviewed or in any way passed judgment upon these materials, the information contained herein or the merits of the securities described herein, and any representation to the contrary is an
offense.
If you are an HSBC Private Banking (“PB”) customer with approval for receipt of relevant research publications by an applicable HSBC legal entity, you are eligible to receive this publication. To
be eligible to receive such publications, you must have agreed to the applicable HSBC entity’s terms and conditions (“KRC Terms”) for access to the KRC, and the terms and conditions of any
other internet banking service offered by that HSBC entity through which you will access research publications using the KRC. Distribution of this publication is the sole responsibility of the
HSBC entity with whom you have agreed the KRC Terms.
If you do not meet the aforementioned eligibility requirements please disregard this publication and, if you are a customer of PB, please notify your Relationship Manager. Receipt of research
publications is strictly subject to the KRC Terms, which can be found at https://research.privatebank.hsbc.com/ – we draw your attention also to the provisions contained in the Important Notes
section therein.
© Copyright 2017, The Hongkong and Shanghai Banking Corporation Limited, ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or
transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of The Hongkong and Shanghai Banking
Corporation Limited. MCI (P) 094/06/2016, MCI (P) 085/06/2016, MCI (P) 126/02/2017
[594301]
Industrials
Analyst Michael Hagmann +44 20 7991 2405 [email protected]
Analyst Scott Cagehin +44 20 7992 1444 [email protected]
Analyst Debashis Chand +91 80 4555 2755 [email protected]
Head of Research, Korea Brian Cho +822 3706 8750 [email protected]
Analyst Paul Choi +822 3706 8758 [email protected]
Analyst Anderson Chow +852 2996 6669 [email protected]
Analyst Puneet Gulati +91 22 2268 1235 [email protected]
Analyst Yeon Lee +822 3706 8778 [email protected]
Analyst Sean McLoughlin +44 20 7991 3464 [email protected]
Analyst Ashutosh Narkar +91 22 2268 1474 [email protected]
Analyst Edward Perry +44 20 7991 8415 [email protected]
Analyst Shrinidhi Karlekar +91 22 6164 0689 [email protected]
Analyst Nick Webster +27 11 676 4537 [email protected]
Analyst Jörg-André Finke, CFA +49 211 910 3722 [email protected]
Analyst Somesh Agarwal +65 6658 0616 [email protected]
Analyst Richard Schramm +49 211 910 2837 [email protected]
Analyst Philip Saliba +49 211 910 2672 [email protected]
Associate Tracy Li +852-2996 6751 [email protected]
Autos
Analyst Horst Schneider +49 211 910 3285 [email protected]
Analyst Yogesh Aggarwal +91 22 2268 1246 [email protected]
Analyst Henning Cosman +44 207 991 0369 [email protected]
Analyst Matthias Schäfer +49 211 910 1556 [email protected]
Analyst Vivek Gedda +91 22 6164 0693 [email protected]
Analyst Vikas Ahuja +91 22 3396 0690 [email protected]
Analyst Tarun Bhatnagar +65 6658 0614 [email protected]
Analyst Carson Ng +852 2822 4397 [email protected]
Analyst John Chung +8862 6631 2868 [email protected]
Transportation
Analyst Andrew Lobbenberg +44 20 7991 6816 [email protected]
Analyst Edward Stanford +44 20 7992 4207 [email protected]
Analyst Parash Jain +852 2996 6717 [email protected]
Analyst Achal Kumar +91 80 4555 2751 [email protected]
Analyst Wei Sim +852 2996 6602 [email protected]
Analyst Shishir Singh +852 2822 4292 [email protected]
Analyst Jack Xu +852 2996 6566 [email protected]
Associate Louis Pang +852 2914 9934 [email protected]
Analyst Joe Thomas +44 20 7992 3618 [email protected]
Analyst Alexandre Falcao +1 212 525 4449 [email protected]
Analyst Ravi Jain +1 212 525 3442 [email protected]
Analyst Augusto A Ensiki +1 212 525 4915 [email protected]
Construction & Engineering
Analyst Tarun Bhatnagar +65 6658 0614 [email protected]
Head of French Research Pierre Bosset +33 1 56 52 43 10 [email protected]
Analyst Jonathan Brandt, CFA +1 212 525 4499 [email protected]
Analyst Eduardo Altamirano +1 212 525 8333 [email protected]
Analyst Kevin R Gonzalez +1 212 525 4394 [email protected]
Global Equity Head of Building Materials John Fraser-Andrews +44 20 7991 6732 [email protected]
Analyst Tobias Loskamp +49 211 910 2828 [email protected]
Analyst Lesley Liu +852 2822 4524 [email protected]
Analyst Shishir Singh +852 2822 4292 [email protected]
Analyst Patrick Gaffney, CFA +971 4 423 6204 [email protected]
Analyst Nicholas Paton, CFA +971 4 423 6923 [email protected]
Analyst Emily Li +852 2996 6599 [email protected]
Specialist Sales
Rod Turnbull +44 20 7991 5363 [email protected]
Oliver Magis +49 21 1910 4402 [email protected]
Billal Ismail +44 20 7991 5362 [email protected]
Jean Gael Tabet +44 20 7991 5342 [email protected]
Global Industrials Research Team