Beijing used to be a city of bicycles. Now it's a city of couriers, solo drivers whizzing around on motor scooters with a lockbox full of small packages on the back.
It's a pattern that's being repeated all across greater China, which surpassed the United States as the world's biggest express-delivery market back in 2014.
Last year, courier companies delivered 31.3 billion parcels, up 51% over the previous year. This was up 54% over the year before. You get the idea.
The e-commerce boom has combined with the cheap cost of labor to generate a hive of activity, delivery bees in scooters and small vans buzzing out from central drop-off points to deliver anything you can imagine to the 1.4 billion people that call China home.
It has already transformed the retail landscape here, and means the stocks of the main courier companies are worth considering. I'll outline them lower down.
My wife runs a graphic-design business here in Hong Kong, part of which involves getting customized greetings cards and kids' clothing labels printed. For instance, she has a new line of cards featuring the Beautiful Birds of Hong Kong, with text from yours truly.
The point is that we get a lot of printed materials shipped to and from us. It all goes through SF Express.
At times, I do the pickup when I'm driving past the courier. The local SF Express office is in a rundown mall in Tai Po Center, one of Hong Kong's New Towns. The New Towns are densely populated concrete suburbs that bristle with skyscraper public and private towers, both public and private housing. The towns sprung up starting in the 1970s to house the city's booming population.
Close to 300,000 people live in Tai Po's New Town. The shabby shopping mall has been sold off strata-title to a ramshackle list of tenants, half of which seem to be selling phone cases. The restaurants do a brisk trade, but most shops don't get a lot of customers.
The busiest store of them all, by far, is the SF Express courier dropoff and pickup point. Sometimes there's a line that stretches out the front door of the shopping mall. It's become so popular, in fact, that SF Express has taken up two of the neighboring shopfronts just to store the packages that are waiting for pickup.
The parent of SF Express, Shenzhen-listed SF Holding SZ:002352, went public in February. That has suddenly helped make SF Express founder Wang Wei, 47, one of China's richest people. Wang made the top 10 of the Hurun China Rich List for the first time in October, essentially from nowhere, with a net worth of $22 billion. That was good enough for No. 6 on the list.
SF Express used to operate via some franchises, but it has taken full control of all its stores, which has seen its popularity soar. The company has ranked No. 1 in terms of customer satisfaction in surveys conducted over the last eight years in China.
That draws the eyes of Nomura's transport and logistics analysts for Asia, Shirley Lam and Benjamin Lo. "Based on our view that the quality of services would be the key for success of express operators, we expect SF to enjoy first-mover advantage," they write in initiating coverage of the industry. "We believe that its direct-operate business model and self-operated freighters should set high entry barriers for its peers."
It's not hard to open concrete boxes that contain other boxes. It is hard to keep all those boxes moving through the stores as smoothly as possible.
SF Express has diversified into cold storage, heavy-goods transport, and is increasingly offering international express services, too. Ultimately it aims to become a diversified operator of supply-chain management.
Nomura expects the stock to rise to 61 yuan, from 51 now, which itself is already an advance of 23% since going public. Their target price is based on an estimated compound annual growth rate in earnings of 36% from now through 2019.
SF Express should trade at a premium to its competitors, Nomura anticipates. The worries to watch include higher-than-expected initial losses at the new lines of business that it enters, and any surprise slowdown in volume growth.
Sinotrans Air Transportation Development SH:600270 has the backing of the Chinese government, as part of the state-owned enterprise Sinotrans. It has a joint venture with European shipping giant DHL Express, itself an offshoot of the German mail service, Deutsche Post (DPSGY) .
There are broad alliances shaping up. Not to be left out, SF Express has established a j.v. with United Parcel Service (UPS) . FedEx (FDX) , for its part, bought TNT in May 2016, a company that ran the Dutch national post service and operates extensively in Asia, as well as Europe.
DHL reduced its holding in DHL-Sinotrans Air Courier in May 2015, which alarmed some investors that the Europeans might pull out of the venture altogether. But the two companies have a 50-year cooperation in place that runs through 2036.
Nomura has a target price of 20 yuan on Sinotrans Air stock, now trading at 16.78. Higher oil prices are the main threat to the company's earnings, since it deals so much with international shipments.
Sinotrans Air has a Hong Kong-listed parent Sinotrans HK:0598 that is an international freight-forwarding business. Nomura's analysts are less keen on this company, which they believe may suffer from the consolidation underway in the shipping industry. Any slowdown in China's rate of growth in its exports would also hit Sinotrans hard. Nomura recently lowered its target price to HK$4.00 per share, from HK$4.40. It's now at HK$3.82.
What's more, Sinotrans is absorbing its purchase of China Merchants Logistics. The company's core earnings are growing at around 5%, although the acquisition will produce a sudden rise of around 25% in profits. If Sinotrans manages the acquisition well, expect the share price to get a goosing. Likewise, better-than-expected exports out of China would feed through to greater profits.
Kerry Logistics Network (KLGSY) had something of a first-half stall in its earnings advance in the first half of this year, profits rising only 4%. But that looks to have risen to 10% in the second half of the year.
The company may unlock value by selling its warehouses in Hong Kong and leasing them back. The warehouses have a book value of only HK$8 billion ($1 billion) as part of the public company. But they could likely fetch at least double that, HK$16 billion to HK$20 billion ($2-2.6 billion), on the market.
In fact, the entire market capitalization of Kerry Logistics is only HK$17.9 billion ($2.3 billion), meaning that the rest of the business is valued at a bonus $0. Even at a 15% discount to its asset value, it should trade at HK$14.30, compared with HK$10.58 now.
Shenzhen International Holdings HK:0152 is ultimately controlled by the Shenzhen government and Cheung Kong Holdings (CHEUY) . It operates several logistics parks in China as well as infrastructure such as the port in Nanjing and toll roads. It also owns the carrier Shenzhen Airlines, with a joint venture freight supply-chain management business at the airport.
It has, as of October, signed an agreement with the government of the budding free-trade zone in Qianhai, next to Shenzhen across the border from me here. The free-trade zone has had a rocky start to its existence, struggling to find tenants, but the Chinese government is intent to get it going by 2020 -- and gets what it wants within China's borders.
Shenzhen International has a large land bank in Qianhai, where it will have a 40:60 profit-sharing agreement with the government on a logistics park. It will have another logistics center of its own. And it also has some land that it may sell off at a likely valuation of triple its book price now, if sold for residential homes.
The company also owns four expressways that it is likely to sell back to the Chinese government in late 2018. That should give it a gain of 2.17 billion yuan ($330 million) from the sale, which should boost the share price by HK$1.30 per share. Nomura recently boosted its expected share price from HK$16.30 to HK$18.40, with the stock trading at HK$13.64 now.
There's plenty of room for all the operators to grow. The Chinese government has a target of seeing the courier trade hit 50 billion parcels by the end of 2020. That would mean a compound annual growth rate of 12% from 2016 to 2020, while courier revenue should rise by a compound rate of 19% per year over the same period.
Given that the number of parcels has risen by more than 50% in each of the last two years, that's a pretty safe bet. Nomura expects both shipments and sales to rise by 20% to 30% per year through 2020 instead. Expect those shares, then, to deliver returns as well.