Investment Highlights

• We are NEUTRAL on the transportation sector in 2018. While we like transport firms which operate (or have a growing presence) in the tourism and e-commerce space, we are cautious on seaport operators.

• Transport firms operating in the tourism space, i.e. AirAsia and Malaysia Airports, will benefit from the sustained recovery in tourist arrivals in 2018 (after reporting the first dip since 2003 in 2015 following the air disasters of MH370 and MH17 in 2014) (Exhibit 2). In his Budget 2018 speech, PM Datuk Seri Najib Razak said that Malaysia’s tourist arrivals should hit 28mil in 2018 (up 3.3% from 27.1mil in 2017 based on the projection by FT Confidential Research). The number should continue to grow, leading up to Visit Malaysia Year in 2020, when Malaysia is also slated to host a series of highprofile international events including the Commonwealth Heads of Government Meeting (CHOGM), the APEC Summit and World Congress of Information Technology (WCIT).

• The rapidly expanding e-commerce sector, particularly, online shopping, has created huge opportunities for parcel delivery service providers such as Pos Malaysia. Meanwhile, Malaysia’s presence in the regional and global e-commerce market is on the cusp of an unprecedented quantum leap forward, 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 a regional 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 action in the physical zone of the DFTZ.

• On the other hand, we do not expect seaport operators (particularly, a transshipment port like Westports) in 2018 to completely shrug off the negative impact from the recent reorganization of the global shipping alliance, and the resulting diversion of transshipment cargo volumes to Singapore. On a brighter note, we expect gateway cargo volumes to continue to grow in 2018, thanks to Malaysia’s robust exports and imports. Meanwhile, Bintulu Port will be weighed down by start-up costs at its newly completed Samalaju Industrial Port in 2018.

• 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 in lower 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) comes in higher on stronger crude oil prices.

• Our top pick for the sector is AirAsia. AirAsia is a good proxy to the growing low-cost air travel market in the region, underpinned by rising per capita incomes and a young demographic. Its strong market presence (in terms of the number of routes, and frequencies for each route) enables it to compete effectively against its rivals (both low-cost and fullservice). It has struck a chord with investors with its plans to monetise some of its auxiliary businesses and assets including its leasing arm and ground handling unit, which could translate to special dividend payouts to shareholders.

Source: AmInvest Research - 6 Dec 2017