Shipping, Ports & Logistics NEUTRAL · top-two positions in terms of market share, despite continuous pricing pressures. Of the two, we still believe GDEX to be the better earnings

Sector Update

06 October 2017

PP7004/02/2013(031762) Page 1 of 8

Shipping, Ports & Logistics NEUTRAL Low Tides ↔ By Steven Chan / [email protected] From our observation s, logistics counters have already begun reversing earlier gains following a subpar results season. Likewise, earnings growth we akness within the logistics space is expected to persist for the next 1-2 years, underpinned by risi ng competition coupled with higher running costs for ventures and expansions. Parcel delivery player s are expected to continue recording top-line growth amid the burgeoning e-commerce trend in the country, but margins suppression due to fierce competition may dampen the trickle-down effect on b ottom-line earnings growth. Coupled with lofty valuations, we are opting to stay side-lined from t his sub-segment for now. Meanwhile, container throughput in domestic ports is expected to be weak er for the remainder of the year due to the reshuffling of global shipping alliances. However, we believe 2017 will serve as a low-base year for throughput volume to recover, starting from 2018. M ISC is expected to see limited catalysts for the time being as charter rates have yet to show any si gns of recovery. Within the sector, MMCCORP emerged as our preferred pick and the upcoming list ing of its ports operations may potentially serve as a re-rating catalyst. Overall, we maintain our N EUTRAL stance on the sector.

Retracement of earlier gains. While logistics counters saw a sector-wide price rally earlier in the year following positive trading sentiments from the launching of the Digital Free Trade Zone, the last quarter of 3QCY17 saw many of them erasing some earlier gains amid an underwhelming round of quarterly earnings. Overall, logistics counters declined an average of 5% over the last quarter, with the notable ones, including CENTURY (-16%), XINHWA (-11%), TNLOGIS (-10%), and NATWIDE (-6%). Comparatively, our sector’s coverage had also underperformed against the broader market during the quarter with an average 3% decline, while the FBMKLCI gained 0.4% QoQ. (Take note that our strategy’s cut-off date is at 21-Sep-2017)

Weakness in earnings growth persists. We view the recent round of poor results among logistics players to be a larger indication of underlying weakness in earnings growth. Within our coverage, notable ones include GDEX (UP, TP: RM0.45), which had just posted its first ever negative quarterly results (down 12% YoY) due to lower margins, despite having a strong history of consistent earnings growth. TNLOGIS (MP, TP: RM1.60) also posted shockingly poor results (down 55% YoY) due to higher expenses coupled with weakness from its property development segment. Outside our coverage, CENTURY (Not Rated) posted notably poor results (down 45% YoY), citing lower logistics activity due to the festive season. Moving forward, we expect the weakness in earnings growth among industry players to continue for the next 1-2 years, mainly underpinned by: (i) increased competition within the industry, leading to margins suppressions, coupled with (ii) higher running costs arising from expansions and new ventures, with most industry players currently having expansion plans or new ventures in their pipelines. With that said, main drivers towards a recovery in earnings growth for logistics players are mainly: (i) consolidation activities within the industry, resulting in dampened competitiveness among players, (ii) strong growth in domestic economy to drive volume growth, and (iii) expansions and new ventures to grow beyond current infancy phases to potentially turn earnings-accretive. Elsewhere, port operators are also expected to see weaker earnings for the remainder of the year, with WPRTS (MP, TP: RM3.70) suffering from throughput decline from reshuffling of global shipping alliances. BIPORT (MP, TP: RM6.05) is also expected to see a weaker 2H17 due to increased costs from the commencement of Samalaju Port, while MMCCORP (OP, TP: RM2.85) is also expected to show weaker FY17 earnings due substantial completion of KVMRT Line 1 coupled with absence of land sale in Senai Airport Free Industrial Zone.

Lofty valuations on established parcel delivery pla yers. Volume growth continued to be positive for established parcel delivery players, mainly underpinned by the growing e-commerce. In the last quarter, established parcel delivery players POS (UP, RM4.00) and GDEX recorded healthy growth of 11% and 10% YoY, respectively, in parcel delivery revenue. However, while top-line is expected to continue growing, we believe that the sub-sector could see suppressed margins going forward, due to increased competition within the industry. As such, top-line growth may not entirely cascade into bottom-line growth moving forward. Many of the competitions consist of smaller start-ups and non-listed players, often positioning themselves competitively in-terms of pricing in order to gain market share from established players. From our understanding, POS and GDEX still hold the top-two positions in terms of market share, despite continuous pricing pressures. Of the two, we still believe GDEX to be the better earnings proxy for e-commerce, given its pure-play parcel delivery business model, while POS’ earnings will continue to be dragged by its declining postal mail and retail businesses for the foreseeable future. However, we are opting to stay side-lined from this sub-sector for now due to lofty valuations, with GDEX and POS currently trading at forward PERs of 102x and 35x, respectively.

Shipping, Ports & Logistics Sector Update 06 October 2017

PP7004/02/2013(031762) Page 2 of 8

Ports throughput expected to see mild recovery from 2018 onwards. Of the two main container transhipment ports in the country, WPRTS was the most adversely affected from the reshuffling of global shipping alliances, with its 2Q17 throughput deteriorating a staggering 11% YoY, while Port of Tanjung Pelepas (PTP) remains flattish. Comparatively, Singapore’s container throughput continued its trend of positive growth, recording 9% higher TEUs YoY. This was also partially due to volumes shift from WPRTS to Singapore, as an aftermath of: (i) CMA CGM’s decision to use Singapore as its main transhipment hub within the region, thus moving containers away from WPRTS, coupled with (ii) UASC’s completed merger with Hapag-Lloyd. As a result, we are expecting container throughput to record a c.10% drop in FY17. However, with that being said, we believe that FY17 shall serve as a new base for organic growth. As such, we are expecting to see some recovery in throughput in FY18 and beyond, underpinned by: (i) expected growth in gateway volumes, (ii) gradual recovery of transhipment as post-reshuffling business environment stabilises, and (ii) overall domestic economic growth.

Expecting seasonal improvement in 4Q17 for shipping rates. The Hurricane Harvey has caused a short-lived gain in charter rates in September, but such hikes are not bound to be sustainable. Overall, tanker rates are still on a declining trend dragged by higher tanker fleet growth and sluggish tonnage demand. Having said that, stepping into 4Q17, rates improvement is expected from 2017 low with seasonal pick-up as the winter season kicks in. Thus far, VLCC, Suezmax and Aframax average spot rates in September have fallen almost by half YoY, and such, weakness could persist if OPEC extends its production cut beyond March 2018, which will likely be concluded by the next regular OPEC meeting in November this year. On the flip side, LNG spot rates have rebounded c.50% from its 2017 low, strongly underpinned by improving flow of volumes, especially from Australia and US to countries such as China, Taiwan and South Korea. Overall, we see limited catalyst in our sole shipping coverage, MISC (MP, TP: RM8.04) in the near term but its balance sheet remains healthy with net gearing of 0.2x, allowing it to seek opportunistic brown field replacement projects, shallow-water assets requirement in the region as well as to grow its fleet size upon weakness in asset value.

Maintain NEUTRAL. Being the sole OUTPERFORM call within our sector’s coverage universe, MMCCORP emerged as the preferred pick within our sector. While near-term earnings are expected to show some weakness due to: (i) substantial completion of KVMRT Line 1, and (ii) absence of land sale in Senai Airport Free Industrial Zone, we believe MMCCORP is a solid SoP-valuation play, with the upcoming listing of its ports operations as a potential rerating catalyst. Likewise, a successful conclusion to talks for a stake in Sabah Ports would further bolster the group’s current profile as the largest ports operator in the country. Conversely, despite being widely regarded as earnings proxy for the growth of e-commerce within the country, we opt to stay side-lined from established parcel delivery players POS and GDEX, given their lofty valuations. GDEX had already gained +48% since our initiation with an OUTPERFORM call, and thus, we believe that foreseeable positives are well priced-in at current levels. We maintain our call for the rest of our sector, with MARKET PERFORM on BIPORT, MISC, TNLOGIS and WPRTS.

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PP7004/02/2013(031762) Page 3 of 8

Appendix

Old Shipping Alliances Current Shipping Alliances since 1 April 2017

Source: Kenanga Research, Google Image Notable points: � UASC completed merger with Hapag-Lloyd in May 2017 � Hanjin declared bankrupt in February 2017 � HMM joined 2M alliance in vessel sharing agreement, rather than full membership � CSCL merged with COSCO to form China COSCO Shipping in January 2016 � CMA CGM acquired APL (NOL) in June 2016

Port Klang vs PSA Container Throughput (mil TEUs)

23.2

24.8

27.9

29.9

25.9

28.4

29.9

31.632.6

33.9

30.9 30.9

16.1

5.56.3

7.18.0

7.3

8.99.6 10.0 10.4

10.911.9

13.2

6.2

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 1H17

mill

ion

TEU

s

Port of Singapore Authority Port Klang

Source: Bloomberg, Port Klang Authority, WPRTS, MMCCORP

Tanker Charter Rates vs MISC Share Price Dry Bulk Vessel Charte r Rates

3.50

4.50

5.50

6.50

7.50

8.50

9.50

10.50

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

US

D/d

ay

VLCC Suezmax Aframax LR2 (105K dwt)

LR1 (80K dwt) MR (40K dwt) MISC

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000

USD/day

Panamax (75K dwt) Handysize (53K dwt)

Capesize (170K dwt) Capesize (180K dwt)

Source: Fearnleys, Kenanga Research


PP7004/02/2013(031762) Page 4 of 8

LNG Vessel Charter Rates Bunker Costs Versus Baltic Dry Index

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

US

D/d

ay

Suez East 155-165' cbm 1 yr TC 155-165' cbm Suez West 155-165'cbm

0

100

200

300

400

500

600

700

800

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17

Bu

nk

er

Co

st

US

D/M

T

Ba

ltic

Dry

In

de

x U

SD

/m

t

Baltic Dry Index (Left side) Weighted Average 380cST Bunker Fuel Price (Right side)

Source: Fearnleys, Bloomberg, Kenanga Research

BIPORT – Fwd PER Band BIPORT – Fwd PBV Band

5.70

6.20

6.70

7.20

7.70

RM PRICE (RM) PER 19.1 x PER 20.7 x PER 22.2 x PER 23.7 x PER 25.2 x

5.50

6.00

6.50

7.00

7.50

8.00

RM PRICE (RM) PBV 2.2 x PBV 2.5 x PBV 2.7 x PBV 3.0 x PBV 3.3 x

Source: Kenanga Research

GDEX – Fwd PER Band GDEX – Fwd PBV Band

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17

PRICE (RM) PER 28.4 x PER 49.5 x PER 70.6 x PER 91.6 x PER 112.7 x

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17




PP7004/02/2013(031762) Page 5 of 8

MISC – Fwd PER Band MISC – Fwd PBV Band

3.50

5.50

7.50

9.50

(RM) Price (RM) PER 10.4 x PER 13.1 x PER 15.8 x PER 18.4 x PER 21.1 x

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00

(RM) Price (RM) PBV 0.7 x PBV 0.8 x PBV 0.9 x PBV 1.0 x PBV 1.1 x


MMCCORP – Fwd PER Band MMCCORP – Fwd PBV Band

1.50

1.70

1.90

2.10

2.30

2.50

2.70

2.90

RM


1.50

1.70

1.90

2.10

2.30

2.50

2.70

2.90

RM

PRICE (RM) PBV 0.5 x PBV 0.7 x PBV 0.8 x PBV 1.0 x PBV 1.2 x


POS – Fwd PER Band POS – Fwd PBV Band

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17


0.00

2.00

4.00

6.00

8.00

10.00

12.00





PP7004/02/2013(031762) Page 6 of 8

TNLOGIS – Fwd PER Band TNLOGIS – Fwd PBV Band

0.80

1.00

1.20

1.40

1.60

1.80



0.80

1.00

1.20

1.40

1.60

1.80




WPRTS – Fwd PER Band WPRTS – Fwd PBV Band

2.50

3.00

3.50

4.00

4.50

5.00



2.50

3.00

3.50

4.00

4.50

5.00




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PP7004/02/2013(031762) Page 7 of 8

Sector Peers Comparisons

Company Price @ 21 September

2017 Mkt Cap PER (x)

Est. Div. Yld.

Hist. ROE

Hist. P/BV NP Growth (%) Target Rating

(RM) (RM'm) CY16 CY17 CY18 (x) CY17 CY18 (RM)

BIPORT 5.90 2,714.0 18.1 19.8 18.9 3.1% 13.0% 2.3 -8.6% 4.7% 6.05 MARKET PERFORM

GDEX 0.63 3,513.0 104.6 102.4 88.3 0.5% 8.8% 9.2 2.1% 16.0% 0.45 UNDERPERFORM

MISC 7.38 32,942.8 16.6 17.1 16.0 2.7% 5.2% 0.9 -2.7% 6.6% 7.25 MARKET PERFORM

MMCCORP 2.20 6,699.1 13.1 19.5 14.6 1.4% 5.4% 0.7 -32.9% 33.8% 2.85 OUTPERFORM

POS 5.35 4,187.9 57.1 34.8 34.1 2.1% 3.8% 2.2 64.0% 2.2% 4.00 UNDERPERFORM

TNLOGIS 1.58 718.0 13.4 12.6 10.4 3.2% 7.5% 1.0 6.7% 21.3% 1.60 MARKET PERFORM

WPRTS 3.77 12,855.7 20.4 21.5 19.5 3.5% 30.4% 6.2 -4.9% 10.2% 3.70 MARKET PERFORM

Simple Average 34.8 32.5 28.8

Weighted Average 24.6 24.2 21.8

Source: Bloomberg, Kenanga Research

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PP7004/02/2013(031762) Page 8 of 8

Stock Ratings are defined as follows: Stock Recommendations OUTPERFORM : A particular stock’s Expected Total Return is MORE than 10% MARKET PERFORM : A particular stock’s Expected Total Return is WITHIN the range of -5% to 10% UNDERPERFORM : A particular stock’s Expected Total Return is LESS than -5% Sector Recommendations*** OVERWEIGHT : A particular sector’s Expected Total Return is MORE than 10% NEUTRAL : A particular sector’s Expected Total Return is WITHIN the range of -5% to 10% UNDERWEIGHT : A particular sector’s Expected Total Return is LESS than -5% ***Sector recommendations are defined based on market capitalisation weighted average expected total return for stocks under our coverage.

This document has been prepared for general circulation based on information obtained from sources believed to be reliable but we do not make any representations as to its accuracy or completeness. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may read this document. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees. Kenanga Investment Bank Berhad accepts no liability whatsoever for any direct or consequential loss arising from any use of this document or any solicitations of an offer to buy or sell any securities. Kenanga Investment Bank Berhad and its associates, their directors, and/or employees may have positions in, and may effect transactions in securities mentioned herein from time to time in the open market or otherwise, and may receive brokerage fees or act as principal or agent in dealings with respect to these companies.

Published and printed by: KENANGA INVESTMENT BANK BERHAD (15678-H) Level 12, Kenanga Tower, 237, Jalan Tun Razak, 50400 Kuala Lumpur, Malaysia Chan Ken Yew Telephone: (603) 2172 0880 Website: www.kenanga.com.my E-mail: [email protected] Head of Research

Documents

Shipping, Ports & Logistics NEUTRAL · top-two positions in terms of market share, despite continuous pricing pressures. Of the two, we still believe GDEX to be the better earnings