Logistics firms running ahead of fundamentals?

Counters have been trending upwards in line with e-commerce evolution

EVEN before this week’s big Jack Ma event, logistics stocks have been seeing strong interest.

The sector had already boasted of having one of the most highly-valued companies on Bursa Malaysia in the form of GD Express Carrier Bhd (GDEX), which trades at price-earnings (PE) multiple of a whopping 72.36 times.

GDEX is a leading package delivery services company and boasts attracting such big names as Singapore Post Ltd (Singpost) and Japan’s Yamato Holdings Co Ltd to take up chunks of shares in the company despite its high PE.

Companies like GDEX and Pos Malaysia Bhd were long seen as being the beneficiaries of e-commerce growth.

And then this week, Ma’s presence at the launch of the Digital Free Trade Zone (DTFZ) seems to have sparked even more interest in this sector.

Since March 17, logistics stocks have seen some RM342.6mil increase in their combined market capitalisations.

Hence the question is, are these stocks running ahead of themselves or are they trading on the promise of future growth?

Century Logistics Holdings Bhd executive director Edwin Yeap says that logistics counters have already been trending upwards in line with the e-commerce evolution, even before the recent driving force, which is Ma’s presence in Malaysia.

Yeap believes that there is still a lot of growth opportunities in local logistics companies, seeing that the penetration rate of e-commerce in Malaysia is still relatively low at an estimated 3%.

This is compared with countries like Japan and South Korea, where the penetration rates of e-commerce are at an average of 20%.

“Currently, the courier industry delivers about 500,000 boxes per day in Malaysia, and this figure is set to grow in the next four to five years.

“The growth of e-commerce is not one to be ignored.

“In fact, e-commerce platforms are creating more demand and building up a pool of purchasers by offering promotions to entice buyers to shop online,” says Yeap.

Another point which Yeap brought up was the lack of integration of logistics and courier systems in Malaysia.

A quick look at the logistics and courier-listed companies shows that few integrate both systems in their operations.

Generally, courier systems are last-mile services or the last leg of a logistics supply chain, while logistics encompasses the entire chain of operations right before last-mile services.

“Companies like Pos Malaysia and GDEX that have integrated logistics and courier systems have shown commendable results, having PEs of 32.54 and 72.36 times, respectively.

“For us at Century Logistics, we are rolling out our courier business over the next couple of months,” Yeap adds.

The courier business for Century Logistics comes in line with the emergence of South Korea’s CJ Express as its largest shareholder with a 31.44% stake.

Kenanga Research believes there will be sufficient time for integrated logistics players that are venturing into e-commerce delivery to mature, as the expected launch of the distribution hub under the DTFZ initiative is set for end-2019.

Take Tiong Nam Logistics Holdings Bhd for example.

Tiong Nam has ventured into cross-border land-trucking in Asean, specifically to target e-commerce firms in China, and will commence e-fulfillment deliveries domestically by the second quarter of the year.

Meanwhile, Affin Hwang Investment Bank Bhd in a recent sector report highlighted that logistics players are set to enter earnings upcycle, but only if the DTFZ initiatives take off in the form of pent-up demand for last-mile delivery, total supply chain management as well as warehousing requirements.

Affin Hwang also highlighted that Pos Malaysia’s total integrated logistics solution ecosystem offerings will enable it to benefit from Alibaba Group’s upcoming regional distribution hub in KLIA Aeropolis.

Pos Malaysia is the largest postal delivery service provider in Malaysia and the biggest courier delivery partner with a domestic courier market share of more than 40%.

“With the recent acquisition of KL Airport Services Sdn Bhd (KLAS), which has since been renamed into POS Aviation, Pos Malaysia has strategically positioned itself as an endto-end integrated logistics fulfilment solutions provider to tap on the growing demand of e-commerce services, both domestically and internationally.

“Pos Malaysia is poised to tap into the air cargo logistics with two Boeing 737-400 freighters under its fleet and plans to expand to six aircrafts within the next five years, which could connect China and Malaysia for airfreight deliveries for Alibaba,” says Affin Hwang.

Another logistics company to jump on the e-commerce bandwagon is Xin Hwa Holdings Bhd.

Yesterday, Xin Hwa announced that it had bought a 50% stake in Yiwugou Ecommerce Sdn Bhd (YESB) for a total cash consideration of RM500,000.

YESB is principally involved in e-commercial and e-business transactions.

The company has a cooperation agreement with Zhejiang Yiwugou E-commerce Co Ltd, where the latter has agreed to provide the database of suppliers in Yiwu Commodity Market, China, to YESB and grants YESB the rights to use the “Yiwugou” brand name and logo for its businesses.

Xin Hwa managing director Ng Aik Chuan says the acquisition of YESB serves as a stepping stone into the fast-growing e-commerce segment and is part of the group’s expansion plan as well as diversification of revenue streams.

“This particular platform will have over 1.8 million products, the same offering as the well-known Yiwu Commodity Market, which is the world’s largest small-commodity wholesale market.

“On top of that, a key feature that I believe is unique to our e-commerce platform is our all-in pricing in ringgit that includes door-to-door delivery from China to our customers’ locations, be it in Peninsular or East Malaysia.

“In fact, with this proprietary platform, we are certainly exploring the feasibility to scale up and expand into neighboring countries too,” says Ng.

He adds that the acquisition of YESB will provide Xin Hwa with an opportunity to extend its scope of logistics services, which may include courier services as well as door-to-door services.

In a nutshell, while there is promise of earnings upcycle from the DTFZ and e-commerce evolution for logistics companies, most of these are going to be long-term plays.

As the term “e-commerce evolution” suggests, the e-commerce growth does not happen overnight.