Macquarie: The Street's 'Over-Bearish' View On China's BEST Is Wrong

China-based Best Inc (ADR) (NYSE: BSTI), a smart supply chain, logistics solutions and services provider, faces "over-bearish" sentiment from the Street, but the stock is in fact undervalued and could generate a 26-percent return, according to Macquarie Research.

The Analyst

Analyst Eric Zong upgraded Best from Neutral to Outperform with a price target lowered from $12.60 to $8.20.

The Thesis

Best's biggest business unit, the parcel delivery division Express Service, accounted for more than 60 percent of total revenue in the second quarter and should see a 34-percent compounded annual growth rate in its parcel delivery volume through 2020, Zong said in the upgrade note.

The growth projection comes at a time when management is working on cost-saving initiatives to improve its higher than industry average unit transit cost of Rmb1.50/parcel, which implies a potential EBITDA margin increase to 7.7 percent in 2019 due to economies of scale, the analyst said. 

The Freight Service business — accounting for 16 percent of revenue — became profitable in the second quarter and holds a top-three market share in the country, Zong said. The segment showed a 5.2-percent GP margin, and EBITDA margins should reach as high as 6 percent in 2019 from improvements in route planning and optimization of Best's sorting-center network, he said. 

Best stock is trading at a market cap of around $2.4 billion, which only reflects the true value of the Express Service business and completely ignores the remaining businesses, Zong said. The firm's $8.20 price target implies a total valuation of $3.1 billion and the emergence of a value play after the stock hit a new 52-week low in early September, the analyst said. 

Price Action

Best shares were trading higher by 3.46 percent at $6.57 at the time of publication premarket Wednesday. 

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