Introduction of the digital tax may have an indirect impact to healthy parcel delivery volume growth. In Japan, eCommerce revenue growth was tempered post implementation of its digital tax, albeit at a stiff rate of 8%. However, we are more concerned with new entrants into the parcel delivery business coupled with a capex influx which could likely only enhance already elevated competition in the industry. Maintain NEUTRAL on the logistics sector.

Taxing the New Boundless Economy

On the domestic front, local authorities are looking to implement a digital tax on eCommerce transactions. Malaysia is not alone with conventional tax mechanisms falling behind the emerging digital economy. Digital tax would shore up much needed tax revenue collections and level business competitiveness. In our interest, digital tax does not apply to imported physical goods, which is already levied. However, it could apply to online market operators such as the likes of Lazada, 11street and Shopee, indirectly impacting eCommerce volume. Ultimately trickling down to the parcel delivery operators.

Digital Tax Could Temper Parcel Delivery Growth

Japan being one of the earliest adopters of digital tax sets the precedence. The tax treatment was a consumption tax rate of 8% on all eCommerce transactions delivered by foreign business customers, levelling the playing field to Japanese businesses. eCommerce revenue growth took a step down in 2015 and 2016 growing 7.6% and 9.9% respectively against the 4-year historical average of 13.3% (refer Fig. 2). It coincided with the implementation of digital tax in late 2015. Depending on the quantum and extent of the digital tax implemented by Malaysian authorities, it could very well impact parcel delivery volume growth which has been growing at a healthy 4-year CAGR of 24.9%.

Competition Likely to Persist Over the Near Term

Fierce competition in the parcel delivery space that is unlikely to dissipate over the near term is most disconcerting to us. All time high parcel delivery license holders coinciding with a recent influx of capex from existing public listed companies, including GD Express, CJ Century and Tiong Nam is likely to burden the industry over the near term. Emerging headwinds from rising labour cost and potential fuel adjustment could further crimp margins that are already at a multiyear low. It clouds the outlook of the logistics companies under our coverage. Maintain BUY and TP of RM1.25 on Tiong Nam and maintain HOLD and TP of RM0.70 on CJ Century.

Source: Affin Hwang Research - 22 Oct 2018