• Malaysia set to become a regional E-commerce hub

• GDEX is a beneficiary as a pure play courier service provider

• Further expansion in the pipeline

• GDEX is nurturing its investment in Indonesia

• We maintain our BUY call on GDEX with a higher TP of RM2.28

Malaysia set to become a regional E-commerce hub. The ecommerce sector is likely to benefit from government initiatives including the Digital Free Trade Zone (DFTZ) and the National E-commerce Strategic Roadmap. The DFTZ will be launched this week in conjunction with Alibaba’s founder, Jack Ma’s visit to Malaysia. Incentives that could be unveiled include: 1) Tax holidays for e-commerce platforms (Lazada, Zalora and Alibaba) that establish their regional distribution hubs in Malaysia, 2) Tax exemption for goods priced

GDEX is a prime beneficiary of e-commerce growth as a pure play courier service provider which has increased its daily parcel sorting capacity from 78k parcels per day in FY16 to 85k parcels per day (150k under stretched conditions) as of 1HFY17. We expect the company to be able to increase its capacity to 100k parcels per day under normal conditions by end-FY17 and 130k per day in FY18.

Further capacity expansion on the cards. GDEX is currently in the design stage of a new international parcel sorting hub in Sungai Buloh with possible capacity addition of 70k parcels per day. Meanwhile, the company is also keen on expanding its operations in Sabah and Sarawak. It aims to operate a new sorting hub in the latter to receive goods directly from overseas suppliers instead of transiting from Peninsula Malaysia which reduces the cost of e-commerce goods in Sabah and Sarawak

GDEX is nurturing its investment in Indonesia. Having invested RM10m in convertible bonds (convertible to 40% equity) in PT SAP Express in Indonesia, GDEX has been transferring its technical know-how and experience to enhance the company. PT SAP Express is currently profitable and experiencing high volume growth (close to 100%yoy). However, GDEX does not recognise any economic benefits from the company as it is currently not receiving any coupon payments to allow the company to grow unhindered. GDEX could convert its bonds into equity sometime down the road possibly resulting in contributions from associate stake. At this juncture, we have yet to impute any potential profits from PT SAP Express in our forecast.

Maintain BUY with higher TP of RM2.28. On the backdrop of the positive developments in the e-commerce industry, we increase our TP to RM2.28 (from: RM2.06) as we increase our growth rate assumption for 2020-2027 from 6% to 7.5% in our 2-stage DCF model. We value the company using the discounted cash flow method (DCF) which assumes WACC of 8.5% and terminal growth rate of 3%. GDEX has consistently achieved PBT margins of 15- 16% which are on average 10ppts higher compared to its peers. Our TP implies a forward price-to-earnings (PER) of 77x FY18 fully diluted core earnings, which we believe is justified as GDEX is a proxy of the high growth e-commerce sector.

Source: MIDF Research - 20 Mar 2017