E-commerce. The booming e-commerce industry has redefined ways of retailing and selling in the modern world these days. In Malaysia, it has created plenty of opportunities within the supply chain but at the same time, posing serious threats to those traditional brick and mortal shops.

Logistics service providers, those who deal with the last-mile delivery, have become important integration between “etailers’ and consumers. This is especially true as any negative customer feedback about product expectation and delivery experience will not only affect sales but also tarnish product image and brand name as well.

E-commerce not new to Tiong Nam. In Tiong Nam, e-commerce is not something new as the company had established e-commerce relationship with a leading computer manufacturer long time ago. Also, it had set up TNTT Package Express (60%-owned) (TNTT) in FY03, which is known for its orange trucks, in handling business-to-business e-commerce delivery. Currently, TNTT has a fleet size of 53 trucks zooming up and down all major cities in the peninsula Malaysia, generating annual sales of approximately RM10mn.

Making inroads into China’s e-commerce industry. Early this year, Tiong Nam negotiated with a China’s e-commerce giant for the provisions of logistics and warehousing services to the latter. While the negotiation has not yet turned into a formal agreement, Tiong Nam has taken steps to further explore transborder e-commerce opportunities by bringing in inventories and other import/export cargoes directly from Guang Zhou, China via road transportation.

Connecting the dots. The picture above shows Tiong Nam’s version of One Belt, One Road. Basically, the company will bring inventories from Guang Zhou, which will transit in Hanoi, Laos, Bangkok, before reaching Kuala Lumpur and Singapore. According to management, the cargoes from Guang Zhou will first be transferred to other trucks at Pingxiang (Guangzhou-Hanoi) border. These trucks, which are registered in Vietnam, will then enter into Laos to Savannakhet (Laos-Bangkok) border. The cargoes will then be transferred to Thailandregistered trucks (belonging to Tiong Nam’s associate) when crossing to Bangkok. At last, it will be moved to Malaysia-registered trucks (belong to Tiong Nam group) at Padang Besar before reaching Kuala Lumpur, Johor and Singapore. The entire one-way trip is expected to take 5 days.

Expanding into integrated services. In the near future, Tiong Nam would expand this into an integrated service, which covers warehousing service as well. This expansion would enhance operating efficiency by consolidating loose cargoes coming from 6 different countries within the network. Note that Tiong Nam group can tap on its existing warehouses in Bangkok, Padang Besar and Singapore to facilitate the movement of inventories. In Laos and Vietnam, the company is expected to build new warehouses in the countries. In fact, Tiong Nam is in the midst of drafting a new warehouse plan in Laos.

Viability of cross-border road transportation. Last month, Tiong Nam had started its maiden China-Malaysia route trial run. For a starter, the company targeted 6 countries (China, Vietnam, Laos, Bangkok, Malaysia and Singapore) in the network with a frequency of one trip per day. By 2018, the company hopes to expand the network to include Myanmar as well. Being the first in Malaysia to provide this cross-border door-to-door road transportation service, we think this strategy has huge potential to be one of the earnings drivers in the future as it will provide an alternative to customers, especially e-commerce players, who require speedy delivery at reasonable costs. Note that road freight is much cheaper than airfreight and faster than sea freight (see Table below).

Forecast

We keep our FY17/18/19 earnings projections unchanged while keeping an eye on the progress of this new China-Malaysia transborder transportation venture. As far as capex is concerned, we understand the capex is currently limited to the construction cost of a 30,000sf warehouse in Laos, which is approximately US$1.5mn.

Recommendation

We maintain our SOP-valuation of Tiong Nam at RM2.03/share, using CY17PE multiple of 13x and 6x to value its logistics and warehousing and property segments respectively. Tiong Nam remains as one of our top picks for 2017 for: 1) its exponential earnings growth for FY17; 2) warehouse REIT IPO in 2017; and 3) special dividend post listing of REIT. Maintain Buy.

Source: TA Research - 30 Dec 2016