AmInvest Research Reports
TRANSPORTATION & LOGISTICS - Seaports the Bright Spot
AmInvest
Publish date: Fri, 27 Dec 2019, 09:04 AM
AmInvest
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All materials published here are prepared by AmInvest. For latest offers on AmInvest trading products and news, please refer to: https://www.aminvest.com/eng/Pages/home.aspx
Tel: +603 2036 1800 / +603 2032 2888
Fax: +603 2031 5210
Email: enquiries@aminvest.com
Office Hours
Monday to Thursday: 8:45am – 5:45pm
Friday: 8:45am – 5:00pm
(GMT +08:00 Malaysia)
Investment Highlights
We are NEUTRAL on the transportation sector over the next 12 months. The prospects of airlines and airport operators are favourable, backed by tourist arrivals projected to reach 30mil in 2020 (+12% YoY vs. annualised 9M2019 of 26.8mil) by Tourism Malaysia in conjunction with Visit Malaysia Year (VMY) 2020. For seaport operators in Malaysia, we are forecasting a container volume growth of 4–5%, in line with a projected CAGR of 4.5% in 2019–2024 for international containerized trade by the United Nations Conference on Trade and Development (UNCTAD).
We believe Tourism Malaysia’s forecast of 30mil tourist arrivals in 2020 is achievable. Historically, tourist arrivals surged during VMYs (Exhibit 1 and 2). Also helping are a weak ringgit and “tourist diversion” to Asean destinations (Malaysia included) from Hong Kong amidst unabated political unrest and protests. The positive outlook for Malaysia’s tourist arrivals will be a tailwind to AirAsia’s key strategy to aggressively grow its top line to mitigate the higher cost structure arising from: (1) the sale and leaseback of its aircraft; and (2) the high start-up costs of its digital ventures.
The outlook for the port sector in the region (Malaysia included) is resilient, underpinned by global trade and investments in the manufacturing sector that generate tremendous inbound (feedstock) and outbound (finished product) throughput for ports. There have been significant relocations of the manufacturing bases by multi-national companies out of China to the region due to the rising labour and land costs, exacerbated by the US-China trade war.
An added competitive advantage of seaports in Malaysia is its low port charges, bolstered further by a weak ringgit. Global shipping lines will have to step up their cost-cutting initiatives on the back of slowing business amidst a global economic slowdown. Not helping either is the much more stringent IMO 2020 sulphur cap (sulphur content of fuel used) that will come into effect from 1 Jan 2020, exerting further upward pressure on operating cost of shipping lines.
The growth in local seaports will be underpinned by expansion plans, i.e. a new liquid bulk jetty and eight new container terminals (CT10 to CT17) (that will double its handling capacity from 14mil to 28mil TEUs by 2040) and new triple-E cranes and development of autonomous driving terminal tractors (a JV with Terberg Tractors Malaysia) at Pelabuhan Tanjung Pelepas (PTP).
The local e-commerce sector is expected to expand rapidly with Fitch Solutions projecting a CAGR of 14% in 2018–2022 while the government is even more optimistic with its 20% projection. The online shopping segment, for intance, has created huge opportunities for parcel delivery service providers such as Pos Malaysia (Pos) and GDex. However, the sector is weighed down by an overcrowding of participants (116 as at November 2019), resulting in cut-throat competition and severe squeeze in margins of the service providers. In addition, service quality is an issue, particularly the inability of logistics player to cope with a sudden surge in volume (during promotional periods by e-commerce operators). This can be seen during the recent 11.11 promotion where Shopee (one of the biggest e-commerce player in Malaysia) clocked up sales of 70mil items, as compared with a combined maximum sorting capacity of the two largest logistic players in the region (Pos and GDex) of only 710K pieces/day.
We may upgrade our stance on the transportation sector to OVERWEIGHT if: (1) volume performance (such as passenger traffic, cargo throughput and mail/ parcel volume) beats expectations; (2) yields surprise in the upside on reduced competition; and (3) fuel cost (jet fuel for airlines and diesel for seaport operators) comes down on weaker crude oil prices.
We may downgrade our stance on the transportation sector to UNDERWEIGHT if: (1) volume performance (such as passenger traffic, cargo throughput and mail/ parcel volume) misses expectations as a result of escalated trade war and other geopolitical risks; (2) yields surprise in the downside on heightened competition; and (3) fuel cost (jet fuel for airlines and diesel for seaport operators) rises on stronger crude oil prices.
Our top pick for the sector is Westports (BUY, FV: RM4.81) and MMC (BUY, FV: RM1.58). We believe the seaport operators are beneficiaries of the trade diversion from the US-China trade war. Also helping is the resilient outlook in the region’s port sector, underpinned by investments in the manufacturing sector that generate tremendous inbound and outbound throughput, couple with the weak currency and cheaper port charges.
We are NEUTRAL on the transportation sector over the next 12 months. The prospects of airlines and airport operators are favourable, backed by tourist arrivals projected to reach 30mil in 2020 (+12% YoY vs. annualised 9M2019 of 26.8mil) by Tourism Malaysia in conjunction with Visit Malaysia Year (VMY) 2020. For seaport operators in Malaysia, we are forecasting a container volume growth of 4–5%, in line with a projected CAGR of 4.5% in 2019–2024 for international containerized trade by the United Nations Conference on Trade and Development (UNCTAD).
We believe Tourism Malaysia’s forecast of 30mil tourist arrivals in 2020 is achievable. Historically, tourist arrivals surged during VMYs (Exhibit 1 and 2). Also helping are a weak ringgit and “tourist diversion” to Asean destinations (Malaysia included) from Hong Kong amidst unabated political unrest and protests. The positive outlook for Malaysia’s tourist arrivals will be a tailwind to AirAsia’s key strategy to aggressively grow its top line to mitigate the higher cost structure arising from: (1) the sale and leaseback of its aircraft; and (2) the high start-up costs of its digital ventures.
The outlook for the port sector in the region (Malaysia included) is resilient, underpinned by global trade and investments in the manufacturing sector that generate tremendous inbound (feedstock) and outbound (finished product) throughput for ports. There have been significant relocations of the manufacturing bases by multi-national companies out of China to the region due to the rising labour and land costs, exacerbated by the US-China trade war.
An added competitive advantage of seaports in Malaysia is its low port charges, bolstered further by a weak ringgit. Global shipping lines will have to step up their cost-cutting initiatives on the back of slowing business amidst a global economic slowdown. Not helping either is the much more stringent IMO 2020 sulphur cap (sulphur content of fuel used) that will come into effect from 1 Jan 2020, exerting further upward pressure on operating cost of shipping lines.
The growth in local seaports will be underpinned by expansion plans, i.e. a new liquid bulk jetty and eight new container terminals (CT10 to CT17) (that will double its handling capacity from 14mil to 28mil TEUs by 2040) and new triple-E cranes and development of autonomous driving terminal tractors (a JV with Terberg Tractors Malaysia) at Pelabuhan Tanjung Pelepas (PTP).
The local e-commerce sector is expected to expand rapidly with Fitch Solutions projecting a CAGR of 14% in 2018–2022 while the government is even more optimistic with its 20% projection. The online shopping segment, for intance, has created huge opportunities for parcel delivery service providers such as Pos Malaysia (Pos) and GDex. However, the sector is weighed down by an overcrowding of participants (116 as at November 2019), resulting in cut-throat competition and severe squeeze in margins of the service providers. In addition, service quality is an issue, particularly the inability of logistics player to cope with a sudden surge in volume (during promotional periods by e-commerce operators). This can be seen during the recent 11.11 promotion where Shopee (one of the biggest e-commerce player in Malaysia) clocked up sales of 70mil items, as compared with a combined maximum sorting capacity of the two largest logistic players in the region (Pos and GDex) of only 710K pieces/day.
We may upgrade our stance on the transportation sector to OVERWEIGHT if: (1) volume performance (such as passenger traffic, cargo throughput and mail/ parcel volume) beats expectations; (2) yields surprise in the upside on reduced competition; and (3) fuel cost (jet fuel for airlines and diesel for seaport operators) comes down on weaker crude oil prices.
We may downgrade our stance on the transportation sector to UNDERWEIGHT if: (1) volume performance (such as passenger traffic, cargo throughput and mail/ parcel volume) misses expectations as a result of escalated trade war and other geopolitical risks; (2) yields surprise in the downside on heightened competition; and (3) fuel cost (jet fuel for airlines and diesel for seaport operators) rises on stronger crude oil prices.
Our top pick for the sector is Westports (BUY, FV: RM4.81) and MMC (BUY, FV: RM1.58). We believe the seaport operators are beneficiaries of the trade diversion from the US-China trade war. Also helping is the resilient outlook in the region’s port sector, underpinned by investments in the manufacturing sector that generate tremendous inbound and outbound throughput, couple with the weak currency and cheaper port charges.
Source: AmInvest Research - 27 Dec 2019
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