All may not necessarily be as it may first seem in the world of company earnings. Logistics company Sinotrans (HKEX: 598) may not have delivered a Halloween shocker even though its third quarter results were splattered in red ink all over its income statement. One long-short equities analyst was very bullish on the company’s stock despite the seemingly-poor results!
Operating income generated by Hong Kong-listed Sinotrans fell by 5.79% to stand at 18.13 billion Chinese yuan ($2.54 billion) in the third quarter of the year. That’s an absolute year-on-year decrease of 302.33 million yuan ($41.32 million). Net profits were written in red ink too, falling year-on-year by 6.64% to stand at 599.83 million ($19.68 million). That’s an absolute decrease in year-on-year profit of 42.65 million yuan ($9.64 million).
Healthy underlying performance
Long-short equity analyst Osbert Tang, who publishes his insight via the Smartkarma platform, shrugged off the apparently poor results with the headline “3Q19 Result Continued to Suggest Healthy Underlying Performance.”
Addressing the declines in revenues and profits, Tang argued that profitability had only deteriorated in the third quarter because the year-on-year comparison was distorted by a one-off high in the same period in 2018.
“In 3Q last year, the company booked a gain of RMB112m from the change in fair value of its holdings in Americold, which was subsequently sold; and this has inflated the base for comparison. Excluding this item, its earnings actually rose by 13% year-over-year in 3Q19,” Tang noted.
He added that Sinotrans showed “continued strength… despite the ongoing U.S.-China Trade War.”
Investment income jumps up
It is also worth noting that Sinotrans experienced a large jump in the amount of investment income it received from associates and joint ventures. This line item rose by 27.62% year-on-year to 336.84 million yuan ($47.12 million), which was an absolute increase of just under 72.90 million yuan ($8.69 million).
Tang argued that the most important contribution to income from associates and joint ventures was the DHL-Sinotrans businesses. He added that the increase in income from associates “offset weaker earnings from [Sinotrans] freight forwarding and logistics businesses. We believe this reflects the sustained good performance for DHL-Sinotrans, which has its focus on the China-Europe market, sheltering it from the exposure to the weakened U.S.-China trade activities.
Discipline: falling costs
Tang also observed that the company’s major costs had also declined, “indicating the disciplines in cost management.”
Year-on-year costs at Sinotrans did indeed fall.
The single biggest cost by far, as may be expected of any major logistics business, was its operating costs. These fell by 3.88% from 17.92 billion yuan ($2.61 billion) in the third quarter of 2018 to 17.23 billion yuan ($2.41 billion) by the end of the most recent reporting period. That’s an absolute reduction in cost of about 695.33 billion yuan ($199.99 million), which is a sizable drop in the single biggest cost of the company.
There were also a range of cost declines in a variety of line items on the income statement, including marketing (down 9.6%), administrative expenses (down 5.3%) and financial costs (down 56.2%), among others.
Tang calculated Sinotrans’ total cost of operations as having decreased by 5.9%, from 18.40 billion yuan for the three months as of the end of September 30, 2018, to 17.37 billion for the three months as of the end of September 30, 2019. That’s an absolute decrease in costs of about 1.09 billion yuan ($257.17 million).
Operational performance: mixed results
Sinotrans also provided an operational overview of the volume of cargo it is handling in its various businesses. This information was given on a nine-month January to September basis.
Operationally, it was a mixed bunch of results for Sinotrans. Sea freight forwarding volumes (as measured in twenty foot equivalent unit ocean shipping containers, or ‘TEUs’) increased year-on-year by 1.58% to stand at 9.52 million TEUs. Sinotrans’ shipping agency business increased its TEU volumes by 3.98% to 19.29 million TEUs in the most recent reporting period. Meanwhile, Sinotrans’ shipping agency volumes by weight were also up, this time by 11.59% to 302.3 million metric tonnes (333.23 million U.S. tons). Meanwhile, contract logistics was essentially flat year-on-year, falling by 3.96% from 30.3 million metric tonnes (33.4 million U.S. tons) to 29.1 million metric tonnes (32.1 million U.S tons).
It was a similar pattern across its other logistics, storage, terminals and other transport businesses with some volumes marginally up and others flat or marginally down.
“In other words, the diversified service and product mix of Sinotrans has allowed the company to limit the decline in business performance in 3Q19,” Tang said.
Looking forward, while Sinotrans is exposed to trade war tensions, as, indeed, are all international trade-focused businesses, Tang pointed out that, in the run-up to the report of its most recent results, Sinotrans had been on an “acquisition spree.”
Specifically, it bought logistics companies KLG Europe along with some assets of Keppel Logistics in China and also in Hong Kong.
KLG Europe, like Sinotrans, provides trucking, air and sea freight forwarding and logistics services in Europe. The former Keppel assets provide port, dock, warehousing, cargo import and export, warehousing and customs-related services.“The purchases will enhance Sinotrans’ presence in Europe and South China, which are strategically significant to the company,” Tang noted in his September 2019 insight, “Acquisition Spree Expands Global and Domestic Networks.”