SF Express's Strategy for A-Share to Hong Kong Stock Migration

Shunfeng Holdings, known as the "logistics leader," has finally completed its secondary listing on the Hong Kong Stock Exchange, making it the first express delivery company to be listed under the "A+H" model.

On November 27, Shunfeng debuted on the Hong Kong stock market with an issue price of HKD 34.30 per share. As of the time of writing, the share price has slightly increased to HKD 34.90, giving it a market capitalization of HKD 174 billion. As of the close on November 26, Shunfeng's A-share was priced at RMB 42.07 per share, with a market capitalization of RMB 202.617 billion.

"The benefit of listing is primarily to secure the funds needed for corporate development. Shunfeng does need money, but it cannot go public purely for the sake of funds." Thirteen years ago, Wang Wei, Chairman of Shunfeng Group, expressed resistance during a media interview about going public. However, a series of events in the past has shown that Shunfeng is indeed a company adept at capital operations.

In 2017, Shunfeng achieved backdoor listing on A-shares, briefly becoming the company with the highest market capitalization on the Shenzhen Stock Exchange. Over the past seven years, Shunfeng has raised over RMB 68 billion in financing and sent three subsidiaries to list in Hong Kong, now re-entering the Hong Kong IPO scene.

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From its current development status, the primary goal of Shunfeng's listing in Hong Kong remains financing: on one hand, consolidating its core competitiveness and market position requires significant expenditure; on the other hand, Shunfeng's market capitalization in A-shares has halved from a peak of RMB 500 billion in 2021, urgently necessitating new financing channels.

Many investors believe that the advantages of a secondary listing outweigh the disadvantages for Shunfeng. Besides raising funds, it also aids in expanding its international market presence. However, given the lackluster performance of JD Logistics and Jitu Express in Hong Kong, Shunfeng's future results remain to be seen.

Moreover, it is noteworthy that while most express companies choose to list on A-shares, Shunfeng opted for the "A+H" dual listing structure. This year alone, alongside Shunfeng and Midea, eight other companies are planning "A+H" listings, surpassing the total for the entire year of 2021. What is driving this new wave of "A+H" listings?

Going to Hong Kong for capital and globalization

As early as last August, Shunfeng attempted to list on the Hong Kong Stock Exchange but was unsuccessful. Four months after its prospectus expired, it refocused on the Hong Kong market with a clear purpose: securing funding and expanding into international markets.

Whether through its timely delivery services or its continuously expanding business, Shunfeng requires substantial financial support. According to Wind data, since its listing in 2017, Shunfeng has raised a total of RMB 68.066 billion through methods such as private placements, convertible bonds, and short-term loans.

Similar to JD Logistics, which traded speed for losses in its early stage, a comprehensive and efficient delivery service system demands substantial infrastructural investment, equipment procurement, and recruitment of delivery personnel. For instance, the construction of Ezhou Airport (which became operational in July 2022) alone cost RMB 2.61 billion. Currently, the airport operates 73 cargo routes, including a number of international freight routes.

In addition, Shunfeng is expanding its business through acquisitions. In March 2018, it acquired a 71% stake in Guangdong Xunbang Logistics, laying out its presence in the less-than-truckload (LTL) express market. In October of the same year, it took over all shares of DHL's operations in Hong Kong and Beijing, which is one of the "three major international logistics giants." In September 2021, Shunfeng acquired a 51.5% stake in Kerry Logistics, aiming to penetrate the Southeast Asian market.

Through various capital operations, Shunfeng has firmly established itself as China’s "express leader." In its prospectus, it claims to be the largest comprehensive logistics service provider in Asia and the fourth largest globally.

However, this strategy has resulted in increased financial pressure. From 2018 to 2023, Shunfeng's debt rose from RMB 34.7 billion to RMB 118.2 billion, with its debt-to-asset ratio increasing from 48% to 53%. By mid-2023, the company's liabilities had already reached the level of the previous year's total, amounting to RMB 121 billion.

Shunfeng's debt situation table

In this IPO, Shunfeng aims to raise approximately HKD 6.171 billion, which will infuse new energy into the company.

Hao Xiuru, a partner at Cinda Law Firm engaged in domestic and international IPOs, analyzed for "Ding Focus One" that Shunfeng's listing in Hong Kong can alleviate operational cash flow challenges while also facilitating access to overseas financing channels. Given the differing interest rates and stock market conditions between the domestic and international markets, this access can provide flexibility in issuing bonds and stocks in either market.

Another major objective of Shunfeng's Hong Kong listing is to advance its internationalization strategy. According to its prospectus, 45% of the funds raised from this listing will be utilized to strengthen its international and cross-border logistics capabilities.

Wu Jierong, founder and CFO of Yiyun, asserts that H-share companies are more accessible to international capital and related resources, aiding Shunfeng's expansion into overseas markets from the perspective of capital operations. Simultaneously, in today's international climate, leveraging Hong Kong's status as a global financial center is advantageous for its international operations and helps foreign investors, customers, and suppliers understand Shunfeng better.

Shunfeng’s foray into overseas markets began in 2021, largely due to the diminishing clarity of its initial business advantage—timely delivery services. According to the mid-2024 report, although this business still contributes 44.03% of Shunfeng's total revenue, being the largest segment, companies such as JD and the "Three Links and One Da" have ramped up their speed and offered lower prices, thus exerting pressure on Shunfeng.

Additionally, "timely delivery" represents a "small yet exquisite" business model, while other express companies are bound to e-commerce platforms that, despite slower delivery speeds, benefit from higher volumes. According to a report from Guoxin Securities, Shunfeng's market share has consistently been below that of the "Three Links and One Da," showing a gradual decline since Q1 2023.

With fierce competition in the domestic market, Shunfeng's overseas market performance remains unstable and requires further exploration. According to the prospectus, revenue from Shunfeng’s international business peaked in 2022, growing by 224.54% year-on-year to RMB 58.928 billion, but then plummeted by 40.78% year-on-year to RMB 34.899 billion in 2023.

Shunfeng's international business revenue and its proportion

In the international market, the three major global express giants maintain a monopoly status, and domestic players continue to join in. For Shunfeng, the IPO in Hong Kong merely marks the beginning of this overseas race.

After the listing, Shunfeng still needs to prove itself

Looking at the entire express delivery industry, "Two Tongyi Da" (Shentong, Yuantong, Yunda) and Debang have all chosen to list on A-shares. Although Shunfeng's choice of the "A+H" structure reflects its confidence, it also faces certain challenges.

According to performance data from the express industry for the first three quarters of 2024, Shunfeng leads other express companies listed on A-shares with revenue of RMB 206.861 billion and a net profit attributable to the parent company of RMB 7.617 billion, surpassing the combined figures of the other four companies.

Shunfeng's revenue and profit data for the first three quarters

The "A+H" structure is more suitable for leading companies in the industry, as the Hong Kong market tends to favor blue-chip stocks. Hao Xiuru noted that smaller companies might struggle to list in Hong Kong due to low price-to-earnings ratios and valuations, which might result in their stocks failing to issue or having poor liquidity post-listing, making it an unwise decision for such firms.

Although historically, the vast majority of A-shares adopt a pricing discount strategy when issuing H-shares, Hao believes that Shunfeng will still care about its issue price when listing on the Hong Kong stock exchange. "The current price-to-earnings ratio for its A-shares is around 21 times; if the price is too low or significantly different from the A-share P/E ratio, the company will certainly be reluctant to issue."

Nevertheless, the logistics sector in the Hong Kong market is not particularly vibrant overall, with companies like Jitu Express and JD Logistics facing instances of shares falling below their issue prices. Market predictions regarding Shunfeng's valuation and stock performance remain uncertain.

Wu Jierong believes that leading companies may see some premium, as there are differences in strategies, genetics, and business models between Shunfeng and the aforementioned two companies. Ultimately, Shunfeng's stock performance will depend largely on its narrative logic and whether its business performance meets market expectations.

According to the prospectus, Shunfeng's business is divided into three parts: speed and large cargo business, same-city instant delivery business, and supply chain and international business. Among these, timely delivery remains its core business, which has consistently driven the express segment as the backbone of the company, with stable growth from 2021 to 2023.

From 2021 to June 2024, Shunfeng's three major business revenue distribution

The future growth potential of this company hinges on its international and same-city business.

Shunfeng's international business revenue heavily relies on Kerry Logistics, which contributed 27.8% of the group's revenue in 2022 after its acquisition in 2021, pushing the group's international business revenue to its peak, with a contribution ratio surpassing 30% for the first time.

However, as the global supply chain gradually returned to normal post-pandemic, the demand and prices for international air and sea shipping have declined, resulting in Kerry Logistics contributing just 17.8% to the group in 2023. Due to the dragging effect of its international business, Shunfeng faced a decline in total revenue for the first time in 2023.

Shunfeng's approach to international business—whether to trade losses for growth or ensure stability while protecting profits—is still a matter for observation, and this will impact market perceptions of the company.

In the eyes of capital markets, Shunfeng faces competition in overseas markets from Jitu and Cainiao. Cainiao has Alibaba's international e-commerce operations, while Jitu is linked with cross-border e-commerce platforms like Temu and Shopee, leaving Shunfeng in a difficult position due to a lack of stable major clients. Without sufficient cross-border order volume, shipping costs will further erode its profits.

Furthermore, Shunfeng's same-city instant delivery service, often described as "getting up early and catching the late train," has contributed less than 3% of revenue for three consecutive years.

In recent years, instant retail has surged in popularity, with players ranging from e-commerce platforms with product supply (JD, Taobao) to takeout providers with delivery networks and local services (Meituan, Ele.me), even encompassing live streaming platforms with high-frequency online traffic (Douyin). Shunfeng's role in instant delivery is primarily fulfillment, lacking the customer acquisition and product supply capabilities of its competitors.

It is worthy to note that Shunfeng is adept at capital operations and possesses a keen understanding of the Hong Kong stock market, which aids investors in familiarizing themselves with the company.

In recent years, Shunfeng has spun off three subsidiaries for listing in Hong Kong—Shunfeng Tongcheng, Shunfeng REIT, and Kerry Logistics. Additionally, another company, Fengchao, is also in the midst of an IPO in Hong Kong, with Wang Wei holding a 36.54% stake and 48.45% voting power, making him the actual controller.

Previously, companies like JD and Alibaba had been quite "obsessed" with spinning off subsidiaries for listings, primarily to enhance overall valuation. "If a group has several businesses bundled for listing, investors and the market may find it challenging to provide an accurate valuation. If each entity is separated out into singular businesses, the market's valuation can be higher and more accurate, facilitating independent financing and development for those businesses," Hao noted.

However, with changes in the market environment and the ongoing sluggishness of Hong Kong's stock market over the past two years, coupled with the average performance of the spun-off companies, many enterprises have seen their shares fall below their issue prices post-listing; thus, enthusiasm for spinning off subsidiaries for listings has cooled off. Shunfeng must further prove itself.

In 2024, the market will witness another wave of "A+H" listings

As of this year, the number of A-share companies pursuing secondary listings in Hong Kong has already surpassed the total for the entire year of 2021. On September 17, Midea Group also listed on the Hong Kong Stock Exchange. Currently, with Shunfeng's successful listing, eight other A-share companies are planning "A+H" listings in 2024.

What has triggered this new wave of "A+H" listings this year?

On one hand, favorable policies and enhanced liquidity in the Hong Kong stock market have spurred a surge in companies' listing pursuits. In April, there was a wave of capital influx into Hong Kong stocks, when US funds clustered around the "seven giants," and stock markets in Japan and India hit historical highs—yet against this backdrop, Hong Kong has become a value lowland. The China Securities Regulatory Commission also announced five measures supporting mainland industry leaders to list in Hong Kong in April.

On the other hand, companies' own developmental needs play a significant role. Wu Jierong believes the "A+H" listing structure is beneficial for domestic companies, enabling them to enjoy the high valuation dividends of the mainland market while enhancing their international image, expanding financing channels, and attracting international capital to support their globalization efforts.

Additionally, changes in industry dynamics and market conditions over the past two years have contributed to this trend. Going overseas has become a major trend, with many companies focusing on diversifying risks to avoid the volatility of a single capital market affecting their development. For industry leaders facing heightened funding demands and urgent overseas business expansion needs, the "A+H" dual listing structure has become increasingly appealing.

Therefore, beyond early dual listings by large state-owned enterprises in sectors like banking, securities, oil, and aviation, various companies in industries such as automotive, renewable energy, smart home appliances, and healthcare have also chosen the "A+H" structure in recent years. Many have indicated in their prospectuses that the proceeds from the listing will primarily be used for "expanding overseas markets."

According to statistics from LiveReport, as of November 12, 2024, there are 150 companies listed in Hong Kong that also hold A-shares, of which 144 are A+H companies (96%), with a total market cap exceeding HKD 20 trillion.

Among the listed companies, in 2023, ten reported overseas revenues exceeding RMB 100 billion, with BYD having the largest overseas revenue of RMB 160 billion; Midea and Haier ranked fifth and sixth with overseas revenues of RMB 150.9 billion and RMB 135.6 billion, respectively. When considering the proportion of total revenue, 40 companies reported overseas business revenues accounting for over 20%. The highest proportion among them reached a staggering 92%, while another five companies had overseas revenue constituting over 70%.

In reality, A-shares and Hong Kong shares represent two distinct markets. Hao Xiuru explained that the listing and delisting rules in the Hong Kong market are relatively transparent, with a high degree of certainty regarding hearing processes; the challenges lie in the difficulties of IPO issuance, smaller financing scales, or post-listing stock liquidity being comparatively low. Many companies dive into the listing process due to commitments made to investors and the need to provide accountability. In contrast, the A-share market is more stringent in its review process, but once approved, issuance poses little trouble, leading to higher overall valuations.

For those companies listed on A-shares first and then pursuing secondary listings on H-shares, they have made optimum choices after adapting to the rules of capital markets based on their unique circumstances.

In Wu Jierong's perspective, any quality company is suitable for pursuing an “A+H” or “A+foreign” listing structure. Essentially, going public involves selling expectations, equities, and narratives, and the key is ensuring that the narrative resonates with international investors—making it interesting, comprehensible, and convincing about its positive outlook.

So, how will Shunfeng tell its story?