Investment Highlights

• We are NEUTRAL on the transportation sector over the next 12 months. While we see opportunities in the e-commerce space, we are cautious on the tourism sector. Also, we are mindful of the increased policy/regulatory risk to businesses operating on a concession basis (such as Malaysia Airports) given the pro-competition stance of the new administration. On the other hand, the seaport sector may get a lift through the government’s initiatives to engage international shipping operators/alliances in enticing them to pick Malaysian ports as their transhipment hubs.

• Statista projects the e-commerce sector in Malaysia, estimated to be valued at US$3.14mil (RM13.2mil) in 2018, to grow at a CAGR of 12.7% over the next five years (Exhibit 1). We believe the key driving forces are the trend towards online shopping and an expanding peer-to-peer economy. Consumers are attracted to online shopping due to price advantages, product range and its sheer convenience. The rapidly expanding e-commerce sector has created huge opportunities for parcel delivery service providers such as Pos Malaysia. Also, Malaysia’s presence in the regional and global e-commerce market is on the cusp of a quantum leap, driven by the Alibaba-backed Digital Free Trade Zone (DFTZ) project in the KLIA Aeropolis. The DFTZ will serve as a regional e-fulfilment centre (virtual zone) as well as an e-commerce logistics hub (physical zone). Apart from Malaysia Airports (the landowner and developer of the KL Aeropolis), we believe local logistics players (including warehouse operators) are poised to garner a slice of the action in the DTFZ physical zone.

• Tourism Malaysia projects Malaysia’s tourist arrivals to grow by 6.4% to 28.1mil in 2019 and by another 6.8% to 30.0mil in 2020 (from 26.4mil estimated for 2018) backed by the Visit Malaysia Year 2020 campaign (Exhibit 2). We are more inclined to believe that these are relatively tall orders given: (1) the limited government funding for tourism promotion; (2) the imposition of a departure levy of RM20 and RM40 for Asean and international destinations respectively effective 1 June 2019 that may discourage budget travelers from visiting Malaysia; (3) the termination of the 20th Century Fox World Theme Park in Genting Highlands; (4) the cancellation of the 2020 Commonwealth Heads of Government Meeting (CHOGM) in Kuala Lumpur; and (5) an expected slowdown in China’s economy which may reduce its outbound tourists (Chinese tourists contributed 12% of Malaysia’s tourist arrivals for 9M18). Tourist arrivals have a direct impact on the performance of low-cost carrier AirAsia and AirAsia X and airport operator Malaysia Airports.

• We see heightened policy/regulatory risk for Malaysia Airports. Malaysia Airports may be subject to higher lease rentals to support the valuations for the impending IPO of the Airport REIT (Malaysia Airports operates airports which are currently leased from the government, and upon the IPO, from the Airport REIT). Also, it appears that the Malaysia Aviation Commission (Mavcom) is moving ahead with plans to implement a new passenger service charge (PSC) calculation in accordance to airport’s facilities (which is more likely to result in lower PSC vs. increased PSC). There is uncertainty with regards to Malaysia Airports’ participation in the future expansion of airports in Malaysia. We believe the Airport REIT could potentially assume the role, or the government may decide to carry it out via open bidding to promote operational and cost efficiency.

• Meanwhile, we are more upbeat on Westports in 2019 with a projected throughput growth of 4% as compared with 2% estimated for 2018, assuming that the lip service and leg work provided by the government will pay off. Transport Minister Anthony Loke will soon meet up with the management of Cosco Shipping Corp Ltd to entice the Chinese shipping giant to make Malaysia its transhipment hub in the region. Also, despite the US-China trade war, regional trade activities, especially the electrical and electronic (E&E) segment, are expected to remain robust.

• We may upgrade our NEUTRAL stance on the transport sector to OVERWEIGHT if: (1) tariffs (such as airport taxes, postage rates and port tariffs) are adjusted upwards; (2) volume performance (such as passenger traffic, cargo throughput and letter mail/ parcel volumes) beats expectations; (3) yields surprise in the upside on reduced competition; and (4) fuel cost (jet fuel for airlines and diesel for seaport operators) comes down on weaker crude oil prices.

• We may downgrade our NEUTRAL stance on the transport sector to UNDERWEIGHT if: (1) volume performance (such as passenger traffic, cargo throughput and letter mail/ parcel volumes) misses expectations; (2) yields surprise in the downside on heightened competition; and (3) fuel cost (jet fuel for airlines and diesel for seaport operators) goes higher on stronger crude oil prices.

Source: AmInvest Research - 21 Dec 2018