China's BEST Inc. operates in a hot sector of the country's economy, is backed by hot e-commerce operator Alibaba (BABA 0.09%), and has a former top manager of Alphabet's Google China operations as its CEO. As such, BEST Inc.'s upcoming IPO -- in which it will sell a pack of American Depositary Shares (ADSes) to trade on the New York Stock Exchange -- has attracted a lot of attention from the investment community. Let's look behind the hype at the very confidently named BEST Inc. to see if it's worthwhile as an investment.
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Trying to be the...
BEST Inc. is selling 62.1 million ADSes in the issue. These will be listed on the New York Stock Exchange under the ticker symbol BSTI. The large underwriting syndicate for the issue is headed by Citigroup, Credit Suisse, Goldman Sachs, JPMorgan Chase unit J.P. Morgan, and Deutsche Bank.
BEST Inc. says it was founded "in the belief that technology and business model innovation can disrupt and transform the inefficient logistics and supply chain industry in China." It operates as a holding company for a raft of subsidiaries that offer services including but not limited to express delivery, supply chain operations, and even store management.
It's a dizzying menu, but going wide and big on the competitive Chinese market is necessary. Recently, four logistics operators there have gone public with one company -- ZTO Express (ZTO 3.57%) -- which raised an impressive $1.4 billion in its U.S. IPO last year.
It's no wonder. According to data from iResearch quoted by BEST Inc., China is the largest logistics market in the world, with around $1.6 trillion in revenue last year (the U.S. tally was $1.4 trillion). It's also positioned for robust growth; iResearch forecasts that China's e-commerce market, the fuel that powers the logistics business these days, will grow at a compound annual growth rate of over 15% from 2016 to 2021.
Not surprisingly, a big name in Chinese tech wants part of the action. An Alibaba affiliate is the company's largest single outside shareholder, and will remain so post-IPO, holding around 37% of the voting rights.
Alibaba will, however, be invested in a loss-making company. BEST Inc. has posted deepening bottom-line losses over the past three fiscal years, from 718 million yuan ($110 million) in 2014 to 1.06 billion yuan ($162 million) the following year to 1.36 billion yuan ($208 million) in 2016.
On the flip side, driven by that explosive growth in e-commerce (and standard commerce too), revenue has headed sharply north, nearly tripling from 2014 to 2016 to land at 8.84 billion yuan ($1.35 billion). Also, taking a longer view, BEST Inc. said its market share in the crucial express delivery segment rose from 2.7% at the end of 2012 to 8.6% as of June 30 this year.
This Fool's take
Those growth numbers are hard to ignore, even if BEST Inc. remains loss-making. It's also in a "rising tide lifts all boats" situation. As such, even if it stumbles a bit, it should be able to keep growing that top-line figure. And one would imagine it will eventually be able to flip those bottom-line figures from red to black (the company is forecasting a profit in 2019 at least; more on this in a moment).
I'd give it a better-than-average chance given the many and varied services it can package (pun intended) for its clients. I very much like the fact that it's not skimping on research and development, a crucial and often underappreciated aspect of the logistics game. In fact, BEST Inc.'s R&D spending has slightly outpaced its revenue growth over the past few years.
Also, the company's shares should be reasonably priced, assuming they IPO within the anticipated price range of $13 to $15 per ADS. According to Reuters, referencing the company's term sheet, that range gives the stock a P/E of 17.7 to 20.4 on anticipated 2019 net profit. That's lower than that of domestic rivals SF Holding and YTO Express, although not as modest as ZTO Express' 13.7, according to Reuters.
Meanwhile, on our shores FedEx (FDX 0.11%) currently trades at a P/E of just under 14 on the consensus EPS forecast for 2019. If we go by the single analyst who's slapped a 2019 estimate on peer United Parcel Service (UPS 0.34%), that company's ratio is 18.
On a comparative basis, then, BEST Inc. stock certainly looks compelling -- particularly given the monster growth story that's still unfolding in its home market. It's certainly worthy of consideration at the given price range, although investors should be aware that Chinese stocks can be quite volatile.
Income investors in particular should also bear in mind that BEST Inc. has no immediate plans to pay a dividend. UPS and FedEx both reward their shareholders, albeit at sharply different rates. At the moment, UPS' dividend yield is 2.8%, while FedEx's is 0.9%.
