Investment positives
　　We initiate coverage on ANE （Cayman） Inc with an OUTPERFORM rating and a TP of HK$7.5, implying 17.1x 2023e and 12.8x 2024e non-HKFRS P/E.
　　Why an OUTPERFORM rating?
　　Express freight: A high-potential segment to lead the consolidation of the Rmb1trn LTL market. Less-than-truckload （LTL） is the backbone of the road transportation market, while express freight is a high-potential segment with stronger growth potential than full truckload （FTL） with a larger market size and consolidation potential than express delivery.
　　According to Yunlian Research Institute and our estimates, the LTL market was Rmb1.5trn in 2022, with only 12 express companies operating the national network. LTL's penetration rate was only 8.0% in terms of revenue. In recent years, express freight networks have gained competitive advantages over regional networks and liner logistics. Guided by the policy of building a national market, we expect express freight to consolidate the LTL industry and its penetration rate to keep rising amid industrial upgrading and channel reform.
　　ANE is China's first platform-based express freight network and one of its largest, fastest-growing, and most profitable. In 2022, the firm's LTL freight volume was 12.11mn tonnes, accounting for 15.2% of the freight volume in the express freight market and 23.7% of the platform-based express freight segment. As of end-2022, ANE had about 30,000 freight partners and agents and about 4,000 trunk-line high-capacity trucks （HCT）。 The firm's LTL freight volume grew at a CAGR of 13.4% over 2018-2022.
　　ANE is at a vital transformation point in its growth trajectory, and we are upbeat about the growth momentum resulting from the firm's management and operational optimization. With a freight volume of 10mnt in 2020, the first growth curve for ANE centers on transforming economies of scale into cost and pricing advantages by focusing on freight volume growth. The second curve focuses on effective scale expansion and emphasizes cost reduction, efficiency enhancement, and service quality improvement.
　　We think ANE is shifting from being focused on expanding scale to transitioning toward being focused on quality and profit. If its efforts to optimize the organizational structure, reduce costs, improve quality, and improve its outlet ecosystem pay off, we expect its earnings to return to growth.
　　How do we differ from the market? We think the market has not fully recognized the logic behind the consolidation of the LTL industry's competitive landscape and the potential earnings recovery brought by the firm's management and operational reforms.
　　Potential catalysts: Freight volume recovery accelerates; franchisee management improves and the pace of cost optimization beat expectations.
　　Financials and valuation
　　We estimate the firm’s non-HKFRS EPS at Rmb0.37 in 2023 and Rmb0.48 in 2024 and non-HKFRS attributable net profit at Rmb431mn in 2023 and Rmb558mn in 2024. The stock is trading at 13.4x 2023e and 10.1x 2024e non-HKFRS P/E. Given the segment’s growth potential and rate, and ANE’s leadership and comparative advantages, we assign an OUTPERFORM rating and a TP of HK$7.5 （17.1x 2023e and 12.8x 2024e non-HKFRS P/E）， offering 27% upside.
　　Risks
　　Disappointing organizational efficiency improvement; lack of sector and company data transparency; disappointing economic growth; sharper-than-expected increase in fuel costs; disappointing cost control.