Investment Highlights

• We maintain our OVERWEIGHT recommendation for the transportation and logistics sector. We believe seaport operators will continue to benefit from the growing containerised cargo movements worldwide while the parcel delivery segment will continue to ride on the exponential volume growth as the pandemic has permanently shifted part of consumers’ shopping to online. On the other hand, while lagging at present, we believe the recovery in the air travel industry shall gradually take hold as international borders reopen with more economies in the world reaching herd immunity on the back of robust vaccine rollouts.

• The seaport segment has already emerged from the pandemic since mid-2020 and stayed resilient, underpinned by strong demand for seaborne freight as reflected in the record Shanghai Containerize Freight Index (SCFI) (Exhibit 2), a barometer of the containerised trade globally. We believe this has been supported by: (i) the recovery in demand for consumer and industrial goods such as apparel, accessories, machinery parts, automotive parts, etc. in the West; (ii) the restocking activities by big retailers (such as Amazon and Walmart); and (iii) increased semiconductor production in response to the acute chip shortages worldwide (especially in the automotive industry).

• However, seaports have not been able to realise their full potential due to the congestion at the ports that hurts efficiency. The port congestion has been triggered by: (1) the imbalance in the East–West seaborne trade as economies in the West are reopening faster than in the East (due to their better accessibility to vaccines). The imbalance has resulted in the shortage of empty containers in the East but excess in the West; and (2) a longer turnaround time at seaports in the East due to various restrictions as the pandemic is still raging on in the East.

• We believe the port congestion should gradually ease: (1) as shipping liners take delivery of new containers; (2) as the East catches up with the West in recovery (with vaccination programmes in the East gaining momentum); (3) as more air cargo capacity comes back online as international borders reopen; and (4) the shift in consumer spending in the West to services (restaurant dining, entertainment, travelling, etc.) from imported goods (consumer electronics, white goods, furniture, home improvement products, etc.) as the movement restrictions ease.
  
  Already, the Flexport Post-Covid Indicator (Exhibits 3 & 4), a tracker for US imports of goods by sea, has eased from its peak in 1Q2021 but held up at pre-pandemic levels, which is ideal as it is not too hot (over-heating could worsen or prolong the port congestion) and not too cold (a pullback that is too steep could put the long-term growth prospect of seaports into question).
   
• Westports, being one of the key transhipment ports in the region, could still be punching below its weighting amidst the ports congestion. Its operational efficiency is hurt amidst excessive traffic at the port and as shipping lines miss their port call schedules, having been held up too long during their calls in the previous ports (again, due to the port congestion). However, assuming the situation is to revert to normalcy over the immediate term, Westports should return to a stronger growth path. As such, we are projecting Westports’ container volume to grow by a stronger 5% in FY22F, from a mere 2% in FY21F.
   
• The parcel delivery segment will continue to ride on the exponential volume growth as the pandemic has altered consumers’ shopping habit to a combination of visiting physical stores and browsing online channels (from predominantly visiting physical stores previously). We believe consumers have permanently shifted part of their shopping to online, having experienced the convenience and price competitiveness without a significant compromise on product quality.
  
  Meanwhile, the moratorium on new courier service licences will prevent the already crowded playing field from growing bigger. We see the existing players gravitating towards the crowd-sourcing model (i.e. outsourcing the last-mile delivery fulfilment to third-party contractors) and the asset-sharing model introduced under the National Courier Accelerator Plan (PAKEJ) as a step in the right direction. Under the crowd-sourcing model, it allows for flexibility in terms of accessibility to additional capacity during the peak period without having to carry the fixed overheads during the off-peak period, while the asset sharing model optimizes players’ capex plans. The crowd sourcing model also helps groom self-employed entrepreneurs in the gig economy.
   
• Zooming in on Pos Malaysia, we remain cautious for its near-term outlook as its operational efficiency (which resulted in high costs structure) and service quality (which poses risks in losing market shares) remain big concerns. Following the roll out of initiatives under the PAKEJ, Pos Malaysia might be subject to penalties if it continues to miss the quality of service standards. Moreover, under the asset-sharing initiative, Pos Malaysia might lose its advantages over its inherited extensive network coverage, as now other service providers can ride on their network to gain more coverage and expand their services. This will result in Pos Malaysia losing its market share to its competitors that have been expanding aggressively and is operating with much leaner and efficient business structure.
   
• We believe the recovery in the air travel industry shall gradually take hold as international borders reopen with more economies in the world reaching herd immunity on the back of the robust vaccine rollout. However, for 2021, the prospects remain unexciting, with MAVCOM projecting the air passenger traffic in Malaysia to contract between 22.9% and 29.1% YoY, in line with our assumption of 20% contraction YoY.

• For proxy to the recovery in the air travel industry, we pick Malaysia Airports which is a relatively safe bet given its business of airport operation of strategic national interest and strong shareholders of government-linked entities. We are cautious on AirAsia as despite a highly dilutive cash call, it remains to be seen if it will emerge from the current crisis given its severely damaged balance sheet in the aftermath of the pandemic.

• We believe, as far as the transport and logistics sector is concerned, there are silver linings during the pandemic. For instance, certain seaport operators locally have managed to gain market share from the diversion of cargoes from congested ports. Meanwhile, the significantly expanded parcel delivery market locally allows new and smaller players to find their niches and co-exist with the more established and larger players. The airlines and airport operators see opportunities in increased demand for freight services and the survival instinct has prompted them to innovate and develop new income stream while containing their cost to a bare minimum.

• Our top pick is Westports (fair value RM5.07). We believe the throughput of seaports, Westports included, to continue to grow as global trade recovery gains further momentum, backed by the reopening of economies, businesses and borders. Looking beyond the pandemic, 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 base by multi-national companies out of China to the region due to the rising labour and land costs, exacerbated by the USChina trade war. Westports has charted a long-term expansion plan to capitalise on these.

• We may downgrade the sector to NEUTRAL/UNDERWEIGHT if: (1) the container throughput volume came in weaker than expected; (2) the air travel demand recovery is slower than expected; and (3) the parcels volume came in lower than expected.

Source: AmInvest Research - 14 Jul 2021