• Remain NEUTRAL; Top Picks: TASCO and Malaysia Airports (MAHB). With the ongoing inflationary pressures and sharp correction in freight rates, the sector’s sentiment has been lukewarm since 2H22. We continue to favour service providers within the logistics and transportation industries – particularly 3PL players with diversified portfolios that remain shielded from the ongoing weakening freight environment. We added MAHB as one of our Top Picks, riding on the aviation industry recovery trend moving forward.

• China outbound travellers making a comeback. While China’s domestic travel has well surpassed 2019 levels, international tourism still remains relatively soft. Outbound trips booked by Chinese nationals in 1Q23, according to the country’s Culture of Tourism Ministry’s data, have been low, accounting for <1% of trips organised by travel agencies. This was mainly due to limited capacities and elevated airfares. According to the Civil Aviation Authority of China (CAAC), international flights are expected to increase to >6,000 flights/week during the summer travel season in July. The first week of June has already seen 5,822 flights/week. CAAC is optimistic on the market’s recovery and anticipates the number of international travellers to and from China to reach c.7,300 flights/week – at c.80% of pre-pandemic levels. In Malaysia, we note that the rate of Chinese travellers returning to the country remains at a slow pace – passenger traffic recovery rate in March was only 18% of 2019 levels vs Feb 2023’s 12% (Figure 5). Hence, we reiterate our view that a greater influx of travellers can be expected in 2H23, as airlines continue to resume their capacities and routes at a gradual pace, as well as the easing of travel access for Chinese citizens – particularly visa applications.

• Ocean capacities continue to grow amidst lacklustre demand. The world’s largest container line – MSC – has touched new heights, with its vessel fleet pushing past the 5m TEUs mark on 22 May. It is now looking to grow further to 6m TEUs by end 2024. The continued lower demand, destocking, and ramping up of ocean capacities have resulted in a sharp correction to ocean freight rates since 3Q22. Nevertheless, the much- affordable container rates have encouraged the use of ocean shipments, especially within the intra-Asia trade region. While rates have largely returned to pre-pandemic levels, with certain routes reaching historical lows, we view the rates as having stabilised since 1Q23 (Figure 1).

• Air freight market. According to DHL, volumes have remained low (May: -10% YoY) despite seeing a MoM improvement. Moving forward, the trend of shifting volumes to ocean freight will likely persist due to the latter’s affordability, higher ocean capacities, and improvements in ocean reliability schedules. While air freight rates have also been trending downwards, the market still remains competitive due to the higher-than-normal jet fuel prices, given that demand for travel has picked up (Figure 2).

• Sector risks: i) Resurgence of COVID-19 variants that led to lockdowns, ii) a slowdown in global economic growth that paralyses trade activities, and iii) slower-than-expected recovery in passenger and trade volumes.

Source: RHB Research - 22 Jun 2023