Expansion and efficiency improvements will drive the funding needs of Chinese road logistics companies, as leading companies invest in logistics infrastructure, technology upgrades and overseas expansion, says Fitch Ratings.

China’s logistics sector, the world’s largest, grew by a CAGR of 6.6% between 2017 and 2022 exceeding real GDP growth in the same period. Fitch expects the sector’s growth to hover in the mid-single digits in the medium term as China’s slowing economic outlook will be partly offset by customers’ rising demand for fast and quality logistics services.

China’s 14th Five-Year Plan for the sector focuses on developing an efficient and integrated network. About 72% of China’s total freight volume was transported by road in 2022 and privately owned entities dominate road logistics. China’s logistics infrastructure, however, is mainly invested by state-backed capital and state-owned logistics companies tend to provide more integrated and multimodal logistics services than their private counterparts.
Leading road logistics companies enjoyed strong revenue growth in the past few years from M&A and network expansion. Companies also expanded overseas to widen their customer bases and gain market share.

As marginal cost savings from economies of scale diminish after reaching a certain scale, companies try to maintain profitability by going asset-light, providing differentiated service, and upgrading technology, including automation and digitalisation.

Expansion and efficiency improvements led to road logistics companies’ high capex needs in recent years. As a result, most companies’ free cash flows (FCFs) were negative in 2020-2021. Nevertheless, their FCF margins turned positive in 2022 as they focused on efficiency improvement and cost management. While the leaders have access to diverse funding channels, most companies rely on equity market to fund their increasing investment needs.
Source: Fitch Ratings