Sinotrans Ecom OPS 152@HK 071114 6186

Fri, 11 Jul 2014

Equi ty Research China Logistics Logist ics / China

E-commerce Enablers in China

Warehousing – a low risk proxy for e-commerce boom in China: China

e-commerce is expected to record over 20% CAGR in gross merchandise

value (GMV) in the next few years due to change in consumer patterns and

penetration in 3rd – 4th tier cities. We believe e-commerce related logistics

will drive a robust need in warehousing space, especially for the high-end

modern warehouses in 1st – 2nd tier cities. Given lower valuation and lower

operation risks than e-commerce listed companies, we believe investing in

warehouse owners would be a low risk proxy to enjoy the e-commerce boom

in China.

Cold Chain Logistics - giving a “blue ocean” for e-commerce: Driven by

the increasing disposable income and food safety concerns of the middle

class in China, we believe the consumption boom in fresh products will

create a “blue ocean” for the e-commerce industry under currently keen

competition. Cold chain logistics is the key to enable high value added

products and services for the express delivery companies and the

e-commerce online shops to create margin expansion. We believe

companies with cold chain logistics facilities deserve a premium in the

logistics sector.

Third Party Logistics (3PLs) – robust growth driven by industry

optimization: Due to high transportation and fuel costs, China logistics cost

to GDP was 18% in 2012, which was much higher than in developed

countries, such as USA (8.5%) and Japan (8.5%). Outsourcing logistics

operations to 3PLs would reduce costs by better resources utilization and

operations efficiency. We believe companies with integrated logistics

expertise will capture the huge business demand in logistics cost savings.

Recommendations: We initiate with 3 new BUY ratings on Beijing

Properties (925 HK), Sinotrans (598 HK), Shenzhen Int’l (152 HK) and ASR

Logistics (1803 HK) as they are well positioned to capture the e-commerce

boom and the growing 3PLs outsourcing to drive their strong earnings

growth in near future. Moreover, SOE reforms would also unlock their assets

value given by strong support from their parents. Our sector top pick is

Beijing Properties (925 HK) since the company owns scarce warehouse

resources in prime locations as well as promising cold chain logistics

facilities. We also like Sinotrans (598 HK) since the company will have

continuous margin expansion driven by growth in 3PLs business. Shenzhen

International (152 HK) is tripling their logistics land bank by developing

integrated logistics projects, which we think the deep value will be unlocked.

Bruce Yeung

+852 2135 0214

[email protected]

Sector Report

Exhibit 1: Recommendations summary

Company Stock code Rating Target Price Closed Price Upside

Beijing Properties 925 HK BUY HK$1.2 HK$0.84 43%

Sinotrans 598 HK BUY HK$6.5 HK$5.34 22%

Shenzhen International 152 HK BUY HK$13 HK$9.51 37%

ASR Logistics 1803 HK BUY HK$1.9 HK$1.42 34%

Source: Bloomberg, OP Research

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Table of Contents

Table of Contents ......................................................................................................................................... 2

E-commerce – The gold rush in China ......................................................................................................... 3

Logistics revolution ...................................................................................................................................... 8

E-commerce enablers – Pick and shovel for gold rush ................................................................................22

Warehousing ...............................................................................................................................................25

Cold Chain Logistics ...................................................................................................................................32

Integrated Logistics Services Providers ......................................................................................................37

Beijing Properties (925 HK) – A Hidden Gem with Prime Locations Logistics Properties .............................41

Sinotrans (598 HK) – A Leading 3PL Provider .............................................................................................71

Shenzhen International (152 HK) – A Single Stock for Multiple Catalysts ....................................................82

ASR Logistics (1803 HK) – Asset Light Air Freight Solution Provider ..........................................................98

Appendix ................................................................................................................................................... 104

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E-commerce – The gold rush in China

China's e-commerce is one of the fastest growth markets in the world with CAGR

of 28.8% in 2009-2013. The gross merchandise value (GMV) of the e-commerce

market increased 21.3% in 2013 to Rmb9.9 trillion, and expected to grow more

than double to Rmb21.6 trillion by 2017.

To meet rapid volume growth and higher consumer satisfaction standards, we

have seen e-commerce accelerating transformation of supply chain management

in China where corporates tend to use open platforms for transport and inventory

controls without putting heavy investments into self-owned logistics operations.

Exhibit 2: China E-commerce market GMV 2011-2017

Source: iResearch, OP Research

Exhibit 3: China e-commerce GMV forecast

Category Sub-category 2013 GMV

(RMB mn)

2017 GMV

(RMB mn)

CAGR

(2013-17)

Online Shopping Total 1,850,000 4,140,000 22%

PC 1,693,600 3,145,400 17%

Mobile 156,400 994,600 59%

O2O

119,380 524,500 45%

Online Travel 225,860 484,000 21%

B2B Total 7,754,250 16,435,500 21%

SME's B2B 5,147,400 12,370,200 25%

B2B of enterprises above designated size 2,606,850 4,065,300 12%

Total

9,949,490 21,584,000 21%


6.4

8.29.9

12.7

15.5

18.5

21.6

28.1%

21.3%

27.9%

21.6%19.4%

16.8%

0%

5%

10%

15%

20%

25%

30%

0

5

10

15

20

25

30

2011 2012 2013 2014E 2015E 2016E 2017E

GMV % Growth rate

(Rmb tn)

China e-commerce GMV is

expected to have a 21.5% CAGR

in 2013-2017

E-commerce drives

transformation in supply chain

management

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Reasons for the huge growth

According to iResearch, B2B for SME ranks first by GMV with some 52% of the

total in 2013. This segment GMV is expected to maintain CAGR of 25% to reach

Rmb12.37 trillion by 2017, staying on as one of the key drivers for further growth

in China's e-commerce.

Exhibit 4: Share of China E-commerce market segments 2013


Value-added services in B2B e-commerce will increase 3PL demand

On payment of a non-onerous membership fee, SMEs can quickly tie-up with

potential domestic and foreign partners through e-commerce platforms. Lower

entry barriers mean SME B2B operators can expand in cost effective ways.

SMEs can also improve operational efficiency by leveraging on value added

services provided by B2B platforms, such as pay-for-performance model (word

search), financial guarantee services, import/export services and big data

sharing.

Alibaba is promoting its one-stop import and export business process outsourcing

(BPO) service for SMEs through OneTouch, which centralizes foreign trade

resources like customs clearance, transportation and financing to reduce overall

expenditure and to improve the efficiency of the whole process. Sinotrans (598

HK), a leading integrated logistics services provider in China, has also launched

an e-commerce platform to facilitate cargo space reservations and cross-border

e-commerce logistics services. We believe the innovation in B2B e-commerce

value added services will drive more third party logistics (3PLs) demand in China

in coming years, with Sinotrans (598 HK), SITC (1308 HK) and Kerry Logisitcs

(636 HK) benefiting.

SME's B2B51.7%B2B of enterprises

above designated

size26.2%

Online shopping18.6%

Online travel2.3%

O2O1.2%

B2B Platforms: A cost effective

way for SMEs

Value-added services of BPO will

increase 3PLs demand in China

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Exhibit 5: Alibaba’s 1-Touch

Source: Company, OP Research

Exhibit 6: Sinotrans (598 HK) e-commerce system


Online shopping will drive higher demand in logistics services

In the past e-commerce GMV was dominated by B2B segments due to much

higher average ticket size. But in Taobao's success in the C2C market, we have

seen online shopping more than doubling the contribution of total e-commerce

GMV, from 7.3% in 2009 to 18.2% in 2013. As China's GDP focus is shifting from

manufacturing to consumption, we believe the growth in online shopping will

outpace B2B markets and the share of total GMV will increase to 19.8% by

2016e.

Tmall's dedicated “November 11” promotion to popularize online shopping totted

up Rmb35 billion GMV in one day, up 83% yoy. However, as online shopping

depends heavily on express delivery, the jump in online shopping volume creates

significant pressure on supply chains to avoid problems like slow response. More

and more e-commerce companies are investing in their logistics services,

creating extraordinary investment opportunities for the industry to capture and

share the boom. Logistics facilities providers, such as Beijing Properties (925 HK)

Online shopping becomes one of

the major contributions to

e-commerce, driving higher needs

in logistics services

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and Shenzhen Int’l (152 HK) will benefit from higher demands generated by

delivery volumes.

Exhibit 7: China E-commerce market segments 2009-2016


China online shopping GMV recorded 58.7% CAGR in 2010-2013, hitting

Rmb1.841 trillion in 2013, surpassing US to become the largest online shopping

country in the world. In 2003 online shopping GMV accounted for only 1.7% of

total retail sales of consumer goods in China. However, after 10 years of

development, online shopping in China has recorded an amazing 7.9% share in

total retail sales of consumer goods, just 2.1% behind the US total. Online

shopping GMV is expected to maintain 22% CAGR to Rmb4.14 trillion or 12.4%

of retail sales in 2017, providing an attractive investment counter. The growth of

online shopping would be supported by (1) higher penetration in 3th – 4th tier

cities and major cities in Western China, (2) gradual perfection of the mobile

infrastructure behind such shopping, and (3) more traditional retailers investing in

and getting into B2C online business.

Thus, despite rampant development of e-commerce in China during last decade,

online shopping, especially B2C e-commerce, would maintain robust growth in

the next few years. We believe 3PL outsourcing and modern logistics facilities are

essential parts to enable the success of e-commerce, where Beijing Properties

(925 HK), Sinotrans (598 HK), Shenzhen Int’l (152 HK), SITC (1308 HK), Haier

(1169 HK) and Kerry Logistics (636 HK) are HK-listed companies with this

attractive exposure.

51.2% 52.8% 53.8% 53.3% 53.8% 54.7% 56.1% 57.4%

39.8% 35.6% 31.6% 28.3% 25.5% 23.2% 21.4% 20.0%

7.3% 9.6% 12.3% 16.0% 18.2% 19.5% 19.8% 19.8%

1.7% 2.0% 2.1% 2.1% 2.2% 2.3% 2.4% 2.4%

0%

20%

40%

60%

80%

100%

2009 2010 2011 2012 2013 2014E 2015E 2016E

SME's B2B B2B of enterprises above designated size

Online shopping Online travel booking

Online group buying

Online shopping will have 22%

CAGR under multiple drivers

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Exhibit 8: China online shopping market GMV 2010-2017


Exhibit 9: GMV of online shop in China vs. in USA 2009-2016


461.0

784.5

1,320.3

1,841.0

2,420.0

3,119.0

3,790.0

4,450.0

75.3%

70.2% 68.3%

39.4%

31.5% 28.9%

21.5%17.4%

2.9%4.3%

6.3% 7.9% 9.1% 10.4% 11.5%12.4%

0%

20%

40%

60%

80%

0

1,000

2,000

3,000

4,000

5,000

2010 2011 2012 2013 2014E 2015E 2016E 2017E

GMV % Growth rate % Share in the total retail sales of consumer googs

(tn Yuan)

984 1,108

1,226 1,409

1,609

1,822

2,044 2,275

263 461

784

1,303

1,841 2,450

3,030

3,600

0

1,000

2,000

3,000

4,000

2009 2010 2011 2012 2013 2014E 2015E 2016E

Online shopping GMV in USA Online shopping GMV in China

Online shopping hits 7.9% of total

rental sales of consumer goods in

2013

China becomes the largest online

shopping country in the world by

GMV

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Logistics revolution

In the traditional brick and mortar retail sales business model, retailers depend

heavily on the physical presence of shoppers to visit the stores and buy directly.

However, e-commerce revolutionised the logistics industry by creating a totally

different set of supply chain management that greatly lowered channel costs,

especially in China.

In the past suppliers tailored output to response at trade fairs held two to four

times each year. Suppliers then sold their products to main distributors at a

certain discount and credit period as incentives for channel owners. The main

distributors then passed the products through layer upon layer of sub-distributors.

Normally, a product would be pushed through three to six layers of distributors

from manufacturer to point of sales (POS). The layers would be set at regional

(northern/eastern/southern China), provincial, city and county levels. Suppliers

would be rid of capital intensive investments, skirting local laws and relationships

to build up their nationwide sales networks very quickly with their own distributor

models. Suppliers can focus on production efficiency and brand advertising by

outsourcing channel expansion, achieving great success in the past when

consumer information flow in China was insufficient without the internet.

However, this distributor model takes a long period (usually nine to twelve months)

for a product to appear on the market from the design stage. Consumer

preference for 3C products changes very quickly with new technology and the

extensive range of fluctuations, within months, in electronic component costs.

For apparel products the prevailing weather plays a significant role with, at most,

a fortnight's notice. Thus a long production to market lead time is a big cost

disadvantage against competition. Besides, as suppliers do not have end

customer data (such as consumer background, usage preferences and product

quality feedback), there is a big hurdle to improving marketing by cross-selling

and building up brand loyalty. Additionally, the many layers of distributors and

suppliers make for difficult adjustments to production and quick inventory

clearance due to their lack of power to collect data or force selling at retail

promotions. This was the main cause of the “channel stuffing” in China's

sportswear market.

B2C e-commerce has price

competitiveness because of lower

channel costs

Traditional suppliers have little

information on end users and the

channel

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Exhibit 10: Traditional logistics

Source: OP Research

Change in logistics

Advances in e-commerce have ensured that customers always place orders to

B2C online shops directly in online transactions. Online shops can offer sales

services directly to customers by creating a website and mobile apps, which can

be dispersed through the internet at very low costs. Operating costs are reduced

as no capital expenditure, rental or staff costs are required to draw in foot traffic

with storefront visibility and attractive store designs. Besides, with higher internet

penetration in China, online shops can be accessed by customers anytime,

anywhere – without spending to acquire physical space in shopping malls. Thus,

online shops usually have price competitiveness against a physical presence for

the same products under the new supply chain model.

This new supply chain model requires procurement warehouses, distribution

centers and delivery services to fulfill customers’ orders. With direct consumer

orders, online shops will procure directly from suppliers. The products will be

centralized in the modern warehouse for barcode, sorting, storage and inventory

control. At the time of delivery, the products are transferred to different distribution

centers and delivered by express service or picked-up at collection points in the

cities. With a full picture and control of channel inventory, online shops can

always effectively provide more stock keeping units (SKUs) to customers. For

example, JD.com, the second largest B2C e-commerce shop in China, can

provide 40.2 million SKUs as of March, 2014, increased from 1.5 million SKUs in

2011, which is a great difference to the maximum of 20k – 80k SKUs provided in a

Regional

distributors

Province

sub-distributors

Country

sub-distributors

Suppliers

POS

Channel inventory

Consumers

Long lead time to end customers

Efficient supply chain

management in e-commerce

gives strong advantage over

physical shops

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physical shop.

Due to explosive growth in recent years, it would be cost effective and

time-saving to outsource part of the asset heavy logistics operations to third party

logistics (3PLs) expertise. In contrast to old model distributors, 3PLs do not make

money by taking up inventory, but they serve different online shops to save

transportation costs by higher utilization. For example, over half of the trucks are

empty in trials for the return trip, ensuring that toll fees will most certainly increase

transportation costs without 3PLs centralizing logistics demand from different

areas. Additionally, express delivery involves a lot of human activity, while an

online shop would be very inefficient if it had to hire its own delivery staff for its

online business, which focuses on brand building and whole logistics

management.

We expect the boom in e-commerce to lead to a new age in 3PLs outsourcing

and demand growth in logistics facilities due to cost savings from division of work

and new consumption behaviors. We believe Beijing Properties (925 HK) and

Shenzhen Int’l (152 HK) will enjoy the high demand growth in modern

warehousing, with Sinotrans (598 HK), SITC (1308 HK) and Kerry Logistics (636

HK) benefiting from more 3PL outsourcing in China.

Exhibit 11: JD.com (B2C e-commerce) logistics flow

Source: OP Research

Exhibit 12: Major China B2C e-commerce delivery services

Logistics operation type Coverage Remarks

Tmall.com 3PL Nationwide Delivery protection

JD.com Self-owned Nationwide 1 – 2 days delivery

Suning.com Self-owned + 3PL Nationwide Half day delivery

Amazon.com Self-owned + 3PL Nationwide 1 – 2 days delivery

(include night time)

Dangdang.com Self-owned + 3PL Nationwide 1 days delivery

Source: OP Research

Customers

3PL3PL

Delivery

stations

Service

centers

3PL

(express

Delivery)XXX

Regional logistics

centers

Distributor

centre

Suppliers

JD.com

Express

Delivery

Customers

order

• Manufacturing

• Brand building

• Storage

• Barcode

• Sorting

• Inventory

• Platform

• Promotion

• Online traffic

• Assorted to different

distribution centers

• Delivery • Confirm collection

•Procurement

• Re-stocking

Direct order though B2C channels

3PL

Distributor

centre

Distributor

centre

Huge growth in 3PLs outsourcing

and logistics facilities expected

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Express delivery – riding on e-commerce growth

Revenues of sizeable express delivery companies have grown at a 25% CAGR to

Rmb144.2 billion in 2013, which is over six times that of 2005. It is expected that

revenue will record another 30% growth in 2014e to Rmb187.5 billion with

increase in e-commerce penetration. According to some market research, over

50% of the express delivery demand is generated by B2C and C2C e-commerce

transactions, which usually focus on small parcels of relatively low value

(Rmb100 – Rmb500). Major express delivery companies in China handled 9.19

billion parcels in 2013, a very impressive 61.6% growth. We believe this strong

growth will be maintained as some B2C companies, such as JD.com, have

successfully ramped up to a critical mass to become profitable. This will lead to

higher efficiency in logistics operations as well as better price competitiveness to

capture retail sales penetration. For 2014, it is expected the delivery volume will

be further increased by 30% to 11.95 billion parcels. Thus, Haier (1169 HK) will

certainty capture the industry growth by their “last mile” delivery capacity for large

items in rural area.

Exhibit 13: China sizable express delivery companies revenue

Source: Enfodesk, State Post Bureau of PRC

23.97 29.97 34.26

40.84 47.90

57.46

75.80

105.53

144.17

187.50

25.0%

14.3%

19.2%17.3%

20.0%

31.9%

39.2%

36.6% 30.1%

0%

10%

20%

30%

40%

50%

0

40

80

120

160

200

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E

Revenue Growth rate

(bn)

Express delivery is one of the

3PLs benefiting from e-commerce

boom

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Exhibit 14: China sizable express delivery companies volume

Source: Enfodesk, State Post Bureau of PRC

Although there are thousands of express delivery companies the seven largest

players combined take up more than 80% of the market. The data above shows

that average revenue per parcel was only a tiny sum of Rmb15.7 with the profit

margin for the industry dropping to below 5%, making economy of scale very

significant in such a highly competitive market. Besides, over half of the parcel

deliveries are intercity, further increasing operating costs for small local

companies that only have a network in one province. Thus, we believe the

express delivery will be further consolidated in the future.

EMS, founded by China Post Group, is the largest integrated express and

logistics services provider with the longest history in business operations.

Meanwhile, SF Express, founded in 1993, is the largest privately owned express

delivery company with a nationwide network, owning 14 aircraft, 10,000 vehicles

and over 7,800 service centers in China. Both EMS and SF Express target the

mid-high end express market and nearly half of their revenues come from the

business segment.

For cost savings and time insensitive delivery market in C2C e-commerce,

Shentong, Yuantong, Zhongtong, Best Express and Yunda have captured 54.5%

of the e-commerce delivery outsourcing in 2012. Their low costs are driven by a

high level of franchising, with over 50% of their business from franchisees.

However, the low level of control in service quality of franchisees has led to ever

more scandals like toxic deliveries and parcel thefts. We believe the low end

market will become less competitive since B2C operators tend to increase

customers satisfaction by offering better and faster logistics services.

Due to fast growing demand of express delivery companies, it creates a huge

demand in logistics facilities across different locations in China. Shenzhen Int’l

(152 HK) has made a strategic cooperation agreement with Shentong Express,

the second largest courier in China, for in-depth cooperation in integrated

logistics and cross border e-commerce. They will share customer and data

resources to accelerate the development of nationwide logistics network as well

as co-operation in express delivery business. We believe the growth in express

0.87 1.06 1.20 1.51 1.86

2.34

3.67

5.69

9.19

11.947

21.8%

13.2%

25.8%23.2%

25.8%

56.8%55.0%

61.5%

30%

0%

10%

20%

30%

40%

50%

60%

70%

0

2

4

6

8

10

12

14

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E

Express delivery volume (bn pieces) Growth rate

(100 mn)

Express delivery is a competitive

market

EMS and SF Express target

mid-high end market

Shentong, Yuantong, Zhongtong,

Best Express and Yunda target

low end market

Express delivery drives fast

growing demand in logistics

facilities

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delivery industry will benefit companies with rentable warehouses resources,

such as Beijing Properties (925 HK), Sinotrans (598 HK), SITC (1308 HK) and

Kerry Logistics (636 HK).

Exhibit 15: Market share of express delivery

Source: OP Research

Exhibit 16: Market share of express delivery in B2C e-commerce

Source: EnfoDesk

Increasing investments in logistics facilities by e-commerce

We have seen increasing investments by B2C operators to build their own

logistics network in order to secure higher customer satisfaction. Currently, major

B2C online shops aim to provide one to two deliveries per day in 1st – 2nd tier

cities, which is a clear competitive edge over small C2C online shops with

delivery time of three to four days. Besides, as most of the B2C e-commerce

operators have less than 1 million square metres of warehouse space, most are

planning to build more distribution centers in different regions to capture the

growing business.

EMS, 25%

SF Express, 20%

Shentong, 12%

Yuantong, 10%

Yunda, 8%

Zhongtong, 6%

Others, 19%

EMS, 15.5%

Sheuntong, 15.2%

Yuantong, 12.9%

SF Express, 10.3%

Best Express, 9.5%

Zhongtong, 9.2%

TTK Express, 8.0%

Yunda, 7.7%

Others, 11.6%

Increasing logistics facilities

demand by investments from B2C

e-commerce operators

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Exhibit 17: China B2C e-commerce operators logistics facilities

Company Warehouse size Remarks

JD 100+ million sqm 6 mega size logistics hub and warehouses in 27 cities

Suning 12 warehouses in China Nanjing, Beijing, Shanghai, Guangzhou, Shenyang,

Chengdu, Wuhan, Xian, Hangzhou, Shenzhen

Amazon.cn 700k+ sqm 11 logistics facilities

Yixun 230k sqm Shanghai, Suzhou, Hangzhou, Yangzhou, Shenzhen,

Beijing

Yihaodian 280k sqm 7 logistics centres in Shanghai, Beijing, Guangzhou,

Chengdu and Wuhan

Source: 100EC.cn

JD.com has set itself apart from other e-commerce shops with greater logistics

coverage, better efficiency and higher express delivery service standards. The

company has aggressively increased its storage area to over 1 million square

metres at the end of 2013 to fulfill the demand of over 1 million orders per day.

Their self-owned express service has handled more than 100k daily orders. Their

network consists of 6 mega-sized logistics centres, 27 city storage centres and

1,620 delivery stations covering nearly 500 cities. Recently JD.com became the

first on the market to offer “3-hours” express delivery service. JD.com aims to use

70% of their IPO proceeds, over Rmb 7 billion, to build a logistics network. JD has

completed their “Asia Number One” logistics center in Shanghai with an

operational area of more than 100k square metres. They plan to build similar

facilities in Beijing, Guangzhou, Wuhan and other cities.

Sunning will spend Rmb20 billion over the next three years on a logistics network

under their “Logistics Cloud”. By 2015, Sunning aims to build 60 logistics bases

and 12 automatic warehouses. 16 logistics bases in Beijing, Nanjing, Chengdu,

Shenyang, Hangzhou, Qingdao, Xiamen, Tianjin, Chongqing and etc. have been

in operation, with automatic warehouses in Nanjing and Guangzhou specifically

to meet e-commerce needs. The company is expected to invest in last mile

services as they have secured express delivery licences in 22 provinces.

Cainiao – China Smart Logistic Network (CSN) was launched by Alibaba

Group jointly with eight other companies on 28 May, 2013. It promised to support

Rmb30 billion worth of daily online sales with delivery within 24 hours to

anywhere in China. In the first phase, the company will invest Rmb100 billion to

set up the logistics network to stimulate the growth of current logistics

infrastructures investment, such as highways, railways and airports. Total

investments will eventually increase to Rmb300 billion.

Exhibit 18: Shareholders of Cainiao network

Company Background Stake

Alibaba E-Commerce 43%

Intime Retailer 32%

Fosun Conglomerate - property investment 10%

Forchn 3PL 10%

Shunfeng Express 1%

STO Express 1%

YTO Express 1%

ZTO Express 1%

Yunda Express 1%


JD.com aims to spend bulk of IPO

proceeds on logistics network

Sunning Logistics Cloud –

Investing Rmb20 billion

Cainiao – Rmb100 billion

investment in five to eight years

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Goodaymart logistics is targeted by Alibaba for their integrated channel service,

which has the ability to deliver large items with integrated installation service

across rural China. With over 6,000 points of service, Goodaymart is offering “last

mile” service to deliver the items to over 1,500 counties within 24 hours. Alibaba

Group announced a HK$2.82 billion investment to secure a maximum of 34%

stake in Goodaymart in December 2013.

Exhibit 19: Haier e-commerce “last mile” service


Exhibit 20: Alibaba investment in Haier and Goodaymart Logistics


International express companies, such as UPS and Fedex have been granted

operating licenses in some cities in China. Although they only have 3% market

shares in China, we believe they will drive the demand in high end logistics

facilities since international express companies are targeting the premium parcels

market as more cities are opened to international express companies.

By having investments from different parties to improve logistics efficiency, we

strongly believe the demand for modern high-end logistics facilities will see a

growth phase to fulfill needs from the e-commerce boom. Due to the limited

supply of land in 1st – 2nd tier cities, we think the value of logistics assets in

prime locations will see an appreciation in value. Beijing Properties (925 HK) and

Shenzhen Int’l (152 HK) have strong logistics facilities development in the

87

logistics

centres

After sales services

IT system to allocate

orders to regional

logistics centers

Delivery, installation, cross selling

Consumers

9.9% stake

2.0% stake

66% stake

3.59% in Haier

or

24.1% in Goodaymart

Logistics

HK$1.316

billion

Goodaymart – Integrated “last

mile” service

Huge investments from

e-commerce on logistics facilities

will benefit companies with

projects in pipeline

Fri, 11 Jul 2014

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pipeline in prime locations which, we believe, will yield exceptional returns in the

near future.

Increasing outsourcing to integrated logistics services providers

In addition to the increasing demands for logistics facilities, we believe the

e-commerce boom will introduce more logistics operations outsourcing to third

party logistics (3PLs) in China to save costs and improve efficiency.

According to Armstrong & Associates, China has one of the highest logistics

costs to GDP countries in the world. Total logistics cost to GDP in China reached

18% in 2012, which is more than double those of developed countries, such as

8.5% in US, 8.8% in Germany and 8.5% in Japan. The data showed that China

would be even more inefficient in logistics than other developing countries, such

as 13% in India, 11.6% in Brazil and 12% in Mexico. We believe the major

reasons for the extremely high logistics costs in China are the low level of

logistics outsourcing, redundant logistics operations in old supply chains and

mismatching resources geographic distribution with economic activities locations.

Exhibit 21: Total Logistics Costs to GDP

Source: Armstrong & Associates, OP Research

9.0% 8.5%9.5%

8.8%9.7%

8.8%

10.5%

8.5% 9.0%

18.0%

13.0%

11.6% 11.6%

0%

5%

10%

15%

20%

Developed countries Developeingcountries

Very high logistics cost to GDP in

China

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Exhibit 22: 3PL Revenue in Total Logistics Costs


In developed countries, such as US, Germany, UK, Japan and South Korea, 3PL

revenue contributed over 10% of total logistics costs, indicating a higher level of

outsourcing. By utilizing integrated logistics services offered by 3PL, local

companies can focus on optimizing core competencies and reducing capital

expenditures to build their own logistics facilities. Besides, by serving diversified

clients in different segments, 3PL companies can improve asset profitability with

higher utilization and more in-depth IT systems developments. For example,

many companies are used to having their own trucking operations to transport

materials for processing. However, as production processes are in one-direction,

over half of the trucks in China run empty on return trips, which greatly increase

toll fees and fuel costs. 3PL companies, however, can share transportation

power with multiple clients in many locations from data analyses, thus improving

assets utilization and reducing wastage. So we believe 3PL outsourcing demands

will be on an upward trajectory in China as more in-depth IT systems of 3PL will

allow for e-commerce “big data” analyses, which offer real-time cargo monitoring

for logistics management to achieve cost savings from higher utilization and

economies of scale.

10.2%10.6% 10.5% 10.5% 10.6% 10.5% 10.2% 10.5%

11.1%

8.0%

7.0%

9.0%8.2%

0%

5%

10%

15%Developed countries Developingcountries

3PL outsourcing can achieve cost

savings by utilizing “big data” in

e-commerce

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Exhibit 23: Total logistics costs breakdown by different functions

Source: CFLP, OP Research

As shown below, although total logistics costs to GDP in China is on a downward

trend, the speed of costs reduction is still very slow. Over a decade, total cost to

GDP only dropped by 1 ppt from 18.9% to 17.9% in 2013, which means that there

was minimal structural change in the supply chain management and the revenue

growth in the logistics segment was driven only by the robust GDP expansion in

China, not industry upgrading. We believe the reluctance to make changes in

logistics services is because investments in logistics facilities in the past were

based on speculation on asset price inflation, where fixed assets, such as

warehouses, can be sold at higher prices at a later date. However, we believe

that when China GDP growth slows down, investments tend to improve asset

quality to generate higher profitability by value added services in the future. As a

result, logistics facilities will be upgraded for better utilization and the total

logistics costs to GDP will be lowered to the level of developed countries in the

long run. (US has a stable total logistics cost to GDP at a range between 8%-9%)

Exhibit 24: Total Logistics Costs in China

Source: CFLP, OP Research

52%63% 61%

35%

33% 35%

12%5% 4%

0%

20%

40%

60%

80%

100%

China US Japan

Transportation Storage Management

0

5

10

15

20

25

30

0

2,000

4,000

6,000

8,000

10,000

12,000

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Total logistics cost (RMB bn) % of GDP

Total logistics costs to GDP in

China will decrease as more

industries upgrade while GDP

growth slows down

Fri, 11 Jul 2014

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Exhibit 25: Total Logistics Cost


With increasing internet and e-commerce penetration, consumer behavior tends

to be more and more impulsive. For example, in fast fashion, apparel retailers

need to offer more SKUs to customers for shorter periods. Traditional fashion

designs have only four seasons a year, whereas fast fashion designs have eight

to ten seasons. To limit inventory risks each SKU comes in smaller quantities in

the channel. This creates greater pressure on the supply chain management to

ensure inventory refills can be made with more SKUs at a quicker pace to the

market. Online shoppers are becoming more aware of delivery times after some

delivery delay complaints at major promotion events, such as “November 11”. To

secure customer satisfaction under keen competition, many B2C online shops

aim for two or three deliveries per day to guarantee delivery to end-user within 24

hours of closing online transactions. It will certainly increase the complexity of the

whole supply chain and more 3PL outsourcing will be adopted to sustain this fast

growing business.

We believe 3PL companies with strong domestic distribution networks in China,

such as Sinotrans (598 HK), SITC (1308 HK) and Kerry Logistics (636 HK), will

benefit since they can provide shorter origin-to-delivery cycle times by utilizing

alternative transportation modes to allow better routings.

According to Armstrong & Associates, 3PL revenue in the Greater China region

will have a higher than average CAGR of 8% in 2012-2015. China 3PL revenue in

total logistics costs would have 1 to 2 ppt increment with support from

government. China’s 12th Five-Year plan approved the following objectives for

third-party logistics market:

1. To improve logistics efficiency and reduce logistics costs by accelerating

establishment of modern logistics system, developing 3PL, prioritizing the

integration of logistics resources and linking-up the logistics infrastructure

2. To optimize the development of regional distribution systems and the orderly

development of logistics parks

163.7

1,334.60

247.6299.7

195.4 213.9161.8

506.9

103.9

1,480.90

237.1 277.9

0

200

400

600

800

1,000

1,200

1,400

1,600World total: 8,350.60

Developed countries Developeingcountries

US$ Bn)

3PL revenue will grow as

consumer preference leads to

higher supply chain complexity

12th

Five-year plan on 3PL market

Fri, 11 Jul 2014

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3. To promote the development of modern logistics management to increase the

standardization of logistics

4. To promote development of logistics in agricultural, bulk mineral and

industrial products

Exhibit 26: Revenue of 3PL companies in China

Source: Armstrong & Associates, CFLP, OP Research

Exhibit 27: 3PL revenue growth (CAGR by major region)


There are over 10,000 3PL companies operating in China. However, the average

profit margin of Chinese logistics enterprises was 5.59% in 2011, according to a

survey by the NDRA and Nankai University. The poor profitability of this logistics

industry in China is a result of the highly fragmented market, where the top 10

logistics firms only have a 13% market share, compared to the 30% - 40% in US

and Europe. As China’s 3PL market continues to develop, we anticipate more

M&A activity for 3PL market consolidation since small logistics enterprises without

economies of scale will find it difficult to fight the heavy tax burden, high toll fees,

expensive fuel costs and rising salary costs. It would provide expansion

7.0%7.0%

7.4%

7.9%

8.5%

9.2%

5%

6%

7%

8%

9%

10%

0

200

400

600

800

1,000

1,200

2010 2011 2012 2013 2014E 2015E

3PL revenue as % of total logistics cost

(RMB bn)

18.8%

9.5%

13.3%

4.0%

6.3%

-1.7%

8.0%

4.8%3.6% 4.2%

1.5% 1.0%

-5%

0%

5%

10%

15%

20%

Greater China Asia Pacific (ex. Greater

China and Japan)

South AmericaNorth America Japan Europe

2007-2012 2012-2015E

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opportunities for leading 3PL companies, such as Sinotrans (598 HK), SITC

(1308 HK) and Kerry Logistics (636 HK).

Exhibit 28: Profit margins of Chinese logistics enterprises

Source: NDRC, Nankai University, OP Research

Exhibit 29: Market share of top-10 logistics firms

Source: CFLP, AT Keaney

0

10

20

30

40

50

2007 2008 2009 2010 2011

Profit margin: <0% Profit margin: 0-5%

Profit margin: 5-10% Profit margin: >10%

(% of surveyed enterprises)

13%

34%

40%

0%

10%

20%

30%

40%

50%

China USA Europe

(% of total market share)

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E-commerce enablers – Pick and shovel for gold rush

“During the gold rush it’s a good time to be in the pick and shovel

business.” – Mark Twain

Although many e-commerce operators are enjoying explosive growth in revenue

under the boom in China, many of them are still operating at a loss or barely

breaking even.

For the newly listed JD.com, revenue has jumped three-fold from Rmb21.1 billion

in 2011 to Rmb69.3 billion in 2013. However, the company remains a

loss-operator with a net margin of around - 4% in the past 5 years. JD.com barely

broke even in 2013 only because of non-core incomes, such as income from

interests and government grants. General consensus estimates the company will

not record meaningful earnings until 2017 with a net margin of 0.13%.

We believe the poor profitability of B2C e-commerce operators is due to intensive

price wars between different online shops as they aim to capture majority market

share to achieve economy of scale. VIPS is one of the few e-commerce operators

to be profitable with improving margin. This is due to VIPS unique positioning in

channeling discounted off-season apparels and cosmetic products, forming a

mutually beneficial relationship with brand suppliers. Due to aggressive growth in

B2C business, operators tend to build up inventories quickly, an approach fraught

with potential risks. For example, electronics products and home appliances

accounted for over 60% of JD.com GMV in 2013. Since electronic products fade

out with the seasons, slow moving inventories carry potential write-offs if revenue

growth slows and sales promotions find no response. Thus, investing in

e-commerce operators may not be the best choice during a boom, not unlike the

fortunes of a gold miner during a gold rush, where there is no guarantee that he

will finally dig up enough gold to achieve a high return.

Exhibit 30: Gross margin


0

5

10

15

20

25

30

2009 2010 2011 2012 2013 2014E 2015E 2016E

JD VIPS DANG

High revenue growth, but high

operational risks

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Exhibit 31: Net margin


Exhibit 32: Inventory day


For the well-known Alibaba Group in e-commerce, the company has recorded

over US$4.2 billion net profit in FY13, an increase of 200% over last fiscal year.

The company achieved a very high gross margin of 78% from focusing on

third-party platform business without holding lots of inventory. However, the IPO

of Alibaba Group is said to be valued at a range of US$109 billion to US$200

billion, which would be quite a demanding valuation of over 30x PE.

Investing enablers: A ‘Pick-And-Shovel Play’ in gold rush

Except investing directly in e-commerce operators, we believe there are huge

opportunities arising from different industries in the ecosystem, which are

essential to enable e-commerce to succeed. For example, the robust growths in

express delivery set out are typical examples of e-commerce enablers who make

sure products are physically delivered from sellers to end users.

(15)

(10)

(5)

0

5

10

2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E

JD VIPS DANG

.

.

.

.

.

(-50)

0

50

100

150

200

250

2009 2010 2011 2012 2013

JD VIPS DANG

Demanding valuation for Alibaba

Group IPO

Investing enablers of e-commerce

would yield higher risk reward

ratio

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We highlight warehousing, cold chain logistics and integrated logistics service

providers as our top picks for the e-commerce enablers investment as they act

like “pick and shovel” in the gold rush that are needed in e-commerce operations.

With robust growth in the e-commerce market, they will generate huge demands

for warehouse, cold chain logistics and 3PL services. We believe investing in

enablers will yield better risk reward ratio as enablers are service providers that

do not involve operational risks in e-commerce, but enjoy the benefits of the

industry's boom.

Exhibit 33: E-commerce enablers exposure

Rating Warehousing Cold chain logistics Integrated logistics services

Beijing Properties (925 HK) BUY Mega projects in prime locations,

such as Beijing inland port,

Shanghai FTZ and Tianjin Airport

Tianjin and Quzhou projects in

pipeline

Sinotrans (598 HK) BUY Across Greater China Leading 3PL provider in China

SITC (1308 HK) NR Smart Logistics Park JVs in

Qingdao

Focus intra-Asia sea freight routes

Shenzhen Intl (152 HK) BUY Mainly in Shenzhen, nationwide

integrated logistics hubs in

pipeline

Haier (1169 HK) NR Last mile service by Goodaymart

ASR (1803 HK) BUY Asset light air freight solution provider

Chu Kong Shipping (560 HK) NR Tuen Mun warehouse and

Nansha bonded area

Kerry Logistics (636 HK) NR Across Greater China Leading 3PL provider in China

Source: OP Research

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Warehousing

A Low Risk Proxy for e-Commerce Boom

According to CAWS, total market supply of logistics facilities in China amounted

to 550 million square metres in 2010, which was far below the demand for over

700 million square meters. Over 80% of the warehouses in China are poorly

constructed or converted from factories with insufficient clearance height, lack of

loading docks, restricted vehicle accessibility and lack of office space. Including

facilities owned for self-use by small to midsize developers, the total modern

warehouses in China amounted to only about 100 million square meters or 18%

of the supply. For major providers in 11 cities, there were only 13 million square

meters (or 2.4% of the total stock) of modern logistics facilities built for leasing out,

indicating significant scarcity in the high-end warehousing market.

Exhibit 34: Modern logistics facilities account for 15-20% of total supply;

market is fragmented

Source: GLP, JLL report

We believe this under-supply of logistics facilities in China is driven by multiple

factors. Over a decade, land costs in China have been climbing up a lot in prime

locations, such as first tier cities. The higher costs to acquire industrial land may

not justify investment returns if the developer does not have the expertise to

generate higher rental income by building high-end logistics facilities. Besides,

local governments tend to assign lands for commercial and residential uses since

they would generate higher tax revenues and create jobs, which further reduce

the supply of logistics land. On the other hand, the amount of industrial lands

which are poorly developed for low-end warehouses because of land squatting

for the purpose of profiting from selling the land at a higher price after asset price

inflation. We believe government is planning changes to land policies to increase

land supply for logistics facilities to support their growth. From July 2014,

Shanghai will take the first step to lower lease terms of industrial land not

exceeding 20 years, down from 50 years, with lower land premiums.

13.0

100.0

550.0

Major providers Modern logistics facilites Total market supply of logistics facilites

(mn sqm)

Modern logistics facilities are in

very limited supply in China

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High demand in modern logistics facilities in China

Meanwhile, research also shows that the high logistics costs to GDP in China

(18% in China vs 8% in US) is related to the lack of average warehouse stock

since existing warehouses on the market are too small or obsolete. Average

warehouse stock in China is 0.41 square metres per capita, which is only one

twelfth or 8% of US. Given the strong demand for modern logistics facilities from

e-commerce boom, it is expected the total warehouse supply will be 4 times

bigger to 2.4 billion square metres in 2029. The average logistics space per

capita in China will hit 1/3rd of the US or 1.74 square metres, representing a

US$2.5 trillion market.

Exhibit 35: Current supply of logistics facilites in the US is ~12 times that of

China

Source: GLP, CAWS, CB Richard Ellis estimates, CIA The World Factbook

Exhibit 36: Logistics space per capita is 1/3rd of the US by 2029

Source: GLP, CAWS, CB Richard Ellis estimates, CIA The World Factbook

0.41

5.06

0

1

2

3

4

5

6

China US

Warehose stock: total area (sqm) per capita

12x

High organic growth of logistics

space in China is expected in the

next 15 years

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In order to handle the fast order flow and the short duration to market in

e-commerce, the requirements in standards of logistics facilities have got much

higher, which traditional low-mid end warehouses cannot fulfill. Modern logistics

facilities are usually large-sized with sizeable floor areas for leasing to premium

3PL operators, but there are few suppliers in the market. The high ceilings, high

load tolerance, wide column spacing and elevators with large capacity will enable

vehicle accessibility in modern warehouses. Besides, wide truck yard, ramp ways

and elevated berths will facilitate loading and unloading activities with the trucking

in an efficient manner. These modern facilities can allow automated inventory

management for cost savings in supply chain management.

With improvements in efficiency, the average rental rate of modern facilities can

yield over 40% more than traditional warehouses. However, due to complexity in

design and higher capital investments, there are only a few providers in a market

dominated by Global Logistics Properties (GLP) holding more than half of the

shares in the 7.4 million square metres of net rentable area of completed modern

logistics facilities. With less competition from second tier players, we believe

there are huge opportunities for small companies like Beijing Properties (925 HK)

and Shenzhen Int’l (152 HK) to become one of the leading players by completing

their scalable projects on hand and securing new projects.

Exhibit 37: Existing facilities not built to modern standards

Existing logistics facilities Modern logistics facilities

Owned by users

Small-sized and old facilities

Fragmented market

Leased spaces, largely to 3PL operators

Large-sized modern facilities

Few players of scale

Source: GLP

Modern facilities generate higher

rental income

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Exhibit 38: Limited supply of modern logistics facilities in China

Interior Exterior Characteristics

Modern

Wide column spacing

Large floor plates

High ceilings

Modern loading docks, enhanced safety systems and other value-added features

Middle

Some converted from factories

Insufficient clear height and lack of loading docks

Lack of office space

Low-end

Poorly constructed

Restricted vehicle accessibility

Source: GLP

Exhibit 39: Various features of modern logistics facilities

Large floor area High ceilings High load tolerance

10,000 sqm or more 5.5 m or more 1.5 t/sqm or more

Wide column spacing Wide truck yard Elevated berths

Dock leveler Ramp ways Elevator with large capacity

Source: GLP

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Exhibit 40: Average rental rate of modern and traditional facilities

Source: OP Research

Exhibit 41: Completed modern logistics projects in China by net rental area

Source: Prologis Research

1.2

0.8

0.7

0.8

0.6

0.5

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1st-tier cities 2nd-tier cities 3rd-tier cities

Modern logistics facilites Traditional facilities

(RMB/m2 per day)

GLP, 52%

Blogis, 11%

Goodman, 8%

Mapletree, 7%

Prologis, 6%

CB Investor, 5%

China Merchants Logistics, 5%

Yupei, 3%

South Logistics, 2% Zenith, 1%

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Exhibit 42: Modern warehouse providers in China

Source: GLP

GLP enjoys fast development from e-commerce boom

Global Logistics Properties (GLP) was listed on the Main Board of Singapore

Stock Exchange in October 2010 through the largest real estate IPO ever globally.

With the strong demand in logistics and ample cash raised by IPO, the company

has recorded 25% CAGR in the total GFA of completed properties, reaching 14.8

million square metres in China, Japan and Brazil as of March 2014. It has

projects located in 34 cities across China with 9.5 million square metres

completed and 9.3 million square metres in the development pipeline to meet the

growing needs of e-commerce clients.

Exhibit 43: GLP logistics property portfolio in China

As at Mar

31, 2014

Tptal area

(sqm mn)

Pro-rata area

(sqm mn)

Total valuation

(US$ mn)

China portfolio 18.7 13.8 8,224 6,249

Completed and stabilized 7.4 6.1 5,147 4,148

Completed and pre-stabilized 1.3 1.1 900 692

Other facilites 0.8 0.4 207 110

Properties under development or

being repositioned 3.6 2.3 787 541

Land held for future development 5.7 3.9 1,184 759

Source: GLP

25% of GLP’s total leased area in China have been signed up by e-commerce

clients such as Amazon, Vipshop, JD.com and Goodaymart Logistics.

E-commerce companies prefer modern logistics facilities as they can build up

automated and complex inventory control systems in the warehouses to lower

storage costs with real-time information. Besides, modern logistics facilities can

also draw tenants from e-commerce related businesses, such as 3PL and

express delivery, since the warehouses are mostly located in prime locations.

Deppon is a good example of how a delivery company can save logistics costs

and improve service quality by integrating first tier storage facilities.

In the first quarter of 2014, GLP achieved record new leases in China with 1

million square metres, up 123% yoy. E-commerce represents 45% of the new

7.6

1.1 1.0 0.8 0.7 0.4 0.4 0.4 0.2 0.1

(mm sqm)

GLP stake: 19.9%GLP stake: 53.1%

GLP stake: 90.95%

Global Logistics Properties (GLP)

is the leading modern logistics

facilities provider in China

E-commerce is the core driver for

modern logistics facilities in

China

Fri, 11 Jul 2014

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lease due to fast expansion of their business. We believe e-commerce boom is

the core driver for the robust demand of modern logistics facilities in China as

e-commerce and 3PL are increasing their share in the tenants mix. Except GLP,

companies with modern logistics development projects in the pipeline, such as

Beijing Properties (925 HK) and Shenzhen Int’l (152 HK), will capture the need for

impressive returns in coming years.

Exhibit 44: Top 10 tenants in China (March 2014)

Rank Name Industry % leased area

1 Amazon* Retailer 4.1%

2 Deppon 3PL 4.1%

3 Vipshop* Retailer 3.1%

4 Nice Talent 3PL 2.8%

5 Best Logisitcs 3PL 2.6%

6 DHL 3PL 1.6%

7 Schneker 3PL 1.5%

8 Toll warehouse 3PL 1.4%

9 JD.com (360buy)* Retailer 1.3%

10 Goodaymart Logistics* 3PL 1.2%

Total

23.7%

* E-commerce related customers

Source: GLP

Exhibit 45: Composition of China new leases - 4Q FY2014

Source: GLP

Existing customers, 71%

New customers, 29%

Retail/Fast food chain, 50%

General logistics services, 23%

FMCG, 11%

Electronics/ High-tech, 6%

Auto & Parts, 3%

Pharma & Medical instruments, 1%

Others, 5%

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Cold Chain Logistics

A Blue Ocean in e-Commerce

The e-commerce market in China is becoming more and more competitive, with

B2C online shops offering similar products with similar channels. Since B2C

e-commerce operators do not involve themselves in products manufacturing,

major online shops are offering homogeneous products where consumers’

decisions are based mainly on pricing, not other value added services. It leads to

large scale price wars as happened before when online shops tried to capture a

majority of market share to lower costs by economy of scale. So far, only Vipshop

is profitable by uniquely positioning itself in discounted off-season apparel and

cosmetic products by bonding strong mutually beneficial ties with brand suppliers.

However, JD.com is still making losses in the price war as consumers can easily

find another e-commerce channel to acquire the same 3C products offered even

though the price is not the lowest in the market. Thus, we believe low profitability

may be sustainable if e-commerce operators are still in this red sea.

Exhibit 46: Cold warehouse in Tianjin Smart Logistics Park

Source: OP Research

Cold chain logistics is a blue

ocean in e-commerce

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Exhibit 47: Frozen fish and juice in cold warehouse at below -19oC

Source: OP Research

On the other hand, cold chain logistics are making a blue ocean in e-commerce

latest development. Different from electronic and textile products, fresh food,

such as fruits, vegetables, meats and aquatic products are perishable, requiring

to be transported and stored in low temperature. Due to limited supply of cold

storage facilities and refrigerated, insulated trucks in China, very few companies

are able to deliver fresh products. Without keen competition as freshness is

difficult to replicate, we expect cold chain logistics to create a high margin

premium market in e-commerce in the near future. As the middle class population

in China grows, we believe increasingly disposable income and rising food safety

concerns will drive a huge demand for fresh foods in e-commerce as well as for

the enabler – cold chain logistics.

Exhibit 48: Middle class population in Asia (number of people in mn)

Source: Armstrong & Associates

346

23 123

201

696

179 127

390

1,794

607

122

1,066

0

500

1,000

1,500

2,000

Asia China Japan Rest or Asia

2000 2010 2020

(mn)

Increasing middle class in China

will drive fresh food demand in

e-commerce as rising food safety

concerns mount

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Cold chain logistics will become hot investment item

Shunfeng Express has provided an outstanding example of how to use their cold

supply chain capacity. In May 2012, SF Express launched SFBest.com (順豐優

選), which focuses on offering B2C e-commerce fresh products and timely direct

deliveries from origins, such as choice lychees from Lingnan and Peking ducks

from Quanjude. Without any solid cold chain logistics, fresh foods delivery is

difficult to achieve. Based on their strong cold chain logistics network, SF Express

has found its niche in e-commerce business as an express delivery company. As

shown in the table below, some A-shares listed Chinese companies are also

investing in this area to grab a share of the boom. We believe companies with

cold chain logistics exposure, such as Beijing Properties (925 HK), deserve a

premium since cold chain logistics most certainly will be a hot investment item in

the next few years.

Exhibit 49: SFBest.com


More companies are stepping into

cold chain logistics

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Exhibit 50: List of cold chain developments by A-shares listcos

Name Stock code Event

YUD Yangtze River

Investment Industry

600119 CH Become qualified cold chain logistics provider for

Yihaodian and Tmall in 2013

Completed over 400,000 cold delivery in 2013

Shanghai Jinjiang Int'l 600650 CH Modified 11,000 tons normal warehouse into cold

warehouse

CMST Development 600787 CH Developed valued cold chain transportation business

Shenzhen Haupengfei

Modern Logistics

300350 CH Acquired cold chain company for pharmaceutical segment

Shanghai Haibo 600708 CH Invested over Rmb1 billion into West Hong Qiao cold chain

logistics park project

Acquired 51% stake in 962360.com 菜管家

Acquired 70% of Creative Giant - food logistics company

though subsidiary

Source: OP Research

Policy targets to double cold chain logistics capacity

According to NDRC, China has around 400 million tons of fresh products in

circulation every year. However, the cold chain circulation rates of fruit and

vegetables, meats and aquatic products were only 5%, 15% and 23%

respectively in 2010 – a very low level compared to the near 100% in developed

countries.

Low cold chain circulation rate leads to high loss rate and decay of the fresh

products during transportation. The loss rate of fruit and vegetables, meats and

aquatic products were 25%, 12% and 15% respectively in 2010, which, as a

result, increased the average logistics costs. The Chinese Government has,

therefore, unveiled the Development Plan for Cold Chain Logistics of Agricultural

Products (農產品冷鏈物流發展規劃) in the 12th Five-Year Plan in order to boost

the country’s cold storage capacity development to improve food safety by

raising cold chain circulation rates. The plan aims to triple the number of

refrigerated and insulated trucks to 60,000 by 2015 from 20,000 in 2010. Due to

lack of cold chain capacity, NDRC also began to promote development of cold

storage capacity to 18.8 million tons by 2015 from 8.8 million tons in 2010. As a

result, the cold chain circulation rates of fruit and vegetables, meats and aquatic

products will be increased to 20%, 30% and 36% respectively by 2015 and to

lower wastage rates to 15%, 8% and 10% respectively.

Policy favors cold chain logistics

development

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Exhibit 51: China's cold-storage capacity by main types of products (2011)

Source: CAWS

Exhibit 52: 12th

Five-Year Plan cold chain logistics target

Category 2010 2015

Total cold storage capacity (m tonnes) 8.8 18.8

Total number of refrigerated and insulated trucks (1,000 units) 20 60

Circulation rate of fruit and vegetables 5% 20%

Circulation rate of meats 15% 30%

Circulation rate of aquatic products 23% 36%

Wastage rate of fruit and vegetables 25% 15%

Wastage rate of meats 12% 8%

Wastage rate of aquatic products 15% 10%

Source: NDRC, OP Research

Mixed, 47%

Fruit & vegetables, 27%

Aquatic products, 13%

Meat, 11%

Dairy products, 1%

Other, 1%

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Integrated Logistics Services Providers

Enabling simple business model in complex business flow

Logistics services are an asset heavy industry, involving warehousing,

transportation and inventory management. In order to expand logistics capacity to

support the business growth, traditional 1PL companies with in-house logistics

operations are needed to invest intensive capital to acquire lands to build

warehouses as well as to buy their own trucking teams. It will certainly increase

their operational risks and asset heavy companies find it difficult to change their

business model to cope with adverse market conditions.

Some manufacturers and retailers will outsource the freight transportation to

individual 2PL carriers to move their goods between factories, distributors and

points of sales. However, it will create lots of inefficiency in the supply chain since

they do not have the expertise of IT management for inventory control. Moreover,

when the manufacturing process involves multiple countries within a region, the

administrative costs of preparing and processing customs and other local

requirements in international shipments become a huge burden in operations. For

example, there are over 20,000 parts in the manufacture of a passenger car.

Under JIT manufacturing process, the transportation of parts are frequent and in

small quantities. Without outsourcing logistics operations to freight forwarder,

there will be plenty of wastage as there will be low utilization in transportation

power. Thus, 3PL is enabling more profitable business models for different

industries. Sinotrans (598 HK), SITC (1308 HK) and Kerry Logistics (636 HK)

have strong growth in 3PL business since they have integrated their freight

forwarding service with land based logistics to offer a simple solution for

manufacturers to maintain a smooth supply chain.

Exhibit 53: Layers of logistics services

Source: cerasis.com, OP Research

1PL

2PL

3PL

4PL

Supply chain integration

Serv

ice in

teg

ratio

n

Actors Services

Cargo owners Manufacturing, Retailing

Carriers Transportation

Logistics service

providers

Logistics

Lead logistics providers

& consultants

Supply chain

management

Third party logistics providers

enable simpler business model

for fast expansion and JIT supply

chain

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Exhibit 54: Freight forwarding –B2B 3PL service


Under the explosive expansion of e-commerce business, 3PL has become an

essential part of the supply chain. With increasing internet penetration and speed

of information flow, consumer behaviors are fast changing and product cycles are

very short. Time to market is a key to success in e-commerce. Since e-commerce

is a very scalable business, where a B2C online shops can offer thousands of

branded products and millions of SKUs to customers. For example, JD.com has

over 40 million product SKUs with its own inventory. To avoid creating significant

inventory risks, JD.com needs to focus on top level supply chain management by

adopting high level of logistics outsourcing to maintain a low level of inventory.

Besides, time and quality of delivery is the key to securing consumer satisfaction

for online shoppers. Goodaymart under Haier (1169 HK) has unique strength in

distributing large items across rural areas of China within 48 hours of making

online transactions. They have experienced strong demand for their last mile

logistics channel services when they opened it to third party e-commerce

operators, which is the main reason for the Alibaba investment.

Exhibit 55: 3PL in e-commerce

Source: rosspw.com , OP Research

Customs clearance Transportation Storage Insurance

Port Foreign exchange Tax reimbursement

All services in

import and export

trade……

1Orders shipped

direct to 3PL

2 Received & checked

3Product stocked for

fulfillment

4 Customer order

5Submitted to 3PL for

fulfillment

6Order packaged

for shipment 7Order delivered to shipper for delivery

3PL

3PL becomes more important in

the complex logistics flow in

e-commerce

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Cross border e-commerce has higher complexity in logistics

With higher disposal incomes and higher consumption of mid-high end products,

China's middle class population is driving a fast growth in cross border

e-commerce (Haitao). The cross border e-commerce market increased nearly

60% to Rmb76.7 billion in 2013 and is expected to double in 2014. Since Haitao

involves cross border express delivery logistics, it would further increase

complexity in e-commerce logistics as logistics facilities, such as warehouses are

required in foreign countries. Thus, we believe 3PL companies with strong

domestic distribution networks in China as well as international freight forwarding

expertise will benefit since they can capture the demand at a lower cost by using

alternative transportation modes to allow more cost effective routings. Sinotrans

(598 HK) has demonstrated its ability to utilize their air express delivery arm to

offer integrated service for Haitao's development.

Exhibit 56: Cross border e-commerce market

Source: 100EC.cn, OP Research

Exhibit 57: Sinotrans (598 HK)’s “Sunshine Haitao” service


B2B2C haitao service: Centralize e-commerce operators cross border orders.

Freight transportation to the warehouses in bonded area in China. Express

delivery service combined together with customs process to save operational

5 12

27

48

77

155

0

50

100

150

200

2009 2010 2011 2012 2013 2014E

(bn)

Haitao, cross border e-commerce,

will drive more 3PL outsourcing

as more complex international

transportation

Fri, 11 Jul 2014

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costs.

Exhibit 58: B2B2C Haitao service

Source: Company

B2C haitao service: Collection of the freight in foreign country and international

express delivery service to China for individual orders.

Exhibit 59: B2C Haitao service

Source: Company

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Beijing Properties (925 HK) – A Hidden Gem with Prime Locations Logistics Properties

Beijing Properties (BJP) has refined itself into a promising modern

logistics facilities provider in China with a series of prime logistics

assets acquisitions

BJP aims to build the second largest nationwide network of logistics

properties in China with 4 million square metres rentable area, behind

only the well-known GLP

BJP has an unique exposure in cold chain logistics to capture the high

demand from fresh products e-commerce in the near future

Aggressive acquisitions: BJP has spent a huge capex of nearly HK$3billion in

the past 18 months to expand their development pipeline to over 1 million square

metres planned GFA of strategic logistics facilities in prime locations, such as

Beijing Inland Port, Shanghai Free Trade Zone and Tianjin Airport Bonded Area.

We believe the company is well positioned to become the second largest modern

logistics facilities providers in China with more than 4 million square meters

rentable areas of logistics facilities in the coming four years.

Strong competitive edge from prime locations: BJP will be able to generate

considerable rental income after completion of major logistics facilities in 2016.

BJP can achieve above average daily rental rates due to prime locations of

logistics facilities, which we believe is a key to securing first tier clients, such as

B2C e-commerce giants, express delivery companies and 3PL providers.

Cold chain logistics: We believe BJP deserves a premium valuation as the

company has tapped into the cold warehousing facilities in 2013. We expect

BJP’s cold chain logistics to enjoy a high demand due to higher entry barrier and

robust growth in fresh products e-commerce.

Initial BUY: We estimate BJP will record over 30% CAGR in rental income in the

next five years to over HK$500mn in 2019E. Our target price implies 10%

discount to NAV and 43% upside to current price.

Initial Coverage

BUY

Close price: HK$0.84

Target Price: HK$1.2 (+43%)

Key Data

HKEx code 925

12 Months High (HK$) 1.06

12 Month Low (HK$) 0.50

3M Avg Dail Vol. (mn) 6.54

Issue Share (mn) 6,749.99

Market Cap (HK$mn) 5,669.99

Fiscal Year 12/2013

Major shareholder (s) Beijing Ent. Gourp (67.41%)

Source: Company data, Bloomberg, OP Research Closing price are as of 10/7/2014

Price Chart

1mth 3mth 6mth

Absolute % 12.0 -4.5 52.7

Rel. MSCI CHINA % 11.9 -6.4 50.8

Company Profi le

Beijing Properties is a logistics property

development company in China, which

focuses in building and operating logistics

facilities and cold chain warehouses in prime

locations. Beijing Properties also has an

investment portfolio of commercial properties

in Beijing and Guangzhou.

Exhibit60: Forecast and Valuation Year to Dec (HK$ mn) FY12A FY13A FY14E FY15E FY16E

Revenue 11.0 35.8 146.4 198.4 341.4

Growth (%) (99.3) 225.7 308.3 35.5 72.1

Net Profit (97.8) 701.0 160.0 (53.1) (7.1)

Growth (%) (180.8) (817.0) (77.2) (133.2) (86.7)

Diluted EPS (HK$) (0.015) 0.101 0.019 (0.006) (0.001)

EPS growth (%) (185.5) (778.0) (81.3) (133.2) (86.7)

Change to previous EPS (%)

0.0 0.0 0.0

Consensus EPS (HK$)

N/A N/A N/A

ROE (%) (8.2) 30.6 4.3 (1.4) (0.2)

P/E (x) (56.3) 8.3 42.8 (129.2) (969.8)

P/B (x) 2.8 1.5 1.4 1.4 1.4

Yield (%) 0.0 0.0 0.0 0.0 0.0

DPS (HK$) 0.000 0.000 0.000 0.000 0.000


0.0

0.2

0.4

0.6

0.8

1.0

1.2

Jul/13 Oct/13 Jan/14 Apr/14 Jul/14

HK$925 HK MSCI CHINA

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Investment Thesis

A hidden gem for the second largest nationwide logistics network

Beijing Properties (BJP) has been reinventing itself from property developer into a

promising logistics facilities provider with a series of low-profile investments and

acquisitions of logistics assets. The company aims to own at least total 4 million

square meters in total of rentable areas of modern high-end warehouses and cold

chain warehouses in the next four years. This would make BJP the second

largest logistics facilities provider in China, just behind the famed

Singapore-listed Global Logistics Properties (GLP).

BJP has spent nearly HK$ 3 billion capex in the past 18 months to build up over 1

million square metres planned GFA of logistics assets under its current

development pipeline. It acquired an extra 24% stake in Beijing Inland Port, which

is developing the Majuqiao Logistics Base in Beijing with over 600k square

metres planned rentable area. BJP also acquired 212k square metres of

warehouses within the Shanghai Free Trade Zone and 27k square metres of

customs warehouses in Tianjin Airport Bonded Area. Including the investment on

construction of 80k square metres of cold chain warehouse in the Tianjin Marine

Economic Area, BJP is set to secure top-tier logistics assets in prime locations,

which will give it a strong competitive edge in capturing the robust demand for

logistics facilities from e-commerce boom in China.

To expand the high-end warehouses network rentable area to 3 million square

metres in four years, BJP will continue to identify suitable partners for logistics

development projects in western and southern cities such as Chengdu,

Chongqing, Dalian and Guangzhou. As e-commerce of fresh products is driving

the high demand growth in cold storage, BJP aims to develop 1 million square

metres of cold storage facilities in the next four years, starting with preliminary

negotiations in major rapidly growing key first-tier cities like Beijing and Shanghai.

We believe BJP is a hidden gem in the logistics sector as it owns first tier logistics

assets in prime locations, which would generate meaningful rental income and

trigger a consensus re-rating when construction is completed.

Exhibit 61: Major acquisitions

Announce Event Consideration

9-Jun-2014 Disposal of Haikou Project for 17.9% of Cell Aquaculture AUD 24,900,000

2-Jun-2014 Acquisition of 21.85% of Genvon Group (2389 HK) HKD 472,500,000

8-Apr-2014 Acquisition of Lugang Receivables HKD 46,950,929

24-Jan-2014 Acquisition of Guangzhou Guangming Receivables HKD 292,853,953

29-Nov-2013 Investment Cold Storage Warehouse CNY 82,500,000

18-Oct-2013 Acquisition 99.9% of Oriental Union (owns 80% GZ Guangming) HKD 50,372,040

10-Sep-2013 Acquisition of 75% of Holiday Inn Downtown Beijing CNY 415,620,300

8-Aug-2013 Acquisition of Phoenix Real Estate (Wai Gao Qiao) USD 143,888,734

20-Jun-2013 Acquisition 40% of Haikou Peace Base Industry CNY 40,000,000

7-Mar-2013 Acquisition 70% of High Church (TYWL) CNY 32,955,767

7-Mar-2013 Acquisition 70% of Tianjian Transwell (WSL) CNY 101,500,000

16-Jan-2013 Acquisition of land use rights by Quzhou Tongcheng CNY 15,401,100

24-Dec-2012 Acquisition 24% of Beijing Inland Port (from 52%) HKD 47,156,006

24-Dec-2012 Transfer land of Lugang for fully control

13-Jul-2011 Establishment of JV (Beijing Inland Port) CNY 2,000,000,000


China’s second largest logistics

property network in the making

A hidden gem of first tier logistics

assets in prime locations

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Prime Locations Warehouse Network

Solid demand in first tier cities

Due to the explosive growth in e-commerce China has experienced rapid

development in logistics supply chain. According to Colliers International

(“Colliers”) China’s logistics industry is still in relatively early development with

growing demand and strong fundamentals. Under the new supply chain of

e-commerce products are no longer sold and stored by individual distributors, but

B2C e-commerce giants tend to build or rent their own mega distribution centers

in major cities, such as Beijing, Shanghai and Guangzhou, which are closer to the

customers for shorter delivery time and lower transportation costs. Greater

urbanisation, with higher disposable income, has seen domestic consumption

soar and demand for modern storage facilities in first-tier cities outpacing other

property assets. Due to tight supply of industrial lands in major cities, the vacancy

rate of logistics property remains low as new warehouses in Beijing and Shanghai

are quickly snapped up.

Exhibit 62: Logistics properties new supply and demand in Beijing and

Shanghai

Source: Colliers International Research, OP Research

As shown in Exhibit 62, the rental rate of logistics property in major cities is

growing at a steady rate of 5% - 10% per annum driven by (1) demand and

supply imbalance and (2) modernization of warehouse facilities for higher yields.

With over 10% internal return rate (IRR), we believe logistics properties in major

cities, especially in prime locations, are a low risk proxy for getting the exposure

of e-commerce boom. Besides, the average rental rates of logistics properties are

still undemanding compared to other popular logistics hubs in Asia. For example,

the average rental rate in Beijing, Shanghai and Guangzhou is around 70% lower

than in Hong Kong, Tokyo and Singapore. We believe the rental rate of logistics

properties in major cities of China will be on par with developed cities in Asia in

the long run by improvements in efficiency and completion of urbanization

process.

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

(100,000)

(50,000)

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

2009 2010 2011 2012 2013 2014E

Beijing new supply Shanghai new supply

Beijing net take-up Shanghai net take-up

Beijing vacancy rate Shanghai vacancy rate

(sq.m.)

E-commerce drives solid demand

for logistics property in first tier

cities

Logistics properties are a low risk

proxy for e-commerce boom

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Exhibit 63: Logistics properties rental rate


Exhibit 61: Warehouse rental rate in Asia


-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

2009 2010 2011 2012 2013 2014E

Beijing rents Shanghai rents

Beijing rent growth Shanghai rent growth

(RMB/sq.m./day)

5.0% 5.0%

0.0%

5.0%4.0%

10.1%

2.6%

0%

5%

10%

15%

20%

25%

0

5

10

15

20

25

Hong Kong Singapore Tokyo Delhi Shanghai Beijing Guangzhou

Dec 2012 prime warehouse rent 2013 forecast

(US$/SF/YR) (YoY change)

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Beijing Properties (925 HK) prime locations are simply the cream

Strategic acquisitions over the past years have given Beijing Properties (925 HK)

multiple modern warehouse facilities in prime locations in first tier cities like

Beijing, Shanghai and Tianjin. BJP currently owns over 200k square metres of

completed rentable area, which would fully consolidate the rental income to BJP

in 2014. Although some of the projects are not yet developed, we expected the

rentable area will ramp up quickly to over 1 million square metres as the

development cycle of modern logistics facilities is relative short.

As multi-storey warehouse would take up 12 – 18 months to be built, we expect

Majuqiao Logistics Base will start to commerce in 2016 if the construction starts in

2H14. By 2016, we believe the rental income would jump significantly due to the

completion of this project and BJP would become one of the major logistics

facilities provide in China in near future given the secured development pipeline.

Exhibit 62: Beijing Properties development pipeline

Project Ownership Land Area Planned Newly developed rentable area (sqm)

(sqm) Rentable Area (sqm) Existing FY14 FY15 FY16 FY17 FY18

Logistics Properties

Majuqiao Logistics Base* 76.00% 474,300 539,400

239,400 150,000 150,000

Shanghai Phoenix WGQ 100.00% 192,670 211,918 211,918

WSL Logistics (Tianjin) 70.00% 45,551 27,494 27,494

TYWL (Tianjin) 70.00% 47,317 35,766

11,766 24,000

Chaoyang Inland Port** 82.24% 161,499 18,155 18,155

(18,155)

Cold Chain Properties

Tianjin Zhongyu 60.00% 85,638 150,000

67,986

82,014

Quzhou Tongcheng 100.00% 56,667 58,716

58,716

Commercial Properties

Holiday Inn Downtown Beijing 75.00% 7,057 27,570 27,570

Guangzhou Guangming 79.92% 59,093 41,818 41,818

Gross Logisitics Area

1,063,642 1,041,449 257,567 269,333 420,035 641,280 873,294 1,023,294

Attributable Logisitics Area

859,012 829,791 246,094 254,331 370,638 537,652 700,860 814,860

*Majuqiao Logistics Base is planned to construct warehouse area and office area of 450,000 and 89,400 square metres respectively

**Chaoyang Inland Port business will be migrated to Majuqiao Logisitcs Base in 2016E

Source: OP Research

Exhibit 63: Beijing Properties rentable area growth

Source: OP Research

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

FY13 FY14 FY15 FY16 FY17 FY18

Gross Logisitics Area Attributable Logisitics Area

Beijing Properties (925 HK)

already has a strong collection of

over 1 million sqm of logistics

properties in prime locations in

China

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Exhibit 64: Modern logistics facilities development timeline

Source: GLP, OP Research

China's second largest high-end warehouse provider in the making

Beijing Properties have shown rapid development in its logistics segment since

most of the projects mentioned above were acquired and developed in 2013. As

the company aims to expand its high-end warehouse network's rentable area to 3

million square metres in four years, we believe BJP will continue to identify

suitable partners to seek potential logistics development projects in western and

southern cities such as Chengdu, Chongqing, Dalian and Guangzhou.

Besides, due to strong demand in e-commerce, cold storage and food safety

related logistics segment, BJP aims to develop 1 million square metres of cold

storage facilities in the next four years by starting preliminary negotiations in

major rapidly growing first-tier cities like Beijing and Shanghai.

Based on the strong SOE background, we believe BJP can maintain the high

speed of expansion in the next few years. With 4 million square metres rentable

area, it is over 50% of the current GLP portfolio to become the second largest

logistics facilities provider in China.

Various 3-6 Months 6-12 Months* 3-9 Months

Project Identification /

AcquisitionPre-Development Construction Lease-Up

City / submarket identification

Site selection

Negotiation with government

Customer demand analysis

Bidding process

Project design

Building permitting

Government approvals

Pre-marketing

Construction financing

Contracting

Foundation

Base-building

Substantial completion

Marketing

Customer relationships

Lease contracts – negotiation and drafting

Tenant fit-out

Tianjin TEDA Park – Pre-Construction Tianjin TEDA Park – Completed

A typical development takes ~21 months from site acquisition to lease-up

* Typical construction period for single-storey warehouses. Multi-storey warehouses will take about 18 months to be built

More strategic acquisitions to

drive growth are expected

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Exhibit 65: Beijing Properties aims to become the second largest logistics

facilities provider in China with 4 million square metres rental area (3 mn

sqm in modern warehouse and 1mn sqm in cold chain logistics)

Source: OP Research

7.6

4.0

1.1 1.0 0.8 0.7 0.4 0.4 0.4

0.1

(mm sqm)(mm sqm)

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Exhibit 66: Company Structure

* for identification purpose only ** Joint Venture Company *** Associate Company ^ Transaction not yet completed

+ Subject to the approval of the relevant authority of the place of incorporation, the company will be renamed to China Hui Ying Cold andAgriculture (Holdings) Limited( 中國匯盈冷凍及農業（控股）有限公司* )


(1) Beijing Inland Port – Majuqiao Logistics Base

Beijing Inland Port (BIPL) is a JV set up by Beijing Properties, Beijing Lugang,

Kerry Logistics and Hutchison Port in 2011 with a maximum investment of Rmb

20 billion. By acquiring 24% stake from Hutchison Port, Beijing Properties

currently owns 76% stake in BIPL, which will perform as investor, developer and

operator of the Majuqiao Logistics Base (馬駒橋物流基地), that is located in the

Fu Ma Village (駙馬莊) of the Tongzhou District (通州區), about 20 km from CBD,

Beijing.

Majuqiao Logistics Base is one of four approved by the government for the

strategic inland port development in Beijing City. Since Majuqiao Logistics Base is

next to the intersection of Jinghu Expressway and South 6th Ring Road, it has

effective transport connections to multiple highways to other cities. Cargo

between Beijing and Tianjin will be centralized in this inland port for customs,

Beijing Enterprises Group

Company Limited

北京北控置業有限責任公司(Beijing Enterprises Group

Real-Estate Co., Ltd.*)

Beijing Enterprises

Real Estate (HK) Limited

Brilliant Bright Holdings

Limited

Beijing Properties (Holdings) Limited

Stock Code: 925

BPHL Real Estate

(Holdings) Limited

China Logistics

Infrastructures

(Holdings) Limited

Elite Horizon Investments

Limited+ 廣州光明房產建設有限公司**

(Guangzhou

Guangming

PropertyConstruction

Co. Ltd.*)

海口安基實業發展有限公司***

(Haikou Peace

Base Industry

DevelopmentCo., Ltd.*)假日飯店

有限公司(Holiday

Inn

Downtown

Beijing

Company

Limited*)^

北京陸港國際流有限公司

(Beijing

Inland

Port

International

Logistics

Co. Ltd.*)

北京北建通成國際物流有限公司**

(Beijing

Inland

Port

Co., Ltd.*)

天津萬士隆國際物流有限公司(Tianjin

TranswellInternational

Logistics

Co., Ltd.)

天域萬隆物流（天津）有限公司

(Transwealth

Logistics

(Tianjin)

Co., Ltd.)

上海凡宜和倉儲有限公司

(Shanghai

Phoenix

Real

Estate

FundWarehousing

Co. Ltd.)

衢州通成國際物流

有限公司(Quzhou

Tongcheng

International

Logistics

Co., Ltd.*)

天津中漁置業有限公司

(Tianjiu

Zhongyn

Properties

Co. Ltd.*)^

北京北建物流有限公司

(Beijing

Beijian

Logistics

Co., Ltd.*)

北京北建陸港國際物流有限

公司(Beijing

Beijian

Lugang

International

Logistics

Co., Ltd.*)

100%

100%

100%

24.94%

38.69%

100% 100% 100% 79.92% 40%

75% 82.24% 75.4% 70% 70% 100% 100% 60%-68.2%

0.6%

100% 100%

As at 28 March 2014

Majuqiao Logistics Base is one of

the largest inland ports in Beijing

Fri, 11 Jul 2014

China Logistics

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inspection and sorting out completion.

It has a land area of 474,300 square metres for logistics facilities and related

offices, with total construction area over 637,000 square metres. On completion,

the warehouse and office areas set aside for rental will be about 450,000 and

89,400 square metres respectively.

BJP aims to start construction in 2H14 after finalizing the design and layout with

local government. With 18 months construction period, Majuqiao Logistics Base

is expected to start operations in 2016, and generate remarkable rental income

as we expect occupancy will ramp up quickly due to its prime location.

Exhibit 67: Majuqiao Logistics Base strategic location

Source: amap.com, OP Research

Majuqiao is expected to

contribute rental income in 2016

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Exhibit 68: Majuqiao Logistics Base floor plan


Exhibit 69: Majuqiao Logistics Base design outlook


(2) Shanghai Free Trade Zone – Waigaoqiao Free Trade Zone

BJP acquired the entire Shanghai Phoenix Real Estate Fund Warehousing

(Phoenix WGQ Group) in November, 2013, giving the company total control over

scarce warehouse assets within the Shanghai Free Trade Zone.

The Shanghai Free Trade Zone is the first such entity in mainland China,

Beijing Properties has secured

scarce warehouses in Shanghai

Free Trade Zone

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integrating four existing bonded zones in Pudong district, namely Waigaoqiao

Free Trade Zone (where Phoenix WGQ is located), Waigaoqiao Free Trade

Logistics Park, Yangshan Free Trade Port Area and Pudong Airport

Comprehensive Free Trade Zone.

The warehouse comprises a total of 23 warehouse units within a 1- to 2-storey

warehouse building with a total gross floor area of 211,985 square metres in

Shanghai Waigaoqiao Logistics Centre. The occupancy rate of the warehouses

was high, near 80%, at the end of 2013 as it is close to the CBD of Shanghai city.

With strong official support for the first free-trade zone in China, more enterprises

are setting up business units within the zone, pushing up the asset price. As a

result, BJP has recorded significant bargains on purchases at the end of 2013 or

two months after the acquisition was completed.

We believe the prime location of Shanghai WGQ warehouse will keep the

occupancy rate high at first tier rental rates. Although Phoenix WGQ only had

two months income contribution in 2013, we think it would provide a stable rental

income for BJP in 2014 and afterwards.

Exhibit 70: Shanghai Phoenix WGQ location

Source: amap.com, OP Research

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Exhibit 71: Shanghai Phoenix WGQ outlook


(3) Tianjin Airport Economic Area (International Logistics Zone)

Beijing Properties (925 HK) have extended their logistics properties network by

acquiring 70% interests in Tianjin Transwell International Logistics (WSL Logistics)

and 70% interests in Transwealth Logistics (Tianjin) (TYWL) in 3Q13, which

would enhance the synergy with the Majuqiao Logistics Base in future.

WSL Logistics owns the sole blocked warehouse of the Customs of the Tianjin

Binhai International Airport (Customs Warehouse), which has been in operation

since 2003 with a rentable area of some 25,000 square metres. Due to its unique

location in a bonded area of a first tier airport, the occupancy of WSL Logistics

warehouses and offices was 87.55% at the end of 2013. Thus, the acquisition of

WSL Logistics can ensure satisfactory income contribution for BJP in the future.

Besides, TYWL holds a parcel of land with an area of some 47,300 square metres,

just next to the Customs Warehouse on WSL Logistics land. Phase II will develop

it into a new warehouse complex with a total gross floor area of approximately

35,000 square metres, of which some 11,800 square metres have been

substantially completed. We believe rental income from TYWL will start to

contribute in 2H14 and will gradually increase on completion of the project.

Tianjin Airport Economic Area serves as a connection point to the Beijing Airport,

thus promoting the integration of Beijing Properties logistics assets in northern

China to form a logistics platform with land, sea and air freight transportation

capability. With guaranteed operating income of Rmb14 million in the next 3 years,

we believe the acquisitions of WSL Logistics and TYWL would be one of the

earning drivers for Beijing Properties.

Unique Custom Warehouse in

Tianjin Binhai International

Airport

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Exhibit 72: Beijing Properties’ development in Tianjin Airport Economic

Area


Exhibit 73: Custom warehouse in Tianjin Airport


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(4) Chaoyang Inland Port

Beijing Properties (925 HK) currently owns 82.24% of Beijing Inland Port

International Logistics (Lugang), which is the operator of Chaoyang Inland Port in

Beijing. The property comprises four parcels of industrial land with a total area of

161,500 square metres. It has only 18,000 square metres of rentable warehouse,

office and utility areas. According to the arrangement set out by the government,

the entire existing function and business of this port will be migrated to Majuqiao

Logistics Base for further expansion in the future.

Since the lands are located in the 4th Ring of Beijing, very close to the city centre

(Dongshihuan Nanlu, Chaoyang District), we believe the land may be

re-developed into other uses for better economic value. Even assuming

Rmb20,000 per square metre land price after re-development, it will be a huge

gain for Beijing Properties when that eventuates.

Exhibit 74: Chaoyang Inland Port location

Source:amap.com, OP Research

(5) Haikou Integrated Free Trade Zone

Beijing Properties aim to build a nationwide logistics network with access points

in different bonded areas across China. With plans of Hainan Island being

developed into an International Tourist Island in mind BJP stepped into southern

China by acquiring a 40% stake in Haikou Peace Base.

Haikou Peace Base has a piece of land of some 53,000 square metres in the

Haikou Integrated Free Trade Zone, which is well connected to Haikou Port,

Haikou Meilan International Airport, highway and railway. Haikou Peace Base will

Chaoyang Inland Port will be

migrated to Majuqiao Logistics

Base

Haikou Project focuses on

jewellery, diamond trading and

warehousing in Haikou Integrated

Free Trade Zone

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develop a complex of exhibition centre, bonded warehouse and planted areas of

25,000 square metres, 40,000 square metres and 10,000 square metres

respectively. The project will primarily target trading and warehousing of luxury

products, such as jewellery and diamond, within the Zone to take advantage of

Hainan's tourism policy.

Because of taxation policies there is a high price difference for luxury items

between domestic and foreign markets in China. The free trade zone offers

duty-free items for the outbound tourists in search of luxury goods in China. The

jewellery and diamond processing centres in Haikou FTZ targets the rising local

consumption demand for luxury items. We believe Haikou Peace Base would be

a strategic investment for Beijing Properties.

In June 2014, BJP announced it would inject Haikou Peace Base into its Cell

Aquaculture Limited (CAQ AU), an ASX listed company, at a valuation of A$24.9

million. BJP will hold 166 million shares of CAQ or 17.9% of the enlarged share

capital on completion. Although Haikou Peace Base is making fast development

progress in the luxury industry in the free trade zone, the whole construction cost

would be about Rmb240 million, which far exceeds the registered capital of

Rmb60 million of the Haikou Peace Base. Thus, in order to focus the capex in

port related logistics segment and cold chain logistics segment, BJP decided to

inject Haikou Peace Base into an ASX listed company, which would create wider

variety and easier ways to raise funds for future development at a lower cost.

By doing this BJP expects to record a gain of around HK$88 million based on the

difference between the value of the consideration shares and the NAV of the 40%

stake in Haikou Peace Base.

Exhibit 75: Haikou Project design


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Cold Chain Logistics - A Blue Ocean in e-Commerce

Cold warehouses are hot investments

B2C e-commerce has been a total departure from seller-buyer relations where

intangibles mattered as 3C products and apparels are indifferent to which online

shop puts them up for sale. Consumers decide entirely on the basis of price and

discount, leading to extensive price wars between online shops to capture market

shares. However, with wages rising and growing concern over food safety in

China, consumers are more willing to pay a premium for high quality fresh food

and consumables. Food, such as meat and seafood, are highly perishable and

incur a high loss rate during transportation without proper refrigeration. As

freshness cannot be easily replicated, we believe more B2C e-commerce

operators will tap into cold chain logistics to capture the blue ocean market. With

the policy to promote higher capacity of cold circulation, we expect a high

demand in cold chain logistics and cold chain will be a hot investment topic.

Exhibit 76: Tmall’s ice cream sales with quality assurance in cold logistics

Source: Tmall, OP Research

In spite of increasing demands, the cold chain logistics infrastructure in China is

underdeveloped; average cold storage capacity per capita in China is only 7

kilograms, far below the 200 to 500 kilograms in developed countries. Besides,

the current cold storage equipment is old and inefficient as nearly half of the

country's cold storage warehouses are over 30 years'old. Thus, NDRC has

planned to double the cold storage capacity to 18.8 million tonnes by 2015, which

requires construction of a group of efficient, large and sophisticated cold chain

logistics and distribution centres. Given the significant undersupply of cold chain

Cold chain logistics will

experience a higher growth

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logistics industry in China, it brings great business development opportunities to

Beijing Properties, which has secured a cold chain logistics project to develop

cold warehouse and distribution centres to serve multiple regions.

Exhibit 77: Worldwide cold storage capacity per capita

Country litres per capita Volume (m3)

Netherlands 550.9 9

Finland 344.1 1.8

Denmark 330.2 1.8

Norway 325.3 1.5

Ireland 320 1.3

Australia 293.3 6

USA 231.1 69

Japan 217.2 27.7

Canada 208.9 6

The IIR has calculated the refrigerated-warehouse capacity per capita by country, based on IARW -International Association of Refrigerated Warehouses- list of public refrigerated capacity in 2006.

Source: fluorocarbons.org

Beijing Properties cold chain logistics projects:

BJP aims to own 1 million square metres of cold warehouses by 2018 as driven

by the high industry demand and support from government policy. BJP currently

owns two cold chain logistics projects located in Tianjin and Quzhou.

(6) Tianjin Marine Economic Area

Tianjin Marine Economic Area is a newly developed economic zone with a land

area of 10 square kilometres and a marine area of 8 square kilometres. The area

has been developed by the Tianjin government as the largest logistics, trading

and processing centre of aquatic products in northern China.

Beijing Properties agreed to inject Rmb82.5 million into Tianjin Zhongyu

Properties, a domestic company to develop a cold chain logistics distribution

centre of aquatic products within the Marine Area, during 4Q13. After the capital

increase, BPJ owns 60% - 68.2% of Zhongyu depending on the availability of

government grant to support the project. Zhongyu will use the capital to construct

a cold storage warehouse with a gross floor area of 150,000 square metres and

carrying capacity of 80,000 tonnes of frozen aquatic products. About 68,000

square metres of cold warehouse will be built in Phase I and commence

operations in 3Q15. The remaining portion of the land will be developed as Phase

II, depending on the progress of Phase I.

Because of its strategic position Tianjin acts as a major port of frozen food for

Beijing. Within 400 km of Tianjin, the cold chain circulation volume will reach 15 to

18 million tonnes by 2015. With current capacity of only 3.9 million tonnes, the

construction of a new cold warehouse in the Tianjin Marine Economic Area will

allow BJP to capture the rising demand in the region. Besides, this cold

warehouse would act as a pilot project, where valuable experience in developing

modern cold warehouse facilities can be leveraged in future projects.

To ensure a sustainable income and profit after the commencement of operations,

the cold storage warehouse will be entirely rented out to one original shareholder

Beijing Properties has an

aggressive expansion drive for

cold chain logistics

Tianjin Zhongyu will offer 150,000

square metres cold warehouse in

the future

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when construction is completed. The original shareholders of Zhongyu Properties

are highly knowledgeable about the actual demands of members of the China

Aquatic Production Chamber of Commerce, who can utilize their experience,

abundant resources and extensive customer network in aquatic product industry

to secure high quality tenants.

Exhibit 78: Location of Tianjin Marine Economic Area

Source: http://yg.bh.gov.cn/, OP Research

Exhibit 79: Tianjin Zhongyu location


http://yg.bh.gov.cn/

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Exhibit 80: Tianjin Zhongyu design ()


(7) Quzhou Cold Chain Logistics Park

Beijing Properties acquired a parcel of land of about 57,000 square metres in

Quzhou City in January 2013 to develop the Quzhou Cold Chain Logistic Park

project. Quzhou is located in the western part of Zhejiang Province, which is well

connected to four provinces in Zhejiang, Fujian, Jiangxi and Anhui. Through

highways, cargo can be transported to major cities in the four provinces within 2

hours, making it a strategic location for logistics development.

The size of the logistics park is about 321,000 square metres, with 58,700 square

metres in phase I for a cold storage warehouse and the remaining 264,000

square metres in phase II for a normal warehouse.

As Quzhou is a major production base for agricultural products, the Quzhou

project is the major focus of the local government to promote the development of

warehousing and cold chain logistics. It is expected that Beijing Properties will

develop Quzhou into a mega logistics hub to provide a trading platform for

agricultural products of the four provinces. Besides, BJP may also utilize their

cold chain logistics expertise to offer professional, standardized and high

efficiency cold chain logistics service in agriculture products in the Quzhou

project.

2#冷藏库

1#冷藏库

Quzhou project will be built as

cold warehouses for agriculture

products as well connected to

other four provinces

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Exhibit 81: Quzhou project location


Exhibit 82: Quzhou project design (Phase 1 & 2)


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Commercial Properties

To develop through another listed company

Beijing Properties commercial properties portfolios are located in prime areas

which are expected to contribute a stable rental income in future. However, since

BJP is focusing its resources on logistics business development, BJP declared its

plans to develop commercial properties business through a listed company called

Genvon Group (2389 HK) to enhance the cash inflows contribution to the logistics

business.

In June 2014, Beijing Properties announced its acquisition of 21.85% of the

issued share capital of Genvon Group for HK$472.5 million. BJP will become the

single largest shareholder of Genvon Group to lead its development after the

acquisition. Using Genvon Group as a platform for commercial properties

development would enhance orderly management by (1) ensuring sound

corporate governance, (2) providing a wider choice of fund raising ways in the

capital market and (3) paying additional incentives to retain expertise to

strengthen the management team.

Thus, we believe this acquisition would diversify BJP operational risks since it

would leave BJP as a purely logistics company with warehousing and cold chain

exposure. By separating different platforms for commercial properties

development, BJP can utilize capital market for fund raising in different segments

as well as generate greater cash flow for core business development.

Ultimately, we believe the commercial properties will be centralized into a listed

platform for better management and capital use in the future, which would be a

win-win situation for BJP and Genvon.

Beijing Properties commercial properties projects

(8) Holiday Inn Downtown Beijing

Beijing Properties announced plans to acquire 75% of Holiday Inn Downtown

Beijing Company for about Rmb415.6mn in Oct 2013. This hotel is located at Li

Shi Road North, Xi Cheng District of Beijing, with land area of around 4,300

square metres. Currently, the hotel is in operation with a complex accommodating

a total of 346 guest rooms, restaurants and other facilities. As it is in No. 2 Ring of

Beijing, the location is in the urban core area, just within a few minutes’ walking

distance of Financial Street. Since the deal is waiting for approval of the

government, it is expected the transaction will only be completed in 2H14.

Besides, as the land use right is expiring on 24 March 2017, we believe BJP will

apply for renewal of a further term of 40 years with approximately Rmb1.56

million land premium each year. Due to its prime location, we believe there may

be appreciation of land prices and property value if there is any increase in plot

ratio for the redevelopment after the renewal of land use right.

Genvon Group (2389 HK) is

expected to become commercial

properties development platform

for Beijing Properties

Acquisition of Holiday Inn

Downtown Beijing will be

completed in 2H14, which may be

re-developed in 2017

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Exhibit 83: Outlook of Holiday Inn Downtown Beijing


Exhibit 84: Location of Holiday Inn Downtown Beijing

Source: google.com, OP Research

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(9) Guangzhou Metro Mall

Beijing Properties acquired 79.92% of Guangzhou Guangming at the end of 2013,

which owned Guangzhou Metro Mall, a 10-storey shopping mall on Xihu Road,

Yuexiu District in Guangzhou. The construction area of Metro Mall is about

59,000 square metres, which would generate reasonable rental income for the

Group. BJP also announced acquisition of receivables of Guangzhou Guangming

from its parent company by issuing shares. It would integrate the equity rights and

restructure the debt of the project for better future development.

Exhibit 85: Outlook of Guangzhou Metro Mall


Exhibit 86: Location of Guangzhou Metro Mall

Source: google.com, OP Research

Acquisition of receivables from

parent by share issuance is

expected to integrate the debt

ownership for developing in a

listed platform in the future

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(10) Chaoyang Inland Port

As mentioned in the logistics section, for Chaoyang Inland Port, the logistics

business will be migrated to Majuqiao project after the constructions complete in

2016. We expect the land will be re-developed into commercial properties given

the close distant to CBD of Beijing and high value of the land. If the

re-development of the land is approved, we believe it will be a value accretive to

the commercial properties development of BJP.

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Significant Investment from Big Name Investor

An early bird signal

PAG, a well known alternative investment fund management group, subscribed

US$80 million 5-years convertible bonds from Beijing Properties in February

2014. The initial conversion price is HK$0.74 per share and the full conversion

represents 13.43% of the issued share capital. The interest rate of the CB is 4%

and it can be redeemed at 117.25% on the maturity date.

BJP would enhance its working capital and strengthen its financial position by the

issuing the CB without immediate dilution effect. The net proceeds are intended

to fuel the possible future investments as well as working capital for current

development.

We believe the investment from PAG, a big name institutional investor with

extensive experience, would be an early bird signal for a hidden gem company.

With such significant investment size, it would increase the market confidence on

the logistics business development of BJP although it has no strong track record

in its past. Besides, with the capital injected, it would accelerate BJP’s future

development and acquisitions for building up a critical mass of the property

portfolio, which would drive a re-rating in long run.

Exhibit 87: Major shareholders list

Name of shareholder Number of

shares

% to issued

shares

% to fully diluted

shares

Beijing Enterprises Group Company Limited 4,495,519,975 67.15 53.59

PAG Holdings Limited* 838,573,244 13.42 10.00

Kerry Group Limited 354,400,000 5.68 4.22

* by Convertible Bonds

Source: Company

PAG subscribed CB of US$80

million

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Valuation

NAV Model

Given its property development business nature in logistics, cold chain and

commercial segments, we use NAV-based methodology to derive the 12-month

target price of HK$1.2 for Beijing Properties or 43% upside to the current price.

We use weighted average cost of capital (WACC) of 7.8%, based on these

assumptions (1) risk free rate of 3%, (2) market risk premium of 9%, (3) beta of 1

to reflect the sector’s volatility relative to the benchmark and (4) 3% long term

growth rate to the land use right expiration, a conservative approach relative to

inflation rate in China.

Our target price is set at 10% discount to NAV, which is inline with peers, such as

Global Logistics Properties (GLP), since Beijing Properties owns top tier logistics

facilities projects in prime locations. We expect a lower discount to NAV in

logistics properties than residential properties as logistics facilities have robust

demand and more stable income cashflow.

Exhibit 84: NAV calculation

Business segment NAV (HK$ mn)

Logistics HK$6,567

Cold Chain HK$1,025

Commercial HK$3,062

Others HK$235

Net debt at the end of FY14E (HK$1,876)

Total NAV HK$9,013

NAV per share (HK$) HK$1.34

Source: OP Research

12-month target price HK$1.2 or

43% upside

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Key risks

Delay in Beijing Inland Port project

Although Beijing Properties aims to start construction of the Majuqiao Logistics

Base in 2H14, delay of government final approval and longer than expected

construction period may delay the project to start business later than expected.

As a mega size project, any delay could have a sizeable impact on BJP future

earnings.

Insufficient capital for future commitment

The company had outstanding contracted capital commitment of over HK$2

billion for various projects on hand. Given only HK$468 million cash in hand at the

end of 2013, future fund raising may be needed for the capital to develop the

outstanding projects.

Failure in future acquisitions

Although BJP is looking for logistics development projects and cold chain logistics

projects in other major cities in China, the acquisition may not be secured to drive

the project pipeline and the growth in the future.

Competition in logistics facilities for new supply

As strong demand in the logistics facilities in China, more developers are entering

the industry segment given the high returns. The new investment may result in

more new supplies in the future, which would incur competition in rental rates,

especially in non-prime area.

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Management background

MR. YU LI, Vice Chairman: Aged 50, Mr. Yu is the chairman and an executive

director of the Beijing Enterprises Group Real-Estate Co., Ltd (“BE Real Estate”).

Mr. Yu obtained an Executive MBA degree from the Peking University. Mr. Yu has

extensive experience in corporate management. Mr. Yu joined the Group in

January 2011.

MR. QIAN XU, Chief Executive Officer: Aged 50, Mr. Qian is the general

manager and an executive director of the BE Real Estate. Mr. Qian graduated

from the Economics and Management Faculty of the Beijing Industrial University

with a Bachelor’s degree in economics and has obtained his EMBA degree from

Tsinghua University. Mr. Qian has extensive experience in mergers and

acquisitions, corporate restructuring and financial management. Mr. Qian joined

the Group in July 2009.

MR. SIU KIN WAI, Chief Financial Officer and Company Secretary: Aged 45,

Mr. Siu graduated from the City University of Hong Kong with a Bachelor’s degree

in Accountancy and is a fellow member of the Association of Chartered Certified

Accountants and members of the Hong Kong Institute of Certified Public

Accountants and Institute of Chartered Accountants in England and Wales. Mr.

Siu has extensive experience in financial management and corporate advisory

and assurance. Mr. Siu joined the Group in July 2009.

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Financial Summary – Beijing Properties (925 HK) Year to Dec FY12A FY13A FY14E FY15E FY16E

Year to Dec FY12A FY13A FY14E FY15E FY16E

Income Statement (HK$ mn)

Ratios

Properties business 3 0 0 0 0

Gross margin (%) 66.1 89.1 93.8 92.1 82.8

Logistics business 8 36 146 198 341

Operating margin (%) (297.8) (76.4) 24.3 31.9 39.9

Others 0 0 0 0 0

Net margin (%) (888.2) 1,955.4 109.3 (26.8) (2.1)

Turnover 11 36 146 198 341

Selling & dist'n exp/Sales (%) 7.7 2.8 2.8 2.8 2.8

YoY% (99) 226 308 36 72

Admin exp/Sales (%) 780.4 324.2 70.5 55.7 34.7

COGS (4) (4) (9) (16) (59)

Payout ratio (%) 0.0 0.0 0.0 0.0 0.0

Gross profit 7 32 137 183 283

Effective tax (%) (0.6) 6.7 15.0 15.0 15.0

Gross margin 66.1% 89.1% 93.8% 92.1% 82.8%

Total debt/equity (%) 142.3 44.2 57.0 70.7 78.5

Other income 71 68 17 13 4

Net debt/equity (%) Net cash 30.5 47.7 64.6 79.8

Selling & distribution (1) (1) (4) (6) (10)

Current ratio (x) 1.2 1.2 1.1 1.0 0.6

Admin (86) (116) (103) (110) (119)

Quick ratio (x) 1.2 1.2 1.1 1.0 0.6

R&D 0 0 0 0 0

Inventory T/O (days) 0 0 0 0 0

Other opex (24) (10) (12) (16) (22)

AR T/O (days) 8 164 40 40 40

Total opex (111) (127) (119) (132) (150)

AP T/O (days) 22 62 75 70 70

Operating profit (EBIT) (33) (27) 36 63 136

Cash conversion cycle (days) (14) 103 (35) (30) (30)

Operating margin -297.8% -76.4% 24.3% 31.9% 39.9%

Asset turnover (x) 0.0 0.0 0.0 0.0 0.0

Provisions 26 859 260 0 0

Financial leverage (x) 3.0 1.9 1.6 1.8 1.9

Finance costs (91) (38) (80) (106) (123)

EBIT margin (%) (297.8) (76.4) 24.3 31.9 39.9

Profit after financing costs (98) 794 216 (42) 13

Interest burden (x) 3.5 (28.3) 5.6 (1.0) (0.0)

Associated companies & JVs (15) (18) (18) (18) (18)

Tax burden (x) 0.9 0.9 0.8 0.9 1.5

Pre-tax profit (113) 776 198 (61) (5)

Return on equity (%) (8.2) 30.6 4.3 (1.4) (0.2)

Tax (1) (53) (32) 6 (2)

ROIC (%) (4.7) (3.0) (0.2) 0.9 1.7

Profit from discontinued

business 6 0 0 0 0

Minority interests 11 (22) (5) 1 (0)


Net profit (98) 701 160 (53) (7)

Balance Sheet (HK$ mn)

YoY% (181) (817) (77) (133) (87)

Fixed assets 255 285 303 329 375

Net margin -888.2% 1955.4% 109.3% -26.8% -2.1%

Investment properties 170 2,919 4,234 4,758 5,308

EBITDA (31) (25) 39 67 141

Intangible assets & goodwill 150 150 150 150 150

EBITDA margin -277.5% -70.1% 26.4% 33.9% 41.4%

Associated companies & JVs 359 997 979 961 943

EPS (HK$) (0.015) 0.101 0.019 (0.006) (0.001)

Long-term investments 15 268 268 268 268

YoY% (185) (778) (81) (133) (87)

Other non-current assets 0 0 0 0 0

DPS (HK$) 0.000 0.000 0.000 0.000 0.000

Non-current assets 950 4,619 5,935 6,467 7,045


Inventories 0 0 0 0 0

Cash Flow (HK$ mn)

AR 0 16 16 22 37

EBITDA (31) (25) 39 67 141

Prepayments & deposits 50 33 29 40 68

Chg in working cap (97) 0 (47) (5) (7)

Other current assets 323 312 312 312 312

Others (28) 2 0 0 0

Cash 1,769 468 364 235 (49)

Operating cash (155) (24) (8) 63 134

Current assets 2,143 829 721 608 368

Interests paid 0 0 0 0 0

Tax (0) (4) (3) (32) 6

AP 0 1 2 3 11

Net cash from operations (155) (28) (11) 30 140

Tax 0 3 32 (6) 2

Accruals & other payables 30 81 29 40 68

Capex (1) (9) (7) (10) (17)

Bank loans & leases 32 208 208 208 208

Investments (313) (1,530) (1,070) (544) (584)

CB & other debts 1,580 373 373 373 373

Dividends received 0 0 0 0 0

Other current liabilities 207 0 0 0 0

Sales of assets (247) 13 0 0 0

Current liabilities 1,850 665 644 617 662

Interests received 71 29 (80) (106) (123)

Others 0 0 0 0 0

Bank loans & leases 35 935 1,035 1,535 1,835

Investing cash (490) (1,497) (1,157) (659) (724)

CB & other debts 0 0 624 624 624

FCF (646) (1,524) (1,168) (629) (584)

Deferred tax & others 66 350 350 350 350

Issue of shares 0 0 340 0 0

MI (15) 67 73 72 72

Buy-back 0 0 0 0 0

Non-current liabilities 86 1,353 2,082 2,581 2,881

Minority interests 0 0 0 0 0

Dividends paid 0 0 0 0 0

Total net assets 1,157 3,430 3,930 3,877 3,870

Net change in bank loans (131) 128 724 500 300

Others (322) 80 0 0 0

Shareholder's equity 1,157 3,430 3,930 3,877 3,870

Financing cash (452) 208 1,064 500 300

Share capital 384 624 624 624 624

Reserves 773 2,806 3,305 3,252 3,245

Net change in cash (1,098) (1,316) (104) (129) (284)

Exchange rate or other Adj (6) 15 0 0 0

BVPS (HK$) 0.30 0.55 0.58 0.57 0.57

Opening cash 2,873 1,769 468 364 235

Closing cash 1,769 468 364 235 (49)

Total debts 1,647 1,515 2,239 2,739 3,039

CFPS (HK$) (0.024) (0.004) (0.001) 0.004 0.017


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Exhibit 88: Peer Group Comparison

Company Ticker Price

Mkt cap

(US$m)

3-mth

avg t/o

(US$m)

PER Hist

(x) PER FY1 (x)

PER

FY2

(x)

EPS

FY1

YoY%

EPS

FY2

YoY%

3-Yr EPS

Cagr (%) PEG (x)

Div

yld

Hist

(%)

Div

yld

FY1

(%)

P/B

Hist

(x)

P/B

FY1

(x)

EV/

Ebitda

Hist

EV/

Ebitda

Cur Yr

Net

gearing

Hist

(%)

Gross

margin

Hist

(%)

Net

margin

Hist

(%)

ROE

Hist

(%)

ROE

FY1 (%)

Sh px

1-mth

%

Sh px

3-mth

%

Beijing Properti 925 HK 0.84 732 0.7 8.0 42.8 (129.2) (81.3) (133.2) (120.2) (0.36) 0.0 0.0 1.47 1.39 (243.0) 189.9 30.5 89.1 1,955.4 30.6 4.3 12.0 (4.5)

HSI 23,238.99 10.9 10.8 9.9 0.3 8.8 6.2 1.75 3.9 3.7 1.38 1.29 12.7 12.0 (0.3) 0.2

HSCEI 10,368.13 7.6 7.2 6.7 5.0 8.8 7.8 0.92 4.2 4.4 1.16 1.07 15.3 14.8 (1.4) (0.5)

CSI300 2,142.85 9.9 8.6 7.5 14.2 15.3 15.1 0.57 2.6 2.9 1.40 1.27 14.2 14.7 (0.9) (5.8)

Adjusted sector avg* 18.6 16.2 14.0 11.1 17.5 12.1 0.99 3.3 3.1 2.46 2.44 12.2 10.2 21.2 30.4 12.3 17.5 16.9 (0.5) 4.0

Sinotrans Ltd-H 598 HK 5.34 2,928 6.5 21.4 16.8 13.9 27.5 20.8 22.3 0.75 1.2 1.5 1.66 1.54 12.9 10.6 0.0 N/A 1.8 7.9 9.4 9.2 31.9

Kerry Logistics 636 HK 12.70 2,770 3.2 9.1 21.2 18.7 (57.2) 13.2 (18.6) N/A 0.9 1.0 1.57 1.46 13.2 12.0 1.2 N/A 9.2 16.8 7.1 5.0 10.4

Haier Electronic 1169 HK 21.40 7,400 10.3 21.4 18.7 15.4 14.5 21.0 16.2 1.15 0.5 0.6 5.71 4.27 14.7 12.0 0.0 14.7 3.3 30.7 25.6 5.4 10.5

Shenz Intl Hldg 152 HK 9.51 2,100 3.2 9.5 7.2 7.8 31.9 (7.3) 13.7 0.53 3.9 4.9 1.13 0.95 9.0 8.7 50.7 49.3 27.5 12.3 14.3 (0.3) (3.0)

Sitc 1308 HK 3.28 1,094 0.6 9.7 8.1 6.4 19.5 26.9 21.0 0.39 7.6 5.0 1.47 1.32 10.0 5.8 0.0 11.3 8.9 15.5 17.0 (2.4) (11.8)

Asr Logistics 1803 HK 1.42 147 0.1 12.2 10.9 9.5 11.8 15.4 19.8 0.55 13.8 3.6 3.80 4.58 7.8 7.0 0.0 26.6 11.5 34.6 37.4 2.2 0.9

China South 1668 HK 3.96 3,879 13.2 7.1 6.9 5.4 2.5 28.9 23.2 0.30 2.5 4.6 1.37 1.19 6.9 4.7 23.7 48.6 25.9 19.5 18.3 3.4 10.0

Wuzhou Internati 1369 HK 1.68 1,009 2.7 5.4 9.1 6.3 (41.2) 44.9 15.0 0.61 2.1 2.8 1.79 N/A 9.5 N/A 71.6 43.7 25.2 42.3 12.1 10.5 11.3

Hydoo Internatio 1396 HK 2.39 1,238 2.9 4.7 3.6 2.7 31.0 30.9 20.9 0.17 8.2 8.5 1.74 1.35 1.7 1.2 0.0 61.6 24.8 N/A 41.7 (11.5) (28.7)

Zall Development 2098 HK 2.74 1,237 0.7 4.9 N/A N/A N/A N/A N/A N/A N/A N/A 1.22 N/A 36.1 N/A 69.9 42.0 100.2 28.3 N/A 0.0 3.4

Global Logistic GLP SP 2.68 10,433 26.1 15.7 33.2 28.8 (52.6) 15.4 (13.7) N/A 1.5 1.7 1.17 1.14 35.7 26.7 11.1 N/A 116.1 8.0 3.4 (2.9) 3.5

Mapletree Log Tr MLT SP 1.16 2,293 3.2 9.7 15.3 15.1 (36.7) 1.3 (13.0) N/A 6.3 6.4 1.19 1.15 18.1 18.2 49.1 N/A 96.0 13.1 7.7 0.0 9.4

Goodman Group GMG AU 5.14 8,318 26.7 53.5 14.8 13.9 261.5 6.9 60.6 0.24 4.0 4.0 1.56 1.46 34.8 16.4 27.5 N/A 18.7 3.0 10.8 0.6 4.9

Prologis Inc PLD US 41.05 20,517 94.8 63.2 129.1 85.9 (51.1) 50.3 0.9 149.36 3.0 3.2 1.52 1.26 30.9 25.1 60.1 N/A 19.6 0.4 1.9 (0.2) 1.5

Deutsche Post-Rg DPW GR 25.88 42,618 73.6 15.0 15.3 13.7 (2.3) 11.6 6.0 2.53 3.1 3.3 3.16 2.87 8.1 7.6 16.9 N/A 3.8 21.9 20.3 (4.9) (3.1)

Kuehne & Nagel-R KNIN VX 114.90 15,459 14.7 23.1 21.2 19.5 8.9 8.6 8.7 2.43 5.1 3.9 5.23 5.51 13.1 12.3 0.0 36.4 3.5 23.6 25.7 (6.1) (5.9)

Panalpina We-Reg PWTN SW 136.40 3,632 3.0 272.8 29.8 22.3 814.0 33.6 151.6 0.20 1.6 1.9 4.54 4.30 16.1 13.7 0.0 23.1 0.2 2.1 15.1 (6.1) 3.8

United Parcel-B UPS US 102.98 94,674 255.6 22.1 20.2 17.5 9.4 16.0 11.8 1.71 2.5 2.6 15.15 15.52 11.2 10.4 87.3 25.5 7.9 82.6 69.0 0.1 6.6

Expeditors Intl EXPD US 44.88 8,858 64.8 26.6 23.8 21.2 11.7 12.1 10.5 2.27 1.4 1.5 4.52 4.70 12.7 11.7 0.0 13.2 5.7 17.3 19.3 (1.5) 15.5

* Outliners and "N/A" entries are in red and excl. from the calculation of averages


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Sinotrans (598 HK) – A Leading 3PL Provider

Sinotrans (598.hk) is one of the largest integrated logistics service

providers to enjoy the 3PL boom in China by offering a complete range

of specialized logistics services

Sinotrans is improving its profitability by undertaking asset

restructures with the parent

The growth in 3PL and asset restructures will drive Sinotrans earnings

at a 26% CAGR in the next three years

Initiate coverage with a BUY rating and TP of HK$6.5 or 22% upside

Riding on 3PL boom in China: Logistics cost to GDP was much higher in China

than in developed countries because of lower utilization in logistics assets. With

industry optimization and the rise in e-commerce, more and more enterprises in

China are tending to outsource logistics functions to 3PL providers in order to

lower total costs. We believe Sinotrans will capture the huge business demand

growth in logistics cost savings by their leading position in 3PL and extensive

experience and expertise in integrated logistics services.

Asset restructures with parent to become a logistics services platform for

the group: To minimize potential competition between Sinotrans and the rest of

the parent group, Sinotrans aims to integrate most of the logistics businesses and

subsidiaries from the parent by both entrusted management agreement and

acquisitions. We believe the overall efficiency and earnings can be improved by

consolidation of logistics resources and enhancement of integrated operations.

Disposal of marine transportation business: Marine transportation has been

reporting losses over a long period of time due to keen market competition and

high volatility of the business. The loss-making marine transportation unit will be

disposed of to the parent and sister company, allowing Sinotrans to focus on

developing the high value-added core integrated logistics services business.

Initial BUY: Our target price of HK$6.5 implies 22% upside and 15.8x FY15E PE.

Initial Coverage

BUY



Key Data

HKEx code 598






Fiscal Year 12/2013

Major shareholder (s) Sinotrans & CSC Group Company

(57.93%)


Price Chart

1mth 3mth 6mth

Absolute % 9.2 34.6 74.5

Rel. MSCI CHINA % 9.1 32.8 72.5

PE

Company Profi le Sinotrans Limited provides integrated

logistics services with core service of sea,

air, rail and road freight forwarding, express

services and shipping agency services. The

company also provides support services of

storage and terminal services, trucking and

marine transportation services.

Exhibit 89: Forecast and Valuation Year to Dec (RMB mn) FY12A FY13A FY14E FY15E FY16E

Revenue 47,482.0 47,768.9 48,987.9 50,875.4 54,999.7

Growth (%) 8.5 0.6 2.6 3.9 8.1

Net Profit 649.1 844.5 1,144.9 1,395.1 1,706.2

Growth (%) 1.0 30.1 35.6 21.9 22.3

Diluted EPS (HK$) 0.191 0.248 0.337 0.410 0.502

EPS growth (%) 1.0 30.1 35.6 21.9 22.3


0.0 0.0 0.0

Consensus EPS (HK$)

0.319 0.385 0.458

ROE (%) 5.3 6.5 8.1 9.0 9.9

P/E (x) 28.0 21.5 16.2 13.3 10.8

P/B (x) 1.8 1.7 1.6 1.4 1.3

Yield (%) 0.7 1.2 1.6 2.0 2.4

DPS (HK$) 0.037 0.063 0.086 0.104 0.128


0.0

1.0

2.0

3.0

4.0

5.0

6.0



0

5

10

15

20

Dec/08 Dec/09 Dec/10 Dec/11 Dec/12 Dec/13

Forward P/E Ratio

+1std.

avg.

-1std.

Fri, 11 Jul 2014

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Strong Earnings Growth Driven by Third Party Logistics (3PL) Development

26% earnings CAGR by 3PL boom in China

Sinotrans is the largest freight forwarder by revenue in China with 12%-13%

market share. The company is well positioned to capture and consolidate the fast

developing third party logistics (3PL) market in China as specialized logistics

services have already contributed over 50% operating profits in freight forwarding

segment in FY13. Specialized logistics service is an integrated logistics service

offering to first tier clients (such as BMW, Samsung, GE, CNPC and Huawei) in

specified areas (like contract logistics, project logistics, energy logistics and

chemical logistics). Management believes the specialized logistics will still

maintain over 15%+ growth in FY14E even if China's economic growth slows

down.

3PL is still at an early stage of development in China since the participation rate

of 3PL is relative low. According to Armstrong & Associates, 3PL firms only

account for 8% market share of the total logistics costs in China, which is far

lower than the 10%-14% in developed countries. It is expected that 3PL will enjoy

above average growth in Greater China and market leaders, such as Sinotrans,

will be the primary beneficiaries of the boom.

Together with the reduced losses from the disposal of the marine transportation

unit, we expect Sinotrans will record a 26% CAGR in net profit in the coming

years, driven by the robust growth of 3PL business in freight forwarding.

Exhibit 90: Strong growth in 3PL business drives 26% earnings CAGR

Source: OP Research

(500)

0

500

1,000

1,500

2,000

FY11 FY12 FY13 FY14E FY15E FY16E FY17E FY18E

Freight forwarding Shipping agency

Marine transportation Storage and terminal services

Other services

Sinotrans is the largest freight

forwarder in China to capture 3PL

market

Fri, 11 Jul 2014

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3PL is the major growth driver for Sinotrans

A s 3PL is a specialized and custom made logistics solution, 3PL usually achieves

higher margin than standard freight forwarding as foreign players and asset-light

industries are willing to pay the premium for 3PL solutions. (5-6% in 3PL Vs 2% in

standard freight forwarding). Since logistics is an asset heavy industry, owning

self-operated logistics unit would hinder the business growth of foreign

enterprises to further penetrate into lower tier cities due to complexities in local

laws and regulations. Besides, self-owned logistics operations would be

unfeasible to asset-light companies, such as e-commerce operators, as it is a

different set of management (labor intensive vs information intensive) and too

much investment in fixed assets for distribution would limit the high growth nature

of asset-light businesses. Thus, we expect an increasing contribution from 3PL

business in Sinotrans would be the main driver of the EBIT margin uptrend. We

estimate the EBIT margin of Sinotrans will increase over 2ppt by 2017 from 2.2%

in 2013 and 3PL profit will surpass standard freight forward profits in FY14E.

Exhibit 91: EBIT margin uptrend as 3PL business growth

Source: OP Research

Exhibit 92: Segment margin

Segment Margin FY11 FY12 FY13 FY14E FY15E FY16E FY17E FY18E

EBIT Margin 2.0 1.4 2.2 2.8 3.4 3.8 4.3 4.8

Freight forwarding 1.9 1.4 1.8 2.0 2.2 2.5 2.8 3.1

Shipping agency 44.4 27.4 42.7 44.5 46.1 47.7 49.3 50.8

Marine transportation (8.4) (6.8) (1.1) 0.2 (0.9) (0.9) (0.9) (0.9)

Storage and terminal services 18.7 17.9 17.2 17.0 15.9 15.4 15.7 16.5

Other services 0.4 (0.3) 1.0 3.3 5.5 7.5 9.4 11.2

Source: OP Research

0

1

2

3

4

5

6


EBIT Margin

EBIT Margin

Sinotrans has an operating

margin uptrend as driven by 3PL

business growth

Fri, 11 Jul 2014

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Exhibit 93: Freight forwarding profit contribution (3PL Vs Standard)

Source: OP Research

Exhibit 94: 3PL drives freight forwarding segment margin upward

Source: OP Research

Details in contract logistics

Contract logistics in 3PL serve different industries such as consumer, FMCG and

electronic products. 3PL providers will build warehouses and distribution centers

near department stores where their owners can centralize and pack the products

in a container box to save transportation costs during the import / export. Besides,

due to low value per unit weight of FMCG products, long distribution distances

would significantly impact manufacturer's margin. Thus, effective distribution

system would be crucial to a company like Tingyi. In FMCG, Sinotrans has

secured first tier customers, such as P&G, Kimberly Clark and Coca Cola for their

3PL business. IT equipment usually require high quality air transport for timely

delivery since electronic products are time sensitive and fragile. Sinotrans has

0

400

800

1,200

1,600


Standard f reight forwarding Specialized Logistic (3PL)

* 3PL prof it surpass standard f reight forwading prof it

0.0

2.0

4.0

6.0

8.0

10.0


Freight forwarding margin Standard f reight forwarding

Specialized Logistic (3PL)

Sinotrans has top tier clients in

contract logistics

Fri, 11 Jul 2014

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provided logistics services to Samsung, Huawei and Lenovo for their electronic

products.

For energy and chemical logistics, service providers are required to have the

necessary expertise to handle hazardous chemical and explosive oil products.

Due to several previous safety issues, there are strict regulations in chemical and

energy logistics, creating a high entry barrier for small service providers.

Sinotrans is the market leader in chemical and energy logistics with clients such

as Dow Chemical, Du Pont and Bayer.

For project logistics, Sinotrans has fast growth as Chinese E&C and equipment

companies are expanding the overseas market due to strong infrastructure

demands in South-East Asia and Africa.

Exhibit 95: 3PL sub-segment profit contribution

Impact from marine transportation business disposal

We expect some Rmb99 million annual earnings enhancement from the disposal

of loss-making marine transportation unit due to lower fuel costs, rental expenses

and transportation charges. By this disposal, we estimate near 90% lower fuel

costs and near 50% lower and rental expenses can be achieved in FY15E. As a

result, the net profit of Sinotrans will see 7.4% improvement in FY14E.

Exhibit 96: Impact from disposing loss-making marine unit

FY14E FY15E

Sales dropped by Marine disposal (HK$ mn) (1,388.4) (1,666.1)

Total cost saving by Marine disposal (HK$ mn) 1,475.8 1,677.1

Cumulative earnings enhancement (HK$ mn) 87.4 98.5

% to net profit 8.3% 7.6%

Source: OP Research

Contract Logistic

75%

Energy Logistic

8%

Chemical Logistic

8%

Project Logistic

9%

Fri, 11 Jul 2014

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Asset injections from parent

Sinotrans has entered an Entrusted Management Agreement with the parent co

to manage and consolidate the parent’s logistics assets by charging a fixed

management fee of Rmb6.75m-9m per annum. We believe this entrusted

management agreement will bring considerable benefits to the listco by (1)

eliminating the existing competition between Sinotrans and the parent for the

overlapping businesses (2) enlarging Sinotrans geographical coverage as the

managed companies are located in the border areas adjacent to Russia, Vietnam

and Mongolia as well as central and western China, (3) opening up asset injection

opportunities from raising operational efficiency of subsidiaries through transfers

of key management personnel.

Sinotrans also announced plans to acquire 11 companies under the parent group

at a consideration of Rmb901 million. The target companies have freight

forwarding, shipping agency, containers lease, warehousing storage and customs

declaration operations in Beijing, Shandong, Guangxi, Fujian, Jiangsu, Hong

Kong, Japan and South Korea. We believe the acquisitions as a whole will bring

synergy to Sinotrans since it will integrate parent logistics business and expand

Sinotrans business geographic coverage to inland China and Northeast Asia.

The total attributable profit of the target companies was Rmb72.5 million and

Rmb80.6 million in FY12 and FY13 respectively with NAV of Rmb841 million.

With total consideration of Rmb901 million, the acquisitions will be made at a

valuation of 11.2x historical PE and 1.07x PB, which is 46% discount on the

current Sinotrans valuation. By consolidating logistics resources with the parent,

the enhanced capability will reinforce and strengthen Sinotrans leading market

position in China. As the deal is expected to be completed in 4Q14, we believe

the acquisitions make full year contribution in FY15 to some 5% earnings

enhancement to Sinotrans. Besides, the extended customer bases in the

acquired companies will bring more multinational clients to Sinotrans to develop

their high value-added 3PL business.

Fri, 11 Jul 2014

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Exhibit 97: Sinotrans acquisitions detail

Equity interests Net asset value as at Net profits before taxation Net profits after taxation

acquired 31 Dec 2013 (Note 2) FY12 FY13 FY12 FY13

(%) RMB ('000) RMB('000) RMB('000) RMB('000) RMB('000)

Wholly-owned targets:

Fujian Ningde 100 6,540 381 472 236 378

Wide Shine 100 392,354 37,155 42,056 37,143 42,045

International Cargo (Note 3) 55 15,143 (274) 77 (274) 77

Jiangsu Fuchang 100 64,978 3,115 3,115 1,250 1,949

Jiangsu Jinmao 100 40,090 (998) 297 (801) 286

Sinotrans Japan 100 19,665 20,807 17,784 11,002 10,054

Sinotrans Korea 100 27,255 4,755 3,726 3,288 2,752

Majority-owned target:

Sinotrans Wuzhou 70 77,390 10,628 12,159 7,857 8,956

JV targets:

Sinotrans Nissin 50 52,243 11,778 15,169 8,608 11,034

Sinotrans Yantai (Note 1) 50 1,483 (38) (46) (38) (46)

Other:

Zhonglian 32 144,678 48,703 48,736 33,620 35,353

Notes:

1. Sinotrans Yantai is currently owned as to 50% by a wholly-owned subsidiary of the Company.

2. The net asset value attributable to the Target Shares as at 31 December 2013 (calculated as the aggregate of the net asset value as at 31 December

3. The remaining 45% of International Cargo is currently owned by Wide Shine. Therefore, upon completion of the Acquisition, the Company will (as a result of direct and indirect holdings through Wide Shine) own 100% equity interest of International Cargo.


Fri, 11 Jul 2014

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Valuation

PER model

We derive our 12-month target price of HK$6.5 or 22% upside from a PER based

methodology. The 2015E P/E multiple is 15.8x, based on par value to the sector

average on back of (1) Sinotrans is one of the largest freight forwarders in the

world, (2) Sinotrans has above average growth from 3PL boom in China, and (3)

profitability enhancement from assets restructure with parent.

Exhibit 98: Major shareholders

Shareholder name No. of shares (mn) % of all shares % of H shares

Sinotrans & CSC Holdings 2,549.6 60.0% 4.9%

Deutsche Post AG 237.5 5.6% 13.3%

Brandes Investment Partners 124.8 2.9% 7.0%

Free float 1,337.1 31.5% 74.8%

Source: OP Research

Key risks

(1) Delay in asset restructure with the parent group (2) Lower demand/margin in

freight forward business. (3) Worse than expected return in warehouse and

storage business during capex up-cycle. (4) Less than expected shipping activity

for agency business.

Our target price of HK$6.5 is

based on 15.8x of FY15E PE

Fri, 11 Jul 2014

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Management profile

Zhao Huxiang, age 59, executive director and the chairman: Mr. Zhao

graduated with a MBA degree from University of Louisville, USA, and carries the

professional title of “Senior Engineer”. He used to work in the Marine Shipping

Bureau of the Ministry of Communications. In December 2005, Mr. Zhao became

the Director and President of Sinotrans Group Company. In December 2008, Mr.

Zhao became the Vice Chairman and president of SINOTRANS & CSC. From

January 2011, Mr. Zhao was appointed the Chairman of SINOTRANS & CSC. Mr.

Zhao is also the chairman of DHL-Sinotrans. Mr. Zhao was elected as the

chairman of China International Freight Forwarders Association in February 2007,

and was appointed Senior Vice Chairman of International Federation of Freight

Forwarders Association (FIATA) in October 2013. In March 2006, Mr. Zhao was

appointed Executive Director and the Chairman of the Company.

Zhang Jianwei, age 57, executive director. Mr. Zhang has been employed by

Sinotrans Group Company since 1980 with experience in Sinotrans Group

Company’s Finance Department, Overseas Enterprises Management

Department and Chartering Department. From December 2008, Mr. Zhang

became the Director of SINOTRANS & CSC. Mr. Zhang is also the Chairman of

Sinoair and Grandstar Cargo International Airlines Co., Ltd. at present, he is also

the Vice Chairman of China Federation of Logistics & Purchasing (CFLP). Mr.

Zhang graduated from University of International Business and Economics in

1980 and obtained his Master of Business Administration degree from China

Europe International Business School in 1998. Mr. Zhang was appointed

Executive Director of the Company in November 2002.

Tao Suyun, age 60, executive director. Ms. Tao has worked for Sinotrans

Group Company since 1979. From December 2008, Ms. Tao became the Vice

President of SINOTRANS & CSC. At present, she is also the vice chairman of

China Association To Customs and Vice President of Association for Shipping

Exchanges across the Taiwan Strait. Ms. Tao graduated from University of

International Business and Economics in 1979 and obtained her Master of

Business Administration degree from China Europe International Business

School in 2002. Ms. Tao was appointed Executive Director of the Company in

November 2002.

Li Jianzhang, age 58, executive director. During Mr. Li’s career, he has worked

in various governmental departments. Mr. Li started working for Sinotrans Group

Company in May 2001. Mr. Li graduated from Beijing Normal University in 1981.

Mr. Li is also the Chairman of Hong Kong Solar Company Limited. Mr. Li was

appointed Executive Director of the Company in June 2003.

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Financial Summary – Sinotrans (598 HK) Year to Dec FY12A FY13A FY14E FY15E FY16E


Income Statement (RMB mn)

Ratios

Freight forwarding 39,449 40,382 42,664 45,801 49,455

Gross margin (%) n.a. n.a. n.a. n.a. n.a.

Shipping agency 1,018 649 688 730 775

Operating margin (%) 1.4 2.2 2.8 3.4 3.8 Marine transportation 3,809 3,471 2,083 417 417

Net margin (%) 1.4 1.8 2.3 2.7 3.1

Storage and terminal services 1,898 1,870 2,046 2,299 2,595


Other services 1,308 1,397 1,508 1,628 1,759

Admin exp/Sales (%) 0.4 0.4 0.4 0.4 0.4 Turnover 47,482 47,769 48,988 50,875 55,000

Payout ratio (%) 19.4 25.4 25.4 25.4 25.4

YoY% 9 1 3 4 8

Effective tax (%) 66.2 40.3 35.0 35.0 30.0 Other income 148 161 165 172 185


Business tax and other surcharges (267) (102) (105) (109) (118)

Net debt/equity (%) Net cash Net cash Net cash 0.0 Net cash

Transportation and related charges (39,625) (39,846) (41,858) (44,628) (47,948)

Current ratio (x) 1.2 1.3 1.3 1.2 1.2

Staff costs (2,725) (2,925) (2,469) (1,964) (2,125)

Quick ratio (x) 1.2 1.3 1.3 1.2 1.2 Depreciation & Amortisation (475) (513) (589) (740) (905)

Inventory T/O (days) (0) (0) (0) (0) (0)

Repairs and maintenance (193) (197) (202) (210) (227)

AR T/O (days) 62 60 60 60 60 Fuel (1,503) (1,341) (799) (160) (160)

AP T/O (days) (44) (45) (45) (45) (45)

Travel and promotional expenses (372) (363) (372) (386) (418)

Cash conversion cycle (days) 105 104 104 104 104

Office and communication expenses (202) (184) (189) (196) (212)

Asset turnover (x) 1.7 1.6 1.6 1.6 1.6

Rental expenses (989) (908) (739) (469) (493)

Financial leverage (x) 2.3 2.3 2.2 2.1 2.0 Other opex (578) (434) (445) (462) (499)

EBIT margin (%) 1.4 2.2 2.8 3.4 3.8

Total opex (46,929) (46,812) (47,766) (49,323) (53,103)

Interest burden (x) 1.8 1.4 1.4 1.4 1.4

Other losses, net (19) (90) (13) (13) (13)

Tax burden (x) 0.5 0.6 0.6 0.6 0.6 Operating profit (EBIT) 683 1,028 1,374 1,711 2,069

Return on equity (%) 5.3 6.5 8.1 9.0 9.9

Operating margin 1.4% 2.2% 2.8% 3.4% 3.8%

ROIC (%) 1.3 4.5 6.2 7.0 8.3

Interest Income 126 104 101 98 99

Year to Dec FY12A FY13A FY14E FY15E FY16E Finance costs (322) (300) (332) (332) (332)

Balance Sheet (RMB mn)

Profit after financing costs 487 833 1,143 1,477 1,836

Fixed assets 8,794 9,773 11,299 12,758 14,234 Associated companies & JVs 746 654 784 900 990


Pre-tax profit 1,233 1,486 1,927 2,377 2,826

Associated companies & JVs 3,348 3,305 3,617 3,929 4,240 Tax (322) (336) (400) (517) (551)

Long-term investments 1,407 1,158 1,187 1,216 1,245

Minority interests (262) (306) (382) (465) (569)

Other non-current assets 124 203 203 203 203 Net profit 649 844 1,145 1,395 1,706

Non-current assets 13,770 14,549 16,403 18,191 19,996

YoY% 1 30 36 22 22 Net margin 1.4% 1.8% 2.3% 2.7% 3.1%

Inventories 53 60 62 64 69 EBITDA 1,158 1,541 1,963 2,451 2,974

AR 8,019 7,866 8,066 8,377 9,056

EBITDA margin 2.4% 3.2% 4.0% 4.8% 5.4%

Prepayments & deposits 1,073 1,139 1,168 1,213 1,311 EPS (RMB) 0.153 0.199 0.269 0.328 0.402

Other current assets 778 1,005 1,005 1,005 1,005

YoY% 1 30 36 22 22

Cash 5,595 5,276 4,999 4,916 5,106 DPS (HK$) 0.037 0.063 0.086 0.104 0.128

Current assets 15,518 15,346 15,300 15,576 16,548


AP 5,687 5,841 5,990 6,221 6,725

Cash Flow (RMB mn)

Tax 147 145 400 517 551 EBITDA 1,158 1,541 1,963 2,451 2,974

Accruals & other payables 1,932 2,014 2,065 2,145 2,319

Chg in working cap (572) 52 12 19 41

Bank loans & leases 810 855 855 855 855 Others 105 71 0 0 0

CB & other debts 2,023 548 548 548 548

Operating cash 690 1,665 1,975 2,470 3,016

Other current liabilities 2,715 2,279 2,322 2,388 2,534 Interests paid 0 0 0 0 0

Current liabilities 13,313 11,682 12,180 12,674 13,531

Tax (309) (352) (149) (400) (517) Net cash from operations 381 1,313 1,826 2,070 2,499


CB & other debts 2,544 3,999 3,999 3,999 3,999

Capex (1,316) (1,387) (1,707) (1,773) (1,917)

Deferred tax & others 402 451 447 447 447 Investments (564) (532) (820) (838) (877)

MI 2,365 2,493 2,874 3,339 3,908


Non-current liabilities 5,613 7,288 7,666 8,131 8,700 Sales of assets 131 84 84 84 84

Interests received 128 58 101 98 99

Total net assets 10,362 10,925 11,857 12,961 14,313 Others (139) (208) 0 0 0

Investing cash (1,190) (1,220) (1,559) (1,529) (1,622)

Shareholder's equity 10,362 10,925 11,857 12,961 14,313 FCF (809) 93 267 540 877

Share capital 4,249 4,249 4,249 4,249 4,249


Reserves 6,113 6,676 7,608 8,712 10,064 Buy-back 0 0 0 0 0

Minority interests (69) (73) 0 0 0

BVPS (HK$) 3.05 3.21 3.49 3.81 4.21 Dividends paid (42) (127) (212) (291) (355)

Net change in bank loans 1,473 86 0 0 0

Total debts 5,851 5,928 5,928 5,928 5,928 Others (472) (274) (332) (332) (332)

Net cash/(debts) 522 353 76 (7) 184

Financing cash 890 (389) (544) (623) (687)

Net change in cash 81 (296) (277) (83) 190 Exchange rate or other Adj (7) (23) 0 0 0 Opening cash 5,521 5,595 5,276 4,999 4,916 Closing cash 5,595 5,276 4,999 4,916 5,106

CFPS (HK$) 0.112 0.386 0.537 0.609 0.735


Fri, 11 Jul 2014

China Logistics

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Mkt cap

(US$m)

3-mth

avg t/o

(US$m)

PER Hist

(x)

PER FY1

(x)

PER

FY2

(x)

EPS

FY1

YoY%

EPS

FY2

YoY%

3-Yr EPS

Cagr (%) PEG (x)

Div

yld

Hist

(%)

Div

yld

FY1

(%)

P/B

Hist

(x)

P/B

FY1

(x)

EV/

Ebitda

Hist

EV/

Ebitda

Cur Yr

Net

gearing

Hist (%)

Gross

margin

Hist

(%)

Net

margin

Hist

(%)

ROE

Hist

(%)

ROE

FY1

(%)

Sh px

1-mth

%

Sh px

3-mth

%

Sinotrans Ltd-H 598 HK 5.34 2,928 6.5 21.5 15.9 13.0 35.6 21.9 26.4 0.60 1.2 1.6 1.66 1.53 14.5 11.5 Net cash n.a 1.8 6.5 8.1 9.2 31.9

HSI 23,238.99 10.9 10.8 9.9 0.3 8.8 6.2 1.75 3.9 3.7 1.38 1.29 12.7 12.0 (0.3) 0.2

HSCEI 10,368.13 7.6 7.2 6.7 5.0 8.8 7.8 0.92 4.2 4.4 1.16 1.07 15.3 14.8 (1.4) (0.5)

CSI300 2,142.85 9.9 8.6 7.5 14.2 15.3 15.1 0.57 2.6 2.9 1.40 1.27 14.2 14.7 (0.9) (5.8)

Adjusted sector avg* 22.4 19.9 17.2 9.0 14.5 10.2 1.59 2.3 1.9 3.70 3.44 12.2 10.1 12.1 19.8 11.3 19.6 18.7 (1.3) 3.4



Shenz Intl Hldg 152 HK 9.51 2,100 3.2 9.5 7.2 7.8 31.9 (7.3) 13.7 0.53 3.9 4.9 1.13 0.95 9.0 8.7 50.7 49.3 27.5 12.3 14.3 (0.3) (3.0)

Sitc 1308 HK 3.28 1,094 0.6 9.7 8.1 6.4 19.5 26.9 21.0 0.39 7.6 5.0 1.47 1.32 10.0 5.8 0.0 11.3 8.9 15.5 17.0 (2.4) (11.8)

Beijing Properti 925 HK 0.84 732 0.7 7.5 N/A N/A N/A N/A N/A N/A N/A N/A 1.53 N/A (81.0) N/A 24.2 89.1 1,955.4 30.6 N/A 12.0 (4.5)

Asr Logistics 1803 HK 1.42 147 0.1 12.2 10.9 9.5 11.8 15.4 19.8 0.55 13.8 3.6 3.80 4.58 7.8 7.0 0.0 26.6 11.5 34.6 37.4 2.2 0.9



Fedex Corp FDX US 151.32 43,484 252.7 22.2 17.2 14.2 29.2 21.0 22.5 0.76 0.4 0.5 2.85 2.65 7.5 6.5 12.0 20.6 4.6 12.8 15.3 5.2 14.6



Tnt Express TNTE NA 6.43 4,779 7.0 N/A 19.5 14.1 N/A 38.9 (234.6) N/A 0.7 2.0 1.45 1.42 6.5 7.3 0.0 N/A (1.9) (10.3) 6.4 (2.3) (5.6)


Ch Robinson CHRW US 64.00 9,500 95.6 24.2 22.4 20.3 7.8 10.1 9.0 2.50 2.2 2.2 9.68 9.69 14.0 13.5 83.2 7.9 3.3 32.8 43.9 3.7 19.0

Oesterreich.Post POST AV 35.21 3,239 1.2 19.3 15.5 15.2 25.1 2.0 8.3 1.86 5.4 5.6 3.21 3.29 6.1 7.3 0.0 N/A 5.2 16.1 21.1 (2.9) (3.5)

Dsv A/S DSV DC 173.30 5,602 14.0 19.5 16.8 15.2 15.7 10.7 12.4 1.36 0.9 1.0 5.08 4.58 12.0 11.5 95.2 21.9 3.5 24.0 26.8 (6.1) 0.4

Bollore BOL FP 443.30 16,547 7.4 40.3 32.1 27.0 25.6 18.8 19.4 1.66 0.7 0.7 1.41 1.51 16.5 14.7 19.3 N/A 2.5 4.0 6.1 (5.9) (0.3)

Hunt (Jb) Trans JBHT US 74.14 8,694 61.2 25.4 23.5 19.4 8.2 20.7 13.8 1.71 0.9 1.0 8.14 7.11 11.4 10.3 69.4 13.0 6.1 34.7 33.8 (3.7) 3.0

Nippon Express 9062 JP 491.00 5,149 12.7 19.2 15.8 14.2 21.3 10.9 11.9 1.32 2.0 2.0 1.02 0.96 8.1 7.4 37.1 7.1 1.5 5.2 6.2 (3.3) 1.4

Yamato Holdings 9064 JP 2,058.00 9,237 34.6 25.0 21.4 19.7 16.9 8.9 11.6 1.84 1.2 1.2 1.56 1.52 7.9 7.1 0.0 7.3 2.5 6.4 7.1 (5.6) (4.6)

Blue Dart Expres BDE IN 4,035.00 1,596 0.5 78.1 60.7 49.9 28.7 21.7 N/A N/A 2.6 1.1 14.89 10.80 54.4 44.5 0.0 N/A 6.3 18.8 19.5 1.6 11.4

Singapore Post SPOST SP 1.73 2,673 11.1 25.6 24.0 21.9 6.7 9.7 9.7 2.48 3.6 3.6 9.50 4.94 15.8 15.9 0.0 N/A 17.4 42.9 22.4 3.3 26.3




Fri, 11 Jul 2014

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Shenzhen International (152 HK) – A Single Stock for Multiple Catalysts

SZI is focusing on logistics business by tripling logistics land bank to

over 3 million square metres for setting up “China Urban Integrated

Logistics Hubs” in at least 6 cities in China

Redevelopment of the land in Qianhai and the possible securitization

of Shenzhen Airlines may unlock the bonus value inside SZI

Initiate BUY with TP HK$13 or 37% upside

Diversified portfolio, but refocusing on logistics: Even though logistics only

contributes 12% of total earnings in FY13, SZI will spend bulk of future capex to

build a nationwide logistics network by setting up integrated logistics hubs in

major cities, such as Shenyang, Tianjin, Shijiazhuang, Wuxi and Wuhan. SZI will

spend around Rmb1.3bn each year, 64% of the total capex in FY14E, to ramp up

their operational area from 1 million sqm to near 3 million sqm by 2017. From

then on earnings generated by logistics business are expected to make up a

significant portion of SZI profits.

Solid financial strength for development: The existing well developed toll road

business would generate strong and stable cashflow for SZI to develop logistics

business. Besides, SZI has generated exceptional investment cash returns by

continuous disposal of non-core investments.

Unlocking value from investments: SZI owns 380k sqm of land in Qianhai

through the western logistics park in Shenzhen. With average auction price of

Rmb20,000 per sqm, SZI would unlock the land redevelopment value by

changing the land use rights once government plans are firmed up. Besides,

investment in Shenzhen Airlines is generating considerable dividend income and

profit contribution to SZI, the true value of SZ Airlines would be unlocked by

spin-off or disposal.

Initial BUY: We initiate BUY with a 12-months target price of HK$13 or 37%

upside by SOTP valuation for the SZI business portfolio.

Initial Coverage

BUY


Target Price: HK$13 (+37%)

Key Data

HKEx code 152






Fiscal Year 12/2013

Major shareholder (s) Shenzhen Investment Holdings Company

Limited (48.59%)


Price Chart

1mth 3mth 6mth

Absolute % -0.3 3.0 -0.6

Rel. MSCI CHINA % -0.5 1.1 -2.6

PE

Company Profi le Shenzhen International Holdings Limited is

involved in investments, construction and

operation of logistic infrastructure facilities,

such as toll roads, integrated logistics hubs

and ports. The company also offers logistics

services to customers by utilizing its

infrastructure facilities. The company also

has a passive investment in Shenzhen

Airlines and property development of the

land in Qianhai.

Exhibit 100: Forecast and Valuation Year to Dec (HK$ mn) FY12A FY13A FY14E FY15E FY16E

Revenue 5,739.5 5,962.8 6,154.7 6,568.2 7,193.8

Growth (%)

3.9 3.2 6.7 9.5

Net Profit 1,878.3 1,641.0 1,811.7 1,997.0 2,234.1

Growth (%)

(12.6) 10.4 10.2 11.9

Diluted EPS (HK$) 1.147 0.982 1.084 1.195 1.336

EPS growth (%)

(14.4) 10.4 10.2 11.9

Change to previous EPS (%) 0.0 0.0 0.0

Consensus EPS (HK$)

1.319 1.223 1.468

ROE (%) 10.1 12.3 12.4 12.6 13.0

P/E (x) 8.3 9.7 8.8 8.0 7.2

P/B (x) 1.2 1.1 1.0 1.0 0.9

Yield (%) 3.9 3.9 4.3 4.8 5.3

DPS (HK$) 0.374 0.374 0.413 0.455 0.509


0.0

2.0

4.0

6.0

8.0

10.0

12.0



0

2

4

6

8

10

12

Dec/08 Dec/09 Dec/10 Dec/11 Dec/12 Dec/13

Forward P/E Ratio

+1std.

avg.

-1std.

Fri, 11 Jul 2014

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Focusing on Logistics Business

Expanding Across the Country

SZI has three core business segments, namely logistics business, toll road

business and head office (meaning other investments). With a long history of

development, the toll roads business has contributed over half of the earnings in

FY13, with stable growth and strong cash flow. SZI has spun-off the major part of

the toll roads portfolio to a listed platform, Shenzhen Expressway (548 HK, NR),

to better utilize the fund-raising capacity of the capital market for future

development.

Exhibit 101: Segment EBIT breakdown

Source: Company

To become a leading logistics infrastructure company in China, SZI plans to

aggressively increase investments in this sector to build a nationwide network of

“China Urban Integrated Logistics Hub” in major logistic gateway cities in China.

SZI is currently operating 6 logistic parks with total land area and operating area

of 1.3 million square metres and 670k square metres respectively. Although the

current facilities are mainly located in the well-developed Shenzhen City, SZI has

managed to increase the operating area of Shenzhen South China Logistics Park

by 125k square metres to 322k square metres.

Although the new area only started operations in 4Q13, all additional working

areas were leased out due to robust demand for these facilities in first tier cities

like Shenzhen. By maintaining a high overall occupancy rate of 96%, better

economy of scale and stringent cost management, SZI has managed to increase

the logistics park profit contribution by 25.6% to HK$157 million in FY13. We

believe profits from logistics parks will further grow by 19% to HK$187 million in

FY14E due to full year contributions from the additional operating areas.

Besides, with the increase in operating capacity of port business, organic growth

of logistics services and the launch of China Urban Integrated Logistics Hub

Toll roads836

51%

Head office606

37%

Logistic business

199 12%

SZI aims to become a leading

logistics infrastructure company

in China

SZI is building a nationwide

network of logistics hubs in China

Expansion of Shenzhen South

China Logistics Park drives

segment earnings in FY13 and

FY14

Fri, 11 Jul 2014

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projects, we believe SZI’s logistics business will grow at over 20% CAGR and

make a significant contribution in the next few years.

Exhibit 102: SZI logistics business profit growth


China Urban Integrated Logistics Hub

Since 2012, SZI has signed investment agreements with more than 10 gateway

cities for 1.81 million square metres of land to develop integrated hubs to provide

high end logistics services in China. The projects are strategically located in

Shenyang, Tianjin, Wuxi, Wuhan and Shijiazhuang, covering the northern and

eastern parts of China. In addition to warehousing services, these hubs are

enhanced logistics park business models that also provide full-spectrum facilities,

such as offices, logistic information centers, distribution centers and e-commerce

transportation platforms to SZI’s customers and their business partners.

Exhibit 103: Logistics parks signed in 2012-2013

Integrated logistic hub Planned area (sqm)

Shenyang project 700,000

Tianjin project 300,000

Wuxi project 350,000

Wuhan project 130,000

Shijiazhuang project 330,000

Total 1,810,000

Source: Company

By integrating different value-added services, SZI expects its one-stop public

logistics service platform to generate at least an extra 25% value-added service

income and over 15% ROE of mature status.

SZI acquired 240k million square metres of land area for the development of the

first phase of Shenzhen International Shenyang Integrated Logistics Hub in FY13,

which is expected to commence operations in 2H15. We believe another 1.51

million square metres of logistic hubs in other cities will begin operations in

2016-2018, which will push the total operating area of logistics business to nearly

0

100

200

300

400

500

600

FY13 FY14E FY15E FY16E FY17E FY18E

Logistics business profit

Logistics Business Profit Logisitic Park Logisitic Services Port

Integrated logistics hub will

provide warehousing function as

well as other value-added

services, such as customs

clearance and cross-border cargo

transfers

Fri, 11 Jul 2014

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2.5 million square metres in 2018 or 39% CAGR in the coming 4 years.

Exhibit 104: China Urban Integrated Logistics Hub design


Exhibit 105: SZI logistics parks total operating area (‘000 sqm)


Warehousing

Operation Centre

Integrated Ancillary

Service Centre

E-commerce

Transportation Platform

Logistic Consolidation

Centre

Logistic Information

Centre

Urban Distribution

Centre

0

500

1,000

1,500

2,000

2,500

3,000

FY13 FY14E FY15E FY16E FY17E FY18E

Operating Area ('000 sqm)

Operating Area ('000 sqm)

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Exhibit 106: SZI logistics parks operating area breakdown (‘000 sqm)

(sqm '000) FY13 FY14E FY15E FY16E FY17E FY18E

South China Logisctic Park 322 322 322 322 322 322

Western Logistic Park 111 111 111 111 111 111

HTY Logistic Center 130 130 130 130 130 130

Nanjing Chemical Industrial Park 48 48 48 48 48 48

Shandong Booming Total Logistic Park 26 26 26 26 26 26

SZ Airport Express Center 28 28 28 28 28 28

Shenyang Logistic Park

240 500 600 700

Tianjin Binhai New Area Logistic Park

300 300 300

Wuxi Logistic Park

350 350 350

Wuhan Logistic Park

130 130

Shijiazhuang Logistic Park 330 330

Total 665 665 905 1,815 2,375 2,475

yoy

0% 36% 101% 31% 4%

CAGR (FY14E - FY18E) 39%

Source: Company

Riding on tier 1 clients

To leverage on its modernized logistics hub services, SZI has made a strategic

cooperation agreement with Shentong Express, the second largest courier in

China, for in-depth cooperation in integrated logistics and cross-border

e-commerce. They will share customer and data resources to accelerate the

development of a nationwide logistics network as well as co-operation in express

delivery business. After Shentong, the company expects to secure more tier 1

logistics/express companies in the future through similar strategic cooperation

based on their exceptional asset qualities.

Meanwhile, SZI is looking into signing up more investment agreements in other

cities, such as Guangzhou, Xian, Nanjing, Chongqing and Chengdu. Given SOE

background, it will not be a surprise if SZI secures more projects in near future.

We believe SZI will have very high growth in the logistics segment, which will

certainly trigger a re-rating once critical mass is achieved in 2-3 years.

Port business

Ninjina Xiba Port has the advantage of a 70,000-tonnage berthing capacity to

service large vessels. With more large vessels berthing in 2013, the segment

recorded over 60% growth in profits to HK$20 million. With the construction of

three new berths for vessels of 50,000 to 70,000 tonnage to be completed in

2014, it is expected the business will be extremely sound from 2015 onwards.

The business of logistics services

Logistics service is a third party business for logistics and transportation

outsourcing. SZI is expected to maintain solid operations in this segment with

increasing demand from existing customers and cost controls.

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Exhibit 107: SZI logistics parks development pipeline


Guangdong

Northwestern

Chengdu

Southwestern

Northern

Central

Eastern

Southern

Northeastern

Shenyang

Tianjin

Yantai

Nanjing

Xi’an

Wuhan

Wuxi

Shandong Booming

Total Logistic Park

Land Area: 70K sqm

GFA: 50K sqm

Nanjing Chemical Industrial

Park Logistic

Land Area: 95K sqm

GFA: 48K sqm

Shenzhen Airport

Express Center

Land Area: 32K sqm

GFA: 28K sqm

Shenzhen Western

Logistic Park

Land Area: 380K sqm

GFA: 420K sqm

Shenzhen South

China Logistic Park

Land Area: 611K sqm

GFA: 399K sqm

Shenzhen HTY

Logistic Centre

Land Area: 116K sqm

GFA: 133K sqm

Shenzhen International Shenyang Modern

Integrated Logistics Hub

Located in Shenyang city; an

important transportation gateway

city in Northeast China

Total planned land area of 700K

sqm; first phase project area of 200K sqm

Started construction on Dec 2013.

Shenzhen International Tianjin Modern


Located in Tianjin Binhai New Area,

an important strategic node in

Northern China


sqm, expected to construct in 2H2014

Shijiazhuang

Shenzhen International Shijiazhuang Modern


Located in Shijiazhuang Zhengding

county, to strengthen the strategic

position in the Northern China

region

Total planned land area of 270K sqm, expected to construct in 2015

Shenzhen International Wuxi Modern


Located in Wuxi Huishan District,

an important strategic node in

Eastern China


sqm, expected to construct in 2H2014

Shenzhen International Wuhan Moder


Located in Wuhan Dongxihu

District, an important strategic

foothold in Central region of China


sqm, expected to construct in 2015

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Growth fueled by ample cash flow from toll roads business

Shifting capex from toll roads to logistics

SZI operates 15 toll roads with a combined total of over 500km in 5 provinces.

SZI holds the toll roads indirectly through 50.89% owned listed subsidiary

Shenzhen Expressway (548.hk), which contributes 58% profits in its toll road

segment. SZI directly holds around 90% of Longda Expressway and 45% of

Wuhuang Expressway, which contribute 34% and 8% of the toll road segment

profits. Although SZI is expected to spend Rmb600mn capex for toll road

business in FY14, the company expects the capex will be minimal after 2015

since they intend to focus on more attractive logistics business developments.

Given the stable HK$1 billion-plus cash flow from the toll road business every

year, SZI can invest in higher returns projects on the financial strength of its toll

roads business. With the increasing demand in logistics facilities in China, SZI

aims to capture the logistics market by reinvesting in integrated logistics hubs

across China. SZI will spend HK$1.536 billion capex or 64% of the budget in

logistics development, which is 3 times larger than the HK$365 million in FY13.

We believe it would benefit SZI in the long run since logistics facilities are

experiencing higher demand driven by the boom in e-commerce. Logistics

facilities are still an undeveloped market, where it would be crucial to capture the

leading position when the competition is not yet keen. By redirecting the

investment into logistics segment, SZI expects to build up critical mass to put it in

a leading position within a few years.

64% of the capex will be spent on

logistics segment in FY14,

increased from 25% n FY13

Fri, 11 Jul 2014

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Exhibit 108: Shenzhen Int’l corporate structure


Shenzhen

International

Holdings Limited

Logistic

Parks

Logistic

Services

Port

100%

100%

100%

55.39%

51%

50%

100%

100%

68.54%

70%

50.889%

45%

89.93%

49%

5.87%

Logistic Business

Toll Road Business

Other Investment

Shenzhen South China Logistic Park

Shenzhen Western Logistic Park

Nanjing Chemical Industrial Logistic Centre

Shandong Booming Total Logistic Park

Shenzhen HTY Logistic Centre

Shenzhen Airport Express Center

China Urban Integrated Logistics Hub

Third Party Logistic Service

Logistic Information Service

Nanjing Xiba Port

Shenzhen Expressway Company Limited (600548.SS/ 00548.HK)

Hubei Wuhuang Expressway

Shenzhen Longda Expressway

Shenzhen Airlines Company Limited

CSG Holding Company Limited (000012.SZ)

55%

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Exhibit 109: Shenzhen International toll roads portfolio

Location Toll road Interests

controlled

by the Group

Length

by toll

(km)

Concession

period

(Year. Month)

Remaining

concession

as of 2014

No. of

lane(s)

2013 Ave. daily

mixed traffic

volume

(vehicle/thousands)

2013

Ave.

daily toll

revenue

(HK$'000)

Held directly

Shenzhen 1 Longda Expressway 89.93% 28 2005.10 - 2027.10 13 6 88 1,713

Hubei 2 Wuhuang Expressway 45% 70.3 1997.09 - 2022.09 8 4 39 1,314

Held indirectly through Shenzhen Expressway

Shenzhen

1 Meiguan Expressway 100% 5.4 1995.05 - 2027.03 13 6/8 130 1,014

2 Jihe West 100% 21.8 1999.05 - 2027.03 13 6 123 1,323

3 Yanpai Expressway 100% 15.6 2006.05 - 2027.03 13 6 50 683

4 Yanba Expressway 100% 29.1 (Note) - 6 31 561

5 Nanguang Expressway 100% 31 2008.01 - 2033.01 19 6 775 994

6 Jihe East 100% 23.7 1997.10 - 2027.03 13 6 150 1,678

7 Shuiguan Expressway 40% 20 2002.02 - 2025.12 11 10 155 1,639

8 Shuiguan Extension 40% 6.3 2005.10 - 2025.12 11 6 39 222

Guangdong

9 Yangmao Expressway 25% 79.8 2004.11 - 2027.07 13 4 31 1,855

10 Guangwu Porject 30% 37.9 2004.12 - 2027.11 13 4 27 908

11 Jiangzhong Porject 25% 39.6 2005.11 - 2027.08 13 4 89 1,167

12 GZ W2 Expressway 25% 40.2 2006.12 - 2030.12 16 6 42 1,042

13 Qinglian Expressway 76.37% 216 2009.07 - 2034.07 20 4 28 2,460

Hubei 14 Wuhuang Expressway 55% 70.3 1997.09 - 2022.09 8 4 39 1,314

Hunan 15 Changsha Ring Road 51% 34.7 1999.11 - 2029.12 15 4 14 182

Jiangsu 16 Nanjing Third Bridge Note(2)

25% 15.6 2005.10 - 2030.10 16 6 29 1,476

Note: Section A, B and C of Yanba commenced operation in April 2001, June 2003 and March 2010 respectively; concession period of Yanba Expressway is 25 years


Exhibit 110: Shifting capex from toll road to logistics park


Logistic Park64%

Toll Road30%

Port6%

2014 Capex estimate: HK$2,400m (RMB1,900m)

Logistic Park25%

Toll Road57%

Port18%

2013 Actual: HK$1,458m (RMB1,138m)

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Unlocking value from investments

Land in Qianhai

At the Western Logistics Park in Shenzhen, SZI owns 380k sqm of land in

Qianhai, which government plans to develop into a new economic zone with

preferential policies to support future development. As a result, thousands of

enterprises have been attracted to Qianhai, pushing up the average auction land

price to Rmb20,000 per square metre in 2013.

To benefit from the growing scarcity of land in Qianhai, SZI maintained close

communications with the authorities to change the land use rights and to push

forward the first phase land project in Qianhai. The company has already

established a JV company with Shenzhen Invest (604.hk), which is owned by

Shum Yip, so that a professional team can design and develop the Qianhai land

bank once government approval is secured. SZI has also signed MOUs with

several well-known large-scale enterprises to enter cross-border bilateral RMB

loan agreements with a total of Rmb700 million facility for future construction and

business developments in Qianhai. We believe the value of SZI’s Qianhai land

bank will soon be unlocked once government plans are firmed up.

Exhibit 111: SZI land in Qianhai


Other investments

SZI bought 49% stake of Shenzhen Airlines during 2010 to 2011 at a total cost of

HK$1.4 billion as the former-head Li of SZA has been jailed for misappropriation

of Rmb20 billion. SZI treats SZ Airlines as a passive investment as Air China

(753.hk), which owns 51% of SZA, has a professional management team in the

airlines industry. SZ Airlines contributed HK$480mn profit and HK$140mn cash

dividend to SZI in FY13, which is a fair return for SZI as SZ Airlines has above

average profitability by focusing on domestic routes. SZ Airlines would bring a

huge fortune to SZI whenever it goes public or introduces other professional

investors since SZI bought it at a relatively low price. (Current attributable NAV of

SZ Airlines is over HK$2,769 million, which is far above acquisition costs.)

The land in Qianhai would bring a

huge fortune to SZI by rezoning

development

Exceptional return from Shenzhen

Airlines investment

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Exhibit 112: Shenzhen Airlines operating statistics

(RMB mn) 2013 2012 Increase/ (Decrease)

Transportation revenue# 21,019 21,597 (3%)

Of which: Passenger revenue 18,412 19,428 (5%)

Transportation costs# 17,715 17,942 (1%)

Passenger load factor 81.6% 80.55% 1.05%*

Number of flight routes 180,023 167,784 7%

Of which: Domestic routes 172,728 160,769 7%

Total no. of aircraft in service 132 116 14%

#Extracted from audited financial statements of Shenzhen Airlines

*Change in % point


Besides, SZI holds over 121.83 million shares or 5.87% of issued share capital of

CSG (000012.CH), an A-share listed company from previous investment. SZI has

been unloading this holding year by year to generate some additional income and

cash returns. SZI disposed of 11.34 million shares of CSG at an average selling

price of Rmb11.14 (HK$14.07) per share. The disposal generated a realized gain

after tax of HK$106 million in 2013. Given the low book cost (HK$1.54 by OP

estimate Vs current price of Rmb6.87), it is expected that disposal of CSG shares

will be one of the major income sources for SZI in the future. Last but not least,

SZI has also disposed of 2.33% equity interest in Shenzhen Capital Group and

recorded a gain after tax of HK$130 million. We believe the capital raised by

disposing of passive investments would give SZI more resources to develop the

logistics business, which also shows efficient capital management of SZI.

Exhibit 113: Disposal gain of CSG shares since 2009

Year Stake disposed Net gain

2009 29.31mn shares HK$283mn



2012 - -



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Valuation

Sum of the parts (SOTP) estimate

We use sum of the parts (SOTP) estimate for the valuation of SZI, since SZI is a

holding company structure with toll roads, logistics and investments business.

We used 10x FY14E PE to valuate toll roads, logistics services and port business

because of stable business nature with low-teen growth outlook.

Given fast development and aggressive investment from SZI in integrated

logistics hubs, we use 1x FY14E PEG or 22.9x FY14E PE for logistics parks

business. Due to robust demand and promising industry outlook, peers in

logistics facilities sector are trading at high valuation, where our target PE has

over 30% discount to GLP, a market leader in logistics facilities, due to the much

smaller scale.

Although Shenzhen Airlines has better profitability by focusing on domestic routes,

industry peers such as China Southern Air, recorded earnings decline in 1Q14

due to exchange losses from depreciation of Rmb. Thus, it would be better to

value the segment by 1x FY14E PB instead on earnings.

As CSG is a publicly traded share, we directly use market value excluding profit

gain tax for the valuation.

For the land in Qianhai, since the land premium to be paid for redevelopment is

still unknown, with the market value of commercial land at around Rmb20,000 per

square metre, we assume Rmb8,000 per square metre or 60% discount in the

valuation.

Exhibit 114: Sum of the parts (SOTP) valuation

Valuation method Valuation methodology HK$ mn

Toll Roads 10x FY14E PE 9,611

Logistics Business

Logistics Parks 1x FY14E PEG 4,278

Logistics Services 10x FY14E PE 201

Port 10x FY14E PE 234

Shenzhen Airlines 1x FY14E PB 2,769

CSG (000012 CH) Market value (after tax) 832

Land in Qianhai Rmb8,000 per sqm 3,800

Total 21,724

Target price (HK$) 13

Upside 37%

Source: OP Research

We use SOTP to valuate SZI and

our TP is HK$13 or 37% upside

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Key risks

1. Less than expected demand in logistic hubs.

2. Delay in logistics hub construction.

3. Higher than expected construction costs.

4. Unflavorable toll road policies.

5. Lower profitability in Shenzhen Airlines.

6. Failure to divest available-for-sales assets.

7. Lower than expected returns in Qianhai land bank re-development.

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Management profile

Mr. Gao Lei, Chairman: Mr. Gao, aged 54, was appointed in September 2012 as

the Chairman of the board of directors of the Company. Mr. Gao has extensive

experience in finance, investment, corporate management and administration. Mr.

Gao is responsible for devising the Group’s overall development strategy and

important systems, as well as supervising the implementation of resolutions of the

general meetings and the board. Mr. Gao holds a master degree in money and

banking from Xi’an Jiaotong University and is a senior economist.

Mr. Li Jing Qi, Chief Executive Officer: Mr. Li, aged 57, was appointed in March

2000 as an Executive Director and Vice President of the Company, and was

appointed in August 2006 as the Chief Executive Officer of the Company. Mr. Li is

responsible for the overall daily operations of the Group and the implementation

of the Group’s development strategies and the resolutions of the general

meetings and the board. Mr. Li is a graduate of Shanghai International Studies

University with a Bachelor of Arts degree. He has over 20 years of experience in

international banking and corporate management.

Mr. Tse Yat Hong, Chief Financial Officer: Mr. Tse, aged 44, joined the Group

as Chief Financial Officer in June 2000. Mr. Tse is responsible for the Group’s

financial management and planning and coordinating the Group’s major

transactions. Mr. Tse graduated from Monash University in Australia with a

bachelor’s degree in accounting and computer science. He is a Fellow of the

Hong Kong Institute of Certified Public Accountants and a FCPA of CPA Australia.

Prior to joining the Company, Mr. Tse worked in the audit profession in one of the

international accounting firms for years. Mr. Tse has extensive experience in

accounting, finance and corporate governance matters of listed companies and

has broad knowledge in accounting and financial rules and regulations in Hong

Kong and China.

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Financial Summary – Shenzhen International (152 HK) Year to Dec FY12A FY13A FY14E FY15E FY16E



Ratios

Toll roads 4,817 4,934 4,999 5,274 5,548

Gross margin (%) 46.0 49.3 53.0 55.6 57.7

Logistics business 922 1,029 1,156 1,294 1,646

Operating margin (%) 40.7 43.3 47.4 50.2 52.6

Head Office 0 0 0 0 0

Net margin (%) 32.7 27.5 29.4 30.4 31.1

Turnover 5,740 5,963 6,155 6,568 7,194


YoY%

4 3 7 10

Admin exp/Sales (%) 5.9 5.5 5.6 5.5 5.1

COGS (3,102) (3,025) (2,893) (2,918) (3,043)

Payout ratio (%) 32.6 38.1 38.1 38.1 38.1

Gross profit 2,638 2,937 3,262 3,651 4,151

Effective tax (%) 32.3 28.8 28.8 28.8 28.8

Gross margin 46.0% 49.3% 53.0% 55.6% 57.7%


Other income 80 42 72 72 72

Net debt/equity (%) 108.8 91.5 73.3 58.5 44.1

Selling & distribution (43) (64) (67) (70) (72)

Current ratio (x) 1.2 1.8 2.0 2.2 2.5

Admin (337) (331) (347) (358) (369)

Quick ratio (x) 1.2 1.7 1.9 2.1 2.4

R&D 0 0 0 0 0

Inventory T/O (days) 1 54 54 54 54

Other opex 0 0 0 0 0

AR T/O (days) 74 82 82 82 82

Total opex (379) (395) (414) (428) (442)

AP T/O (days) 245 231 231 231 231

Operating profit (EBIT) 2,339 2,584 2,920 3,295 3,782

Cash conversion cycle (days) (170) (96) (96) (96) (96)


Asset turnover (x) 0.2 0.1 0.1 0.1 0.1



Interest Income 73 77 91 116 141

EBIT margin (%) 40.7 43.3 47.4 50.2 52.6

Finance costs (928) (816) (795) (792) (789)


Profit after financing costs 1,484 1,845 2,216 2,619 3,134

Tax burden (x) 0.7 0.6 0.6 0.6 0.6

Associated companies & JVs 1,291 792 792 792 792

Return on equity (%) 10.1 12.3 12.4 12.6 13.0

Pre-tax profit 2,775 2,637 3,008 3,411 3,926

ROIC (%) 7.6 5.3 5.9 6.6 7.5

Tax (479) (531) (638) (753) (902) Minority interests (417) (465) (559) (660) (790)


Net profit 1,878 1,641 1,812 1,997 2,234


YoY%

(13) 10 10 12

Fixed assets 4,951 5,257 5,854 6,464 7,101

Net margin 32.7% 27.5% 29.4% 30.4% 31.1%

Intangible assets & goodwill 24,189 23,618 23,147 22,753 22,415

EBITDA 2,628 2,884 4,192 4,571 5,116

Associated companies & JVs 5,339 5,842 6,154 6,465 6,777

EBITDA margin 45.8% 48.4% 68.1% 69.6% 71.1%


EPS (HK$) 1.147 0.982 1.084 1.195 1.336


YoY%

(14) 10 10 12

Non-current assets 34,694 35,209 35,647 36,174 36,785

DPS (HK$) 0.374 0.374 0.413 0.455 0.509

Inventories 9 447 427 431 449


AR 1,165 1,340 1,383 1,476 1,616

Cash Flow (HK$ mn)


EBITDA 2,628 2,884 4,192 4,571 5,116

Other current assets 1,649 1,278 1,278 1,278 1,278

Chg in working cap (131) (280) (107) (81) (80)

Cash 4,866 4,950 6,620 8,101 9,828

Others 842 1,105 0 0 0

Current assets 7,689 8,014 9,707 11,284 13,171

Operating cash 3,339 3,709 4,084 4,490 5,036 Interests paid (768) (881) (831) (831) (831)

AP 2,082 1,918 1,834 1,850 1,929

Tax (642) (493) (173) (638) (753)

Tax 123 173 638 753 902

Net cash from operations 1,929 2,336 3,080 3,022 3,452


Bank loans & leases 3,898 2,297 2,297 2,297 2,297

Capex (1,318) (1,319) (1,362) (1,453) (1,591)

CB & other debts 377 135 135 135 135

Investments (97) (86) 0 0 0



Current liabilities 6,496 4,555 4,935 5,067 5,294

Sales of assets 45 385 0 0 0 Interests received 71 81 91 116 141

Bank loans & leases 14,108 15,034 15,034 15,034 15,034

Others 40 35 0 0 0

CB & other debts 244 294 294 294 294

Investing cash (1,147) (425) (790) (857) (970)

Deferred tax & others 1,548 1,432 1,432 1,432 1,432

FCF 782 1,911 2,289 2,165 2,482

MI 7,343 7,918 8,477 9,137 9,928


Non-current liabilities 23,242 24,678 25,237 25,897 26,688

Buy-back 0 0 0 0 0 Minority interests 177 97 0 0 0

Total net assets 12,645 13,990 15,182 16,494 17,974

Dividends paid (782) (776) (620) (684) (754) Net change in bank loans 957 (1,229) 0 0 0

Shareholder's equity 12,645 13,990 15,182 16,494 17,974

Others 7 (4) 0 0 0

Share capital 4,952 5,100 5,100 5,100 5,100

Financing cash 360 (1,828) (620) (684) (754)

Reserves 7,693 8,890 10,081 11,394 12,874

Net change in cash 1,142 82 1,670 1,481 1,728

BVPS (HK$) 7.72 8.44 9.16 9.95 10.85

Exchange rate or other Adj 0 2 0 0 0 Opening cash 3,724 4,866 4,950 6,620 8,101

Total debts 18,627 17,760 17,760 17,760 17,760

Closing cash 4,866 4,950 6,620 8,101 9,828

Net cash/(debts) (13,758) (12,803) (11,134) (9,653) (7,925)

CFPS (HK$) 1.178 1.397 1.842 1.808 2.065


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Mkt cap

(US$m)

3-mth

avg t/o

(US$m)

PER Hist

(x) PER FY1 (x)

PER

FY2

(x)

EPS

FY1

YoY%

EPS

FY2

YoY%

3-Yr EPS

Cagr (%) PEG (x)

Div

yld

Hist

(%)

Div

yld

FY1

(%)

P/B

Hist

(x)

P/B

FY1

(x)

EV/

Ebitda

Hist

EV/

Ebitda

Cur Yr

Net

gearing

Hist

(%)

Gross

margin

Hist

(%)

Net

margin

Hist

(%)

ROE

Hist

(%)

ROE

FY1 (%)

Sh px

1-mth

%

Sh px

3-mth

%

Shenz Intl Hldg 152 HK 9.51 2,100 3.2 9.7 8.8 8.0 10.4 10.2 10.8 0.82 3.9 4.3 1.13 1.04 9.9 6.4 91.5 49.3 27.5 12.3 12.4 (0.3) (3.0)

HSI 23,238.99 10.9 10.8 9.9 0.3 8.8 6.2 1.75 3.9 3.7 1.38 1.29 12.7 12.0 (0.3) 0.2

HSCEI 10,368.13 7.6 7.2 6.7 5.0 8.8 7.8 0.92 4.2 4.4 1.16 1.07 15.3 14.8 (1.4) (0.5)

CSI300 2,142.85 9.9 8.6 7.5 14.2 15.3 15.1 0.57 2.6 2.9 1.40 1.27 14.2 14.7 (0.9) (5.8)

Adjusted sector avg* 14.9 14.0 12.5 7.1 18.8 11.0 1.36 3.4 3.0 2.11 2.03 9.7 8.4 25.6 29.1 11.5 13.1 13.4 0.7 3.0

Toll Roads

Zhejiang Express 576 HK 8.49 4,758 3.2 15.5 14.8 14.0 4.7 5.2 4.9 3.01 4.6 4.8 1.85 1.71 7.9 7.6 0.0 36.9 24.3 11.9 12.0 9.4 19.4

Shenzhen Expre-H 548 HK 4.30 1,256 1.1 10.4 5.2 7.6 100.6 (31.9) 14.5 0.36 4.6 5.5 0.75 0.67 6.9 6.4 74.0 51.8 22.8 7.4 13.3 11.7 16.8

Anhui Express-H 995 HK 4.74 1,130 0.8 7.5 7.5 7.0 (0.2) 7.5 2.0 3.74 5.8 6.0 0.88 0.83 5.1 4.6 27.5 39.3 24.7 12.2 11.1 0.6 11.0

Jiangsu Expres-H 177 HK 9.67 5,031 4.3 14.4 13.6 12.7 5.9 7.0 7.1 1.92 4.9 5.3 1.99 1.91 7.8 7.3 20.2 50.2 36.5 14.1 14.3 5.7 4.7

Hopewell Infr 737 HK 3.96 1,575 0.7 16.0 16.6 15.3 (3.3) 8.4 5.1 3.28 9.3 5.9 1.34 1.40 6.6 5.6 73.1 N/A 24.2 8.1 8.3 1.5 5.3

Yuexiu Transport 1052 HK 4.92 1,062 0.6 11.9 8.9 7.9 33.7 12.2 18.4 0.48 5.3 6.9 0.80 0.77 9.6 8.2 39.5 66.8 31.6 6.8 8.8 13.1 25.8

Sichuan Exp-H 107 HK 2.52 1,232 1.0 6.1 6.0 5.6 1.5 7.7 2.4 2.44 3.9 3.9 0.56 0.54 7.4 7.0 70.2 20.9 11.8 9.6 9.1 5.9 1.6

Airlines

Cathay Pac Air 293 HK 14.22 7,218 6.5 21.4 14.7 10.2 45.6 43.3 37.6 0.39 1.5 2.4 0.89 0.85 7.7 7.2 64.9 N/A 2.6 4.4 5.9 (2.2) (8.3)

Air China Ltd-H 753 HK 4.61 7,275 4.5 13.9 13.7 9.8 1.7 40.0 18.2 0.75 1.2 1.5 0.90 0.83 9.1 6.6 168.3 N/A 3.4 6.3 6.2 (1.5) (5.1)

China East Air-H 670 HK 2.47 4,508 1.0 9.9 11.6 7.8 (15.0) 49.4 15.5 0.75 N/A 0.1 0.93 0.88 9.0 6.9 251.0 N/A 2.7 10.1 6.8 (2.0) (9.2)

China Southern-H 1055 HK 2.40 3,481 3.7 9.6 11.5 6.5 (16.5) 77.8 21.5 0.53 2.1 1.5 0.55 0.55 7.1 5.8 190.2 N/A 2.0 5.9 4.7 (0.4) (7.0)

Integrated Logistics

Sinotrans Ltd-H 598 HK 5.34 2,928 6.5 21.4 16.8 13.9 27.5 20.8 22.3 0.75 1.2 1.5 1.66 1.54 12.9 10.6 0.0 N/A 1.8 7.9 9.4 9.2 31.9



Sitc 1308 HK 3.28 1,094 0.6 9.7 8.1 6.4 19.5 26.9 21.0 0.39 7.6 5.0 1.47 1.32 10.0 5.8 0.0 11.3 8.9 15.5 17.0 (2.4) (11.8)

Asr Logistics 1803 HK 1.42 147 0.1 12.2 10.9 9.5 11.8 15.4 19.8 0.55 13.8 3.6 3.80 4.58 7.8 7.0 0.0 26.6 11.5 34.6 37.4 2.2 0.9









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ASR Logistics (1803 HK) – Asset-Light Air Freight Solution Provider

ASR is well positioned to leverage on the increasing intra-Asia Pacific

air freight forwarding demand to drive its solid earnings growth.

Targeting to increase representative offices from 29 in FY13 to 44 in

FY14E, mainly to gear up for the intra-Asia Pacific recovery and

launching of e-booking platform.

Maintain BUY with TP HK$1.90 unchanged, representing 15x FY14E

PE.

Reaping the booming intra-Asia Pacific air cargo market. ASR listed on HKEx

Jan 2012 with IPO price of HK$0.47, up 200% since its listing or 32% since our

initial coverage. As a leading asset light 3PL service company focusing on the

wholesale market, we believe ASR is able to (1) maintain its healthy net cash

position or ~HK$0.13 p.s. after distributing HK$120mn special dividend in May

2014 and (2) leveraging on its well-established point of sales network (from 16 to

29 offices by FY13, targeting 44 by FY14E) and comprehensive airline portfolio to

reap the upcoming recovery in air cargo freight market from FY15E onwards.

E-booking platform launched in early 2014 together with well-established

network likely yield promising earnings growth from 2015 onwards. 2 years

after its debut on HKEx, ASR is gradually developing its sales representative

offices covering Asia-Pacific region in-line with what it planned during IPO. We

believe the past two years' efforts are due for harvesting in FY15E, thanks to

increasing B2B and B2C popularity and the rapid growth of China's e-commerce

industry. We believe the recent launch of E-booking platform is likely to support

ASR to better utilize its airline portfolio and cargo capacity without rapidly

increasing its operating costs i.e. labor. Although 2014 air cargo freight outlook

remains foggy, we expect the synergies together with economies of scale to show

enough bouyancy from FY15E to support 20% earnings CAGR in 2013 – 2016.

Maintain BUY: We maintain our BUY rating with TP HK$1.90 unchanged,

representing 15x FY14E PE.

Company Update

BUY



Key Data

HKEx code 1803




Issue Share (mn) 800.00


Fiscal Year 12/2013

Major shareholder (s) ASR Victory Ltd (64.5%)

Yu Ho Yuen Sunny (8.5%)

Source: Company data, Bloomberg, OP Research

Closing price are as of 10/7/2014

Price Chart

1mth 3mth 6mth

Absolute % 6.8 2.2 5.5

Rel. MSCI CHINA % 3.8 0.6 1.9

PE

Company Profi le ASR is a non-asset based third party logistic

(3PL) service provider, headquarter in HK, in

that they do not own any physical freight

distribution assets, but leverage their over 20

years accumulated freight industry expertise

to source air cargo space and on-sell it to

over 1,000 freight forwarders

Exhibit 116: Forecast and Valuation Year to Dec (HK$ mn) FY12A FY13A FY14E FY15E FY16E

Revenue 674.2 806.7 932.4 1,150.4 1,362.2

Growth (%) 11.7 19.7 15.6 23.4 18.4

Net Profit 89.9 93.1 103.0 124.7 162.2

Growth (%) (7.6) 3.5 10.7 21.0 30.1

Diluted EPS (HK$) 0.112 0.116 0.129 0.156 0.203

EPS growth (%) (7.6) 3.5 10.7 21.0 30.1


1.4 1.9 1.4

Consensus EPS (HK$)

0.130 0.150 0.200

ROE (%) 51.0 34.6 37.2 41.2 39.2

P/E (x) 12.6 12.2 11.0 9.1 7.0

P/B (x) 2.4 3.8 4.5 3.2 2.4

Yield (%) 2.4 13.8 2.3 2.7 3.6

DPS (HK$) 0.034 0.196 0.032 0.039 0.051


0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6



0

2

4

6

8

10

12

Apr/12 Oct/12 Apr/13 Oct/13 Apr/14

Forward P/E Ratio

+1std.

avg.

-1std.

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Exhibit 117: New offices to be establised in 2014 (China)


Exhibit 118: New offices to be establised in 2014 (Asia/Europe)


Beijing (2)

Tianjin

Zhengzhou

Shanghai (2)

Hangzhou

NanchangChengdu

Kunming

MacauHK

Shenzhen (3)Zhongshan

Fushan

Guangzhou (3)Dongguan

Xiamen

Qingdao

WuhanChengdu (new)

Chongqing

Head office

Hong Kong

Branch Offices

Beijing

Chengdu

Dongguan

Foshan

Guangzhou

Hangzhou

Kunming

Macau

Nanchang

Shanghai

Shenzhen

Tianjin

Xiamen

Zhengzhou

Zhongshan

Existing offices

Offices to be established by 2014

Head office

Hong Kong

Branch Offices

Helsinki

Kuala Lumpur

New Delhi

Osaka

Singapore

Taipei

Tokyo

Existing offices

Offices to be established by 2014

Tokyo

Bangladesh

Osaka

TaipeiNew Dehli

Kaula Lumpur

Singapore

Helsinki

Yanggon

BangkokCambodia

Vietnam

ManaliBombay

Frankfurt

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Exhibit 119: Number of ASR Logisitcs airline appointments


Exhibit 120: Number of ASR Logisitcs office locations


Over31

Over45

Over52

0

10

20

30

40

50

60

2011 2012 2013

Number of airline appointments

16 21 290

5

10

15

20

25

30

35

2011 2012 2013

Number of office locations

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Exhibit 121: ASR e-booking platform (website: asr-e.com.hk)


Exhibit 122: ASR e-booking platform (mobile application)


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Financial Summary – ASR Logistics (1803 HK) Year to Dec FY12A FY13A FY14E FY15E FY16E



Ratios

Europe 151 124 131 137 144

Gross margin (%) 27 27 27 26 26

America 73 83 132 257 398

Operating margin (%) 16 14 13 13 14

Asia-Pacific 373 506 577 663 726

Net margin (%) 13 12 11 11 12

Africa 78 93 93 93 93

Selling & dist'n exp/Sales (%) 0 0 0 0 0

Turnover 674 807 932 1,150 1,362

Admin exp/Sales (%) 12 13 13 13 12

YoY% 12 20 16 23 18

Payout ratio (%) 30 169 25 25 25

COGS (489) (592) (685) (856) (1,004)

Effective tax (%) 16 17 17 17 17

Gross profit 185 215 248 295 358

Total debt/equity (%) 0 0 0 0 0

Gross margin 27.4% 26.6% 26.5% 25.6% 26.3%

Net debt/equity (%) Net cash Net cash Net cash Net cash Net cash

Other income (1) (1) 0 0 0

Current ratio (x) 3.3 3.1 2.5 2.6 2.9

Selling & distribution 0 0 0 0 0

Quick ratio (x) 3.3 3.1 2.5 2.6 2.9

Admin (78) (103) (125) (146) (165)

Inventory T/O (days) 0.0 0.0 0.0 0.0 0.0

R&D 0 0 0 0 0

AR T/O (days) 56.2 60.4 38.0 38.0 38.0

Other opex 0 0 0 0 0

AP T/O (days) 50.9 55.3 55.3 55.3 55.3

Total opex (78) (103) (125) (146) (165)

Cash conversion cycle (days) 5.3 5.2 (17.3) (17.3) (17.3)

Operating profit (EBIT) 106 111 123 149 193

Asset turnover (x) 2.4 2.1 2.2 2.4 2.1




EBIT margin (%) 15.8 13.7 13.2 12.9 14.2

Interest Income 0.5 0.6 0.6 0.8 1.1


Finance costs (0) (0) 0 0 0

Tax burden (x) 0.8 0.8 0.8 0.8 0.8

Profit after financing costs 107 111 123 149 194

Return on equity (%) 51.0 34.6 37.2 41.2 39.2


ROIC (%) 253.7 192.1 495.9 (1,208.6) (902.4)

Pre-tax profit 107 111 123 149 194

Tax (17) (18) (20) (25) (32)


Minority interests (0) 0 0 0 0


Net profit 90 93 103 125 162

Fixed assets 8 7 13 19 26

YoY% (8) 3 11 21 30


Net margin 13.3% 11.5% 11.1% 10.8% 11.9%


EBITDA 109 112 125 151 197


EBITDA margin 16.1% 13.9% 13.4% 13.2% 14.5%


EPS (HK$) 0.112 0.116 0.129 0.156 0.203

Non-current assets 10 17 22 29 36

YoY% (8) 3 11 21 30

DPS (HK$) 0.034 0.196 0.032 0.039 0.051

Inventories 0 0 0 0 0

AR 104 134 97 120 142



Cash Flow (HK$ mn)

Other current assets 28 29 29 29 29

EBITDA 109 112 125 151 197

Cash 193 253 262 366 500

Chg in working cap (27) (2) 55 10 7

Current assets 335 422 396 525 682

Others (2) 0 0 0 0

Operating cash 80 110 179 161 204

AP 68 90 104 130 152

Tax 14 16 20 25 32

Tax (23) (14) (16) (20) (25)


Net cash from operations 58 96 164 141 179


CB & other debts 0 0 0 0 0

Capex (3) (1) (7) (9) (11)


Investments 0 0 0 0 0

Current liabilities 102 137 161 200 238


Sales of assets 1 0 0 0 0


Interests received 1 1 1 1 1

CB & other debts 0 0 0 0 0

Others 7 0 0 0 0

Deferred tax & others 1 1 1 1 1

Investing cash 6 (0) (7) (8) (10)

MI 2 1 1 1 1

FCF 64 96 157 133 170

Non-current liabilities 3 3 3 3 3


Buy-back 0 0 0 0 0

Total net assets 240 299 255 351 477

Minority interests 0 0 0 0 0

Dividends paid (42) (36) (147) (28) (36)

Shareholder's equity 240 299 255 351 477

Net change in bank loans (0) 0 0 0 0

Share capital 4 4 4 4 4

Others 76 0 0 0 0

Reserves 236 295 251 347 473

Financing cash 35 (36) (147) (28) (36)

BVPS (HK$) 0.60 0.37 0.32 0.44 0.60

Net change in cash 99 60 10 104 134

Exchange rate or other Adj 1 0 0 0 0

Total debts 0 0 0 0 0

Opening cash 94 193 253 262 366

Net cash/(debts) 193 253 262 366 500

Closing cash 193 253 262 366 500

CFPS (HK$) 0.072 0.120 0.205 0.176 0.224


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Mkt cap

(US$m)

3-mth

avg t/o

(US$m)

PER

Hist (x)

PER

FY1

(x)

PER

FY2

(x)

EPS FY1

YoY%

EPS FY2

YoY%

3-Yr EPS

Cagr (%) PEG (x)

Div

yld

Hist

(%)

Div

yld

FY1

(%)

P/B

Hist

(x)

P/B

FY1 (x)

EV/

Ebitda

Hist

EV/

Ebitda

Cur Yr

Net

gearing

Hist (%)

Gross

margin

Hist

(%)

Net

margin

Hist

(%)

ROE

Hist (%)

ROE

FY1 (%)

Sh px

1-mth

%

Sh px

3-mth

%

Asr Logistics 1803 HK 1.42 147 0.1 12.2 11.0 9.1 10.7 21.0 20.4 0.54 13.8 2.3 3.80 4.46 7.9 7.0 Net cash 26.6 11.5 34.6 37.2 2.2 0.9

HSI 23,238.99 10.9 10.8 9.9 0.3 8.8 6.2 1.75 3.9 3.7 1.38 1.29 12.7 12.0 (0.3) 0.2

HSCEI 10,368.13 7.6 7.2 6.7 5.0 8.8 7.8 0.92 4.2 4.4 1.16 1.07 15.3 14.8 (1.4) (0.5)

CSI300 2,142.85 9.9 8.6 7.5 14.2 15.3 15.1 0.57 2.6 2.9 1.40 1.27 14.2 14.7 (0.9) (5.8)

Adjusted sector avg* N/A 20.6 18.2 13.7 18.1 11.3 1.68 1.4 1.4 3.59 3.89 N/A N/A 32.6 20.3 3.1 13.3 17.4 (0.3) 5.4

Ch Robinson CHRW US 64.00 9,500 95.6 24.2 22.4 20.3 7.8 10.1 9.0 2.50 2.2 2.2 9.68 9.69 14.0 13.5 83.2 7.9 3.3 32.8 43.9 3.7 19.0


Uti Worldwide UTIW US 9.92 1,045 15.9 N/A 152.6 22.6 N/A 573.8 (201.0) N/A 0.6 0.6 1.48 1.52 16.7 10.5 49.3 13.2 (1.7) (14.3) 2.1 (1.6) (5.7)

Radiant Logistic RLGT US 3.07 105 0.2 27.9 N/A N/A N/A N/A N/A N/A N/A N/A 2.67 N/A 10.6 8.5 106.7 27.2 1.2 18.4 N/A (1.3) 2.3

Silver Eagle Acq EAGL US 9.78 397 0.2 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A 0.3 1.0

Forward Air Corp FWRD US 47.54 1,483 5.7 26.3 22.4 19.3 17.0 16.5 16.8 1.34 0.9 1.0 3.25 2.95 13.4 10.5 0.0 25.0 8.3 12.9 13.0 4.6 5.2

Hub Group-A HUBG US 50.19 1,881 16.0 26.7 24.7 20.7 8.3 19.3 13.0 1.89 N/A N/A 3.28 3.03 13.5 13.7 0.0 6.8 2.0 12.1 13.0 3.1 24.5

Landstar System LSTR US 64.46 2,898 20.1 20.3 22.3 19.7 (8.6) 12.7 3.9 5.72 0.7 0.4 6.54 6.02 14.1 11.9 0.0 22.1 5.5 34.5 27.7 (0.5) 9.3

Pacer Intl Inc PACR US N/A N/A N/A N/A 23.4 18.9 66.5 24.0 N/A N/A N/A N/A N/A N/A N/A N/A 0.0 23.1 0.8 6.4 10.4 N/A N/A

Echo Global Logi ECHO US 19.55 459 3.2 31.5 26.7 20.4 17.9 31.1 23.4 1.14 N/A 0.0 2.77 2.75 12.3 10.2 0.0 16.4 1.6 8.9 12.4 2.4 13.6


Fedex Corp FDX US 151.32 43,484 252.7 22.2 17.2 14.2 29.2 21.0 22.5 0.76 0.4 0.5 2.85 2.65 7.5 6.5 12.0 20.6 4.6 12.8 15.3 5.2 14.6




Air Transport Se ATSG US 8.25 536 1.6 N/A 15.4 11.8 N/A 31.0 N/A N/A N/A N/A 1.42 N/A 5.6 5.1 95.6 26.8 (3.4) (6.3) N/A (9.6) 7.7

Atlas Air Worldw Aaww US 35.54 897 9.4 9.7 11.0 10.3 (12.0) 7.1 (1.6) N/A N/A N/A 0.68 0.64 8.9 8.6 103.2 28.1 5.7 6.3 8.5 (7.6) 2.4

Park Ohio Hldgs Pkoh US 59.43 739 2.2 16.3 13.1 11.3 24.1 16.4 N/A N/A 0.2 N/A 4.34 N/A 9.7 7.9 200.2 17.5 3.6 30.7 N/A 1.9 2.4

Air T Inc Airt US 12.58 30 0.1 20.6 N/A N/A N/A N/A N/A N/A N/A N/A 1.09 N/A 7.0 N/A 0.0 14.7 1.5 5.3 N/A 3.5 2.9



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Appendix

Drivers for online shopping growth

China's 600 million internet-linked population, or 45.8% penetration in 2013, still lags far behind the US total of over 80% in 2013. China is undertaking heavy infrastructure investment in optical fiber broadband, with the aim of pushing the internet coverage to over 70% by 2020. This increase in internet adoption will provide continuous support for online shopping growth.

Exhibit 124: Internet population and penetration rate in China

Source: Statistical Survey Report on Internet Development in China, OP Research

Some 49% or 300mn internet users have made a purchase online which is similar to the world average of 40%. Since China's online shoppers are concentrated in the first and second tier cities, there is a huge potential to explore in the 3rd – 4th tier cities as well as major cities in Western China. Online shoppers are expected to further increase by 26% to over 380mn in 2014. We believe e-commerce penetration in China will keep growing to match the 70%-80% level of developed countries like UK, Germany and Japan in the long run.

Exhibit 125: User base of China online shopping market 2011-2017


384

457

513

564

618

28.9%

34.3%38.3%

42.1%45.8%

0%

20%

40%

60%

80%

0

100

200

300

400

500

600

700

2009 2010 2011 2012 2013

Internet population Internet penetration rate

(mn)

194242

301.9

350389

424460

24.8% 24.7%

15.9%

11.1%9.0% 8.5%

37.8%

42.9%

48.9%52.3% 53.2% 53.7% 54.1%

0%

10%

20%

30%

40%

50%

60%

0

200

400

600

800

2011 2012 2013 2014E 2015E 2016E 2017E

Number of e-shopping % Growth rate % Share in Internet users

(mn)

Increase in internet adoption will

further increase online shopping

3rd

– 4th

tier cities and major cities

in Western China will increase

internet shopping penetration

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Exhibit 126: Global ecommerce penetration by country: 2013

Source: eMarketer, OP Research

Remarkably, mobile internet has begun to penetrate the e-commerce market. The development of 4G networks account for this. With higher adoption of smart devices (smartphones and tablets), mobile shopping GMV has doubled to Rmb169 billion in 2013, to give a mobile shopping penetration rate of 9.2%, up from 4.8% a year ago. Mobile devices are small and easy to carry, so they can be used anywhere, anytime, especially during leisure time breaks. Hence, mobile shopping is gaining popularity, snatching traffic flow from PC online shoppers as well as offline shoppers. It is expected that mobile shopping will chalk up an impressive 59% CAGR in the next 4 years and tot up a breathtaking Rmb994 billion GMV by 2017.

Exhibit 127: Mobile internet population and penetration rate in China

Source: Statistical survey report on internet development in China, OP Research

20.4%

23.5%

36.0%

39.7%

40.4%

43.0%

44.1%

45.7%

49.3%

54.5%

63.1%71.1%

74.6%

76.2%

76.3%

78.1%

78.3%

80.8%

87.2%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Mexico

India

Brazil

Russia

Worldwide

US

Italy

Argnetina

ChinaSpain

Canada

South Korea

Netherlands

Australia

Sweden

France

Japan

Germany

UK

233

302

356 420

50060.8%

66.2%69.3%

74.5%

81.0%

0%

20%

40%

60%

80%

100%

0

100

200

300

400

500

600

2009 2010 2011 2012 2013

Number of mobile internet users Mobile internet penetration rate

(mn)

Mobile shopping will have 59%

CAGR as driven by mobile

internet (4G) penetration and

smart devices adoption

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Exhibit 128: Share of GMV of PC-based online shopping and mobile

shopping 2011-2017


Taobao dominated the C2C market with 96.5% share in 2013, with Paipai on

3.4% share in second place. Although C2C market was the major channel for

online shopping in the past, B2C has become the main driving force of the market,

which takes up nearly 40% share of the online shopping market by GMV in 1Q14.

The growth in B2C market is attributed to (1) better after sales services and (2)

more promotions by major online stores. China Consumer Association received

nearly 13,000 complaints about online shopping in 2013. Since most of the C2C

online shops are operated by small enterprises or individuals, they may be

involved in fake products, poor services and slow delivery due to low brand

awareness.

B2C operators put building brand loyalty as one of their top priorities, making

them to invest more in their own logistics facilities to ensure consumer

satisfaction. With better financial strength B2C operators spend hugely on

promotion to win market share and create critical mass. This enormous price war

will drive online shopping penetration as well as the B2C market share. The

B2C market is expected to exceed C2C market by 52.7% by 2017. Thus, by

riding on the fast growing B2C market leaders, such as Tmall, JD, VIPS, Amazon

and Sunning, high end logistics facilities will have better than market growth in

near future. Beijing Properties (925 HK) and Shenzhen Int’l (152 HK) have a

sizeable modern warehouse development project in the pipeline which, we

believe, will be the key beneficiary from B2C e-commerce growth.

98.5% 95.2% 90.8% 86.6% 83.2% 79.5% 75.8%

1.5% 4.8% 9.2% 13.4% 16.8% 20.5% 24.2%

0%

20%

40%

60%

80%

100%

2011 2012 2013 2014E 2015E 2016E 2017E

Share of PC-based online shopping GMV Share of mobile shopping GMV

B2C market growth will outpace

C2C market

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Exhibit 129: Share of China online shopping B2C and C2C websites

2010-2017


Exhibit 130: China C2C e-commerce market shares in 2013

Source: 100EC.cn, OP Research

13.7%

25.3%30.5%

36.2%40.5%

45.2%49.6% 52.7%

86.3%

74.7%69.5%

63.8%59.5%

54.8%50.4% 47.3%

0%

20%

40%

60%

80%

100%

2010 2011 2012 2013 2014E 2015E 2016E 2017E

% Share of B2C websites % share of C2C websites

Taobao96.5%

Paipai3.4%

ebay0.1%

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Exhibit 131: Market share of China B2C websites by GMV in Q1 2014


Warehouse data in China

Exhibit 132: Warehouse supply and demand in China

City Warehouse demand Warehouse supply Supply/demand ratio

Beijing 1,655.90 1,462.50 0.883

Tianjin 960.30 913.50 0.951

Shanghai 1,715.30 1,522.80 0.888

Guangzhou 1,176.80 1,084.50 0.922

Shenzhen 1,645.40 1,413.00 0.86

Chengdu 477.00 447.50 0.938

Wuhan 524.90 455.00 0.869

Shenyang 605.40 455.00 0.752

Xi'an 322.90 297.50 0.921

Xiamen 305.00 292.00 0.957

Source: CFLP

Tmall.com, 50.6%

JD.com, 23.3%Vip.com, 3.0%

Yixun.com, 2.6%

Amazon.cn, 2.1%

Suning.com, 2.0%

Dangdang.com, 2.0%

Yihaodian.com, 1.9%

Gome.com.cn, 1.7%

Vancl.com, 0.5%

Others B2C websites, 10.4%

Fri, 11 Jul 2014

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Oriental Patron, its directors, officers and employees, including persons involved in the preparation or issuance of this report, may, to the extent permitted by law, from time to time participate or invest in financing transactions with the issuer(s) of the securities mentioned in this report, perform services for or solicit business from such issuers, and/or have a position or holding, or other material interest, or effect transactions, in such securities or options thereon, or other investments related thereto. In addition, it may make markets in the securities mentioned in the material presented in this report. Oriental Patron may, to the extent permitted by law, act upon or use the information presented herein, or the research or analysis on which they are based, before the material is published. One or more directors, officers and/or employees of Oriental Patron may be a director of the issuers of the securities mentioned in this report. Oriental Patron may have, within the last three years, served as manager or co-manager of a public offering of securities for, or currently may make a primary market in issues of, any or all of the entities mentioned in this report or may be providing, or have provided within the previous 12 months, significant advice or investment services in relation to the investment concerned or a related investment or investment banking service to the issuers of the securities mentioned in this report.

Regulatory Disclosures as required by the Hong Kong Securities and Futures Commission

Particular matters which may give rise to potential conflict of interests between Oriental Patron (inclusive of OPSL) which is carrying on a business in Hong Kong in investment banking, proprietary trading or market making or agency broking and the investors or the potential investors are now disclosed as follows:

As at the date of the report, Oriental Patron has an investment banking relationship with the subject company(ies) and received compensation or mandate for investment banking services from the subject company(ies) within the preceding 12 months and may be currently seeking on investment banking mandate from the subject company(ies).

Analyst Certification:

The views expressed in this research report accurately reflect the analyst’s personal views about any and all of the subject securities or issuers; and no part of the research analyst’s compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in the report.

Rating and Related Definitions

Buy (B) We expect this stock outperform the relevant benchmark greater than 15% over the next 12 months. Hold (H) We expect this stock to perform in line with the relevant benchmark over the next 12 months. Sell (S) We expect this stock to underperform the relevant benchmark greater than 15% over the next 12 month. Relevant Benchmark Represents the stock closing price as at the date quoted in this report.

Copyright © 2014 Oriental Patron Financial Group. All Rights Reserved

This report is being supplied to you strictly on the basis that it will remain confidential. Except as specifically permitted, no part of this presentation may be reproduced or distributed in any manner without the prior written permission of Oriental Patron. Oriental Patron accepts no liability whatsoever for the actions of third parties in this respect.

CONTACT

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Sinotrans Ecom OPS 152@HK 071114 6186

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