The launching of the Malaysia Digital Free Trade Zone is deemed to be a positive development towards the overall logistics sector. We believe this follows up on Alibaba’s USD1b investment to control Lazada in April last year, with Lazada Malaysia already overtaking its Singaporean counterpart to become the fastest growing e-commerce platform in the region. We identified GDEX to be the immediate proxy for e-commerce in the country, while integrated-logistics companies venturing into the e-commerce delivery business, e.g. TNLOGIS and CENTURY, may also benefit given the end-2019 launch timeline for Alibaba’s distribution hub. Following a strong share price rally of 28% within a month, we are downgrading our call on GDEX to MP from OP, as we believe the foreseeable positives have already been priced in. We maintain our calls for the rest of our coverage, while keeping our NEUTRAL stance on the sector

Launching of the Malaysia Digital Free Trade Zone. On Wednesday, The Prime Minister, accompanied by Jack Ma of Alibaba, launched the Digital Free Trade Zone (DFTZ), which includes Alibaba’s regional e-commerce distribution hub, a first outside its home base in China. The plan for Alibaba’s e-commerce distribution facility, with an expected launch at end-2019, is to function as a centralised customs clearance, warehousing and fulfilment facility for Malaysia and the region to deliver faster clearance for imports and exports. Meanwhile, the DTFZ will provide physical and virtual zones to facilitate businesses to capitalise on the growing internet economy, with its implementation to be done in phases. The first phase is the development of the e-commerce logistics hub near KLIA, with the second phase being the launching of the Kuala Lumpur Internet City that will take the form of a 500k sq ft area in Bandar Malaysia.

Positive long-term impact towards overall logistics sector. The launch of the DFTZ, together with Alibaba’s regional distribution hub in Malaysia, shows some level of commitment to unlocking the penetration rate of e-commerce within the country. With the expected launch of the distribution hub set at end-2019, we believe this will be enough time for integratedlogistics players that are venturing into e-commerce delivery, such as CENTURY (Not Rated) and TNLOGIS (MP, TP: RM1.71), to mature out of their gestation periods to reap benefits from upcoming launch. TNLOGIS’s ventures into: (i) land-trucking in ASEAN, specifically to target e-commerce firms in China, and (ii) e-fulfilment deliveries domestically, are expected to commence operations this coming 2QCY17. And while initial earnings impact is expected to be minimal, longer-term prospects are promising, especially after the commencement of DTFZ, as it may potentially drive higher cargo volume to/from China postestablishment of the e-commerce distribution hub. We also believe TNLOGIS has the unique ability to integrate its logistics service to present itself to customers as a one-stop logistics solution. Likewise, CENTURY is also understood to be venturing into the e-commerce and parcel delivery space since the entry of CJ Korea Express as its largest shareholder.

E-commerce as a focal point. We believe that the launching of Alibaba’s distribution hub is a follow-up on its USD1b investment last April for control over Lazada. In the past nine months, Lazada Malaysia has overtaken its Singaporean counterpart to be the fastest growing e-commerce platform in Southeast Asia. We believe all these developments show signs that the local e-commerce market is ready for a new stage of growth, with the government targeting the digital economy to contribute 18% of GDP by 2020. Amongst all, we have identified GDEX (MP, TP: RM1.93) to be an immediate beneficiary and earnings-proxy for the country’s growing e-commerce, given its: (i) well-established up-and-running e-commerce delivery operations, while other logistics players venturing into this space may face initial setting-up period and costs, (ii) streamlined business model focusing on pure-play parcel delivery, and (iii) second largest market share, behind POS (UP, TP: RM3.32) at number one. Furthermore, Alibaba’s indirect interest in GDEX through its 14.4% stake of SingPost, which in turn is GDEX’s third largest shareholder with 11.2% stake, may augur positively for GDEX to leverage on Alibaba’s expansion growth, although we doubt this to be a major deciding factor.

Retain NEUTRAL on the sector. While we are positively biased on the logistics sector’s outlook given the booming ecommerce as a sentiment-driver, as well as aggressive expansion plans, logistics stocks within our coverage, TNLOGIS and GDEX, seems to have already priced in visible positives, especially after the recent logistics sector rally. TNLOGIS may not be the most suitable proxy for the industry due to earnings exposure to property development, with the segment contributing an average of >50% PBT for the past three years. Likewise, following GDEX’s recent positive price performance of 28% within the month, we are downgrading its rating to MARKET PERFORM, from OUTPERFORM previously, with an unchanged TP of RM1.93 as we view that the stock is fairly priced at current levels, with price multiples of 82x forward PER much higher than global industry average of c.32x. While positively impacted by the growing e-commerce, our growth assumption has already taken into account strong growth from its e-commerce B2C delivery, expected to overtake its B2B delivery revenue by FY19 to achieve a revenue mix of 55:45 from 26:74 in FY16. Upside rerating catalysts include: (i) exponential volume growth beyond our forecasts, and (ii) sooner-than-expected earnings materialisation from its potential regional acquisitions.

Source: Kenanga Research - 24 Mar 2017