China Transportation_ Measuring Risks from China – US Cross-Border E-commerce Growth Dynamics

Summary of Key Points from the Conference Call Industry Overview - Industry: China-US Cross-Border E-commerce and Air Freight - Context: The discussion revolves around the potential risks and dynamics affecting the growth of cross-border e-commerce between China and the US, particularly in light of increased taxes on small parcels shipped from China to the US [2][8]. Core Insights - Downside Risks: There are concerns regarding a potential decline in demand for cross-border e-commerce, which could revert to pre-COVID levels. This scenario poses risks to earnings for various companies involved in logistics and air freight [2][8]. - Air Freight Rates: The air freight market may not experience a down-cycle due to persistent capacity bottlenecks in long-haul freighters. If demand growth merely slows rather than declines, air freight rates could remain high or even increase [4][8]. - Earnings Impact: In a bear case scenario, companies like JD Logistics (JDL), Cathay Pacific (CPA), China Southern Airlines (CSA), and SF Express (SF) could see significant cuts to their projected net profits (NP): - JDL: over 20% cuts to 2025-2026 NP due to exposure to Kuayue - Cathay: likely over 15% cuts to 2025-2026 NP from lower air freight profits - CSA: over 15% cut to 2026 NP, but the bullish thesis remains intact based on passenger business recovery - SF: less than 5% cuts to 2025-2026 NP from freight forwarding exposure [8]. Additional Considerations - Market Dynamics: The US is not the only market for China's cross-border e-commerce, as China-Europe trade has also contributed significantly to air freight demand growth in the past two years [8]. - Valuation Methodology: - JD Logistics: Probability-weighted DCF valuation with 15% bull case, 70% base case, and 15% bear case, reflecting macro headwinds and dependence on its parent group [15]. - Cathay Pacific: Probability-weighted P/B ratios with a bull case of 10% probability for faster global travel recovery and a bear case of 10% for delayed recovery [10]. - China Southern Airlines: Similar probability-weighted P/B ratios with a bull case of 20% probability for faster earnings recovery due to industry capacity discipline [11]. Risks and Opportunities - Upside Risks: - Stronger-than-expected recovery in leisure/business passenger demand - Better-than-expected cargo profits driven by robust cross-border e-commerce demand [12][19]. - Downside Risks: - Weaker-than-expected travel demand - Increased competition in the passenger business - Higher operational costs due to rising fuel prices [12][19]. Conclusion - The conference call highlighted significant concerns regarding the future of China-US cross-border e-commerce and its implications for air freight rates and logistics companies. The potential for earnings cuts across major players in the industry underscores the need for careful monitoring of market dynamics and regulatory changes affecting cross-border trade.