Disclosures & Disclaimer: This report must be read with the disclosures and the analyst certifications inthe Disclosure appendix, and with the Disclaimer, which forms part of it.By: David Wu (S1700518110001)China LogisticsWhat common prosperity means for the industryRising labour costs threaten the razor-thin margins of China’s giant logistics industryWe detail how logistics players can absorb or reduce the cost pressure……and focus on new drivers for the on-demand delivery sector. Initiate on leader SF Intra-city with a Buy rating; maintain Buys on YTO Express and Yunda Future TransportEquity Research Reportwww.research.hsbc.comFebruary 2022ChinaThematic research
1Future Transport ● Equities25 February 2022Why now? China's giant logistics industry has long relied on cheap labour who works long hours under pressure and often without social security. That’s coming to an end as common prosperity aims to improve livelihoods, especially for vulnerable workers like delivery couriers. The logistics industry relies on razor-thin margins and labour accounts for as much as 95% of costs for some companies according to our estimate. We take a deep dive into what higher salaries, increased social insurance payments and other welfare expenses mean and why the long-term outlook isn’t too gloomy.How will companies cope? We provide sensitivity analysis around increased social security expenses. The impact of increased injury insurance payments on earnings is less than 10% for most players. But increased compliance and social security payments (like pension contributions) could lower earnings by 15-35% in the short term (till 2025), and the impact is even greater for small and medium-sized logistics enterprises in the long run. Still, big logistics companies have various methods to absorb or reduce cost pressures, like cutting operating costs by increasing investments in automation equipment and accelerating last-mile delivery innovation. We also look around the world for similar experiences. In Japan, Yamato Holdings (9064 JP, JPY2192, not rated) coped with higher wages by hiring more part-time employees. In the US and Europe, Doordash (DASH US, USD93.17, not rated) and Deliveroo (ROO GB, GBP127.95, not rated) reduced operating costs per order by 15%-40% thanks to algorithm optimisation (source: Doordash, Deliveroo). We look closely at on-demand delivery. This booming corner of the logistics industry - where goods are delivered within the hour in cities - is the most labour-intensive segment of all. It’s also a key area for new policies aimed at better protecting the legal rights and interests of workers. We analyse new drivers like the local lifestyle service market (such as laundry delivery) and the rise of third-party service providers. New drivers of this segment include: 1) structural price increase for delivery, and 2) rapid growth in orders. We believe...
