Investment Highlights

• We are NEUTRAL on the transportation sector over the next 12 months. While there are plenty of opportunities in store for players, particularly, in the tourism and e-commerce space, we are mindful of various headwinds such as the increased regulatory risk on the back of the change in the political landscape following the 14th general election (GE14), potential dial-back of certain major initiatives by the preceding administration and rising fuel costs.

• Tourism Malaysia has projected Malaysia’s tourist arrivals to surge by a whopping 28% to 33.1mil in 2018 from 25.9mil in 2017, and will hit 36mil in 2020 in conjunction with the Visit Malaysia Year 2020 campaign (Exhibit 1). We find the projection a tad optimistic given that the numbers had stagnated at about 26mil over the last three years. Nonetheless, we do agree that the trend for tourist arrivals in coming years is upwards, as Malaysia is 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). Low-cost carrier AirAsia and airport operator Malaysia Airports are the main beneficiaries of the growing tourist arrivals.

• The rapidly expanding e-commerce sector, particularly, online shopping, has created huge opportunities for parcel delivery service providers such as Pos Malaysia. 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 action in the physical zone of the DTFZ.

• On the other hand, regulated businesses may face a higher regulatory risk, as the new administration strives for better deals for the rakyat, as promised in its election manifesto. Under these circumstances, it is unlikely, for instance, for airport operator Malaysia Airports to secure an upward revision in passenger service charges (PSC). In fact, in the runup to potentially new rates in 2019, the Ministry of Transport now says that PSC should be determined in accordance with the quality of facilities in the airport, which means certain smaller and older airports may even see a reduction in PSC.

• Also, there are concerns if the DFTZ project, a China-Malaysia initiative of the preceding administration, will go ahead as planned. All China-Malaysia deals signed in recent years will now come under scrutiny. This follows the revelation of unconventional contractual terms the preceding administration entered into with Chinese lenders and contractors with regards to the East Coast Rail Link (ECRL) and two multi-product petroleum pipeline projects, where the payment schedules are based on timeline milestones (which are effectively automatic), vs. the industry’s norm of percentage of completion. This has resulted in the payments being way ahead of the actual work done, which is nonsensical.

• Meanwhile, transshipment seaport operator Westports will still feel the negative impact from the recent reorganization of the global shipping alliance, resulting in the diversion of transshipment cargo volumes to Singapore. On a brighter note, we expect gateway cargo volumes to continue to grow in coming years, 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.

• 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.

• Our top pick for the sector is AirAsia (BUY, FV: RM3.63). 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 full-service). It has struck a chord with investors with its plans to monetise some of its auxiliary businesses

Source: AmInvest Research - 14 Jun 2018