2H23 results in line with our expectations
　　SF Intra-City Industrial announced its 2023 results. In 2023, revenue rose 21.1% YoY on a comparable basis to Rmb12.39bn. Gross profit increased 93.5% to Rmb0.79bn, and gross margin rose 2.4ppt YoY to 6.4%. Net profit increased Rmb0.34bn to Rmb51mn, and net profit margin rose 3.2ppt to 0.4%. Net profit from continuing operations grew Rmb0.3bn to Rmb63mn (or it recorded a net loss of Rmb14mn excluding the disposal of businesses), marking the firm turned profitable in 2023. SF Intra-City Industrial’s results are in line with our expectations.
　　Trends to watch
　　Intra-city delivery: Diversified business traffic and product categories drive sustained growth in orders from merchants. In 2023, revenue from merchant services rose 12.8% YoY to Rmb7.39bn, and the number of active merchants increased 42% YoY to d 470,000. Revenue from counties rose 147% YoY. Given falling average price per order, we project the volume of orders from merchants grew about 20% YoY.
　　1) Diversified business traffic: The firm continued to diversify its business traffic to build an ecosystem jointly with major platforms (e.g., Douyin, Alibaba, Weixin, and Didi). 2) Diversified product categories: In 2023, revenue from deliveries of tea & beverages rose 75% YoY, and revenue from deliveries of pharmaceuticals, cosmetics, mother & baby products, pets, and jewelry all registered high-double-digit growth.
　　Customer base and order volume of consumer services grew more than 30% thanks to good brand reputation and extension of business scenarios. In 2023, the number of active consumers grew more than 30% YoY to around 20.5mn. Backed by SF's brand image and the expansion of business scenarios from intra-city delivery to “hourly delivery”, we believe the firm’s order volume rose more than 30% in 2023 though short-distance orders accounted for a higher proportion of total order volume and average price per order declined. We believe the intra-city delivery business will maintain rapid growth driven by increasingly diversified business traffic and sources of demand.
　　Last-mile delivery: In 2023, revenue from the last-mile delivery business grew 36% YoY (vs. +20% YoY in 2022), which we attribute to the accelerated development of intra-city delivery and expansion of　　cooperation scenarios, e.g., the upgrade of SF's intra-city half-day delivery products. In view of the firm's rising penetration rate in SF Express’ service network and growing synergies with SF Express, we believe the business will continue to drive the steady growth of and contribute profit to the firm.
　　We expect the firm's net profit margin to increase in 2024 as it moves to strike a balance between revenue growth and profit. Looking ahead, we expect the firm's gross margin to continue to rise as order volume increases, and we believe its net profit margin may rise 0.5ppt YoY to 0.9% in 2024 thanks to cost reduction and efficiency enhancement.
　　In addition, we believe the firm will continue to attach importance to improving shareholder returns. The firm announced a share buyback plan in October 2023, aiming to spend up to HK$200mn on share buyback. It had spent around HK$100mn before the annual report quiet period. We estimate that if the remaining HK$100mn is used up, the firm might have met the requirements for inclusion into the Stock Connect program in terms of market cap and turnover as of end-March, boding well for its valuation.
　　Financials and valuation
　　As the absolute values of the firm's average price per order and profit per order declined amid its rapid penetration in lower-tier markets, we lower our 2024 earnings forecast 13% to Rmb142mn and introduce our 2025 earnings forecast of Rmb241mn. The stock is trading at 0.5x 2024e and 0.4x 2025e P/S. We maintain OUTPERFORM rating and our target price at HK$12.50, implying 0.6x 2024e and 0.5x 2025e P/S, and offering 29% upside.
　　Risks
　　Economic slowdown; COVID-19 resurgence; deteriorating competitive landscape; high exposure to related-party transactions.