We maintain our NEUTRAL stance on the sector as the shipping diversion from the Red Sea continues to weigh down on global trade. However, we expect the domestic logistics sector to play a key role in connecting economies that benefited from the trade diversion on US-China trade tensions. The WTO in October 2024 cut CY25's projection to 3.0% (from 3.3%), quoting lower water levels in the Panama Canal due to an extreme drought that is disrupting the movement of shipping liners, and the potential escalation of Middle East conflicts. We also acknowledge that global trade will have to navigate stricter regulations on carbon emissions. Nevertheless, we continue to see a bright spot in the domestic logistics sector, which is a beneficiary of the booming e-commerce, global tech upcycle led by AI demand, a resilient US economy, potential trade diversion amid US-China trade tensions and short-term surge in domestic ports' container volume on frontloading activities ahead of potential US tariff revision. We do not have any top pick for the sector, although we have recently upgraded Westports to MP from UP.

Emerging trend of connecting economies. Globally, the shipping diversion from the Red Sea (see Exhibit 1) continues to weigh down on global trade, especially in the Asia-Europe sector. The diversion from the Suez Canal to the Cape of Good Hope has resulted in a longer voyage for the Asia-Europe route (which contributes 30% of global container volume), reducing the frequency of calls that shipping lines could make at WPRTS's ports (and all other ports in the region). The WTO in October 2024 cut its projection for CY25 global merchandise trade volume growth to 3.0% (from 3.3%), quoting lower water levels in the Panama Canal due to an extreme drought that is disrupting the movement of shipping liners, and the potential escalation of Middle East conflicts (see Exhibit 1).

Closer to home, the WTO cited an emerging trend of connecting economies or countries that benefited from the trade diversion on US-China trade tensions (see Exhibit 2 on trade war impact in 2018−2022, other economies recover faster than China). Malaysia, Singapore, India and Vietnam growth is surging due to their emerging role as "connecting" economies, trading across geopolitical blocs, thereby potentially mitigating the risk of trade fragmentation. Based on the Malaysia's external trade November numbers, there was an export surge to the US (57.3% vs. Oct's 32.5%) with the US now Malaysia's largest export destination. We expect domestic logistic sector growth to remain steady going into 2025, which is a beneficiary of the booming e-commerce, supported by the global tech upcycle led by AI demand, a resilient US economy, potential trade diversion amid US-China trade tensions and short-term surge in domestic ports' container volume on frontloading activities ahead of the potential US tariff hike on China goods in 2025.

During the 12-month period for the trade war since Feb 2018 (see Exhibit 3), we saw local listed port operators' share prices trading sideways except for BIPORT (MP; TP:RM6.20) which took a dive due to its largest exposure to China as its biggest LNG export market. China, the biggest export destination for Malaysia in 2018−2022, saw a double whammy (US tariff hike and ports closure due to the pandemic lockdown). Presently, the US is now Malaysia's largest export destination which we believe is due to trade diversion, trade frontloading, and China's slowdown in economic growth. Overall, Malaysian ports' container growth volume is expected to remain in single-digit growth due to the China projected slower growth in 2025 (the IMF projected China's economic growth to slow down to 4.5% from 5% in 2024), but partially offset by the potential trade diversion amid US-China trade tensions.

We also acknowledge that 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 regulations of the 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 and to take effect by 2026), 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.

• 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.
• 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 on a quarterly basis, as well as any carbon price paid to 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. On a more positive note, we see a bright spot in the domestically driven third-party logistics (3PL) sector, which is less vulnerable to external headwinds, being buoyed by 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, reaching 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.

We maintain NEUTRAL on the sector and do not have any top pick for the sector.

Source: Kenanga Research - 7 Jan 2025