Sinotrans: domestic M&A or overseas expansion?

What challenging questions were you asked during your IPO and how did you respond to them?

Zhang: Investors questioned whether Sinotrans would be able to sustain its recent growth rates, which have been 19% in revenue terms and 32% in net profit over the past three years. In our presentations we showed that we are the number one in the freight forwarding business, commanding a market share of 10%. In shipping agency, we are second only to COSCO, with a market share of 25% to 30%. In express services, we are again number one, with a market share of 30% based on proportionate consolidation. We made $35 million in profit in the first half of last year. But many investors wanted to know how these figures would be impacted by competition, as mandated by our entry into the World Trade Organization. We think we can maintain a growth rate of 15% to 20% in the medium term with the help of our business relationships and local knowledge. And thanks to the IPO proceeds, the service and network scale will be enlarged, and quality improved.

Why do you think your IPO did well, despite the terrible broader market conditions in late January, early February?

We are in one of the most exciting markets in China, and we are the leading company in that space. In addition, our management team is well respected. Logistics is clearly linked to GDP growth, and at 8%, China's growth is by far the highest among the world's large economies. Finally, our strategy for injecting only the best assets into the Hong Kong listed company satisfied our investors. We didn't encumber the listed company with assets that weren't going to generate profit and adopted an asset light model. That improves the return and is attractive to equity investors.

What are your investor relations plans, especially with your strategic investors?

That's an important point. We intend to have large scale meetings twice a year to discuss the interim and final results and to meet with investors regularly on an individual basis, as well as initiate roadshow programmes for investors. We already have a multilingual investor relations department. We've also worked with our strategic partners for many years and as such have a regular and ongoing dialogue with them.

What role will your numerous strategic investors - UPS, DHL, Exel and Nissin - play going forward?

We have very good relationships with our strategic investors. For example, our contract with DHL is set to last for 50 years. On their part, DHL hope to penetrate the China market through leveraging Sinotrans' network.

Can you imagine a situation where your strategic investors decide on a more independent attack on the mainland market?

In practice, the tend is for an increasing degree of cooperation, with DHL for example. That makes sense from the perspective of foreign companies: Think what it would cost for these companies to set up their own independent networks. They are also fully aware that we are an arm of the Ministry of Foreign Trade and Economic Cooperation, and so have some very strong relationships with central and local governments.

So what is the relationship at the express post level between Sinotrans and its strategic investors?

We have a 50-50 joint venture express service with DHL, which delivers to 39 cities on the mainland and uses the DHL network internationally. We have a similar, smaller scale JV with OCS. International players such as UPS pay to use Sinotrans facilities through an agency agreement. We also have Sinoair, our air freight forwarding business. This company is listed in China, and is 70 % owned by the Hong Kong-listed company. Sinoair is our flagship company through which we carry out our air freight forwarding and international express businesses.

When will you decide to broach the international express mail market?

It's a matter of cost and maturity. We are not in a position yet to build our own international express mail business network, and that's one reason cooperation with DHL and UPS is important to us.

How close are you to becoming a genuine multinational company?

We don't have the resources at the moment to expand abroad, but we accept there's an urgent need to do that. We have decided to do it by working with foreign agencies in each major European country. Our primary focus is to consolidate our leading market positions in each of our core business units domestically. We will continue to expand internationally, but only by working with foreign global players in each major European country and the USA. Accordingly, we don't plan to buy assets abroad.

How will you use your IPO proceeds?

For expansion, such as M&A activities within China that add either network or capabilities. In addition, we will use part of the proceeds to help train our staff and modernize our Information Technology systems to help coordinate our many operations.

Although $500 million is a large chunk of cash, your market is evolving rapidly. Do you envisage tapping the markets again soon?

We estimate we should have sufficient funds for the next five years or so.

Were do you see as the growth areas in the logistics markets?

With China becoming the factory of the world, there's little doubt of the increasing importance of export driven logistics, especially in the Yangtze and Pearl River deltas. Terminal and container operations where we can consolidate freight will be huge growth areas. We are homing in on these coastal areas. By 2008, China will move more than three billion tons of freight every year, of which 70% will be containerized. Note we will not be buying ships, but we will be planning the consolidation, thereby keeping costs and asset ownership at a minimum.