High-quality newcomer in the Hong Kong Stock Connect, SF INTRA-CITY with dual drivers

Recently, a new batch of Hong Kong Stock Connect list has been updated, and among the successful companies included in this round, there are actually not many high-growth companies. Upon closer inspection of the list, it is found that SF INTRA-CITY has outstanding performance, with a 19.6% increase in revenue in the first half of the year, and the net profit in the first half of the year alone exceeded the full-year net profit level of 2023. Moving forward, with the increasing chain rate of retail and catering brands, as well as the decisions of internet platforms such as Douyin, Alibaba, and JD.com to accelerate the layout of local life, the demand for instant delivery will usher in a new round of growth. From the financial report, SF INTRA-CITY has solidified the profit model of instant delivery in the first half of the year. As the largest third-party instant delivery platform in China, both industry increment and profit capability have improved, and the liquidity improvement after inclusion is worth paying attention to. 1. Enhancing services while achieving high growth in performance According to the financial report, SF INTRA-CITY's revenue in the first half of the year was RMB 6.878 billion, a 19.6% increase from RMB 5.749 billion in the same period last year, with the overall order volume increasing by over 30% compared to the same period last year. The net profit in the first half of the year was RMB 62.17 million, a 105.1% increase from the same period last year, reaching a new historical high, gradually releasing profit capabilities with the expansion of orders. The performance of SF INTRA-CITY can be compared with that of competitors in the same period. Dada's second-quarter revenue was RMB 2.35 billion, a 9.5% year-on-year decrease, with a net loss of RMB 286 million, compared to a loss of RMB 159 million in the same period last year. Due to the high growth in instant delivery demand across society, JD.com's orders for instant delivery increased by 100% year-on-year, but revenue declined, and profits continued to suffer losses, which the capital market does not endorse. Because the delivery industry is no longer solely about making money and gaining market share by having a high order volume. In an economic downturn environment, achieving simultaneous growth in income and profit is more in line with the current market's aesthetics, and SF INTRA-CITY has clearly performed better than Dada in terms of revenue and profit. Breaking down SF INTRA-CITY's revenue, the overall revenue from local delivery services in the first half of the year was RMB 4.038 billion, a 19.2% increase from RMB 3.388 billion in the same period last year. Among them, the revenue from local delivery services for merchants was RMB 2.874 billion, an 18.8% increase from the same period last year; the main driving force for growth comes from SF INTRA-CITY's continuous increase in cooperation share with top customers. While maintaining the industry's leading market share, SF INTRA-CITY has added over 6,000 new cooperative stores in this quarter. In addition to the increase in market share with top customers, there is also a significant growth in the overall number of merchants. As of June 2024, in the past twelve months, the number of active merchants on the SF INTRA-CITY platform has reached 550,000, a 45% year-on-year increase; the new signed order income from key account (KA) important customers has also achieved high double-digit growth, with the proportion of chain customers continuously increasing, indirectly verifying the recognition of customer service quality by customers and bringing business stability improvement to SF INTRA-CITY. It is worth mentioning that those who have not paid attention to SF INTRA-CITY may confuse instant delivery with food delivery services. Although from the consumer's perspective, it is the same delivery person delivering goods to the consumer, the growth logic of the two is different Chain store customers are the basic foundation of instant delivery, and customer quality is even more important for instant delivery. Simply put, in daily life, everyone should have noticed that with the decentralization of traffic, more and more businesses, in addition to being listed on multiple food delivery platforms, will also expand their own private traffic, such as mini-programs and apps. The delivery service for these businesses is not only for food delivery platform orders like Meituan, but also for third-party delivery services like SF INTRA-CITY, which can meet the fulfillment needs of multiple platforms, ensure fulfillment standards, and offer better prices. For example, McDonald's, HEYTEA, and Luckin Coffee all use SF INTRA-CITY for instant delivery, which gives consumers the most direct feeling that fulfillment rate and service quality are improving. According to financial reports, SF INTRA-CITY's on-time delivery rate fluctuates by no more than 1% and 3% during holidays and inclement weather, with an overall on-time delivery rate of 95%. The average delivery time for orders within 3 kilometers is 22 minutes, better than the average 25-30 minutes of its peers. For businesses, using a third-party instant delivery service is indeed a better choice. The most direct reason is that through the business's ordering channels, businesses can reduce the commission fees on food delivery platforms, keep customers in their own channels, reduce fees, and better standardize customers' dining experiences. From a data comparison perspective, Chinese food delivery consumers pay less than 10% of the meal price in additional costs, while the actual revenue from food delivery for businesses is about 8-9% of the dine-in price. In other words, most of the additional costs of food delivery are borne by businesses, but it is difficult to guarantee fulfillment rate and service quality. This is the direct reason why chain restaurants continue to expand their own ordering channels. By using SF INTRA-CITY, costs can be reduced while service quality is improved, ensuring a win-win situation. Cost reduction is particularly important in the price war of the catering industry. As the overall profit margin of the catering industry declines, large chain restaurants must control profits by reducing costs and increasing efficiency as much as possible while ensuring consumer experience. This is also why chain restaurants recover faster than independent restaurants after the epidemic. Therefore, serving consumers well is not only the responsibility of SF INTRA-CITY, but also the key for businesses to do well in fierce competition. With the improvement of service quality, the stickiness between the delivery service and businesses will become stronger, eventually leading to the binding of chain stores and delivery services. In addition, as the brand chain rate increases, more and more restaurants are expanding into lower-tier cities, and SF INTRA-CITY is also enhancing its service capabilities in sinking markets. During the reporting period, the coverage of national county towns exceeded 1,200, with a coverage rate of 68%, and the income scale of county towns increased by 51% year-on-year. Of course, SF INTRA-CITY is not limited to delivery in the catering industry. With the vigorous development of local retail, SF INTRA-CITY also provides high-quality services to national top chain supermarkets, covering consumer scenarios of online pharmaceutical retail and internet hospitals In the first half of 2024, the revenue of tea drink delivery increased by 60% year-on-year, while the revenue of retail categories such as supermarkets, cakes and pastries, pharmaceuticals, and beauty achieved high double-digit growth year-on-year. Looking at the consumer-facing revenue, it reached 1.163 billion RMB, a 20% increase from the same period last year; the growth stemmed from the improvement in repeat purchases driven by quality services and the expansion of self-owned channels in the same city, effectively meeting the needs of local users. In addition, SF INTRA-CITY performed well in commercial scenarios, especially in the refined operation of the CBD core business district, providing convenient services for efficient delivery of documents, invoices, etc., and creating a high-end brand image. As of June 30, 2024, in the past 12 months, the number of active consumers exceeded 21.9 million. During the reporting period, the volume of instant delivery services doubled rapidly, driving strong year-on-year revenue growth for the service. The revenue from last-mile delivery services was 2.84 billion RMB, a 20.3% increase year-on-year; mainly benefiting from the continuous increase in the scale of cooperation and delivery proportion with major customers by SF INTRA-CITY. The revenue from scenarios such as receiving and half-day delivery doubled compared to the same period last year, achieving rapid growth. Since the first half of this year, SF INTRA-CITY's daily average receiving volume has exceeded one million orders. Looking at the overall performance revenue changes in the first half of the year, based on SF INTRA-CITY providing quality customer service and enhancing the trust accumulated by the SF brand over the years, it was able to gradually develop a profitable model after its listing in 2021. During the phase of continuous high growth, SF INTRA-CITY followed the trend of share repurchases in the Hong Kong stock market, providing considerable returns to shareholders. SF INTRA-CITY's operating cash flow in the first half of the year was approximately 99.2 million RMB, a 189% year-on-year increase, with cash on hand currently at 2.37 billion RMB, no interest-bearing borrowings, and nearly a quarter of the company's market value is in cash. From November 30, 2023, to July 26, 2024, SF INTRA-CITY repurchased a total of 18.9 million shares, with a shareholder return rate of 2% during the period. With the improvement in the company's profitability, there is sufficient capacity for shareholder returns in the future. As for the future growth space, it is not only the improvement in brand chain rate but also new incremental surprises worth looking forward to. II. Competition in E-commerce Local Life, Incremental Volume of Instant Retail In 2024, China's instant delivery market reached 417.68 billion RMB, and by 2028, the market size will double to 810.23 billion RMB, with a compound annual growth rate of 18.9% over five years, so there is no need to worry about the overall market size. 1. The source of growth, in part, can be compared to the chain rate changes in the catering industry. China's catering chain rate has increased from 14.7% in 2018 to 20.4% in 2023; There is a significant gap between various countries, with a chain rate of up to 60% in the United States and 52% in Japan. Based on the current price war in the catering industry, the increase in the chain rate of the catering industry in the future is inevitable. This year, we can see chain brands such as McDonald's, KFC, Pizza Hut, Luckin Coffee, and Starbucks accelerating their expansion into lower-tier cities, and they are entering the sinking market by lowering prices and franchise fees. Due to the escalating price war in the catering industry, from the perspective of the supply chain cost, small brands will find it difficult to compete with chain brands in the price war. With the industry's shrinking profits, we will see a new round of expansion for chain brands, as well as the process of small brands being acquired or eliminated. As chain brands expand their stores, SF INTRA-CITY, as a delivery service provider, also benefits from this, which is one of the reasons for SF INTRA-CITY's rapid expansion in the sinking market. 2. In the process of the industry doubling in size, Douyin, Pinduoduo, Taobao, Sam's Club, JD.com, and other e-commerce platforms are fiercely competing in localization, benefiting third-party delivery services as well. Currently, services like Douyin Supermarket and other home delivery services have integrated SF INTRA-CITY's instant delivery service. The reason is simple: platforms like Taobao, JD.com, and Tmall have their own delivery services, so e-commerce platforms like Douyin and Pinduoduo, which do not have their own logistics systems, find it more convenient and cost-effective to use third-party delivery services. Moreover, when the local delivery capacity of Taobao and Tmall is insufficient, SF INTRA-CITY also supplements the delivery capacity for the Alibaba ecosystem. From the perspective of fierce competition among e-commerce platforms, it is evident that Douyin is expanding its market share the fastest, with Douyin and Pinduoduo as the attackers, while Taobao and JD.com are the defenders. Whether it is providing delivery capacity for platforms without delivery capabilities or supplementing delivery capacity for platforms with self-operated delivery, the demand for SF INTRA-CITY is considerable, driven by both the industry's scale-induced beta and the alpha increment brought by Douyin and Pinduoduo's growth. SF INTRA-CITY is continuously exploring the application of smart logistics and unmanned delivery technology in commercial scenarios. During the reporting period, SF INTRA-CITY conducted pilot tests and put into operation unmanned vehicle deliveries in multiple cities. Whether it is SF Express or SF INTRA-CITY, they are ahead of the industry in the implementation of unmanned vehicles. In the future, they are expected to combine the advantages of unmanned delivery to supplement the existing riders' delivery capacity, further promoting efficiency improvement. Additionally, in July, SF INTRA-CITY officially entered the Hong Kong market under the brand "SoFast" and has currently opened pick-up services in areas such as Yau Tsim Mong, Kwun Tong, Sham Shui Po, and Kowloon City, with service coverage extending to the entire Hong Kong by the end of the year Mainland companies' success rate in entering Hong Kong? You can refer to the competitive landscape after Meituan Waimai entered Hong Kong. In just over a year, Keeta's market share has reached 40%, and the efficiency level can be described as a dimensional reduction strike. SF INTRA-CITY and Meituan do not compete with each other. SF INTRA-CITY enters with a full-scenario business, especially in non-dining scenes such as business and retail. The two compete differentially, leaving room for profitability in the Hong Kong market. According to estimates, by 2024, the total revenue of the online delivery market in Hong Kong will increase by 12.2% to 28.7 billion RMB, with non-dining categories' online delivery revenue reaching 22.18 billion RMB and maintaining an 11% growth in 2025. The overall revenue of the online delivery market is expected to reach 40.89 billion RMB by 2029. This set of data is very attractive, especially with a huge white space in the non-dining market, undoubtedly providing growth opportunities for SF INTRA-CITY in the Hong Kong region. The future growth space is promising, and another core point to ensure long-term service efficiency improvement is good corporate welfare. As of the 12 months ending June 30, 2024, the platform's annual active riders further expanded to 970,000, with a 20% year-on-year growth in the number of riders at the middle and high income levels. In the first half of this year, the rider's safety accident rate decreased by 16% compared to the same period last year. SF INTRA-CITY also established a "Grievance Care Special Fund" for riders, with a scale of 5 million RMB, and has held more than 5,000 offline care activities. By increasing rider income and fostering a culture of care, it further enhances rider activity and retention rates. Conclusion: In summary, based on the industry's future increment, the improvement of brand chain rate, and the optimization of e-commerce competitive landscape, SF INTRA-CITY is gradually becoming a touchstone in instant delivery, with sufficient certainty of future performance breakthroughs. With the catalyst of entering the Hong Kong stock connect in September, there is enough support for cash repurchases on the books. Assuming the maintenance of repurchase intensity in the second half of the year, the shareholder return rate for the whole year is expected to reach 4%, coupled with its high growth and improved liquidity, the stock price is expected to form a double-click