Action
This is the sixth report of our “seeking stable returns series.” The fivecompanies previously covered are: Changjiu Logistics-A, SITC-H,Travelsky-H, Shenzhen Expressway-A/H and GPED-A. We likeSinotrans for its earnings stability and the upside from its comingA-share issuance. We reiterate BUY, as Sinotrans is at the bottom ofits historical valuation.
Reasoning
Sinotrans has three major business segments: freight forwarding,specialized logistics and international express delivery （via JVDHL-Sinotrans）。 These segments contributed 33%, 21%, and 28% of1H2018’s EBIT （excluding other gains/losses）。
We see limited downside. Solid performance: Sinotrans has seen YoYgrowth maintained since 2009, and achieved healthy operating profitgrowth of 10% from 2013 to 2017, and is now at the bottom of itshistorical valuation since 2014 （trading at 6.6x 2019e P/E, 0.7x 19eP/B, with a 4.5% dividend yield）。 Too much concern about tradefriction: The sluggish performance of stock price YTD reflects themarket’s concern about the US-China trade friction. But US linesaccounts for less than 15% of Sinotrans’ total freight volume, most ofwhich is low-value cargo and at present not included in the US’s list oftariff increases. Instead, the manufacturing base transferal may boostintra-Asia lanes （which account for 47% of total）。
Several catalysts ahead: 1） An A-share issuance is around the corner（SinoAir is now suspended until being delisted） – Sinotrans’ H-share is71% cheaper than its a-share issuance price; 2） Synergies with ChinaMerchant Logistics （CML） and expansion in the specialized logisticbusiness will have positive impact next year; 3） We expect furtherimprovement in the profitability of freight forwarding by narrowingthe gap with global comparable companies; 4） Hidden value inSinotrans’ land holdings: CML enhanced Sinotrans’ land area by 35%to 12mn sqm （mostly in East China）。 The HK$20bn market cap doesn’tfully reflect the value of the land.
Earnings forecast and valuation
We lower our 2018’s EPS forecast by 4% from Rmb0.42 to 0.40 （+4.5%YoY） considering probably less one-off gains, and lower 2019’s by 1%from Rmb0.44 to 0.43 （+8.8% YoY） on probable lower FX gains. Wemaintain BUY rating and TP of HK$4.22（9.0x 2019e P/E; 36% upside）。
Risks
Economy slows; US-China trade friction worsens; slower thanexpected A-share issuance.