Action
On Jan. 18, Sinotrans will issue 1.35bn A-shares on the ShanghaiStock Exchange （ticker: 601598.SH）。 We believe Sinotrans-A willcontinue to catalyze the price of H-shares and the hidden value ofland holdings may help boost profit and valuation. We restate BUY forH-share and suggest watching A-share.
Reasoning
Sinotrans has three major business segments. Freight forwarding,specialized logistics, and international express delivery （viaDHL-Sinotrans JV） contributed 33%, 21%, and 28% of 1H18’s EBIT.
Specialized logistics and freight forwarding grew steadily. Net profithas maintained YoY growth since 2009 and the CAGR of operatingprofit reached 10% in 2013–2017. We expect synergies with ChinaMerchant Logistics （CML） and expansion in the specialized logisticbusiness to have a positive impact in 2019. Freight forwarding volumeand margin have kept growing in the past five years. By raising theproportion of direct clients, increasing service contents, andstrengthening regional integration, we believe Sinotrans still haspotential upside in profitability.
Hidden value of land is significantly undervalued. The ChinaMerchants Logistics （CML） acquisition in 2017 enhanced Sinotrans’land area by 35% to 12mn sqm （mostly in East China）。 Sinotransdisposed of a subsidiary called Shenzhen Logistics with 58,550 sqm ofwarehouse space （less than 1% of Sinotrans’ owned land），contributing Rmb480mn in pretax gains in 2015. Current market capis HK$26bn, not fully reflecting the full value of land holdings. IfSinotrans disposes of land assets it could quickly boost profit.
H-share’s valuation more attractive. The P/E ratio of Sinotrans-A is30% lower than the average P/E of A-share logistics companies.Sinotrans’ H-share is over 70% cheaper than its A-share issuanceprice and is at the bottom of its historical valuation （7.5x 2019e P/E;4.4% dividend yield for 2019）。
Earnings forecast and valuation
We maintain 2018 net profit forecast. Considering the consolidationand A-share issuance, we increase our 2019 forecast by 22% fromRmb2.62bn to Rmb3.23bn, and introduce a 2020 forecast ofRmb3.46bn, implying EPS over 2018–2020 of Rmb0.40 （up 4.5%），Rmb0.44 （8.0%）， and Rmb0.47 （7.2%）。 The stock is trading at 7.5x2019e P/E （one standard deviation below the historical average）。 Wemaintain BUY and a TP of HK$4.22 （9.0x 2019e P/E; 20% upside） andsuggest watching Sinotrans-A （the opening price implies 12x 2019eP/E）。 Risks: Economy slows; US-China trade friction worsens