The recent rally in logistics counters has put the sector in the spotlight. This comes after the recent launching of the Malaysia Digital Free Trade Zone, which includes Alibaba’s first regional distribution hub outside of China. The on-going theme for the sub-sector continues to be the booming e commerce as we witnessed several logistics players venturing into the e-commerce delivery market. With that said, we view GDEX as a direct beneficiary and earnings-proxy for the country’s growing e commerce. Meanwhile for ports, the new shipping alliances are set to come into effect this 1 April 2017. We believe this would allow industry players an opportunity to access new markets, thus mitigating some potential loss of volume suffered by WPRTS from CMA CGM and UASC. We maintain our low-to-mid single-digit throughput growth assumption for our ports coverage on the back of the alliances reshuffling and concerns for weak trade volumes. At the same time, MISC continues to be a drag with the lack of any catalyst on the back of lacklustre crude tanker and LNG spot rates. We maintained our calls throughout, with OP for BIPORT, and MP for GDEX, MISC, MMCCORP, TNLOGIS and WPRTS. Maintain NEUTRAL stance on the sector as well.

Key highlights moving into 2Q17. The logistics sector has recently experienced a swing in trading sentiment following a sector-wide share price rally, with the sub-sector gaining an average of +23% YTD. Some top performers include TASCO (+45%) after its venture into cold-chain logistics, GDEX (+23%) and POS (+19%) from positive market sentiments regarding the growing e-commerce, and the launching of the Malaysia Digital Free Trade Zone (DFTZ) proving to be a positive catalyst. Likewise, ports counters may also come into the highlight this coming quarter as the new shipping alliances are set to come into effect this 1 April 2017.

E-commerce as an on-going theme. Parcel delivery volume is expected to show steady growth on the back of a growing e-commerce in the country. As such, we have witnessed a few full-fledged integrated logistics players venturing into the e-fulfilment and parcel delivery space of late, in attempts to tap into the growing e-commerce market. TNLOGIS’ (MP, TP: RM1.71) ventures into: (i) land trucking within ASEAN to specifically target Chinese e-commerce firms, and (ii) last mile delivery services domestically, are expected to commence operations in this upcoming 2QCY17. And while initial earnings impact is expected to be minimal initially due to gestation period, longer-term prospects are deemed to be promising, given that TNLOGIS has the unique ability to integrate its services. Likewise, CENTURY (Not Rated) is also understood to have plans venturing into the e-commerce and parcel delivery sector since CJ Korea’s entry as its largest shareholder. Just last week, trucking and warehousing player XINHWA (Not Rated) also jumped into the e-commerce bandwagon through a 50% stake acquisition in Yiwugou Ecommerce Sdn Bhd for cash consideration of RM500k. The launch of 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. Furthermore, we believe that Alibaba’s distribution hub follows-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 to experience a new stage of growth. 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 periods 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. Meanwhile, TNLOGIS’ trucking venture may also face higher utilisation in the longer-term post-launching of the distribution hub in end-2019 to accommodate increase in e-commerce goods transported to/from China.

Reshuffling of shipping alliances to come into effect. The new shipping alliances are set to commence on 1 April 2017. While there are some lingering uncertainties from the potential loss of volume from CMA CGM and UASC for WPRTS (OP, TP: RM4.33), we believe that the access to new markets arising from the new alliances, especially from Ocean Alliance members, would be able to offset some of the volume loss. WPRTS still remains as one of the cheapest in the region, with transhipment tariff c.50% cheaper as compared to PSA, which plays in its favour in gaining market share. Meanwhile, THE Alliance is expected to consolidate most of its operations in PSA, which we think would have less of a significant impact as WPRTS currently does not service most of THE Alliance’s members (except for UASC, pending merger with Hapag-Lloyd). Furthermore, we expect CMA CGM to most likely adopt a two-hub approach, thus only shifting some, and not all, of its volume to PSA. Upcoming 1Q17 numbers should reflect business-as-usual for WPRTS, with anticipated volume fluctuations in 2Q-3Q17 due to the phase-in phase-out from the alliance reshuffling. Likewise, we expect a better clarity in 4Q17 and FY18 once volumes normalised to post-reshuffling levels.

Overall, we maintain our expectations of a low-to-mid single-digit FY17-18E throughput growth for our port coverage, on the back of the reshuffling of alliances, and concerns for weak trading volumes. Phase 1 of BIPORT’s (OP, TP: RM6.78) Samalaju Port is expected to be completed by 2Q17, but throughput and earnings contributions are not expected to be significant in the near-term. Meanwhile, MMCCORP’s (MP, TP: RM2.70) earnings are expected to be supported by its steady ports business after the acquisition of NCB, coupled with the recent completion of its Penang Port acquisition.

Freight rates remain under pressure. As at report cut-off date 10 March 2017, tankers rates have continued to weaken on excess tonnage. VLCC average spot rates in February dropped to a low of USD29.1k/day (-4% MoM; -44% YoY), approaching its 2016 low of USD28.0k/day while Suezmax and Aframax have fallen to USD22.0k/day and USD16.30k/day, respectively, lowest since mid-2014. We do not foresee strong catalysts to drive up the charter rates in the near-term following greater compliance from oil producers to curb production amidst excess tonnage in the market. On the flip side, LNG spot rates have started to taper off from its peak on lower LNG demand post winter season. The short-term outlook for LNG freight rates, in our view, remains unexciting given that c.90 vessels are slated for delivery within the next two years. However, LNG shipping prospect is still positive in the longer run, as the new LNG projects will create demand for these additional vessels. Our sole shipping coverage, MISC (MP, TP: RM7.88), is expected to experience limited catalyst on the back of the lacklustre rates.

Retain NEUTRAL on the sector. We recently downgraded our call on GDEX to MARKET PERFORM from OUTPERFORM following its positive price performance as we view that foreseeable positives may have already been priced in. The company had also announced a 3-for-1 bonus issue last week, which should have no fundamental impact apart from the increase in share base and shares liquidity. Our TP was kept unchanged at RM1.93, with an ex-bonus TP of RM0.48. We reiterate our views that GDEX may be the best earnings-proxy for the growing e-commerce, while TNLOGIS may be an unsuitable proxy given its earnings-exposure in property development. We are retaining the rest of our calls, with OUTPERFORM for BIPORT as well as MARKET PERFORM for MISC, MMCCORP, TNLOGIS and WPRTS. With most of our sector’s coverages ascribed to MARKET PERFORM ratings, bogged down by heavyweights MISC and WPRTS, we retained our NEUTRAL stance.

Source: Kenanga Research - 30 Mar 2017