Kerry Logistics share sale a bargain for investors

The logistics arm of Kerry Properties expects price range for listing at 14.9 to 17.3 times its forecast earnings, lower than global peers

PUBLISHED : Tuesday, 03 December, 2013, 5:45am
UPDATED : Tuesday, 03 December, 2013, 5:45am

The US$284 million initial public offering by Kerry Logistics Network, the logistics arm of Kerry Properties, is expected to be a bargain for investors compared to its international peers.

The company expects to cash in on increasing demand for third-party logistics services in the region, especially from multinational brands.

The price range has been set at HK$8.80 to HK$10.20 per share on the first day of its international roadshow. That means the company will trade at a market capitalisation of between US$1.9 billion and US$2.2 billion, translating to 14.9 to 17.3 times its projected earnings in 2014.

That is a large discount in comparison to its international peers, including Germany's Kuehne & Nagel, which are trading at about 22 to 23 times.

Unlike other freight-forwarding companies already listed in Hong Kong, Kerry's profit is mainly driven by the growth in third-party logistics service which has double-digit profit margin, compared to the low single-digit margin by freight-forwarding companies such as Sinotrans.

Third-party logistics services include inventory management at regional distribution centres for multinationals and value-added service such as garment-on-hanging, tagging, sorting, kitting, ironing and labelling.

"The logistics industry has become a comprehensive story riding on the growth of e-commerce in the mainland China," said Steve Cheng Ka-wa, managing director of investment services at RHB OSK Securities. "Institutional investors are looking for a growth story in China especially if it is trading at a discount to international peers."

In the Asia-Pacific region, the penetration of third-party logistics services is only 16 per cent, as opposed to 21 per cent in Europe and 22 per cent in Europe. CEVA and DHL Supply Chain have cashed in on the trend for third-party logistics in Europe and US and have grown their share in the market through warehousing and distribution services.

These services are sought-after in Hong Kong and Shanghai, which have served as regional distribution hubs to support the sales of global brands before they enter other mainland cities.

Kerry manages distribution centres for a number of multinational brands, catering for their sales in the China region and Asia-Pacific. Its warehousing facilities for one French brand has increased by five to six times over the past 10 years amid rising sales in Hong Kong and the mainland.

Hong Kong, with its free port status, is also commonly used for ad hoc labelling and adjustment for products destined for different markets in the region.

Last year, about 80 per cent of Kerry's operating profit was generated from warehouse, distribution and return management.

Freight-forwarding service, including road, sea and air freight, however, account for 20 per cent of total operating profit.

Sales of the company rose 80 per cent to HK$19.3 billion in 2012 from 2010, in which logistics operations increased to HK$7.4 billion from HK$4.3 billion while international freight forwarding increased to HK$11 billion from HK$6 billion.

Kerry manages 39 million square feet of warehouses and logistics centres in China and Asean countries, of which over 11 million sq ft is in the mainland.

Owing to its long operating history in Hong Kong, the company has 10 warehouses in the city with total gross floor area of five million sq ft. They contributed nearly 30 per cent of the operating profit last year and for the first half of this year.

The IPO has already been several times covered after its first international roadshow.

Karen Chan, an analyst at RCM, however, said logistics players in Europe and the US deserve a higher PE because their markets are more concentrated and mature and their customers are more loyal. "The return on equity of Kerry Logistics is at 7 per cent, which is just half of its peers in Europe and also makes it less attractive than the international peers," she said.

In addition, there are more than 10,000 logistics providers in the mainland, fragmenting the market, with operators running at higher costs.

The logistics costs in China account for 18 per cent of the GDP, compared with 8 to 9.5 per cent in developed countries.

Kerry Properties is part of the Kerry Group, which also controls SCMP Group, publisher of the South China Morning Post.