What's new
　　ANE （Cayman） Inc. recently informed franchisees that fines for outlet cargo volume assessment would be removed from June 1 and that incremental parcel volume would be rewarded with an Rmb0.1/kg incentive. After removing its compulsory freight volume contracting model, the firm continues to optimize and reform its franchisee ecosystem, transforming its platform's network environment into a win-win collaboration.
　　Comments
　　We think the firm has two growth curves and is transforming from a scale-oriented model to a quality and profit-oriented one. We think canceling the fine for freight volume assessment shows that the firm is accelerating its shift to the second growth curve, which may lead to consolidation in the platform-based express freight sector.
　　“Freight volume contracting” and freight volume assessment fines were early management tools in platform-based express freight. Freight volume contracting means franchisees paying freight transportation fees in advance to the headquarters of express freight companies and obtaining discounts based on the agreed freight volume. In the early stage of network expansion, major platform-based express freight companies adopted this management model to varying degrees to motivate franchisees and reduce billing costs.
　　As the business size of express freight companies reaches 10mn tonnes, the flaws of freight volume contracting, an extensive management model, emerged. The removal of freight volume contracting is a shift in growth logic. Freight volume contracting and fines are based on an extensive one-indicator assessment focusing on the growth of parcel volume. As the express freight network expands, core franchisees continue to enjoy cost advantages in freight volume contracting, while marginal franchisees suffer fines, resulting in unequal rewards and punishments and a loss of parcel volume and franchisees. The express freight network thus faces bottlenecks in volume and profit. As the firm begins to shift to the second growth curve with refined operations, we believe the removal of freight volume contracting is an inevitable adaption to the new stage of development.
　　Cancellation of freight volume contracting and introduction of reward mechanism demonstrate leading companies’ earnings advantage; this may push more express freight franchisees to cooperate with leading players. The scale of franchise-based express freight companies has diverged significantly. Leading express freight companies with an annual freight capacity of more than 10mn tonnes have significantly outperformed smaller ones in terms of freight volume and earnings, while the latter has yet to break even due to insufficient economies of scale.
　　While leading express freight companies take the lead in canceling freight volume contracting and fines by leveraging their earnings advantage, it is often difficult for small- and medium-sized express freight companies to do so due to their cash flow constraints and strong demand for parcel volume growth. Furthermore, leaders also introduce incentives for incremental parcel volume to attract new franchisees. Given the two-way effect, we think leading express freight companies like ANE may push more franchisees to cooperate with industry leaders.
　　Financials and valuation
　　We expect non-HKFRS attributable net profit to be Rmb431mn and Rmb558mn in 2023 and 2024. The stock is trading at 13.2x 2023e and 9.9x 2024e non-HKFRS P/E. We maintain OUTPERFORM and TP of HK$7.50 （17.1x 2023e and 12.8x 2024e non-HKFRS P/E）， offering 29.1% upside.
　　Risks
　　Disappointing reforms to improve organizational efficiency; risks related to transparency of industry and company data; economic growth disappoints; sharper-than-expected increase in fuel costs; disappointing cost control.