Management said that 2016 was the most challenging in adecade （FX & one-offs）； however, the worst may be behind us
Integration of APEX and organic growth to drive profit reboundin 2017e; divestments of non-core assets could improve ROE
Upgrade to Buy （from Hold） after recent underperformanceand strong 2017e outlook.
Maintain HKD12.2 TPHSBC participated in a reverse non-deal roadshow （NDR） and site visits organized byKerry Logistics Network （KLN） in Hong Kong on 25 November. Below are the highlights.
　　Muted profit growth in 2016e due to FX and one-offs: During the reverse NDR,management said that 2016 so far has been the most challenging in a decade andexpects low single digit profit growth as adverse FX coupled with certain one-offs hurtgrowth. Since Donald Trump’s election as the next US president, USD has furtherstrengthened against EM FX and so we expect it will continue to weigh on KLN’searnings. Besides FX, organic growth was also hurt by 1） 21 fewer working days in2H16 in Taiwan due to introduction of more holidays and typhoons; 2） weakereconomic conditions in Thailand; 3） lower freight forwarding margins due to the surgein shipping rates caused by Hanjin Shipping’s （117930 KS, NR, KRW709） bankruptcy;and 4） demonetisation in India could pull back the strong growth seen during 1H16.
　　The worst may be behind us; management expects profits to rebound in 2017e:
　　Management said that the integration of the recently acquired APEX （Asia-US freightforwarding）， recent customer wins and organic growth in logistics business, and a lowbase due to the one-off events of 2016e, could potentially drive higher profit growth in2017e. Hong Kong warehousing is also looking better with occupancy rebounding to97% now （vs 93% in 1H16）。 KLN is looking to scale down investments in 2017-18eand focus on integration of recent acquisitions and organic growth. KLN also said thatit will look to divest certain non-core assets （c10% of assets base） over the next fiveyears and reinvest in remunerative businesses which could provide upside to ROE.
　　We cut our 2016 profit estimates by 2% to reflect lower margins in freight forwarding（post Hanjin bankruptcy in 3Q16） and weak EM FX vs the USD post US elections. Wemaintain our 2017-18 profit estimates （implying 9% CAGR）。 In 2016e, we are 5%below consensus on EBIT and 13% below on recurring earnings estimates.
　　Upgrade to Buy （from Hold） with unchanged HKD12.2 TP: Over the past one year,KLN’s share price declined 14% vs a 3% increase in the local index andunderperformed its international peers led by concerns of a slowdown in China, FXheadwinds and the rejection of its columbarium project in Hong Kong more recently.
　　We value the stock at 18.1x 2017e PE （from 18.2x） based on a market cap weightedaverage PE of comparable peers. KLN is trading at close to its trough 12-monthforward consensus PB and PE valuations. We upgrade KLN to Buy （from Hold）following recent underperformance and our expectations of profit rebound in 2017e.