See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts. Global Markets Research ANCHOR REPORT Asean logistics: Delivering the last mile Logistics players ride the internet retail tide Asean remains well behind regional peers when it comes to overall internet retail and last-mile delivery infrastructure. A tripling of Asean postal volumes by 2020F combined with economies of scale for the more established players should result in even greater earnings growth. Top regional players are circling too, evidenced by deals from both Japan (Yamato into GD Express) and Korea (CJ Express into Century Logistics). We initiate at Buy on four stocks. SingPost is our top pick, given strong earnings growth (three-year CAGR of 21%) driven by logistics and ecommerce fulfilment. LBC Express has a combination of low valuations and strong earnings. GD Express could emerge as a formidable Asean logistics player, on regional expansion moves. At Pos Malaysia we see cost and revenue synergies following the acquisition of KLAS Group. Key themes and analysis in this Anchor Report include: Overview of the Asean postal and courier industries Dynamics of Asean internet retail and consumer behaviour patterns Asean as destination for Japanese / regional investors 6 October 2016 Research analysts ASEAN Transport/Logistics Ahmad Maghfur Usman - NSM [email protected]+603 2027 6892 Riddhi Jain - NSFSPL [email protected]+91 22 67235616 Production Complete: 2016-10-05 20:35 UTC
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See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.
Global Markets Research
AN
CH
OR
RE
PO
RT
Asean logistics: Delivering the last mile
Logistics players ride the internet retail tide
Asean remains well behind regional peers when it comes to overall internet retail and last-mile delivery infrastructure. A tripling of Asean postal volumes by 2020F combined with economies of scale for the more established players should result in even greater earnings growth. Top regional players are circling too, evidenced by deals from both Japan (Yamato into GD Express) and Korea (CJ Express into Century Logistics).
We initiate at Buy on four stocks. SingPost is our top pick, given strong earnings growth (three-year CAGR of 21%) driven by logistics and ecommerce fulfilment. LBC Express has a combination of low valuations and strong earnings. GD Express could emerge as a formidable Asean logistics player, on regional expansion moves. At Pos Malaysia we see cost and revenue synergies following the acquisition of KLAS Group.
Key themes and analysis in this Anchor Report include:
Overview of the Asean postal and courier industries
Dynamics of Asean internet retail and consumer behaviour patterns
Asean as destination for Japanese / regional investors
Asean’s secular growth story on increasing online shopping penetration presents upside earnings potential for last-mile delivery players.
Nomura vs consensus
Our earnings for Pos Malaysia and SingPost are well above consensus (by 8% and 30%, respectively) as we are more bullish on volume upside and economies of scale potential.
EBITDA Margins P/E (x) P/B (x) EV/EBITDA (x) Div yield % ROE (%)3 Year CAGR
Currency Last priceUSD mkt
cap
Target
PriceRating
Nomura | ASEAN logistics 6 October 2016
20
Industry overview
Asean’s online shopping is still at a nascent stage
A matter of convenience and price competitiveness
In a survey from 2,600 customers in Asia conducted by IDC Retail Insights last year, it
was concluded that the primary reason online shopping has garnered rapid popularity is
due to time convenience, representing 43% of the vote, which comprises cutting time at
23% and cutting the need to queue at 20%. This makes sense for the urban consumers
given the high population densities and traffic congestion these days. The second key
reason is price competitiveness offered to consumers, as the overall costs of the
merchandise are cut given the removal of a physical retail store outlet.
Fig. 29: Top shopping inhibitors
Source: IDC Retail Insights 2015
Global retails sales to easily double by 2020
Globally, retail ecommerce has grown tremendously, on the back of rising internet
literacy and smartphone penetration. Emarketer estimates that retail ecommerce sales
raked in a total value of USD1.55tn in 2015 (+25.5% y-y) accounting for 7.4% of total
retail sales. This year, Emarketer expects retail sales to increase by 23.7% to US1.92tn,
and by 2020 the increase will almost be two-fold (at USD4.06tn by 2019), which by then
would account for 14.6% of total retail sales (Fig. 31).
Fig. 30: Total retail sales worldwide, 2015-2020
Source: Emarketer. Note: excludes travel and event tickets
Fig. 31: Total retail ecommerce sales worldwide, 2015-2020
Source: eMarketer. Note: includes products or services ordered using the internet via any device, regardless of the method of payment or fulfilment; excludes travel and event tickets
23%
20%
16%
13%
10%
9%
Takes too much time, money and/or effort
Long queues and slow checkout process
Prices are not competitive
The merchandise available does not includewhat I am looking for
The opening hours are not convenient
Products are out of stock
$20.80
$22.05
$23.45
$24.86
$26.29
$27.73
5.8%6.0%
6.3% 6.0%5.8%
5.5%5.2%
6.2%
7.2%
8.2%
9.2%
10.2%
11.2%
$15
$17
$19
$21
$23
$25
$27
$29
2015 2016 2017 2018 2019 2020
Total retail sales (LHS)
% change (RHS)
(trn)
$1.55
$1.92
$2.35
$2.86
$3.42
$4.06 26%
24% 23%22%
20% 19%
7%9%
10%12%
13%15%
0%
5%
10%
15%
20%
25%
30%
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
$3.0
$3.5
$4.0
$4.5
2015 2016 2017 2018 2019 2020
Retail ecommerce sales (LHS)
% change (RHS)
% of total retail sales (RHS)
(trn)
Nomura | ASEAN logistics 6 October 2016
21
So how big is Asean’s online retail? Working out the numbers
Riding on the increasing propensity to spend online, we estimate that Asean’s online
retail sales (both C2C and B2C) will show a five-year CAGR of 34% to hit a total of
USD36.1bn by 2020. Asean’s B2C retail market is still at its nascent stage, at only 1.2%,
vs Japan’s 7.2% and China’s 13.8%, as estimated by Euromonitor, suggesting further
upside growth potential for ecommerce.
Fig. 32: Estimated size of internet retail (B2C and C2C) by Nomura
Source: Nomura research, Euromonitor, various news media
Measuring the actual statistics for online retail transactions in developing economies
such as Asean can be difficult, as there are no official bodies compiling such data and
given the difficulty of obtaining recorded online shopping transactions.
We highlight three numbers below by different research and data providers to measure
the actual size of the Asean online retail pie. We observe that the variance can be quite
substantial because of the difference in categorizing what transactions can be
categorized as online/ecommerce exactly, noting that some may have accounted for the
size of C2C transactions / online classifieds, which can be quite substantial.
Fig. 33: Estimates of ecommerce by various research providers (USDbn)
Source: Euromonitor, Statista, Frost & Sullivan
We then try to compare what we manage to obtain through various Google search
entries and online news articles as tabled below. We also present our estimates for the
other types of online retailers including the C2C transactions, which we think can also be
quite substantial. We can roughly estimate that online retail (including C2C) is close to
USD7.9bn in 2015, as presented in our workings below.
With a total transacted value of USD7.9bn in 2015, this works out to an average spend of
USD41 per online user, which we think is a fairly decent amount.
7,905
11,140
15,374
20,755
27,811
36,155
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
2015F 2016F 2017F 2018F 2019F 2020F
Nomura's estimation of internet retail (including C2C) in ASEAN (LHS)
Zalora B2C 39 70 107 148 Based on 1H16 YTD growth rate 3
Elevenia B2C & some C2C 89 268 Based on management target 19
Tokopedia B2C & some C2C 100 161 429 1,179 Based on growth of average monthly transactions 12
Lelong.my B2C & some C2C 40 85 114 154 208 2013 based on management target. 2014 onwards assumes a 35% growth rate 2
Qoo10 Others B2C & some C2C 226 305 412 2015 onwards based on a growth rate assumption of 35% y-y 3
Qoo10 Singapore B2C & some C2C 182 246 332 2015 onwards based on a growth rate assumption of 35% y-y 3
Sub total 318 1,137 2,354 3,879 114
% chg y-y 257% 107% 65%
Others pure online retailers (B2C) notably foreign names like Amazon and Alibaba 1,677 2,763 As a fraction of their traffic against the key local ASEAN players above 81
Brick and mortar online shops 2,374 2,549 Estimated 0.5% of actual retail sales (based on Euromonitor numbers)
C2C 1,500 1,950 Ballpark estimate 35
Grand total 7,905 11,140 230
% chg y-y 41%
Number of internet users in ASEAN (mn)
Total annual spend/ internet user/ annum (USD) 41.0 57.7
193
0.5%
0.8%
1.0%
0.7%
1.2%
1.6%
4.1%
7.2%
9.2%
13.8%
0% 5% 10% 15%
Philippines
Vietnam
Malaysia
ASEAN ex Sing.
Indonesia
Thailand
Singapore
Japan
USA
China
Ecommerce sales as a %of retail sales (2015)
USA
Singapore
China
Japan
Vietnam
Thailand
Indonesia
Malaysia
Philippines
0
2
4
6
8
10
12
0% 5% 10% 15%
Fre
quency
of re
tail
site
vis
it per
inte
rnet use
r
Ecommerce sales as a % of retail sales
USA
Singapore
China
Japan
Vietnam
Thailand
IndonesiaMalaysia
Philippines0
1
2
3
4
5
6
7
8
9
10
0 2 4 6 8 10 12
Reta
il S
ale
s p
er
capita (
$ '0
00)
Frequency of online shopping visits per internet user
USA
Singapore
China
Japan
Vietnam
ThailandIndonesia
MalaysiaPhilippines
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
0 5 10 15
AR
PU
($)
Frequency of online shopping visits per internet user
Nomura | ASEAN logistics 6 October 2016
23
Indonesia is Asean’s biggest ecommerce market; with trend shifting to fashion,
increasing frequencies of online shopping activities
According to statistics compiled by Euromonitor, Asean online retail is estimated to have
a market size of USD5.67bn in 2015, translating to an online retail penetration rate of
1.2% (Fig. 35). Of that USD5.67bn total online retail amount, USD1.68bn alone is
achieved from Indonesia, given its sizeable population base (Fig. 39).
By measure of categories (Fig. 40), electronics and media represents the biggest
proportion, although fashion is expected to be catching up fast in the next five years. The
shift towards the fashion trend will be the key to drive online shopping frequencies.
Fig. 40: Asean’s ecommerce sales by product category 2015
Source: Euromonitor, Nomura research
Malaysia9%
Singapore17%
Thailand26%Philippines
6%
Vietnam12%
Indonesia30%
0% 20% 40% 60% 80% 100%
Developed
Indonesia
Singapore
Thailand
Vietnam
Philippines
Malaysia
ASEAN
Electronics & Media FashionFood & Personal care Furniture & AppliancesToys, Hobby & DIY
Nomura | ASEAN logistics 6 October 2016
24
An overview of the postal industry, then and today
A natural decline to extinction, eventually
The global postal industry represented a market size of USD330bn in revenue in 2014,
which saw a 2% y-y increase then (source: UPU), largely attributed to a combination of
increase in tariffs as well as higher parcel delivery volumes.
According to 2014 data from the UPU (Universal Postal Union), the industry volume
represents a total traffic of 327bn pieces of traditional mail postage, of which 99%
constitutes domestic with the remaining 1% being international mail.
However, the traditional mailing volume has been undergoing a structural attrition phase
over the past decade as a result of technological substitutes, notably from the increasing
usage of the internet across all societies as a form of communication and in other
aspects of life for that matter. As a result, this has led to a decline of 2.7% annually in
mailing volume, over the past decade.
… Cushioned by direct mail volume
The ongoing natural attrition of the traditional postal activities has led to the demise of
the traditional business model of the postal industry. In countering this attrition,
traditional mail operators have fortunately been able to sustain their existing mail volume
through the rising trend of direct mail, which is essentially advertisement mail.
Most developed markets have found this a success given the personalized marketing
touch but given the rising numbers of digital-based advertising trends, this advertising
segment is also seeing diminishing marketing impact. The usage of other medium
channels, notably through online digital and also the social media, has resulted in greater
accuracy and less resource wastage.
Fig. 41: Global domestic mail volume
The rate of decline cushioned by direct mail over the past decade
Source: UPU, Nomura research
Fig. 42: Global international mail volume
International mail volume saw a faster drop as usage of email increases
Source: UPU, Nomura research
In the US for instance, an analysis by Winterberry Group revealed that direct mail
volumes had witnessed a drop as a result of the shift to digital-based advertising.
Although the adspend allocation has been growing (largely due to the increase in postal
costs and increasing number of catalogues, which are heavier), the growth rate has been
fairly marginal (at only 2.9% y-y) when compared to the increase in adspend on digital
platforms such as search (+12.8% y-y), display (+24.9% y-y) and email (+9.5% y-y), as
illustrated in Fig. 43 below.
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
0
50
100
150
200
250
300
350
400
450
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015F
Domestic mail volume (LHS)
% chg y-y (RHS)(bn)
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
0
1
2
3
4
5
6
7
8
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015F
International mail volume (LHS)
% chg y-y (RHS)
(bn)
Nomura | ASEAN logistics 6 October 2016
25
Fig. 43: 2015, US direct and digital spending (USD bn) - (totalling: USD153.2bn)
Note: Arrows reflect percentage change in spend, by channel, from 2014 levels; insert media includes FSIs and statement inserts; Display and search reflect spending in desktop and mobile
Source: Winterberry Group
Parcel segment shows life and continues to grow
Although the use of physical mail has been on a gradual structural downtrend, postal
providers have seen one particular volume growing aggressively over recent years –
parcel volumes. UPU estimates this area accounted for total traffic of 7.38bn (as of
2014) parcel items globally, where 98.6% constitutes domestic, with the remaining being
international parcel shipments.
Last year alone, we estimate that the global parcel volumes may have grown by 4% y-y,
largely driven by the 6.0% growth in international traffic (vs 5.7% in 2014). Parcel volume
has grown by a CAGR of 4.0% in the past decade.
Fig. 44: Global domestic parcel volumes
Source: UPU, Nomura research
Fig. 45: Global international parcel volumes
Source: UPU, Nomura research
The rising shipments of parcel deliveries have been primarily due to the growing number
of online shopping transactions. This rapid growth has further stimulated the urgency for
postal operators to transform their business models to cater for the rapid evolution of
consumer habits and diversify their revenue bases. Similarly, the rising number of small
enterprise start-ups has also started to capitalize on this growing trend, which we discuss
in subsequent sections.
Direct Mail (↑2.9%), $46.8
Teleservices (↑2.7%), $42.6
Search (↑12.8%), $27.3
Display (↑23.3%), $24.9
Other Digital (↑42.9%), $5.0
Insert Media (↑0.0%), $0.8
Email (↑9.5%), $2.3 Other (↑2.9%),
$3.5
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015F
Domestic parcel volume (LHS)
% chg y-y (RHS)
(bn)
-15%
-10%
-5%
0%
5%
10%
15%
20%
0
20
40
60
80
100
120
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015F
International parcel volume (LHS)
% chg y-y (RHS)
(bn)
Nomura | ASEAN logistics 6 October 2016
26
Asean’s postal and courier industry
A similar phenomenon, but last mile for parcel / express mail delivery is still in its infancy
Asean handled approximately 4,667mn regulated postal mails (Fig. 46) and
approximately 396mn parcels / non-basic mail items in 2015 (Fig. 47). Both of these
numbers are nowhere near to the billions of postal mails and parcels handled in Japan
and the US (Fig. 48 and Fig. 49).
Asean’s 396mn parcels handled in 2015 however may be understated, given the
fragmented nature of the express delivery segment. This is because there are no
regulatory bodies tracking these volumes. We estimate the actual numbers could easily
be an additional 15-20%.
Fig. 46: Regulated mail volumes (mn)
Asean's total volume despite a population size of 629mn is nowhere near Japan and US
Source: Company and Postal data, Nomura research
Fig. 47: Parcel / non basic mail postal items (mn)
Source: Company and Postal data, Nomura research
We estimate that although the regular mail segment has seen a natural attrition rate of 3-
4% over the past decade on higher usage of emails and other digital form of
communications, its parcel / express volume has picked up strongly by a CAGR of at
least 15% over the past five years, thanks to the rise of online retail sales, which we
estimate to account for 40% of total volumes currently.
Fig. 48: Regular mail handled in 2015 plotted against per urban population
Source: UPU, Company data, Nomura research
Fig. 49: Parcel mail handled in 2015 (mn) plotted against per urban population and where we expect it to be by 2020.
Source: UPU, Company data, Nomura research
18,030
4,580
151,024
870
856
853
145
222
1,722
4,667
Japan
China
USA
Malaysia
Singapore
Indonesia
Vietnam
Thailand
ASEAN
7,370
20,710
9,721
396
Japan
China
USA
ASEAN
Japan
China
USA
ASEAN Global
0
100
200
300
400
500
600
700
800
900
0 100,000 200,000 300,000 400,000
Mail
per
urb
an p
opula
tion
Mail size (mn)
Japan
ChinaUSA
ASEAN
ASEAN by 2020
0
10
20
30
40
50
60
70
80
90
100
0 5,000 10,000 15,000 20,000 25,000
Parc
els
per
urb
an p
opula
tion
Non letter postal items/parcels
Nomura | ASEAN logistics 6 October 2016
27
On the back of increases in internet and smartphone penetration and higher spending
propensity on online transactions, we foresee Asean’s parcel size to grow by a CAGR of
23% by 2020, from 396mn to 1,104mn by 2020 (Fig. 51 and Fig. 49). This implies that
each urban population in Asean receives approximately an average of 2.6x parcels /
express postals annually in 2015, and by 2020, this is expected to increase to 5.6x
parcels / express postals received per pax. At that number, it will still be lower than those
received by most developed countries including China (Fig. 50).
Among the Asean nations, we estimate that both Vietnam and Philippines will see the
highest growth rate over the next five years. This is also backed by robust economic
growth.
Fig. 50: Average parcels per urban population received
Source: Nomura research, UPU, Postal statistics, National statistics, Company data, World Bank, Demographia
Fig. 61: Domestic and international mail volume evolution (mn)
Source: Nomura research, Company data
672
684
701
719
724
758
789
861
880
882
952
960
935
931
917
891
150
146
142
131
129
135
130 156
175
169 180
221
229
224
224
223
822
830
843
850
853
892
918 1,0
17
1,0
55
1,0
51
1,1
31
1,1
81
1,1
64
1,1
55
1,1
42
1,1
14
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
FY
01
FY
02
FY
03
FY
04
FY
05
FY
06
FY
07
FY
08
FY
09
FY
10
FY
11
FY
12
FY
13
FY
14
FY
15
FY
16
Domestic mail International mail
Nomura | ASEAN logistics 6 October 2016
33
Terminal dues
A mispriced trade policy?
When a mail or a postal item is sent out (in this context, postal items weighing less than
2kg), the cost associated to it involves not only the sending country but also the
destination country, where the last-mile delivery of the item is done. As such, the cost
associated to the last-mile delivery is incurred by the local postal operator and therefore,
this entitles them to be compensated by the postal providers of the sending country. This
form of compensation is called terminal dues, which are handled and managed by the
Universal Postal Union (UPU). Terminal dues are typically negotiated among the 192
members of the UPU every four years and are implemented 18 months after.
Fig. 62: Flow of cross-border postage and terminal dues settlement
Source: OIG graphic
The process of the negotiation is through a voting process where each country counts as
one vote. This has been the drawback of the UPU terminal dues agreement, which more
reflects the majority vote of the agreement rather than the true cost of international mail
deliveries currently. As an example, where the true costs have been distorted despite
offering the same level of last-mile delivery services, domestic postal rates in most
developed countries are much costlier than the cost of inbound mail from less developed
countries, such as China.
Back in 1969, when terminal dues were introduced, the original goal of the terminal dues
agreement was to provide some sort of subsidy to the less developed countries so that
they could participate in the universal services of international cross-border mail. This
form of subsidy, ie, low compensation rates paid by postal providers from the less
developed economies, were agreed back during the heydays when usage of postal mail
was still relevant and have not been substituted by emails or any other form of
communication mediums.
With the decline in traditional international mail over the past decade, the usage of
international cross-border mails is currently experiencing rapid growth thanks to the
growing use of international postal services for the shipment of ecommerce products,
which are mostly made and posted from less developed economies, notably China. This
old structure of the terminal dues agreement has played well for postal providers of the
less developed economies such as China Post, which has taken advantage of the low
terminal dues structure paid to the developed economies providing the last-mile delivery
services.
Nomura | ASEAN logistics 6 October 2016
34
Fig. 63: Groupings of postal providers
Source: UPU
The unfair compensation structure has caused postal operators in developed countries
(those in Group 1.1 as per Fig. 63 above), notably the US — who are typically the last
mile providers of the ecommerce products — to note what they receive in compensation
as the last-mile service provider does not cover their true costs. Not only the postal
operators are voicing concerns, but also the non-postal third party last-mile delivery
providers and the local online retailers are joining in to address the system’s unfair
advantage granted to their Chinese competitors.
According to research by James I. Campbell, Jr, those in Group 1.1 undercharged last-
mile delivery of inbound letters and small packages to the tune of USD2.1bn in 2014
(based on SDR1,527mn, where 1SDR equals to USD1.4).
Fig. 64: Undercharges by industrialized countries, letter post 2014
(SDR currency)
Source: Jcampbell.com
Why are terminal dues important for ecommerce?
According to the UPU, 80% of ecommerce purchases that weigh less than 2kg are
posted through the conventional postal stream. By 2020, 33% of all online trade is
expected to take place across borders.
Terminal dues have grown in importance given the rise of ecommerce boosting cross-
border mail, which as of 2013 comprises around 3.5bn postal items, which constitutes
roughly approximately 1% of total mails handled globally (327bn). While cross-border
postal traffic is still predominantly within developed countries — notably between
Western Europe and North America (Fig. 65) — those from Asia Pacific, notably China,
are seeing tremendous increases in cross-border mailing volume given the increase in
ecommerce purchasing volumes from buyers in North America and Europe.
Fig. 65: Top five international letter post flows (2011)
Source: UPU. Note: Flows measured in kg
Current groups (2014–2017) Example of countries Proposed groups (2018–2021) Example of countries
Group 1.1 (target system prior to 2010) Australia, North America, Western Europe, UK, Japan Group I (target system, level I) Same as previous classification
Group 1.2 (target system from 2010) Hong Kong, Singapore, Qatar
Group 2 (target system from 2012) Korea, Brunei, Saudi Arabia, Macau
Group 3 (target system from 2016) Malaysia, Thailand Group III (target system, level III) Malaysia, Thailand
Group 4 (transitional system) Indonesia, Philippines,
Group 5 (transitional system) Ethiopia, LiberiaGroup IV (transitional system) Combine both group 4 and 5
Group II (target system, level II) Combine both group 1.2 and 2
Destination Total undercharge Destination Total underchargeAustria 65.7 Israel 4.0 Australia 65.0 Iceland 0.2 Belgium 44.5 Italy 91.8 Canada 275.0 Japan 45.7 Switzerland 58.5 Luxembourg 3.3 Germany 74.8 Netherlands 33.0 Denmark 38.5 Norway 154.7 Spain 9.5 New Zealand 15.3 Finland 26.9 Portugal 2.7 France 123.4 Sweden 31.7 Great Britain 89.1 United States 182.3 Greece 4.3 Europe Minor 25.7 Ireland 61.2 Totals 1,527.0
Flow % of total international flowsWithin Western Europe 43Between Western Europe and North America 15Between Western Europe and Eastern Europe & Central Asia 9Between North America and Asia Pacific 8Between Western Europe Asia Pacific 8
What if terminal dues are revised higher for the less developed economies?
While we think UPU’s terminal dues structure needs to be looked at, we think the
increase foreseen is unlikely to be significant to meaningfully change the trade flow of
postal mails. This is because that ecommerce products delivered through the low-cost
terminal dues system does not meet the standard of speediness and reliability.
Furthermore, most ecommerce products that are channelled through the cross-border
postal mail system are typically products that are of typically low value, low weight and
non-time sensitive packages.
In the ongoing UPU meeting, e-commerce will be the key topic of discussion. We believe
issues that need to be addressed first is strengthening the operational efficiencies of the
end-to-end supply chain, which would then subsequently touch upon the issues of an
unfair compensation of terminal dues.
Aligning the terminal dues with actual delivery costs remains the longer-term goal for
UPU. Done in an orderly manner, UPU has since 1999 implemented a structural
segregation where countries are categorized according to their economic status. As and
when timely, the respective countries will eventually be upgraded to developed status,
thus requiring them to pay higher terminal dues to compensate for the lower-tiered
countries. This is the case with Singpost back in 2014, which got its country rating
upgraded by two notches to Group 1.2 (Fig. 63).
What is the agenda of the meeting?
In this meeting, the member countries are expected to adopt the new world postal
strategy commencing in 2017. To be discussed are also rules governing the exchange of
international mail, focusing on strengthening the three aspects of the global postal
network: physical, electronic and financials. The discussions for its upcoming masterplan
will centre on the development of e-commerce, financial services and postal reform as
major priorities for the next cycle.
Fig. 66: Top priorities identified at each past conferences were centred on development of e-commerce
Source: UPU
Africa
Improvement of operational efficiency and e-commerce development
Latin America
Strengthening operational efficiency and effectiveness and e-commerce development
Europe & CIS
Improvement of operational efficiency and e-commerce development
Asia-Pacific
Improving the operational efficiencies of end-to-end postal supply chain and e-commerce
development
Arab Region
Strengthening operational efficiency and effectiveness and e-commerce development
Caribbean
Strengthening operational efficiency and effectiveness and e-commerce development
Nomura | ASEAN logistics 6 October 2016
36
When is the next cycle of hikes in terminal dues?
The last round of terminal dues was approved back in September 2012, which took
effect from 1 January 2014 to 31 December 2017. During the last round of the congress
meeting, more than 50% of member countries have moved to the target system of
terminal dues, essentially requiring them to pay higher terminal dues eventually.
The next round of hike will be effective come 1st 2018 until end 2022. This is to be
decided this month in Turkey from 20th September until 7th October.
Country upgrade rating raises terminal dues for SingPost
It was during the last round in 2012 that Singapore’s country classification had been
upgraded twice (to category 1) by the UPU. This has resulted in costlier terminal dues on
outbound mail (predominantly business-related mails). Despite seeing a two notch
upgrade, the impact on terminal dues would be in two stages, first to be effective in 2014
with the final round of increase in 2017. In Singpost’s news release back in September
2014, it was stated that terminal dues have risen up by 42.6% and are expected to
increase by an additional 37% by 2017.
Due to the higher terminal dues as among other reasons cited for its cost increases,
Singpost announced in September 2014 that it will raise postage rates by an average of
15.4%. Its last rate revision was back in 2006, whereas some rates of certain weighting
categories had remained unchanged since 1972.
Not only SingPost saw higher terminal dues on outbound mail from the country rating
upgrade, but this had also caused SingPost to lose market share on transshipment mail
to Malaysia given the latter’s cheaper cost structure.
Winners and losers of an upward terminal due revision
Due to the asymmetric nature of mails flows, where some countries would be handling
more inbound than outbound mail, a rise in terminal dues will impact negatively those
postal operators handling a higher amount of outbound mail vs inbound.
This is applicable for both Pos Malaysia and Singpost. The quantum of increase will
likely be more for the lower-tiered countries such as Malaysia (at Group 3, Fig. 63) as
the lower terminal dues charged to these groups are likely to be revised up more, which
effectively reduces the level of rate subsidies provided by the industrialized group of
countries (such as Singapore).
On the positive side of things, as Singpost has been upgraded to developed country
status earlier back in 2012 (which we will discuss later), they are unlikely to see a
significant round of terminal due increases. On the contrary however, SingPost will
instead receive more terminal dues compensation if the other developing countries’
terminal dues are seeing their rates revised upwards.
Fig. 67: Tonnage volume of international mail
Source: Company data, data.gov.sg
2010 2015 2010 2015 2010 2015
Changi 11,164 14,460 16,028 19,385 27,192 33,845
MAHB 8,921 14,691 8,836 18,216 17,756 32,907
AOT 288 537 969 620 1257 1,157
5 year CAGR rates
Changi 5% 4% 4%
MAHB 10% 16% 13%
AOT 13% -9% -2%
TotalOut-going MailIn-coming Mail
Nomura | ASEAN logistics 6 October 2016
37
And Pos Malaysia could also be impacted…
Pos Malaysia will likely also be subjected to higher terminal dues from 2018 onwards as
a result of its change in status from a transitional to a target system (Fig. 63).
Quantifying the impact – higher terminal dues presents a case for more postal rates revision
Assessing the impact of terminal dues can be a tricky affair given the lack of disclosure
provided by both Pos Malaysia and Singpost.
But as has been the case in the past, for Singpost, the increases in costs were passed
on easily to customers through higher postage tariffs, which was more than enough to
compensate for the increase in terminal dues. This has been noted in the margin
expansion seen the following quarter (to register operating margins of 29.8%; higher by
0.6ppts y-y) following the revision in postage tariffs.
Pos Malaysia is currently waiting for an increase in postal tariffs, for which the quantum
remains unknown at this juncture. We understand that the postal operator is close to
seeing an increase by an average of double digit percentage change for its regulated
mail services. We reckon the exact quantum will only be made known once UPU
determines the exact quantum of the increase in terminal dues.
Nomura | ASEAN logistics 6 October 2016
38
Fighting for transhipment market share Provided that mail volumes are sizeable, transhipment mail represents a sizeable
business for both Pos Malaysia and Singpost in FY16.
Transhipment / transit mail refers to en-route mail items that are consolidated at an
International Mail Processing Centre for transit processing to its intended final
destination. In Asean, we understand that Singapore remains a major destination of
choice for transhipment transit mail given Changi Airport’s status as a leading air traffic
hub.
Transhipment mail contractual volume arrangements can be done in two different ways,
either through a form of bilateral agreement with several postal players or through a mail
consolidator.
We understand that Singpost has already engaged several bilateral agreements with
other postal providers such as Emirates Post, PostNL, United States Postal Service,
Royal Mail Great Britain, Deutsche Post AG etc to name a few. Singpost does not
disclose the breakdown of its transhipment revenue, but we estimate that this could
easily account for half of its total international revenue of SGD228.8mn, at SGD114.4mn.
While Singapore has been the dominating country in Asean’s transhipment market,
Malaysia is aggressively catching up, given its lower-cost appeal, where Pos Malaysia
has seen a significant volume increase from mail consolidators, particularly from China.
This has also been the key reason for the sharp fall in Pos Malaysia’s FY16 profitability,
as its transhipment handling revenue generated failed to cover expenses (USD
denominated). This is because prices were still quoted in local currency (MYR), which
had depreciated sharply y-y. We understand that transhipment revenue generated by
Pos Malaysia in FY16 was close to MYR240mn, which is a 700% y-y increase from only
a mere MYR30mn in FY15. For FY17, Pos Malaysia cited that they are likely to see
transhipment revenue drop by 10% after negotiating better pricing. Despite the lower
revenue, management has guided that the business will be profitable this year, with a
rough PBT margin of approximately 7%.
Nomura | ASEAN logistics 6 October 2016
39
How technology is changing landscape
The rise of the start-ups
Riding on the rapid growth of ecommerce activities and the adoption of the omni-retail
concept, which should make an impactful change across the entire supply chain
distribution, we see this underlying theme to stimulate the demand for last-mile delivery
logistics players.
With the shorter delivery time demanded by online shoppers, ecommerce players, which
are aggressively expanding in an attempt to reach mass scale, are pouring significant
investments into improving their supply chains to stay relevant and differentiate
themselves against competitors. Given the disperse locations of shipment geographies,
distribution/fulfilment centres, they will need to be decentralized, as was the case with
Amazon.
Most of these investments have been poured into expanding the number of fulfilment
centres. Although the concept of pick, pack and ship is simple - when volumes are
massive with large SKU (stock keeping unit) counts, which are sourced from many
merchants and shipped to customers, the process can be a very complex one to achieve
at its most optimal efficiency. Given the sheer volumes handled, full-scale automation
sorting processes are needed, thus minimizing human touch. One has also to take into
consideration return costs as well - which forms a sizeable unnecessary cost item that
could have been avoided earlier.
Amazon, which is one of the largest ecommerce players globally, has stepped up its
fulfilment economics by leasing as much as 20 aircraft to improve the efficiencies of its
delivery network further given the higher demand for its 48-hour delivery guarantee for its
growing Amazon Prime subscribers. The giant internet retailer has also embarked on its
own last-mile delivery initiative under Amazon Flex, which is a ride-sharing program for
any third parties to deliver parcels to Amazon’s customers.
While efficiencies on economies of scale can be controlled and optimally achieved at the
warehouse and sorting side, it is typically the last-mile delivery process that is
supposedly to be the least efficient and the costliest of the entire fulfilment process,
especially when economies of scale in volume size have yet to kick in.
Fig. 68: A typical fulfilment process of internet retailers
Source: JD.com
Given the low online retail penetration rate in most Asean countries, most ecommerce
retailers lack the volume to justify the scale to have their own in house last-mile delivery
fleet. The last-mile portion of the fulfilment process is typically outsourced to the
incumbent express delivery providers.
Given the underlying simplicity of the last-mile delivery business model and with its low
barriers on entry (where regulations are not strictly enforced in some countries), this has
led to the proliferation of third-party fulfilment and last-mile providers – some of which
provide on-demand deliveries, leveraging on the sharing economy model on unutilized
capacity from third party / freelance providers.
Nomura | ASEAN logistics 6 October 2016
40
Fig. 69: Some examples of last mile start-ups and fulfilment providers
Source: Company data, Nomura research
Seed
Start-up name Countries in operations Business model funding date Total disclosed funding Customers Staff size Website Link
CarPal Singapore Local on-demand delivery. They use apps and websites to link their clients with third-party drivers - much like how taxi
booking apps work. With 6000 drivers registered in 2016, they deliver goods, documents, and even pets. Gives instant
price quote, pays 60-80% of the fee to driver.
Dec-15 USD1.0mn na 2-10 https://www.carpal.me/
GoGoVan Hong Kong, Singapore Last-mile, point-to-point delivery through mobile app, bridging customers and drivers. Services retail customers as well
as businesses. Has a large driver base
na na na na https://www.gogovan.sg/
Lalamove Hong Kong, Singapore, Bangkok On demand delivery app to help you find a van or truck instantly. Operations in Bangkok is bigger than Singapore na USD30mn (Asia Plus Inc.,
MindWorks Ventures, AppWorks
Ventures, Crystal Stream, The Aria
Group, Sirius Venture Capital)
na 201-500 www.lalamove.com
Zyllem (formerly Rocket Uncle) Has ceased operations Third party marketplace model na na na na www.zyllem.com/sg/
Qourier Singapore On-demand service that delivers your items at the touch of a button na na na na
FastFast Singapore FastFast is a personalized delivery service platform that aims to connect customers with on-demand drivers and riders.
na na na na https://fastfast.delivery/
Ninja Van / Ninja Logistics Singapore Provides services under two heads, Last mile delivery and Ninja Collect. Marketplace capacity model. 10000 parcels a
day in Singapore (more than double y-y). 5000 parcels a day (with 200 drivers) in Malaysia with a 3-5 fold increase by
year end.
Jan-14 USD32.6mn (B Capital Group, The
Abraaj Group, Monk's Hill
Ventures, Yahoo Japan, Monk's Hill
Ventures, Insas Berhad)
Singapore: Lazada, Zalora,
Qoo10, Shopee, Charles &
Keith, Watsons, Guardian
51-200 https://www.ninjavan.co/en-sg
Zap Delivery Singapore On-demand service that delivers your items at the touch of a button na SGD400k na na zap.delivery/
Anchanto Singapore, India Provides channel management, cross-border ecommerce support and related services including warehouse and
inventory management, etc. Does not do marketplace on-demand delivery
na na L'Oreal, Maybelline,
Scotchbrite, 3M
na www.anchanto.com/
EasyParcel Malaysia, but potentially expanding into
Indonesia, Singapore and Thailand
Web-based parcel consolidator and E-commerce shipping solutions provider Dec-15 na - Axiata Digital Innovation Fund na
NeonRunner Malaysia Operates a fleet of motorcycle couriers and they specialise in point-to-point delivery. With over a 100 drivers, cater to
the needs of e-commerce firms, businesses and retail consumers. We find their response time too long, from previous
personal experience.
na na na na https://www.neonrunner.com/
Ninja Van / Ninja Logistics Malaysia Provides services under two heads, Last mile delivery and Ninja Collect. Marketplace model. Supports ecommerce
merchants primarily including Lazada. Has presence in Indonesia and Malaysia as well.
na na na na
PostCo Malaysia Designed to address the issue of customers missing deliveries. Has 30 designated collection points, mostly local
convenience stores or merchants, which receive parcels on behalf of the customer and the customer picks the parcel
according to his convenience. One spot costs RM2.90. The model is somewhat similar to SingPost's locker service-
Rent-a-POP.
na na na na https://www.postco.com.my/
The Lorry Malaysia Offers on-demand cargo transportation services throughout Malaysia, connecting lorry and van owners with customers
who wish to move cargo – household or commercial . Extra services such as manpower, boxes, packing, and
dismantling are also available. Raised USD1.5mn funding from SPH Media Fund in Jan 2016.
na na na na www.thelorry.com/
Ezycourier Malaysia, Hong Kong, Vietnam Largest P2P logistic network for on demand convenient sending/delivery na na na na www.ezycourier.com
Go Get Malaysia Marketplace for deliveries and errands, ranging from picking up a dress, to stringing a racquet. Most helpers are
college students or retiress, the usual pay for a chore is around RM 20.
na na na na https://goget.my/
aCommerce Indonesia, Thailand Offers end-to-end e-commerce solutions including building of websites, warehouse management, customer service,
returning fulfillment and cash on delivery for retailers, brands, and manufacturers in Southeast Asia. Good client list.
Businesses predominantly in Indonesia, judging from website traffic flow
Jan-13 USD20.2mn (MDI Ventures,
DKSH,NTT DoCoMo Ventures,
Asia Pacific Capital, Sinar Mas
Digital Ventures (SMDV),
CyberAgent Ventures, Sumitomo
Corporation Equity Asia Limited,
Ardent Capital, Inspire Ventures, JL
Capital)
MatahariMall, MAPeMall (the
ecommerce arm of Indonesia’s
largest retailer, Mitra
Adiperkasa), BerryBenka, HP
and L'Oreal
501-1000 www.acommerce.asia/
Skootar Thailand Helps connect SMEs with available scooter messengers in the area, mainly for documents, but accept anything that
can be transported on a bike. Features tracking and rating systems for messengers.
na na na na www.skootar.com/
Rushbike Thailand Parcel and document delivery anywhere in central Bangkok in 60 minutes
Notify delivery status via SMS including photo and signature. Realtime position tracking.
Oct-14 na (JFDI.Asia) na na www.rushbike.com
Go-Jek Indonesia Marketplace capacity model, one of the largest in Indonesia, with 200,000 motorcycle riders. Provide not only mail and
parcel transportation but also a host of other services like Bike Taxi, grocery and food delivery, salon and massage
Fig. 91: The changing dynamics of order fulfilment in the logistics supply chain
Traditional order fulfilment Challenges
Given the single platform of distribution - inventory management is only a two way process between suppliers / manufacturers and retailers
Inventory management not flexible as this involves thorough planning depending on sales pipelines / forecasts
Inventory management has to be managed properly at the physical shops
Higher unnecessary logistics costs
Warehouse solely used for storage Warehousing capacity not fully optimized
Customer management will be more reactive Although the shopping experience is more personalized, it sacrifices the convenience of time and lacks scale on marketing opportunities
Omni-channel supply chain fulfilment Challenges
Seamless inventory management integrated across all ordering /booking channels and suppliers/ manufacturers. Dynamic inventory allocation across all omni-channels
Huge investment required. Needs scale to be economically feasible. Real time monitoring infrastructure needed
Delivery options to either stores/ homes/ parcel collection points
Last mile delivery challenges. High volume to ensure economies of scale
Warehouses could similarly function as showrooms or front facing roles
Location accessibility
Proactive customer management by exploiting data analytics Data mining analysis required, depending on the size of product portfolio
Source: Nomura research, DHL Omni channel logistics report
Customers who have made purchases through the online channel would eventually
(although not yet) expect the immediacy of product availability to their doorstep – as
would be the case if they were to pay a visit to the physical store.
Although same day delivery is not a benchmark yet for ecommerce order fulfilments
today, this standard could soon be a benchmark in the near term for staying relevant
given the increasing empowerment of consumers, as suggested by the survey below
(Fig. 92).
In a nutshell, the urgency in responding time has to be emphasized and this will
eventually see lead times becoming much shorter - across all supply chains, whether
B2B or B2C. This presents a challenge for logistics supply chains today.
Fig. 92: What are your consumers’ expectations for omni-channel experience?
Fast delivery remains a key priority for online shoppers
Fig. 97: What are your current sales channels and what are the growth expectations over the next 2-5 years?
The traditional retail channel remains popular and is expected to show growth although the omni-channel model is showing strong growth potential among respondents
In the online space, Rakuten and Amazon have grown and taken market share at a
fierce pace, with Rakuten’s online market share rising from 15% in 2006 to 20%
currently. Amazon has been even more aggressive, almost doubling its market share in
10 years from 9% in 2006 to ~17% at present. Even so, a lot of traditional players are
still gradually building capacity to succeed online. For instance, Seven & I, the popular
convenience store chain holds 6% market share of the total retail pie in Japan (Fig. 112),
but a mere 2% of the total internet retail market (Fig. 113).
Fig. 112: Total retail market share of top 10 companies in Japan
Source: Euromonitor, Nomura Research
Fig. 113: Total internet retail market share of top 10 companies in Japan
Source: Euromonitor, Nomura Research
What have we leant? Convenience is key
The Japan online retail segment history tells us that as the demographic structure
matures, coupled with the increase in per capita income, people prefer a convenient and
hassle-free shopping experience. Euromonitor estimates that 50% of total online retail
transactions in Japan will be through mobile applications by 2020, up from the current
37% (Fig. 111). This hardly seems unlikely.
In Asean, with per-capita incomes being low and the population relatively much younger,
we expect affordability to still dictate which channel dominates. But given the rapid
advancement of internet penetration and the lures of the digital segment today (both
cost-effectiveness and a painless shopping experience), we don’t see consumers
veering away from online purchases any time soon.
How the need for convenience has made parcel shipments a daily routine in Japan
In Japan, the use of courier services is a common routine, not only just for online
shopping but in almost any daily aspect of life, whenever one would want to avoid the
need to haul bulky goods. We can attribute this to its reliable and timely delivery service
execution and vast nationwide coverage.
Below are some routine examples to name a few:
• Getting your ski or golf equipment couriered to the resort.
• Dropping off luggage at a courier point, to get it delivered to the airport rather than
having to haul it yourself on the subway metro.
• Sending out shopping gifts to loved ones from the shopping store.
• Getting fresh seafood delivered for dinner preparations. Calling the nearest
convenience store to have your shopping list delivered to you.
Seven & I 6%
AEON Group
6%
Lawson Inc2%
FamilyMart 2%
Yamada Denki 2%Rakuten
1% Japan CCU1%
Amazon1%Uny
1%Isetan
Mitsukoshi 1%
Wal-Mart Stores
1%
Others76%
Apple 4%
Japan CCU3%
Seven & I 2%
Start Today 2%
FamilyMart 1%
Senshukai 1%
Bic Camera 1%
Others44%
Rakuten 20%
Amazon17%
Softbank 5%
Nomura | ASEAN logistics 6 October 2016
64
We have yet to see this happening in a big way in Asean, but there are signs that the
market potential is there for on-demand courier services, which are currently being
served by most start-up and technology disruptors.
However, the size remains relatively small compared to the volumes handled in Japan,
where demand and size remains stable with network coverage more clustered. From a
coverage standpoint here in Asean, the feasibility of such services remains low for now
given the sparse delivery locations. But as online shopping penetration increases here,
the Takyubin routine practiced in Japan could be adopted in Asean progressively.
Nomura | ASEAN logistics 6 October 2016
65
Asean offers solid footing for FDIs
Favourable demographics
Asean’s favourable demographics alone present a solid launch pad for economic
prosperity in the long run, given its upside potential in spending propensity — although
in the near term, this is capped by headwinds of the slowing economic growth globally,
more particularly, in China.
Combined, Asean’s economy size would be the sixth-largest economy and third most
populous nation of 621mn, with a relatively young median age of 29. Its low labour costs
as suggested by its low GDP per capita offers investment opportunities for
manufacturers that may attract FDIs from its Northern Asia counterparts such as Japan,
China and Korea. With an average investment/GDP ratio of just 28%, Asean offers lots
of development potential.
We have seen FDIs flowing into Asean in a big way from Japan. According to the Japan
External Trade Organisation, Asean continues to surpass China for the fourth year in a
row since 2009 as a more popular destination for FDIs (Fig. 114). Although FDI into
China is bigger than any individual country in Asean, collectively combined, as of 1H16,
Asean’s total FDI is 91% higher than China’s (Fig. 115).
Fig. 114: FDIs inflows from Japan
Asean's collective FDIs have exceeded China's since 2009
Source: JETRO
Fig. 115: FDI inflow breakdown as of 1H16 (USDmn)
Source: JETRO
The survey also cites that Asean remains on the radar for Japan FDI, of which among
the top 5 - Philippines, Vietnam and Indonesia - are the targeted ones for future near-
term expansions. Of the top 5 countries in the list below, Vietnam was ranked 3 times for
the following 3 reasons: sales increase, deregulation and easy to secure labour force
(Fig. 116).
From the logistics perspective, we noted that Singapore was ranked number 3 as the
country of choice that would see more expansion as businesses review their production
and distribution networks. We reckon this is due to Singapore’s status as a leading hub
(for both airlines and shipping). Also noted in Fig. 117, Japanese businesses also cited
that Indonesia will see a lot of investments in the logistics function along with Philippines,
citing potential increases in sales growth.
6.6 6.2 6.2 6.5
6.9 7.3
12.6 13.5
9.1 10.4
8.9
4.1 5.0
6.9 7.7 6.2
7.0 8.9
19.6
10.5
23.4 22.7
19.5
7.8
0
5
10
15
20
25
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
1H
2016
China ASEAN 6(USDbn)
China, $4,076,
34%
Singapore, $1,508,
13%
Thailand, $1,901,
16%
Indonesia, $1,499,
13%
Malaysia, $539, 5%
Philippines, $1,481,
12%
Vietnam, $845, 7%
Nomura | ASEAN logistics 6 October 2016
66
Fig. 116: Reasons for expected business expansion in the next 1 to 2 years (multiple answers)
Asean remains on the radar for Japan FDIs, of which among the top 5 - Philippines, Vietnam and Indonesia - are the targeted ones for future near term expansions.
Source: Jetro survey
Fig. 117: Functions to invest into
Source: Jetro
..and how TPP could stimulate trade
We note that Japan’s strong interest in Vietnam, as seen in Fig. 116 where more
investments in productions are expected to be poured into (Fig. 117) is also likely on our
expectations of the upcoming negotiations for the Trans-Pacific Partnership (TPP), which
has basically been agreed upon.
It is a consensus view that Vietnam – with its low-cost labour – is a key beneficiary of the
TPP noting that it has both Japan and US as its key trading partners, which will benefit
from higher exports as tariffs are slashed. Part of the TPP agreement is the elimination
of tariffs on textiles and apparel, which has seen a 50% increase in apparel and footwear
exports over the past 10 years according to the Eurasia Group.
The TPP is a trade agreement among 12 countries (4 of which are Asean countries)
where the finalized proposal was signed back February 2016. The 12 countries are listed
below:
Total 82.9 Total 47.0 Total 20.5 Total 19.1 Total 16.1 Total 8.1 Total 3.2 Total 2.4
South Korea 88.2 India 62.8 Philippines 27.7 Taiwan 40.6 Bangladesh 24.2 New Zealand 16.7 Vietnam 6.6 Philippines 13.9
India 86.9 Indonesia 62.3 Australia 27.1 South Korea 32.4 Australia 22.4 Bangladesh 15.2 Taiwan 4.4 Bangladesh 12.1
Philippines 86.2 Bangladesh 60.6 Thailand 24.1 HK & Macau 25.0 Singapore 22.2 Thailand 12.8 China 4.3 Cambodia 9.3
Taiwan 85.5 China 49.7 China 22.1 China 24.9 HK & Macau 21.3 South Korea 11.8 Bangladesh 3.0 Vietnam 5.4
Vietnam 84.6 Cambodia 48.2 Taiwan 21.7 Thailand 22.6 China 19.3 Taiwan 11.6 India 2.7 Indonesia 2.0
Cambodia 83.3 Vietnam 45.9 South Korea 21.6 Australia 21.2 Taiwan 17.4 Australia 9.4 Singapore 2.6 Taiwan 1.5
New Zealand 83.3 Singapore 45.3 Singapore 21.4 Malaysia 19.6 New Zealand 16.7 India 9.2 HK & Macau 2.5 HK & Macau 1.3
Thailand 82.9 Taiwan 43.5 India 19.5 Singapore 17.1 India 16.5 Singapore 7.7 Australia 2.4 Thailand 1.1
Australia 82.4 HK & Macau 41.3 Indonesia 19.1 Indonesia 15.7 Indonesia 15.7 China 7.4 Thailand 2.2 South Korea 1.0
Indonesia 81.4 Australia 37.7 Vietnam 19.1 Vietnam 15.4 Vietnam 15.1 Vietnam 7.1 Philippines 1.5 China 0.9
China 81.3 Philippines 36.9 Bangladesh 18.2 India 14.3 Cambodia 14.8 Malaysia 6.0 Indonesia 1.5 India 0.9
Singapore 80.3 South Korea 34.3 HK & Macau 15.0 Philippines 13.9 Thailand 14.6 Cambodia 5.6 South Korea 1.0 Malaysia -
Malaysia 78.2 Thailand 33.6 Cambodia 14.8 New Zealand 13.3 Philippines 10.8 Philippines 4.6 Malaysia 0.8 New Zealand -
HK & Macau 76.3 Malaysia 32.3 New Zealand 13.3 Bangladesh 9.1 Malaysia 10.5 Indonesia 2.9 New Zealand - Singapore -
Bangladesh 75.8 New Zealand 30.0 Malaysia 12.0 Cambodia 7.4 South Korea 9.8 HK & Macau 2.5 Cambodia - Australia -
Reviewing production
and distribution
networks (%)
Reduction of costs
(e.g., procurement/
labor costs) (%)
Deregulations (%) Easy to secure labor
force (%)
Sales increase (%) High growth potential
(%)
Relationship with
clients (%)
High receptivity for
high-value added
products (%)
Total 62.4 Total 31.9 Total 24.5 Total 11.7
New Zealand 86.7 Thailand 40.2 Bangladesh 45.5 India 16.2
Australia 82.1 China 39.1 Vietnam 42.4 Indonesia 15.5
HK & Macau 82.1 Malaysia 36.4 Thailand 28.8 Philippines 15.4
Singapore 81.7 South Korea 34.3 Cambodia 28.6 Bangladesh 15.2
South Korea 79.4 Vietnam 33.7 Malaysia 27.1 Cambodia 14.3
Taiwan 73.9 Taiwan 31.9 Indonesia 25.5 Australia 14.3
India 71.3 Indonesia 31.0 India 25.3 Taiwan 13.0
Indonesia 63.5 Philippines 30.8 Philippines 23.1 Singapore 13.0
China 62.1 India 29.0 China 22.1 HK & Macau 10.3
Malaysia 57.4 New Zealand 26.7 New Zealand 16.7 Vietnam 9.9
Thailand 54.2 Cambodia 24.5 Australia 13.1 Thailand 9.6
Cambodia 53.1 HK & Macau 24.4 South Korea 10.8 China 8.7
Bangladesh 51.5 Bangladesh 24.2 Taiwan 10.1 South Korea 7.8
Philippines 47.7 Australia 22.6 HK & Macau 5.1 New Zealand 6.7
Vietnam 42.4 Singapore 16.5 Singapore 2.6 Malaysia 6.2
North Asia’s thirst for Asean’s potential piece of the pie The slew of acquisitions by North Asian names in last mile and internet space
Since 2015, we have seen some acquisitions in Asean made by the biggest names in
last-mile delivery from both Japan (Yamato Holdings) and Korea (CJ Express) looking to
tap into Asean’s growth story.
These acquisitions also form part of their longer-term goal to break away from being too
dependent on matured home ground markets.
Additionally, China’s Aliaaba too has expanded in a big way into the Asean market
following its acquisition of a majority stake in Lazada (from Rocket). This sizeable
acquisition also gives the Chinese based e-commerce player a significant first-mover
advantage into Asean collectively, which some players had previously failed in the past,
such as Japan’s Rakuten which had decided to make an exit recently. Alibaba’s move
marks its second major investment into Asean after buying a 10.3% stake in SingPost
back in 2014 (for SGD312.5mn).
While Lazada has marked its territory as the dominant player in Asean’s online shopping
space, its market in Indonesia can be easily contested given the popularity of Tokopedia,
which counts Softbank Group - a leading Japanese internet and telecommunication
conglomerate - as an investor.
Riding on the secular growth story of Asean’s online shopping
The key underlying theme of these acquisitions rides on Asean’s structural growth story
in online shopping penetration, which remains at its nascent stage here.
Certainly establishing a scalable Asean-wide operation can be challenging given its
unique individual country policies and this may require the partnership and collaboration
of several local players to expand customer reach and ultimately volume and earnings
potential. With the rapid growth in the last-mile delivery segment, starting operations
from scratch may risk not getting up to speed to win market share. Both Yamato and CJ
Express had earlier established local operations in Asean but were not seeing the
intended results as fast they had hoped for, we reckon.
So this brings the question about what could be gained from the local last-mile providers
with these tie-ups with players such as Yamato Holdings and Korea’s CJ Express.
Ranked number 1 in Nikkei’s survey of corporate brand perception and as Japan’s
largest courier provider in Japan with a handling volume of 3.27bn parcel items last year,
Yamato has been tying up collaborations in the form of equity partnerships. Following its
equity partnership with GD Express solidifying its position in Kuala Lumpur’s last-mile
delivery segment, the transport carrier had also recently acquired a cross-border line
haul trucking company headquartered in Penang with operations in Thailand and
Vietnam, Cambodia, Laps and China. It had also established a JV with Siam Cement to
operate last-mile delivery services in Thailand.
Judging from the trail of acquisitions Yamato has done, it certainly looks like the courier
players aims to be a leading player (eventually), with formidable last-mile delivery
business in Asean ahead of the AEC integration as well as the impending establishment
of the TPP. Yamato’s expansion into cross-border trucking certainly makes an appealing
case for China’s cheaper last-mile delivery reach into Asean. We foresee Yamato's entry
as GDEX’s strategic shareholder as a positive, paving the way on higher volumes fed
into GDEX as their local last-mile delivery partner. There is scope for revenue synergy
with potential cross offerings on what Yamato can offer to GDEX’s larger client base and
vice versa.
Similarly, CJ Express has also made a sizeable entry into the Malaysia market followings
its acquisition of a majority stake in Century Logistics, and the race is on who among the
two will make it as the dominant leader in Asean’s last-mile delivery space.
Nomura | ASEAN logistics 6 October 2016
69
Fig. 120: Yamato’s and CJ express acquisitions (last mile / cross border logistics focus)
Source: Company data, News releases
For the internet space, Alibaba’s acquisition into Lazada would potentially provide a
fruitful cross-border proposition for its long list of merchants based in China to penetrate
into the Asean market and vice versa.
This certainly will bring in benefits for the last-mile players, particularly Singapore Post.
With Alibaba already a strategic shareholder of Singpost (with discussion to take up
more), we foresee that SingPost may potentially serve as a transit gateway partner for
Alibaba’s redirected shipments into other countries and regions such as Indonesia,
Australia and New Zealand.
Lazada is likely to embark on further expansion plans following the additional
USD500mn cash injection from Alibaba (Alibaba’s other USD500mn used to buy over
the stake from Rocket Internet). As Indonesia is potentially the biggest opportunity given
the population base itself, it certainly is set to be the most contested market for online
shopping market share, in particular, against Softbank Group’s Tokopedia, which is
aggressively expanding rapidly by collaborating with Alfamart to expand its payment
distribution points). Tokopedia had also established a partnership with one of Indonesia’s
leading retailers, Ramayana, which will have Tokopedia as the retailer’s online
distribution platform.
However, what we have found interesting is that both Alibaba and Softbank are equity
partners in India’s Snapdeal, so with both of them venturing into Indonesia individually on
their own, this may potentially present a more meaningful case for collaboration, or even
a merger.
2010 Started providing delivery services in Singapore
2011 Started providing delivery services in Malaysia
19-Dec-13 Established a regional HQ for South East Asia in Singapore
26-Mar-14 Started cross border delivery services (next day services) between Singapore and Malaysia.
10-Jul-14 Acquires 85% share in Tidiki Express to become a subsidiary company. The capital base of Tidiki Express is SGD210,000.
12-Feb-15 Formation of Yamato Logistics Vietnam with a capital base of USD3.2mn
9-Apr-15 Establishment of Asia Business-Model Innovation Centre in Singapore
24-Jul-15 Launched fresh seasonal products delivery from Japan to Singapore
8-Jan-16 Ties up with ANA Cargo to be the last mile provider for Isetan Singapore's online business
21-Jan-16Establishes a business collaboration and acquires a stake in GD Express. The acquisition was done through a placement exercise and buying
over a portion of Singpost's stake. Total deal exercise is approximately MYR549.8mn for a ownership of 22.85% in GDEX.
23-Mar-16 Launched fresh seasonal products delivery from Japan to Malaysia
25-Aug-16Establishes a collaboration to provide last mile delivery with Siam Cement Group where Yamato will have a 35% stake. Capital base is
THB633mn
31-Aug-16 Acquires Overland Total Logistics, a cross border trucking company with a line haul network spanning from Singapore to China (6,000 km)
Recent sizeable acquistions by North Asia companies into ASEAN
8-Sep-16 Korea's CJ Express buys over 31.44% stake from founder. Deal valued at MYR174.8mn
Yamato Holdings' ASEAN expansion
Nomura | ASEAN logistics 6 October 2016
70
Fig. 121: Alibaba and Softbank’s acquisition trail (online shopping)
Source: Company data, News releases
Jun-09Alibaba signed an MoU with Vietnam's Ministry of Industry and Trade, to promote the development of e-commerce and to facilitate
international trade for Vietnamese SMEs.
May-14 Alibaba buys 10.3% stake in Singapore Post for $249 million.
Aug-14Alibaba collaborates with Kasikorn Bank of Thailand to help Thai SMEs looking for new customers to introduce their products to the e-
commerce marketplace.
Feb-15 Alibaba announced that AliExpress, has signed a strategic agreement with DOKU, Indonesia’s largest online payment provider
May-15Alibaba teamed up with online service provider ReadyPlanet in Thailand, its first entrance into the Thai market. ReadyPlanet will become
Alibaba’s first Thai reseller, likely to boost the small- and medium-sized business community in the nation.
Jul-15Alibaba announced another investment round in Singapore Post in July 2015, for additional 5% stake. This deal has been delayed thrice
since, expected date of completion is October 2016.
Aug-15 Alibaba in partnership with Softbank and Foxconn, invested $500 million in Snapdeal, an online marketplace in India.
Sep-15 Alibaba and affiliate Ant Financial invest $680 million in indian etailer Oaytm, becoming largest shareholder with 40% stake.
Apr-16Alibaba buys a controlling stake in Singapore-based e-commerce platform Lazada for $1 billion.
Sep-16 Lazada gears up for deeper penetration in ASEAN by investing in logistics and payment systems.
Sep-16Without disclosing specific plans, Alibaba announed it will boost investment and development in ASEAN, by participating in the
development of local small- and medium-sized enterprises and young people.
Softbank's ASEAN expansion
Jun-13 Softbank Ventures Korea invested an undisclosed amount in Tokopedia. This is the 5th round of funding for Tokopedia.
Oct-14 Softbank and Sequoia Capital invest $100 million in Tokopedia, the online marketplace startup in indonesia.
Feb-15Dealoka, a mobile e-commerce app, received funding SB ISAT, a USD 50 million venture fund jointly established by Indosat, and
Softbank to target Indonesian growth-stage startups.
Aug-16China’s Didi Chuxing and SoftBank Group are leading a new round of funding in South-east Asian ride-sharing service Grab that could top
$600 million.
Apr-16 Indonesia’s Tokopedia raised US$147 million from Softbank in the 7th round of funding.
Alibaba's ASEAN expansion
Nomura | ASEAN logistics 6 October 2016
71
Cost composition: best to stay focused on a single business structure The cost composition of logistic operators centres primarily on staff and transportation
costs. Workforces in this sector tend to suffer a high turnover given the young age
demographic of its workforce, particularly for delivery / driver jobs. Transportation costs
predominantly comprises of fuel and service fees for postal shipments where the other
counter party executes the last-mile delivery. This can also be in the form of terminal
dues. Infrastructure costs, which are generally fixed, relate to warehousing or distribution
centre costs.
Fig. 122: Margin analysis and cost composition
Source: Nomura research, Company data
Our observation shows that as the revenue base diversifies to other areas (Fig. 123),
margins and capital allocation efficiency are at risk to be compromised (Fig. 124 and Fig.
125).
Fig. 123: Revenue mix
Source: Nomura research, Company data
This has also resulted in deteriorating cash ROICs, which has been the case for
Singapore Post. Following Pos Malaysia’s MYR818mn acquisition of KLAS Group, who
are in the business of providing various logistics services — where margins are thin
given its sizeable asset base — the Malaysian postal operator group is also estimated to
witness a similar fate of declining margins and capital efficiencies.
GD Express Pos Malaysia LBC Express Singapore Post
Nomura | ASEAN logistics 6 October 2016
72
As a result, it is always best to remain prudent in any expansion opportunities and this
has proved fruitful for GD Express given the superior margins and cash ROICs achieved.
Fig. 124: Cash profit ROIC trend (%)
Source: Nomura research, Company data
Fig. 125: Net profit margin trend (%)
Source: Nomura research, Company data
The need to be efficient
Why population density matters to boost margins
Fulfilment costs represent a sizeable cost for most e-retailers, ranked within the top cost
items, notably after cost of sales and staffing costs. As volume handled matters to drive
profitability, to achieve the economies of scale desired, one has to efficiently manage
fulfilment costs at an optimal level.
One notable observation that we have also made is that shipping costs as a proportion of
GMV will be lower (and ultimately more cost efficient) on a higher mail delivery density
area. In the chart below, we have observed that, given the high density of postal mail
items per km in Japan, fulfilment costs (including shipping) as a proportion of its GMV is
much more lower for the internet players in Japan such as Japan’s Yahoo Japan and
Rakuten vs JD.com (China) and Amazon (predominantly US).
One needs to be mindful that the caveat to this analysis however is the possibly of lower
rates distorting it.
Fig. 126: Fulfilment costs as % of GMV
Source: Company data, Nomura research
Fig. 127: Mail density per km (based on urban population and urban land density) vs fulfilment cost as a % of GMV
Source: Nomura research, Company data, Demographia
0
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GD Express Singapore Post
Pos Malaysia LBC Express
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GD Express Singapore Post
Pos Malaysia LBC Express
1.3% 1.3%
5.9%
3.1%
Yahoo Japan Rakuten Amazon JD.com
China
Japan
US
0%
1%
2%
3%
4%
5%
6%
7%
0 500,000 1,000,000 1,500,000
fulfilm
ent cost as a
% o
f G
MV
Volume density per km - Number of mails annually per square km
Nomura | ASEAN logistics 6 October 2016
73
Based on the scatter plot charts below, we also observe that the last mile players with
higher mail density per sqm will enjoy higher operating margins, and ultimately further
urbanization is expected to bring more upside to margins on improved economies of
scale – although this could entice a wave of new competitors, diluting the impact of the
margin expansion.
Singapore Post enjoys superior EBIT margins of 29% for its mail business given its high
mail volume density (Fig. 128). With its rising propensity towards online retail spend –
although already the highest in the Asean region – we are likely witnessing this margin to
be sustainable moving forward on the back of relaxed tariff policies amongst the Asean
nations and the upcoming TPP.
Fig. 128: EBIT margin of key last mile operators (averaged of 2-4 players) vs mail density per population
Singapore Post's superior margin is due to its high mailing volume density where urbanization rate stands at 100%.
Source: Nomura research, company data, UN data, World Bank. Note: EBIT margins are based on the mail and last-mile delivery businesses only. For Singapore, it is only represented by SingPost’s mail division.
Fig. 129: Upside growth in urbanization
Vietnam, Indonesia, Thailand and China have high growth potential on the back of rising urbanization
Source: Nomura research, company data, UN data, World Bank
Although one would argue that the rising urbanization would potentially lead to traffic
congestion which slows traffic and the number of delivery beats, we think the upside
benefit on the scale from higher volume would outweigh this downside (as consumers
are reluctant to be stuck in traffic to shop). Furthermore, setup of parcel lockers are
seeing a rising usage trend to maximize the delivery beat efficiency.
Japan
ChinaUSA
Malaysia
Singapore
IndonesiaVietnam
Philippines
Thailand
0%
5%
10%
15%
20%
25%
30%
0 200 400 600
EB
IT m
arg
ins
Postal items/Urban Population
Japan
China
USA
Malaysia
Singapore
Indonesia
Vietnam
Philippines
Thailand
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
0 50 100 150
Urb
aniz
atio
n g
row
th
rate
(%
)
Urbanization rate (%)
Rating Starts at Buy
Target Price Starts at SGD 2.11
Closing price 4 October 2016 SGD 1.50
Potential upside +41.1%
Anchor themes
With scale, infrastructure and wide-spread network partners at the entity level, and surging demand led by e-retail at the macro-regional level, Singapore Post is in a sweet spot, with sharp revenue growth and earnings ahead.
Nomura vs consensus
Our top- and bottom-line numbers are ahead of the Street by 7-15% and 8-37%, respectively.
Since 2011, SingPost has been on an acquisition spree with some prominent pursuits
being Quantium Solutions for logistics and warehousing, Famous Holdings for expansion
of its freight forwarding network, and more recently Trade Global and Jagged Peak in the
US, which are e-commerce service providers for fashion retail and other high-velocity
consumer goods.
Even though the logistics revenue growth has been impressive over the past couple
years (35% y-y in FY16 and 26% y-y in FY15), owing to sound revenue contribution
through Quantium (up 46% y-y in FY16 and 26% in FY15) and Famous Holdings (up
37%/41% y-y in FY16/ FY15), any synergy gains from Trade Global and Jagged Peak
have yet to be realised.
While we do not doubt that the gestation period could be long, we strongly believe that
there will be synergy gains ahead. Our conversations with management have led us to
believe that SingPost’s M&A spree has come to a halt, and the consolidation phase is
due to follow.
Fig. 130: Major subsidiaries and recent acquisitions
Source: Nomura research, company data
Stake: 63% Stake: 100%
Further acquired Further acquired Further acquired
Couriers Please in Australia F.S. Mackenzie in UK and FPS in NZ The Store House in Hong Kong
Stake: 100% Stake: 100% Stake: 75%
Purpose: Last mile delivery
Quantium Solutions-regional platform
for warehousing and distribution
Famous Holdings - SG-based freight forwarder in
6 countries
General Storage- the self-storage
solutions business
Stake: 100% at present (34% to be acquired
by Alibaba in October 2016)
Purpose: Expansion of freight forwarding network
Pupose: The Store House has four storage
facilities in Hong Kong
Purpose: To help SingPost move into US
and Europe while allowing Jagged Peak to
extend its retail clients’ access to Asia-
Pacific.
Purpose: To enable SingPost’s clients in Asia Pacific
to expand their businesses to the US Purpose: 4PX's capabilities in warehousing,
express delivery and freight forwarding, will
help capitalise on the rapid growth in China’s
eCommerce activities.
Jagged Peak - US based ecommerce
solutions provider
Trade Global- US e-commerce services provider Shenzhen 4PX IT - China based
ecommerce solutions provider
Completed acquisition of 71.1%
stake in March 2016
Completed acquisition of 96.4%
stake in November 2015
Increased stake from 18%
to ~36% in February 2016
Nomura | Singapore Post 6 October 2016
77
Fig. 131: Acquisitions/ Divestments/ Collaborations done by SingPost in past 3 years
Source: Nomura research, company press releases
Fig. 132: Quantium Solutions: Warehousing and distribution channel generates 47% of logistics revenue (including Couriers Please)
• Quantium Solutions is a regional logistics distributor and its services include shipping, warehousing & fulfilment, cross-border/ domestic mail and courier services and value-added services such as data management and call centre (http://quantiumsolutions.com/)
• It is a wholly owned subsidiary of SingPost, but Alibaba’s second investment proposal includes Alibaba taking over 34% stake from SingPost for SGD92mn.
• Quantium has only recently started to see meaningful contributions from Alibaba. At present, most of Alibaba business goes through the Cainiao network.
• Revenue growth for the past two years has been at a sturdy 26% and 46%, respectively, and we estimate an increase of about 18% for each of the next three years.
Source: Company data, Nomura research
Announcement date Name of Entity Type Stake Purpose Cost/
Realization
5-Sep-16 Post Luxembourg Collaboration NA Providing eCommerce logistics solutions between Asia and
Europe.
17-Feb-16 GD Express Divestment 11% To free up capital for strengthening financial capability.
SingPost now holds a 11.2 per cent strategic stake in
GDEX.
S$78.4mn
15-Feb-16 Shenzhen 4PX Acquisition 18% Total stake now increased to 36% to leverage on rapid
growth of China's ecommerce activities.
S$36mn
15-Oct-15 TradeGlobal (US) Acquisition 96% To leverage on TradeGlobal's strong end to end ecommerce
solutions network in US.
S$236mn
9-Oct-15 Jagged Peak (US) Acquisition 71% To gain access to Jagged Peak's ecommerce logistics
platform for high velocity consumer products in US.
S$22.5mn
22-Sep-15 Canon Singapore Collaboration NA To build and support Canon's first official web store, the
Canon eShop (shop.canon.com.sg).
1-Sep-15 Store Friendly (SG) Acquisition 100% To enhance self-storage business in Singapore. S$12mn
28-Aug-15 E Link Station Ltd (HK) Acquisition 50% To access Elink's network of self-collection parcel service
points.
S$1.4mn
28-Aug-15 Morning Express &
Logistics (HK)
Acquisition 33% To improve tangibale eCommerce logistics and last mile
delivery capability in Hong Kong.
S$7.1mn
17-Aug-15 SATS Ltd Collaboration NA Located at Changi airport T1, this facility will enhance the
consignment handling capabilities for both SATS and
SingPost.
14-Jul-15 Rotterdam Harbor Hd
(NLD)
Acquisition 80% To expand freight forwarding network in Europe. S$12.6mn
19-Jun-15 PT Trio SPecommerce
Indonesia (TSI)
Joint Venture 33% To provide a one-stop e-commerce solution for both brands
Fig. 133: Famous Holdings: Freight forwarding network generates 37% of logistics revenue
FPS offices in Asia and Europe
• Famous group, consisting of 9 entities, provides complete ocean and air freight related services including but not limited to cargo handling, trans-shipment, customs clearance, storage, distribution and inventory control. (www.famous.com.sg/)
• Since its acquisition in Feb 2013, the company now contributes about 37% of logistics revenue, having grown at 41% and 37% for the past two years, respectively. We estimate a growth rate of about 18% for the next 3 years.
• A special audit** was conducted to examine disclosures on the acquisition of Famous Holdings, FSM and FPS. The report pointed out the absence of M&A procedures at SingPost, and the Board has committed to work on it.
Source: Company data, Nomura research. ** For details on what the report revealed, see the ‘Company specific Investment Risks’. FSM refers to F.S. Mackenzie, a UK based freight forwarding company in which 62.5% stake is held by SingPost. FPS refers to Famous Pacific Shipping (NZ) Limited, a New Zealand based freight forwarding company in which 56.25% is held by Singpost.
Fig. 134: Trade Global: Acquired in Nov 2015, it generated around SGD62mn (~5% of total revenue) in FY16
• It provides end-to-end commerce services to fashion, beauty and lifestyle brands. (www.tradeglobal.com/)
• Helps in website development, digital marketing, Omni-channel fulfilment, supply chain logistics and customer care services.
• It has a notable client list, which includes brand names like Calvin Klein, Puma, Speedo, Tommy Hilfiger, Versace, Hugo Boss etc.
• Acquired in November 2015, it contributed revenue of roughly SGD62mn in FY16. We expect its revenue contribution to be around SGD134mn in FY17F.
Source: Company data, Nomura research
Fig. 135: Jagged Peak: Acquired in March 2016, it provides an SaaS-based e-commerce platform
• It is an Omni-channel commerce solutions provider based in Tampa, Florida, with its prime offering being EDGE *, an e-commerce platform and order management system.
• It also offers warehouse management (WMS), transportation management systems (TPS) and a host of other related services for an end-to-end integrated offering to an online brand. (www.jaggedpeak.com/)
• It operates two warehouses in Florida, and utilizes a network of 22 independently owned fulfilment warehouses throughout North America, and one warehouse in the UK.
• Its customers include brand product manufacturers (Honeywell, LVMH), consumer packaged goods (Nestle, Kimberly-Clark), service providers (AIG, Marriott) and retailers.
• Started in Canada in 2009, it is at present much smaller in size than Trade Global.
• We estimate the revenue contribution from Jagged Peak to be around SGD67mn in FY17F.
Source: Company data, Nomura research. * EDGE stands for E-Commerce Dynamic Global Engine
Sizable e-commerce potential in the region, a tailwind
The rapidly evolving e-commerce landscape in ASEAN could prove to be a major
tailwind for SingPost, aiding in its attempt to be a serious contender in the ecommerce
logistics business. According to PwC in its Total Retail Survey 2016, about 93% of all
South-East Asia (SEA) consumers surveyed have made online purchases – many of
them at regular frequencies. Increasing overseas growth and the completion of the
Regional e-Commerce logistics hub will be helpful, we believe, in riding this wave.
handling increasing volumes for big players like Lazada, we
have factored in steep growth rates in logistics & ecommerce
segment. Also, historically revenue peaks in 3Q which we
believe consensus has omitted to build in.
Our EBITDA lies close to Median consensus level. We have
built in conservative cost assumptions, with y-y decline in
margins this year (especially in logistics and ecommerce), but
recovery from FY 2018F on the back of cost control efforts of
the group.
Higher on account of Higher Revenue and EBITDA numbers.
Our Capex assumptions are on the higher side of consensus,
more so for FY17 as we believe the construction of SPC Mall
and the logistics Hub would continue to pull funds. Moreover,
the 1Q17 numbers are a quarter of our full year forecast.
Our FCF is below the street owing to our higher Capex
assumption (See above).
Nomura | Singapore Post 6 October 2016
86
Fig. 150: One-year forward P/E trend
Source: Bloomberg
Fig. 151: One-year forward EV/EBITDA trend
Source: Bloomberg
Peer comparison
As it stands, SingPost shares are trading and have always traded above postal peers.
We believe the premium valuation against its peers is justified as it remains the only
postal provider (among those listed globally) that has diversified outside the conventional
scope of postal mail services, where usage of traditional mail is on a structural decline.
SingPost’s strategy in diversifying into both logistics and ecommerce fulfilments will
provide the added leg of growth ahead; where there is more upside to be seen for online
shopping penetration in ASEAN.
Further, SingPost remains one of only a few postal providers that offer a combination of
compelling fundamentals worthy of investing in as listed below:
1) Compelling earnings /EBITDA growth (FY16-19F CAGR of +21% / +21% vs
averages of +14% / 12%)
2) Three-year forward PEG of 1.0x vs peer average of 2.7x (excluding outliers).
3) Strong free cash flow from -SGD368mn in FY16 to SGD277mn by FY19F vs
average peer 3-year forward CAGR of 1%.
4) Superior EBITDA margin of 18% in FY17F vs peer average of 12.8%.
5) ROIC / WACC multiplier of 2.3x (suggesting ROIC is much higher than WACC) vs
peer average of 1.6x.
6) FY18F/19F price to FCF of 15x / 11x vs peer averages of 17x / 14x (excluding
outliers).
7) Dividend yield of more than 5% moving forward, which is slightly above the average
fetched by peers.
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BEst P/E Ratio (Next Ann) Mean: 17.6x
-1 stdev: 14.1x +1 stdev: 21x
-1.5 stdev: 12.4x +1.5 stdev: 22.7x
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BEst EV / BEst EBITDA (Next Ann)Mean: 12.7x -1 stdev: 10.19x +1 stdev: 15.16x -1.5 stdev: 8.9x +1.5 stdev: 16.4x
Rating Starts at Buy
Target Price Starts at PHP 17.05
Closing price 4 October 2016 PHP 10.92
Potential upside +56.1%
Anchor themes
The anticipated economic growth trajectory in the Philippines, combined with the increase in online retail penetration, bodes well for this dominant last-mile delivery player.
customers (who have not yet switched), would also migrate to LBC. This, we deem, is
another added stimulus for LBC.
Threats
• One major threat to LBC’s performance could be the development of corporate
governance issues (non-existent now, but a possibility in future). The stock price of
Singapore Post suffered in the past one year, when investors were riled up by ongoing
controversial board changes, and the company ordered a corporate governance
review. With limited information at hand at present, we remain vigilant about any such
issues, and shall update our views accordingly.
• Majority of LBC’s business is based in the Philippines. While this may be good from a
control point of view, we think it makes the business vulnerable to geography-specific
risks. FX fluctuation (accounts for ~5% of its money remittance business) might be a
related risk.
• Rise in the cost of delivery and remittances due to a surge in delivery fees (probably
due to fluctuating oil prices) charged by vendors, or increasing personnel expenses or
other costs pose another threat that could drag down profitability.
Nomura | LBC Express Holdings Inc 6 October 2016
93
Financial overview and forecasts
Top-line growth assumptions
The group’s two main revenue segments are logistics and money remittance services
(Fig. 154).
Logistics: Logistics is LBC’s main division and accounts for c84% of its total revenue.
This is predominantly retail (mostly walk-in), with the group holding ~85% market share.
The corporate business is small and quite recent (started 5-6 years ago). The company
serves the last-mile fulfilment side for Lazada, which accounts for around one-fourth of
LBC’s corporate logistics revenue. We expect this contribution to record a FY15-20F
CAGR of ~45%, given Lazada’s >50% growth. Samsung is LBC’s another major
corporate client. Geography wise, more than 90% of its courier and cargo business is
domestic (Fig. 155), judging from its asset base. LBC’s main competitors are 2Go, JRS
and Air21. We expect the logistics segment to deliver a revenue CAGR (FY15-20F) of
21%, with the strongest growth coming from the corporate logistics division driven by
volume contribution from Lazada.
Fig. 154: We forecast a total revenue CAGR (FY15-20F) of 19%, with the strongest growth coming from corporate logistics driven by Lazada-contributed volumes
Source: Company data, Nomura estimates
Fig. 155: Geography-wise operational breakup, based on the group’s foreign currency denominated net assets (as of end 2015)
Source: Nomura research, company data
Money remittance: The money remittance segment is very small in terms of revenue
contribution (15%), but helps the group expand its customer base as the Philippines is
predominantly unbanked (Fig. 156). According to Infographic, around USD27bn is
remitted annually to the Philippines by Filipino workers from all around the world, which
is close to around 10% of the country’s total GDP. This presents a sizeable market base,
of which the group is estimated to have a 25% market share, with the main competitors
being local pawn shops offering similar services. FX contribution amounts to roughly 5%
of this revenue. According to management, the company is taking on more agents
domestically and abroad to expand volumes. We expect modest y-y growth of 5% over
the next five years.
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
FY13 FY14 FY15 FY16F FY17F FY18F FY19F FY20F
Retail Logistics Corporate Logistics
Money remittance
(PHPmn)
Philippines92%
Canada3%
USA2%
Saudi Arabia
1%
Kuwait1%
Other Middle East
1%
Nomura | LBC Express Holdings Inc 6 October 2016
94
Fig. 156: More than two-thirds of adults in the Philippines are unbanked, preferring remittance centres to banks (as of 2014)
Source: Businessworld
Other: Other new segments like bill payments over the counter are coming up. The
company has also started cold-chain facilities over the past year, but contribution from
both these new segments is very small at present.
Asset-light model
LBC rents most of the cargo space it requires from Cebu Pacific and Philippine Airlines.
This asset-light model helps it maintain cost discipline. Moreover, capacity expansion
with growing volumes is not a problem given the ample warehousing and fleet capacity
available on demand. Also, given the scale of LBC’s operations (close to 150 tonnes of
volumes handled by air/land every day), it can negotiate favourable prices.
EBIT/ EBITDA margins to expand
We believe that holding the largest market share puts the group in a sweet spot, and
affords it the opportunity to enjoy economies of scale, given its asset-light model and the
freedom to hire belly/warehousing space as needed. We therefore, expect margins to
expand over the next couple years and stabilise thereafter as the group tries to contain
costs (Fig. 157). We estimate average EBIT/EBITDA margins of ~12%/16% long term.
Earnings expectations
All in, on the back of robust demand stimulated by ecommerce activities coupled with the
backdrop of a more favourable economy, we expect LBC’s revenue and earnings to
record sturdy growth, and project a three-year CAGR of 18% and 33%, respectively.
Minimal financial burden
LBC’s FY15 net debt was PHP179mn (including lease liabilities). This constitutes a net
gearing ratio of 11%, which we believe is quite positive. We expect LBC to be in a net
cash position over each of the next five years, given our low capex expectation and the
foreseeable follow-on offering in 1HFY17, which we believe indicates management’s
intention of not gearing up.
Capex assumption
We project capex of PHP300mn for FY16-18F, as guided by management. We expect
this to be evenly split between maintenance expenditure (leasehold improvements,
renovations etc ) and growth expenditure (branch expansion, corporate segment
expansion etc).
81%78%
36%31% 31%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Malaysia Thailand Indonesia Philippines Vietnam
Banking penetration rate
Nomura | LBC Express Holdings Inc 6 October 2016
95
Optimistic on ROE and cash ROIC
LBC’s ROE and ROIC were strong in FY15 despite the dip in EBITDA, EBIT and GP
margins (Fig. 158). Our ROE and ROIC numbers paint a positive picture, with cash
ROIC for FY16-18F of 23-29% (FY15: 19%) and FY16F/FY17F/FY18F ROE of
38%/32%/28% (FY15: 28%). The declining ROE is primarily due to the entire earnings
being accumulated into shareholders’ equities as the firm has no track record of paying
dividends. However, if dividends are distributed back to the shareholders with a formal
consistent payout policy, this should improve ROEs going forward.
Fig. 157: We expect margins to expand over the next two years, and stabilise thereafter, as the group tries to control costs
Source: Company data, Nomura estimates
Fig. 158: We are bullish on LBC’s cash ROIC, and estimate a cash ROIC of 26% next year
Source: Company data, Nomura estimates
Some noteworthy facets of LBC’s financials/operations
• LBC also holds a 10% stake in Araneta Properties (ARA PM, NR), a real estate
company based in the Philippines, which is also a related party. According to
management, Araneta has numerous land holdings in the north of Manila. These
investments are held as Available for Sale (AFS) securities, and our TP does not
include any upside/downside potential on the revaluation of these investments.
• The company’s operations tend to experience increased volumes on remittance
transmission as well as cargo through the second and fourth quarter of the year,
particularly during the start of the school year and during the Christmas season.
• In 2013, the company underwent a rebranding program with the help of the Brand
consulting firm Tangible, changing its old Filipino tagline “Hari ng Padala” (meaning
King of shipments) to the current, punchier English one “We like to move it”. Well, we
are glad they do.
• In 2014, the company announced a new service that delivers “balikbayan” boxes from
the US, Canada and other areas to recipients in the Philippines in just 15 days. Before
this, regular balikbayan box delivery took at least three months. In its announcement,
LBC stated that if this is not delivered in 15 days, the customer’s next shipment is free
of charge.
• LBC had an affiliate Lovable commerce (shut down this year ) which operated a
website theshop.ph, a market tool for small SMEs. At present, it operates another
website called shippingcart.com, via which consumers in the Philippines can shop
online in the US and ship their purchases to their address in the Philippines.
Net operating cash flow 597 609 1,522 1,800 2,130 2,547
(Capex) (331) (300) (300) (300) (250) (250)
FCF 266 309 1,222 1,500 1,880 2,297
WACC 10.2% 10.2% 10.2% 10.2% 10.2% 10.2%
Period T-0.5 T+1 T+2 T+3 T+4
DCF 154 1,108 1,234 1,404 1,556
WACC computation
Cost of equity 10.6%
Cost of debt (net of tax) 2.8%
Risk-free rate 3.6%
Beta 110%
Market return 10.0%
Proportion of Debt 5.0%
Proportion of Equity 95.0%
WACC 10.2%
Terminal growth 3.8%
Terminal value 23,732
PV of Terminal value 20,443
Equity value 25,900
Net cash/(debt) - FY16F (85)
Minority interest (43)
Enterprise value 25,772
No of shares (mn) 1,426
TP without considering damages in lawsuit (PHP) 18.07
If we consider the suit
Value at stake for that suit 1,820
Probability of losing 80%
Contingent loss 1,456
Value of firm given loss 24,316
TP after considering the lawsuit (PHP) 17.05
FY16F FY17F FY18F FY19F FY20F
P/E 30.5 25.1 21.1 17.7 14.7
EV/EBITDA 16.8 13.5 10.7 8.3 6.1
P/ Op CF 39.9 16.0 13.5 11.4 9.5
P/ FCF 78.7 19.9 16.2 12.9 10.6
FCF yield (%) 1.3 5.0 6.2 7.7 9.4
P/B 9.8 7.0 5.2 4.0 3.1
Rating Starts at Buy
Target Price Starts at MYR 4.85
Closing price 4 October 2016 MYR 3.77
Potential upside +28.6%
Anchor themes
Pos Malaysia stands to benefit from revenue synergies with the acquisition of integrated logistics provider KLAS Group, which we think the market has yet to factor in. This should enable Pos Malaysia to provide comprehensive solutions to ecommerce players.
Nomura vs consensus
Consensus has yet to factor in consolidated earnings thus our earnings estimates are well above consensus.
Fig. 169: Implied price multiple valuations (x) based on our DCF derived TP
Source: Nomura estimates, Company data
Fig. 170: Historical 5 year +2 forward P/E
Source: Bloomberg
Fig. 171: Historical 5 year +2 forward EV/EBITDA
Source: Bloomberg
Key downside risks to our call are: i) the intensifying competitive landscape in the
already fragmented logistics sector coupled with ii) the macro economic slowdown
impacting spending.
FY17F FY18F FY19F FY20F FY21F
P/E 33.9 21.5 19.2 16.3 15.3
EV/EBITDA 12.4 8.4 7.5 6.3 5.6
O/ Op CF 20.6 10.1 8.8 7.7 7.2
P/ FCF (10.4) (402.1) 135.4 18.4 13.6
FCF yield (%) (9.6) (0.2) 0.7 5.4 7.4
P/B 2.1 2.0 1.9 1.8 1.7
5.0
7.0
9.0
11.0
13.0
15.0
17.0
19.0
21.0
23.0
25.0
Feb-1
2
Ap
r-12
Jun
-12
Au
g-1
2
Oct-
12
Dec-1
2
Feb-1
3
Ap
r-13
Jun
-13
Au
g-1
3
Oct-
13
Dec-1
3
Feb-1
4
Ap
r-14
Jun
-14
Au
g-1
4
Oct-
14
Dec-1
4
Feb-1
5
Ap
r-15
Jun
-15
Au
g-1
5
Oct-
15
Dec-1
5
Feb-1
6
Ap
r-16
Jun
-16
Au
g-1
6
BEst P/E Ratio (Next Ann) Mean: 14.04x -1 stdev: 11.4x
+1 stdev: 16.7x -1.5 stdev: 10x +1.5 stdev: 18x
2.5
3.5
4.5
5.5
6.5
7.5
8.5
9.5
10.5
11.5
12.5
Jul-1
2
Se
p-1
2
Nov-1
2
Jan
-13
Mar-
13
May-1
3
Jul-1
3
Se
p-1
3
Nov-1
3
Jan
-14
Mar-
14
May-1
4
Jul-1
4
Se
p-1
4
Nov-1
4
Jan
-15
Mar-
15
May-1
5
Jul-1
5
Se
p-1
5
Nov-1
5
Jan
-16
Mar-
16
May-1
6
Jul-1
6
Se
p-1
6
BEst EV / BEst EBITDA (Next Ann) Mean: 5.1x
-1 stdev: 3.8x +1 stdev: 6.4x
-1.5 stdev: 3.2x +1.5 stdev: 7.02x
Rating Starts at Buy
Target Price Starts at MYR 2.21
Closing price 4 October 2016 MYR 1.74
Potential upside +27%
Anchor themes
We expect e-commerce to be the delta driver, led by volume growth. Decongestion at its parcel sorting hub should help improve cost efficiencies and enable margin expansion.
Nomura vs consensus
Our FY17F earnings are in line with consensus, but we are more bullish than the Street for FY18/19F by 13%/19%, given our higher volume assumptions.
business from these clients, given its ability to execute both, the first mile (picking up
from the merchant store) and the last mile portion.
Fig. 174: Average daily sorting capacity and utilisation rate
During peak season, daily sorting capacity can be bumped up to 120k items per day but this may prove to be challenging if It has to be done consistently.
Source: Nomura research, Company data
Fig. 175: Tonnage volumes handled
We expect tonnage volumes handled to increase by 20% over the next few years
Source: Nomura research, Company data
Sorting centre strategically located within densely populated areas of Klang
Valley.
GDEX’s sorting centre is strategically located in Klang Valley itself (Petaling Jaya), which
gives the carrier ‘proximity advantage’ (12km to KLCC) compared with Pos Malaysia’s
mail processing hub which is located further away at Shah Alam (24km to KLCC). As
express mail delivery services are mostly sought by business offices, the close proximity
to KLCC gives GDEX an advantage compared with other courier providers. The postal
sorting hubs of City Link and Skynet, its key competitors in the local express delivery
market, are also located at least 22km away from the city centre.
30 30 30
60 60 60 72 78
100 100 100
200
-
50
100
150
200
250
0%
20%
40%
60%
80%
100%
120%
FY
09
FY
10
FY
11
FY
12
FY
13
FY
14
FY
15
FY
16
FY
17F
FY
18F
FY
19F
FY
20F
Daily sorting capacity - '000 items/day(RHS)
Utilization (LHS)
16%15%
17%16%
22%
19%
16%
20%20% 20%20%
0%
5%
10%
15%
20%
25%
-
20,000
40,000
60,000
80,000
100,000
120,000
FY
09
FY
10
FY
11
FY
12
FY
13
FY
14
FY
15
FY
16
FY
17F
FY
18F
FY
19F
FY
20F
Tonnage volume handled (LHS)
% chg y-y (RHS)
Nomura | GD Express Carrier Bhd 6 October 2016
116
Weaknesses A small share of retail base customers
GDEX has a very small proportion of retail base customers, as its client base largely
comprises corporates. This has been its weakness to rake in market share in the past,
but it has proved to be advantageous by:
1) Allowing it to maintain focus on a set of customers…
2) …which has thus limited its branch expansion network costs.
Not up-to-date on technology in terms of convenience for retail consumers
One setback observed by us from a consumer perspective is that GDEX has not been
up-to-date in terms of technology development to serve retail customers, such as a live
consignment tracker. But this, we think, makes business sense for GDEX, at least for
now, since retail only accounts for less than 2% of its total revenue pie.
According to management, the carrier will be undergoing some capex allocations for
technology and IT infrastructure to ensure a pleasant customer service experience.
Limited network coverage compared with Pos Malaysia
We estimate that GDEX has a 20% market share of the local courier pie (in volume
terms), thus making it the second largest player after Pos Malaysia which we estimate to
have a market share of 40%. This is also evident by GDEX’s smaller network coverage
vs Pos Malaysia’s courier arm Pos Laju, which leverages on its postal network.
Although GDEX’s limited network coverage has allowed it to remain focused, it does
have its drawbacks when delivering to non-covered areas, thus requiring the last mile
portion of the delivery to be done by third-party agents. However, costs related to third-
party agents are very marginal.
As consignment delivery coverage predominantly centres within Klang Valley, GDEX
only operates one sorting hub which serves nationwide. This implies that all volumes are
rerouted back to its sorting hub in Petaling Jaya (hub and spoke model) which makes the
shipment process slower compared with a point-to-point delivery system. However,
realistically, the volumes that would have been delivered faster through a point-to-point
system are actually very small to begin with and therefore not operationally feasible.
GDEX does have a small sorting centre in Penang to serve its customer there, but this
operation is customised to meet the requirements of its customers than being applied to
its entire mail delivery process. Earlier the company had expressed its desire to expand
its sorting centre at Penang, but the volumes did not justify the same.
Slow regional expansion
The story of GDEX’s regional ambitions is not new, and in the past GDEX has been
exploring various markets to grow its courier business. Management practices a very
careful and diligent approach for future expansions and partnership collaborations.
Sometime back in 2011, GDEX was close to inking a major collaboration JV partnership
with Laos’ national postal operator, but the deal fell through after almost two years of
talks given the cap on foreign ownership.
Regulations could be a risk to GDEX’s ongoing discussions on expanding into Indonesia
where foreign ownership in local last mile delivery companies are only capped at 49%.
Nomura | GD Express Carrier Bhd 6 October 2016
117
Opportunities Scope for revenue synergies with potential cross offerings
We see Yamato's entry as a strategic shareholder in GDEX, earlier this year, as a key
positive potentially bearing more fruit than its current stale relationship with Singapore
Post, in which GDEX has not seen any meaningful collaboration so far.
Aside from its investments in GDEX, Yamato has also been on an aggressive acquisition
trail by making additional new acquisitions in a cross-border trucking company which
should give it access to trucking transportation in Singapore, Thailand, Indo-China and
China. The Japan-based courier company has also established a JV with Siam Cement
to provide last mile delivery services in Thailand.
Fig. 176: Yamato Holdings' ASEAN expansion
Source: Company data, Nomura research
Judging from the trail of Yamato’s acquisitions over the past one year in ASEAN, we believe
the courier player aims to have a first mover advantage and establish a bigger presence in
ASEAN’s last mile delivery ahead of the impending AEC (ASEAN Economic Community)
integration and TPP (Trans-Pacific Partnership) agreement, which would foster cross-border
trades. We believe Yamato’s expansion into cross-border trucking certainly makes an
appealing case for China’s cheaper last mile delivery reach into ASEAN.
Currently, GDEX is already benefiting from the higher volumes fed from Yamato
(although still small relative to GDEX’s total volumes), as the local last mile partner given
its extensive network coverage. We foresee Yamato's role as being a regional facilitator
and provider of volumes for GDEX. We see scope for revenue synergies with potential
cross-offerings on what Yamato can offer to GDEX’s larger client base and vice versa.
Establishing a new working relationship with SingPost
Under the new management leadership of SingPost, we understand from GDEX’s
management that it is engaging in discussions for collaborating on potential cross-border
synergies. In the past, synergies with SingPost did not really materialise despite it being
a major strategic shareholder. This, we believe, is likely to change as SingPost is taking
an approach to consolidate synergies from its recent acquisitions, with the group
entering the integration phase this year.
Regional ambitions
We believe further catalysts for the stock are potential acquisitions in the pipeline from its
MYR37mn cash available in hand obtained from the placement of new shares to Yamato
earlier this year as its strategic shareholder. We understand that GDEX looks to expand into
Indonesia, which is a promising market for the company with growing demand for online
shopping giving a push for last mile delivery needs. However, a key stumbling block is
regulatory barriers which prevent foreign ownership in a last mile delivery company.
Therefore, it is crucial that GDEX finds a workable local partnership in Indonesia.
2010 Started providing delivery services in Singapore
2011 Started providing delivery services in Malaysia
19-Dec-13 Established a regional HQ for South East Asia in Singapore
26-Mar-14 Started cross border delivery services (next day services) between Singapore and Malaysia.
10-Jul-14 Acquires 85% share in Tidiki Express to become a subsidiary company. The capital base of Tidiki Express is SGD210,000.
12-Feb-15 Formation of Yamato Logistics Vietnam with a capital base of USD3.2mn
9-Apr-15 Establishment of Asia Business-Model Innovation Centre in Singapore
24-Jul-15 Launched fresh seasonal products delivery from Japan to Singapore
8-Jan-16 Ties up with ANA Cargo to be the last mile provider for Isetan Singapore's online business
21-Jan-16Establishes a business collaboration and acquires a stake in GD Express. The acquisition was done through a placement exercise and
buying over a portion of Singpost's stake. Total deal exercise is approximately MYR549.8mn for a ownership of 22.85% in GDEX.
23-Mar-16 Launched fresh seasonal products delivery from Japan to Malaysia
25-Aug-16Establishes a collaboration to provide last mile delivery with Siam Cement Group where Yamato will have a 35% stake. Capital base is
THB633mn
31-Aug-16Acquires Overland Total Logistics, a cross border trucking company with a line haul network spanning from Singapore to China (6,000
km)
Nomura | GD Express Carrier Bhd 6 October 2016
118
Threats Competitive landscape on competition between start-ups and incumbents
The incumbent express delivery providers also handle sizeable volumes from the B2B
segment, where margins are better. We argue that despite the proliferation of last mile
start-ups eating into competition, most of the start-ups lack the scale and volume size to
operate efficiently.
Judging from the difference in website traffic volume (either desktop or mobile traffic)
between incumbent last mile providers and start-up players alone, does indicate that the
start-ups are hardly having a big impact on the incumbents. Therefore, competition looks
fairly manageable for the incumbents, in our view.
Fig. 177: Market share estimate based on referral traffic
Source: Similiarweb, Nomura research
Fig. 178: Size of referral traffic over the past 90 days for start-up players
Source: Similairweb, Nomura research
Fig. 179: Last mile providers for Ali Baba/ Ali Express volumes
Source: Similiarweb, Nomura research
Fig. 180: Last mile providers for Lazada’s volumes
Source: Similiaraweb, Nomura research
8% 10% 15% 1%0%
20%
40%
60%
80%
100%
120%
Malaysia Indonesia Philippines Singapore
Start-ups Incumbent
120,000
90,000
74,156
25,000
21,103
15,000
8,453
3,769
1,099
899
524
-
Acommerce (Indonesia)
Xend
Ninjavan (Malaysia)
GoGet
GoJek
Ninjavan (Singapore)
Thelorry
Gogovan (Singapore)
Qourier
Neonrunner
Ezycourier
Mober
Last mile provider
June - August
traffic Country
Traffic Source
ranking
Singapore Post 1,030,717 Singapore 1
Pos Malaysia 279,680 Malaysia 1
Indonesia Pos 31,990 Indonesia 2
ABX Express 369 Malaysia 5
Last mile provider
June - August
traffic Country
Traffic Source
ranking
LBC Express 305,324 Philippines 1
JNE 198,534 Indonesia 1
Indonesia Pos 80,866 Indonesia 1
Pos Malaysia 34,040 Malaysia 3
GD Express 23,446 Malaysia 2
Skynet 16,405 Malaysia 1
Ninjavan 15,015 Malaysia 1
Nomura | GD Express Carrier Bhd 6 October 2016
119
Financials and forecasts GDEX has reported strong growth in revenue and profitability, ever since its controlling
shareholder and CEO, Mr Teong Teck Lean stepped in as an angel investor, and helped
put the company on track, after it was troubled by the 1997 financial crisis. The
company’s revenue track record witnessed strong growth on the back of higher volumes,
and new businesses secured owing to its trusted delivery services.
Revenues: Higher volumes following the 40% capacity expansion
The delta of GDEX's upside volume in recent years has been driven by higher volumes
from B2C online shopping players, notably Lazada and Astro's Go Shopping venture.
Ecommerce-related volumes which accounted for less than 10% of total revenue in 2013
have grown rapidly, and now account for 30%. According to the company, volumes could
have been higher but this was constrained by a capacity bottleneck which the company
addressed a few months ago by converting its parking space (40,000 square feet) as an
extension to its sorting centre. This move, according to the company, will boost capacity
by 40%, thus bumping up handling capacity to 110,000 consignment volumes per day.
We forecast aggressive revenue growth, with removal of the capacity bottleneck which
capped volume upside in the past.
Our revenue assumptions are below:
Fig. 181: Revenue assumptions
MYRmn unless stated otherwise
Source: Nomura research, Company data
Costs: Decongestion to bring more cost efficiencies
For GDEX, cost predominantly comprises staff and transport which is a crucial element
in this industry. With higher volumes contributing to economies of scale and higher
volumes per delivery, cost efficiencies can be easily achieved. This has been the case
for GDEX, with its EBITDA margin expanding from 15.7% since 2011 to 20.7% in FY16.
While EBITDA margins have remained consistent at around 20% over the past few
years, we believe they could expand further with further improvements in operating
efficiency following the decongestion at its parcel sorting centre and higher volumes.
Revenue Assumtions FY12 FY13 FY14 FY15 FY16 FY17F FY18F FY19F FY20F FY21F 3 Year CAGR 5 Year CAGR
Pos Malaysia Berhad POSM MK Not rated Buy N/A MYR 4.85
Singapore Post SPOST SP Not rated Buy N/A SGD 2.11
GD Express Carrier Bhd: Valuation Methodology We derive our DCF based TP of MYR2.21 based on the present value of
its free cash flow (to firm) generated from FY17-FY39 at a WACC of 9.2% with a terminal growth of 2.5% from FY40 onwards. We have also used the expanded share base by converting the warrants traded in the market and added in the cash derived from the conversion of the warrants (exercise price of MYR1.53) and assume an after tax interest cost savings as well from the additonal cash outlay.
GD Express Carrier Bhd: Risks that may impede the achievement of the target price Key downside risk to our call are: i)
the intensifying competitive landscape in the already fragmented logistics sector coupled with ii) the macro economic slowdown impacting spending.
LBC Express Holdings Inc: Valuation Methodology Our DCF-based TP of PHP17.05 is based on a WACC of 10.2% and
terminal growth of 3.8%. We have built in 80% probability of losing the LBC Development Bank lawsuit as a conservative buffer, thus factoring in the an impending damage claim of PHP1.46bn. (Our TP is 6% lower due to this adjustment). Our TP implies FY17F P/E of 25x and 20FY16F/20FY17F EV/EBITDA of 17x/ 14x. The benchmark index for LBC Express is the MSCI Philippines.
LBC Express Holdings Inc: Risks that may impede the achievement of the target price The impending lawsuit by sister
entity LBC Development and plausible corporate governance issues are the key downside risks. Stronger-than-expected revenue growth or margin expansion are upside risks.
Pos Malaysia Berhad: Valuation Methodology We derive our TP based on sum of parts valuation: 1) We use DCF method for
its FCF to firm over FY18-48F at a WACC of 8.1%. Our terminal value is derived with a terminal growth rate of 3% and COE of 10.4%. 2) We use a target P/E of 15x on FY18F earnings to value its logistics operations (KLAS Group), which is slightly lower than the Asia peer average of 17x. 3) We add the forecasted net cash balance for FY17F. 4) We also add a valuation of MYR199mn on five landbank parcels that Pos Malaysia can monetize on. The benchmark index for this stock is MSCI Malaysia.
Nomura | ASEAN logistics 6 October 2016
126
Pos Malaysia Berhad: Risks that may impede the achievement of the target price Key downside risk to our call are: i) the
intensifying competitive landscape in the already fragmented logistics sector coupled with ii) the macro economic slowdown impacting spending.
Singapore Post: Valuation Methodology We derive our TP of SGD2.11 using DCF (WACC of 7.3% and TG of 1.8%), implying
FY18F EV/EBITDA of 17x and P/E of 26x, higher than the stock’s three-year historical averages of 14x and 20x. The benchmark index for this stock is the STI.
Singapore Post: Risks that may impede the achievement of the target price Excessive margin compression, rising
competition and falling through of the Alibaba deal are downside risks to our valuation. Upside risks are greater-than-expected revenue growth and cost synergies.
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51% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 37% of companies with this rating are investment banking clients of the Nomura Group*. 0% of companies (which are admitted to trading on a regulated market in the EEA) with this rating were supplied material services** by the Nomura Group.
43% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 54% of companies with this rating are investment banking clients of the Nomura Group*. 0% of companies (which are admitted to trading on a regulated market in the EEA) with this rating were supplied material services by the Nomura Group
6% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 10% of companies with this rating are investment banking clients of the Nomura Group*. 0% of companies (which are admitted to trading on a regulated market in the EEA) with this rating were supplied material services by the Nomura Group.
As at 3 October 2016. *The Nomura Group as defined in the Disclaimer section at the end of this report. ** As defined by the EU Market Abuse Regulation Explanation of Nomura's equity research rating system in Europe, Middle East and Africa, US and Latin America, and Japan and Asia ex-Japan from 21 October 2013 The rating system is a relative system, indicating expected performance against a specific benchmark identified for each individual stock, subject to limited management discretion. An analyst’s target price is an assessment of the current intrinsic fair value of the stock based on an appropriate valuation methodology determined by the analyst. Valuation methodologies include, but are not limited to, discounted cash flow analysis, expected return on equity and multiple analysis. Analysts may also indicate expected absolute upside/downside relative to the stated target price, defined as (target price - current price)/current price.
STOCKS A rating of 'Buy', indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of 'Neutral', indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of 'Suspended', indicates that the rating, target price and estimates have been suspended temporarily to comply with applicable regulations and/or firm policies. Securities and/or companies that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage. Investors should not expect continuing or additional information from Nomura relating to such securities and/or companies. Benchmarks are as follows: United States/Europe/Asia ex-Japan: please see valuation methodologies for explanations of relevant benchmarks for stocks, which can be accessed at:
http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia, unless otherwise stated in the valuation methodology; Japan: Russell/Nomura Large Cap.
SECTORS A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months. A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months. A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next 12 months. Sectors that are labelled as 'Not rated' or shown as 'N/A' are not assigned ratings. Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX 600; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia. Japan/Asia ex-Japan: Sector ratings are not assigned.
Explanation of Nomura's equity research rating system in Japan and Asia ex-Japan prior to 21 October 2013 STOCKS Stock recommendations are based on absolute valuation upside (downside), which is defined as (Target Price - Current Price) / Current Price, subject to limited management discretion. In most cases, the Target Price will equal the analyst's 12-month intrinsic valuation of the stock, based on an appropriate valuation methodology such as discounted cash flow, multiple analysis, etc. A 'Buy' recommendation indicates that potential upside is 15% or more. A 'Neutral' recommendation indicates that potential upside is less than 15% or downside is less than 5%. A 'Reduce' recommendation indicates that potential downside is 5% or more. A rating of 'Suspended' indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the subject company. Securities and/or companies that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage of the Nomura entity identified in the top banner. Investors should not expect continuing or additional information from Nomura relating to such securities and/or companies.
SECTORS A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive absolute recommendation. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative absolute recommendation. Target Price A Target Price, if discussed, indicates the analyst’s forecast for the share price with a 12-month time horizon, reflecting in part the analyst's estimates for the company's earnings. The achievement of any target price may be impeded by general market and macroeconomic trends, and by other risks related to the company or the market, and may not occur if the company's earnings differ from estimates.
Disclaimers This document contains material that has been prepared by the Nomura entity identified on page 1 and/or with the sole or joint contributions of one or more Nomura entities whose employees and their respective affiliations are also specified on page 1 or identified elsewhere in the document. The term "Nomura Group" used herein refers to Nomura Holdings, Inc. or any of its affiliates or subsidiaries and may refer to one or more Nomura Group companies including: Nomura Securities Co., Ltd. ('NSC') Tokyo, Japan; Nomura International plc ('NIplc'), UK; Nomura Securities International, Inc. ('NSI'), New York, US; Nomura International (Hong Kong) Ltd. (‘NIHK’), Hong Kong; Nomura Financial Investment (Korea) Co., Ltd. (‘NFIK’), Korea (Information on Nomura analysts registered with the Korea Financial Investment Association ('KOFIA') can be found on the KOFIA Intranet at http://dis.kofia.or.kr); Nomura Singapore Ltd. (‘NSL’), Singapore (Registration number 197201440E, regulated by the Monetary Authority of Singapore); Nomura Australia Ltd. (‘NAL’), Australia (ABN 48 003 032 513), regulated by the Australian Securities and Investment Commission ('ASIC') and holder of an Australian financial services licence number 246412; P.T. Nomura Indonesia (‘PTNI’), Indonesia; Nomura Securities Malaysia Sdn. Bhd. (‘NSM’), Malaysia; NIHK, Taipei Branch (‘NITB’), Taiwan; Nomura Financial Advisory and Securities (India) Private Limited (‘NFASL’), Mumbai, India (Registered Address: Ceejay House, Level 11, Plot F, Shivsagar Estate, Dr. Annie Besant Road, Worli, Mumbai- 400 018, India; Tel: +91 22 4037 4037, Fax: +91 22 4037 4111; CIN No: U74140MH2007PTC169116, SEBI Registration No. for Stock Broking activities : BSE INB011299030, NSE INB231299034, INF231299034, INE 231299034, MCX: INE261299034; SEBI Registration No. for Merchant Banking : INM000011419; SEBI Registration No. for Research: INH000001014 and NIplc, Madrid Branch (‘NIplc, Madrid’). ‘CNS Thailand’ next to an analyst’s name on the front page of a research report indicates that the analyst is employed by Capital Nomura Securities Public Company Limited (‘CNS’) to provide research assistance services to NSL under a Research Assistance Agreement. ‘NSFSPL’ next to an employee’s name on the front page of a research report indicates that the individual is employed by Nomura Structured Finance Services Private Limited to provide assistance to certain Nomura entities under inter-company agreements. THIS MATERIAL IS: (I) FOR YOUR PRIVATE INFORMATION, AND WE ARE NOT SOLICITING ANY ACTION BASED UPON IT; (II) NOT TO BE CONSTRUED AS AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY IN ANY JURISDICTION WHERE SUCH OFFER OR SOLICITATION WOULD BE ILLEGAL; AND (III) BASED UPON INFORMATION FROM SOURCES THAT WE CONSIDER RELIABLE, BUT HAS NOT BEEN INDEPENDENTLY VERIFIED BY NOMURA GROUP. Nomura Group does not warrant or represent that the document is accurate, complete, reliable, fit for any particular purpose or merchantable and does not accept liability for any act (or decision not to act) resulting from use of this document and related data. To the maximum extent permissible all warranties and other assurances by Nomura group are hereby excluded and Nomura Group shall have no liability for the use, misuse, or distribution of this information. Opinions or estimates expressed are current opinions as of the original publication date appearing on this material and the information, including the opinions and estimates contained herein, are subject to change without notice. Nomura Group is under no duty to update this document. Any comments or statements made herein are those of the author(s) and may differ from views held by other parties within Nomura Group. Clients should consider whether any advice or recommendation in this report is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice. Nomura Group does not provide tax advice. Nomura Group, and/or its officers, directors and employees, may, to the extent permitted by applicable law and/or regulation, deal as principal, agent, or otherwise, or have long or short positions in, or buy or sell, the securities, commodities or instruments, or options or other derivative instruments based thereon, of issuers or securities mentioned herein. Nomura Group companies may also act as market maker or liquidity provider (within the meaning of applicable regulations in the UK) in the financial instruments of the issuer. Where the activity of market maker is carried out in accordance with the definition given to it by specific laws and regulations of the US or other jurisdictions, this will be separately disclosed within the specific issuer disclosures.