This is a continuation of our initial article on GD Express. If you haven't read the first part, you may check it out here. Post publishing of this article, shares of GD Express have been split further. New target range starts from conservative figure of 0.44 to 0.72 post share split exercise.   

In Part 1, we focused a lot on the business fundamentals of GD Express. Why we were positive about the business, the direction, where we saw the growth and our entry points for the stock. In this second part, we look to focus on our exit justification.

Valuation & Pricing

As of writing - GD Express is trading at RM2.90 at a PE of around 106. A lot of investors use PE religiously as an indicator to determine if a stock is expensive or not (etc. stock >PE20, is expensive) but we invest in stocks based on their intrinsic value, not price. We wrote an article on the difference between the two and advise you to read the article to understand the distinct difference. 

We used a discounted cash-flow method to calculate the value for this stock. We don't want to bore you with the details of our calculations but in our valuation model, we had a conservative value of RM1.78 and a top value of RM2.55. The difference between the two prices was determined by how much better the business would perform over time.

At RM1.78, the model projected a solid revenue growth but a more conservative market-share and business efficiency similar to the growth pace of what GD Express performance has been able to achieve in the last 5 years. At RM2.55, the projection on revenue was very high - close to what some regional low-cost airlines would gross in revenue and margins that beat transportation industry peers. In summary, GD Express would become one of the leaders regionally (SEA) with a business efficiency that beats it peers.

So the fact that the priced rised to a high of RM3.26 last week, was enough for us to offload 50% of our position at RM3.10 as it was already running more than 22% higher than our best scenario valuation.

What about Jack Ma and the regional hub he is setting up? Doesn't that have an effect? 

Sure it would - if we hadn't already priced that into our valuation. As we mentioned above and in Part 1 of this series, we looked at GD Express as a logistics player benefiting both from the growth of B2B e-commerce transactions as well as B2C e-commerce transactions in Asia. We also inserted into our valuation, revenue growths that what we believe a regional (SEA) logistics player could gross.

That didn't change with Jack Ma's announcement. In fact, our top valuation of RM2.55 became more possible if the regional hub was a success and its already priced way more than that now. 

The only way for us to get a much higher valuation was a scenario where GD Express became a much larger household name in the region and possibly Asia. Think say what Air Asia have done and how much it has left Malaysian Airlines behind. If you can't see GD Express even taking over POS Malaysia, then it is hard to justify a higher value for them at this moment. 

Are we off-loading all our holdings now then since it has hit our value?

Definitely..... NOT. Although our investment strategy is based on trying to correctly value a company and profiting from mis-match of stock pricing to is value, we know markets have a life of their own. Strong trends up or down can continue even though it defies your logic. 

We are happy to book 50% of the profits right now while we see how far the positive sentiment can help us profit further. Based on the latest charts, it is possible that we have somewhat reached a reversal point. But we will monitor this closer to confirm. 

Being in profit gives us an advantage to be more patient. Maybe like in 2016, a new set of information comes in that will enable us to value this stock higher. Maybe Jack Ma starts piling work for his hub in Sepang that turns a plan into a reality - bringing in further euphoria to the stock. Maybe GD Express starts to buy-up smaller local players into their business to fortify their position raising their market share. That would be a totally different scenario that would likely mean a hike in value. 

We don't know - but we have preset a price when we are quite certain the trend it over. Until that happens, we will sit in this stock and hopefully some of these "maybes" will become announcement or plans - and we get a further boost in our portfolio returns from GD Express.

We can't advise if this strategy will work but for now, we will happily stay invested - albeit only partially. 

Disclaimer : This article is for educational purposes and not a solicitation to buy or sell this stock. Please use your own judgement before making any investment decision.