We maintain our NEUTRAL call on the sector. Amidst the global economic uncertainty, the World Trade Organisation (WTO) projects the global merchandise trade volume to only inch up by 1.7% in CY23, down from a 2.7% expansion in CY22. Additionally, stricter regulations on carbon emissions may pose new challenges to global trade. This does not augur well for seaport operators like WPRTS (MP; TP: RM3.65). However, we see a bright spot in the domestic logistics sector as it is: (i) driven internally and less directly exposed to external headwinds, and (ii) a beneficiary of the booming e-commerce. Our sector top picks are BIPORT (OP; TP: RM5.55) and SWIFT (OP; TP: RM0.97). We maintain our NEUTRAL call on the sector.
Uninspiring global trade, stricter regulations. The WTO projects global merchandise trade volumes to only inch up by 1.7% in CY23 (minor revision from previous forecast of 1%), down from a 2.7% expansion in CY22, amid the global economic uncertainty. Not helping, China re-opening activities were slower than global market expectation despite the recovery in the supply chain. Also, consumer confidence and spending globally are likely to take a beating on sustained elevated inflation, rising interest rates and the slowing global economy.
These issues do not augur well for seaport operators like WPRTS. However, we believe BIPORT will be able to weather these macro challenges better thanks to: (i) its stable operation in the handling of LNG cargoes, (ii) a potential tariff hike at Bintulu Port as well as (iii) the long-term growth potential of Samalaju Industrial Port’s hinterland in Samalaju, Sarawak driven by the growing investment in heavy industries.
Additionally, stricter regulations on carbon emissions may pose new challenges to global trade, particularly, one from the United Nations’ International Maritime Organization (IMO) and another from the European Union (EU). While the exact implications of the regulation of IMO and EU’s Carbon Border Adjustment Mechanism (CBAM) on the seaport and logistics sectors remain unclear (especially for CBAM which is still pending finalisation), the volume of containers heading to the EU will certainly be affected (about 18% of container throughput under Asia-Europe trade), especially those originating from China, which is a major exporter of iron, steel and aluminium to the EU.
(1) Under the new IMO rules, effective January 2023, all ships must report their carbon intensity and will be rated accordingly. The ships must record a 2% annual improvement in their carbon intensity from 2023 through 2030 or face being removed from service.
(2) Meanwhile, the EU’s CBAM policy could disrupt the exports of certain commodities (iron and steel, cement, aluminium, fertiliser, electricity, hydrogen) to the EU. During the transition period between Oct 2023 and Dec 2025, EU importers must report embedded emissions in goods imported importers, on a quarterly basis as well as any carbon price paid in a third country. When the CBAM takes full effect starting 2026, importers will need to buy carbon credits reflecting the emissions generated in producing them.
Logistics to ride on e-commerce boom. However, we see a bright spot in the logistics sector locally as: (i) it is domestically driven and less directly exposed to external headwinds, and (ii) it rides on the booming e-commerce. Industry experts project the local e-commerce gross merchandise volume to grow at a CAGR of 7% from 2023 to 2027, while its size could reach RM1.9t by 2027 from RM1.4t in 2023.
The booming e-commerce will spur demand for distribution hubs and warehouses to enable: (i) just-in-time (JIT) delivery, (ii) reshoring/nearshoring to bring manufacturers closer to end-customers, (iii) efficient automation system including interconnectivity with the customer system, and (iv) warehouse decentralisation to reduce transportation costs and de-risk the supply chain. There is also strong demand for cold-storage warehouses on the back of the proliferation of online grocery start-ups.
Our sector top picks are:
Source: Kenanga Research - 17 Jul 2023
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WPRTSCreated by kiasutrader | Aug 23, 2024
Created by kiasutrader | Aug 23, 2024