Investment positives
　　We initiate coverage on ANE （Cayman） Inc with an OUTPERFORM rating and a target price of HK$7.50, implying 17.1x 2023e and 12.8x 2024e non-HKFRS （Hong Kong Financial Reporting Standards） P/E.Why an OUTPERFORM rating?
　　Express freight: High-potential segment to lead consolidation of Rmb1.5trn LTL market. The less-than-truckload （LTL） segment accounts for the biggest portion of the overall road transportation market. We consider express freight a sub-segment of LTL. We believe express freight has stronger growth potential than the full truckload （FTL） segment. Express freight is a larger market than express delivery, and we think it has more consolidation potential.
　　According to Yunlian Research Institute and our estimates, the LTL market was Rmb1.5trn in 2022, with only 12 express companies operating national freight express networks. In 2022, express freight accounted for just 8.0% of the overall LTL market in terms of revenue. In recent years, express freight networks have gained competitive advantages over regional networks and liner logistics. Guided by government policy for building a national market, we expect express freight companies to consolidate the LTL industry and their 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.
　　At a transformation point in growth trajectory; we are upbeat about growth momentum resulting from management and operational optimization. With a freight volume of 10mnt in 2020, we think 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 a focus on expanding scale to a focus 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 do not think the market has fully recognized the logic behind consolidation in the LTL industry and a potential earnings recovery spurred by the firm's management and operational reforms.
　　Potential catalysts: Freight volume recovery accelerates; franchisee management improves and pace of cost optimization beats 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 both the segment’s growth potential and its current growth rate, and ANE’s leadership and comparative advantages, we assign an OUTPERFORM rating and a target price of HK$7.50 （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.