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Long: Kerry Logistics Network

|Includes: Kerry Logistics Network Ltd ADR (KLGSY)

Overview

Kerry Logistics Network (SEHK:636) is a Hong Kong-based 3PL logistics and freight forwarding company focused on the Greater China market. The company operates in 40 countries, employs over 20,000 employees and manages/owns 45 million sq. ft. logistics facilities.

The business was started as a single warehouse facility in Hong Kong in 1981 and is currently a majority-owned subsidiary of Kerry Properties Limited (SEHK:683), the property development company of Malaysian billionaire Robert Kuok (aka Sugar King of Asia) and his family.

Kerry Logistics operates in three major segments, as follows:

  • Logistics operations (excluding Hong Kong warehouse) (56% of segment profit) - 3PL service provider for manufacturers, retailers and other customers worldwide. Services include storage, trucking, distribution, returns management and etc., primarily in Asia
  • Hong Kong warehousing (26% of segment profit) - Leasing of warehousing space in Hong Kong
  • International freight forwarding (18% of segment profit) - Focused on freight forwarding for intra-Asia and Asia-Europe trade lanes. Includes air freight, ocean freight and cross-border road freight forwarding services.

Geographically, the company generates 36% of its profit from Hong Kong, 22% from Mainland China, 20% from Taiwan, 17% from South and Southeast Asia and 5% from the RoW.

Over the past few years, Kerry Logistics had made several strategic acquisitions to expand its footprint. In Q1'2016, the company announced the acquisition a 51% in a US-based ocean freight forwarder (handled ~270,000 TEUs) that gives the company a presence in the Trans-pacific trade lane. During the same quarter, the company also completed the acquisition of a majority stake in Speed Group, a leading air freight company in Taiwan (renamed as Kerry Speedy Logistics). The company is also working to established an intra-Asia road transport network under its "Kerry Asia Road Transport" initiative - a road freight network that extends from Shanghai and Chongqing in China to across Indochina, to take advantage of increasing China-ASEAN trade.

Financial Summary

In 2015, Kerry Logistics generated HK$21.1 billion in revenue, HK$3.4 billion in gross profit (+9% y-on-y), HK$2.3 billion in EBITDA and HK$1.1 billion of core profit (net profit excluding gains from revaluation of assets). Net debt stood at HK$4.5 billion, including HK$3.7 billion of cash and HK$5.5 billion of debt. Operating cash flow reached a record HK$1.7 billion, compared to HK$1.1 billion in 2014.

Kerry Logistics has a portfolio of quality logistics assets - HK$12.8 billion book value, including investment properties, warehouse and logistics centers, and freehold land and buildings.

Valuation

Kerry Logistics' portfolio includes HK$8.1 billion of investment properties that the company leases out to third-parties. These investment properties generated HK$409 million in net rental income (5% yield). Adjusting out the investment properties and the rental income, the company is currently valued at 7.6x EV/EBITDA, which represents a significant discount to industry peers, and to comparable transactions in the Asian freight forwarding industry (>10x EV/EBITDA).

Trade

Long Kerry Logistics at HK$10.60 per share, with a stop-loss of HK$9.45. Our entry price represents 11.6% off 52-week low price of HK$9.50.

Catalysts

  • Re-rating of the business as it continues to demonstrate profitable growth, and revaluation of its quality investment warehouse portfolio
  • Cross-border (China-ASEAN) e-commerce fulfillment business in China can potentially drive significant growth and profitability

Disclosure: I am/we are long KLGSY.