SF Express Goes International
On November 27, the prominent Chinese express delivery company SF Holding (顺丰控股) made its much-anticipated debut on the Hong Kong Stock Exchange. However, the excitement surrounding this secondary listing did not last long. The stock closed flat on its first day, lacking any upward momentum, and the following day it experienced a decline, marking the first instance of a share price drop, creating a stark contrast to its robust market value in the A-share sector.SF Holding’s journey to Hong Kong began in June 2022 when Jitu Express (极兔快递) made history by being the first in the industry to list in Hong Kong. Following suit, SF Holding submitted its IPO prospectus in August. Yet, delays in completing the hearing meant the listing took significantly longer than expected. After overcoming these obstacles, the company successfully issued its shares at HKD 34.3 each, with founder Wang Wei symbolically ringing the opening bell at the Exchange, flanked by the delivery personnel who form the backbone of this sprawling logistics network.SF Holding stands as a giant in the logistics industry, boasting a market cap of approximately RMB 200 billion and employing nearly 500,000 delivery personnel. In fact, close to 36% of their operational costs in 2023 stemmed from outsourcing labor, underscoring the essential role of these workers in the company's overall functioning.Traditionally, companies that have made similar dual listings tend to see their stock prices in Hong Kong lower than those on the mainland A-share market. On the last trading day before SF Holding's debut in Hong Kong, the company's A-share close was PLN 42.07, which confirmed this expected price disparity. This phenomenon has historical roots, where various tech companies, including well-known giants like BAT (Baidu, Alibaba, Tencent) and Xiaomi, chose to go public in Hong Kong largely due to A-share market constraints such as profitability thresholds. Similarly, many state-owned enterprises have opted for dual listings across various markets primarily for diversification in funding options, rather than strict focus on market valuation.SF Holdings isn’t the only player in a precarious market situation; its competitors, JD Logistics (京东物流) and Jitu Express, have also struggled post-listing, facing a decline in their stock prices. This reality starkly highlights the increasing challenges within the Chinese express delivery landscape, even for a leader like SF Holding. The occurrence of a stock drop so soon after its debut is not wholly surprising given the contemporary market dynamics.Direct stock performance does not always mirror the operational health of a business. Wang Wei, the company's founder, has openly acknowledged the burdens of public company responsibilities, calling the stock market “a machine for making money” that imposes pressures on managers that can hinder effective business operations.SF Holding's foray into Hong Kong involved issuing 170 million shares, and barring any over-allotments, the company raised a net amount of HKD 5.66 billion through this IPO. This makes it one of the largest listings in Hong Kong in 2023. Notably, 45% of the funds raised is set to bolster the company's international and cross-border logistics capabilities. Rising to prominence in China, SF Holding now ranks among the foremost comprehensive logistics service providers in Asia, trailing only after global giants like UPS, DHL, and FedEx.However, with international ambitions still nascent and competition intensifying in global markets, the proposition of pursuing cheaper capital through the Hong Kong listing (with a pricing discount of 24% compared to its A-share closing price) became an appealing strategy for the company facing rising domestic liabilities and decreasing profit margins.From the hectic logistics environment of Hong Kong and Guangdong to the bustling Huahu Airport in Ezhou, where 73 freight routes maintain a constant rhythm, Wang Wei’s philosophy in logistics emphasizes the importance of self-operated models. Backtracking to 2017, when the Ezhou airport was being constructed, SF Holding had a mere net profit of RMB 4.7 billion. The toll of nearly RMB 20 billion invested in this “first cargo airport in China” ultimately resulted in substantial losses for the group in 2020, prompting an apology from Wang Wei during a shareholder meeting. He, however, expressed his commitment to sticking with the company’s self-funding model.Since 2020, SF Holding has significantly ramped up its fixed asset investments, reaching a record investment amount of RMB 19.2 billion in 2021. The commitment to self-operated logistics networks sets SF Holding apart from competitors, who utilize franchise models that require lower capital investments. Competitors like Shentong, Zhongtong, and Yunda have managed their growth more efficiently by outsourcing delivery responsibilities, which alleviates financial burdens on the companies. Conversely, SF Holding’s comprehensive approach comes with hefty investments to build foundational logistics networks, resulting in a significant rise in liabilities from RMB 34.7 billion in 2018 to RMB 118.2 billion in 2023, reflecting an increase in debt-to-asset ratio from 48% to 53%.Although substantial capital investments do not guarantee immediate returns, SF Holding did show signs of tightening capital expenditures. As of the first half of 2024, the company reduced capital expenditures to RMB 5.1 billion, indicating a potential shift towards realizing investment returns. Additionally, following its A-share shell listing in 2017, SF embraced an aggressive acquisition strategy, much to the benefit of its market capital in subsequent years. However, this approach led the company to spend aggressively on acquisitions, totaling RMB 17 billion for a 71% stake in Xibang logistics in Guangdong, USD 100 million to invest in U.S.-based Flexport, and RMB 55 billion to buy DHL's operations in China, among others.Years of mergers resulted in a peak market valuation but also saw a steep decline in profit margins, with gross margins compressing from 20% upon listing to roughly half that by the present day. Despite this decline, SF's strong revenue generation—about RMB 600 billion as of mid-2024—remains worthy of attention, although various competitors continue increasing their market share through aggressive pricing strategies. The domestic express delivery sector has faced significant challenges, largely driven by an intensive price war that has forced former household names like Debon and Best Express to seek mergers to maintain operational viability. SF Holding has managed to retain a strong position, but steady erosion of its market share has occurred due to pricing pressures from rivals leveraging e-commerce integrations, thus posing further threats to SF’s previously trademark efficiency-based pricing model.Despite efforts to stabilize pricing and maintain market share, SF Holding’s revenue has been increasingly pressured. The overall volume and revenue data released reflect a continuing rise across the sector, yet profitability has become increasingly elusive for competing companies. With market dynamics shifting in response to broader trends and competitive pressures, the company finds itself at a crossroads—whether to continue investing deeply in its current high-quality service paradigm or to adapt and adopt alternative strategies to regain lost ground in the increasingly competitive market.As part of its strategic vision, SF Holding has identified international and supply chain operations as essential growth trajectories, which accounted for 8.7% of their revenue in 2020 and spiked to 33.6% by 2022, largely due to acquiring Kerry Logistics. Yet this growth was short-lived as the post-pandemic landscape yielded fluctuating international shipping costs, leading to a notable decline in international revenues from HKD 48.47 billion in 2022 to HKD 25.76 billion in 2023, pushing SF Holding’s total revenues into decline for the first time in years. As a secondary listing in Hong Kong prior to catching the international scene, the firm emphasized that they had moved past the peak phase of capital expenditure]and positioned themselves with aspirations of becoming a more internationally recognized entity.In the face of these challenges, Wang Wei is leading SF’s charge into the international domain, understanding the need to take advantage of potential trends in global logistics. The company has had an established presence in overseas operations since 2009, expanding to markets across Southeast Asia and East Asia. However, apart from the strategic oversight, they are facing intensified competition from the likes of Jitu Express, which similarly has significant aspirations abroad.Ultimately, as SF Holding steers towards globalization and attempts to carve a niche within the international logistics game, the framework and strategic approaches it adopts must be reflective of competitive realities in the broader marketplace. This involves navigating complex operational environments and fostering synergies with key market players, as the battle for market share and profitability expands beyond domestic borders into the global arena.