1H25 results beat our expectations
　　SF Intra-City Industrial announced its 1H25 results: Revenue rose 49% YoY to Rmb10.236bn; gross profit grew 44% YoY to Rmb681mn, and gross margin fell 0.2ppt YoY to 6.7%; net profit grew 120% YoY to Rmb137mn, and net margin rose 0.4ppt YoY to 1.3%; adjusted net profit grew 139% YoY to Rmb160mn. The results beat our expectations, mainly thanks to stronger-than-expected growth in instant retail demand. Annual active merchants increased 55% YoY to 0.85mn; annual active consumers increased 13% YoY to more than 24.77mn; and annual active riders increased 18% YoY to 1.14mn.
　　Trends to watch
　　Intra-city delivery: 1) Growing order volume in the food delivery industry and rising demand from diversified businesses boosted demand for instant delivery fulfillment; revenue from merchants continued to grow and key account (KA) business maintained high growth. In 1H25, the firm’s revenue from merchants rose 55% YoY to Rmb4.467bn. We think the food delivery industry has seen strong order volume growth driven by platform subsidies and pro-consumption policies, and KA restaurants may benefit more. In addition, instant delivery demand from diversified KA businesses such as supermarkets and pharmaceuticals is growing. Against the backdrop of rapid industry growth, we believe the firm will continue to win incremental orders from KA merchants thanks to its neutrality as a third party, refined business district network operation capability, and flexible transport capacity network. We expect the firm’s revenue from merchants to grow more than 50% in 2025, with YoY growth in KA business likely to be higher. 2) Consumer business grew steadily along with macro demand and continued to create synergies with express delivery business. In 1H25, the firm’s revenue from consumer business grew 12% YoY. Thanks to synergies with express delivery, the firm expanded its high-quality service scenarios, and the penetration rate of its “hourly delivery” product continued to rise. We expect consumer business to maintain double-digit growth in 2025.
　　Last-mile delivery: Revenue from last-mile delivery business rose 57% YoY in 1H25, driven by the parentco’s growing demand for last- mile delivery and the firm’s rising penetration rate in the parentco’s network. SF Holding announced that its parcel volume rose 26% YoY in 1H25. We think the firm’s last-mile delivery business grew strongly thanks　to rising demand for returns and exchanges on e-commerce platforms and last-mile fulfillment demand generated by the delivery of products receiving national subsidies. In addition, as the firm’s transport capacity network is gradually integrated with the parentco’s express delivery network, its penetration rate in the parentco’s network rises, and synergies strengthen, we expect last-mile delivery business to grow more than 50% in 2025.
　　As economies of scale continue to emerge, we expect expense ratio to be 5.4% in 2025, with considerable downside potential in the future. Thanks to the growth of orders and the firm’s asset-light business model, we expect the firm’s expense-to-revenue ratio to drop further. Its net margin may rise 0.4ppt YoY to 1.2% in 2025.
　　Financials and valuation
　　As the firm continues to benefit from growing demand for instant delivery, we raise our 2025 and 2026 net profit forecasts 18.5% and 42.6% to Rmb296mn and Rmb579mn. Considering the firm has entered a period of stable earnings, we switch our valuation method from P/S to P/E. The stock is trading at 40.7x 2025e and 20.5x 2026e P/E. We maintain an OUTPERFORM rating and raise our target price 38% to HK$18.70, implying 53x 2025e and 27x 2026e P/E and offering 30% upside.
　　Risks
　　Disappointing growth of instant delivery demand; deteriorating competitive landscape; high exposure to related-party transactions.