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Long: Sinotrans Limited

|Includes: Sinotrans Ltd. (SNOTF)

Sinotrans Limited is a state-owned freight forwarding (also known as non-vessel operating common carrier or NVOCC) and logistics company in China.

Central government controlled Sinotrans & CSC Holdings owns 53.44% of the company. Sinotrans & CSC Holdings also owns a majority stake in Sinotrans Shipping Limited (SEHK:368), a dry bulk and container ship owner and operator. Sinotrans & CSC Holdings is currently in negotiations for a merger with China Merchants Group, other state-owned transportation conglomerate and parent company of China Merchants International (SEHK:0144) and China Merchants Bank (SEHK:3968, SHSE:600036). We believe that post merger, Sinotrans Limited is a likely candidate to be the logistics platform of the enlarged group.

With a revenue of almost RMB46 billion, it is the largest freight forwarding company in China. The company operates in four different segments:

  • Freight forwarding (49% of segment results) - multi-modal freight forwarding and shipping agency services
  • Logistics (21% of segment results) - contract logistics services
  • Storage and terminal services (26% of segment results) - warehousing, container yards, container freight stations and terminals
  • Others (3% of segment) - trucking, shipping and logistics services

In freight forwarding, the forwarder pays the freight rate to shipping lines and carriers on behalf of the customer (shipper), and subsequently gets reimbursed by the customer for the freight rate, as well as other fees such as handling charge, CFS, etc. Consequently, the freight rate, which is booked as revenue on the forwarder's income statement, is pass-through. Given the freight rates can fluctuate significantly, revenues are often not good indicator of the size or profitability of a forwarder's business. To determine revenue mix and profitability in this industry, we tend to look at gross profit (e.g., salaries as a percentage of gross profit). In the above case, we use segment results as a proxy for the approximate revenue mix.

Sinotrans Limited owns 60% of A-share listed Sinotrans Air Transportation Development Limited (SHSE:600270), which has a market capitalization of RMB17.4 billion (USD2.7 billion). Sinotrans Air provides air freight forwarding, express and e-Commerce services, and has a 50/50 joint-venture with DHL Express (NYSE:USA) Inc., DHL-Sinotrans International Air Courier Limited. Profit from this joint venture with DHL accounts for the vast majority of Sinotrans Air's profit. Sinotrans' stake in Sinotrans Air is estimated to be worth USD1.6 billion versus Sinotrans' market capitalization of USD1.8 billion.

As of June 30, 2015, Sinotrans has a net debt position of RMB3.6 billion, comprised of RMB6.2 billion of cash, RMB6.1 billion of debt and RMB3.7 billion of minority interest. Over the years, Sinotrans has levered up its balance sheet to build up logistics infrastructure (terminals, warehouses, container yards, logistic centers) in China. This is a deviation from Sinotrans' asset-light business model but does provide some competitive advantage given that the company is able to secure good locations due to its state-owned status. At less than 2x leverage, we do not believe that Sinotrans is over leveraged at this point, but we will keep an eye on the leverage level going forward.

The company's shares are currently trading at approximately 14% above its 52-week low and 54% below its 52-week high. The current share price represents 4.2x EV/LTM EBITDA, which we feel is attractive, particularly since the company has consistently increased its EBITDA over the past few years. International freight forwarding peers such as K+N (VTX:KNIN), Panalpina (SWX:PWTN), DSV (CPH:DSV) and Expeditors (NASDAQ:EXPD) typically trade at 10x EV/LTM EBITDA or higher. There have been various M&A transactions in the freight forwarding and logistics segment in recent years - these transactions tend to value the target company at 6x EV/LTM EBITDA or higher. Examples of such transaction include the acquisition of Toll Holdings by Japan Post (TYO:6178) (11x EV/EBITDA), the acquisition of APL Logistics by Kintetsu World Express (TYO:9375) (15x EV/EBITDA), the acquisition of Con-Way by XPO Logistics (NYSE:XPO) (5.7x EV/EBITDA), the acquisition of Coyote Logistics by UPS (18x EV/EBITDA) and the pending acquisition of UTi Worldwide (Nasdaq:UTIW) by DSV A/S (6.75x EV/EBITDA).

Long Sinotrans at HK$3.05 per share with a stop loss of HK$2.65 per share.

Catalysts

  • Merger between parent company, Sinotrans & CSC and China Merchants Group means that the company is a likely candidate as the logistics platform for the expanded group
  • Strong performance of Sinotrans Air due to cross-border e-Commerce may bring about a re-rating of 60% owner, Sinotrans Limited

Disclosure: I am/we are long SNOTF.