STO Express: First-Quarter Results Better Than We Expected; Shares Fairly Valued

While STO Express's 2023 full-year revenue and gross profit were 3% and 7% better than our estimates, operating profit excluding noncash and nonrecurring items was broadly in line. Meanwhile, STO's first-quarter results are ahead of our expectations. Revenue grew 16% year over year in the quarter, thanks to a strong volume growth of 37%. Gross margin rose a single percentage point year over year to 5.88% in the quarter. Operating profit excluding noncash and nonrecurring items and recurring net profit to shareholders surged 85% and 49%, respectively, year over year. These beat our expectations due to higher-than-expected cost savings and economies of scale. As such, we increased our revenue assumptions in the next three years by an average of 4% to factor in the high volume achieved. We also raised our 2024-26 operating profit excluding noncash and nonrecurring items by 0%-5%. However, the better earnings were more than offset by the increased net debt position in 2023, and therefore we cut STO's fair value estimate by 4% to CNY 9.20 per share. We think STO's shares are fairly valued currently, as we still expect intense competition in the sector.