News

• Malaysia Digital Free Trade Zone (DFTZ). It is announced that Malaysia Airport Holdings and Cainiao Network, logistics arm of Alibaba group signed MOU for the development of a regional electronic commerce and logistics hub (under e fulfilment hub area) in KLIA Aeropolis by end 2019, with operations to be led by Cainiao and Lazada (wholly owned by Alibaba Group).

• Initial phase in end 2017. The initial phase of the project will be launched before end 2017 whereby Alibaba, Cainiao, Lazada & POS will be utilizing KLAS upcoming new warehouse (old LCCT terminal) in KLIA. A new proper e fulfilment hub (operated by Cainiao and Lazada) is expected to be formally launched by end 2019.

• We believe the subsequent phase will involve more investments and collaborations between the companies mentioned to further develop the DFTZ into a regional e commerce and logistics cross border hub.

Financial Impact

• We believe one of the direct beneficiaries of this project would be POS, given its direct involvement in the e-fulfilment hub and potential synergies with its other business areas (last mile delivery, haulage, freight forwarding and etc.).

• The launch of DFTZ project will give a boost to Pos Aviation (previously KLAS) revenue as the group would secure additional sources of income from warehousing, distribution and haulage once DFTZ commence its initial phase.

• The fixed overhead that POS will incur for the business would be lease rental of its upcoming warehouse in LCCT amounting to circa RM10m/year.

Forecast

• Raise FY18/19 earnings forecasts by 7/13% to account for higher revenue assumption for Pos Aviation.

Rating

• HOLD 

• Long term prospects of the company remains intact with e commerce set to drive its growth in courier and logistics businesses. However, we believe that it is priced in at its current share price, while its current restructuring and expansion will only bear fruits in the longer term.

Valuation

• TP is raised to RM4.80 from RM3.36 previously post our earnings upgrade and roll forward valuation pegging to higher target FY19 PER multiple of 25x (from 20x) to price in improvement in prospects for e-commerce business in Malaysia post DFTZ launch.

Source: Hong Leong Investment Bank Research - 23 Mar 2017