China Transportation Logistics:Unboxing what’s happening,record parcels;update estimates/TPs

Record parcels: 44% increase in Nov; setting the scene for 2017

China's express parcels volume growth moderated to +44% yoy in Nov(from +56% yoy in Oct), but still implied healthy volume growth of 53% ytdon the back of ongoing e-commerce growth (online retail sales grew 30%yoy in Nov vs. 23% in Oct and 26% ytd).

Setting the scene for 2017: Average daily parcels reached a record highof 125mn in Nov this year on the back of strong Singles’ Day sales with32%/59% yoy increase in GMV at Alibaba/JD on 11.11 (vs. ave. daily parcelsof 83mn ytd). We note Nov-Dec parcel volumes (stimulated by 11.11, 12.12events) had historically been a leading indicator to the subsequent year’save. parcel volumes (vs. GSe: 115mn ave. daily for 2017E, 34% yoy).Inter vs. intra-city: Inter-city parcels continued to grow faster (+50% yoy)in Nov vs. intra-city of +30%, yet ASPs for inter-city fell 11% yoy (samepace as Oct, vs. -12% in 3Q16) while intra-city ASPs were up 4% yoy.

New entrants, raisings: YTO proposed a private placement, ANEenters express parcels, JD Logistics opens to outside customers

Over the past month, key industry developments in the China e-commercelogistics space included (1) YTO Express’ proposed Rmb8.5bn privateplacement to fund further capex on warehousing, sorting automation, anew self-operated intra-city parcel network and planes (announced on Dec4, 2016), (2) ANE Logistics’ official entry into the express parcel marketsince early Dec 2016 as a new player, with 8,000 outlets nationwide (vs.ZTO/YTO of >23k), targeting Alibaba parcels, and (3) JD’s official openingof JD Logistics’ expertise/offerings to third-parties, providing supply-chainand express delivery services to all merchants nationwide.

Addressing investor concerns on ZTO Express; favorable risk-reward

We believe the market has been concerned about more intensecompetition following competitors’ fund raising plans/new entrants. Underour base/bear case scenarios, i.e. ZTO expands market share and defendsits unit cost leadership (base) vs. no market share gains with intensecompetition eroding profit per parcel (bear), the risk-reward is increasinglyfavorable with 44% upside (base) vs. 23% downside (bear).

Fine-tune estimates/TPs; Sinotrans still our top pick, Buy (on CL)

We roll forward our valuation base year and fine-tune our estimates for therest of China logistics coverage on FX and forwarding volumes/rate trends.This is the primary driver of our TP cuts of up to 8%, ZTO’s TP isunchanged. Sinotrans Ltd remains our top pick (CL-Buy) on higherforwarding rates, and restructuring potential.