Company Report
China
Shipping
Analyst: Alan Lam
(852) 2509 7589
[email protected]
29 August 2005
1H05 Net profit jumped 33%, better than expected
Sinotrans Holdings
Stock Code: 0598
ACCUMULATE
Price: HK$2.450
Sinotrans announced the interim results for 1H05. Net profit for the period increased 32.5% yoy to
Rmb498.7 million. Earnings per share were Rmb0.12. The profit was higher than our and the market
consensus expectations. The Company received compensation income of Rmb98.4 million for the
transition of business back to UPS during the period. Profit margin of freight forwarding business turned
to stabilize. Therefore, we raise the profit forecasts for 2005-2007 by 9%-10%. In view of the Company’
s
rich assets, cash per share and the equity interest of Sinotrans Development equivalent to HK$2.37 per
share, we believe most of negative factors were factored on the stock price already. We may raise the 12M
target price by 8% to HK$2.80. The investment rating is ‘
accumulate’
.
Yr End
12/31
2003A
2004A
2005F
2006F
2007F
Turnover
(RMB m)
17,374
21,880
26,380
29,601
32,779
Net
Profit
(RMB m)
705
803
977
1,032
1,103
EPS (RMB)
0.174
0.189
0.230
0.243
0.260
Shares Outstanding (m)
Total market capital (HK$m)
Major shareholder Sinotrans (Group)
Free Float (%)
Source: The Company, GTJAS(HK)
EPS
(Δ%)
PER (x)
(20.2)
8.5
21.7
5.6
6.9
4,429.0
10,410.1
57.9%
42.1
14.9
13.7
11.1
10.5
9.8
05
05
04
05
NBV
P/B
Net
PEG
DPS
(RMB)
0.056
0.064
0.078
0.082
0.087
per share (HK$)
(x)
gearing (%)
(x)
Yield
(%)
ROE (%)
2.2
2.5
3.0
3.2
3.4
17.4
12.3
13.7
13.2
12.9
1.8
1.5
Net cash
1.0
Profit for 1H05 rose 33% yoy, better than expectation. Sinotrans (0598) announced the interim results for
2005. Net profit for the six months ended 30 June 2005 increased 32.5% yoy to Rmb498.7 million. Earnings per
share were Rmb0.12. Interim dividends of Rmb0.038 per share were declared, up 27% yoy. The profit surge was
higher than our and the market consensus expectations, mainly attributable to Rmb98.4 million compensation
income for the transition of business to the UPS. In addition, strong transportation demand also boosted turnover
increasing 34% yoy to Rmb13.073 billion. Operating profit margin, however, decreased 0.46% to 5.00%. The
overall operation was in line with our expectation.
Profit margin of freight forwarding business stabilized. During 1H05, the number of containers handled in
sea freight and air freight forwarding services increased 34.4% and 30.4% yoy respectively. Turnover of freight
China Shipping –August 29 2005
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1
forwarding business increased 33.2% yoy to Rmb9.537 billion. It was mainly attributed to the extension of
output capacity, the acquisition of logistics business in Fujian and the establishment of storage center in
Shanghai and Dalian. Operating profit of freight forwarding business rebounded 31.9% yoy to Rmb205 million.
Operating profit margin seems to stabilize and slightly fell 0.02% to 2.15%, or 0.02% up compared to the margin
in 2004, higher than our expected. The Company said it successfully prevented profit from falling through
effective cost controls, restructuring the business structure and more value added services on the freight
forwarding business in order to prevent the profit margin from falling further. We maintain our view that the
profit margin of freight forwarding business to stabilize and enhance the projected operating profit margin for
2005 by 0.3% to 2.13%. We maintain our projected turnover from the freight forwarding business in 2005
unchanged and 22% YoY growth.
Profit margin of express services declined rapidly. Under the new accounting standard in 1H05, the Company
should separately disclose turnover and profit of the express services joint venture with UPS (UPS Express
Services) from its own express services business (including DHL joint venture). The Company would transit the
UPS Express Services back to UPS within three years. The transaction will be scheduled to complete before the
end of 2007. Handling capacity of the Company’
s own express services in 1H05 rose 21% yoy to 5.36 million
pieces. Turnover of the business rose 32.3% yoy to 1.083 billion. Nevertheless, operating profit margin of
express services slipped 4.4% to 15.95%. Including the UPS Express Services, overall operating profit margin
dropped 4.8% to 17.4%. The Company explained the reduction of operating profit margin was due to the keen
market competition. The Company has to invest more to expand the network, marketing advertisement and staff
resources. We reduce the operating profit margin forecast for 2005 by 5.5% to 17%. However, according to the
figure in 1H05, the Company’
s turnover of express services in 1H05 has already been higher than the last same
period (including UPS Express Services). It reflected the output growth increasing rapidly. Excluding the
disposal gains of the joint venture with UPS. We estimate the Company’
s operating profit margin for 2005 may
remain flat as last year’
s. Although the profit contributions from the UPS joint venture may decrease gradually in
2006-2007, we think the Company is capable to enhance the market share in order to offset the adverse impact
from the disposal of UPS joint venture.
Turnover of other supporting businesses grew rapidly. Turnover of shipping agency business in 1H05
increased 16.4% yoy to Rmb269.6 million. Handling capacity of container terminals surged 25.5% yoy to 4.33
million TEU. Net registered tonnage of vessels handled by the Company rose 17.8% and the number of vessels
calls managed also grew 2.6% yoy. Operating profit margin for 1H05 fell 1.68% yoy to 46.2%. Operating profit
increased 12.3% yoy to Rmb125 million, basically in line with our expectation. On the other supporting
businesses side, the Company’
s storage and terminal services and marine transportation increased 45.2% yoy and
36% yoy respectively. Operating profit margin of both businesses rose 3.0% and 0.3% yoy. Attributed to new
logistics facilities in 500,000 sqm capacity commencing operations in 1H05, the utilization rate of new godown
was close to saturation. We raise the turnover forecast on the storage and terminal services and marine services
for 2005 by 20%. The Company said there would be more godown and storage facilities commencing operations
in future. Meanwhile, the Company proposed to establish a small terminal in Delta Pearl Region and a logistic
project in Shanghai.
Profit from Sinotrans Development in 1H05 increased 32% yoy. The Company holds 70.63% equity stake in
the A-share listing company, Sinotrans Development, which announced the interim results for 1H05 earlier.
According to the PRC accounting rules, turnover of Sinotrans Development rose 30.4% yoy and net profit
increased 32.3% yoy to Rmb241.7 million. The management of Sinotrans Development stated that it has
transitted six operation points back to UPS in 1H05. The parent company is strengthening to promote its own
brand name. The management of Sinotrans Development disclosed it might carry out the non-tradable share sale
reform in future and the proposal would be subject to approvals of shareholders. Although the carrying out of the
non-tradable share sale reform may dilute the profit contribution of Sinotrans Development to the Company, we
think this arrangement may clearly reflect the intrinsic value of Sinotrans Development and A-share price may
not be easily depressed in future. The stock price now trades at 29% of the stock valuation.
China Shipping –August 29 2005
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www.gtjas.com.hk
2
Overall operating cost in 1H05 jumped 34.8% yoy. During the period, the cost of transportation and related
services to the Company rose 35.5% yoy to Rmb9.97 billion. Operating expenses rose 31.9% yoy to Rmb2.45
billion. The cost of oil, accounting for 13% of total expenses, surged 61.6% yoy. Operating cost including
transportation and related business surged 34.8% yoy and dampened the overall operating profit margin of the
Company by 0.46%.
Raise the profit forecast for 2005-07 by 9%-10%. Operating profit margin of freight forwarding and the
higher-than-expected profit from the joint entity with the UPS, we raise the Company’
s projected earnings per
share for 2005-07 by 10.2%, 9.3% and 9.5% yoy to Rmb0.230, Rmb0.243 and Rmb0.260 respectively. We
estimate the net earnings CAGR growth at 11.2% for 2004-07. The Company’
s major risk is the tightening
operating profit margin.
The Company’
svaluation per share is raised to HK$3.51. As at the end of June 2005, the Company’
s cash in
hands amounted to Rmb5.976 billion, equivalent to HK$1.35 per share, including the market capital of its 70%
owned Sinotrans Sea and Sinotrans Air. Valuation per share is approximately HK$2.37. The market value of
other businesses such as freight forwarding and shipping agency is just HK$0.08 per share. We further raise the
valuation per share by 17% to HK$3.51. We think the negative factors of tightening operating profit margin and
the non-tradable share sale reform have been factored on the stock price already.
The investment rating is maintained at ‘
Accumulate’and 12M target price is HK$2.80. The Company’
s
stock price hovered in a narrow range for the past five months. The price was ranged from HK$2.20 to HK$2.50.
The Company currently trades at 11.1x 2005E P/E and 10.5x 2006E P/E respectively. PEG is 0.99x. P/BV for
2005 is 1.5x. In view of the rich asset and most of negative factors already factored on the price, operating profit
margin of major operations is in hopes to stabilize, we will raise the 12M target price by 8% to HK$2.80,
equivalent to 12.0x projected earnings of 2006 P/E. The price has 20% discounts to the valuation. PEG is 1.1x.
Long-term target price is HK$3.15, equivalent to 10% discounts to the valuation. The investment rating is
‘
Ac
c
umul
a
t
e
’
. We expect the price to be strongly supported at HK$2.10 to HK$2.20.
China Shipping –August 29 2005
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www.gtjas.com.hk
3
Rating Definition
The Benchmark: Hong Kong Hang Seng Index
Rating
Buy
Accumulate
Neutral
Reduce
Sell
Time Horizon: 6 to 18 months
Relative Performance
>15%
5% to 15%
-5% to 5%
-5% to –15%
<-15%
Editor: Christine Yim
Research Report Disclaimers
This report is only subject to GTJAS (HK) Ltd. Co. be circulated to specified clients and other
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subjective and prospective assumptions and judgements on future politics and economy without
certainties. Investors should thoroughly understand the purposes and risks of equities and
derivatives investment therein. Before making the investment, if necessary, investors should
consult the professionals and then make a prudential investment decision.
China Shipping –August 29 2005
See back of report for disclaimer
www.gtjas.com.hk
4