MP Logistics (8239)

7 July 2003

BUY

Stock Code

8239.HK

Price(as at 4/7/03)

HK$1.45

Target Price

HK$2.00

 

Key Data

 

Shares Outstanding

300M

Market Capitalisation

HK$435M

52 week high/low

HK$1.50/HK$0.44

ROA

7.5%

ROE

8.8%

Current ratio

7.3x

Gearing

0.18x

Major shareholder

 

Mr. Wong

43.11%

Mr. Chan

22.3%

Continue having high growth

Total solutions provider MP Logistics has its competitive edge over other traditional players as it provides one-stop services that satisfy the changing demand of customers. Its online tracking system also increases transparency and reduces transition time.

JV in the PRC The group will set up a joint venture in the PRC. It aims at providing door-to-door services to end-users. A distribution center will be built and profit margin of distribution services is much higher than ordinary freight services.

Enormous mainland market potential The trend of cost reduction and outsourcing of logistics by companies in China spurs demand for third party logistics services. Strong growth in exports and imports, together with accession of WTO, will also create market opportunities for logistics service providers.

Strong profit growth Net profit has grown with a 39.8% CAGR from FY01 to FY03. Benefiting from China market and CEPA, it is expected to grow by over 50% this year. Moreover, the group is in a net cash position of $13M and gearing is only 0.18. 

As at 31 March (HK$・000)

2001A

2002A

2003A

2004F

Turnover

16698.1

17840.9

32650

45057

Gross Profit

4452.4

5061.9

10414.5

15319.4

Net Profit

748

1399.7

2220.8

3339.1

EPS (HK$cents)

0.3

0.56

0.88

1.32

Growth

-

86.6%

57.1%

50%

Source: MP Logistics, Tung Tai estimates

MP Logistics primarily coordinates various logistics services for its customers. The group provides sea freight forwarding, road freight forwarding, air freight forwarding and other logistics services such as customs clearance and declaration, purchasing of insurance policies on behalf of customers, repackaging and storage.

The group handles both inbound freight and outbound freight for its customers. Inbound freight is from worldwide to Hong Kong and then to the PRC. Outbound freight is mainly from the PRC through Hong Kong to South East Asia. In previous years, approximately 70% of freight handled by the group was inbound freight and 30% was outbound. After China joining WTO, the trend was reversed i.e. 70% is outbound freight and 30% is inbound.

Customers of the group are mainly multinationals, whose production bases are located in the mainland. As at FY01 and FY02, major customers accounted for 66.4% and 87.8% respectively of the group・s turnover. It has obtained the contract until March 2004 from its customer.

The turnover breakdown by business has changed from FY02 to FY03. In FY02, sea freight, road freight, air freight, and other logistics services account for 39.3%, 31.7%, 17.1% and 11.9% respectively. In FY03, the breakdown is 35%, 47%, 10% and 8% for sea freight, road freight, air freight, and other logistics services. The decreased proportion of sea and air freight and rise in road freight were due to cost reduction by customers. However, the group was not affected much because it receives handling charges, which is a premium on top of costs. At present, 70-80% goods handled by MP Logistics are cosmetics and home care products, with the remaining 20-30% of goods being electronics.

Competitive Strengths

One-stop service provider

MP Logistics provides value-added services that can satisfy customers・ changing needs

At present, most players in the industry are pure-players or traditional players. They are involved in only one or a few parts such as transportation or storage in the supply chain management. MP Logistics provides comprehensive services from the time of placing purchase orders to product delivery. It provides value-added services such as purchase order and vendor management, customs clearance and brokerage, warehousing, insurance and financial services.

In today・s fast technology development, product life cycles, especially for high-tech products, tend to be very short. Prompt product launch is the key to success. Moreover, the current trend is make-to-order, which means firms start their production only when orders are received. However, traditional players that merely provide transportation or storage services cannot satisfy the ever-changing demand. MP Logistics has its competitive edge in providing efficient supply chain management services.

Online tracking of goods

Online tracking system increases transparency and minimizes transition time

MP Logistics has its own realtime tracking system that enables customers to check the status of processing online. To ensure the information is accurate, the group updates the data everyday so that customers can check the status through internet. The system creates transparency and minimizes transition time. The group will continue investing in computer system. Expenditure on upgrading and developing computer system will be maintained at 20-30% of total expenditures. The group plans to invest US$2-3M in computer system for the JV in Shenzhen (see below). The cost will be shared with the JV partner.

Future growth drivers

JV in the PRC

JV to be set up targets to provide door-to-door distribution service

MP Logistics will establish a JV with a subsidiary of a listed company in China. MP will issue old shares for a non-controlling stake of about 30-40%. A 20,000 square-metre distribution centre will be built in Shenzhen. The JV partner will be responsible for the construction of warehouse and coordination of local transportation. MP Logistics will be responsible for management and marketing. The distribution center targets domestic customers. It aims at providing door-to-door service in which delivery can be extended to end-users. Gross margin of distribution business can reach 30-40%, which is much higher than the 28.4% overall margin in FY02. Currently, the group has offices in mainland cities like Guangzhou, Shanghai, and Tianjin. The group・s ultimate goal is to build warehouses along the coastal area in China and link them up by an operating platform such that an extensive network can be established. 

Huge market potential

Countrywide cost reduction spurs demand for third party logistics services

Currently, logistics cost in the mainland accounts for over 20% of GDP, while the rate is only 10% in developed countries. This implies there is plenty of room for cost reduction. An investigation conducted by China Warehouse Storage Association shows that in the coming one to two years, 60% of enterprises will outsource all their materials distribution business to logistics service providers. Future trend in logistics will be zero inventory and outsourcing logistics to third party logistics providers. In fact, at present there is no single logistics company that has over 2% of China・s market share. That means there are ample growth opportunities for logistics companies.

As product pricing is becoming more competitive, slashing logistics cost, which makes up a significant proportion in sales, will be a way for enterprises to boost profits. In addition, it is estimated that logistics takes up about 90% of production cycle in China. High inventory level resulted from poor supply chain management also reduce competitiveness. Hence an effective logistics system can shorten production cycle, reduce inventory requirement and warehouse rents. 

China・s imports and exports continue to be strong

The booming Chinese economy spurs the demand for logistics services. China・s imports and exports surged to record high in 2002. Total imports of last year reached US$295.2B and total exports jumped to US$325.6B. As more manufacturing plants were set up in China, total exports surged from US$29.5B in 1990 to US$325.6B in 2002 with a CAGR of 22.05%. For the first four months in 2003, exports of China was US$122B, up 33.5% y-o-y. We expect MP Logistics can continue to benefit from the strong exports growth.

Opportunities arising from WTO

Opening up of logistics sector and foreign investment inflow after WTO accession create market opportunities

China has committed to open logistics sector after its accession to WTO. Foreign companies are allowed to set up JVs and then wholly-owned subsidiaries in various sub-sectors such as transport, freight forwarding, storage and warehousing. In addition, as the trend that foreign corporations shift production bases into China continues, logistics service demand will certainly grow. In previous years, outbound freight accounted for about 30% of the group・s turnover. After the accession of WTO, it has accounted for 70%, as no value-added tax is imposed on exports. The trend is expected to sustain given the continuous inflow of foreign investment. To tap the enormous market potential, MP Logistics will set up a JV mentioned above. It has the option to set up a wholly-owned subsidiary, but MP Logistics does not have the plan at the moment. Despite the opening up of logistics sector will bring competition, the number of players is small relative to the market size. In addition, according to management, there are 20-30 competitors and competition is not vigorous at present.

CEPA also provides more opportunities for Hong Kong logistics companies

According to CEPA, Hong Kong companies are permitted to set up wholly-owned enterprises in the Mainland to provide logistics services and related consultancy services for ordinary road freight, and to engage in the management and operations of logistics services through electronic means.

Conclusion

MP Logistics just announced good FY03 results. Turnover surged from last year・s $17.8M to $32.6M, up 83%. Net profit also increased 57.1% from $1.4M to $2.22M. From FY01 to FY03, turnover jumped with a CAGR of 39.8%. Net profit even increased with 72.3% CAGR. Gross profit margin was 31.9%, compared with 28.4% in FY02. With the increasing weight of distribution business, we expect it can be raised to 34% level.

The group is financially healthy. As at 31 March 2003, cash and cash equivalents was approximately $13M and the group has no bank borrowings. Gearing (total liability to equity) also fell from 0.41 in FY02 to 0.18 in FY03. In addition, the group has no bad debt. It grants 60-90 days credit period to its customers. On the other hand, it repays its payables in 30 days on average and may be offered discount.

With the exponential growth in China・s exports and foreign direct investment, logistics industry will continue growing. Moreover, possible shifting back of production to Hong Kong after CEPA will also spur logistics services demand. We are optimistic about the prospect of logistics industry. We expect the strong revenue and profit growth of MP Logistics can be sustained.

Profit and Loss account

Year ended 31 March (HK$'000)

2001A

2002A

2003A

2004F

Turnover

16698.1

17840.9

32648

45057@

Cost of Sales

(12245.7)

(12779)

(22233.5)

(29737.6)@

Gross profit

4452.4

5061.9

10414.5

15319.4@

Other revenue

223.1

229.1

40

40@

Selling and distribution costs

(247.2)

(187.2)

(1762.9)

(3154)@

Administrative expenses

(3636)

(3472.9)

(5934.5)

(8110.3)@

@

 

 

 

@

Profit from operating activities

792.4

1630.9

2757.2

4095.1@

Finance costs

(44.4)

(11.2)

(119)

(120)@

Profit before tax

748

1619.7

2638.2

3975.1@

Tax

-

(220)

(417.4)

(636)@

Net profit from ordinary activities attributable to shareholders

748

1399.7

2220.8

3339.1@

@

 

 

 

@

EPS(HK$cents)

0.30

0.56

0.88@

1.32@

Source: MP Logistics, Tung Tai estimates

Cash flow statement

For the year ended 31 March HK$'000

2002

2003

Cash flows from operating activities

1619.7

@2638.2

Profit before tax

 

@

Adjustments for:

 

@

Finance costs

11.1

@119

Interest income

(13.1)

@(40.1)

Depreciation

312

@666.2

Write off of fixed assets

90

@17.7

@

 

@

Operating profit before working capital changes

2019.8

3401@

Decrease/(increase) in accounts receivable

103.8

@(9627.3)

Increase in prepayments, deposits and other receivables

(2)

(1767.5)

Decrease/(increase) in an amount due from a director

(157.2)

@163

Decrease/(increase) in accounts payable

(178.2)

@982.7

Increase in accrued liabilities and other payables

364.8

559.8@

Decrease in an amount due to a related company

(625)

@-

 

 

 

Cash generated from/(used in) operations

1526

(6288.4)@

@

 

 

Interest paid

-

(31)

Interest element of finance lease rental payments

(11.2)

(88)@

Hong Kong profits tax paid

-

@(437.1)

Net cash inflow/(outflow) from operating activities

1514.9

(6844.5)

@

 

@

Cash flows from investing activities

 

@

Interest received

13.1

@40.1

Acquisition of a subsidiary

307.9

@-

Purchases of fixed assets

(472.4)

@(178.5)

Net cash outflow from investing activities

(151.5)

@(138.4)

@

 

@

Cash flows from financing activities

 

@

Proceeds from issue of shares

-

@26000

Proceeds from issue of shares by a subsidiary

(11.7)

@-

Share issue expenses

-

(8098.3)

Loans from former shareholders of a subsidiary

50

@-

Capital element of finance lease rental payments

(171.2)

@(526)

Net cash inflow/(outflow) from financing activities

(109.5)

@17375.7

Net increase in cash and cash equivalents

1253.9

@10392.8

@

 

@

Cash and cash equivalents at beginning of year

1350.1

@2604

Cash and cash equivalents at end of year

2604

@12996.8

Analysis of balances of cash and cash equivalents

 

@

Cash and bank balances

2604

@2958.5

Time deposits with original maturity of less than three months when acquired

-

@10038.2

 

2604

12996.8

Source: MP Logistics

Balance sheet

As at 31 March (HK$'000)

2002

2003

Non-current assets

 

@

Fixed assets

875.4

1707.4

@

 

@

Current assets

 

@

Accounts receivable

3406.6

13034

Prepayments, deposits and other receivables

241.4

2008.9

Due from a director

163

-

Time deposits

-

10038.2

Cash and bank balances

2604

2958.5

@

6415

28039.7

Current liabilities

 

@

Accounts payable

802.2

1784.9

Accrued liabilities and other payables

728.4

1288.2

Tax payable

300

280.3

Finance lease payables

231.5

510.4

@

2062.1

3863.8

@

 

@

Net current assets

4353

24175.9

@

 

@

Total assets less current liabilities

5228.4

25883.3

@

 

@

Non-current liabilities

 

@

Finance lease payables

62.6

595.2

@

5165.7

25288.2

Capital and reserves

 

@

Issued capital

44.6

3000

Reserves

5121.1

22288.2

@

5165.7

25288.2

Source: MP Logistics




Research Home Page


If you would like to know more about a specific stock, you can ask us by emailing:Mr Kenny Tang.

This circular is for information only. The information and opinion presented are believed to be accurate but are not guaranteed and without legal responsibility. Neither the information, nor any opinion expressed, constitutes a solicitation by us of the purchase or sale of any securities or futures contract, or options thereon.

Home | Search | Index | Email