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Investment Thesis
Full Truck Alliance Co. Ltd. (NYSE:YMM) grew revenues nicely in Q4 2022 but was in a decelerating trend and likely to persist based on management's outlook.
The company does not provide its financial information prior to 2018. Based on recent trends in the industry and our analysis below, the B2B on-demand freight platform might suffer in this buyer's market.
Hence, even though we think YMM stock valuation seems attractive and the low P/B ratio provides downside protection for the stock, investors should wait and see how the economic slowdown in China affects the platform business in the coming quarters, before taking any action.
Company Profile
Full Truck Alliance Co. Ltd. is not a Chinese operating company but a Cayman Islands holding company with operations primarily conducted (i) through contractual arrangements with certain variable interest entities, or the Group VIEs, in China and (ii) by its subsidiaries in China.
It generated RMB 6,733 million (USD 976 million) of revenue and RMB 261 billion (USD 37.9 billion) of Gross Transaction Value (“GTV”) in 2022.
The company provides the following services:
- Freight listing
- Freight brokerage
- Online transaction service
- Value-added service
Business segment (Company's presentation)
Business model (Company's presentation)
Key Takeaways from Q4 2022 Earnings:
In Q4 2022, its total net revenues increased 34.5% to RMB1,922.5 million (US$278.7 million) from RMB1,429.4 million, due to an increase in revenues from freight brokerage services and transaction commission. Its freight brokerage services increased by 24%, driven by increased user penetration. Transaction commission revenue increased by 67%, driven by an expanded take rate. However, its revenue growth decelerated from 45% growth in Q3 2022.
In Q4 2022, its GTV increased by 3.6% to RMB72.0 billion (US$10.4 billion) from RMB69.5 billion. Gross Transaction Value (“GTV”) in 2022 reached RMB261.1 billion (US$37.9 billion), compared with RMB262.3 billion in 2021. Its GTV growth stayed at a similar pace as Q3 2022.
In Q4 2022, its fulfilled orders decreased by 6.4% to 32.6 million from 34.8 million, decelerating from 5.4% in Q3 2022.
In Q4 2022, its average shipper MAUs increased by 19.7% to 1.88 million from 1.57 million, accelerating from 15.2% in Q3 2022.
In Q4 2022, its SG&A% decreased to 14.6% from 16.7%, and its R&D% decreased to 13% from 16%, due to the increase in revenues.
Q4 2022 Revenue breakdown (Company's presentation) Q4 2022 Company's profits (Company's presentation)
- The management expected its revenue to grow between 16.9% to 23% in Q1 2023.
The management had the following comments regarding its outlook for 2023:
As we progress through 2023, we will strive to implement an active user acquisition strategy, elevate our products’ level of differentiation, and further optimize matching efficiency to encourage more high-quality users to join our platform.
Following the removal of COVID restrictions in December, the order volume from the platform gradually ramped up, reaching the full-year peak in early December. However, in mid-December, the order volume declined due to a large number of truckers getting infected with COVID, which affected overall transport capacity. As infected truckers returned to work and transport capacity recovered after the Chinese New Year, we see activity within the freight industry re-surging from the lows of last year.
In the last four quarters and the 12-month rolling retention – the 12-month rolling retention rate of those shipper members and the next month's retention rate of truckers who responded to orders remained steady at around 85%.
Moreover, with the resumption of new user registration, the overall number of shippers on the platform grew, of which most of them are direct shippers with relatively higher fulfillment rates as compared to middlemen, and therefore contributed to our improved fulfillment rate.
We have the below comments:
- The company grew revenues nicely in Q4 2022 but was in a decelerating trend and likely to persist based on management's outlook. We think the boom in 2022 is likely the result of the COVID lockdown in China. According to Caixin media, the China economy might see a fallback in business exports. The subdued global demand was attributed to the high-interest rate and the inflation environment.
In March, the new export orders sub-index fell to 49.0 after briefly swinging into growth in February, suggesting global demand remains weak, according to the Caixin survey.
"The relatively modest and short-lived pick-up in the manufacturing PMIs in the first quarter suggests that the industrial sector has only received a limited boost from reopening," Capital Economics wrote in a note.
China PMI (Caixin media)
- Although shipper MAU increased 20% in the quarter, continued sluggish Orders/MAU and GTV/MAU growth suggested that the demand for its services in China was weakening. The company increased its take rate in the midst of a challenging environment, likely by aggressively lowering truckers' pay. This argument can be supported by the trucker MAUs remaining flat from the management's comments.
Average shipper MAUs to 1.88 million or a year-over-year increase of 19.7%. Our average trucker MAUs, including those fulfilling and responding to orders, remain stable month-over-month with 3.5 million active truckers.
- According to MacroMicro, as of February 2023, China's urban unemployment rate was 5.6%, and the number of the top 31 cities was 5.7%. Teen (ages between 16-24) unemployment rate was much higher, at 18.1%. We think the company faced the labor market tailwind short term but is likely to slow further due to the slower global and domestic demand.
China's unemployment rate (MacroMicro)
The B2B On-Demand Platform Might Suffer in a Buyer's Market
The company doesn't have long-term contracts with shippers. In the economic downturn, unemployment rose. As the result, shippers can more easily recruit truckers directly to save commissions and fees. Truckers also are willing to have direct conversations with the shippers to get higher pay.
A couple of news below might provide support for our arguments.
- According to Seeking Alpha, Uber considered parting with its freight logistics division, either via an initial public offering or outright sale. The news outlet added that the freight unit has struggled in recent months and is in the process of laying off 3% of its workforce, as it deals with a cyclical downturn in the business.
- In an interview with Uber Freight CEO, the company decided to maintain the independence of its operation and brokerage business for client pricing reasons.
“Everybody benefits if you have one platform,” Ron emphasized. “It’s a much more scalable platform. That’s what excited us at the end of the day.”
But the company plans to “maintain an absolute separation of state and church and be sure that none of the operational insights pricing bleeds to the 3PL and broker side of the house,” and vice versa.
We think that, in a buyer's market, the on-demand freight platform might have low bargaining power toward shippers.
In addition, the company generated an operating loss of RMB 162 million (USD 23 million). If the macro goes against the company, its loss might widen.
Income Statement (Company's filing)
The Company Might Receive Extra Support from the Government
The company was among those seeing growth in China during the COVID lockdown. This demonstrates how essential the company was to the Chinese economy.
The management provides a couple of key trends in China as below. We agreed that the government is currently favorable to standardization and digitization. Hence, China's government might provide extra support for the company in this challenging environment.
Key Trends for Digital Freight Platforms in China
- Rapid adoption of digital freight platform. Compared to the U.S. market where there are a number of large-scale offline freight providers, China’s road transportation market has historically been highly fragmented with no dominant offline freight service providers. The rise of digital freight platforms replaced a large number of small offline brokers and provided an accelerated transformation and disruption to China’s road transportation market. Due to a lack of meaningful alternatives, truckers and shippers have rapidly adopted the solutions provided by digital freight platforms.
- Higher level of standardization and digitalization. As digital freight platforms further penetrate China’s road transportation market, they are able to transform the market through digitalization and standardization of transaction processes and the application of advanced technologies. Digital freight platforms bring more efficiencies to the supply chains and offer greater value to their ecosystem participants and set the industry standards for scope of service, truck types, and delivery time, among other things, for industry participants to follow.
- Technology plays an increasingly important role. Advances in AI technology will drive optimization and innovation in China’s road transportation industry. Digital freight platforms can apply AI to various scenarios such as demand prediction, pricing determination, and route optimization, which would enable higher agility and greater efficiency in the road transportation industry. For example, by leveraging their technology and data capabilities and extending their services from matching one shipper with one trucker such as in the FTL market to matching multiple shippers with one trucker such as in the LTL market, digital freight platforms are able to reduce friction and achieve optimization of the road network.
Valuation and Catalysts
Valuation metrics suggest the stock is not cheap compared to its sector median. It is likely the market still priced it as a growth stock. Its PEG ratio of 0.54x appears not very expensive.
Valuation (Seeking Alpha)
The P/B ratio of the stock is currently at 1.59x, not a very high level. Its assets comprised 72% of cash and cash equivalents. This provides some downside protection for the stock.
Balance Sheet (Company's presentation)
We will utilize the DCF model and value it as a growth stock to examine its valuation in greater detail.
The management mentioned an RMB 4 trillion GTV freight-matching market potential in China. The company currently had a 6% penetration into this market.
FTL is the largest segment in China’s road transportation market in terms of the gross transaction volume or GTV of freight fees. It also accounts for about 70% of China’s road transportation market in terms of goods turnover, according to the CIC report. In 2020, an aggregate of 997 million inter-city shipping orders was completed in China’s FTL segment. The total number of trucks utilized in the segment represents a substantial share of the total trucks in China. In 2020, there were 9.1 million heavy-duty and medium-duty trucks with truckloads above 4 tons (including 6.2 million freight trucks and 2.9 million engineering trucks) out of 31 million total trucks in China, and 13.7 million heavy-duty and medium-duty truckers (including 9.2 million freight truckers and 4.5 million engineering truckers) out of 35 million total truckers in China.
FTL goods typically are shipped directly from the point of departure to the point of destination through linehaul without the need for aggregation of shipments from time to time, making it suitable for management and scheduling through standardized online platforms. Due to high fragmentation, only approximately 20% of FTL shipments involve truckers with a term contract, according to the CIC report. The remaining shipments, typically without formal contracts, involve either fee-charging intermediaries or acquaintance truckers. Shipments through acquaintance truckers are typically not economical because they do not present a stable and scalable source of income for truckers and are typically priced above the optimal price shippers can source from an efficient market. According to the CIC report, the FTL market is expected to reach RMB 4.5 trillion in 2025.
Freight matching market in China (Company's presentation)
We make the following assumptions based on management's projection and current market conditions:
- 10% market share
- 24% WACC
- 3% terminal growth rate
- 10% free cash flow margin
- Net debt -3801 million (Q4 2022)
- Outstanding shares 1065 million (Q4 2022)
Applying the DCF method, we can arrive at an equity value of 11,875 million ($11.1 per share), which implies a 57% return from the current stock price.
With the sensitivity test below, we can see that the stock is overvalued only if its free cash flow margin decreased below 3%. We think the downside risk is limited.
Sensitivity test (LEL Investment)
Risks
Legal Risk
On Jan 24, 2023, the company's stock was mentioned as "Short" at J Capital Research. J Capital claimed the company exaggerated its financial information to mislead investors. Although, the company denied the allegation from the short seller during its Q4 2022 earnings release. The stock has dropped by 19% since the news.
Stock chart (Seeking Alpha)
Chinese ADR De-Listing Risk
China and U.S. relationship is still intense at the moment. Surprisingly, according to Seeking Alpha, the company might drop its plans for a potential Hong Kong listing. According to the article, the companies reportedly feel that they no longer need to hedge against future regulatory conflicts between China and the U.S.
We don't have evidence to support if the tension has eased between the two nations. However, the rationale behind the drop is worth exploring since most large Chinese companies with US listings have already completed their dual listings in Hong Kong. DiDi Global Inc. (OTCPK:DIDIY) was forced to delist by China government from the U.S. stock exchange due to a violation of national information security. If China government thinks the company plays the same important role as DiDi, there is a risk that the stock will be delisted and likely to be traded in the OTC market as DiDi.
