The author is an analyst for NH Investment & Securities. He can be reached at ys.jung@nhqv.com -- Ed.
Moving ahead, we expect to see further structural strengthening in CJ Logistics’ profitability, powered by a combination of higher parcel delivery volume, a widening sales portion for small parcels, heftier pricing power for parcels and services (alongside rising fulfillment demand), and cost reductions (thanks to improving automation rates). We boost our TP by 27%.
Domestic logistics market changes are structural, not one-off
Reiterating a Buy rating, we raise our TP on CJ Logistics by 27% to W145,000, reflecting hikes to our 2024 and 2025 OP projections (of 12% and 15%, respectively), ongoing structural growth (in terms of both parcel and fulfillment sales), improving margins (in response to increased automation capabilities) for contract logistics (CL), and an upward adjustment in target P/B to 0.9x.
Despite a recent surge in share price, we see additional upside. Investment points that are to translate into mid/long-term valuation expansion include: 1) changes in the e-commerce market (including for AliExpress) that are to lead to a structural climb in parcel delivery volume; 2) a rising sales portion for high-margin small parcels; 3) further unit price hikes and increased lock-in effects on the advancement of the firm’s fulfillment and parcel delivery services, and 4) beefier margins alongside rising automation rates. Viewing these changes as being structural rather than one-off in nature, we foresee profitability improvement through 2025.
Profit level to be robust in 4Q23 despite higher costs; expect parcel delivery volume growth in 2024
We foresee 4Q23 sales of W3.45tn (+0.7% y-y) and consensus-topping OP of W139.2bn (+23.9% y-y; OPM of 4.6%). Boding well are signs of stronger levels of profitability across all divisions, even after accounting for likely higher expenses, including for incentive compensation (which is typically recognized by the firm in 4Q).
With AliExpress’s parcel delivery volume growth looking steep on higher cross-border shopping volume, CJ Logistics' 4Q23 parcel delivery volume will likely show a drop of only 0.2% y-y, easing a volume growth decline trend. We expect its parcel delivery volume growth rate to turn to positive territory from 2024, removing a discount factor.