Investment Highlights

• We upgrade our call on the transportation & logistics sector to NEUTRAL from UNDERWEIGHT. We believe the seaport segment has embarked on a firm and sustainable recovery path underpinned by the reopening of economy globally and a seemingly decent peak year-end holiday season, as evidenced in the record high Shanghai Containerized Freight Index (SCFI) (Exhibit 3), often used to gauge the health of global trade, which shows the strong demand for container capacity. Meanwhile, the logistics segment continues to benefit from a surge in e-commerce demand fuelled by the pandemic. The air travel industry, however, is still in a survival mode, suffering from a cash crunch and cross-border travelling restrictions.
• Ports: We are keeping our view that the seaport sector locally and in the region has seen the worst, and is on its recovery path as global economies reopen. We believe the pandemic (as well as the increased trade tensions between major economies in the world prior to the pandemic) will reshape the global supply chain, resulting in diversion of investments away from China to the Southeast Asian region, boosting container throughput in the region.
• According to UNCTAD (Exhibit 4), the world output growth is projected to be more resilient in developing countries compared to developed countries. It is forecasting the Asia region to have output growth of 6.3% YoY for FY21F, vs. a 4.1% YoY growth globally (after shrinking by a marginal 0.9% YoY for Asia, vs. 4.3% YoY contraction globally in FY20F). We believe this was mainly because the developing countries are home to many suppliers in the fast-growing sectors such as communication equipment, semiconductors, textile and apparels, which will contribute positively towards the growth in container trade volume, and thus the container throughput volume at the ports in the region. As of the first half of 3Q, some of these sectors have already registered positive growth YoY (Exhibit 5), i.e. communication equipment (+8%) and textiles and apparel (+3%).
• Air travel: According to data published by Lufthansa Innovation Hub (Exhibit 6), China’s weekly domestic flights have already recovered to the pre-Covid level, registering a ~4% growth YoY (as at the second week of October), mainly driven by the country’s Golden Week holidays as the country celebrates its national day with a week-long holiday. Meanwhile, international flights recovery remains slow at ~6% of the pre-Covid level.
• Taking China’s recovery as a reference, we believe the domestic and regional air travel could bounce back strongly if the pandemic is effectively contained either by way of contact tracing or the availability of vaccines. We project the domestic air travel demand to recover back to the pre-Covid level by 2022, while expecting the international air travel demand to only recover fully by 2024.
• To ride on the recovery in the air travel segment, we prefer airport operator Malaysia Airports (BUY, FV RM6.64) to airline AirAsia (SELL, FV RM0.44) as it is a foregone conclusion that the latter will have to raise a significant amount of fresh capital to patch up the damaged balance sheet, which will be highly dilutive to existing shareholders.
• Logistics: The parcel delivery segment will continue to be the winner from the pandemic as consumers shift their shopping habits from physical stores to online channels, boosting the demand for parcels delivery. However, the crowded sector locally continues to be weighed down by the cut-throat competition, resulting in severe squeeze in margins.
• We believe the logistics players will continue to focus on improving their service level and operational efficiencies to gain market shares and improve margins, which is critical for the players to survive in the overcrowded space, and eventually benefit from the e-commerce boom.
• Our top pick within the sector is MMC Corporation (BUY, FV RM1.56) and Westports (BUY, FV RM4.45), as we anticipate the recovery in container throughput over the next 6–12 months.

Source: AmInvest Research - 22 Oct 2020