1H24 results in line with our expectations
　　ANE (Cayman) Inc (ANE) announced its 1H24 results: Revenue rose 16% YoY to Rmb5.29bn, gross profit grew 59% YoY to around Rmb878mn, gross margin rose 4.5ppt YoY to 17%, and adjusted net profit grew 82% YoY to about Rmb430mn. We calculate that in 2Q24, the firm's revenue rose 17% YoY to Rmb2.91bn, gross profit grew 47% YoY to over Rmb496mn, and adjusted net profit rose 39% YoY to Rmb221mn, in line with our expectations. The firm's businesses expanded despite headwinds, and its earnings improved notably, mainly because its efforts to expand franchise network and upgrade product mix further enhanced its cost advantage.
　　Franchise channel expansion and product mix optimization drove freight volume and revenue growth. In 1H24, the firm's freight volume rose 20% YoY to 6.42mnt. In 2Q24, the freight volume grew 19% YoY to 3.55mnt. The firm recorded strong growth in small parcel volume, with YoY and growth at 28% in 1H24 and 30% in 2Q24. Road freight demand has been weak since 2Q24, but the firm's business scale has maintained rapid growth due to two reasons.
　　First, the firm continued to expand franchise channels and build a network ecosystem. The number of its partners and distributors rose about 11% YoY to more than 31,000 in 1H24, and end-market customers increased about 16% YoY to about 5.8mn.
　　Second, the firm optimized product mix. It lifted special surcharges for goods weighed between 3kg and 300kg, and improved competitiveness in terms of timeliness, loss and damage, and complaint rate. As a result, its small parcel volume increased rapidly, and average weight of the parcel dropped 5% YoY to 89kg.
　　Continues to benefit from the optimization of transportation network; profit margin hit a new high. The firm began to optimize its distribution structure in May 2023. It integrated or eliminated small distribution centers to reduce good transfer frequency, transportation costs, and distribution costs. Thanks to its efforts, its unit transportation and distribution costs in 1H24 fell 6% and 23% YoY, while gross margin hit a new high of 17%. Given the peak season in 2H24 and the firm’s pace of cost reduction, we expect its full-year gross margin to remain stable at around 16%.
　　Trends to watch
　　We expect consolidation of the express delivery industry to accelerate in recent years, and we are upbeat on the firm's sustained growth in terms of market share and earnings amid market concentration. After analyzing the US less-than-truckload (LTL) industry, we note that the industry saw small-size companies (e.g., Yellow) exit the market in 2010 and 2023 when demand declined. Hence, leading players (e.g., ODFL) saw market share and profit increase.
　　In recent years, China's LTL market has been experiencing moderate demand recovery, related companies have been penetrating into lower-tier markets, and there are a large number of dedicated line and regional network companies. Some special lines and regional networks will likely be eliminated due to a lack of anti-risk capability and diverse good sources. Compared with them, leading express delivery companies with advantages in network coverage, efficiency, and quality are leveraging their economies of scale and cost advantages to offer services with higher quality but lower prices. We expect the express delivery industry to become more concentrated in recent years, and leading companies to continue to increase market share.
　　Financials and valuation
　　We keep our 2024 and 2025 earnings forecasts unchanged. The stock is trading at 9.1x 2024e and 7.3x 2025e adjusted P/E. We maintain an OUTPERFORM rating and our TP of HK$10.00, implying 12.5x 2024e and 9.9x 2025e adjusted P/E, offering 38.1% upside.
　　Risks
　　Disappointing economic growth; intensifying price competition; disappointing cost control.