Description

Chinese ADRs are close to uninvestable for many investors for good reasons, so feel free to pass on this idea, especially if you don’t feel comfortable with VIE and delisting risks.

Chinese Internet names have been destroyed over the last year – KWEB was down 80% from the peak in just over 12 months, a similar drawdown to Nasdaq after 2000 in less time. I believe Full Truck Alliance (YMM) is one of those babies thrown out with bath water.  YMM is China’s largest digital freight platform connecting over 1.5m shippers with 3.5m monthly active truckers.  It is an asset light business model with dominant market share and healthy growth prospects in a huge market – even amidst a brutal recession, mgmt guided for 20-25% revenue growth for Q1 ’22, although things could get worse in Q2. This is more remarkable as the company has not been able to sign up new users in almost a year due to government redtape (which may soon lift). On Thursday’s closing price, this company sported a market cap of $5.5B vs. $4B of net cash (60% offshore). I think YMM could generate $500m+ net income by 2025, and a 20x PE/FCF multiple is quite reasonable. As a sanity check, YMM had a pre-IPO round in Nov 2020 at $12B valuation. Risk/reward appears highly favorable.

The FTA platform (YMM) is the market leader and pioneer in digitalizing China’s road transport sector (mostly focusing on Full Truck Load, or FTL), and is China’s largest digital freight platform by GTV in 2021. The company was created through a merger in December 2017 between Yunmanman and Huochebang, two similar sized competitors at each other’s throat and burning tons of cash building market share. The playbook is similar to many other industries in China, leading to a dominant player with 80%+ market share in digital freight volume vs. competitors at low single digit %. In 2021, the company faciliated 128.3m fulfilled orders with GTV of RMB 262B, representing 79% and 51% growth respectively. Penetration remains low as the Chinese FTL market is 3800B RMB, although the immediately addressable market is closer to 1500B.

On the demand side, China’s FTL market is highly fragmented with 30-40m SMEs accounting for 70% total volume. 80% total shipping orders are attributable to spot demand. The spot market is roughly 50/50 between broker market (YMM’s immediate TAM) and acquaintance market (shippers find truckers based on acquaintance without intermediaries). On the supply side, truckers are even more fragmented with 35m truckers who on average own 3 trucks per carrier. This compares to 7m truckers and 25 trucks/carrier in the US.

YMM helps address many pain points in the traditional offline FTL market, including shortening transaction time from one day to 2 hours (truckers used to go to physical blackboards in logistics parks to find loads), increasing cargo load (especially on the back haul), and providing various services to shippers (invoice, VAT tax, insurance etc). The old model was dominated by local brokers (“huangniu”) who typically take a 8-10% cut, while the YMM platform promotes pricing visibility and lowers costs and time for shippers by cutting out middle men. The two-sided network effect is obvious given robust growth rate in both shippers and truckers in recent years.

 The company reports revenue in four segments – freight brokerage (54%), freight listing (16%), transaction commission (15%) and VAS (15%). Freight brokerage (invoice, tax) and VAS (insurance, fuel cards) are low value add revenue, and do not generate much profit/value. Freight listing is primarily membership fees paid by shippers to list their loads on the platform. Transaction commission is paid by truckers (monetization began in ’20). These two segments will drive most of future growth and value of the company.

Modeling and projection is admittedly a bit of art in the near term, as China is going through a severe freight recession driven by various seemingly self-induced measures (real estate, zero Covid, etc). So I am primarily modeling 2025 EPS power. I think downside is partially supported by the $4B+ cash. Stock was trading at sub $5 on Thursday vs. net cash $3.7.

In terms of risks, there are two main issues, both on the regulatory front. First, the government launched a cybersecurity investigation last summer into several companies (YMM, DIDI, BZ) and banned the platform from adding new users (both shippers and truckers). It is widely believed that this investigation was a direct result of DIDI’s IPO without getting explicit approval, and YMM was just collateral damage. Mgmt had commented that majority of the information collection had taken place in the first three months and they are waiting for final resolution (company’s internal estimate was this April although the timeline has been pushed back several times). I believe the regulators was just awaiting for clearance from higher-ups, which may have well just occurred last week, when the Politico Bureau essentially announced the end of “platform reform”. This should serve as a immediate catalyst for YMM, as the company saw continued new prospective users attempting to register on the platform (1m+ shippers/truckers each).

The second issue is more long term and profound – what is the ceiling of blended take-rate? In 2021, take rate as (freight listing rev and commission revenue) % GTV was 0.55%, but closer to 1%, adjusted for coverage ratio. Mgmt believes 2%+ is easily achievable in the medium term, which is not high compared to most other platforms, including LTL, intra-city, and DIDI. Perhaps not apple-to-apple, CHRW in the US appears to take in a 8% cut on its TL business, even though the Chinese market is far more fragmented and YMM is more dominant. On an average load costing 2500 RMB, the absolute $ does not feel excessive (a pack of cigarettes). However, the government is focusing on “common prosperity”, and truckers in China in general have far worse unit economics than their counterparts in the US, so the company could face issues raising blended take rate much beyond 2%. The good news is that a high take rate is certainly not in anyone’s model right now.

Catalyst

conclusion of cybersecurity review, leading to new user sign-up

secondary listing on HK, share buyback.