1H23 profit slightly beats our expectation
　　SF Intra-City Industrial announced 1H23 results: Revenue rose 29% YoY to Rmb5.75bn. Gross profit rose 112% YoY to Rmb383mn and GM rose 2.6ppt YoY to 6.7%, the firm’s highest yet. Net profit rose Rmb174mn YoY to Rmb30mn and net margin grew 3.8ppt YoY to 0.5%, with profit from continuing operations rising Rmb45mn （excluding a net loss of Rmb14mn from discontinued operations）。 The firm turned profitable for the first time in 1H23, slightly beating our expectations.
　　Operating data: The number of active merchants increased 27% YoY to 380,000, the number of active consumers rose 50% YoY to 185,000, and the number of active riders increased 23% YoY to 860,000.
　　Trends to watch
　　Intra-city delivery.
　　Due to the firm’s reputation and neutral position as a third-party delivery service platform, the firm cooperates with platforms, maintaining growth in revenue from merchant services. Revenue growth of merchant services slowed to 12% in 1H23 due to customer structure adjustment and COVID-19 resurgences.
　　Key account （KA） business: We expect cooperation with Douyin Lifestyle will drive rapid revenue growth.
　　Small and medium-sized enterprise （SME） business: We expect the firm’s unit economics （UE） to continue to improve as order volume increases. In addition, the company announced cooperation with Meituan Waimai （link in Chinese） which we believe illustrates the firm’s advantages in fulfillment. During peak season in 2H23, we expect revenue from merchant services to grow about by 18% YoY in 2023, with KA business growing even faster.
　　Gross profit of consumer services improved due to economies of scale and optimization of network efficiency. We expect the Intra- city delivery segment to continue to grow rapidly as the firm connects with more than 3mn monthly active customers in its network and penetrates business scenarios due to synergies with SF Express.
　　Last-mile delivery: Revenue from last-mile delivery services grew 54% YoY in 1H23, accelerating notably from 7% in 1H22, which we attribute to　efforts to take over some intra-city express delivery services and upgrade of intra-city half-day delivery services. As the firm's penetration rate in the large network rises and synergies develop, we believe this business segment will contribute to earnings and further improve its gross profit.
　　We expect net profit margin to improve to 0.3% in 2023. Looking ahead, we expect the firm's average cost per order to decline further thanks to diversified business traffic and gradual expansion of order volume. We expect the firm to record a profit margin of 0.3% in 2023, up 3.1ppt YoY.
　　In addition, the firm completed two H-share full circulations in February and July, increasing the proportion of free float from 25% to 82%, and expanding the number of free float to 762mn. On March 28, the firm announced the first employee incentive scheme since its listing （no more than 5% of H-shares in issue）， which we believe could drive up its valuation and inject vitality to business development.
　　Financials and valuation
　　As the firm has turned profitable faster than we expected, we raise our 2023 earnings forecast by Rmb78mn to Rmb35mn and our 2024 earnings forecast by 4% to Rmb164mn.The stock is trading at 0.5x 2023e and 0.4x 2024e P/S. We maintain OUTPERFORM rating and our target price of HK$12.50, implying 0.8x 2023e and 0.6x 2024e P/S, offering 52% upside.
　　Risks
　　Economic slowdown; COVID-19 resurgence; deteriorating competitive landscape; high exposure to related-party transactions.