Later, exclusive丨Jitu is negotiating with SF to buy shares and explain the logic behind the transaction in detail

Wen 丨 Shen Fangwei

Editor丨Gao Honghao

In its third year in China, J&T Express, known for its aggressiveness and boldness, opened a new round of mergers and acquisitions. In May, J&T spent 1.18 billion yuan to acquire SF's Fengwang Express, an economy express delivery business established by SF in 2020. But this deal is just the beginning of a partnership between the two sides.

"LatePost" exclusively learned that SF is in recent contact with J&T on equity cooperation, or will invest in J&T Global at a ratio of 1% - 2%, and the specific investment amount and cooperation details are still under discussion.

J&T was founded in 2015 by Li Jie, the founder of OPPO's Indonesia business, and grew into the largest express delivery company in Southeast Asia in 4 years. In the second half of 2019, Jitu returned to China for development and achieved the fifth place in China's express delivery industry 3 years later. However, at present, China's express delivery industry has entered the stock era, and the possibility of Jitu seeking greater growth space here has become smaller, and its eyes have once again turned overseas.

SF, on the other hand, set internationalization as its second growth curve after its sinking failure in 2021. It acquired Kerry Logistics, now the second-largest express delivery company in Southeast Asia, which had competed fiercely with J&T in Thailand. A person close to SF said the two sides were expected to have a truce after the cooperation.

Today, the wave of Chinese e-commerce going global is one of the few opportunities that can allow emerging express companies to go global. For two companies eager to explore the international market, cooperation is more urgent than competition - J&T has overseas customer resources, as well as terminal distribution networks in Southeast Asia, the Middle East and South America; SF has the largest air cargo fleet in China and an extensive network of air trunk lines, and the two sides can seize this window faster. Otherwise, it will take them three to five years to build infrastructure from scratch.

"LatePost" asked Jitu and SF officials to confirm the news, but did not receive an official response.

Difficult to deal with Chinese opponents

Three years ago, after J&T shifted its business focus from Southeast Asia to China, it became the fifth in China's express delivery industry by relying on the support of Pinduoduo, initiating price wars to subsidize merchants, and spending more than 20 billion yuan to build infrastructure.

Acquisitions are a common method it uses when expanding its domestic territory. In 2019, J&T obtained the China express business license through the acquisition of Longbang Express; In September 2021, it acquired and integrated Best Express for 6.8 billion yuan, which greatly improved its infrastructure, raised the capacity ceiling and obtained orders from Taojie e-commerce. But this time, the acquisition of Fengwang may not help Jitu's business much.

Several polar rabbits expressed similar views to LatePost. In the year before the acquisition, SF had reduced its investment in Fengwang, and its unit volume fell from a peak of 8 million to around 3 million. Fengwang previously mainly relied on SF's infrastructure to support its operations, and did not have much of its own infrastructure for J&T to use. After the acquisition news was announced, SF also announced that it would return the deposit and deposit to Fengwang franchisees, and give compensation, which further accelerated the loss of Fengwang franchisees.

A person close to J&T revealed that the essence of the deal is that J&T hopes to establish a deeper relationship of trust with SF and seek more cooperation. An investor of J&T cited SF's stake as an example, and if the deal is completed, J&T will be replenished with funds. "Buying a fengwang is about equal to not spending money."

In 2020, when J&T came to China, founder Li Jie hoped to learn from China's more advanced experience, improve efficiency, and then go to a larger global market. It is understood that the two sides may seek cooperation in international freight business, using SF's aircraft and aviation trunk lines to carry e-commerce packages carried by Jitu.

As the largest cargo airline in China, SF has nearly 100 cargo aircraft and has opened cargo routes to and from Europe, North America, Southeast Asia and other regions, which is also a popular destination for J&T's overseas customers. CITIC Securities' previous survey of SF showed that SF Airlines has a trunk line load rate of 51%, lower than FedEx and UPS's 61% and 73%, and SF's aircraft can theoretically carry more packages.

At present, J&T is shifting its focus back to the global market, which is also the choice that J&T has to make after the slowdown in domestic business growth.

In 2022, J&T's share and ranking in the Chinese market have not gone further. It had hoped to continue to cooperate with Pinduoduo to expand its market share by subsidizing merchants together; Then invest the money raised and the profits obtained in the Southeast Asian market into China, build a basic network, and obtain scale effects.

This plan worked for a time. However, with the introduction of more logistics partners in the past two years, Jitu's parcels have no longer grown significantly, and the proportion of parcels it carries in Pinduoduo's total daily parcels has always remained at about 20%.

Today, when the number of express parcels in China is stuck at 300 million per day and is no longer growing significantly, competitors are also starting to squeeze each other in the way they are good at. Zhongtong and YTO, which ranked first and second, have lowered their prices to varying degrees this year; Shentong, who finished fourth, also plans to sacrifice profits for growth and reach third place by the third quarter of this year.

A number of franchisees from Guangdong and Jiangsu, the main production areas of express delivery, told LatePost that since March 2023, the price of three links and one delivery in some areas of the two provinces has been lower than the 2021 express price war period. An industry insider believes that the price reduction of ZTO and YTO means that the network construction of the two companies in the past few years has borne fruit, and it can make single-piece express delivery cheaper.

For polar rabbits, this is not good news. In the case of similar price levels, merchants are more inclined to use express delivery such as ZTO and YTO with more stable service and timeliness. In terms of market share, ZTO's market share increased to 23.4%, YTO to 16.58%, Shentong to 12.48%, and SF to 10.67% in the first quarter of this year.

"LatePost" learned that the best result of the past year was 40 million orders peaked in June last year. Since the third quarter of last year, Jitu's goal has shifted to pursuing a positive national gross profit and abandoning large-scale subsidies. At the end of the year, J&T China achieved positive gross profit by shrinking its scale. As of April this year, the average daily order volume of Jitu has not exceeded 40 million.

A number of J&T people said that in order to cope with possible future listing plans, J&T allows a certain loss of market share, but does not want to produce large losses, so it will not follow up subsidies in the future competition. This means that the opponent's crushing erosion of polar rabbits will persist.

The express delivery industry has also returned to the competition of efficiency and cost today, and the resources invested in the past determine today's efficiency. Rivals are more powerful than Jittu, buying more land, updating vehicles and equipment, and constantly reducing costs and improving efficiency over the past decade. This is directly reflected in the capital investment of several companies, the industry's first place ZTO Express has achieved capital expenditure of 27.5 billion yuan in the past three years, and Shentong, which has the least investment, has also reached 8.9 billion yuan.

The Best Express previously acquired by J&R has helped its production capacity reach the level of 55 million orders, but in terms of efficiency and cost, J&R and its acquisition point Best are not dominant, and the gap between J&R and the industry's first place ZTO is not only 25 million units. If Jitu wants to grow bigger and healthier in China, it must shorten the cost gap with its rivals as much as possible. These absent courses cannot be quickly won by subsidies, and they need to be made up for at a higher cost in the future.

"LatePost" learned that from 2021 to 2022, J&T spent about 3.5 billion yuan on upgrading and expanding the transit center, updating equipment and improving production capacity. At present, Jitu franchisees, trunk lines and franchisees in various regions are also increasing investment to improve and improve service quality.

A person close to Jitu revealed that the company has realized that under today's fierce competition, the express delivery industry will change greatly in the next year, and the top five players may have at least one laggard, and Jitu at the bottom of the unit volume ranking is facing greater pressure.

SF's second growth curve

For a long time, "SF" was an alternative to the Chinese express delivery industry, and this company stood for speed and quality.

SF's barrier builds on the early vision of founder Wang Wei, who built China's largest cargo aviation network and firmly grasped the most profitable business in the express delivery industry - time-limited express shipments with an average price of more than 20 yuan. About 70% of the time-limited express shipments in the Chinese market are in the hands of SF Express.

Three links and one arrival chose another way - 2-3 yuan per order of economic express. They have traded profits for scale in the past decade of e-commerce, surviving years of price wars and knockouts.

Since 2013, SF has followed the fast-growing e-commerce market to launch standard parts with a 6% discount price for time-limited parts, and since then it has successively launched lower-priced e-branded fast, special special distribution and Fengwang. In 2020, Fengwang and Jitu started the same year, but Fengwang is positioned more high-end, priced at 3-5 yuan, and plans to erode the mid-to-high-end market of three links and one reach.

SF's original vision for Fengwang was to use the spare capacity of SF's main network to operate products at low cost. In areas with a large volume of express delivery, franchisees are recruited to collect and receive e-commerce parts, rely on SF terminal outlets to deliver for them, and absorb more franchisees after reaching a certain scale, establish independent distribution centers and transshipment networks, and realize self-collection and self-dispatch.

This idea was once successful, and at the beginning of its establishment, Fengwang launched the slogan of "SF's service, accessible price", absorbing a large wave of franchisees and e-commerce customers, and the peak order volume once reached 8 million.

However, the influx of orders has created new problems. SF was able to spill less capacity than expected. If the number of Fengwang express shipments exceeds the carrying capacity of SF trunk line vehicles, the excess parcels will be stranded in transit centers at all levels, resulting in impaired user experience. If a new car is reopened, Fengwang will find it difficult to pay for the vehicle because the package price is too low, and the business will face the risk of loss.

During the e-commerce promotion seasons such as "Double 11" and "618", in order to give priority to ensuring time-limited parts with higher profit margins and standard fast e-commerce parts, SF required Fengwang to actively reduce production, and franchisees to reduce receipts, resulting in the loss of customers. Some merchants who use Feng.com will also falsely claim to use SF to send mail, but the result is that users still do not receive the package after three or four days, venting their dissatisfaction on SF. After that, SF began to cut with Fengwang, not allowing Fengwang to solicit customers in the name of SF, and the words "SF Express", "SF" and "SF Fengwang" were not allowed to appear on the face list.

In the first quarter of 2021, SF suffered its first quarterly loss since its listing due to its investment in new businesses such as Fengwang and special offers. Gross margin slipped to 7.16% from nearly 20% when it went public in 2017. Coupled with the price war set off by Jitu and Tee Yida, SF's stock price fell by more than 30% in the quarter, and its market value fell by more than 200 billion yuan.

The performance fluctuated sharply, and Wang Wei had to stand up and apologize to investors. He acknowledged that there had been problems with the company's operations and assured that a similar situation would not occur a second time. An SF source told LatePost that after Wang Wei apologized, the company's investment in sinking business and new businesses unrelated to the main business was significantly reduced, low-priced special products were canceled, and Fengwang no longer received a lot of resource support, becoming more and more marginal in the SF system.

The above-mentioned SF person believes that today, SF's attitude towards China's express business has changed from offensive to defensive. SF's previously planned network integration is still continuing, but the core purpose is no longer to touch the low price and sink sharply to 2-3 yuan, but to hold the basic market, such as making e-commerce pieces with an average price of more than 7 yuan to 5-6 yuan, ensuring stable services and preventing further upward penetration of opponents.

Since 2021, SF has begun to plan going overseas as the company's new second curve, and acquired a 51.5% stake in Kerry Logistics, Southeast Asia's second largest express delivery company, for HK$17.555 billion, but this is not enough to support SF's ambitions.

Kerry is still facing fierce competition in the Southeast Asian market, and since 2021, Kerry Express, Kerry Express, a subsidiary of Kerry, has engaged in a fierce price war with Jitu and Thailand's local express Lightning, and all three parties have invested a lot of subsidies, which directly led to the profit of Kerry's express business in 2022 turning from HK$40 million in the previous year to a loss of HK$826 million.

A number of SF people told LatePost that SF's expectation for the future is to challenge the world's top three express delivery companies, which means that SF needs to look for more opportunities in overseas markets. Today, the world's top three express companies firmly capture 80% of the world's international express business with their huge fleet size and transshipment network, and have an absolute advantage in cost and efficiency. In the international market, there are not many opportunities left for emerging express companies.

For J&T and SF, cooperation is the best choice to open up a new front in a market surrounded by strong enemies.

What SF wants and what Jitu can give

A number of relevant people close to J&R and SF told "LatePost" that J&R has overseas customer resources, as well as terminal networks in Southeast Asia, the Middle East, and South America; SF's aircraft network and aviation trunk lines can help J&T increase overseas logistics lines and supplement transportation capacity after cooperation.

A J&T source told "LatePost" that if the two sides choose to fight alone, whether it is SF's self-built terminal network and attracting customers, or Jitu self-built aviation trunk line, it will take three to five years, they will not be able to keep up with the current wave of Chinese e-commerce going overseas, and the market may also be intercepted by DHL and FedEx.

E-commerce is one of the few opportunities that will allow emerging couriers to go global. The three major express delivery companies led by UPS, FedEx and DHL account for 90% of the world's international express shipments, and with their hub sites around the world and hundreds of cargo aircraft, it is difficult for latecomers to challenge them in the frontal battlefield. As one of the few emerging global express delivery companies in the past few years, J&T relies on the order support of Chinese cross-border e-commerce such as Temu, Shopee, TikTok, and SHEIN.

However, for now, there is still considerable uncertainty about the effectiveness of this cooperation. "LatePost" learned that the overall cross-border business of J&T is in the stage of exchanging subsidies for market scale, and it is still losing money.

International freight usually adopts a bidding model, and the lowest price wins. We have previously reported that about 50% of Temu's overseas packages are shipped by J&T, and the price charged by J&T to Temu is about 40 yuan / kg (about equal to the delivery fee at the end of the United States), which is lower than the market quotation of 80-100 yuan / kg. In this regard, J&T International said that the news was untrue.

SF can provide aircraft and aviation trunk lines, which means timeliness and stability, but does not mean better cost.

Cargo flights were hot in the past three years when the pandemic led to a decline in passenger flights, but when the world returns to normal and a large number of passenger flights resume, they will take a share of cargo orders. The price of sending goods by passenger aircraft is about 70% of that of a special freighter.

In the short term, if this cooperation wants to achieve greater results, SF must subsidize with Jitu and absorb more customers. In the long run, the business depends on how much users are willing to spend – whether e-commerce platforms are willing to pay a premium for faster, more stable logistics.

A problem that cannot be ignored is that the vast majority of air parcels sent overseas by Chinese cross-border e-commerce are now small items with low unit prices. For more controllable and stable standard products, especially larger volumes, when destination consumers have developed the habit of continuous purchase, e-commerce platforms can solve the first-mile logistics through low-cost sea transportation, build local warehousing locally, and then consider solving the distribution problem at the destination.

Only when these cross-border e-commerce platforms are interested in giving a faster and better quality shopping experience, and the unit price of goods is high enough, will they have more motivation to choose air parcel service providers with better timeliness. In the future, it is still unknown how continuous order growth e-commerce platforms can bring and how expensive goods they can sell.

But today, Jitu and SF have to cooperate, which is one of the few opportunities they are unwilling to give up and open up overseas battlefields.