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We lower our TP on CJ Logistics by 5% to W122,000 in light of both a slowdown in parcel delivery volume growth and a decline in forwarding profitability. However, pointing out that delivery players continue to wield pricing power in the parcel delivery market, we anticipate further earnings expansion this year in response to parcel delivery price hikes.
Pricing power is still in effect
Although keeping a Buy rating, we lower our TP on CJ Logistics by 5% from W128,000 to W122,000, reflecting cuts to 2023F and 2024F EPS of 3% and 8%, respectively. We have downwardly adjusted our earnings estimates in light of: 1) deteriorating forwarding profitability in the global division (stemming from decreased container freight rates); and 2) a trimming back of our parcel delivery volume estimates. The combination of these two factors this year is to reduce the annual growth rate of the firm’s parcel volume from 3% to 2%.
We attribute the ongoing stagnation in parcel delivery volume growth to a slowed consumption amid both inflation woes and a shift in consumption patterns (online → offline). That said, we point out that supply-demand conditions for the parcel delivery market remain tight, and delivery players continue to wield hefty pricing power. In 2023, CJ Logistics plans to boost its parcel delivery prices by an average of 5% in 2023, and it is aiming to secure profitability by reducing low-margin customers. Coupang’s expansion of its parcel delivery business and the aggressive promotion of Hanjin and Lotte are both causes for concern. But, considering that cost increases are in all directions, the chances appear limited of an intensifying price competition among parcel delivery firms. Against this backdrop, we expect CJ Logistics to enjoy further annual OP growth in 2023, supported by low-base effects stemming from a delivery strike in 2022.
4Q22 preview: Earnings to arrive strong on parcel delivery price hikes and global local logistics boom
On a consolidated basis, we expect CJ Logistics to post 4Q22 sales of W3.256tn (+6.5% y-y) and OP of W116.2bn (+16.4% y-y), with both figures roughly satisfying the market projections.
Although CJ Logistics’ delivery volume likely declined 3.1% y-y to 440mn boxes in 4Q22, we believe that this negative was offset by delivery price hikes, estimating that the company’s average delivery unit price upped 4.1% y-y to W2,317. For 2023, we forecast annual delivery volume growth of +1.9% and unit price expansion (y-y) of +4.7%. Forwarding profitability at the global logistics division will likely slow down due to falling container freight rates, but anticipated healthy local logistics earnings in overseas countries (including for India and Vietnam) should make up for such.