New Stock Analysis | Cainiao: Global E-commerce Logistics Leader, Accumulated Losses of Nearly 7 Billion Yuan in Three Years

A few months ago, there were constant rumors about the listing of Cainiao, the global leader in the e-commerce logistics industry under Alibaba. Now, the news has finally been confirmed.

According to the information obtained by the Zhitong Finance APP, Cainiao submitted its application to the main board of the Hong Kong Stock Exchange on September 26th, with Citigroup, CITIC Securities, and JPMorgan Chase as its joint sponsors. According to Zhushi Consulting, the company provides logistics services and is the world's largest cross-border e-commerce logistics service enterprise. It is also a leader in domestic logistics services, ranking first in the global cross-border e-commerce logistics industry with a market share of 8.1% based on parcel volume in 2022.

Cainiao's revenue scale for the fiscal year 2023 is expected to reach 77.8 billion yuan, with a compound annual growth rate of 21.46% from 2021 to 2023. In the first quarter of fiscal year 2024, the company achieved a growth rate of 33.62%, maintaining double-digit growth. It is worth noting that the company has incurred losses for the past three fiscal years, but it turned a profit in the first quarter of fiscal year 2024. However, the accumulated losses still amount to nearly 7 billion yuan. So, how is the fundamental situation of Cainiao, as the leader in the e-commerce logistics industry? Let's explore it further.

Achieving scale in business and profitability with adjustability

According to the Zhitong Finance APP, Cainiao was established in 2013. Initially, it mainly met the logistics needs of both buyers and sellers on Alibaba's e-commerce platform. Its business scope has been continuously expanding, providing domestic and international logistics services for global merchants, brands, e-commerce platforms, consumers, and logistics companies. The company has a dual gene of "e-commerce × technology". In addition to logistics services, it also provides technology services through Cainiao Post Stations, Cainiao APP, and logistics technology.

The company's revenue has been steadily growing. From 2021 to 2023, the compound annual growth rates of international logistics, domestic logistics, and technology and other services revenue were 12.65%, 33.87%, and 17.23% respectively. In the first quarter of fiscal year 2024, the growth rates were 40.88%, 23.83%, and 63.92% respectively. The revenue shares were 48.1%, 45.8%, and 6.1% respectively. Domestic and international logistics account for the core revenue, and in previous years, the revenue share of domestic logistics has been increasing.

International logistics provides cross-border express delivery, international supply chain, and overseas local logistics services. Cross-border express delivery includes priority, standard, and economy solutions, with a delivery time ranging from 5 to 45 natural days. The customers are mainly Alibaba and platform merchants, covering more than 200 countries and regions, with over 133 million customers and more than 1.5 billion cross-border e-commerce packages. In addition, international supply chain includes export and import supply chain, and overseas local logistics services include overseas express delivery and overseas supply chain, providing services such as warehousing, front-end collection, sorting, regional trunk transportation, end delivery, and intelligent lockers.

Domestic logistics provides domestic supply chain and domestic quality express services. The core of the domestic supply chain is standardized solutions, including optimized warehousing and intelligent warehousing services. The main service targets are still Alibaba and platform merchants. As of June 2023, it has established long-term business relationships with more than half of the top 50 global FMCG companies. Quality express services include Cainiao Express and Cainiao Guoguo, which have tailored unique combinations of cost and service quality for e-commerce.

In the 2023 fiscal year, Cainiao International Logistics handled 1.519 billion parcels, and domestic logistics fulfilled 2.311 billion logistics orders. The compound growth rates for the past three fiscal years were 4.88% and 43.9%, respectively. In Q1 of the 2024 fiscal year, the numbers were 439 million and 736 million, with year-on-year growth rates of 26.51% and 35.05%, respectively. It is evident that the company's performance has not been affected by the pandemic. On the contrary, the "volume-price" of parcels is on the rise, driving the business to maintain double-digit growth.

In addition, the company has been exporting technology since 2015 to empower the digital development of the logistics industry. As of June 2023, its Cainiao Post has built the world's largest digital network, connecting over 170,000 posts. The average monthly active users of the Cainiao app exceed 60 million. Currently, technology export mainly serves advertising revenue and technology service fees, contributing relatively low revenue.

It is worth mentioning that, relying on its relationship with Alibaba and its vast number of merchants and consumers, the company's contribution to Alibaba's revenue has remained stable at around 30% for a long time. Apart from Alibaba, its customer base is relatively diversified, with the top five suppliers being independent third parties and having a relatively low dependency. In Q1 of the 2024 fiscal year, the proportion of procurement amount continued to decrease to 19.1%. The company has always been expanding its platform, with a revenue scale close to 80 billion yuan, and has the ability to achieve profitable scale.

But why has Cainiao been losing money in the past three fiscal years? It can be observed on the Intelligent Finance and Economics app that from 2021 to 2023, the company's gross profit margin has remained good, stabilizing at 10.5-10.7%. However, the combined expense ratio of sales, administration, and research and development expenses is higher than the gross profit margin. In the 2023 fiscal year, they were 1.6%, 7.9%, and 3.2%, respectively, totaling 12.7%. With the addition of financial costs, the net profit margin is a loss rate of 3-4%. In 2023, the company is facing an IPO and needs to make accounting adjustments to achieve profitability. With scaled revenue, it is not difficult to adjust to profitability. In Q1, the gross profit margin was first increased to 13.7%. Secondly, the total expenses are not significantly different from the gross profit margin, so a slight decrease can achieve profitability, with a net profit margin of 1.2%. Industry development is promising, and going public may become the focus of the market's attention.

From an industry perspective, according to Zhushi Consulting, the global retail logistics market consists of e-commerce logistics and offline logistics sub-markets. The overall market size in 2022 is 17.5 trillion yuan, with a compound annual growth rate of 6.8% over the past five years. It is expected to reach 22.8 trillion yuan by 2027, with a compound annual growth rate of 7.3%. E-commerce logistics has achieved double-digit compound growth, with a continuous increase in penetration rate. In 2022, the penetration rate reached 18.7%, an increase of 5.5 percentage points over the past five years, and is expected to reach 26.7% by 2027.

The growth rate of China's cross-border e-commerce logistics market is higher than that of overseas markets. It has become the largest component and main growth driver of the global cross-border e-commerce logistics market. According to Zhushi Consulting, by 2027, the cross-border e-commerce logistics related to Chinese merchants and consumers is expected to reach 1.4 trillion yuan, with a compound annual growth rate of 18.5%, contributing 60.8% to the global cross-border e-commerce logistics market. With the continuous penetration of digitalization and AI, e-commerce models are also evolving, such as AI live streaming sales, which will create multiple growth tracks in the future.

The competition in the cross-border e-commerce industry is fierce. Based on the parcel volume in 2022, the top five global logistics companies account for a total market share of 23.8%, with Cainiao having the largest market share of 8.1%. It is worth noting that in the field of quality e-commerce logistics, the domestic market has a high concentration, with the top five companies accounting for 78.3%, and Cainiao ranking third with a market share of 16.4%. In the market worth over trillions of yuan, Cainiao has core competitive advantages.

Cainiao has a dual gene of e-commerce and technology. It has evolved from a technology platform to a smart logistics network with end-to-end capabilities. With a global network and extensive site coverage, it has become the world's largest in terms of scale. It has a say and pricing power in the industry. At the same time, on the product side, it firmly grasps the supply chain system and deeply cooperates with logistics companies and brand merchants. It continuously optimizes the experience through digitalization and intelligence, and has developed and integrated a series of proprietary AI technologies, including optimization AI and generative AI, which can greatly improve operational efficiency. After achieving profitability on a large scale this year, there is still room for further improvement.

The company is backed by Alibaba and has opened up a gap with its peers by relying on the "giant". Today, through internal expansion and external development, driven by e-commerce and technology, its leading position in the industry is difficult to shake. In addition, the company maintains a good cash flow, with net cash flow from operating activities remaining positive, and net cash outflow from investment activities mainly used for investment and financial management. It has great flexibility in adjustment and overall cash flow stability. As of June 2023, cash and cash equivalents amounted to 15.508 billion yuan. Annual capital expenditures fluctuate around 5 billion yuan, and short-term borrowings are about 3 billion yuan, providing ample cash flow to cope with competition and business expansion. Overall, Cainiao Logistics has a strong fundamental performance, with double-digit compound growth in revenue. It is a leading player in both domestic and international logistics markets. Continuous investment in technology empowers its core business, which is highly competitive. The industry's development prospects are also promising, with the continuous increase in the penetration rate of e-commerce logistics, especially in the Chinese market, where the company is expected to benefit greatly. In addition, the company has achieved profitability at scale, making its IPO highly likely to attract market attention.