Hello!
I am /r/lykosen11 and I recently have been looking at some young fast international growers, and after looking at a few, I decided to deep dive. Here is my writeup of my fundamental DCF and business analysis of BEST INC.
The Business
BEST INC. is a China based Smart Supply chain service company, which uses multiple platforms to create an easy way for new as well as old businesses to flourish without having to worry about logistics. They have a multitude of different platforms and aim to integrate technology with everything from parcel handling in warehouses to local smart stores, as well as everything moving in between. Because of the macroeconomic situation over in China, the company's market is growing by the quarter with new businesses that want to take a foothold in the market, but need to offload the immense work that is infrastructure, logistics and the design of those.
The BEST Cloud services uses data to help businesses pick out route assignments, optimal partner selections, inventory management, fulfillment planning and methods to optimize all these. The business is sold as SaaS, and reap the benefits from that business model (great margins, recurring revenue, etc).
Their shipping businesses, BEST Freight and Best Express handle cargo and parcels respectively. They use a per package payment method to sell their immense distribution network to other businesses. They hold almost 5 million square meters of warehouse space and while a majority is located within china, they offer services out of the country as well. Germany, Australia, USA, Japan and Canada all have their distribution centers, and they are looking to expand into Thailand, Spain, Korea and Taiwan.
Last but not least, they have their newest service, the BEST STORE+, which is a local store business they use to get the last mile fulfillment done, the hardest part of the business. Stores where sales can be made, while sending, receiving and handling shipping for parcels can efficiently be done. It is fairly new, and is growing very very well.
Growth & Financials
The business today is growing by roughly 50%, but as they had their IPO last year very little can be assumed. They are growing their parcel fulfillment volume at roughly 60%, while the chinese shipping market is only growing 30% (both Y/Y). They today hold over 375 thousand membership stores, with 452 brands within. They currently hold 9.6% of the shipping market now in Q118, which is up from 7.5% Q1 last year, which means that they are taking additional market share in a growing market.
They are currently holding $480 million NET cash, with debt exceptionally low for a growing logistics company. During 2017, they had a revenue of $3 Billions, and according to their guidance 2018 will be roughly 51% higher, at $4.47 Billions. They use this revenue to finance their growth and the increasing cost of labor, and right now they are not profitable. Their net loss in 2017 was $189 million. In 2017 however they held their first positive gross margin, a fantastic sign, at 2.4%. Along this however, they have a -6.4% operating margin and -6.14% net margin, as their financial income is positive.
Modelling & My Thoughts
The model for a company like this becomes fairly sketchy, as very little historical data is available. Using some number crunching you can figure out quite a bit however, and you need to have some numbers to back up your thesis in my eyes. My financial model for $BSTI assumes that the net loss peaks at 2023, while their margins grow. When analyzing the prospects of a unprofitable growth story, you have to assume something, but it is important to be bordering pessimistic to get a realistic view. It is easy to create what you want to find in these cases. I assume that the revenue growth has peaked, and wil fall up ad infinitum at roughly 2-4% rate. I do however think their margins will keep growing at the same rate they have been, up to a gross margin of 8%. This number is low, however, it is to hard to predict anything except small cumulative growth.
I think this is a very young growth story, at a market cap of not even 5 billion USD, to be less than 10 years since the company was founded and 1 year off IPO. It makes it very hard to predict what will happen, and it is made even more difficult by the Chinese development story. I have attempted to offset this but not assuming to optimistic scenarios, as well as attaching a high discount rate (9%) and maturity (-3%) to reflect the risks. That said, it does not make the stock a less risky pick. The non-financial growth numbers look fantastic, and they outperform/match the financial numbers, which indicates that the company has natural growth. If they are ever put in the position where they can use their pricing power from their high-tech services, they can really flourish. That combined with the strong partnerships they hold, with Bank of China, Visa, Mastercard and Alibaba, makes them very very strong.
There is tons of risk as the business is very capital heavy, with over extensions in their logistics network (similar to the risk with JD), strong competitors (although none which employ as much IT/DATA technology in their services), and bad current margins. However, there is much to like as well. Strong net cash position, immense natural growth, growing faster than the fast growing market as well as China develops, a lot of business will be made and all of them will need logistics.
My Verdict
My model is very sporadic, which makes price targets irrelevant. However, since a lot of people like it for my bottom line, here it is: 27 USD. 129% upside. I made different models for each scenario, optimistics scenarios, scenarios where growth slow down but they adapt with pricing, pessimistic scenarios, scenarios where they fail to improve their margins because of competition, etc. I then analyse what I think is the probability of each scenario so I can create the model I believe in the most. The assumptions I made for this "Realism" model are the numbers I used in the main text.
Logistics is a tough business, and normally growth is fairly slow and expensive. I must say however I respect immensely how BEST is paying for their growth up front and not with debt. I also like that they have strong allies that are friendly with the local government, which makes them more government-proof (always a risk with China). I like seeing that they take more market share as the quarters come and go, as well as they are growing their by far highest margin business, their Store+, the fastest at 74%. A lot of other good companies like Amazon, Apple and Microsoft have done the same with AWS, Apple Services and Microsoft cloud services. Growing fast in high margin businesses is the optimal way to high earnings, and when BEST INC gets any earnings whatsoever, I believe they will be strong. That said, this is a slow story, and it will take a while before that point is reached. I buy $BSTI knowing that they might not move much this year even, but when they start moving I want to be a shareholder. Know the risks though.
I link my writeups on this sub from /r/lykosen so I can keep track of them. I havent added them all there but if you are intrested /r/Lykosen
Thanks for reading! I'd love to discuss, take questions or argue in the comments.
Submitted June 20, 2018 at 08:31AM by lykosen11 https://ift.tt/2ti0XIG
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