Asean logistics: Delivering the last...

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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

Anchor themes

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.

Research analysts



Riddhi Jain - NSFSPL [email protected] +91 22 672 35616

ASEAN logistics

EQUITY: ASEAN TRANSPORT/LOGISTICS

Delivering the last mile

Riding the internet retail tide

Catalyst: Online shopping benefiting Asean’s last-mile delivery players.

Asean is still behind the curve when it comes to most things internet-related.

As internet shopping plays catch up with regional peers further north, we

expect postal volumes at Asean courier players to triple by 2020F (giving a

five-year CAGR of 23%). Improving economies of scale on such volumes

mean we forecast higher three- and five-year earnings CAGRs for the four

couriers on which we initiate in this report, at 21-43% and 19-30%,

respectively.

North Asia’s thirst for Asean internet players.

We estimate Asean’s overall online retail sales (both C2C and B2C) will post a

five-year CAGR of 34% to hit USD36.1bn by 2020. Such outsized growth has

not surprisingly sparked interest among the regional internet heavyweights.

Alibaba has invested USD1bn for a majority stake in Singapore’s Lazada, and

Japan’s Softbank is expanding further with Tokopedia (Indonesia’s leading

online mall), in which Softbank started investing in 2012. The last-mile delivery

players have not been far behind, with some sizeable acquisitions from both

Japan (Yamato Holdings bought a strategic stake in GD Express) and Korea

(CJ Express acquiring a strategic stake in Century Logistics).

Action: Bullish view on the sector with all Buys. Singpost as top pick.

We initiate on the sector with a Bullish view, and four Buy calls. We introduce

a valuation framework to identify whether higher implied P/Es are justified by

superior cash ROIC vs WACC spreads. Overall, SingPost is our top pick,

given strong earnings growth (three-year CAGR of +21%) driven by logistics

and ecommerce fulfilment segments. We note an attractive implied P/E over

its cash ROIC-WACC spread (at 2.4x, vs the sector’s median of 2.5x).

Investment thesis on other names also compelling.

LBC Express offers a compelling combination of both cheap valuations and

strong earnings prospects, on the back of the strong macro story in the

Philippines. GD Express could emerge as a formidable Asean logistics player,

as it embarks on regional expansion, likely into Indonesia, possibly together

with its strategic shareholder, Yamato Holdings. We also like Pos Malaysia, as

we see cost and revenue synergy opportunities following the acquisition of

KLAS Group, a formidable local integrated logistics provider.

Our pecking order is SingPost, LBC Express, GD Express and Pos Malaysia. Fig. 1: Stocks for action

Source: Bloomberg, Nomura Research, * Initiating coverage

Company Code Rating Mkt Cap

(USD mn)

Avg. TO

(USD mn)

Target

Price

Price

4-Oct

Upside

(%)

LBC Express LBC PM Buy* 323 0.00 PHP17.05 PHP10.92 56%

Singapore Post SPOST SP Buy* 2,361 7.70 SGD2.11 SGD1.50 41%

GD Express GDX MK Buy* 584 0.10 MYR2.21 MYR1.74 27%

Pos Malaysia POSM MK Buy* 715 1.58 MYR4.85 MYR3.77 29%


6 October 2016


Nomura | ASEAN logistics 6 October 2016

2

Contents

Executive summary ................................................................................ 3

The pecking order: our fundamental scoring framework ....................... 12

Industry overview ................................................................................. 20

An overview of the postal industry, then and today ............................... 24

Asean’s postal and courier industry ...................................................... 26

Market dynamics .................................................................................. 30

Terminal dues....................................................................................... 33

Fighting for transhipment market share ................................................ 38

How technology is changing landscape ................................................ 39

Robocars and drones… ........................................................................ 45

The current dynamics of Asean retail e-commerce ............................... 47

Asean e-commerce behaviour characteristics ...................................... 58

The Japan angle ................................................................................... 62

Asean offers solid footing for FDIs ........................................................ 65

North Asia’s thirst for Asean’s potential piece of the pie ....................... 68

Cost composition: best to stay focused on a single business structure . 71

Singapore Post ..................................................................................... 74

LBC Express Holdings Inc .................................................................... 87

Pos Malaysia ........................................................................................ 97

GD Express ........................................................................................ 111

Appendix A-1 ...................................................................................... 125


3

Executive summary

Asean internet retail outlook

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 (Fig. 3), suggesting

further upside growth potential for ecommerce.

Fig. 2: Estimated size of internet retail (B2C and C2C) by Nomura (USDbn)

Source: Nomura research, various news media, Euromonitor

As plotted below (Fig. 4), we observed that the frequency of visits to shopping websites

in Asean remains relatively low compared to Japan and the US. While China has a high

value of ecommerce retail sales relative to total sales (at 13.8%), its frequency of retail

site visits per internet user is much lower than in Singapore, given its massive population

base. This too suggests more upside, not only for Asean but also China as well,

particularly in rural areas. We think China’s higher internet retail penetration rate (at

13.8%) is more likely pushed up by the urban population generating higher GMV per

user.

Fig. 3: Ecommerce as a percentage of total retail sales

Source: Euromonitor, Nomura research

Fig. 4: Asean ecommerce is still at its nascent stage

Asean has still a lot more room to grow its online retail penetration

Source: Nomura research, Euromonitor, Statista, Similiarweb

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)

% chg y-y (RHS)

% of internet retail to total retail sales (RHS)

(USDbn)

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 o

f re

tail

site v

isit p

er

inte

rnet user

Ecommerce sales as a % of retail sales


4

Fig. 5: Online shopping frequency quadrant

Source: Nomura research, Statista, Similiarweb

Fig. 6: Frequency vs ARPU quadrant


We also explain in detail the demand and supply dynamics of online retail in Asean,

including comparisons between consumer behaviour with developed economies, the top

players in each market, and omni-channel characteristics, among other things. We

derive lessons from Japan’s online retail segment history about how with mature

demographic structures and increasing per-capita income, people prefer convenience

over costs. In summary, we note that online retail still has strong potential upside to be

routinely instilled into the daily lives of Asean’s population, driven by its young

demographic appeal and rising spending propensity.

Bullish on parcels

While Asean’s post and parcel numbers are nowhere near the billions of postal mails and

parcels handled in Japan and the US, they suggest a similar story (Fig. 7). With surging

internet and smartphone penetration and higher online spending propensity, we foresee

Asean’s parcel size to see a CAGR of 23% by 2020, from 396mn to 1,104mn (Fig. 8).

We estimate both Vietnam and Philippines will see the highest growth rates over the next

five years, within Asean.

The revenue opportunity for courier players should double to USD7.54bn by 2020, from

the current USD3.69bn in 2015 (a 15% CAGR over 2015-20). The main driver of this

revenue growth will be contributed by online shopping. We forecast ecommerce

shipment revenues translating to 7-8% of total online retail sales / GMV (Fig. 9).

On the improved economies of scale from the higher volumes handled, we expect the

incremental earnings for courier players to grow — we forecast four of the companies in

our new coverage to post three- and five-year earnings CAGRs of 21-43% / 19-30%.

Although we expect all last-mile players to benefit from this growing revenue potential,

we believe cost efficiencies will prevail to win sizeable business. Those with economies

of scale, which can effectively enable them to compete on a low-cost structure, will

continue to win sizeable market share over the years to come.

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

($)



5

Fig. 7: Average parcels per urban population received

Source: Nomura research, Universal Postal Union, Postal statistics, National statistics, Company data, World Bank, Demographia

Fig. 8: Parcel / express item delivery volumes (mn)

Source: Nomura research, UPU, Postal statistics, National statistics, Company data, regulatory bodies

Fig. 9: Overview analysis of the parcel and express revenue pie

Source: Nomura

4.7

6.1

2.3

1.4

1.6

3.8

2.6

87.2

48.3

55.1

7.7

9.8

5.1

3.9

5.0

8.2

5.6

Malaysia

Singapore

Indonesia

Vietnam

Philippines

Thailand

ASEAN

Japan

China

USA

2020

2015

# of

consignments

(mn)

2014 2015 2016 2017 2018 2019 2020

Malaysia 56 59 69 80 93 107 122

Singapore 33 35 40 46 52 58 65

Indonesia 126 153 207 273 328 377 434

Vietnam 25 29 40 55 73 90 103

Philippines 45 54 76 103 136 169 195

Thailand 55 65 88 116 140 161 185

ASEAN 341 396 521 673 822 962 1,104

% chg y-y 2015 2016 2017 2018 2019 2020 CAGR

Malaysia 6% 17% 17% 16% 15% 13% 16%

Singapore 6% 15% 14% 13% 10% 11% 13%

Indonesia 22% 31% 24% 22% 15% 15% 23%

Vietnam 14% 25% 24% 22% 20% 18% 29%

Philippines 20% 30% 35% 33% 24% 15% 29%

Thailand 18% 25% 24% 20% 15% 15% 23%

ASEAN 16% 32% 29% 22% 17% 15% 23%

2015F 2020F CAGR (2015-2020)

Volume

Traditional 238 276 3%

Ecommerce 158 828 39%

Total volume 396 1,104 23%

Volume mix

Traditional 60% 25%

Ecommerce 40% 75%

Average revenue per shipment (USD)

Traditonal 13.2 16.8 1%

Ecommerce 3.5 3.5 0%

Effective average 9.3 6.8 -6%

Revenue (USDbn)

Traditonal 3,137 4,646 8%

Ecommerce 554 2,892 39%

Total 3,690 7,538 15%

Revenue mix

Traditional 85% 62%

Ecommerce 15% 38%

Total online transactions (B2C & C2C related) (USDbn) 7,905 36,155 36%

Delivery cost to total transaction value 7% 8%


6

Asean – The focus for Asian investors

Among the internet juggernauts, Alibaba has invested USD1bn for a majority stake in

Lazada, and Japan’s Softbank is embarking on further expansion with Tokopedia

(Indonesia’s leading online mall), where they started investing in 2012. This provides

opportunities for last-mile delivery players, where we have also seen some sizeable

acquisitions in Asean by the biggest names in last-mile delivery from both Japan

(Yamato Holdings acquiring a strategic stake in GD Express) and Korea (CJ Express

acquiring a strategic stake in Century Logistics (CLH MK) looking to tap into Asean’s

growth story.

Judging from the trail of acquisitions Yamato has made over the past year in Asean, it

certainly looks like the courier player aims to have first-mover advantage and a bigger

presence in Asean’s last-mile delivery ahead of the impending AEC integration and the

TPP agreement, which should foster cross-border trade. Yamato’s expansion into cross-

border trucking certainly makes an appealing case for China’s cheaper last-mile delivery

reach into Asean.

There’s no doubt that establishing a scalable Asean-wide operation can be challenging,

given its unique individual country policies, and partnerships with local players. But these

acquisitions and the continued interest from investors shows that investors are not willing

to hold back, and the story has just begun.

Fig. 10: Yamato and CJ Express acquisitions (last-mile / cross-border logistics focus)

Source: Company data, News releases

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


7

Fig. 11: Alibaba and Softbank’s acquisition trail (online shopping)


Stock recommendations

Given the strong earnings growth profile of the last-mile delivery players, we expect the

four players in our coverage to post three-year earnings CAGRs (2015-20) of 21-43%

(Fig. 12).

We rate SingPost as our top pick, as it still has an attractive implied P/E (on our TP) over

its cash ROIC-WACC spread ratio. This is a framework we introduce to identify whether

the higher P/E valuation is justified when considering its superior cash ROIC vs WACC

spread (discussed in more detail in another section).

Our pecking order is SingPost, LBC Express, GD Express and Pos Malaysia.

Fig. 12: TP and current price multiple valuations

Source: Nomura research, Company data

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

WACC Current Currency Target

applied Price (LC) Price (LC) Upside FY +1 FY +2 FY +3 FY +1 FY +2 FY +3 FY +1 FY +2 FY +3 EBITDA FCF Earnings

GD Express 9.2% 1.74 MYR 2.21 27% 55.8 44.0 35.7 36.7 28.2 22.3 3.1 2.1 2.5 26% -11% 24%

LBC Express 10.2% 10.92 PHP 17.05 56% 19.5 16.1 13.5 10.7 8.4 6.4 1.5 1.0 0.7 27% 78% 33%

Pos Malaysia 8.1% 3.77 MYR 4.85 29% 26.3 16.7 14.9 9.6 6.5 5.8 9.1 2.7 2.5 40% -40% 43%

Singapore Post 7.3% 1.50 SGD 2.11 41% 21.1 17.0 13.1 14.7 12.0 9.6 5.7 2.9 1.5 21% -191% 21%

Average 30.7 23.4 19.3 17.9 13.8 11.0 4.9 2.2 1.8 28% -41% 30%

P/E EV/EBITDA P/E over Cash ROIC WACC spread 3 forward year CAGR


8

Fig. 13: LBC Express scores highly on our scoring. Followed by SingPost


Fig. 14: The plotted quadrant


Singapore Post

We choose SingPost as our top pick for three reasons: 1) Strong volume growth,

supported by surging ecommerce retail demand, especially since SingPost is located at

the intersection of Asean trade in geographic terms. 2) Its massive scale and impeccable

infrastructure give it an edge over competitors, driving it further in exploiting the

opportunities offered for the last-mile delivery segment. 3) Consolidation synergies from

recent acquisitions such as Trade Global and Jagged Peak should kick in, with the group

entering integration phase this year, propelling overseas revenues (currently 44% of

total). We see the partnership with Alibaba and its subsidiary Lazada as a big positive for

the company as well. SingPost has landed at the right place, at the right time, with the

right capabilities.

Our TP of SGD2.11 is derived by DCF (WACC of 7.3% and TG of 1.8%), implying a

FY18F EV/EBITDA and P/E of 17x / 26x respectively, higher than the three-year

historical averages of 14x / 20x (reflecting its current valuations too). We think the stock

deserves higher valuations, given the steep earnings growth (five-year CAGR of +19%)

driven by the logistics and ecommerce fulfilment segments coupled with its recovering

ROEs (+20% by FY19). Initiate at a Buy.

LBC Express

LBC Express is naturally the default postal provider in Philippines, given its nationwide

and global coverage. The Philippines is an under-penetrated market, both in terms of

banking and internet retail. LBC Express offers the most compelling case, with a

combination of both cheap valuations and strong earnings prospects (five-year earnings

CAGR of 28%) and an impressive cash ROIC potential upside on the back of the

Philippines’ favourable macro-economic growth and its underpenetrated online shopping

participation. The courier company already has Lazada as one of its biggest corporate

accounts, which is seeing strong growth. We initiate with a Buy call premised on a DCF-

based valuation of PHP 17.05, implying an FY 2016F EV/EBITDA of 17.7x and PE of

33x.

Score FY +2 FY +3 FY +4 FY +5

GD Express 2.8 3.0 3.6 2.5 1.6 2.7

LBC Express 3.0 1.6 1.1 0.8 0.5 1.0

Pos Malaysia 1.8 3.5 3.2 2.4 2.1 2.8

Singapore Post 2.5 4.4 2.3 1.7 1.2 2.4

Median 2.6 3.2 2.7 2.0 1.4 2.5

Implied P/E over Cash ROIC -

WACC Spread Average

(FY+2-FY+5)GD

Express

LBC Express

Pos Malaysia

Singapore Post

0.0

0.5

1.0

1.5

2.0

2.5

3.0

0.0 1.0 2.0 3.0 4.0

Implied average forward P/E over Cash ROIC - WACC spread (FY +2 to FY+4)

The lower the forward P/E over Cash ROIC - WACC spread, the cheaper the stock is.

Maximum fundamental score is 4.0 points. The higher the better

Our 2 top picks

Fundamental framework score (5-year forward horizon)


9

GD Express

GD Express is the only pure courier play in our Asean last-mile coverage. It is also the

smallest by size (revenue and earnings). Its operational merits centre on its very optimal

capital and cost efficiencies, given its cost prudence. GD Express has seen its share of

B2C ecommerce clients growing over the past four years, since Lazada came in, which

now forms 30% of its total revenue (from 10% back in FY14).

Last year, the courier provider suffered some capacity bottlenecks, as a result of which

top growth slowed to 12% y-y, from 24% in FY15, ultimately capping the earnings upside

(FY16 EBITDA: +12.4% y-y vs +23% in FY15).

This issue has now been addressed, with the conversion of its unutilized land bank

(previously for a staff car park) as an extension to its existing sorting centre hub,

enabling them to bump up capacity from 78k consignment sortings daily to 100k daily

(+28.2%). Longer-term plans are also in place to seek new landbank for expansion. We

initiate with a Buy on the stock with 27% upside with a DCF-derived TP of MYR2.21

(after dilution of warrants). The stock will continue to fetch lofty P/Es, which we think are

justified given its superior cash ROICs (even against its WACC) and cost efficiencies.

GD Express could also potentially emerge as a formidable Asean logistics player as it

embarks on regional expansion, likely into Indonesia, possibly together with its strategic

shareholder, Yamato Holdings.

Pos Malaysia

Pos Malaysia is Malaysia’s postal provider. Suffering the same fate on the decline in

traditional mail, the postal provider leads with highest market share in the parcel and

courier delivery business due to its pricing affordability.

We also see cost and revenue synergy opportunities following the acquisition of KLAS

Group, a formidable integrated logistics provider with operations in air cargo, trucking,

haulage as well as airport-related services. The low-hanging fruits on synergy potential

from both revenue and costs will be centred on integrated supply chain fulfilment. This

brings a valuable supply chain proposition for clients, whereas Pos Malaysia was

previously only serving the last-mile portion.

We think consensus has yet to fully factor in the merged entity’s earnings potential,

where our FY17-19F earnings are 38% / 72% / 58% above consensus. Despite the

strong run in the price, we believe this stock is still poised for a re-rating. We initiate the

stock with a Buy with a TP of MYR4.85, which implies 26% upside potential.


10

Fig. 15: Comparison of the four last-mile players

Source: Company data, Nomura research

Singapore Post LBC Express GD Express Pos Malaysia

Financials

EBITDA 5 year CAGR 18% 23% 26% 28%

EBITDA margins (5 year forward avg) 20% 16% 23% 17%

Cash ROIC (5 year forward avg) 16% 30% 27% 6%

Business operations

Revenue source Mail/ retail / logistics/ ecommerce fullfiment Courier Mail / logistics / remittance Courier mail Mail/ retail / Integarated logistics / airport related services / air cargo

Geographic presence - Present in 19 countries worldwide

- Strongest presence in Asia in 12 countries

(ASEAN 6+others)

- Outside Asia, presence in US, UK, Canada,

Germany, Netherlands, Australia and NZ via

subsidiaries and associates.

- For logistics, the most predominant market is

Philippines itself, with inbound traffic a small fraction of

total volumes.

- For money remittance, LBC has partners and

agents in over 30 countries with a strong presence in South-

east asia and North America

- Purely Malaysia. Ties up with foreign courier providers for

outbound items.

- Ties up with foreign courier providers as the last mile

delivery provider on international inbound

- for its mail and retail business, Geographic presence will be

confined to Malaysia

- Logistics and airport related services will be predominantly Malaysia.

But on the air cargo side, it is looking to expand into ASEAN.

Strategy

Strengths - Massive scale and pervasiveness

(Pop-lockers in every 2km radius in SG.)

- Upcoming automated Regional eCommece Logistics

hub (2H16), with enhanced sorting and warehousing

capabilities.

- Synergies from recent spree of

acquisitions (eg TG expected to contribute

55% of logistics revenue in FY17F.)

- Partnership with Alibaba.

- Strong overseas growth.

- Largest market share at c85%, and significant

experience in the logistics business

- Asset light operations model which helps to

contain costs.

- Warehousing and belly space available on

demand in Philippines.

- High B2B clientele base, which commands decent

margins

- Timely deliveries, making it the top courier provider in

Malaysia -

Sorting hub situated right smack at the centre of Klang

Valley

- Leveraging on the extensive nationwide postal network coverage,

this gives massive reach to the retail base customers.

Weaknesses - Corporate Governance issues

(since last December) have dissipated, but

the Board needs to work on the

recommendations from CG review.

- Contracting margins from the current

transition costs.

- The looming PHP 1.82bn lawsuit filed by sister

concern LBC Development bank.

- The continuing related party transactions that the company

incurs and related corporate governance issues.

- The company does not pay dividends.

- Premium pricing a downside for the retail segment / walk

ins

- Branch network coverage not as extensive as Pos

Malaysia.

- With the postal provider forming into a bigger entity, this makes

coordination difficult

- Tied by social obligation to provide mail service at rural areas which

are loss making.

- Feedback on postal delivery service are mostly negative, notably on

its poor punctuality

Opportunities - The aggressive growth potential of

internet retail in the region.

- Located in SG, it is at the centre of economic

activity, with supportive regulations

and developed infra.

- The Philippines macro growth story, ecommerce growth

potential and underpentrated market in the ecommerce

delivery segment.

- Coporate revenues anchored to Lazada's growth

- Philpost's declining reputation and service

quality, which makes LBC the secondary go to

postal provider.

- Growing branch outlet coverage through tie-ups,

potentially with convenience stores and other service centre

outlets such as MBE (Mail Boxes Etc)

- More collaboration with Yamato Holdings for cross border

volumes following their recent acquistions in a cross border

trucking company (spanning from Singapore to China).

- Acquisition of KLAS Group, an integrated logistics and airport

services provider will bring more synergy opportunities for the postal

business in the ecommerce fulfillment play.

- Joining both the postal and courier workforce into one entity brings

massive costs downside potential as redundancies are removed

Threats - Postal volumes disintegrating faster than

expected (Postal still contributes ~80% of

operating profits.)

- The delayed second investment by

Alibaba falling through.

- Greater than expected margin contraction.

- Risings start-ups in last mile delivery.

- Too much dependence on the domestic market.

- Raise in delivery fee charged by Cebu or other

vendors from whom belly space is leased.

- Rising personnel cost.

- Potential Corporate Governance issues.

- Inability to secure new land for its upcoming expansion

plan. -

Near to full utilization capacity creates a bottleneck

- Cost synergy not materializing

- The logistics sector is a very fragmented and competitive industry

- Capital allocation not efficiently managed

Strategic partners Alibaba (10.3%) and potentially raising it to 15% from

second tranche

None Yamato Holdings (22.84%) / Singapore Post (11.23%) None

Core business operations Largest ecommerce player in the world (by measure of

GMV)

Yamato: Largest courier provider In Japan / Singapore

Post: Leading last mile player in Singapore with a global

presence


11

Fig. 16: Financial metrics summary


GD Express (MYRmn) FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17F FY18F FY19F FY20F FY21F FY10 - FY16 FY16 - FY21

Revenue 82 93 116 135 159 197 220 266 326 398 485 592 18% 22%

Opex (68) (78) (98) (108) (126) (156) (174) (209) (253) (306) (370) (447) 17% 21%

EBITDA 14 15 19 28 33 40 46 57 73 91 116 145 21% 26%

Core PATAMI 6 7 9 15 24 29 35 43 55 67 84 107 33% 25%

Capex (3) (22) (8) (5) (4) (7) (4) (9) (4) (29) (18) (9) 1% 19%

Free cash flow 7 (14) 7 13 23 14 37 25 37 26 57 95 33% 21%

EBITDA margin 17% 16% 16% 20% 21% 21% 21% 21% 22% 23% 24% 24% 3% 4%

Core PATAMI margin 8% 7% 8% 11% 15% 15% 16% 16% 17% 17% 17% 18% 8% 2%

Capex / revenue 4% 23% 7% 4% 3% 4% 2% 3% 1% 7% 4% 1% -3% 0%

FCF / revenue 8% -15% 6% 10% 15% 7% 17% 9% 11% 7% 12% 16% 9% -1%

ROE 15% 16% 18% 23% 29% 24% 13% 11% 12% 14% 15% 17% -2% 4%

Cash ROIC 20% 16% 18% 23% 31% 27% 28% 27% 30% 23% 25% 29% 7% 2%

LBC Express (PHPmn) FY13 FY14 FY15 FY16F FY17F FY18F FY19F FY20F FY13 - FY15 FY15 - FY20

Revenue 6,087 7,056 7,686 9,015 10,654 12,640 15,025 17,974 12% 19%

Opex (5,193) (6,066) (6,697) (7,572) (8,957) (10,636) (12,651) (15,143) 14% 18%

EBITDA 894 991 989 1,443 1,697 2,005 2,374 2,831 5% 23%

Core PATAMI 342 590 491 797 970 1,154 1,377 1,655 20% 28%

Capex (245) (428) (331) (300) (300) (300) (250) (250) 16% -5%

Free cash flow 52 (344) 266 309 1,222 1,500 1,880 2,297 127% 54%

EBITDA margin 15% 14% 13% 16% 16% 16% 16% 16% -2% 3%

Core PATAMI margin 6% 8% 6% 9% 9% 9% 9% 9% 1% 3%

Capex / revenue 4% 6% 4% 3% 3% 2% 2% 1% 0% -3%

FCF / revenue 1% -5% 3% 3% 11% 12% 13% 13% 3% 9%

ROE 46% 32% 34% 29% 26% 23% 22% -10%

Cash ROIC 25% 20% 19% 23% 26% 29% 33% 39% 20%

Pos Malaysia (MYRmn) FY10 FY12 (15 months) FY13 FY14 FY15 FY16 FY17F FY18F FY19F FY20F FY21F FY10 - FY16 FY16 - FY21

Revenue 1,015 1,482 1,270 1,427 1,467 1,713 2,161 2,775 2,970 3,200 3,437 11% 15%

Opex (807) (1,189) (1,011) (1,137) (1,232) (1,525) (1,858) (2,322) (2,454) (2,604) (2,793) 14% 13%

EBITDA 208 293 258 290 235 188 303 454 517 596 644 -2% 28%

Core PATAMI 129 162 150 157 104 67 112 177 198 233 249 -12% 30%

Capex (76) (174) (68) (121) (104) (112) (277) (293) (309) (187) (190) 8% 11%

Free cash flow (35) 130 56 43 6 128 (366) (9) 28 207 279 -229% 17%

EBITDA margin 20% 20% 20% 20% 16% 11% 14% 16% 17% 19% 19% -10% 8%

Core PATAMI margin 13% 11% 12% 11% 7% 4% 5% 6% 7% 7% 7% -9% 3%

Capex / revenue 8% 12% 5% 8% 7% 7% 13% 11% 10% 6% 6% -1% -1%

FCF / revenue -3% 9% 4% 3% 0% 7% -17% 0% 1% 6% 8% 11% 1%

ROE 16% 18% 16% 15% 9% 6% 6% 9% 10% 11% 11% -10% 5%

Cash ROIC 26% 33% 29% 21% 14% 12% 11% 14% 14% 15% 15% -14% 3%

Singapore Post (SGDmn) FY11 FY12 FY13 FY14 FY15 FY16 FY17F FY18F FY19F FY20F FY21F FY11 - FY16 FY16 - FY21

Revenue 566 579 659 821 920 1,152 1,420 1,626 1,859 2,087 2,354 15% 15%

Opex (345) (372) (444) (606) (696) (931) (1,164) (1,311) (1,467) (1,646) (1,851) 22% 15%

EBITDA 221 207 215 215 223 221 256 315 392 441 502 0% 18%

Core PATAMI 150 135 126 135 145 139 153 191 247 283 326 -2% 19%

Capex and acquistions of new subs (2) (31) (117) (37) (213) (500) (250) (80) (80) (70) (70) 209% -33%

Free cash flow 185 146 86 204 22 (368) 11 213 277 338 394 -215% -201%

EBITDA margin 39% 36% 33% 26% 24% 19% 18% 19% 21% 21% 21% -20% 2%

Core PATAMI margin 26% 23% 19% 16% 16% 12% 11% 12% 13% 14% 14% -14% 2%

Capex / revenue 0% 5% 18% 5% 23% 43% 18% 5% 4% 3% 3% 43% -40%

FCF / revenue 33% 25% 13% 25% 2% -32% 1% 13% 15% 16% 17% -65% 49%

ROE 45% 21% 12% 12% 10% 9% 10% 12% 15% 17% 20% -36% 11%

Cash ROIC 29% 26% 16% 15% 14% 10% 11% 13% 16% 18% 20% -18% 9%

CAGR


12

The pecking order: our fundamental scoring framework The need to gauge longer-term perspective when building in valuations

While the logistics sector’s performance ties strongly with economic cycles, this may not

be the case for the last mile and postal players, given the nascent stage of online

shopping in this part of the world compared to developed economies. So we need to take

a perspective that current valuations hinge on the long-term earnings growth profile.

Before finalizing our pecking order, we identify a few criteria that we need to take into

account to measure both growth prospects and earnings quality, as well the balance

sheet employed. We then compare these to respective valuations.

We rank the four new stocks under our coverage based on the categories below, and to

finalize our pecking order, we apply a scoring weighted system where the highest ranked

will be given a score of 4 and the lowest at 1 for each category:

• Cash ROIC spread vs WACC: As we want to achieve a pecking order on quality

earnings, we quantify how optimally the firm generates its invested capital against its

average cost of capital over the next five years. We apply the highest weighting on this

metric at 30%.

Why cash ROIC?

To put in perspective, this measures the actual dollar return of cash invested to run the

business. Cash ROIC essentially gives a more reflective measure on how much

operating earnings are generated based on the underlying asset, as it eliminates the

distortive measure on return on equity capital that would have been depressed by

depreciation and amortization charges over the years. This is done by taking the gross

investments and adding non-cash working capital into the denominator. Factoring in

non-cash working capital takes into consideration that this too is part of the employed

working capital needed to run the business. A quality cash ROIC can be seen in how the

spread is relative to their respective weighted average cost of capital.

Fig. 17: Cash ROIC formula

Cash ROIC: Operating Income (1-tax rate) + Depreciation and amortization / Gross Fixed Assets + Non – Cash Working Capital

Where

- Gross Fixed Assets = Net Fixed Assets + Accumulated Depreciation

- Non-Cash Working Capital = Inventory + Other Current Assets + Accounts Receivable - Accounts Payable - Other

Current Liabilities.

Note that Current Assets exclude cash. Current Liabilities excludes interest bearing debt.

Source: Aswath Damodaran: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/home.htm

• Free cash flow growth has the second biggest weighting (at 25%), as this gives an

idea on how much cash earnings growth is expected to be achieved after netting off its

capex requirements.

• Revenue growth and EBITDA margin. Equal weightings of 15% are applied on both

revenue growth (a measure of how many customers are generated) and EBITDA

margins (how much each dollar of revenue gives as cash profits; a measure of

operating efficiency).

• Net earnings growth: We apply only a 10% weighing on this, as the bottom lines are

more prone to being distorted by accounting policies, which may compromise the actual

earnings quality.

• We prefer companies with lower net gearing, as the last-mile delivery industry is not

deemed a high capex one (at least for now in Asean). This criterion has the smallest

weighting proportion in our scoring system at 5%.


13

Fig. 18: Our fundamental scoring system

Source: Nomura research

Another way to look at this scoring exercise is from a perspective of a Dupont analysis

on ROEs, but a more refined framework.

Recall that a Dupont analysis on ROE focuses on which particular components

enhances a firm’s ROE, be it operating efficiency / asset use efficiency / gearing.

However we note the drawback of this analysis, as net profit margin can be distorted by

accounting policies and aggressive revenue recognition; while asset turnover can be

distorted by asset revaluations, among other things.

As can be seen by the Dupont analysis below (Fig. 18), we can conclude the following:

• GD Express has a combination of both commendable operating and asset utilization

efficiencies, allowing it to post high ROEs of over 20% in the past. Net margin has also

been on an uptrend as more economies of scale are achieved from the higher volumes

handled. Note that its ROE in FY16 was depressed by the placement exercise for the

entry of a new strategic shareholder, Yamato Holdings.

• LBC Express utilizes its asset base heavily, but this is because of its asset light model

structure, where most of its branches and warehouses are leased. It also has a high

composition of borrowings, thus giving them the leverage to maximize ROEs.

• SingPost at one point back before FY13 had decent ROEs, beating GD Express, but its

aggressive acquisition spree has seen its assets not being utilized optimally, with

operating efficiencies on a declining trend as a result of the decline of traditional mail

items (which fetch decent margins).

• Pos Malaysia does not optimize its asset base fully, given its nationwide branch

coverage as the national postal operator, which is not churning decent business.

Furthermore, margins have been on a declining trend over recent years given the

decline in traditional mail and the migration to online payments hurting payment

transaction volumes from walk-in customers.

Fig. 19: Dupont analysis on ROE


Category Horizon Weighting

Cash ROIC spread vs WACC 5 year forward average 30%

Free cash flow growth 5 year forward CAGR 25%

Revenue growth 5 year forward CAGR 15%

EBITDA margin 5 year forward average 15%

Net earnings growth 5 year forward CAGR 10%

Net gearing 5 year forward average 5%

100%

Singapore Post FY11 FY12 FY13 FY14 FY15 FY16 FY17F FY18F FY19F FY20F FY21F

Net Profit Margin (Core PATAMI/Revenue) 26% 23% 19% 16% 16% 12% 11% 12% 13% 14% 14%

Asset turover ratio (Revenue/Total Assets) 52% 40% 34% 47% 42% 48% 56% 62% 69% 75% 81%

Equity Multiplier (Total Assets/Equity) 329% 217% 185% 156% 151% 155% 164% 167% 169% 173% 176%

ROE (as calculated by Dupont) 45% 21% 12% 12% 10% 9% 10% 12% 15% 17% 20%

LBC Express FY13 FY14 FY15 FY16F FY17F FY18F FY19F FY20F

Net Profit Margin (Core PATAMI/Revenue) 6% 8% 6% 9% 9% 9% 9% 9%

Asset turover ratio (Revenue/Total Assets) 145% 129% 136% 148% 142% 138% 135%

Equity Multiplier (Total Assets/Equity) 368% 366% 271% 210% 193% 181% 173%

ROE (as calculated by Dupont) 45% 30% 33% 28% 25% 23% 21%

GD Express FY11 FY12 FY13 FY14 FY15 FY16 FY17F FY18F FY19F FY20F FY21F

Net Profit Margin (Core PATAMI/Revenue) 7% 8% 11% 15% 15% 16% 16% 17% 17% 17% 18%

Asset turover ratio (Revenue/Total Assets) 107% 122% 126% 114% 104% 50% 54% 58% 62% 67% 72%

Equity Multiplier (Total Assets/Equity) 185% 183% 165% 144% 134% 113% 116% 120% 124% 126% 127%

ROE (as calculated by Dupont) 15% 17% 23% 25% 20% 9% 10% 12% 13% 14% 16%

Pos Malaysia FY11 FY12 FY13 FY14 FY15 FY16 FY17F FY18F FY19F FY20F FY21F

Net Profit Margin (Core PATAMI/Revenue) 11% 12% 11% 7% 4% 5% 6% 7% 7% 7%

Asset turover ratio (Revenue/Total Assets) 99% 79% 86% 87% 92% 76% 89% 91% 93% 95%

Equity Multiplier (Total Assets/Equity) 167% 170% 160% 150% 168% 156% 164% 164% 163% 164%

ROE (as calculated by Dupont) 18% 16% 15% 9% 6% 6% 9% 10% 11% 11%


14

We proceed with our scorecard below (Fig. 20) along with its summary (Fig. 21).

Based on forward earnings expectations, LBC Express ranks highly based on our

scoring system, followed by GD Express. This is because the stock offers a strong

earnings growth trajectory, given the upside for online shopping on the back of its

favourable structural macro-economic growth prospects.

Historically, GD Express ranks highly as a result of its economies of scale achieved on

higher volume and prudent capital allocation efficiency.


15

Fig. 20: Scoring card workings and final ranking


Cash ROIC FY -7 FY -6 FY -5 FY -4 FY -3 FY -2 FY -1 FY +1 FY +2 FY +3 FY +4 FY +5 +3F years avg +5F years avg Ranking (5 yrs avg) Score Weighted score (30%) -2 years avg Ranking Score Weighted score (30%)

GD Express (MYRmn) 20% 16% 18% 23% 31% 27% 28% 27% 30% 23% 25% 29% 27% 27% 2 3 90% 28% 2 3 90%

LBC Express (PHPmn) 25% 20% 19% 23% 26% 29% 33% 39% 26% 30% 1 4 120% 20% 1 4 120%

Pos Malaysia (MYRmn) 26% 33% 29% 21% 14% 12% 11% 14% 14% 15% 15% 13% 14% 4 1 30% 13% 4 1 30%

Singapore Post (SGDmn) 29% 26% 16% 15% 14% 10% 11% 13% 16% 18% 20% 13% 16% 3 2 60% 12% 3 2 60%

WACC FY -7 FY -6 FY -5 FY -4 FY -3 FY -2 FY -1 FY +1 FY +2 FY +3 FY +4 FY +5 +3F years avg +5F years avg Ranking (5 yrs avg) Score Weighted score (30%) -2 years avg Ranking Score Weighted score (30%)

GD Express (MYRmn) 8.7% 11.5% 9.6% 6.7% 6.2% 8.3% 8.6% 9.2% 9.2% 9.2% 9.2% 9.2% 9.2% 9.2% 8%

LBC Express (PHPmn) 10.2% 10.2% 10.2% 10.2% 10.2% 10.2% 10.2% 10.2% 10.2% 10.2% 10%

Pos Malaysia (MYRmn) 8.7% 9.7% 12.1% 10.9% 8.2% 7.8% 8.1% 8.1% 8.1% 8.1% 8.1% 8.1% 8.1% 8.1% 8%

Singapore Post (SGDmn) 6.8% 7.2% 5.0% 4.9% 5.8% 6.6% 6.2% 7.3% 7.3% 7.3% 7.3% 7.3% 7.3% 7.3% 6%

Cash ROIC-WACC FY -7 FY -6 FY -5 FY -4 FY -3 FY -2 FY -1 FY +1 FY +2 FY +3 FY +4 FY +5 +3F years avg +5F years avg Ranking (5 yrs avg) Score Weighted score (30%) -2 years avg Ranking Score Weighted score (30%)

GD Express (MYRmn) 11.8% 4.4% 8.6% 16.5% 25.0% 19.2% 19.0% 18.2% 21.3% 14.0% 16.1% 20.0% 17.8% 17.9% 2 3 90% 19.1% 1 4 120%

LBC Express (PHPmn) 14.7% 9.9% 8.7% 12.6% 15.3% 18.6% 22.9% 28.3% 15.5% 19.6% 1 4 120% 9.3% 2 3 90%

Pos Malaysia (MYRmn) -8.7% 16.0% 21.1% 18.1% 12.5% 6.2% 4.0% 2.9% 6.1% 6.1% 6.9% 7.1% 5.0% 5.8% 4 1 30% 5.1% 4 1 30%

Singapore Post (SGDmn) -6.8% 21.5% 21.3% 11.1% 9.4% 7.5% 4.2% 3.7% 5.9% 8.6% 10.4% 12.5% 6.1% 8.2% 3 2 60% 5.9% 3 2 60%

Free cash flow FY -7 FY -6 FY -5 FY -4 FY -3 FY -2 FY -1 FY +1 FY +2 FY +3 FY +4 FY +5 CAGR +3 years CAGR +5 years Ranking (5 yrs growth) Score Weighted score (25%) CAGR -2 years Ranking Score Weighted score (25%)

GD Express (MYRmn) 7 (14) 7 13 23 14 37 25 37 26 57 95 -11% 21% 4 1 25% 27% 2 3 75%

LBC Express (PHPmn) - - - - 52 (344) 266 309 1,222 1,500 1,880 2,297 78% 54% 2 3 75% 127% 1 4 100%

Pos Malaysia (MYRmn) - (35) 130 56 43 6 128 (366) (9) 28 207 279 -40% 17% 3 2 50% 72% 3 2 50%

Singapore Post (SGDmn) - 185 146 86 204 22 (368) 11 213 277 338 394 -191% -201% 1 4 100% NM 4 1 25%

Revenue FY -7 FY -6 FY -5 FY -4 FY -3 FY -2 FY -1 FY +1 FY +2 FY +3 FY +4 FY +5 CAGR +3 years CAGR +5 years Ranking (5 yrs growth) Score Weighted score (15%) CAGR -2 years Ranking Score Weighted score (15%)

GD Express (MYRmn) 82 93 116 135 159 197 220 266 326 398 485 592 21.9% 21.9% 1 4 60% 17.7% 2 3 45%

LBC Express (PHPmn) - - - - 6,087 7,056 7,686 9,015 10,654 12,640 15,025 17,974 18.0% 18.5% 2 3 45% 12.4% 3 2 30%

Pos Malaysia (MYRmn) - 1,015 1,482 1,270 1,427 1,467 1,713 2,161 2,775 2,970 3,200 3,437 20.1% 14.9% 4 1 15% 9.6% 4 1 15%

Singapore Post (SGDmn) - 566 579 659 821 920 1,152 1,420 1,626 1,859 2,087 2,354 17.3% 15.4% 3 2 30% 18.4% 1 4 60%

EBITDA margin FY -7 FY -6 FY -5 FY -4 FY -3 FY -2 FY -1 FY +1 FY +2 FY +3 FY +4 FY +5 +3F years avg +5F years avg Ranking (5 yrs avg) Score Weighted score (15%) -2 years avg Ranking Score Weighted score (15%)

GD Express (MYRmn) 17% 16% 16% 20% 21% 21% 21% 21% 22% 23% 24% 24% 22% 23% 1 4 60% 21% 2 3 45%

LBC Express (PHPmn) 0% 0% 0% 0% 15% 14% 13% 16% 16% 16% 16% 16% 16% 16% 4 1 15% 13% 4 1 15%

Pos Malaysia (MYRmn) 0% 20% 20% 20% 20% 16% 11% 14% 16% 17% 19% 19% 16% 17% 3 2 30% 14% 3 2 30%

Singapore Post (SGDmn) 0% 39% 36% 33% 26% 24% 19% 18% 19% 21% 21% 21% 19% 20% 2 3 45% 22% 1 4 60%

Net earnings growth FY -7 FY -6 FY -5 FY -4 FY -3 FY -2 FY -1 FY +1 FY +2 FY +3 FY +4 FY +5 CAGR +3 years CAGR +5 years Ranking (5 yrs growth) Score Weighted score (10%) CAGR -2 years Ranking Score Weighted score (10%)

GD Express (MYRmn) 6 7 9 15 24 29 35 43 55 67 84 107 24% 25% 3 2 20% 20% 3 2 20%

LBC Express (PHPmn) - - - - 342 590 491 797 970 1,154 1,377 1,655 33% 28% 2 3 30% 20% 2 3 30%

Pos Malaysia (MYRmn) - 129 162 150 157 104 67 112 177 198 233 249 43% 30% 1 4 40% -35% 1 4 40%

Singapore Post (SGDmn) - 150 135 126 135 145 139 153 191 247 283 326 21% 19% 4 1 10% 2% 4 1 10%

(net gearing ratio) / net cash ratio FY -7 FY -6 FY -5 FY -4 FY -3 FY -2 FY -1 FY +1 FY +2 FY +3 FY +4 FY +5 +3F years avg +5F years avg Ranking Score Weighted score (5%) -2 years avg Ranking Score Weighted score (5%)

GD Express 13% -36% -30% -13% 18% 25% 73% 73% 74% 70% 70% 74% 72% 72% 1 4 20% 49% 1 4 20%

LBC Express -28% -11% 3% 38% 60% 77% 90% 34% 54% 2 3 15% -19% 4 1 5%

Pos Malaysia 35% 42% 61% 68% 38% 35% 43% 3% 0% -3% 2% 9% 0% 2% 3 2 10% 39% 2 3 15%

Singapore Post -38% -49% 17% 9% 15% 24% -10% -21% -20% -18% -15% -17% -17% 4 1 5% 19% 3 2 10%

Total score Forward Growth Ranking Total score Historical Ranking Total score

GD Express 2 2.75 1 3.25

LBC Express 1 3.00 2 2.70

Pos Malaysia 4 1.75 4 1.80

Singapore Post 3 2.50 3 2.25

Forward assessment Historical assessment


16

Fig. 21: Summary of score rankings (historical and forward)


Implied valuations on our TPs

As we take a long-term view on earnings potential, with five-year earnings CAGRs of 19-

30% – which is roughly within our growth expectation for parcel volumes — we value the

four stocks in our coverage on a DCF basis with Buy calls across the board. Our TPs

and the current price multiples are summarised below:

Fig. 22: TP and current price multiple valuations


With our fundamental ranking done based on the scoring exercise earlier, we table down

below where they stand valuation wise against their respective implied price multiples

(Fig. 23) based on our TPs as mentioned above.

Fig. 23: Ranking and where they stand against our implied price multiples based on our TPs


With GDEX having a higher ranking historically with a score of 3.25, on which it scores

highly in: i) Cash ROIC – WACC spread, and ii) free cash flow growth, it is certainly no

surprise it commands higher P/Es compared to the rest of its peers (Fig. 24).

Recall that in our fundamental framework analysis, we had given Cash ROIC – WACC

spread the highest weighting at 30%, while free cash flow growth is given a 25%

weighting (Fig. 18).

Trading at a historical average forward P/E of 59.1x over the past 3 years, we believe

this is justifiable, given its superior cash ROICs and EBITDA growth track record.

Therefore, we think this warrants the stock to trade at a deserving P/E over Cash ROIC

WACC spread of 2.9x, vs the sector average of 2.2x (as shaded in pink below).

Total score Forward Growth Ranking Total score Historical Ranking Total score

GD Express 2 2.75 1 3.25

LBC Express 1 3.00 2 2.70

Pos Malaysia 4 1.75 4 1.80

Singapore Post 3 2.50 3 2.25

WACC Current Currency Target

applied Price (LC) Price (LC) Upside FY +1 FY +2 FY +3 FY +1 FY +2 FY +3 FY +1 FY +2 FY +3 EBITDA FCF Earnings

GD Express 9.2% 1.74 MYR 2.21 27% 55.8 44.0 35.7 36.7 28.2 22.3 3.1 2.1 2.5 26% -11% 24%

LBC Express 10.2% 10.92 PHP 17.05 56% 19.5 16.1 13.5 10.7 8.4 6.4 1.5 1.0 0.7 27% 78% 33%

Pos Malaysia 8.1% 3.77 MYR 4.85 29% 26.3 16.7 14.9 9.6 6.5 5.8 9.1 2.7 2.5 40% -40% 43%

Singapore Post 7.3% 1.50 SGD 2.11 41% 21.1 17.0 13.1 14.7 12.0 9.6 5.7 2.9 1.5 21% -191% 21%

Average 30.7 23.4 19.3 17.9 13.8 11.0 4.9 2.2 1.8 28% -41% 30%

P/E EV/EBITDA P/E over Cash ROIC WACC spread 3 forward year CAGR

Total score

Historical

ranking

Forward

ranking

Total

score FY +1 FY +2 FY +3 FY +4 FY +5 FY +1 FY +2 FY +3 FY +4 FY +5 FY +1 FY +2 FY +3 FY +4 FY +5

GD Express 1 2 2.75 80 63 51 41 32 55 42 34 26 20 103 85 62 46 33

LBC Express 2 1 3.00 31 25 21 18 15 31 25 21 18 15 40 16 14 11 10

Pos Malaysia 4 4 1.75 34 21 19 16 15 12 8 7 6 6 21 10 9 8 7

Singapore Post 3 3 2.50 32 26 20 17 15 21 17 14 12 10 19 17 14 12 11

Average 44 34 28 23 19 30 23 19 16 13 46 32 25 19 15

Implied P/E Implied EV/EBITDA Implied P/Op CF


17

Fig. 24: Historical rankings and where they stand against on their respective 3 year average P/Es


Why one needs to look at P/E over cash ROIC WACC spread ratio

As depicted below (Fig. 25), our forward multiples appear expensive based on our

implied TPs. However we argue that one must not look solely on an earnings angle (a

dollar generated from customers) but also where it is at in optimally utilizing its invested

assets (a dollar generated from investments). Focusing on the last two columns of the

table below (Fig. 25), as suggested by its implied P/E over its respective cash ROIC

WACC spread ratio, valuations still appear to be fairly reasonable and are not trading

too far on a three-year forward-looking horizon (Fig. 25).

The obvious cheapest stock from this viewpoint is LBC Express, given its superior cash

ROICs on the back of relatively low price multiples (as highlighted in pink below),

notably its P/E over cash ROIC – WACC spread ratio. This also justifies why the stock

has the most upside to our TP.

Fig. 25: Forward-looking implied price multiples based on our TP against their respective WACC


Concluding our framework against potential upside

In summary, to identify whether a stock is cheap in the longer run, one would need to

look for a low P/E stock combined with superior cash ROICs (against its WACC).

Sometimes, this may be hard to come by, especially with low P/Es. Therefore,

companies with a demanding forward P/E, at a glance, may appear to be excessive,

when it is actually not the case, especially with GD Express.

As shown in the first and last column of Fig. 26, LBC Express scores highly on our score

(at 3.0) and has a low P/E over cash ROIC – WACC spread (of only 1.0x vs the median

multiple of 2.5x). This implies that the stock is attractive. This is followed by SingPost,

with a score of 2.5 and a cheaper average on its P/E over cash ROIC of 2.4x vs its

median multiple of 2.5x.

Historical

ranking Score FY -4 FY -3 FY -2 FY -1 FY +1 FY +2 FY +3 FY +4 FY +5

P/E

Cash ROIC -

WACC spread

P/E over

Cash ROIC

WACC EBITDA CAGR

GD Express 1 3.25 16.5 25.0 19.2 19.0 18.2 21.3 14.0 16.1 20.0 59.1 20.2 2.9 18%

LBC Express 2 2.70 14.7 9.9 8.7 12.6 15.3 18.6 22.9 28.3 12.3 -

Pos Malaysia 4 1.80 18.1 12.5 6.2 4.0 2.9 6.2 6.1 6.9 7.1 17.3 12.2 1.4 -10%

Singapore Post 3 2.25 11.1 9.4 7.5 4.2 3.7 5.9 8.6 10.4 12.5 21.5 9.3 2.3 1%

-

Average 15.2 15.4 10.7 9.0 9.4 12.2 11.8 14.1 17.0 32.6 13.5 2.2 2%

3 year historical average

Cash ROIC - WACC spread

Total score

Forward

ranking

Total

score FY +1 FY +2 FY +3 FY +1 FY +2 FY +3 FY +1 FY +2 FY +3 FY +1 FY +2 FY +3 FY +1 FY +2 FY +3 FY +1 FY +2 FY +3

GD Express 2 2.75 80 63 51 55 42 34 103 85 62 18.2 21.3 14.0 4.4 3.0 3.6 5.6 4.0 4.4

LBC Express 1 3.00 31 25 21 31 25 21 40 16 14 12.6 15.3 18.6 2.4 1.6 1.1 3.2 1.0 0.7

Pos Malaysia 4 1.75 34 21 19 12 8 7 21 10 9 2.9 6.1 6.1 11.7 3.5 3.2 7.1 1.6 1.4

Singapore Post 3 2.50 32 26 20 21 17 14 19 17 14 3.7 5.9 8.6 8.6 4.4 2.3 5.1 2.8 1.6

Average 44 34 28 30 23 19 46 32 25 9.4 12.2 11.8 6.8 3.1 2.6 5.3 2.4 2.0

Implied P/E Implied EV/EBITDA Implied P/Op CF

Cash ROIC - WACC

spread

Implied P/E over

Cash ROIC WACC

spread

Implied P/ Op CF

over cash ROIC

spread


18

Fig. 26: Where the rankings stack up


Fig. 27: The plotted quadrant


Score FY +2 FY +3 FY +4 FY +5

GD Express 2.8 3.0 3.6 2.5 1.6 2.7

LBC Express 3.0 1.6 1.1 0.8 0.5 1.0

Pos Malaysia 1.8 3.5 3.2 2.4 2.1 2.8

Singapore Post 2.5 4.4 2.3 1.7 1.2 2.4

Median 2.6 3.2 2.7 2.0 1.4 2.5

Implied P/E over Cash ROIC -

WACC Spread Average

(FY+2-FY+5)GD

Express

LBC Express

Pos Malaysia

Singapore Post

0.0

0.5

1.0

1.5

2.0

2.5

3.0

0.0 1.0 2.0 3.0 4.0

Implied average forward P/E over Cash ROIC - WACC spread (FY +2 to FY+4)

The lower the forward P/E over Cash ROIC - WACC spread, the cheaper the stock is.

Maximum fundamental score is 4.0 points. The higher the better

Our 2 top picks

Fundamental framework score (5-year forward horizon)


19

Fig. 28: Peer comparison

Source: Bloomberg, Company data, Nomura research

Ticker NameCore

EarningsEBITDA FCFF FY1F FY2F FY3F 1E 2E 3E 1E 2E 3E 1E 2E 3E 1E 2E 3E 1E 2E 3E ROIC

ROIC/WACC

ratio

Net

Gearing1E 2E 3E

Postal providers

SPOST SP SINGAPORE POST LTD SGD 1.495 2,359 2.11 Buy 21% 21% nm 18.0 19.4 21.1 21.1 17.0 13.1 2.1 2.1 2.0 14.7 12.0 9.6 5.0 5.4 6.8 12.9 15.9 20.2 12.8 2.3 9.9 283.6 15.2 11.7 1.0

POSM MK POS MALAYSIA BERHAD MYR 3.770 710 4.85 Buy 43% 40% -40% 14.0 16.4 17.4 26.3 16.7 14.9 1.6 1.6 1.5 9.6 6.5 5.8 1.9 3.0 3.3 7.7 9.5 10.1 3.4 0.3 net cash -8.1 -312.6 105.3 0.6

UKM LN UK MAIL GROUP PLC GBp 441.750 310 NR NR 26% 9% -3% 5.0 5.6 6.1 20.4 17.1 14.3 3.5 3.3 3.1 10.0 8.7 7.6 3.9 4.5 5.4 17.5 20.4 21.5 16.1 2.5 net cash 27.8 18.5 15.5 0.8

RMG LN ROYAL MAIL PLC GBp 496.500 6,323 NR NR 1% 30% -13% 9.0 8.9 9.4 12.6 12.2 11.5 1.2 1.2 1.2 6.1 6.0 5.7 4.6 4.8 5.1 8.7 9.3 11.1 3.4 0.9 5.5 16.0 15.5 16.5 9.3

BPOST BB BPOST SA EUR 24.510 5,487 NR NR 0% 2% 5% 24.8 24.8 25.1 15.1 14.9 14.8 6.5 6.0 5.6 7.4 7.3 7.2 5.4 5.4 5.5 44.2 41.2 38.9 36.9 3.5 net cash 16.5 15.5 14.6 150.1

PST IM POSTE ITALIANE SPA EUR 6.150 8,992 NR NR 19% 11% -43% 4.8 5.1 5.8 12.6 10.8 8.6 0.8 0.8 0.7 3.5 3.3 3.3 6.2 6.6 7.4 6.5 6.9 8.9 0.7 0.5 net cash 12.0 24.4 18.5 0.7

DPW GR DEUTSCHE POST AG-REG EUR 27.601 37,470 NR NR 13% 11% 16% 8.4 8.6 8.9 13.4 12.8 12.1 2.8 2.5 2.3 7.4 6.8 6.3 3.5 3.8 4.1 21.4 20.1 19.4 15.3 1.4 10.5 26.4 17.1 16.4 1.0

POST AV OESTERREICHISCHE POST AG EUR 32.500 2,458 NR NR 3% -1% 18% 14.1 14.5 14.8 14.1 14.1 14.0 3.3 3.3 3.2 6.8 6.8 6.7 6.2 6.3 6.3 23.4 22.7 23.0 12.5 0.5 net cash 12.5 13.1 11.6 4.2

CTT PL CTT-CORREIOS DE PORTUGAL EUR 5.961 1,001 NR NR 3% 2% 70% 18.3 18.1 18.8 12.5 12.5 11.4 3.9 3.9 3.9 5.0 5.0 4.8 8.0 8.3 8.6 28.7 30.2 33.9 38.6 1.6 net cash 21.6 19.2 11.4 4.3

PNL NA POSTNL NV EUR 4.144 2,054 NR NR 4% -3% -3% 11.3 11.4 11.1 8.5 9.5 8.9 NA 25.3 11.5 4.4 4.0 4.0 NA 4.6 6.8 -220.3 116.5 118.7 39.6 2.3 net cash 4.2 12.8 12.3 2.1

Average 14% 12% 1% 12.8 13.3 13.8 15.7 13.8 12.4 2.9 5.0 3.5 7.5 6.6 6.1 5.0 5.3 5.9 -4.9 29.3 30.6 17.9 1.6 8.6 41.3 -16.1 23.4 17.4

Courier express deliveries

GDX MK GD EXPRESS CARRIER BHD MYR 1.740 579 2.21 Buy 24% 26% -11% 21.4 22.4 23.0 55.8 44.0 35.7 5.6 5.1 4.7 36.7 28.2 22.3 0.6 0.8 1.0 10.6 12.2 13.7 10.5 0.9 net cash 97.4 65.4 91.1 2.3

LBC PM LBC EXPRESS HOLDINGS INC PHP 10.920 322 17.05 Buy 33% 27% 78% 16.0 15.9 15.9 19.5 16.1 13.5 6.3 4.5 3.3 10.7 8.4 6.4 0.0 0.0 0.0 39.1 32.9 28.6 NA 0.0 10.7 50.4 12.7 10.4 0.6

000120 KS CJ KOREA EXPRESS CORP KRW 213,000.000 4,356 NR NR 66% 17% 30% 6.3 6.5 6.8 38.3 29.1 23.2 1.7 1.7 1.6 17.6 15.1 13.3 - 0.2 - 4.9 6.1 7.1 4.6 0.7 53.6 99.3 32.6 25.9 0.6

2484 JP YUME NO MACHI SOUZOU IINKAI JPY 2,009.000 217 NR NR 108% - 17% - - - 53.9 37.8 23.0 - - - - - - 0.4 0.6 1.0 14.7 19.8 25.5 12.1 1.9 net cash 65.8 38.0 25.6 0.5

9369 JP KRS CORP JPY 2,341.000 288 NR NR 12% 6% -34% 5.7 5.8 6.0 11.0 10.4 9.9 0.9 0.9 0.8 4.6 4.3 3.9 1.6 1.8 2.0 8.7 8.5 8.2 5.9 1.1 20.6 -59.6 18.5 26.6 0.9

6082 JP RIDE ON EXPRESS CO LTD JPY 973.000 98 NR NR 11% - - - - - 12.7 11.2 10.7 - - - - - - 1.0 1.0 1.0 16.7 - - 17.3 2.2 net cash - - - 1.1

FLI NZ FLIWAY GROUP LTD NZD 1.050 34 NR NR -4% 13% - 9.7 9.5 9.5 9.5 9.5 9.5 1.4 1.4 1.3 6.9 6.8 6.6 7.1 7.1 7.2 14.4 14.1 13.8 7.2 1.9 27.4 - - - -2.4

9070 JP TONAMI HOLDINGS CO LTD JPY 264.000 250 NR NR 9% - - - - - 6.1 5.8 - 0.4 0.4 - - - - - - - - - - 4.3 0.8 29.3 - - - 0.7

TOU FP TOUPARGEL GROUPE SA EUR 5.350 62 NR NR 29% 1% 30% 3.4 4.3 4.9 17.8 12.2 8.1 0.7 0.6 0.6 6.7 5.2 4.0 1.7 3.7 - 3.8 5.3 6.5 4.5 1.9 24.0 9.3 22.2 7.1 0.6

GRUB US GRUBHUB INC USD 41.250 3,515 NR NR 27% 35% 69% 28.4 29.6 31.3 49.0 38.0 29.4 3.9 3.5 3.2 23.2 17.5 13.2 - - - 7.3 9.9 11.2 NA 0.4 net cash 52.6 40.3 21.9 1.8

FRE NZ FREIGHTWAYS LTD NZD 6.660 744 NR NR 7% 9% 11% 19.1 19.9 20.1 18.0 16.5 15.3 4.5 4.3 4.0 11.7 10.6 9.8 4.3 4.7 5.1 25.6 26.3 26.7 14.7 1.8 70.7 24.0 17.8 16.1 2.4

9075 JP FUKUYAMA TRANSPORTING CO LTD JPY 595.000 1,612 NR NR -1% 1% nm 10.3 10.4 10.4 15.4 15.6 15.3 0.6 0.6 0.6 9.1 9.0 8.9 1.7 1.7 1.7 4.3 4.1 4.1 2.5 0.3 37.4 61.4 61.5 59.3 -12.2

RRTS US ROADRUNNER TRANSPORTATION SY USD 7.780 298 NR NR -8% -1% 31% 5.4 6.1 6.3 11.2 8.1 7.5 0.5 0.5 0.4 5.2 4.1 2.0 - - - 4.1 5.5 6.8 3.5 -3.0 72.2 5.3 7.2 7.1 -1.4

TFI CN TRANSFORCE INC CAD 26.780 1,865 NR NR 14% 2% 0% 11.2 11.8 11.7 14.7 12.6 9.9 NA NA NA 8.2 7.5 7.7 2.5 8.2 4.0 14.5 13.2 14.2 7.3 0.8 159.1 10.3 9.5 9.2 1.0

9064 JP YAMATO HOLDINGS CO LTD JPY 2,357.000 9,417 2,450.00 Neutral 7% 0% 25% 7.8 7.7 7.6 22.5 20.7 19.5 1.7 1.6 1.6 7.8 7.6 7.4 1.2 1.2 1.3 7.6 7.9 8.1 5.8 0.6 net cash 43 41 40 3.2

BDE IN BLUE DART EXPRESS LTD INR 5,557.600 1,980 NR NR 17% 9% 21% 12.3 12.7 12.7 64.0 51.4 42.3 26.1 20.1 15.2 37.3 30.7 25.9 0.6 0.8 1.0 45.8 45.3 43.6 26.7 2.4 24.6 56.6 42.0 39.0 3.7

UPS US UNITED PARCEL SERVICE-CL B USD 108.312 95,105 NR NR 7% 5% 3% 17.3 17.3 17.1 18.6 17.5 16.1 36.8 22.9 15.2 10.1 9.7 9.4 2.9 3.1 3.3 155.7 206.3 141.1 29.4 2.9 385.7 16.7 16.0 17.4 2.5

FDX US FEDEX CORP USD 173.050 45,990 NR NR 12% 20% 24% 14.2 14.6 15.1 14.3 12.7 11.4 2.9 2.5 2.1 6.7 6.2 5.7 0.9 1.1 1.2 20.8 20.9 20.4 12.6 1.2 75.0 79.2 35.7 27.4 1.2

Average 21% 11% 21% 12.6 13.0 13.2 25.2 20.5 17.7 6.3 4.7 3.9 13.5 11.4 9.8 1.9 2.4 2.3 23.4 27.4 23.7 10.6 1.0 76.2 40.8 30.7 28.3 0.4

Integrated logistics solutions

GTIC IN GATI LTD INR 133.900 176 NR NR 50% 20% - 9.2 9.5 9.5 13.7 10.3 - 2.1 1.8 - 9.0 8.2 7.2 1.1 0.7 - 10.8 10.1 - 5.9 0.6 64.7 - - - 0.3

9076 JP SEINO HOLDINGS CO LTD JPY 1,073.000 2,165 NR NR 1% 3% 34% 7.8 8.1 8.2 11.8 11.4 11.0 0.6 0.5 0.5 3.4 3.0 2.7 2.6 2.7 2.7 5.1 5.2 5.1 4.6 0.3 net cash 11.6 14.3 13.8 15.0

9062 JT NIPPON EXPRESS CO LTD JPY 475.000 4,789 610.00 Buy 9% 3% nm 5.7 5.9 6.0 13.0 12.3 11.7 0.9 0.8 0.8 6.6 6.3 6.0 2.3 2.4 2.5 7.0 7.2 7.3 3.6 0.5 42.9 38 45 37 2

598 HK SINOTRANS LIMITED-H HKD 3.890 2,310 5.00 Buy 13% 9% -64% 4.4 4.6 4.6 10.6 9.8 9.2 0.9 0.9 0.8 7.8 7.2 7.0 2.9 3.0 3.2 9.2 8.9 8.6 4.8 0.6 net cash -1,195 -157 417 1

636 HK KERRY LOGISTICS NETWORK LTD HKD 10.400 2,273 12.50 Buy 4% 12% nm 11.6 11.9 12.7 15.3 14.4 13.2 1.1 1.0 0.9 8.9 8.3 7.6 1.7 1.8 1.9 7.9 8.0 7.9 8.9 1.5 8.2 34.5 55.1 -18.3 3.6

300350 CH SHENZHEN HUAPENGFEI MODERN-A CNY 28.120 1,247 NR NR 27% 27% 24% 21.8 23.3 24.0 - - - - - - 41.2 33.9 28.6 - - - 8.0 9.2 10.1 6.9 0.3 1.5 - - - -

152 HK SHENZHEN INTL HOLDINGS HKD 12.880 3,251 15.00 Buy 9% 7% -28% 59.1 56.9 54.5 13.1 12.3 11.4 1.2 1.2 1.1 10.3 10.0 9.6 2.9 3.2 3.5 9.9 10.0 10.0 5.6 1.0 net cash -6.8 -21.8 -44.5 1.5

Average 16% 11% -9% 17.1 17.2 17.1 12.9 11.7 11.3 1.1 1.0 0.8 12.4 11.0 9.8 2.3 2.3 2.8 8.3 8.4 8.2 5.7 0.7 29.4 -223.5 -12.9 81.0 3.8

Price to FCF P/EG (3

Year

CAGR)

EBITDA Margins P/E (x) P/B (x) EV/EBITDA (x) Div yield % ROE (%)3 Year CAGR

Currency Last priceUSD mkt

cap

Target

PriceRating


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)


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)

% chg y-y (RHS)

% of internet retail to total retail sales (RHS)

(USDbn)

2010 2011 2012 2013 2014 2015 2016F 2017F 2018F 2019F 2020F 2015-2020 CAGR

Statista (includes C2C and online classifides) 11.3 15.9 20.2 24.2 28.5 33.5 38.8 20%

Frost & Sullivan (likely to include C2C) 11.2 25.2 18%

Euromonitor (excludes C2C and onlne classifides) 1.7 2.1 2.5 3.2 4.2 5.7 7.5 9.6 12.3 15.7 20.0 29%


22

Fig. 34: GMVs disclosed and estimated of pure online retailers in Asean (USDmn)

Shaded in pink are our forecasts

Source: Nomura research, Euromonitor, various news media, Similiarweb, Alexa

As plotted below (Fig. 36), we observed that the frequency of visits to shopping websites in

Asean remains relatively low compared to Japan and the US. While China has a high value

of ecommerce retail sales relative to total sales (at 13.8%), its frequency of retail site visits per

internet user is much lower than in Singapore, given its massive population base. This too

suggests more upside, not only for Asean but also China as well, particularly in rural areas.

We think China’s higher internet retail penetration rate (at 13.8%) is more likely pushed up by

the urban population generating higher GMV per user.

Fig. 35: Ecommerce as a percentage of total retail sales


Fig. 36: Asean ecommerce is still at its nascent stage

Asean has still a lot more room to grow its online retail penetration

Source: Nomura research, Euromonitor, Statista, Similiarweb





Category 2012 2013 2014 2015 2016F Remarks

Traffic (mn) over the

past 6 months (after

bounced rate)

Lazada B2C 95 384 1,025 1,332 30% growth for 2016 72

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)


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

($)



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. 39: Asean 6’s 2015 online retail sales breakdown


Fig. 40: Asean’s ecommerce sales by product category 2015


Malaysia9%

Singapore17%

Thailand26%Philippines

6%

Vietnam12%

Indonesia30%

0% 20% 40% 60% 80% 100%

Developed

Indonesia

Singapore

Thailand

Vietnam

Philippines

Malaysia

ASEAN

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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


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)


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


Fig. 45: Global international parcel volumes


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)


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


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. 51: Parcel / express item delivery volumes (mn)

Source: Nomura research, UPU, Postal statistics, National statistics, Company data, regulatory bodies

How big is the Asean’s revenue pie?

We estimate that the regulated postal mail industry revenue alone represents a size of

USD1,088mn, of which USD413mn alone (accounting for 28%) is from Singapore, as it

has the highest number of mails received per urban population (Fig. 50). This size is

getting smaller by the year given the structural decline in mail usage.

Fig. 52: Breakdown of the regulated postal mail revenue currently (USDmn)

Source: Company data, Various Mail operators

4.7

6.1

2.3

1.4

1.6

3.8

2.6

87.2

48.3

55.1

7.7

9.8

5.1

3.9

5.0

8.2

5.6

Malaysia

Singapore

Indonesia

Vietnam

Philippines

Thailand

ASEAN

Japan

China

USA

2020

2015

# of

consignments

(mn)

2014 2015 2016 2017 2018 2019 2020

Malaysia 56 59 69 80 93 107 122

Singapore 33 35 40 46 52 58 65

Indonesia 126 153 207 273 328 377 434

Vietnam 25 29 40 55 73 90 103

Philippines 45 54 76 103 136 169 195

Thailand 55 65 88 116 140 161 185

ASEAN 341 396 521 673 822 962 1,104

% chg y-y 2015 2016 2017 2018 2019 2020 CAGR

Malaysia 6% 17% 17% 16% 15% 13% 16%

Singapore 6% 15% 14% 13% 10% 11% 13%

Indonesia 22% 31% 24% 22% 15% 15% 23%

Vietnam 14% 25% 24% 22% 20% 18% 29%

Philippines 20% 30% 35% 33% 24% 15% 29%

Thailand 18% 25% 24% 20% 15% 15% 23%

ASEAN 16% 32% 29% 22% 17% 15% 23%

Singapore, 413 , 38%

Malaysia, 221 , 20%

Indonesia, 172 , 16%

Thailand, 204 , 19%

Philippines, 54 , 5%

Vietnam, 25 , 2%


28

Despite smaller volume than mail, the courier market is bigger than regulated mail

However, the courier business is much bigger. Malaysia’s courier revenues generated

from the top 10 players alone, which we estimate comprises a 90% market share, have

raked as much as MYR2.8bn (USD678mn). Of this amount, 62% are contributed from

global express carriers such as DHL, Fedex, TNT and UPS, with the remaining 38%

from local couriers, namely Pos Laju, GD Express, City Link and Sky Net.

Assuming a weighted average revenue of USD9.3 per consignment (noting that

international couriers are substantially costlier), we estimate that Asean’s courier

revenues combined represent a revenue pie of USD3,690mn in 2015.

To verify this, Malaysia’s revenue contribution of USD678mn (of the top 10 players)

accounts for 18%, which we think is a fair share of the Asean revenue pie.

Given the strong growth expectation in online retail, shipment- related revenue accounts

for only 15% of parcel and express where we estimate ecommerce revenues in 2015

(7% of total internet retail revenue, or GMV), by 2020, the courier industry revenue could

potentially increase by more than double to USD7,538mn, representing a revenue CAGR

of 15%. This is on the expectations that we expect e-commerce related shipments to

grow by a CAGR of 39% over the same horizon.

Consignment yields could be crimped as e-commerce fetches lower yields

However, as ecommerce shipment rates are very competitive, we expect the effective

revenue per consignment for the courier sector may potentially be diluted given the

proportionate of ecommerce volumes relative to the non-e-commerce.

Fig. 53: Overview analysis of the parcel and express revenue pie

Source: Nomura

2015F 2020F CAGR (2015-2020)

Volume

Traditional 238 276 3%

Ecommerce 158 828 39%

Total volume 396 1,104 23%

Volume mix

Traditional 60% 25%

Ecommerce 40% 75%

Average revenue per shipment (USD)

Traditonal 13.2 16.8 1%

Ecommerce 3.5 3.5 0%

Effective average 9.3 6.8 -6%

Revenue (USDbn)

Traditonal 3,137 4,646 8%

Ecommerce 554 2,892 39%

Total 3,690 7,538 15%

Revenue mix

Traditional 85% 62%

Ecommerce 15% 38%

Total online transactions (B2C & C2C related) (USDbn) 7,905 36,155 36%

Delivery cost to total transaction value 7% 8%


29

Regulatory set-up

Postal is still a monopolistic business

The postal industry is a highly regulated one. As a public postal licensee holder,

expectations are that the licensees are to abide and perform a set of universal postal

service obligations as determined by the respective governing body, not just to the local

governmental and regulatory authority but also to the Universal Postal Union (UPU). The

UPU is a specialized agency body of the United Nations that coordinates postal policies

among member nations.

In some parts of the world, postal operators also function as a bank, such as Japan Post.

In Asean mostly, the scope of financial services offered to the public by most postal

providers are mostly remittances and over-the-counter transactions for bill and utilities

payments. Only two of Asean’s designated country operators are listed, which are

Singapore Post and Pos Malaysia.

In Asean, the level of competition however varies by country, with only two countries

liberalizing the postal sector entirely: Singapore and the Philippines.

Fig. 54: Scope of universal services by Postal country provider

Source: UPU

Courier segment is very fragmented

However, on the courier side, the regulatory requirement is more relaxed, paving the way

for more open competition, with pricing to be dictated by market forces. The courier

market is very fragmented. The only requirement is obtaining a license to run a business

and meeting the necessary permit requirement to operate trucks.

Given the low barriers to entry, the last-mile delivery segment has been the target of

many technology disruptor start-ups, as we have discussed earlier.

In some countries such as Indonesia, foreign shareholding participation is capped, at

49% for those providing transportation services (the transportation of it) but at a higher

67% for those providing logistics support.

While in some countries there is no limit on foreign shareholdings, but to be entitled for

investment tax allowances, there is a cap on foreign shareholding. In Malaysia, the cap

is 40%.

Fig. 55: Foreign shareholding limit in courier companies in Asean countries

Source: Company data

Country Scope of universal service Monopoly Tariffs

Indonesia Collecting, processing, transport and delivery of mail throughout the national

territory at affordable rates.

Yes. Monopoly on letters up to 2 kg, postcards and

aerogrammes.

Govt approval needed for universal

services

Malaysia Receipt, transport and delivery of letters up to 2 kilogrammes(registered,

insured services) and parcels up to 20 kg at uniform rates throughout the

country. Money order is also included.

Yes. Only on letters up to 2 kg and parcels up to 20 kg. Govt approval needed for universal

services

Philippines The delivery of letters, parcels and other mail matters as a basic and strategic

public utility

None Must be at least sufficient to finance

overall cost

Singapore The basic mail services cover the conveyance of letters weighing 500g and

below to any person in Singapore requiring such services, and the provision

and maintenance of posting boxes and post offices throughout Singapore.

None. Liberalized since 2007. Due to high capex barrier,

Singpost have a high market share of 95%. This is because

Singpost is granted access to letterbox masterdoor keys, rights to

issue national stamps and right to maintain the national postal

code system.

Govt approval needed for universal

services

Thailand Postal and remittance services throughout the country at a uniform rate. The

universal postal service includes the following services:

i letter-post items up to 2 kg;

ii books, newspapers, periodicals;

iii parcels up to 20 kg.

Yes. Monopoly on letters up to 2 kg and postcards Govt approval needed for universal

services

Vietnam Postal of domestic and international letter-post items up to 2 kg, public press

distribution and other special obligations.

Yes. Monopoly on letters up to 2 kg Govt approval needed for universal

services

Country Foreign shareholding limit

Philippines 70%

Indonesia Transportation at 49%; logistics warehousing and support at 67%

Thailand Requires cabinet approval, but likely able to obtain up to 49%

Malaysia 100%

Singapore 100%

Vietnam 100%


30

Market dynamics

Philippines

Given the lack of data availability, it is hard to make a measurement of industry data. The

Philippines is among the two countries in Asean that has fully liberalized its postal

industry, and we understand that the last-mile delivery industry is dominated by two

players, Philpost and LBC Express. Most of the customers from these two players are

walk-ins, ie, retail, where parcels from Metro Manila are delivered to other provinces in

the Philippines.

Based on the last reported number in its 2014 annual report, Philpost had posted a total

volume size of 222mn mails in 2014. We estimate that the Philippines as a whole

handled approximately 54mn in express and parcel items in 2015.

Fig. 56: Mail items handled by Philpost (mn)


Fig. 57: Size of both mail and courier volumes in 2015 (mn)


Cross-border inbound parcel deliveries are a norm for the Philippines, especially during

the peak Christmas season, given the high number of overseas foreign workers and

migrants sending Christmas gifts from abroad to their families at home. The local

customs estimates that 7.2mn boxes of inbound boxes by sea were handled last year,

and we think at least another 20% of that amount went by air cargo. The Philippines is

one of the unique markets in Asean in which culturally parcel sending has been one of

the norms during the Christmas season, even before online shopping gained traction. So

the level of confidence by consumers to ship valuable parcel goods from abroad is

already a common routine.

As credit card ownership remains relatively low, most of the e-commerce transactions

are still transacted on cash on delivery basis, and hence, as penetration of credit card

ownership increases, this bodes well for upside growth for online shopping penetration.

Malaysia

In Malaysia, the handling of regulated mail is provided by the national postal operator

Pos Malaysia, so this remains a monopolistic business. With Pos Malaysia being the

national provider, the last-mile provider too has also raked in the biggest market share in

the courier express delivery segment owing to its nationwide branch reach. We estimate

that from the courier side, Pos Malaysia accounts for 40% of the total local parcel /

express delivery volume, followed by GD Express as the second-largest player, at an

estimated 20% local market share.

More than 60% of Pos Malaysia’s courier delivery businesses are generated from its

walk in customers / retail, which can be viewed as C2C, with the remaining ones being

B2Cs.

370 389348

282240

179222

0

50

100

150

200

250

300

350

400

450

2008 2009 2010 2011 2012 2013 2014

Total

Regulated mail, 222

Parcels / express, 54


31

GD Express on the other hand is predominantly B2B, at an estimated 70%. Its online

shopping B2C customers’ share of revenue has grown from 10% to roughly 30% of its

revenue pie currently and this will continue to be the key revenue driver for GD Express.

GD Express’ base of retail customers is still fairly small, but since last year, the business

has grown aggressively following the launch of its prepaid packs.

Fig. 58: Mail and courier volume evolution (mn)

Source: Company data, MCMC, Nomura research

Fig. 59: Evolution of courier volumes(mn)

Source: Company data, MCMC

Fig. 60: Revenue of top 10 courier players in Malaysia (MYRbn)

Source: MCMC

Singapore

Given its small population base and country size, Singapore can be regarded as the

most mature postal services market in Asean, with an average mail received of 156

(including parcels and direct mail) annually. However, this is still relatively much lower

when compared to Japan at an average of 301 mails per annum.

Note however, we estimate that 70% of domestic mail relates to direct mail and

publications as well as business mail, offsetting the declining trend seen in domestic

frank / stamped mail.

Although Singapore’s postal market has been liberalized, Singapore Post continues to

dominate, with an estimated 95% market share. This is partly attributed to its highly

penetrated network coverage and its high mail sorting handling capacity volume.

Competition for the courier deliveries is more intense, notably on the international

segment, but even so, we believe Singpost continues to maintain a dominant market

share given its high delivery punctuality of 99.9-100%.

1,1

48

1,1

47

1,1

48

1,1

99

1,1

58

1,1

52

1,0

95

1,0

27

999

971

905

845

28

24

26 36

40

41

45

44

48

52

56

59

1,1

77

1,1

71

1,1

74

1,2

35

1,1

98

1,1

94

1,1

39

1,0

72

1,0

48

1,0

23

961

904

0

500

1,000

1,500

2,000

2,500

3,000

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Domestic mail International mail

22.9

18.220.4

30.7

34.6 35.837.5 37.8

41.7

46.048.3

5.4 5.8 5.4 5.8 5.4 5.3 6.6 6.3 6.4 6.5 6.8

0

10

20

30

40

50

60

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Domestic International

0.71

1.551.63

1.51 1.49

1.74

2.032.12

2.21

2.44

2.80

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Courier revenue (top 10 players)


32

Fig. 61: Domestic and international mail volume evolution (mn)


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


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.


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

http://www.jcampbell.com/Articles/2016_Campbell_J_Quantifying%20_Terminal_dues.pdf


35

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


Caribbean



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


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.


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%.


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.


40

Fig. 69: Some examples of last mile start-ups and fulfilment providers


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

services at home etc.

USD550mn (NSI Ventures,

Sequoia Capital, KKR, Capital

Group, Rakuten Ventures,

Northstar Group, DST Global,

Farallon Capital Management,

Warburg Pincus, Formation Group)

Tokopedia, flipit.com 1001–5000 https://www.go-jek.com/

Bizzy Indonesia Bizzy helps merchants make the shift to online and meet the logistical demands of B2B business customers, by

integrating multiple shipments from multiple vendors, known as ‘crossdocking’, through the fulfillment centre of partner

aCommerce.

na na na na

Kargo Indonesia Tech-logistic company in Indonesia providing businesses and people to have easy access and control to any logistic

services. Mostly inter-city shipments. Tracks cargo realtime on third party truckers' capacity. Jun-16 na Diano Nurjadin, East Ventures

na na kargo.co.id

HandyMantis Indonesia HandyMantis offers ojek (bike taxi) rides, but its main bread and butter is in courier and personal delivery services.

Prices can be based on distance travelled, time needed to execute a delivery, the nature of the order, or the number of

orders HandyMantis has in its queue at a given moment.

na na na na handymantis.com/

Mober Philippines Last-mile, point-to-point delivery through mobile app, bridging customers and drivers. Services retail customers as well

as businesses. Minimum fare is P500 for a van.

na na na na mober.ph/

City Delivery Philippines Primarily an online food delivery service from local restaurants, it has now started to offer delivery of non-food items as

well, partnering with pharmacies, flower shops, and supermarkets.

na na na na corporate.citydelivery.ph/


41

Assessing the competitive landscape on competition between start-ups and incumbent providers

Unlike the incumbent express delivery providers, which are also handling sizeable amount of goods from the B2B segment (where

margins are better), we argue that despite the proliferation of the last mile start-ups eating into the competition, most lack the scale

and volume size to operate efficiently. Of the list above, we gather that both Singapore’s Ninjavan and Indonesia’s Go-jek have

done well judging from the referral traffics generated (for the address link to track delivery shipment status) from the online

retailers.

To assess how impactful these start-ups are disrupting the incumbent players, we analyse its web traffic, notably on two key

numbers. Note that our traffic analyses are only confined to the list of countries relating to our coverage (Singapore, Malaysia,

Indonesia and the Philippines):

• Number of visits per month (adjusted after factoring in bounce rate)

• Number of referral traffic and the source of referral traffic

• Number of downloads


42

Fig. 70: Website traffic and referral sources

Source: Similiarweb, Nomura research

Type

Average

monthly

traffic

(Jun-Aug)

m-m

chg

average

visit

duration

(mins)

number

of pages

bounce

rate

% on

desktop

% on

mobile

Adjusted

traffic (after

bounce rate)

number of

referral traffic

number

of

referred

websites

1st

rank website address

2nd


3rd


4th


5th


Malaysia 6,106,630 16% 3:30 3.7 39% 38% 62% 3,708,316 1,427,032 463 30% Lelong 20% Ali 6% Lazada 1% Zalora

Pos Malaysia Incumbent 4,549,757 23% 2:00 2.4 36% 32% 68% 2,896,549 968,000 275 29% Aliexpress.com/Alibaba/Hkpost 24% Members.lelong.com.my 4% Lazada.com.my

Gdexpress.com.my Incumbent 464,888 -9% 3:43 3.9 44% 56% 44% 259,547 190,000 22 69% Members.lelong.com.my 12% Lazada.com.my 6% Zaloramalaysia.aftership.com 2% eshopelken.com 2% blogsmartusaha.com

Citylinkexpress.com Incumbent 152,817 -5% 4:41 10.2 26% 54% 46% 112,366 40,000 27 55% members.lelong.com.my 12% mightyutan.com.my 11% qoo10.sg 7% applications.marykayintouch.com.my 3% deccz.com

ninjavan.my Start-up 245,962 5% 2:48 2.8 57% 47% 53% 104,934 74,156 55 20% Lazada.com.my 12% members.lelong.com.my

skynet.com.my Incumbent 293,830 7% 1:47 1.8 68% 59% 41% 94,084 35,000 25 47% Lazada.com.my 34% courierw orld.com 6% askmebuy.com 4% w eb.ecargo.asia 4% courierw orld.net

abxexpress.com.my Incumbent 113,689 -9% 3:01 3.5 27% 54% 46% 82,675 30,000 12 69% members.lelong.com.my 18% askmebuy.com 7% kerryexpress.com 2% cn.cari.com.my 1% Ali Baba

nationw ide2u.com Incumbent 69,041 -3% 3:44 5.4 25% 57% 43% 51,449 15,000 8 92% members.lelong.com.my 2% blog.smartusaha.com 1% padiini.com 1% mypostonline.com.my 1% purefit.my

my.ta-q-bin.com Incumbent 68,343 -18% 1:51 2.2 63% 50% 50% 25,581 15,000 16 43% sellercenter.zalora.com.my 23% lazada.com.my 9% w iw aa.com 5% superbuy.com 5% purplemonkey.com

dhl.com.my Incumbent 87,445 55% 2:34 2.8 47% 53% 47% 46,206 25,000

Goget.my Start-up 31,398 49% 11:34 6.4 31% 85% 15% 21,806 25,000 9 71% Mudah.my 14% Redherring.com 7% 500.co 1% Producky.com 1% raisintheroof.com

thelorry.com Start-up 21,443 29% 1:34 1.7 62% 57% 43% 8,127 8,453 12 46% mudah.my 22% jobstreet.com.my 9% w ritehanded.com 6% angle.co 5% elixircap.com

ezycourier.com Start-up 4,826 -11% 1:39 2.0 32% 50% 50% 3,276 524

neonrunner.com Start-up 3,191 52% 4:42 2.9 46% 89% 11% 1,715 899 2 77% vulcanpost.com 23% expatgo.com

Indonesia 5,915,968 11% 2:46 2.5 29% 58% 42% 4,214,329 1,356,103 495 21% Lazada.co.id 4% mataharimall.com 2% global.cainiao.com 2% my.qoo10.co.id 0% singpost.com

jne.co.id Incumbent 3,850,000 8% 3:17 3.3 25% 58% 42% 2,874,410 870,000 261 23% lazada.co.id 18% ceknoresi.blogspot.com 4% inicaracek.com 4% denynp.blogspot.com 3% my.qoo10.co.id

Indonesia Pos Incumbent 1,637,913 20% 2:06 2.7 29% 59% 41% 1,166,399 345,000 177 23% Lazada.co.id 9% Ali Baba 2% singpost.com

tracking.acommerce.asia Start-up 154,857 -8% 4:12 2.3 44% 35% 65% 87,386 120,000 18 42% mataharimall.com 41% w agimanturbo.com 9% salestockindonesia.com 2% orami.co.th 2% dekoruma.com

Go-jek Start-up 273,198 29% 1:29 1.8 68% 52% 48% 86,134 21,103 39 10% flipit.com 8% go-food.co.id 5% lotteria.id

Philippines 2,538,902 -11% 4:03 3.8 36% 50% 50% 1,630,234 679,360 120 45% Lazada.com.ph 7% visa 3% superferryphilippines.com 1% pc.candyskyshop.com

LBCexpress.com Incumbent 1,206,000 -12% 3:11 2.7 31% 50% 50% 835,276 370,000 33 83% Lazada.com.ph 3% Onlinetrackingnumbers.com 2% metrow idecourier.com 2% cebugle.com 2% yello.ae

Xend Start-up 370,964 108% 4:06 3.1 38% 51% 49% 229,664 90,000 29 11% pc.candyskyshop.com 6% shirtly.supporthero.io 0% 0 0% 0 5% vfsglobal.co.uk

jrs-express.com Incumbent 163,683 26% 2:35 2.4 48% 55% 45% 85,459 45,000 12 18% seedow .net 17% fanshirt.co 11% footw earcollection.w eebly.com 10% lif.paperblog.com

myjamexpress.com Incumbent 6,470 -46% 3:09 3.1 25% 76% 24% 4,851 3,890 -

apcargo.com.ph Incumbent 9,274 178% 1:33 1.9 42% 61% 39% 5,418 470 1 100% onestopseller.w eebly.com 10% panpages.ph

2go.com.ph Incumbent 406,057 -20% 6:09 5.3 29% 54% 46% 287,813 130,000 39 31% new .xend.com.ph 24% ustraveldocs.com 13% superferryphilippines.com 6% visajourney.com

fastrack.ph Incumbent 72,096 -3% 3:56 3.1 38% 54% 46% 44,988 25,000 3 62% skype.com 38% michaelshut.blogspot.com 0% glendabelle.com

mober.ph Start-up 4,479 9% 3:47 6.6 20% 64% 36% 3,589 - -

expresstrack.net Incumbent 196,137 24% 1:27 1.6 69% 26% 74% 59,998 - -

air21 Incumbent 53,368 -45% 3:23 3.3 36% 63% 37% 34,177 15,000 3 38% mystart4.dealw if i.com 32% lina-group.com 30% amazon.com

express.2go.com.ph Incumbent 26,608 37% 11:53 7.7 25% 74% 26% 19,964 - -

w w w express.com.ph Incumbent 23,766 -65% 3:29 5.4 20% 89% 11% 19,039 - -

Singapore 2,916,412 1% 1:41 2.3 42% 55% 45% 1,684,666 1,733,940 389 59% aliexpress.com/ global.cainiao.com 4% banggood.com 4% qoo10.sg

Singapore Post related w ebsites Incumbent 2,865,798 2% 1:49 2.5 42% 55% 45% 1,654,450 1,714,072 377 60% aliexpress.com/ global.cainiao.com 4% banggood.com 3% qoo10.sg 3% hobbyking.com

Ninjavan.sg Start-up 26,098 -34% 0:51 1.4 58% 27% 73% 10,867 15,000 4 48% Qoo10.sg 22% Deagostini.sg 2% Seller.shopee.sg 2% docdroid.net 1% acommerce.atlassian.net

Gogovan.sg Start-up 18,078 -53% 2:55 2.6 24% 66% 34% 13,694 3,769 6 34% gogovan.com.hk 16% search.soso.desktop.com 15% gumtree.sg 13% couponstock.com 13% techincasia.com

qourier.com Start-up 6,438 363% 1:09 2.7 12% 39% 61% 5,654 1,099 2


43

We assume that those who would want to track the status of their parcel deliveries would

have to access the respective couriers’ website by keying in the consignment number.

There are two ways to go about this. Firstly, either by keying in the website address

directly at the browser address field or from a link provided by the online retailer, which

are typically provided within the content of the email of their receipt purchase. This refers

to the referral traffic source.

The caveat to this analysis is that most online shoppers may not have the sense of

urgency requiring them to monitor and track the whereabouts of the consignments. So

the results tabled above could be distorted by frustrated customers, who are only

assessing the parcel tracking function of the respective couriers’ websites. Nonetheless,

judging from the traffic size difference between each courier player already is a strong

indication what their market share size is in the last-mile delivery businesses.

As can be seen above, website traffic visitation as a whole and from referral traffic shows

a wide difference between incumbent players and the start-ups on demand delivery

providers. For instance, incumbent operators such as Singpost, LBC Express and Pos

Malaysia are seeing a monthly visitation of over a million vs the list of start-ups. Similarly,

traffic from referrals (such as online retail merchants) also shows a wide difference.

Judging from the difference in website traffic volume (either desktop or mobile traffic)

between incumbent last-mile providers and the start-ups players, it appears that they are

hardly making a big impact to the incumbent players. So, as far as competition stands, it

looks fairly manageable for the incumbent operators, in our view.

By size of market share, we estimate that Philippine start-up Xend appears to be gaining

a strong foothold in market share there. This is likely due to severe congestion traffic in

Manila, where conventional players would not have access to on-demand capacity. This

characteristic is exhibited in Indonesia as well.

The other notable start-up contenders that incumbent players have to be cautious of are

Singapore’s Ninjavan and Thailand’s Acommerce. The former appears to have a

sizeable operation in Malaysia with Lazada Malaysia as its key customer. Meanwhile, the

latter has noticeably made a decent market share of the last-mile delivery in Indonesia

with Matahari Mall as its key client.

Fig. 71: Market share estimate based on referral traffic


Fig. 72: Size of referral traffic over the last 90 days for the start-up players

Source: Similairweb, Nomura research

Other observations

• National postal providers appear to have the highest volume from Alibaba’s Ali Express

and logistics provider Cainiao, where Aliaaba owns a stake. This is natural, given the

low postal rate (Fig. 73), notably for cross-border e-commerce shipments weighing less

than 2kg.

• Lazada’s last-mile courier operation appears to be heavily concentrated in favour of

Philippine’s LBC Express (Fig. 74).

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


44

• In Malaysia, Lazada’s volume appears to be diversified to many players, but Pos

Malaysia still commands 50% of the last-mile volume. As Pos Malaysia does not fulfil

the pick-up at the merchant store effectively, Lazada’s delivery volume handled by Pos

Malaysia is approximately 25%, with GD Express ranked second, likely with a size of

18-20%.

Fig. 73: Last-mile providers for Ali Baba / Ali Express volume


Fig. 74: Last-mile providers for Lazada’s volume

Source: Similiaraweb, Nomura research

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



GD Express 23,446 Malaysia 2

Skynet 16,405 Malaysia 1

Ninjavan 15,015 Malaysia 1


45

Robocars and drones…

The interest is quite palpable

Lately, automated driving (ADAS cars) and use of drones have caught a lot of attention.

The rising interest is clearly evident, with corporations in every sector experimenting to

use these technologies in their value chains.

Drones: Last year, Walmart applied for drone licences to deliver shopping through the

skies. Amazon went one step further, having designed Amazon Prime Air, a future

delivery system which uses drones to deliver packages to customers in 30 minutes or

less. Their story video (link) where a drone saves the day by delivering football shoes to

a young girl on a match day seemed quite plausible.

In logistics, DHL has clearly taken the lead, by testing their drone delivery system (they

call it Parcelcopter) to complete over 130 autonomous loading and unloading procedures

in differing weather conditions and temperature fluctuations (including the freezing

Bavarian Alps). Within Asean, Singapore Post also did a successful test run for drone

delivery back in October 2015. The UK-based Royal Mail too is considering drones and

autonomous delivery trucks for its supply chain.

Automated vehicles: Our tech analyst Leping Huang sees a shift of focus towards

autonomous vehicles from traditional infotainment systems (Internet of Vehicles, IoV)

driven by a strong push by internet companies (Google) and new players (such as

Tesla). He expects the ADAS sector to post a 76% revenue CAGR over FY16-20F,

driven by stronger consumer interest for in-car infotainment as well as regulatory

requirements to reduce road accidents / traffic congestion. There are many forms of

ADAS available. According to the International Organization of Motor Vehicle

Manufacturers (OICA), there are six levels (L1-L6) of autonomous driving, with the levels

primarily distinguished by who has control over the steering wheel and pedals, and

when. Of note, some first-movers, such as Tesla, might already have their vehicles at

Level 3 or 4 automation.

Coming to its applications in logistics, DHL believes there is a strong case for suggesting

that the logistics industry will adopt self-driving vehicles much faster than most other

industries, primarily because of limited liability (i.e. transportation of goods vs

transportation of people) and the host of benefits which include safety and efficiency. In

Europe especially, substantial progress has been made with regard to inculcating AV

technology into supply chains, with numerous Swiss and German players developing

vehicles which automatically pick and transport goods and connect with other machines

to form a flexible conveyor system.

Yamato Holdings, a leading courier provider in Japan, is also conducting trial runs on

delivery services utilizing self-driving cars through the technology provided by DeNA. It is

noteworthy though that in Japan, under the current law, a human driver must be seated

at the driver seats nonetheless.

Assisted order picking using augmented reality: Augmented reality (or Mixed Reality as it

is sometimes called) combines both the virtual and real. One can see the real world around

them but it is enhanced by additional information that you see through the AR glasses.

Pokémon Go would be a perfect example of AR. But what could be its applications in

logistics? Optimized picking, warehouse planning, quality checks, dynamic traffic support,

freight loading, last mile delivery… the possibilities are endless. Let us look at one of the

applications - optimized parcel picking. DHL has developed a vision picking program (link)

where pickers wear smart glasses which visually display where each picked item needs to be

placed on the trolley (with the help of bar codes on shelves and boxes), thus enabling faster

picking with reduced error rate. In fact, we note a start-up, Smart Pick, which offers

customized order picking and sorting glasses for sorting through high volumes of small

packages and asserts a productivity increase of 25% and 60% error reduction. This is a

wireless solution, and all one needs is a printer and a wireless connection. Smart Pick claims

to setup the process in a mere 15 minutes. The system is already in use by a handful of

bakery warehouses in Belgium, where workers distribute dozens of types of bread to

hundreds of stores. Another Germany based start-up Picavi claims to deliver a market ready

logistics solution through the same technology.

https://www.amazon.com/b?node=8037720011

https://www.wired.com/2016/05/dhls-new-drone-can-ship-packages-around-alps/

http://fleetowner.com/technology/dhl-rolls-out-global-augmented-reality-program

http://www.smartpick.be/

https://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0ahUKEwir7s-Bj6DPAhVIKY8KHXu5D_QQFggbMAA&url=http%3A%2F%2Fpicavi.com%2Fen%2F&usg=AFQjCNFNQYv-kk2JEko6kN2YhboDGzCUqg


46

Internet of things (IoT) in logistics: We had mentioned earlier how consumer

preferences are moving towards omni channel retail where there is real time clear

visibility of the order, inventory and consumer choices (Fig. 90). That is achieved using

internet of things, but that’s not the only application of IoT. IoT can connect different

assets in a supply chain in a meaningful way, increasing the operational efficiency

multifold. Some applications include smart inventory management, real time inventory

visibility (allowing consumer to check whether the store has sufficient inventory), damage

detection (cameras attached to gateways to detect product imperfections), preventive

maintenance (sensors detecting the physical stress on a machine through temperature

or throughput measurement) and Smart warehouse energy management (efficient

control of HVAC systems to control costs). One IoT-enabled use case for the last mile

creates optimized collection from mail boxes. Sensors placed inside the box detect

whether it is empty and, if so, transmits a signal that is then processed in real time. The

delivery person can then skip that box for collection, thereby optimizing daily collection

routes. Overwhelming, yes, but this list is by no means exhaustive.

So what do we think?

Overall, we hold a positive view on the possibilities that use of technology can bring for

the logistics sector. However, we’re unsure about the timeline. Regulatory approval could

also be a stumbling block, notably for ADAS and drones, citing safety concerns. Some

applications (use of drones for last-mile delivery of small packages) should be quicker

and easier to implement than others (autonomous last-mile delivery trucks).

Also, we believe that these automation systems will come to mass logistics markets in

emerging economies at a slower pace, as emerging economies have certain inherent

infrastructure barriers, for which at least some modification to these automation systems

would be requisite. Strong demand side factors shall definitely attract investment this

way. Currently, we sit tight, keenly observing each development and contemplating its

impact on the industry and more specifically on the stocks we cover.


47

The current dynamics of Asean retail e-commerce We assess the dynamics of the Asean retail e-commerce landscape based on both

demand and supply aspects of things.

Demand dynamics

On the demand side, we see factors driving these forces will be mostly related to

demographic (young population) and macro-economic factors (rising middle income),

where Asean is deemed favourable to grow their internet and smart phone penetration

further. This will bring more upside for the societies in embracing online shopping more

into ones’ daily chores as the younger generation enters the workforce to start earning

their own income.

Fig. 75: Demographic breakdown of online shoppers (%)

Asean has a relatively younger age proportion of online shopping users compared to the US and Japan

Source: Statista

Fig. 76: Size breakdown of online shoppers categorized by age (mn)

Of which combined presents a size almost as big as the US

Source: Statista

Fig. 77: Median age vs GDP per capita

The scatter plot below denotes more upside to per capita income as younger generation enters the workforce

Source: Nomura, Statista

Fig. 78: …which would then translate to higher online spend as indicated by the user penetration rate

Source: Nomura, Statista

Although ecommerce transactions are already growing at a rapid stage, there are

barriers that are still capping the upside potential in demand for ecommerce activities.

Here, we highlight 2 key factors that would foster its growth.

Malaysia Indonesia Vietnam Singapore Philippines Thailand ASEAN US Japan China

16-24 28% 19% 37% 13% 31% 32% 30% 22% 12% 30%

25-34 54% 46% 40% 32% 33% 37% 41% 28% 30% 43%

35-44 13% 29% 16% 28% 22% 19% 20% 21% 25% 18%

45-54 4% 5% 5% 16% 9% 9% 7% 16% 19% 6%

55+ 1% 2% 2% 10% 5% 3% 3% 13% 14% 3%

Malaysia Indonesia Vietnam Singapore Philippines Thailand ASEAN US Japan China

16-24 3.5 4.2 11.8 0.4 8.2 3.5 31.4 36.2 9.7 120.2

25-34 6.6 10.3 12.6 0.9 8.5 4.0 33.9 37.5 9.9 121.2

35-44 1.6 6.4 5.1 0.8 5.7 2.1 36.7 38.7 10.1 122.1

45-54 0.4 1.0 1.6 0.4 2.4 1.0 39.4 39.5 10.3 122.5

55+ 0.1 0.3 0.5 0.3 1.3 0.3 42.1 40.0 10.5 122.0

Malaysia

Singapore

ThailandPhilippines

VietnamIndonesia

Japan

China

USA

0

10

20

30

40

50

60

20 25 30 35 40 45 50

Nom

inal G

DP

per

capita (

$ '000)

Median age

Malaysia

Singapore

Thailand PhilippinesVietnamIndonesia

Japan

China

USA

0

10

20

30

40

50

60

0% 20% 40% 60% 80%

Nom

inal G

DP

per

capita (

$)

User penetration 2016


48

1) Internet accessibility and affordability – key to embracing the internet more into daily life

A crucial pre-requisite to spur ecommerce growth is the availability of reliable internet

accessibility (both speed and network coverage) and its affordability. These factors, in

turn, would also boost the ownership levels of smart phones and allow users to embrace

the usage of smartphones in their daily lives.

While the internet penetration rates for developed countries like the US, Japan and

Singapore (the only country in Asean) are close to 90% (Fig. 79), Asean (except

Singapore) lags behind, with penetration ranging from 2% (Myanmar) to 71% (Brunei),

with major countries like Indonesia, Philippines , Thailand showing below 50%

penetration. However, data shows that internet penetration for Asean countries has

improved dramatically between 2010 and 2015, with figures almost doubling for some

(India: 8% to 27%, Thailand: 22% to 40%, Indonesia: 11% to 19% etc).

Fig. 79: Asean 6’s internet penetration vs others

Source: Internet live stats, Nomura research

Fig. 80: Asean 6’s smart phone penetration vs China and Japan

Source: eMarketer.com, Nomura Research

Broadband penetration in some countries in Asean remains relatively low, whereby a

huge gap currently exists between the urban and rural areas.

While ecommerce has been strongly embraced within most urban areas, we estimate

that this accounts easily up to 85-90% of total transactions, but in the rural areas this

may not be the case. Although the accessibility of internet may be there, the usage of

smartphones is largely limited to social media as a form of communication.

2) Enhancing online security to increase internet credibility

We see internet banking penetration as a key measure in explaining the maturity level of

the internet population base in executing online transaction activities / e-payments. A

high internet banking penetration rate suggests a relatively higher level of

trustworthiness instilled among the internet society in transacting online. It is therefore

important for facilitators of internet transactions - from merchants to the payment source

and delivery processes - to reinforce the online security level to prevent any form of

fraudulent transactions and monetary losses.

Credit card penetration is equally important given that it is a widely used payment option

not only for online but also for the traditional shoppers. In Asean, other than Singapore,

credit card penetration remains relatively low when compared to developed countries.

91% 88%

51% 51%44%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Japan USA China ASEAN 6 ASEANexcl.

Singapore

85%

51% 49% 47%39% 37% 37% 36%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Sin

ga

pore

Chin

a

Jap

an

Mala

ysia

Thaila

nd

Indonesia

Ph

ilipin

nes

Vie

tnam

Smartphone penetration in Asia


49

Fig. 81: Rapid growth of Internet banking penetration across Asean

% of respondents using internet banking via PC or smartphone

Source: McKinsey & Company

Fig. 82: Credit card penetration across Asean


Fig. 83: Across Asean, digital banking penetration is higher in the affluent and younger consumer segments

% of respondents using internet banking via PC or smartphone

Source: McKinsey & Company

Adoption of electronic-based submissions by government related entities, such as

payment of traffic summonses, online tax filings, are also important to instill online habits

to cut the inconvenience of traditional submissions.

Other measures to increase the level of confidence in promoting ecommerce (particularly

on fraudulent products) are the offerings of warranty coverages and an accommodative

return policy.

94

41

19

44

13

36

56

24

11

7

5

5

0 20 40 60 80 100

Singapore

Malaysia

Thailand

Vietnam

Philippines

Indonesia

2011

2014

262%

170%

142%

33% 33% 26%7% 6% 3%

0%

50%

100%

150%

200%

250%

300%

Jap

an

US

A

Sin

ga

pore

Thaila

nd

Chin

a

Mala

ysia

Ph

ilippin

es

Indonesia

Vie

tnam

Singapore Indonesia Malaysia Philippines Thailand Vietnam

Affluent 92% 57% 68% 35% 29% 70%

Mass affluent 93% 46% 52% 18% 27% 60%

Upper mass 96% 41% 41% 13% 19% 46%

Lower mass 95% 30% 29% 7% 15% 41%

21-29 100% 52% 57% 18% 22% 60%

30-39 98% 39% 44% 15% 26% 48%

40-49 95% 33% 35% 12% 13% 35%

50-64 81% 18% 35% 7% 5% 39%

Country Average 94% 36% 41% 13% 19% 44%

By income segment

By age group


50

Supply dynamics

On the supply side, this is more weighted on the accessibility of online merchants and

service offerings across its various sales channels.

We expect the enlisted points below to be a key driver in stimulating ecommerce sales

further:

1) Availability of online merchants. These can comprise:

B2B: Business to business.

A B2B model is a sale transaction platform between two business entities, typically

involving a manufacturer and a wholesaler. This presents the oldest form of ecommerce

which had been existent since the 70s before the web’s existence via EDI (Electronic

Data Interchange) through VANs (Value-Added Networks). Alibaba started off as a B2B

platform originally connecting importers and exporters across the globe.

The competition landscape in the B2B segment is less intense, given its niche business

catchment, which typically is served by/to the SMEs. The consumer behavioral changes

are not as dynamic as a B2C setup where currently, there is a flurry of intense

competition.

In Asean, the B2B model represents a small portion of e-commerce sales, unlike China,

which had achieved a GMV of CNY22bn in 2015, of which 51% alone is contributed by

Alibaba (Fig. 85).

Fig. 84: Revenue of SME B2B Platforms in China

Source: iresearch China

Fig. 85: Share of China’s main SME B2B E-commerce platforms by revenue

Source: iresearch China

13 15 16 19 22 25 28 31

13.1%

9.3%

16.8%14.6%

13.4%12.5%

11.9%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

0

5

10

15

20

25

30

35

2011 2012 2013 2014 2015 2016F 2017F 2018F

Revenue (bn yuan) (LHS) % Growth (RHS)

Alibaba51%

Global sources

5%HC360

4%JQW.com

5%

DHGate4%

Made-in-China.com

2%

Global Market Group

1%

Toocle1%

Others27%


51

Fig. 86: Some notable B2B names in Asia

Source: Similarweb.com, Nomura research

C2C: Consumer to consumer marketplace.

The original concept of C2C was selling used goods (eBay) to other consumers on an

auction mechanism and this has expanded rapidly since then to include the offerings of new

products directly from retail merchants. Also more commonly termed as marketplaces, it is an

online platform where various buyers and sellers can connect to transact goods.

Fig. 87: Asean’s biggest C2C names and traffic stats

Source: Similarweb, Nomura Research

Region Website name Total Visits in

past 6 months

85

China+ASEAN alibaba.com 389,700,000

China globalsources.com 3,900,000 B2B media company and facilitator of trade with Greater China. The core business facilitates

trade between Asia and the world using English-language media such as online marketplaces

(GlobalSources.com), trade shows, magazines, and apps.

China HC360.com 3,500,000 B2B e-commerce platform , to provide B2B industry information, supply , purchase , inventory

information, e-commerce network for companies looking to trade information portal of choice for

the industry.

China jqw.com 2,703,000 A Chinese commerce website platform , offers interactive features to business information

companies and enterprises , providing enterprise shops construction, enterprise business

information can be exchanged through this business platform.

ASEAN+US+UK dhgate.com 20,600,000 Based on figures from the last quarter of 2015, DHgate.com claims to have about 40 million

product listings from over 1.2 million Chinese suppliers and 10 million buyers from 230 different

countries.

Vietnam maid-in-vietnam.com 31,600 Vietnam B2B Website for business, online trading and export, helps international companies do

business and find suitable suppliers, manufactures in Vietnam.

India indimart.com 14,600,000 The online channel focuses on providing a platform to SMEs, large enterprises as well as

individuals. Economic Times designated it as India's largest online marketplace and world's

second-largest B2B marketplace after Alibaba.

Singapore exporters.sg 2,055,000 Global B2B marketplace with company directory, product catalogs, buying trade leads for

exporters, importers, manufacturers, suppliers and wholesalers.

USA manta.com 124,000,000

Korea ecplaza.net 465,000

Vietnam vnemart.com No traffic statistics available

Thailand ecthai.net No traffic statistics available

China diytrade.com 1,300,000 China Product Directory,B2B Trading Platform with China Suppliers, Manufacturers. Includes

searchable product directory, free website.

Asia etradeasia.com 42,300 E-Marketplace for Buyers and Suppliers, Asian Manufacturer & Suppliers

China maid-in-china.com 11,500,000 Facilitates trade between worldwide buyers and Chinese suppliers

Country Website name Total Visits in past

6 months (mn)

Avg Visit

Duration

Bounce

Rate

Top

Country %

Actual visits in

Base country

Type

1 Singapore carousell.com 4.7 7:12 38.1% 58.8% 2.8 C2C

2 Singapore ebay.com 1,000.0 7:01 34.7% 0.2% 2.0 C2C

3 Singapore gumtree.sg 1.5 6:32 34.7% 86.3% 1.3 C2C

4 Malaysia mudah.my 11.3 10:02 26.8% 94.1% 10.6 C2C

5 Indonesia olx.co.id 20.9 11:31 23.9% 95.0% 19.9 C2C

6 Indonesia bukalapak.com 26.7 7:40 37.5% 96.3% 25.7 C2C

7 Philippines olx.ph 15.6 9:32 27.1% 87.9% 13.7 C2C

8 Philippines priceprice.com 6.9 3:19 42.0% 33.2% 2.3 C2C

9 Philippines ebay.com 1,000.0 7:01 34.7% 0.3% 3.0 C2C

10 Philippines ebay.ph 1.6 5:22 32.9% 60.6% 1.0 C2C

11 Thailand kaidee.com 11.9 9:53 29.5% 98.0% 11.7 C2C

12 Thailand ebay.com 1,000.0 7:01 34.7% 1.0% 10.0 C2C

13 Vietnam 5giay.vn 5.2 5:24 46.3% 98.9% 5.1 C2C


52

B2C: Business to consumers.

This can comprise a combination of bricks and mortar setup branching out to online

channels (example Dell, for online shopping of desktop pcs) or a pure online retailer

setup with no physical store. The extension of B2C has now expanded to B2B2C, and

this has been the growth driver for ecommerce over the recent years in South East Asia.

The most common example of the B2B2C is Lazada, which collectively offers various

merchants in its website platform for consumers to purchase from online.

Fig. 88: Asean’s biggest B2C names and traffic stats

Source: Similarweb, Nomura Research

2) The Omni channel concept is proving necessary to stay relevant on the changing consumer purchasing behaviour

The omni-channel retail approach is essentially combining both traditional and online

retail and ecommerce as a sales distribution strategy.

Fig. 89: Channels of retailing today


Country Website name Total Visits in past

6 months (mn)

Avg Visit

Duration

Bounce

Rate

Top Country % Actual visits in

Base country

Type

1 Singapore qoo10.sg 8.1 7:20 39.1% 85.8% 6.9 B2C

2 ASEAN amazon.com 2,100.0 6:28 35.7% 2.0% 42.0 B2C

3 Singapore taobao.com 547.2 10:40 28.4% 0.7% 3.8 B2C

4 Singapore lazada.sg 2.8 4:58 39.2% 78.3% 2.2 B2C

5 Singapore tmall.com 288.6 8:36 33.0% 0.7% 2.0 B2C

6 Singapore zalora.sg 1.4 7:14 33.6% 84.2% 1.2 B2C

7 ASEAN aliexpress.com 502.3 9:46 32.2% 2.0% 10.0 B2C

8 Malaysia lazada.com.my 16.4 6:52 45.9% 91.2% 15.0 B2C

9 Malaysia lelong.com.my 6.4 7:04 34.9% 83.1% 5.3 B2C

10 Malaysia taobao.com 547.2 10:40 28.4% 1.0% 5.5 B2C

11 Malaysia 11street.my 5.6 5:41 47.7% 94.4% 5.3 B2C

12 Malaysia zalora.com.my 2.2 8:54 35.1% 88.0% 1.9 B2C

13 ASEAN alibaba.com 445.5 2:33 70.7% 4.3% 19.2 B2C

14 Malaysia tmall.com 288.6 8:36 33.0% 1.0% 2.9 B2C

15 Indonesia tokopedia.com 39.5 10:57 30.7% 97.0% 38.3 B2C

16 Indonesia lazada.co.id 35.3 5:34 52.6% 96.7% 34.1 B2C

17 Indonesia elevenia.co.id 30.0 2:32 63.2% 98.9% 29.7 B2C

18 Indonesia blibli.com 20.1 2:23 71.4% 98.1% 19.7 B2C

19 Indonesia bhinneka.com 5.2 4:19 49.0% 97.0% 5.0 B2C

20 Indonesia jakartanotebook.com 3.9 7:55 36.3% 96.3% 3.8 B2C

21 Indonesia zalora.co.id 3.4 8:18 37.1% 96.8% 3.3 B2C

22 Philippines lazada.com.ph 33.0 5:33 53.1% 95.4% 31.5 B2C

23 Philippines zalora.com.ph 2.1 8:03 38.2% 93.3% 2.0 B2C

24 Philippines metrodeal.com 3.2 4:57 48.1% 82.6% 2.6 B2C

25 Thailand lazada.co.th 28.9 4:57 55.4% 98.1% 28.3 B2C

26 Thailand weloveshopping.com 6.0 3:36 49.5% 96.6% 5.8 B2C

27 Thailand advice.co.th 2.7 12:10 29.1% 97.0% 2.6 B2C

28 Vietnam lazada.vn 24.4 4:12 58.8% 99.1% 24.2 B2C

29 Vietnam thegioididong.com 17.4 4:32 42.3% 98.2% 17.1 B2C

30 Vietnam tiki.vn 10.6 5:01 49.6% 98.9% 10.5 B2C

31 Vietnam sendo.vn 9.6 5:36 39.1% 98.9% 9.5 B2C

32 Vietnam fptshop.com.vn 7.2 3:30 50.1% 98.7% 7.1 B2C

Customer Brick and mortar store Customer E-tailer (online and 24 hours) Customer Store (brick and mortar and online)

Customer Brick and mortar store

Traditional channel Multi Channel Omni channel


53

With the greater adoption of internet, which is also driven by the increase in smartphone

penetration, consumers are combining both the internet and physical store visits as part

of their shopping experience.

This forms an evolutionary behavior pattern in consumerism (Fig. 90), where different

channels are used throughout the shopping experience -product evaluation (through

online research and offline physical store visits), ordering, payment, collection, warranty

defects.

More time is now spent on conducting research online (comparing prices and user

feedback) and this also includes visits to the physical store for the product feel.

Depending on which offers hold the most competitive pricing and the product type itself,

the transaction can end up either through online or a visit to a physical store.

Fig. 90: An omni-channel viewpoint of consumers today

Source: Nomura research, DHL

As consumers embrace online shopping habits strongly, we see that most retailers

cannot solely rely upon a traditional bricks and mortar setup to grow their business. This

makes the Omni channel setup (multi-channel) vital to maximize sales penetration to the

consumers and at the same time facilitates a pleasant seamless shopping experience

ensuring that customer loyalty is retained.

As retailers adopt the omni-channel approach, the supply chain infrastructure will also

need to be more accommodative to the multi-channel distribution points in ensuring that

– through the modern digital technology – inventory management is fully optimized at a

faster pace across all channels. The revamp to the omni channel approach will be

unconventionally upstream focus (pulling inventory instead of pushing), seamless, in a

compressed manner (maximizing inventory yields), thus, efficiently minimizing inventory

levels.


54

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

Source: DHL-IDC Manufacturing Insights Survey, 2015

71%

64%

59%

54%

52%

0% 10% 20% 30% 40% 50% 60% 70% 80%

Fast delivery

Product variety and availability

Enhanced search functionality

Flexible delivery options

Easy return and exchange


55

What are the survey respondents saying?

Last year, DHL IDC conducted a survey with 56 companies in Asia comprising a mix of

companies across all segments notably within the consumer goods, retail sectors. The

five charts below offer an interesting perspective on what they have to say on omni-

channel supply chain management.

Fig. 93: What are the order fulfilment models that you currently offer and plan to offer in the next 1–3 years?

Most of the last-mile delivery processes are still directly to home with some at the store up points


Fig. 94: Which fulfilment models for online sales do you currently use and plan to use in the next 1–3 years?

Back end supply chain are almost equally from various points, but most inventories are still offered at the store


Fig. 95: Have you or are you looking to invest in these areas of your supply chain?

Most have started digitizing their supply chain


Fig. 96: What are the top challenges for implementing omni-channel strategy?

Cost remains the key issue given the lack of economies of scale as the key pushback


18%

21%

44%

48%

56%

63%

28%

31%

22%

26%

10%

19%

54%

48%

35%

26%

34%

18%

0% 50% 100%

Online order & pick up froma locker box

Online/mobile order & pickup at warehouse

Online/mobile order & pickup in store

Mobile order & direct tohome

In-store order & direct tohome

Online order & direct tohome

Currently offered 1-3 years No plans

33%

37%

47%

48%

34%

25%

25%

20%

33%

38%

28%

32%

0% 50% 100%

Dedicated distributioncenters for online

Direct ship frommanufacturer

Shared distribution centersfor online & offl�ine

Stores

Currently offered 1-3 years No plans

38%

43%

52%

54%

54%

55%

63%

29%

15%

17%

14%

15%

14%

13%

33%

41%

31%

32%

31%

31%

24%

0% 20% 40% 60% 80% 100%

Predictive logistics techniques

Cloud-based logistics/supplychain services

Same-day deliveries

Click-and-collect models

Digitalization of stores

Mobility-driven shopping

Automation in distributioncenter

Started/Implemented Planned Nothing planned

13%

13%

14%

14%

21%

0% 10% 20% 30%

Cost pressure

Current infrastructure andprocess challenge

Low priority due to otherinitiatives

Lack of metrics or incentives

Business model to justify ROI


56

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


The survey concludes that many are aware of the importance of the omni-channel supply

chain management given the rapid evolution of consumer behaviour as they embrace

the internet more deeply into their daily lives. And as growth expectations in online

shopping remain robust, the omni channel supply chain approach must not be ignored.

3) Availability of mobile shopping apps and data analytics

The increase in smart phone penetration from the increased ownership affordability has

brought a pick-up in mobile shopping app downloads.

Consumers are spending more time online through their smart phones compared to the

desktops (excluding work-related matters). Their overall online shopping experience

behaviour too has been more become more demanding, as they are only one swipe and

click away from switching to a competing retailer. No wonder then that some retailers are

failing to keep up.

With social media usage on the rise, this has also become a powerful marketing platform for

a more personalized marketing touch and ensures a more effective target marketing strategy.

Cultivating data analytics is proving to be a crucial tool to exploit to engage customers.

4) The need to stimulate online entrepreneurship at rural areas

Creation of an online economy that goes beyond the urban areas to rural areas can be a

key factor in stimulating take-up of ecommerce activities. However, we think this will take

time to materialize in a bigger way as development in the rural areas typically lags that in

urban areas. Rising urbanization too has shifted growth away from the rural areas.

In China, we understand from our Internet analyst, Jialong Shi, that Alibaba and JD.com

along with other e-commerce players, have begun to explore rural markets. Participation in

ecommerce activities is a two-way model - by selling and buying to and by

farmers/craftsmen/local producers. To increase penetration into these areas, internet

companies are setting up service stations in villages, which at the same time act as agents

facilitating the transactions (shopping, payment and collection) with the locals.

In Asean as far as we are concerned, the setup of such stations in the rural areas has not

materialized in a big way and we think embracing such habits of transacting online can only

be relied on the younger demographic group to increase the penetration of online retail

shopping in the rural areas – partly attributed from the education system itself.

7%

10%

14%

14%

22%

33%

11%

23%

18%

24%

11%

13%

Multibrand onlineretailers (e.g., Zalora)

Independentonline stores

Online marketplaces(e.g., Alibaba)

Multi-channelretailers (e.g., Walmart)

Distributors

Retail stores

Current channel Mix

Expected Growth rate


57

Part of this is also due to the fact, that in the urban areas alone, there is still a lot of

potential to increase the ecommerce revenue pie and this has made the private sector

rather reluctant to invest into the rural areas, thus leaving the push to increase online

entrepreneurship to the state / government levels.

5) Cash/credit card swipe on delivery payment options

The popularity of cash on delivery options by online marketplaces has also spurred the

growth of online purchases, as this gives some sense of security in ensuring that goods

are in order and exchanged at the same time with the cash payment / credit card swipe.

Aside from the added security comfort, the implementation of cash payment on delivery

options has been successful particularly in countries where credit card/ debit card

penetration rates are relatively low, such as in Indonesia, Thailand, Vietnam and the

Philippines.

6) Timeliness and accessibility of product deliveries

Given the rapid growth of online shopping activities, delivery volume of parcels globally

has picked up very strongly. This ecommerce revolution has given further empowerment

to the consumers as expectations of a pleasant shopping experience are continuously

inching higher. The last-mile delivery forms part of the final process of the online

shopping experience and is also proving to be a crucial process with lead times also

getting shorter. An unsatisfactory service, where delays in receiving the merchandise are

the likely occurrences, could jeopardize the entire online shopping experience for the

customers, especially when shipping costs are paid for.


58

Asean e-commerce behaviour characteristics In this section, we provide some interesting analysis on Asean’s e-commerce

characteristics, consumer behaviour and where they stand against other developed

nations, such as Japan and the US, which are far more developed economically. As

Asean is a part of Asia, sharing similar cultural values, we lean our focus more on

comparing our analysis with Japan.

Fig. 98: Headline ecommerce stats

* For retail website traffic, we have taken the total number of visits on top 10 websites in a country in the past 6 months.

**Frequency implies the total number of visits on top 10 retail websites in past 6 months divided by number of internet users in the country.

***Bounce rate implies the percentage of visitors to a particular website who navigate away from the site after viewing only one page.

Source: Euromonitor, Internet live stats, Similarweb, Statista, PWC, Alexa, Nomura Research

Higher propensity to spend key to growing e-commerce sales

Countries with high retail spending per pax are more inclined to frequently shop online

(Fig. 99), as suggested by their higher ARPUs (Fig. 100).

In Asia, Both Japan and Singapore, which have the highest retail sales per capita, have

embraced the routine of online shopping deeply and we would eventually see this to be

the case for the rest of Asean on the increase in propensity to spend.





Country Population

(2015) (mn)

Internet

Users

(2015)

(mn)

Internet

Penetration

ratio

ARPU

(USD)

Retail

sales

($mn)

2015

Ecommerce

sales ($mn)

2015

Ecommerce

sales as a %

of retail

sales (2015)

Number of

users

transacting

online

(mn)

Retail

website

traffic in

past 6

months

(mn)

Frequency of

retail site

visit per

internet user

(times)

Bounce

rate (%)

USA 322 284 88% 1,657 2,948,165 270,969 9.2% 163.55 2,993 10.5 37.2%

Singapore 6 5 82% 360 23,807 980 4.1% 2.72 29 6.3 34.9%

China 1,376 706 51% 743 2,120,530 293,045 13.8% 394.38 1,293 1.8 41.7%

Japan 127 115 91% 878 960,296 69,074 7.2% 78.63 1,204 10.5 38.4%

Vietnam 93 47 51% 22 89,058 698 0.8% 31.53 117 2.4 47.2%

Thailand 68 27 40% 131 92,676 1,441 1.6% 11.02 90 3.3 46.0%

Indonesia 258 50 19% 76 145,830 1,682 1.2% 22.17 183 3.7 45.2%

Malaysia 30 21 68% 42 49,981 519 1.0% 12.24 62 3.0 40.0%

Philippines 101 43 42% 14 73,352 354 0.5% 26.01 65 1.5 41.5%

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)


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

($)



59

Despite low internet penetration, internet users in Asean are frequent visitors on online retail websites

We dug out the past six months’ visitor traffic for the top-10 retail websites in each

country under analysis. Fig. 101 plots the internet penetration vs number of online

website visits per pax i.e. visits/population ratio (by country). For countries like the US

and Japan, the visits/population ratio is in excess of 9x per pax. In contrast, Asean

remains under-penetrated, with the existing users also being relatively infrequent.

Fig. 102 shows, penetration rate (Y axis) vs the number of times each person with

internet access has been to the retail websites in the past six months (X-axis) within

Asean. One can see that China and Malaysia, despite falling in high penetration

quadrant, have low visitor frequencies. In contrast, in the thinly penetrated Indonesia

(19%), visitor frequency is above average (3.7x). One can therefore interpret, that with

every 1% increase in penetration in Indonesia, the online retail traffic could increase by a

minimum of 3.5%. Thus, a consistent rise in penetration will lead to a multi-fold

increase in online retail traffic.

Fig. 101: Asean remains under-penetrated with relatively infrequent visitor traffic by measure of percentage of population

Source: Nomura research, Internetlivestats, similarweb

Fig. 102: However, within Asean, the frequency statistics are encouraging

Source: Nomura research , Internetlivestats, similarweb

Asean consumers are merely browsing, given the high bounce rate

The quadrant in Fig. 103 shows that internet users in Japan and United States are

regular online shoppers, given their short browsing time (indicating they know what to

buy) and low bounce rate. This is also evident by their higher ARPUs as shown in Fig.

104.

On the other hand, those in Asean (including China), which have higher bounce rates,

are just browsing, and are undecided on what to buy.

Singapore online shoppers — which are regular shoppers (as suggested by the low

bounce rate) — are notably spending much more longer browsing, suggesting that they

can be selective on deals, noting the much lower ARPUs (of USD360 annually) when

compared to the US (at USD1,657), Japan (USD878) and China (USD743).

Singapore

Malaysia

Philippines

ThailandIndonesia

India

VietnamChina

JapanUSA

0

2

4

6

8

10

12

0% 20% 40% 60% 80% 100%

Vis

its p

er

inte

rnet user

Internet penetration rate as % of population

SingaporeMalaysia

Philippines

Thailand

Indonesia

India

Vietnam

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

0 1 2 3 4 5 6 7

Inte

rnet

penetr

ation r

ate

as %

of

popula

tion

Frequency of visits per person

High penetration low frequency

Low penetration low frequency

Low penetration high frequency

High penetration high frequency


60

Fig. 103: Online shopping habit quadrant

Source: Nomura research, Internetlivestats, similarweb,

Fig. 104: Average revenue per user (USD per annum)

Source: Statista, Nomura research

Based on Google’s consumer barometer survey 2016 (Fig. 105), Singapore internet

users have the highest proportion of international purchases (also given it’s a relatively

small country), with Thailand and Malaysia ranked 2nd

and 3rd

respectively.

One strong reason why Singapore has a high degree on international online shopping

habits is also due to its low shipping costs given it is a leading transit hub for network

carriers. Amazon, for instance, provides free shipping to Singapore and Mexico for some

selected entitled goods – provided that the order amount is more than USD125 (for

selected items) and does not exceed a certain size dimension (45.72 cm x 35.56 cm x

20.32 cm) and weight (less than 9kg).

Fig. 105: Respondents who purchase products online at least once a year from foreign countries

Source: Google’s Consumer Barometer Survey 2016

The tax loophole that online cross-border creates has also driven e-commerce sales

The rapid adoption of online shopping over the years has made tax authorities realize

that there is a tax loophole that consumers are taking advantage of to avoid paying

VAT/GST if a similar product were to be purchased locally. This could be a hindrance for

cross-border ecommerce growth in the future in the event there is a greater enforcement

by tax authorities to not let any tax revenue potential slip.

Singapore

MalaysiaPhilippines

Thailand Indonesia

India

Vietnam

China

JapanUSA

30%

32%

34%

36%

38%

40%

42%

44%

46%

48%

50%

4:40 5:52 7:04 8:16

Bounce r

ate

(%

)

Duration (minutes)

Knows what to buy and orders quickly

Wants to shop but browsing for the best

deals

Just browsing if there's anything interesting

Quickly browsing to see any good deals

1,657

878743

360

131 76 42 22 14

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

US

A

Jap

an

Chin

a

Sin

ga

pore

Thaila

nd

Indonesia

Mala

ysia

Vie

tnam

Ph

ilippin

es

67%

49% 48%

38%33% 32% 31%

14%

4%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Sin

ga

pore

Th

aila

nd

Ma

laysia

Ph

ilippin

es

Vie

tnam

Chin

a

US

A

Jap

an

Indonesia

https://www.amazon.com/gp/help/customer/display.html?nodeId=201214790


61

To put this in perspective, last year’s Singapore’s online retail sales estimated by

Euromonitor were USD980mn. Assuming 60% of those were cross border transactions,

as the country itself is really small, would mean that as much as USD41mn of GST could

be realized (at 7%).

Singapore has a high GST tax free cap limit of SGD400 of the receipt value of the

purchase (CIF) before the product is charged GST. Another way to avoid customs,

online shoppers would make sure shipments come in small packages so they don’t get

checked by customs. In 2015, only 4.5mn parcels went through customs and had to pay

GST, which is a small amount for a nation that receives an estimated average of 6

parcels and 130 postal items per person.

Among the Asean countries, Singapore and Malaysia have the lowest tax custom

charges based on a study by AT Kearney for a USD100 dress.

Fig. 106: Number of parcels cleared at the Parcel Post Customs in Singapore (mn)

Source: data.gov.sg

Fig. 107: The total customs value on a USD100 dress by country

Source: AT Kearney

1.18 1.15 1.19 1.35 1.43 1.53 1.56

2.18

2.60

2.99

3.65

4.83

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

$44

$39

$32$29

$6

$00

10

20

30

40

50

60

Indonesia

Thaila

nd

Vie

tnam

Ph

ilippin

es

Mala

ysia

Sin

ga

pore

Value-added tax Duty Other tax

https://www.ica.gov.sg/page.aspx?pageid=93


62

The Japan angle

How ageing Japan shifts preferences to convenience

With consistently falling real wages in Japan, Asia’s most developed nation’s

consumption level has been stagnating. Plotting on a time series chart we find that in the

long term, both the total annual household expenditure (Fig. 108) and more specifically

the expenditure on clothes and footwear (to measure the retail side) have been on a

slide (Fig. 109). Japanese customers are becoming more cost-conscious, preferring

private label, more economical options. This, combined with demographic factors of an

ageing population, explains part of why the consumer behaviour in Japan is changing.

Fig. 108: Annual household expenditure (12mma) has declined for 19 consecutive months

Source: CEIC, Nomura Research

Fig. 109: For first 7 months Y-Y, expenditure on clothes and footwear is down 5%


Japan's shoppers are showing less interest in large shopping sprees and more interest

in convenience. The reason partly lies in the ageing population of Japan as well as the

increasing number or working women who have less time to go shopping for the family

or for their pleasure. This is visible in the consistent decline of total departmental store

sales in Japan (Fig. 110) and the steady rise in the ratio of Internet sales out of total

retail sales (the red concave curve in Fig. 111). An EY report on Japan retail published in

2014 (link) estimated the online retail market will grow at an annual rate of 9% (2014-

2018) as opposed to only 0.3% for the store-based retail market.

Fig. 110: Total departmental store sales in Japan are on a consistent declining trend


Fig. 111: In Japan, Internet retail ratio has grown at a CAGR of 13% since 2010

Source: Euromonitor, Nomura Research

3,300

3,400

3,500

3,600

3,700

3,800

3,900

Jul-0

1

Jul-0

2

Jul-0

3

Jul-0

4

Jul-0

5

Jul-0

6

Jul-0

7

Jul-0

8

Jul-0

9

Jul-1

0

Jul-1

1

Jul-1

2

Jul-1

3

Jul-1

4

Jul-1

5

Jul-1

6

Annual Household Expenditure (12 month movingaverage)

Long term mean

(JPY '000)

85

95

105

115

125

135

145

Jul-0

0

Jul-0

1

Jul-0

2

Jul-0

3

Jul-0

4

Jul-0

5

Jul-0

6

Jul-0

7

Jul-0

8

Jul-0

9

Jul-1

0

Jul-1

1

Jul-1

2

Jul-1

3

Jul-1

4

Jul-1

5

Jul-1

6

Living Expenditure Index (2015=100): Clothes andFootwear

Long term mean

5,500

6,000

6,500

7,000

7,500

8,000

8,500

Jul-0

3

Jul-0

4

Jul-0

5

Jul-0

6

Jul-0

7

Jul-0

8

Jul-0

9

Jul-1

0

Jul-1

1

Jul-1

2

Jul-1

3

Jul-1

4

Jul-1

5

Jul-1

6

Department Stores Sales Nationwide (12 monthmoving average)

(JPY bn)

4%5%

6%6%

7%8%

9%

10%

10%

11%

13%

20%

26%

32%

37%41%

44%46%

48%50%

0%

10%

20%

30%

40%

50%

60%

0%

2%

4%

6%

8%

10%

12%

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Internet retail as a % of total retail

Mobile retail as a % of total internet retail

http://www.ey.com/Publication/vwLUAssets/EY-Shifting-from-consumer-to-experience/$FILE/EY-Shifting-from-consumer-to-experience.pdf


63

Online retail is the perfect avenue

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


Fig. 113: Total internet retail market share of top 10 companies in Japan


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%


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.


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%


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

Sales function (%) Production (high-value

added products)

(%)

Production

(ubiquitous products)

(%)

Logistics function (%)

https://eurasiagroup.bluematrix.com/sellside/AttachmentViewer.action?encrypt=009c9184-4c8f-4b0f-9f2f-c39d898429a8&fileId=18482_d0bcb84c-803d-4e3f-a57a-cf290798cd59&isPdf=false


67

Fig. 118: TPP members

Source: TPP

To recap - according to the Office of the United States Trade Representative - the 30

chapters of the TPP agreement aim to "promote economic growth; support the creation

and retention of jobs; enhance innovation, productivity and competitiveness; raise living

standards; reduce poverty in the signatories' countries; and promote transparency, good

governance, and enhanced labor and environmental protections”.

According to Jetro’s survey (Fig. 119), Singapore and Malaysia, which are also members

of the TPP, are also expected to see more economic integration. We see these two

countries as likely to compete for market share of the transit volumes to/ from New

Zealand and Australia as trade tariffs are reduced/ removed.

Of particular note (Fig. 119), Vietnam is also expected to see more economic integration

in the e-commerce space (after New Zealand and Australia), which ultimately would

benefit the last-mile delivery players.

Fig. 119: Expectations for TPP negotiations (top 10, multiple answers)

Source: Jetro

….and cross-border online shopping

Aside from the higher economic propensity upside as a result of more FDIs into Asean,

with tariffs potentially removed / reduced from the TPP agreement, this is likely to

stimulate cross-border online shopping activities, which ultimately would benefit the last-

mile logistics providers.

Australia Mexico

Brunei New Zealand

Canada Peru

Chile Singapore

Japan United States

Malaysia Vietnam

Answer Total Mfg Non-mfg

1 Facilitation of trade and customs authorities 59 68.3 49.5 Vietnam

(65.8)

Malaysia

(60.2)

Singapore

(56.6)

2 Market Access for Goods 33.6 34.2 32.8 New Zealand

(59.7)

Australia

(39.6)

Vietnam

(34.5)

3 Rules of origin (Accumulation rules of origin that

enable the value and processing to be added

among multiple contracted countries, etc.)

25.4 32.1 18.6 Malaysia

(28.2)

Vietnam

(27.5)

Singapore

(25.9)

4 Temporary entry of the business person 18.3 15.3 21.4 Singapore

(24.3)

Vietnam

(19.3)

New Zealand

(16.10

5 Service (crossing border service, financial service

and telecommunication service)

15.7 7.9 23.6 New Zealand

(29)

Singapore

(19.6)

Vietnam

(15.80

6 Investment (indiscriminate principles between

investors and resolution of conflict procedures,

etc.)

10.1 3.6 16.8 New Zealand

(16.1)

Australia

(14)

Vietnam

(9.7)

7 Intellectual property 9.8 8.5 11.1 New Zealand

(24.2)

Singapore

(11.1)

Australia

(10.4)

8 Competition policy and state-owned enterprise 8.1 5.2 11.1 New Zealand

(14.5)

Malaysia

(11.2)

Australia

(7.9)

9 e-commerce 7.3 5.8 8.9 New Zealand

(25.8)

Australia

(9.8)

Vietnam

(6.3)

10 TBT(Technical Barriers Trade) 4.5 4.9 4.1 New Zealand

(16.1)

Malaysia

(4.9)

Singapore

(3.7)

Top 3 countries

https://ustr.gov/about-us/policy-offices/press-office/press-releases/2015/october/summary-trans-pacific-partnership


68

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.


69

Fig. 120: Yamato’s and CJ express acquisitions (last mile / cross border logistics focus)


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.










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.



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


70

Fig. 121: Alibaba and Softbank’s acquisition trail (online shopping)


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


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


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


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.

PNL summary FY-2 FY-1 FY +1 FY-2 FY-1 FY +1 FY-2 FY-1 FY +1 FY-2 FY-1 FY +1

Revenue 197 220 266 1,467 1,713 2,161 7,056 7,686 9,015 920 1,152 1,420

COGS (156) (174) (209) (1,232) (1,525) (1,858) (6,066) (6,697) (7,572) (696) (931) (1,164)

EBITDA 40 46 57 235 188 303 991 989 1,443 223 221 256

Core net income 29 35 43 104 67 112 590 491 797 145 139 153

Margins (%) FY-2 FY-1 FY +1 FY-2 FY-1 FY +1 FY-1 FY-1 FY +1 FY-2 FY-1 FY +1

EBITDA 21 21 21 16 11 14 14 13 16 24 19 18

Core net income 15 16 16 7 4 5 8 6 9 16 12 11

Cash ROIC 27 28 27 14 12 11 20 19 23 14 10 11

Cost compositions FY-2 FY-1 FY +1 FY-2 FY-1 FY +1 FY-1 FY-1 FY +1 FY-2 FY-1 FY +1

Salary (93) (106) (131) (785) (849) (872) (2,340) (2,598) (3,011) (263) (300) (340)

Transport (37) (41) (50) (203) (396) (387) (1,702) (1,907) (2,174) (366) (535) (686)

Utilities and rent (6) (6) (6) (150) (185) (198) (1,283) (1,395) (1,665) (66) (95) (139)

Others (20) (21) (22) (93) (95) (401) (573) (613) (497)

Royalty fee (169) (184) (225)

Proportion (%) FY-2 FY-1 FY +1 FY-2 FY-1 FY +1 FY-1 FY-1 FY +1 FY-2 FY-1 FY +1

Salary 60% 61% 63% 64% 56% 47% 39% 39% 40% 38% 32% 29%

Transport 24% 23% 24% 16% 26% 21% 28% 28% 29% 53% 58% 59%

Utilities and rent 4% 3% 3% 12% 12% 11% 21% 21% 22% 10% 10% 12%

Others 13% 12% 11% 8% 6% 22% 9% 9% 7%

Singapore Post (SGDmn)LBC Express (PHPmn)Pos Malaysia (MYRmn)GD Express (MYRmn)

FY-2 FY-1 FY +1 FY-2 FY-1 FY +1 FY-1 FY-1 FY +1 FY-2 FY-1 FY +1

MYRmn MYRmn PHPmn SGDmn

Last mile 197 220 266 Mail 742 905 831 Retail logistics 3,674 4,091 4,828 Postal 565 562 606

Courier 480 556 702 Corporate logistics 1,968 2,199 2,721 Logistics 465 626 737

Retail 194 198 204 Remittance 1,414 1,396 1,466 eCommerce 27 98 244

Others 51 54 55 Inter-segment (137) (135) (166)

KLAS - - 369

Total 197 220 266 Total 1,467 1,713 2,161 Total 7,056 7,686 9,015 Total 920 1,152 1,420

Percentage mix FY-2 FY-1 FY +1 Percentage mix FY-2 FY-1 FY +1 Percentage mix FY-1 FY-1 FY +1 Percentage mix FY-2 FY-1 FY +1

Last mile 100% 100% 100% Mail 51% 53% 38% Retail logistics 52% 53% 54% Postal 53% 44% 38%

B2B 79% 70% 63% Courier 33% 32% 32% Corporate logistics 28% 29% 30% Logistics 44% 49% 46%

B2C e-commerce 20% 28% 35% Retail 13% 12% 9% Remittance 20% 18% 16% eCommerce 3% 8% 15%

Retail 1% 2% 2% Others 3% 3% 3%

KLAS 0% 0% 17%

GD Express Pos Malaysia LBC Express Singapore Post


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 (%)


Fig. 125: Net profit margin trend (%)


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


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

5

10

15

20

25

30

35

40

45

FY

-5

FY

-4

FY

-3

FY

-2

FY

-1

FY

+1

FY

+2

FY

+3

FY

+4

FY

+5

GD Express Singapore Post

Pos Malaysia LBC Express

0

5

10

15

20

25

FY

-5

FY

-4

FY

-3

FY

-2

FY

-1

FY

+1

FY

+2

FY

+3

FY

+4

FY

+5

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


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.

Research analysts




Key company data: See next page for company data and detailed price/index chart.

Singapore Post SPOS.SI SPOST SP

EQUITY: TRANSPORT/LOGISTICS

Major player in a thriving market

Scale, synergies and e-retail to propel growth

Action: Initiate at Buy, with TP implying 41% upside.

We initiate coverage of SingPost with a Buy call, as we believe that currently

several positive forces are in perfect alignment to push the stock upwards.

The group’s changing focus from postal to logistics and ecommerce delivery

opens a huge, relatively untapped market to capture, and its scale would be a

considerable advantage in making this move. With corporate governance

concerns dissipating, the factors dragging the stock down to date have faded,

and we see a promising path ahead.

Our top pick for three reasons.

We choose SingPost as our top pick for three reasons: 1) Strong volume

growth, supported by surging ecommerce retail demand, especially because

geography-wise SingPost is located at the intersection of ASEAN trade. 2) Its

massive scale and impeccable infrastructure give it an edge over competitors

in capitalizing the opportunities offered by the last-mile delivery segment. 3)

Consolidation synergies from recent acquisitions such as Trade Global and

Jagged Peak are expected to kick in with the group entering the integration

phase this year, which should propel overseas revenues further (currently

44% of total). We strongly believe that its partnerships with Alibaba and its

subsidiary Lazada are big positives for the company as well. SingPost we feel,

finds itself today at the right place, at the right time, with the right capabilities.

Valuation: Justified on recovering ROE; decent dividend yield of 5%.

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 19x (reflecting current valuations

too). We think the stock deserves better valuations, given the high earnings

growth (+19% 5-year CAGR) driven by the logistics and ecommerce fulfilment

segments coupled with its recovering ROE (+20% by FY19). Initiate at Buy.

Year-end 31 Mar FY16

FY17F

FY18F

FY19F

Currency (SGD) Actual Old New Old New Old New

Revenue (mn) 1,152

1,420

1,626

1,859

Reported net profit (mn) 234

154

191

247

Normalised net profit (mn) 139

153

191

247

FD normalised EPS 6.41c

7.07c

8.81c

11.42c

FD norm. EPS growth (%) -4.6

10.4

24.6

29.5

FD normalised P/E (x) 23.3 N/A 21.1 N/A 17.0 N/A 13.1

EV/EBITDA (x) 16.3 N/A 14.7 N/A 12.0 N/A 9.6

Price/book (x) 2.1 N/A 2.1 N/A 2.1 N/A 2.0

Dividend yield (%) 5.2 N/A 5.0 N/A 5.4 N/A 6.8

ROE (%) 20.2

12.9

15.9

20.2

Net debt/equity (%) 9.9

21.3

20.6

18.6

Source: Company data, Nomura estimates


6 October 2016


Nomura | Singapore Post 6 October 2016

75

Key data on Singapore Post Relative performance chart

Source: Thomson Reuters, Nomura research

Notes:

Performance (%) 1M 3M 12M

Absolute (SGD) 6.4 -2.3 -11.8 M cap (USDmn) 2,361.4

Absolute (USD) 5.7 -4.0 -7.7 Free float (%) 66.8

Rel to MSCI Singapore 3.7 -1.2 -13.5 3-mth ADT (USDmn) 7.7

Income statement (SGDmn) Year-end 31 Mar FY15 FY16 FY17F FY18F FY19F

Revenue 920 1,152 1,420 1,626 1,859

Cost of goods sold -740 -970 -1,202 -1,354 -1,512

Gross profit 180 181 219 272 347

SG&A 9 7 -7 -12 -20

Employee share expense

Operating profit 189 189 211 260 327

EBITDA 223 221 256 315 392

Depreciation -35 -32 -45 -55 -65

Amortisation

EBIT 189 189 211 260 327

Net interest expense -1 -6 -11 -15 -15

Associates & JCEs 7 9 10 12 14

Other income

Earnings before tax 195 192 210 257 326

Income tax -33 -34 -37 -46 -58

Net profit after tax 162 158 173 211 268

Minority interests -2 -4 -5 -5 -6

Other items 0 0 0 0 0

Preferred dividends -15 -15 -15 -15 -15

Normalised NPAT 145 139 153 191 247

Extraordinary items -3 95 1 0 0

Reported NPAT 143 234 154 191 247

Dividends -128 -167 -160 -175 -220

Transfer to reserves 15 67 -6 16 27

Valuations and ratios

Reported P/E (x) 22.7 13.8 21.0 17.0 13.1

Normalised P/E (x) 22.3 23.3 21.1 17.0 13.1

FD normalised P/E (x) 22.3 23.3 21.1 17.0 13.1

Dividend yield (%) 4.0 5.2 5.0 5.4 6.8

Price/cashflow (x) 13.8 24.6 12.4 11.0 9.1

Price/book (x) 2.2 2.1 2.1 2.1 2.0

EV/EBITDA (x) 14.1 16.3 14.7 12.0 9.6

EV/EBIT (x) 16.6 18.9 17.7 14.4 11.4

Gross margin (%) 19.5 15.8 15.4 16.7 18.6

EBITDA margin (%) 24.3 19.2 18.0 19.4 21.1

EBIT margin (%) 20.5 16.4 14.9 16.0 17.6

Net margin (%) 15.5 20.3 10.9 11.7 13.3

Effective tax rate (%) 16.9 17.8 17.8 17.8 17.8

Dividend payout (%) 89.8 71.4 103.9 91.8 89.1

ROE (%) 15.2 20.2 12.9 15.9 20.2

ROA (pretax %) na 10.1 9.2 10.7 13.1

Growth (%)

Revenue 25.2 23.3 14.5 14.3

EBITDA -1.2 15.9 23.0 24.5

Normalised EPS -4.6 10.4 24.6 29.5

Normalised FDEPS -4.6 10.4 24.6 29.5


Cashflow statement (SGDmn) Year-end 31 Mar FY15 FY16 FY17F FY18F FY19F

EBITDA 223 221 256 315 392

Change in working capital

4 70 26 25

Other operating cashflow 12 -94 -64 -47 -60

Cashflow from operations 235 131 261 293 357

Capital expenditure -213 -500 -250 -80 -80

Free cashflow 22 -368 11 213 277

Reduction in investments

-148 -28 -12 -14

Net acquisitions -1 29 0 0 0

Dec in other LT assets

-33 0 -1 -1

Inc in other LT liabilities

38 0 4 4

Adjustments -22 157 29 9 11

CF after investing acts -1 -326 13 214 278

Cash dividends -128 -167 -160 -175 -220

Equity issue 331 17 0 0 0

Debt issue 0 41 87 0 0

Convertible debt issue

Others -22 -23 -27 -31 -31

CF from financial acts 181 -132 -100 -206 -251

Net cashflow 180 -458 -88 8 27

Beginning cash 404 584 127 39 47

Ending cash 584 127 39 47 74

Ending net debt -346 154 328 320 293

Balance sheet (SGDmn) As at 31 Mar FY15 FY16 FY17F FY18F FY19F

Cash & equivalents 584 127 39 47 74

Marketable securities 0 0 0 0 0

Accounts receivable 164 210 185 211 242

Inventories 6 4 5 5 6

Other current assets 43 26 27 27 27

Total current assets 798 368 256 291 349

LT investments 744 892 920 932 946

Fixed assets 330 517 725 752 769

Goodwill 0 0 0 0 0

Other intangible assets 317 583 581 579 577

Other LT assets 23 55 55 56 57

Total assets 2,211 2,416 2,538 2,611 2,699

Short-term debt 17 71 159 159 159

Accounts payable 352 386 422 475 531

Other current liabilities 46 44 53 53 53

Total current liabilities 415 501 634 687 744

Long-term debt 221 209 209 209 209

Convertible debt

Other LT liabilities 107 144 145 149 153

Total liabilities 743 854 987 1,045 1,105

Minority interest 4 11 12 12 13

Preferred stock 347 347 347 347 347

Common stock 427 447 449 449 449

Retained earnings 683 750 742 758 785

Proposed dividends

Other equity and reserves 7 7 0 0 0

Total shareholders' equity 1,464 1,550 1,539 1,554 1,581

Total equity & liabilities 2,211 2,416 2,538 2,611 2,699

Liquidity (x)

Current ratio 1.92 0.73 0.40 0.42 0.47

Interest cover 373.4 31.0 19.2 16.9 21.3

Leverage

Net debt/EBITDA (x) net cash 0.70 1.28 1.02 0.75

Net debt/equity (%) net cash 9.9 21.3 20.6 18.6

Per share

Reported EPS (SGD) 6.60c 10.81c 7.13c 8.81c 11.42c

Norm EPS (SGD) 6.71c 6.41c 7.07c 8.81c 11.42c

FD norm EPS (SGD) 6.71c 6.41c 7.07c 8.81c 11.42c

BVPS (SGD) 0.68 0.72 0.71 0.72 0.73

DPS (SGD) 0.06 0.08 0.07 0.08 0.10

Activity (days)

Days receivable

59.5 50.7 44.4 44.5

Days inventory

2.0 1.4 1.3 1.4

Days payable

139.2 122.6 120.8 121.4

Cash cycle 0.0 -77.6 -70.5 -75.0 -75.6



76

Overview

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


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.


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

and retailers in Indonesia.

S$0.9mn

19-Jun-15 DataPost Pte Ltd Divestment 90% S$39.3mn

19-Jun-15 Novation Solutions Ltd Divestment 100% S$24.4mn

17-Jun-15 Hubbed Holdings Pty Ltd

(AUS)

Acquisition 30% To add flexibility to SingPost's ecommerce delivery service

in Australia by using Hubbed's network of 680 newsagents.

S$4.42mn

14-Jan-15 Famous Pacific Shipping

(NZ)

Acquisition 90% FPS is NZ-based freight forwarder and the acquisition

would both broaden SingPost's freight network and

establish an entry point into the New Zealand Freight Market.

S$8mn

15-Dec-14 Couriers Please (AU) Acquisition 100% To facilitate SingPost's last mile delivery franchise in

Australia.

S$98mn

20-Oct-14 Taobao Marketplace

Southeast Asia

Collaboration NA Taobao customers in Singapore can now use POP station

services for self-picking up their parcels.

13-Sep-14 Pos Indonesia Collaboration NA To grow ecommerce traffic and ensure mail service quality

between the two countries.

10-Jul-14 The Store House (HK) Acquisition 75% To explore self-storage opportunities in the region and

synergising their operations with Singpost operations in

terms of end to end logistics.

S$12.12mn

29-Jan-14 TRAS-Inter Co. (JPN) Acquisition 100% To expand SingPost's freight forwarding presence in Japan. S$3mn

DataPost and Novation were engaged in document

management and transactional mail printing services. The

divestment is to focus on ecommerce related businesses in

the region.

http://quantiumsolutions.com/


78

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.


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.

http://www.famous.com.sg/Default.aspx

http://www.tradeglobal.com/

http://www.jaggedpeak.com/


79

How we believe SingPost stands to benefit

• Strong overseas growth – The revenue contribution from overseas operations has

been on a consistent rise, now contributing 44% of the total revenue (Fig. 136) and we

expect this trend to continue over the next couple years. Specifically, revenue from the

US should rise given the recent acquisitions of fulfilment providers Trade Global and

Jagged Peak which are looking to expand into Asia. We expect a minimum revenue

contribution of SGD201mn from these two in FY17F. This is substantially higher than

an estimated SGD62mn in 2H16 from Trade Global, noting that Jagged Peak was only

acquired in March 2016.

• Efficiencies from the new e-Commerce logistics hub – The SGD182mn investment

in the regional e-commerce logistics hub is expected to be operational in 2H16. Even

though we believe that the cost benefits will not accrue immediately, we think the

operational efficiency levels will improve, given the increased capacity and advanced

automated parcel sorting and warehousing systems. This should eventually bring

margin expansion come FY18F as economies of scale are realized.

• Strong last mile delivery – The ‘last-mile’ element of the home delivery model

constitutes more than 50% of the overall logistics cost and is the most challenging

segment of the delivery process (See Fig. 137). Through its network partners (eg,

Couriers Please in Australia, Shenzhen 4PX, Famous Holdings), we believe SingPost

has enough resources at hand to expand its last-mile delivery franchise.

• Demand for omni-channel networks and the SPC Mall – According to a survey

conducted by EY (Re-engineering the supply chain for the Omni-channel of tomorrow),

a majority of the supply-chain executives surveyed believe that omni-channel

capabilities are essential and beneficial for broadening the customer base and boosting

revenue growth. The upcoming SPC Mall, which is expected to be operational in 2017,

should help to garner additional revenue if omni-channel demand catches wind. We

have not factored this upside potential in our revenue estimates and valuation.

Fig. 136: Overseas revenue contribution on the rise


Fig. 137: Home delivery logistics cost breakup

Source: Logisym

72%

28%

68%

33%

56%

44% Local

Overseas

2015

2014

2016

Last mile delivery

53%

Collection4%

Sorting6%

Line haul37%

http://www.ey.com/Publication/vwLUAssets/EY-re-engineering-the-supply-chain-for-the-omni-channel-of-tomorrow/$FILE/EY-re-engineering-the-supply-chain-for-the-omni-channel-of-tomorrow.pdf


80

Financial overview and forecasts SingPost’s revenues mainly come from three segments – Postal, Logistics and e-

commerce.

• Postal – Domestic mail volumes, where SingPost has 95% market share, have

stagnated (Fig. 138) and we expect a decline going forward. International volumes,

forming about 46% of total mail volumes, are stable, partially due to Alibaba-routed

volumes. We forecast a 5-year CAGR (FY16-20F) of 4% for total mail revenue,

supported by international mail volumes, which more than offsets the decline in

domestic mail.

• Logistics – The past 5 years of data show a clear shift in the revenue mix, with 49% of

revenue now from Logistics, compared with only 27% in FY10 (Fig. 140). The mail

segment contribution has consequently dropped from 73% in FY10 to 44% in FY16. We

expect this trend to continue and our segmental forecasts for FY21 draw a revenue mix

of 26:53:21 for mail/logistics/ecommerce. We expect overall logistics revenue to grow

at roughly 18% for the next 3 years, with Quantium Solutions and Famous Holdings

contributing 47% and 37% of the Logistics revenue, respectively.

• E-Commerce fulfilment – We expect e-Commerce revenues to grow at a 5-year

CAGR of 41%, with the FY17 growth rate at 148%. Trade Global (acquired in Nov

2015) and Jagged Peak (acquired in Mar 2016) contributions were not completely

incorporated in the e-commerce revenue figures for FY16, hence the higher growth rate

for FY17. We estimate that Trade Global will contribute 55% (estimated at SGD134mn)

of total e-commerce revenue in 2017. For 1Q17, Trade Global and Jagged Peak

registered contributions of SGD31mn and SGD35mn, respectively.

• Margins – Revenues have historically been seasonal with Q3 being the peak, spurred

by the holiday season, and Q1 marking the trough (Fig. 142). Logistics and ecommerce

margins also show the same pattern (Fig. 143). Postal margins, however, stay relatively

consistent . In FY16, they steadily declined in each quarter, as international mail

contributions rose and higher-margin domestic volumes languished. The consolidation

of warehouses after the launch of the Regional Ecommerce Hub (RECH) should lead to

cost efficiencies (targeted to be operational sometime in 2H CY2016), but we believe a

part of the savings will be offset by the depreciation impact. Assuming benefits to

accrue over 20 years, we deem the additional depreciation charge to be around

SGD13/23/33mn for FY17-19F.

• Our margin assumptions are conservative as we expect the costs will stay high in the

consolidation phase. See Fig. 145 for our margin forecast.

• Operating expenses (excluding depreciation) grew by 32% in FY16 owing to growth in

business volumes and inclusion of new subsidiaries. Volume related expenses, which

represent 54% of opex, will continue to move with revenue.

• Capex – The construction of SPC Mall and the e-commerce logistics hub caused capex

to shoot up in FY15 and FY16 (Fig. 141). Capex spend for FY17 should stay elevated

on the back of the on-going construction of SPC Mall, but thereafter, we expect no

major expenditure and forecast steady maintenance capex.

• Gearing – In FY16, SingPost had net debt of SGD154mn, which amounts to a 10% net

gearing ratio. We estimate the gearing to increase to 21% in FY17F due to the higher

capex requirements, but dilute consistently from there onwards towards a 10% net

debt/equity ratio in the long term.

• Expect recovery in ROE and cash ROIC – Cash ROICs and ROEs have dipped

consistently in the past few years, but we expect a recovery ahead. We expect the cash

ROIC of about 13% (vs 10% in FY16) and ROE of about 16% (vs 20% in FY16) in the

coming 3 years (FY17-19F) (See Fig. 144).


81

Fig. 138: Postal volumes have been consistently declining

Source: Company data, Singapore Statistics

Fig. 139: Postal business contributes less than 50% of revenue but close to 80% of operating profit


Fig. 140: Logistics leading the way


Fig. 141: We expect high capex for FY17F and a stable maintenance capex thereafter


Fig. 142: Revenue shows clear seasonality with Q3 peaking on the holiday season


Fig. 143: Logistics and ecomm margins are pattern bound too

Except postal which consistently declines due to higher international contribution


700

900

1,100

1,300

1,500

1,700

1,900

2,1001991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Postal Articles Handled (Mn)

44%

79%

49%

20% 8% 1%

0%

20%

40%

60%

80%

100%

Revenue Operating profit

Postal Logistics eCommerce

0%

10%

20%

30%

40%

50%

60%

70%

80%

FY10 FY11 FY12 FY13 FY14 FY15 FY16

Postal Logistics eCommerce

Revenue mix has been changed considerably with Postal declining and logistics improving on the back of e-Commerce led volumes

0

50

100

150

200

250

300

350

170

180

190

200

210

220

230

240

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260

1Q 2Q 3Q 4Q

2014 (LHS) 2015 (LHS)

2016 (RHS)

(Rev SGD mn)

0

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7

8

9

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-30

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-10

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10

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1Q 2Q 3Q 4Q

Postal (LHS) eCommerce (LHS)

Logistics (RHS)


82

Fig. 144: Cash ROICs and ROEs have dwindled owing to acquisitions, but we sense a recovery ahead


Fig. 145: Revenue and margin forecasts


Company-specific risks

Concerns over Alibaba’s investment delay

The continued extension of Alibaba’s second investment in a ~5% stake in SingPost for

SGD187mn has raised investor concerns about the deal falling through. Announced in

July of last year, the arrangement has been postponed for the third time to October

2016, with the previous two extensions announced in November and February. The deal

also entails Alibaba investing SGD92mn to acquire 34% of Quantium Solutions, a

warehousing and distribution company wholly owned by SingPost.

Alibaba already owns a 10.3% stake in SingPost, which was acquired in 2014 for

SGD313mn. Some sceptics believe that should the second investment fall through,

Alibaba may disinvest the existing stake. We believe these concerns are overblown.

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21

Cash ROIC ROE

(S$ Millions) FY15 FY16 FY17F FY18F FY19F

Domestic Mail Revenue 249 255 250 245 240

International Mail Revenue 206 229 275 302 332

Others (Includes intersegmental elimination) 38 19 17 14 11

Total Postal Revenue 492 503 542 562 584

Postal revenue growth 2% 8% 4% 4%

Quantium Solutions 203 297 350 420 495

Famous Holdings 168 229 270 324 382

Others (Includes intersegmental elimination) 34 34 40 48 56

Logistics revenue 404 560 660 792 934

Logistics revenue growth 39% 18% 20% 18%

eCommerce revenue 23 88 218 273 341

eCommerce revenue growth 278% 148% 25% 25%

Total revenue 920 1,152 1,420 1,626 1,859

Total revenue growth 25% 23% 14% 14%

Margins 2015 2016 2017F 2018F 2019F

EBITDA 24.3% 19.2% 18.0% 19.4% 21.1%

EBIT 20.5% 16.4% 14.9% 16.0% 17.6%

Core PBT 21.2% 16.7% 14.8% 15.8% 17.5%

Core PATAMI 15.8% 12.0% 10.8% 11.7% 13.3%


83

On speaking to our China retail analyst, Jialong Shi, we believe that in terms of absolute

value, the investment in SingPost is too small for Alibaba to give it a second thought.

Moreover, Alibaba’s unceasing spree of collaborations, most recently in India and

Singapore, proves that it is still open to partnerships. Also, we do not believe Alibaba’s

recent acquisition of a controlling stake in e-commerce company Lazada poses a threat

to the revenue pump SingPost would otherwise get through Alibaba, as Alibaba’s

intentions here would be more towards capitalising on Lazada’s customer base than its

logistics strength. On the contrary, we view this as a positive event for SingPost’s

volumes because given Lazada’s revenue growth (78% in FY15), we doubt its logistics

capabilities can keep up with the momentum, and Alibaba would need an established

ASEAN fulfilment provider. SingPost, with its presence in 19 markets (12 within Asia), fits

the bill.

Apprehensions about corporate governance controversy

Special audit for non-disclosure of director’s interest in an acquisition

SingPost sought a special audit last December after former independent director Keith

Tay failed to disclose his interest in a 2014 acquisition of freight forwarder F.S.

Mackenzie. In the 52-page report submitted by PWC and Drew Napier collectively on 3

May, the auditors concluded that the lapse was due to errors made by the staff and not

due to intentional omissions. The report flagged the absence of prescribed policy for

M&As at SingPost and made suggestions for the same. Keith Tay resigned immediately

after the submission of the report.

Overhaul of top management

The complete over-haul of top management only exacerbated the existing governance

concerns. The CEO, Wolfgang Baier resigned in December, and it the chairman Lim Ho

Kee, who was at the helm of the board since 2003, stepped down in May. Sascha Hower,

the group COO, continued the series of resignations, citing pursuit of new opportunities

overseas as his reason for moving out in June 2016. Including CFO Daniel Phua’s exit in

July 2015, majorly 5 important board positions were revamped in a one-year period.

In response to the changes, SingPost appointed Heidrick & Struggles to undertake a

corporate governance review, which was completed in July. The report concluded that

there was no evidence to suggest non-compliance with SGX listing rules. However, it did

make recommendations for disclosures and processes for M&A. On an optimistic note,

the new chairman and CEO Simon Israel seems a capable candidate to help lift the

company’s image and calm the frayed market sentiment. As a former chairman of

Singtel, a company which has a reputation for good governance, we believe his

experience is aptly suited to the role.

Implementation hurdles

SingPost is relatively new to the e-commerce space, which is a very dynamic and fast

moving sector. While e-commerce offers the greatest revenue potential for a postal

company looking to diversify, since it is a volume play, stiff cost management is crucial.

Additionally, venturing into new geographic regions might involve unforeseen challenges,

(eg, difficulty in staying nimble). In the recently released Q1FY17 results, the operating

profit margins slid further down for Logistics to 4.6%. For e-commerce, they remain

negative. As synergies kick in with more integration, we foresee margins improving in

medium term. More than expected margin compression is a downside risk to our valuation.

Rising start-ups pose a threat

A lot of start-ups have sprung up in the last-mile delivery segment recently. Some

examples include Carpal, GoGoVan, FastFast, Ninja Van, Zap Delivery, etc. These firms

are mostly less than 5 years old, and lack the scale to compete, even if they offer cheap

prices, we doubt they would be able to bring in enough volumes. SingPost does not only

have the operational cost advantage, but also wide-spread extensive availability. For

example, the Rent-Pop locker service centres are located within every 2km radius in

Singapore, and such pervasive presence takes time and capital to build. However, most

of the start-ups work in the business model where they connect customers with third-

party drivers, sometimes collaborating with other start-ups as well to share/lend/borrow

capacity in times of peak seasons. The lack of this sharing economy concept is one

disadvantage we think SingPost’s business model has over these start-ups.

http://postandparcel.info/75555/news/alibaba-teaming-up-with-dhl-and-delhivery-for-logistics-in-india/

http://postandparcel.info/72860/news/alibaba-takes-part-in-latest-gogovan-funding-round/


84

Valuation and consensus comparison

DCF-based TP of SGD2.11

We derive our TP using a 5-year DCF with a weighted average cost of capital (WACC) of

7.3% and terminal growth rate of 1.8%. This implies FY18F EV/EBITDA of 17x and P/E

of 26x, which is higher than the 3-year historical averages of 14x / 19x. We initiate with a

Buy call. We believe its intensive reach and scale along with acquisition synergies could

push its earnings to a higher level.

Fig. 146: Valuation based on DCF


Fig. 147: Implied valuations

Source: Nomura Research

Why are we bullish against the Street?

Our top-line and bottom-line numbers are ahead of the Street by 7-15% and 8-37%,

respectively (see Fig. 148 and Fig. 149). With ecommerce momentum building and

SingPost handling increasing volumes for big players like Lazada, we have factored in

steep growth rates in the logistics & ecommerce segment. Also, historically, revenue

peaks in 3Q, which we believe consensus has omitted to build in. Our EBITDA forecast

lies close to the median consensus level. Our capex assumptions are on the higher side

of consensus, more so for FY17F 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.

(S$ Millions) FY16 FY17 FY18 FY19 FY20 FY21

Net operating cash flow 131 261 293 357 408 464

Net Capex & acquisition of subsidiaries (500) (250) (80) (80) (70) (70)

FCF (368) 11 213 277 338 394

WACC 7.3% 7.3% 7.3% 7.3% 7.3% 7.3%

DCF 11 185 224 255 277

WACC computation

Cost of equity 8.3%

Cost of debt (net of tax) 2.3%

Cost of perpetual securities 4.3%

Risk-free rate 2.5%

Beta 1.00

Market return 8.3%

Proportion of Debt 10.0%

Proportion of Equity 80.0%

Proportion of Preffered Equity 10.0%

WACC 7.3%

Terminal growth 1.8%

Terminal value 4,315

PV of Terminal value 3,947

Equity value 4,899

Net cash/(debt) - FY17F (328)

Minority interest (12)

Enterprise value 4,559

No of shares 2,163.98

TP 2.11

FY17F FY18F FY19F FY20F FY21F

EV/EBITDA 21.0 17.1 13.7 12.0 10.4

P/E 32.0 25.7 19.8 17.3 15.0

P/Op CF 18.7 16.7 13.7 12.0 10.6

P/FCF 429.4 23.0 17.7 14.5 12.4

FCF Yield (%) 1% 10% 13% 16% 18%

P/B 3.2 3.2 3.1 3.0 3.0


85

Fig. 148: Nomura vs consensus

Source: Nomura research, Bloomberg

Fig. 149: Where we are against consensus and why?


What Alibaba paid for SingPost

In May 2014, when Alibaba bought the first tranche of SingPost shares, it paid SGD1.42

per share (total SGD312.5mn for 220mn shares), an 8.4% discount to SingPost’s share

price then. This implied P/E (FY15E) of 21.05x against the P/E at which it was trading at

that time of ~23x.

For the second tranche, which is yet to materialise, the announced price is SGD187.1mn

for a 5% stake, which translates into SGD1.74 per share, a 16% premium at the current

share price (an 8.2% discount to the price it was trading in first week of July 2015, when

it was originally announced). Apart from this, SGD92mn is to be paid for a 34% stake of

Quantium Solutions, the wholly owned subsidiary of SingPost.

-200

0

200

400

600

800

1,000

1,200

1,400

1,600

Core Revenue EBITDA Core Earnings Capex Free Cash Flow

BBG High BBG Average BBG Low Nomura

(SGD mn) 2017F 2018F 2019F Remarks

Core Revenue NMR 1,420 1,626 1,859

Core Revenue BBG Avg 1,322 1,472 1,621

Core Revenue BBG High 1,441 1,638 1,967

Core Revenue BBG Low 1,220 1,307 1,337

Difference (NMRvs BBG Avg) 7% 10% 15%

EBITDA NMR 256 315 392

EBITDA BBG Avg 227 253 265

EBITDA BBG High 299 338 293

EBITDA BBG Low 186 211 231


Core Earnings NMR 153 191 247

Core Earnings BBG Avg 142 163 180

Core Earnings BBG High 161 192 215

Core Earnings BBG Low 131 142 150


Capex NMR 250 80 80

Capex BBG Avg 149 68 53

Capex BBG High 260 100 38

Capex BBG Low 26 31 65


Free Cash Flow NMR 11 213 277

Free Cash Flow BBG Avg 74 168 226

Free Cash Flow BBG High 270 215 320

Free Cash Flow BBG Low (51) 147 176

Difference (NMRvs BBG Avg) -85% 27% 23%

With ecommerce momentum building up, and Singpost

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).


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

7.5

9.5

11.5

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17.5

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21.5

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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


Target Price Starts at PHP 17.05

Closing price 4 October 2016 PHP 10.92


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.

Nomura vs consensus

The stock is not covered by any other broker.

Research analysts





LBC Express Holdings Inc

LBC.PS LBC PM


Riding on the macro growth story

Market leader in the local market

Action: Initiate with a Buy rating. TP implies 56% upside.

We initiate coverage of LBC Express (LBC), a courier and cargo company in

the Philippines, with a Buy rating and TP of PHP17.05. With 85% market

share and being a preferred choice over state-owned Philippines Post

(Philpost, unlisted), we feel LBC’s earnings are on a steady upward trajectory,

and forecast a five-year CAGR of 28% (FY15-20F). We believe that its asset-

light model supports its cost-prudence culture, and its strong cash ROIC

(FY16F/FY17F: 23%/26%) justifies its demanding valuation. Management

appears confident in LBC’s ability to serve growing demand.

Catalysts: Philippines macro growth story and strong e-Commerce led

volumes.

Long-term catalysts include the macro growth story in the Philippines and

robust volume growth driven by rising penetration of ecommerce retail.

Currently, more than 20% of its Corporate Logistics segment is driven by

Lazada volumes. While this itself is a major driver, LBC also serves other

major corporate players such as Samsung. We expect the Corporate segment

to record a five-year CAGR of 25% (FY15-20F), with the retail side recording a

CAGR of 18%. We expect the money remittance business to remain stable.

Valuation: Bullish with a DCF-based TP of PHP17.05.

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 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 FY16F/FY17F EV/EBITDA

of 17x/14x.

Key risks: 1) the impending lawsuit by LBC’s sister entity LBC Development

Bank, and 2) plausible corporate governance issues.

Year-end 31 Dec FY15

FY16F

FY17F

FY18F

Currency (PHP) Actual Old New Old New Old New

Revenue (mn) 7,686

9,015

10,654

12,640


797

970

1,154


797

970

1,154


55.91c

68.00c

80.90c


62.5

21.6

19.0




Dividend yield (%) na N/A na N/A na N/A na

ROE (%) 27.7

38.3

32.4

28.3

Net debt/equity (%) 10.7

net cash

net cash

net cash



6 October 2016


Nomura | LBC Express Holdings Inc 6 October 2016

88

Key data on LBC Express Holdings Inc Relative performance chart


Notes:


Absolute (PHP) -8.2 -16.6 -12.6 M cap (USDmn) 322.7

Absolute (USD) -11.5 -19.1 -15.7 Free float (%) 14.5

Rel to MSCI Philippines -7.1 -14.2 -23.4 3-mth ADT (USDmn) 0.0

Income statement (PHPmn) Year-end 31 Dec FY14 FY15 FY16F FY17F FY18F

Revenue 7,056 7,686 9,015 10,654 12,640

Cost of goods sold -6,124 -6,805 -7,641 -9,026 -10,705

Gross profit 932 882 1,374 1,628 1,936

SG&A -217 -152 -217 -260 -309


Operating profit 714 730 1,157 1,368 1,627

EBITDA 991 989 1,443 1,697 2,005

Depreciation -276 -259 -286 -329 -378

Amortisation

EBIT 714 730 1,157 1,368 1,627

Net interest expense -30 -42 -43 -9 -6

Associates & JCEs

Other income

Earnings before tax 684 688 1,114 1,359 1,621

Income tax -107 -221 -342 -416 -494

Net profit after tax 577 467 773 944 1,126

Minority interests 13 24 25 26 27

Other items

Preferred dividends

Normalised NPAT 590 491 797 970 1,154

Extraordinary items -447 -74 0 0 0

Reported NPAT 143 416 797 970 1,154

Dividends

Transfer to reserves 143 416 797 970 1,154


Reported P/E (x) 108.6 37.4 19.5 16.1 13.5

Normalised P/E (x) 26.4 31.7 19.5 16.1 13.5


Dividend yield (%) na na na na na

Price/cashflow (x) 185.7 26.1 25.6 10.2 8.7

Price/book (x) 11.6 9.3 6.3 4.5 3.3

EV/EBITDA (x) 16.1 15.9 10.7 8.4 6.4

EV/EBIT (x) 22.3 21.5 13.3 10.4 7.8

Gross margin (%) 13.2 11.5 15.2 15.3 15.3

EBITDA margin (%) 14.0 12.9 16.0 15.9 15.9

EBIT margin (%) 10.1 9.5 12.8 12.8 12.9

Net margin (%) 2.0 5.4 8.8 9.1 9.1


Dividend payout (%) 0.0 0.0 0.0 0.0 0.0

ROE (%) na 27.7 38.3 32.4 28.3

ROA (pretax %) na 15.6 22.3 24.8 28.4

Growth (%)

Revenue 15.9 8.9 17.3 18.2 18.6

EBITDA -47.6 -0.1 45.9 17.6 18.1

Normalised EPS -16.9 62.5 21.6 19.0



Cashflow statement (PHPmn) Year-end 31 Dec FY14 FY15 FY16F FY17F FY18F

EBITDA 991 989 1,443 1,697 2,005

Change in working capital -234 -162 -600 60 77

Other operating cashflow -673 -231 -235 -236 -282

Cashflow from operations 84 597 609 1,522 1,800


Free cashflow -344 266 309 1,222 1,500

Reduction in investments 0 0 0 0 0

Net acquisitions 0 -1,326 0 0 0

Dec in other LT assets 0 -6 0 0 0

Inc in other LT liabilities 0 0 0 0 0

Adjustments 0 -59 0 0 0

CF after investing acts -344 -1,125 309 1,222 1,500

Cash dividends 0 0 0 0 0

Equity issue 0 1,369 0 0 0

Debt issue 405 241 -25 -832 0

Convertible debt issue 0 0 0 0 0

Others -42 -34 -45 -12 -12

CF from financial acts 362 1,577 -71 -844 -12

Net cashflow 19 451 238 377 1,488

Beginning cash 509 528 979 1,217 1,594

Ending cash 528 979 1,217 1,594 3,082

Ending net debt 369 179 -85 -1,294 -2,782

Balance sheet (PHPmn) As at 31 Dec FY14 FY15 FY16F FY17F FY18F

Cash & equivalents 528 979 1,217 1,594 3,082

Marketable securities

Accounts receivable 894 1,025 1,202 1,421 1,686

Inventories

Other current assets 1,803 2,206 2,443 2,463 2,484

Total current assets 3,225 4,211 4,863 5,479 7,251

LT investments

Fixed assets 637 763 746 688 633

Goodwill

Other intangible assets 257 276 307 336 314

Other LT assets 762 710 710 710 710

Total assets 4,880 5,960 6,626 7,213 8,908

Short-term debt 774 1,084 1,038 205 205

Accounts payable 1,565 1,830 1,644 1,943 2,305


Total current liabilities 2,890 3,573 3,341 2,807 3,169

Long-term debt 123 74 95 95 95

Convertible debt

Other LT liabilities 542 685 743 870 1,024

Total liabilities 3,554 4,332 4,178 3,772 4,288

Minority interest -14 -41 -43 -45 -48

Preferred stock

Common stock 112 1,426 1,426 1,426 1,426

Retained earnings 134 174 996 1,992 3,173

Proposed dividends

Other equity and reserves 1,094 68 68 68 68



Liquidity (x)

Current ratio 1.12 1.18 1.46 1.95 2.29

Interest cover 23.5 17.5 27.0 155.3 278.7

Leverage

Net debt/EBITDA (x) 0.37 0.18 net cash net cash net cash

Net debt/equity (%) 27.5 10.7 net cash net cash net cash

Per share

Reported EPS (PHP) 10.06c 29.20c 55.91c 68.00c 80.90c

Norm EPS (PHP) 41.41c 34.41c 55.91c 68.00c 80.90c

FD norm EPS (PHP) 41.41c 34.41c 55.91c 68.00c 80.90c

BVPS (PHP) 0.94 1.17 1.75 2.45 3.27

DPS (PHP) 0.00 0.00 0.00 0.00 0.00

Activity (days)

Days receivable

45.6 45.2 44.9 44.9

Days inventory

0.0 0.0 0.0 0.0

Days payable

91.0 83.2 72.5 72.4

Cash cycle 0.0 -45.5 -38.0 -27.6 -27.6



89

Company overview LBC Express is a courier and logistics company based in the Philippines. Its range of

services includes mail/document delivery, parcel delivery, money remittance services

and cargo & logistics related services like warehousing, cold-chain facilities, etc. LBC

Development Corp is the main shareholder of the company, with ~85% holding, and it

also owns other LBC courier setups in the US and other parts of the world. Through its

network of 4,400 locations, LBC has a presence in more than 30 countries in Asia-

Pacific, North America, the Middle East and Europe.

Investment thesis and SWOT analysis

We present our view on LBC in the form of a SWOT analysis below:

Fig. 152: SWOT analysis for LBC Express

Strengths

- Largest market share at c85% and significant experience in the logistics business.

- Asset-light operations model which helps it to contain costs.

- Warehousing and belly space available on demand in the Philippines.

- Follow-on offering expected in 1H FY17 to improve free float.

Weaknesses

- The looming PHP1.82bn lawsuit filed by sister entity LBC Development Bank.

- The continuing related-party transactions that the company incurs and related corporate governance issues.

- The company does not pay dividends.

Opportunities

- The Philippines’ macro growth story, ecommerce growth potential and an under-penetrated ecommerce delivery segment.

- Corporate revenues anchored to Lazada's growth.

- Philpost's waning reputation and service quality, which make LBC the secondary go-to postal services provider.

Threats

- Too much dependence on the domestic market.

- A rise in delivery fees charged by Cebu or other vendors from whom belly space is leased.

- Rising personnel costs.

- Potential corporate governance issues.


Strengths

• In the Philippines, LBC has the largest market share of close to 85% in the parcel

segment. We believe this puts the company in a sweet spot, affording it substantial

economies of scale.

• The company follows an asset-light model where it rents cargo space with Cebu Pacific

and Philippines Airlines’ fleet. We believe this leads to effective management, as there

is virtually no unutilised capacity which arises with fleet ownership. The company

enjoys full autonomy with respect to the scale that it wants to operate at, as there is

plenty of warehousing as well as vehicle belly space available on demand in the

Philippines.

• The group is planning a follow on offering in the first half of 2017. It filed a registration

statement with the SEC in last October as well, but the offering did not come through.

We expect the size of the offering to be similar, at around 70mn shares for a total value

of PHP800-900mn. This is fairly small, comprising less than 5% of the current

outstanding amount, and results in a 2% dilution to our TP. More importantly, the

offering is expected to improve liquidity and free float. According to management, these

funds would be utilised for branch expansion and development of its corporate logistics

segment.

http://www.bworldonline.com/content.php?section=Corporate&title=lbc-eyes-p829m-from-follow-on-offering&id=116572

http://www.lbcexpressholdings.com/images/LBC-SEC12-1RegistrationStatement.pdf?bcsi_scan_f13e08b24b540282=0&bcsi_scan_filename=LBC-SEC12-1RegistrationStatement.pdf

http://www.lbcexpressholdings.com/images/LBC-SEC12-1RegistrationStatement.pdf?bcsi_scan_f13e08b24b540282=0&bcsi_scan_filename=LBC-SEC12-1RegistrationStatement.pdf


90

Weaknesses

PHP1.8bn litigation filed by sister entity, the now-bankrupt LBC Development Bank

In November 2015, LBC Development Bank, a sister entity of LBC Express, filed a case

against LBC Express, among other respondents, for a collection of PHP1.82bn,

representing unpaid service fees for remittance transactions done through the bank in

2010-11. In December 2015, the regional court, via a writ petition, attached multiple bank

accounts and the shares owned by parent LBCDC in LBC Express (84% of total shares

outstanding) to the case. This led to a temporary halt in the trading of LBC shares.

While the garnishment was lifted in late February 2016, the final outcome of the case is

still pending. In its financial statements, the group has made no provision or contingent

liability with respect to this lawsuit. According to management, any liability of LBC

Express is not probable and cannot be estimated at present. Being conservative in our

valuation, we have built in 80% probability of LBC Express losing the case, and

consequently recognising damages of PHP1.46bn. Our TP is 6% lower due to this

adjustment.

Corporate governance angle

The problem:

Another point of concern is LBC’s high receivables due from related parties amounting to

PHP1.986bn as of 1H2016 (net amount: PHP1.96bn, Fig. 153). We understand from our

conversations with management that prior to the merger, LBC annually paid a

management fee (now royalty fee) for use of LBC marks to the ultimate parent company

LBCDC, which varied widely from 9-30% of revenue. After the merger, in 2013 it came

down to 3.5% and now accounts for a consistent 2.5% of revenue (PHP183mn in

FY2015).

Apart from this, the company also makes advances to LBCDC, which are used for

working capital requirements. These unsecured advances are non-interest bearing and

are payable on demand. In 1H16, advance payments of nearly PHP119.3mn were made

to the ultimate holding company. At present, a total amount of PHP1,087.4mn (due from

LBCDC before the merger + advances paid - royalty due to LBCDC) stands as

receivables due from related parties. In our cash flow statement as well, we have built in

annual cash outflow of PHP200mn as advances to LBCDC in FY16, and much lower

over the subsequent years at PHP20mn as we foresee LBCDC being more financially

independent then, following dividend proceeds from the upcoming Pilipinas Shell IPO,

which we explain in detail below.

The solution and our view:

While we could not gather absolute clarity on the receivables formed prior to/during the

merger (~PHP1bn out of the current PHP1.9bn outstanding), we did try to understand

from management possible solutions/ways of realising the current outstanding amount.

• On 30 September, management declared a cash dividend of PHP0.43 per share. Since

85% of the shares are held by LBCDC, this we estimate will not result in a huge cash

outflow (only 15% to be paid out), as we think this would offset part of the current

outstanding amount dues to LBC. But since this amounts to a dividend payout of 148%,

we do not deem such dividend levels as sustainable.

• LBCDC’s key shareholder, the Araneta family also holds a 5.14% stake in Pilipinas

Shell Petroleum Corp (PS) through its investment vehicle, Spathodea Campanulata,

Inc. According to the media, Pilipinas Shell is due to come up with a PHP30bn IPO this

year, which is expected to be the biggest in the history of the Philippines (link). The

1H2016 profit of PS was close to PHP5bn. If we were to estimate the annual dividend

on these earnings, based on a conservative pay-out assumption of 30%, a 5% holding

would fetch a dividend payout of PHP150mn. We think this source of income for

LBCDC would also reduce its dependence on LBC Express significantly. Observing

prudent valuation practices, we have not built in any of these positive scenarios in our

valuation, and our FCF assumptions already contain PHP200mn cash outflow as

advances to LBCDC each year.

http://www.manilatimes.net/lbc-trading-temporarily-halted-amid-p1-8-b-lawsuit/237718/

http://www.bworldonline.com/content.php?section=Corporate&title=pse-approves-pilipinas-shell-listing&id=134173


91

• We maintain our cautious stance with respect to the amounts owed to LBCDC, and we

will continue to closely monitor their movement and any corporate governance threats

that may be associated with them.

Other items

This apart, with its courier affiliates overseas, LBC Express also routinely recognises

revenue from delivery fees, as the last-mile service provider for inbound shipments into

the Philippines. Although it is still a significant amount at PHP889mn as of 1H16, it is

less of a concern to us as it has remained quite stagnant over the past three years. More

importantly this also forms the normal course of its business.

Fig. 153: Net outstanding receivables from related parties was PHP1.96bn in June 2016


Lacks a formal dividend payout policy

The group does not have an established dividend payout policy. This is typical of most

listed companies in the Philippines, where majority of the shares are held by a single

shareholder. However, with LBC planning to come up with a follow-on offering, we

believe a formal dividend payout policy is a requisite for institutional holdings.

Opportunities

• The Philippines’ courier industry is in the growth stage; hence, we expect its parcel/

express delivery volumes to multiply 3.5x from an estimated 45mn in 2015 to 195mn in

2020F, with the highest 2015-20F CAGR of 29% among the ASEAN 6 (see Fig 8).

With LBC holding the largest market share, we project a similar growth story at the

entity level as well. Management also appears quite confident, about LBC’s capacity to

leverage the increasing intra-ASEAN trade.

• The outlook for ecommerce in the Philippines is expected to be quite bullish, more so

because it is a very underpenetrated market. Lazada dominates the ecommerce

market, with 80% market share (link), and estimates very aggressive growth, with the

ecommerce retail market expanding to around PHP220bn. Although the Corporate

Logistics segment accounts for only 35% of LBC’s total logistics revenue currently, we

forecast the highest growth for this segment (five-year CAGR of 25%), driven by

Lazada volumes. Lazada, at present, accounts for 20-25% of LBC’s corporate logistics

business. Management has indicated that it is gradually increasing the volumes

handled for Lazada; we expect this to continue in the years to come, and expect

Lazada to be a major revenue driver for LBC’s corporate logistics segment.

• Over the years, Philippines Post (PhilPost) has become quite unpopular, in terms of

service quality and efficiency. Just like Singapore, postal services in the Philippines

have been fully liberalised. LBC Express has hence, secured its position as the

secondary ‘go to’ provider of postal services. Also, Philpost has consistently been

hiking rates (link). Therefore, in our view, unless Philpost pulls its act together, many

548

951

1,070

798 783

886

0

200

400

600

800

1,000

1,200

2014 2015 1H2016

Net outstanding amount due from Ultimate parent (PHP Mn)

Net oustanding amountdue from Affiliates (PHP Mn)

http://www.mb.com.ph/lbc-express-ready-to-serve-newly-integrated-asean-market/

http://www.philstar.com/technology/2015/12/21/1534767/lazada-philippines-bullish-e-commerce-growth-2016

http://www.bicolmail.com/2012/?p=8908

https://suloknitessa.wordpress.com/2016/01/10/philpost-rates-as-of-january-2016-domestic-and-international/


92

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.


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


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%


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


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


Fig. 158: We are bullish on LBC’s cash ROIC, and estimate a cash ROIC of 26% next year


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.

15%

14% 13%

9% 10%

36%35%

36%

16% 16% 16%

9%

13% 13%

36% 36% 36%

0%

5%

10%

15%

20%

25%

30%

35%

40%


EBITDA Margin EBIT Margin Forecast GP Margin45%

28%

38%

32%

26%24%

25%

20% 19%

23%26%

29%

33% 39%

0%

5%

10%

15%

20%

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30%

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45%

50%


ROE Cash ROIC

http://www.tangible.com.sg/lbc/

https://en.wikipedia.org/wiki/Balikbayan_box

http://www.dealstreetasia.com/stories/philippines-logistics-giant-lbc-to-shut-down-e-commerce-platform-theshop-ph-22638/

http://theshop.ph/

https://www.shippingcart.com/


96

Valuation methodology and risks

Our DCF-based valuation 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; hence, we factor in impending damage claims of PHP1.46bn. Our TP is 6%

lower due to this adjustment. Our TP implies FY17F P/E of 25x (EPS: PHP21.6).

Risks: The impending lawsuit by LBC’s sister entity LBC Development Bank and

plausible corporate governance issues are key risks.

Fig. 159: DCF-based valuation of PHP17.05 assumes a WACC of 10.2%


Fig. 160: Implied price multiple valuations (x) based on our DCF derived TP


(PHPmn unless stated otherwise) FY15 FY16 FY17 FY18 FY19 FY20

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 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


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


Target Price Starts at MYR 4.85

Closing price 4 October 2016 MYR 3.77


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.

Research analysts





Pos Malaysia Berhad PSHL.KL POSM MK


Entering a new phase of growth

Acquisition to bring revenue and cost synergies

Action and valuation: Initiate at Buy.

We initiate on Pos Malaysia with a Buy rating, with our SOTP-based TP of

MYR4.85 implying FY18F/FY19F P/Es of 21x/19x, in line with logistics and

last-mile delivery peers at 22x/18x. We use DCF method for the postal

business, assuming a WACC of 8.1% and 3% TG, and a 15x target for the

integrated logistics business.

Formidable powerhouse in the making, not fully priced in by consensus.

We see cost and revenue synergy opportunities following the acquisition of

KLAS Group, a formidable integrated logistics provider with operations in air

cargo, trucking, haulage as well as airport-related services. The low hanging

fruits on these synergies will be centred on integrated supply chain fulfilment.

This brings a valuable supply chain proposition for clients, where Pos

Malaysia had only been serving the last-mile portion. We believe that

consensus has yet to factor in consolidated earnings, which explain why our

FY17-19F earnings estimates are 38% / 72% / 58% above consensus.

Riding on the ecommerce last-mile delivery theme.

We see Pos Malaysia benefiting on the increase in online spending

penetration resulting in higher postal volumes. As the national postal provider,

Pos Malaysia stands to benefit as the beneficiary of the influx of Alibaba’s

goods (those below 2kg) channelled through the international postal mail

system, be it inbound (into Malaysia) or as transshipment goods rerouted to

other parts of the world – the latter due to its lower transshipment fees.

Catalysts: Promising structural changes.

We have yet to factor in two major catalysts in store: 1) postal tariff hikes, and

2) review of the postal land bank plots. These are both complicated processes

that require parliamentary approval and with the general election on the

horizon, this could be put on the backburner for now, in our view.

Year-end 31 Mar FY16

FY17F

FY18F

FY19F

Currency (MYR) Actual Old New Old New Old New

Revenue (mn) 1,713

2,161

2,775

2,970


112

177

198


112

177

198


14.31c

22.59c

25.25c


66.7

57.8

11.7





ROE (%) 5.3

7.7

9.5

10.1

Net debt/equity (%) net cash

net cash

0.3

3.3



6 October 2016


Nomura | Pos Malaysia Berhad 6 October 2016

98

Key data on Pos Malaysia Berhad Relative performance chart


Notes:


Absolute (MYR) 9.9 41.2 2.7 M cap (USDmn) 715.4

Absolute (USD) 8.8 36.7 9.8 Free float (%) 58.6

Rel to MSCI Malaysia 10.3 40.3 -0.6 3-mth ADT (USDmn) 1.6

Income statement (MYRmn) Year-end 31 Mar FY15 FY16 FY17F FY18F FY19F

Revenue 1,467 1,713 2,161 2,775 2,970

Cost of goods sold -1,232 -1,525 -1,858 -2,322 -2,454

Gross profit 235 188 303 454 517

SG&A -88 -102 -147 -200 -232



EBITDA 235 188 303 454 517

Depreciation -88 -102 -147 -200 -232

Amortisation

EBIT 147 86 156 254 285

Net interest expense 14 13 5 -6 -7

Associates & JCEs

Other income


Income tax -57 -32 -49 -71 -80



Other items

Preferred dividends


Extraordinary items -4 -8 0 0 0

Reported NPAT 100 59 112 177 198

Dividends -70 -63 -56 -88 -99

Transfer to reserves 29 -4 56 88 99


Reported P/E (x) 29.6 50.0 26.3 16.7 14.9

Normalised P/E (x) 28.4 43.9 26.3 16.7 14.9


Dividend yield (%) 2.4 2.1 1.9 3.0 3.3

Price/cashflow (x) 27.8 12.3 16.0 7.8 6.8

Price/book (x) 2.6 2.6 1.6 1.6 1.5

EV/EBITDA (x) 10.9 13.1 9.6 6.5 5.8

EV/EBIT (x) 17.4 28.7 18.6 11.7 10.6

Gross margin (%) 16.0 11.0 14.0 16.4 17.4

EBITDA margin (%) 16.0 11.0 14.0 16.4 17.4

EBIT margin (%) 10.0 5.0 7.2 9.1 9.6

Net margin (%) 6.8 3.4 5.2 6.4 6.7


Dividend payout (%) 70.6 106.7 50.0 50.0 50.0

ROE (%) 9.2 5.3 7.7 9.5 10.1

ROA (pretax %) na 6.8 8.0 9.1 9.3

Growth (%)

Revenue 16.8 26.1 28.5 7.0

EBITDA -19.9 60.8 50.1 13.8

Normalised EPS -35.4 66.7 57.8 11.7



Cashflow statement (MYRmn) Year-end 31 Mar FY15 FY16 FY17F FY18F FY19F

EBITDA 235 188 303 454 517

Change in working capital

102 -32 33 14




Free cashflow 2 128 -366 -9 28

Reduction in investments

Net acquisitions

-818

Dec in other LT assets 26 6 0 0 0

Inc in other LT liabilities

Adjustments 16 17 11 0 0

CF after investing acts 45 151 -1,173 -9 28

Cash dividends -38 -70 -63 -56 -88


Debt issue 0 50 57 0 0

Convertible debt issue

Others

CF from financial acts -38 -20 812 -56 -88

Net cashflow 6 131 -361 -65 -60

Beginning cash 439 446 577 216 150

Ending cash 446 577 216 150 90

Ending net debt

-478 -60 5 66

Balance sheet (MYRmn) As at 31 Mar FY15 FY16 FY17F FY18F FY19F






Total current assets 904 1,168 1,026 1,129 1,112

LT investments 31 31 31 31 31

Fixed assets 656 665 1,483 1,670 1,842

Goodwill 5 5 224 224 224

Other intangible assets


Total assets 1,681 1,869 2,826 3,115 3,270

Short-term debt 49 99 150 150 150

Accounts payable 462 618 804 1,005 1,062


Total current liabilities 512 717 955 1,156 1,213


Convertible debt 0 0 0 0 0


Total liabilities 558 753 1,014 1,215 1,272

Minority interest 0 0 4 4 4

Preferred stock

Common stock 269 269 905 905 905

Retained earnings

Proposed dividends

Other equity and reserves 854 847 903 991 1,090



Liquidity (x)

Current ratio 1.77 1.63 1.07 0.98 0.92

Interest cover na na na 43.5 40.1

Leverage

Net debt/EBITDA (x) net cash net cash net cash 0.01 0.13

Net debt/equity (%) net cash net cash net cash 0.3 3.3

Per share

Reported EPS (MYR) 12.73c 7.54c 14.31c 22.59c 25.25c

Norm EPS (MYR) 13.29c 8.59c 14.31c 22.59c 25.25c

FD norm EPS (MYR) 13.29c 8.59c 14.31c 22.59c 25.25c

BVPS (MYR) 1.43 1.43 2.31 2.42 2.55

DPS (MYR) 0.09 0.08 0.07 0.11 0.13

Activity (days)

Days receivable

83.0 84.7 88.2 95.4

Days inventory

2.6 2.4 2.1 2.1

Days payable

129.6 139.6 142.2 153.7

Cash cycle 0.0 -44.0 -52.5 -51.8 -56.2



99

Company overview Malaysia’s national postal provider

Pos Malaysia is the national postal provider for Malaysia. The postal provider has the

most extensive branch network coverage, serving every corner nationwide to 8.5mn

addresses. The scope of business centres on delivery of postal mail services (including

courier) as well as retail (over the counter transactions of various services).

Historical milestones

As the national postal provider, Pos Malaysia’s history can be traced back to the 1800s.

It underwent a listing exercise in 2001 through a reverse takeover of a Philio Allied

Berhad assuming its listing status. Then, wholly owned by Khazanah Nasional (unlisted),

the company was bought over by DRB (DRB MK, Not rated) in 2011, a local Malaysian

conglomerate, with its listing status unchanged.

Acquiring KLAS Group from parent company

In September 2016, the Group acquired a 100% stake in KLAS Group (an integrated

logistics player) from its parent company DRB. The deal was settled with the issuance of

new Pos Malaysia shares to the parent co. Following the acquisition, Pos Malaysia,

which was dominantly a retail centric business previously, now has a high portion of

contribution from various industries and manufacturers.

We present our view on Pos Malaysia in the form of a SWOT analysis below:

Fig. 161: SWOT analysis on Pos Malaysia

Strengths

- Leveraging on extensive nationwide postal network

coverage, this gives massive reach to retail base customers.

- Default provider of government-related transaction points,

such as payment of traffic summonses and tax payments.

- Low postal rates an attractive pull factor for consumers.

- Given the lower tier country grading by the Universal Postal

Union, resulting to low terminal due payments, Pos Malaysia

has been able to compete in securing more transhipment

volumes on mails routed to Europe and other parts of the

world.

Weaknesses

- Feedback on postal delivery service is mostly negative,

notably on its poor punctuality, but there has been a marked

improvement.

- Tied by social obligation to provide mail services in rural

areas which are loss making.

- The postal staff workforce is highly unionised and this could

bring inflexibility to the Group towards any cost restructuring.

Opportunities

- Acquisition of KLAS Group, an integrated logistics and

airport services provider, will bring more synergy

opportunities for the postal business in the ecommerce

fulfilment area.

- Joining both the postal and courier workforce into one

entity brings massive cost cutting potential as redundancies

are removed.

- Potential postal tariff hike would be positive to earnings.

- Review of the postal land parcels under the purview of the

Federal Government could potentially see assets being more

optimized as unnecessary costs are removed.

Threats

- The logistics sector is a very fragmented and competitive

industry.

- Liberalisation of the postal service industry.



100

Strengths Extensive network makes the Group the default provider of mail services and one-

stop solution centre.

Being the national mail provider, Pos Malaysia’s extensive nationwide coverage

comprising of 332 delivery branches and 699 post offices has made it the default choice

for consumers and government agencies to deliver mail and postal items. Its branch

network also serves as a one-stop solution for payment transactions which last year had

processed over 117mn transactions.

The bulk of its mailing volumes (albeit on a declining trend) is franked postal mails from

governments, banks, and other various industries. The natural decline in traditional mail

postage however has been partially offset by higher direct mail (marketing mail) volumes

although this is also facing a decline on the shift to online marketing given its cheaper

costs and wider audience reach. While we note that direct mail has its merits of having a

longer-lasting impact given its personalised touch, this advertising segment is also

seeing diminishing marketing impact.

Fig. 162: Pos Malaysia’s mail volume


Fig. 163: Pos Malaysia retail transactions


Fig. 164: Pos Laju (courier arm) % chg in volume y-y


Its extensive network reach to over 8.5mn different addresses serves as an important merit.

As Pos Malaysia charges lower postal rates than the other express couriers, this makes the

postal group’s courier arm, Pos Laju, the preferred postal service choice for consumers

conducting online C2C transactions and for the online home entrepreneurs. This alone

presents a very sizeable base for Pos Laju to rely on, which contributes as much as 60% of

its total courier volumes, with the rest from corporate accounts. Its most popular postal

product is the prepaid package, which generated MYR70mn revenue last year.

-30%-25%-20%-15%-10%-5%0%5%10%15%20%

0

200

400

600

800

1,000

1,200

1,400

1,600

FY

07

FY

08

FY

09

FY

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FY

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15 m

on

ths)

FY

13

FY

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FY

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FY

16

FY

17F

FY

18F

FY

19F

FY

20F

FY

21F

number of postal mails (LHS)

% chg y-y (RHS)(mn pieces)

-30%

-20%

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10%

20%

30%

40%

0

20

40

60

80

100

120

140

160

FY

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FY

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17F

FY

18F

FY

19F

FY

20F

FY

21F

Number of transactions by Pos Niaga (LHS)

% chg y-y (RHS)

(mn)

42%

5%

21%25%26%

22%

28%28%25%

20%

15%15%15%

0%

5%

10%

15%

20%

25%

30%

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40%

45%

FY

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FY

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FY

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FY

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FY

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FY

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FY

21F


101

Weaknesses Service feedback generally not positive

Feedback on postal delivery service is mostly negative, notably on its poor punctuality.

This is a common feedback for most postal providers generally, but from our

observations there has been a marked improvement, and in some instances, beyond

expectations.

Tied by social obligation to provide mail services in loss-making rural areas

While its extensive network reach can be attributed to as a key strength, it does have its

downside as some branches, notably in the rural areas, are operationally loss making

given insufficient volumes to operate feasibly. We understand from management that as

much as 2/3 of its branches are loss making. A review of the postal land parcels under

the purview of the Federal Government (which is almost 90% of their property plots)

could potentially see assets being more optimized as unnecessary costs are removed.

While there are no annual leases currently to this, it will expire by 2021. By then, a new

structural lease agreement will need to be agreed upon. We note that this is a key

priority for management where a dedicated team has been assigned to assess the

feasibility of all its property whether worthy of renewing the lease extension.

Postal staff workforce is very unionized

We understand that there are 5 different union workforces currently in Pos Malaysia.

While there has not been a financial urgency in the past to cut its workforce size to

enhance productivity and improve costs, this need may arise and could prove difficult to

implement. And given this union structure, it makes workforce deployment to other

entities within the group difficult, in our view.


102

Opportunities Competing for the postal transshipment market share

While Singapore has been the dominant country in ASEAN’s postal transshipment

market, Malaysia is aggressively catching up given its lower cost appeal, where Pos

Malaysia has seen significant volume increases from mail consolidators, particularly from

China.

This has also been the key culprit behind the sharp fall in Pos Malaysia’s FY16

profitability, as its transshipment handling revenue generated failed to cover expenses

(USD denominated). This is because then, prices were still quoted in local currency

(MYR), which had depreciated sharply y-y back then. We understand that transhipment

revenue generated by Pos Malaysia in FY16 was close to MYR240mn, which is a 700%

y-y increase from just MYR30mn in FY15. Pos Malaysia cited that it will likely see

transshipment revenue drop by 10% this year after negotiating for 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%.

Revenue synergies on comprehensive services to penetrate new clients

The recent acquisition of KLAS Group is expected to provide revenue synergies that

each side of the integrated logistics and mail business could tap into. We see

opportunities in creating customised integrated supply chain solutions for existing and

new clientele. With its fleet base no longer merely made up of delivery trucks and

motorbikes (in the mail business), but including air carriers (2 air freighters), haulage

trucks and warehouses, the scope of services that Pos Malaysia can provide can be

broadened further.

Sizeable expansion with regional ecommerce hub targeted

We understand that the postal group is expected to embark on some sizeable

expansions to provide fulfilment solutions accustomed for ecommerce players which Pos

Malaysia hopes to provide by some time next year. We note that a bulk of the logistics

expansion will be on its expanding its cargo operations where KLAS will be taking up

450,000 sqf space at the former LCCT (low cost carrier terminal), of which the group has

ambitions to be a regional ecommerce hub for the handling of both postal mail items

(including transshipment) as well as non-mail cargo. KLAS’ existing capacity has already

been constrained given the limited space and this has prevented the Group from

handling volumes from AirAsia (AIRA MK, Buy).

The expansion of the air cargo handling business will come together along with the

acquisitions of five 737-400 freighters over the next five years, each with a capacity of

18.5 tonnes of cargo and a 4.5 hours flying radius. This will allow the air cargo

operations to expand beyond its domestic routes currently to serve other ASEAN cities.

While Pos Malaysia has no dealings directly with China ecommerce players such as

Alibaba and JD.com, the company intends to approach them given the comprehensive

range of solutions it can potentially provide following the aircraft acquisitions and

expansion of its cargo operations hub, of which the latter is scheduled to be completed

some time early next year.

Cost synergy opportunities

On the cost side, integration of services and logistical network coverage is expected to

enhance its cost efficiencies further. Underutilized assets could be more optimized. From

what we gather from management, we note that Konsortium Logistik Berhad (KLB) is

suffering some business slowdown, particularly from its transportation services. These

underutilized vehicles could then be deployed to the mail operations.

Integrating its mail and courier workforce

Given the rapid increase in courier volumes, management is looking at the possibility of

joining the two workforces of mail and courier together. But this could be a tricky affair

because of the unionized workforce structure and different compensation levels of the

two postal entities. The aim of this exercise is to reduce the redundancies of which both

mail and courier segments are currently serving the same list of addresses. Completion


103

of this exercise will be progressive and management targets a three-year timeline at the

earliest.

Postal tariff hike in the offing?

Pos Malaysia is waiting for an increase in postal tariffs, which the quantum remains

unknown at this juncture. Parliamentary approval however will be required given that the

handling of mail is a regulated item. 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 increase in terminal dues scheduled by end of this

week, if any.

Its last round of tariff hike that had affected across all its products was done back in 2010

(its first hike after 18 years). It had also done another round of hike for international

postage back in 2013.

The potential postal tariff hike will be positive for earnings and TP upside, but could

partially be offset by lower volumes. We estimate that a 10% increase in effective postal

tariffs fetched by FY18, offset by a sharper drop of mail volume of 15%/10% in

FY18F/FY19F (from 7.6% each) would boost FY18F/FY19F/FY20F earnings by 19% /

17% / 14%. Our TP will therefore also be raised to MYR5.31.

Separately, its courier arm is also looking to raise tariffs. This can be done freely as the

industry is not regulated. There has not been any indication on the quantum, but

management did highlight their courier postal rates are the lowest in the industry.


104

Threats Logistics is a very fragmented and highly competitive industry

With the postal group becoming an integrated logistics player, this makes the group

more exposed to competition out of its monopolistic territory of the postal business.

Deemed as a very fragmented sector, the logistics sector has been fully liberalized in

Malaysia with no foreign ownership caps required. We see competition as a key risk to

the Group. Other key threats that need to be taken into consideration are the

liberalization of the postal industry (like Singapore and Philippines), although this

appears to highly unlikely given the unionized workforce.


105

Financials Revenue projections: Higher top line largely driven by integrated logistics

business

Noteworthy this year, Pos Malaysia will only see a half-year recognition on KLAS

Group’s consolidated numbers as the acquisition as a wholly owned subsidiary only

commenced in mid-September. Assuming a full-year consolidation this year, postal

revenue will continue to be the biggest contributor to revenue accounting for 72.5% of

total revenue. See our revenue breakdown below:

Fig. 165: Revenue breakdown

MYRmn unless stated otherwise


Postal:

We expect Pos Malaysia’s postal revenue to be driven by the courier segment owing to

the pick up in online shopping although the increase will be partly mitigated by the

declining trend in traditional mail as well in transshipment volumes, of which

management is guiding this year to be lower by 10% y-y. We estimate that retail

transactions will continue to modestly increase, primarily driven by its insurance

(premium collection) and Islamic pawn-broking business, which we expect to witness

impressive top-line y-y growth of 70% / 60% / 30% for FY17 / 18 / 19, respectively.

Integrated logistics:

On the logistics front, we believe that top-line growth over the next 5 years will primarily

be driven by air cargo business following the incoming capacity of 2 new aircraft in

FY17F and 1 each over the subsequent 3 years.

Another key driver to top-line growth will be the annual revenue from its dry bulk shipping

contract that KLB Group had sealed with Tenaga Nasional (TNB MK, Buy). Although this

is to commence on 1st September 2016 with management guiding MYR100mn annual

Postal group FY16 FY17F FY18F FY19F FY20F FY21F

Mail 905 831 789 750 728 713

Courier 556 702 851 988 1,148 1,333

Retail 198 204 214 222 228 231

Others 54 55 56 58 59 60

Sub total 1,713 1,792 1,910 2,018 2,163 2,337

% chg y-y FY17F FY18F FY19F FY20F FY21F

Mail -8% -5% -5% -3% -2%

Courier 26% 21% 16% 16% 16%

Retail 3% 5% 4% 3% 1%

Others 2% 2% 2% 2% 2%

Sub total 5% 7% 6% 7% 8%

KLAS Group FY16 FY17F FY18F FY19F FY20F FY21F

KLAS 201 213 228 249 265 283

KLB Group 294 306 400 414 428 443

Air cargo transportation 93 142 216 267 319 348

Aircraft and maintenance engineering services 18 20 21 23 25 27

Sub total 606 680 865 952 1,037 1,100

% chg y-y FY17F FY18F FY19F FY20F FY21F

KLAS 6% 7% 9% 7% 7%

KLB Group 4% 31% 3% 3% 3%

Air cargo transportation 52% 52% 24% 20% 9%

Aircraft and maintenance engineering services 7% 8% 10% 7% 7%

Sub total 12% 27% 10% 9% 6%

Total revenue (assuming full year in FY17) 2,320 2,473 2,775 2,970 3,200 3,437

% chg y-y 7% 12% 7% 8% 7%

Consolidated revenue 1,713 2,161 2,775 2,970 3,200 3,437

% chg y-y 26% 28% 7% 8% 7%


106

contribution, we conservatively pencil in this contribution only next year and at a lower

amount of MYR80mn. Valued at USD194mn (news link), this 10-year term charter

contract relates to the shipment of coal.

Elsewhere within the KLAS Group, revenue increases in other areas will be fairly

modest.

Costs: Opportunity for more cost improvements expected.

On the expectations of cost synergies, we look for margins to improve for both the postal

and logistics side, where postal margins are expected to see a bigger increment over the

coming years (Fig. 166). Note that the logistics side is fetching far better margins (17.8%

in FY17F) than its postal business (13.2% in FY17F). This is due to its commendable

EBITDA margins from its airport operations estimated to the tune of 20%.

Had it not been for the unproductive operational branches and postal outlets coupled

with the unionized workforce on the postal side, the postal business could have raked in

better profitability. As a comparison, despite the declining domestic mail volume (which

fetches higher margins), Singapore Post (SPOST SP; Buy) has been able to record EBIT

margins of 30% in FY16 for its postal mail business.

Postal:

The primary driver to margin expansion will be the economies of scale achieved from the

higher courier volumes and improved pricing of transshipment handling. Recall that in

FY16, despite seeing in excess of MYR240mn in revenue from transshipment volumes

(+700% y-y), Pos Malaysia suffered higher losses due to the mispricing attributed to the

weaker MYR. With the improved pricing seen, management guided that its

transshipment business is expected to be profitable with a PBT margin of roughly 7%.

Integrated logistics:

Of particular note, we have already factored in higher jet fuel prices for this year for its air

cargo operations to USD60 / USD70 / USD80 for FY17F/ FY18F/ FY19F, which

accounts for roughly 38-50% of its air express cargo revenue. Given the lack of clarity in

costs from management currently we assume that margins are likely to inch higher for

the logistics side on the premise of a profitable time charter contract from Tenaga and

cost synergies realized within the Group, particularly in optimising its asset utilisation.

We table our cost expectations below at the EBITDA level:

http://klb.my/pnsl-awarded-a-10-year-contract-of-affreightment-coa-by-tnb-fuel-services-ed-1474/


107

Fig. 166: Breakdown of opex and costs between the Group



Lower financing costs as KLAS’s existing borrowings are recapitalised

A key component of the KLAS acquisition deal is the novation of MYR283.6mn in

borrowings to its previous owner, DRB, in exchange for issuance of new shares to them

– indirectly recapitalizing the borrowings. This also involves recapitalising another

MYR172.56mn in existing borrowing facilitated by DRB as well. Combined, this amounts

to MYR456.2mn in borrowings being wiped out and therefore saving a sizeable amount

of interest where MYR29.2mn was incurred back in FY15. As a result to this, we expect

KLAS’s net profit margin in FY17F at 8.3% to be higher than its postal entity of 4.6%

(Fig. 167).

Balance sheet: Still looking solid despite high capex

As the Group is embarking on an aggressive expansion plan, we foresee very sizeable

capex over the next three years, which will amount to MYR550mn / MYR387mn /

MYR404mn respectively for FY17F / FY18F / FY19F. This entails the following:

1) Setup of cargo hub at the LCCT;

2) Roll out of parcel box lockers (up to 100 by end 2016 CY);

3) Drive-through postal outlets (10-11 outlets within the on year);

4) Acquisition of 2 bulk carrier vessels for the TNB charter agreement; and

5) Acquisition of 2 / 1 / 1 aircraft in FY17F / 18F/ 19F.

Post-acquisition, we expect its balance sheet to be weaker. This will likely see Pos

Malaysia obtaining more bank borrowings, resulting to a net gearing position of less than

3% by FY19F. Nonetheless, we think its balance sheet is still in a solid position.

Opex breakdown FY16 FY17F FY18F FY19F FY20F FY21F

Postal opex (1,525) (1,555) (1,620) (1,681) (1,777) (1,921)

Logistics opex (516) (559) (701) (773) (827) (872)

Total opex (assuming full year in FY17) (2,041) (2,114) (2,322) (2,454) (2,604) (2,793)

Consolidated opex (1,525) (1,858) (2,322) (2,454) (2,604) (2,793)

% chg y-y FY16 FY17F FY18F FY19F FY20F FY21F

Postal opex 2% 4% 4% 6% 8%

Logistics opex 8% 25% 10% 7% 5%

Total opex (assuming full year in FY17) 4% 10% 6% 6% 7%

Consolidated opex 22% 25% 6% 6% 7%

EBITDA breakdown FY16 FY17F FY18F FY19F FY20F FY21F

Postal 188 237 290 337 387 416

Logistics 90 121 164 180 210 229

Total EBITDA (assuming full year in FY17) 278 358 454 517 596 644

Consolidated EBITDA 188 303 454 517 596 644

% chg y-y FY16 FY17F FY18F FY19F FY20F FY21F

Postal EBITDA 26% 22% 16% 15% 8%

Logistics EBITDA 34% 35% 9% 17% 9%

Total EBITDA (assuming full year in FY17) 29% 27% 14% 15% 8%

Consolidated EBITDA 61% 50% 14% 15% 8%

EBITDA margin breakdown FY16 FY17F FY18F FY19F FY20F FY21F

Postal 11.0% 13.2% 15.2% 16.7% 17.9% 17.8%

Logistics 14.9% 17.8% 19.0% 18.9% 20.2% 20.8%

Effective EBITDA margin (assuming full year in FY17) 12.0% 14.5% 16.4% 17.4% 18.6% 18.7%

Effective consolidated EBITDA margin 11.0% 14.0% 16.4% 17.4% 18.6% 18.7%


108

Earnings expectations

With Pos Malaysia only consolidating KLAS Group in mid-September, the earnings will

be mostly distorted when measured on a y-y basis until FY19. Nevertheless, earnings

momentum is expected to remain strong lifted by the combination of both top-line growth

and margin expansion from cost synergies. The postal group is expected to register

double-digit growth until FY20F.

Fig. 167: Breakdown of Core PATAMI between the Group



Core PATAMI breakdown (MYRmn) FY16 FY17F FY18F FY19F FY20F FY21F

Postal 67 82 94 109 129 136

Logistics 23 56 82 88 104 113

Core PATAMI (assuming full year in FY17) 90 138 177 198 233 249

Consolidated core PATAMI 67 112 177 198 233 249

Core PATAMI % chg y-y FY16 FY17F FY18F FY19F FY20F FY21F

Postal 21% 16% 16% 18% 5%

Logistics 143% 47% 7% 18% 9%

Core PATAMI (assuming full year in FY17) 53% 28% 12% 18% 7%

Consolidated core PATAMI 67% 58% 12% 18% 7%

Core PATAMI margin breakdown (%) FY16 FY17F FY18F FY19F FY20F FY21F

Postal 3.9% 4.6% 4.9% 5.4% 6.0% 5.8%

Logistics 3.8% 8.3% 9.5% 9.3% 10.0% 10.3%

Core PATAMI (assuming full year in FY17) 3.9% 5.6% 6.4% 6.7% 7.3% 7.2%

Consolidated core PATAMI 3.9% 5.2% 6.4% 6.7% 7.3% 7.2%


109

Valuation and recommendation We derive our TP based on sum of the parts as detailed below:

• We use a DCF on its free cash flow to firm over the period FY18-FY48 at a WACC of

8.1%. Our terminal value is derived with a terminal growth rate of 3% on COE of 10.4%.

• We use a target P/E multiple of 15x on FY18 earnings for its integrated logistics division

(KLAS Group), which is slightly lower than the Asia peers’ average of 17x.

• We add the forecasted net cash balance for FY17F.

• We also add a valuation of MYR199mn on its five owned landbank parcels that Pos

Malaysia can monetize on, eventually.

Fig. 168: Sum of parts derived TP for Pos Malaysia


Source: Nomura, Company data

Our sum of parts TP implies FY18/FY19 P/Es of 21x/19x respectively, in line with the

P/Es fetched by postal and express delivery peers combined of 22x / 18x respectively.

When taking into context its 3 year projected CAGR of 43% (FY16-19), the stock is

trading at only 0.6x PEG which suggests scope for upside potential noting that its other

postal peers are trading at only 2.7x.

FY17 FY18 FY19 FY20 FY21… FY31… FY41… FY48

F F F F F F F F

EBITDA 237 290 337 387 416 564 1,104 1,513

EBITDA (1-t) 178 217 253 290 312 423 828 1,135

+Depreciation(corporate tax) 30 36 42 47 52 83 105 118

+WC inv 76 20 15 (18) (29) (53) (118) (159)

-Capex (277) (293) (309) (187) (190) (224) (259) (284)

FCFF 7 (20) 1 132 146 230 555 810

PV FCFF 7 (18) 1 98 98 58 52 38

Risk free rate 3.3%

Market risk premium 11.2%

Beta 90.0%

Cost of equity 10.4%

Growth rate 3.0%

after tax debt rate 3.8%

Equity 65%

Debt 35%

WACC 8.1%

Sum of parts

1) Postal entity

FY18F-48F 1,773.4

Terminal value 527.7

2,301.1

2) KLAS Group (15x FY18 P/E) 1,236.2

3) Net cash 60.0

4) Landbank owned to be monetized 199.0

Total 3,796.3

Number of shares 782.8

TP (MYR) 4.85


110

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.


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


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.

Research analysts





GD Express Carrier Bhd

GDEX.KL GDX MK


A formidable regional player in the making

The best in class

Action and valuations: High valuation backed by high ROICs; BUY.

We initiate coverage of GD Express with a Buy rating and DCF-derived TP of

MYR2.21. Our TP implies FY17/ FY18F PEs of 80x /63x, vs the peer averages

of 16x / 14x. We believe this premium valuation is justified given its high cash

ROIC – WACC spread (FY17F: 18.2%) and EBITDA margins (FY17F: 21%),

which is double the number achieved by its peers due to its minimal capex

infrastructure and optimised efficiency at capital allocation. Profitability

margins are also far superior to peers, given its cost efficiencies and higher

portion of the B2B client base which bring in more economies of scale on

volume. We forecast an earnings CAGR of 25% over the next five years

(FY16-21F), on the back of our forecast 20% CAGR in volumes boosting

profitability margins on improved economies of scale.

Riding on the rapid rise in e-commerce volumes; 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. Volumes in the past could have been higher, had it not

been constrained by a capacity bottleneck which was addressed two months

ago by converting its parking space (40,000 sqft) as an extension to its

existing sorting centre. This move, according to management, should boost

capacity by 28%-40%, which we expect will benefit GDEX.

Catalyst: Yamato collaboration; regional expansions.

We believe Yamato's entry as a strategic shareholder is a positive, thus

paving the way for higher volumes fed into GDEX, as its local last mile delivery

partner. Yamato has recently stepped up its regional expansion into Thailand

and acquired a Malaysia-based cross-border trucking company thus giving it

operational reach into China. We see scope for revenue synergies with

potential cross-offerings.

Risks: Intensifying competition and macro slowdown impacting on spending.

Year-end 30 Jun FY16

FY17F

FY18F

FY19F

Currency (MYR) Actual Old New Old New Old New

Revenue (mn) 220

266

326

398


43

55

67


43

55

67


3.12c

3.96c

4.87c

FD norm. EPS growth (%) 22.0

23.1

26.9

23.2





ROE (%) 13.0

10.6

12.2

13.7

Net debt/equity (%) net cash

net cash

net cash

net cash



6 October 2016


Nomura | GD Express Carrier Bhd 6 October 2016

112

Key data on GD Express Carrier Bhd Relative performance chart


Notes:


Absolute (MYR) 15.2 8.1 52.6 M cap (USDmn) 583.5

Absolute (USD) 14.1 4.6 63.2 Free float (%) 30.0

Rel to MSCI Malaysia 15.6 7.1 49.3 3-mth ADT (USDmn) 0.1

Income statement (MYRmn) Year-end 30 Jun FY15 FY16 FY17F FY18F FY19F

Revenue 197 220 266 326 398

Cost of goods sold -156 -174 -209 -253 -306

Gross profit 40 46 57 73 91

SG&A -9 -9 -12 -14 -18



EBITDA 40 46 57 73 91

Depreciation -9 -9 -12 -14 -18

Amortisation

EBIT 32 36 45 59 74

Net interest expense 0 5 9 10 10

Associates & JCEs

Other income


Income tax -3 -6 -11 -14 -17



Other items

Preferred dividends


Extraordinary items 0 -1 0 0 0

Reported NPAT 28 34 43 55 67

Dividends

Transfer to reserves 28 34 43 55 67


Reported P/E (x) 85.0 69.9 55.8 44.0 35.7

Normalised P/E (x) 83.7 68.7 55.8 44.0 35.7


Dividend yield (%) 0.6 0.6 0.6 0.8 1.0

Price/cashflow (x) 112.7 59.0 71.7 59.1 43.4

Price/book (x) 17.0 6.2 5.6 5.1 4.7

EV/EBITDA (x) 58.6 46.7 36.7 28.2 22.3

EV/EBIT (x) 74.6 58.9 46.3 35.1 27.7

Gross margin (%) 20.6 20.7 21.4 22.4 23.0

EBITDA margin (%) 20.6 20.7 21.4 22.4 23.0

EBIT margin (%) 16.1 16.4 17.0 18.0 18.6

Net margin (%) 14.4 15.7 16.2 16.8 16.9


Dividend payout (%) 0.0 0.0 0.0 0.0 0.0

ROE (%) 23.7 13.0 10.6 12.2 13.7

ROA (pretax %) 28.6 28.6 33.5 39.6 42.5

Growth (%)

Revenue 24.0 11.7 21.2 22.4 22.0

EBITDA 22.7 12.4 25.4 28.0 25.2

Normalised EPS 18.7 22.0 23.1 26.9 23.2

Normalised FDEPS 18.7 22.0 23.1 26.9 23.2


Cashflow statement (MYRmn) Year-end 30 Jun FY15 FY16 FY17F FY18F FY19F

EBITDA 40 46 57 73 91

Change in working capital -15 1 -3 -4 -4




Free cashflow 14 37 25 37 26

Reduction in investments 0 0 0 0 0

Net acquisitions 0 0 0 0 0

Dec in other LT assets 0 0 0 0 0

Inc in other LT liabilities 0 0 0 0 0

Adjustments 1 6 10 11 13

CF after investing acts 16 43 35 48 39

Cash dividends 0 -1 -1 -15 -19


Debt issue -7 -10 7 12 8

Convertible debt issue -4 -3 -2 -1 0

Others 18 -4 1 -1 -2

CF from financial acts 6 200 5 -5 -14

Net cashflow 22 243 40 43 25

Beginning cash 42 65 307 347 390

Ending cash 65 307 347 390 415

Ending net debt -36 -282 -315 -346 -363

Balance sheet (MYRmn) As at 30 Jun FY15 FY16 FY17F FY18F FY19F






Total current assets 122 367 414 466 501

LT investments

Fixed assets 46 47 54 60 87

Goodwill

Other intangible assets


Total assets 189 435 489 545 607

Short-term debt 5 6 8 11 13

Accounts payable 3 2 2 3 4


Total current liabilities 21 26 32 40 49


Convertible debt


Total liabilities 48 49 60 77 91

Minority interest

Preferred stock

Common stock 62 69 69 69 69

Retained earnings

Proposed dividends

Other equity and reserves 80 318 360 399 447

Total shareholders' equity 141 387 429 469 516

Total equity & liabilities 189 435 489 545 607

Liquidity (x)

Current ratio 5.82 14.23 12.99 11.53 10.26

Interest cover 2,268.7 na na na na

Leverage

Net debt/EBITDA (x) net cash net cash net cash net cash net cash

Net debt/equity (%) net cash net cash net cash net cash net cash

Per share

Reported EPS (MYR) 2.05c 2.49c 3.12c 3.96c 4.87c

Norm EPS (MYR) 2.08c 2.53c 3.12c 3.96c 4.87c

FD norm EPS (MYR) 2.08c 2.53c 3.12c 3.96c 4.87c

BVPS (MYR) 0.10 0.28 0.31 0.34 0.37

DPS (MYR) 0.01 0.01 0.01 0.01 0.02

Activity (days)

Days receivable 75.3 80.5 68.6 62.2 56.6

Days inventory 3.4 3.0 2.3 2.4 2.4

Days payable 8.5 5.4 3.7 3.8 3.8

Cash cycle 70.3 78.1 67.2 60.8 55.2



113

Company overview GD Express (GDEX), established in 1996, is an express courier company based in

Malaysia. The company is managed by its CEO, Mr Teong Teck Lean, who stepped in

as an angel investor and helped put the company, which was troubled by the 1997

financial crisis, on track. To date, GD Express maintains the stand-alone operations of a

pure courier company.

Investment thesis and SWOT analysis

We present our view on GDEX in the form of a SWOT analysis:

Fig. 172: SWOT analysis for GDEX

Strengths

- Prudent cost and capex approach.

- An established brand with high service reliability.

- Increasing online shopping volumes drive margin expansion.

- Sorting capacity strategically located within the proximity of KL.

Weaknesses

- A small share of retail base customers.

- Not up-to-date on technology for the convenience of its retail consumers.

- Limited network coverage, compared with Pos Malaysia.

Opportunities

- Scope for revenue synergies with potential cross-offerings with Yamato and Singapore Post.

- Regional ambitions into Indonesia.

Threats

- Competition between start-ups and incumbent providers.



114

Strengths Prudent cost and capex approach

Despite a significant increase in revenue, GDEX has been very prudent about capex.

Optimised capex outlays, a cost efficient business model, coupled with improved

economies of scale given the growth in volumes have helped maximise cash ROIC (28%

for FY16).

GDEX was able to achieve very decent FCFF of MYR98.8mn over FY09-FY16 after

netting off capex of MYR55mn over the same time period. The company has one of the

highest cash ROICs among the logistics and last mile delivery players in Malaysia,

second to Blue Dart Express (BDE IN, NR).

Capex has been predominantly allocated for maintenance, equipment and machinery.

While fleet expansion would be part of capex, it is mostly transacted as hire purchase,

which essentially defines it under an operating lease structure, and is therefore not

captured in the cash flow statement as cash capex, although hire purchase transactions

are captured as plant, property and equipment, which have already been accounted for

in our cash ROIC computation.

Fig. 173: FCFF and cash ROIC trend


The trusted courier in the corporate segment

A key to GDEX’s success is its delivery service reliability, which has helped the group to

secure sizeable pie of B2B corporate accounts as its key customers. Its key customers

are from various industries such as banking, manufacturing, property, healthcare, and

telecommunications. The types of postal items from these accounts are mostly express

documents. According to management, this segment accounts for 70% of its volume and

revenue, but a bigger and relatively higher percentage as a proportion of earnings given

the higher margins.

High service reliability also paves way for partnerships with international air

express providers

GDEX also works together with international express couriers such as DHL, Fedex as

the local last delivery agent for international inbound postal items, given its high delivery

reliability standards. This collaboration also applies for outbound shipments. Such

working collaboration has made GDEX a trusted name while securing new customers

and to retain customer loyalty.

Increasing online shopping penetration sees volume picking up for online players.

The key customers of GD Express, that have seen rapid growth on the back of higher

online spending propensity, are Alibaba’s Lazada and Astro’s Go Shopping. The other

online shopping providers who use GDEX’s courier services include 11street, GemFive

and Groupon. Together, online shopping B2Cs accounts for close to 30% of their total

revenue from only just less than 10% in 2013. GDEX has been able to secure sizeable

0%

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FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17FFY18FFY19FFY20FFY21F

ROE Cash ROIC


115

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.


Fig. 175: Tonnage volumes handled

We expect tonnage volumes handled to increase by 20% over the next few years


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

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Daily sorting capacity - '000 items/day(RHS)

Utilization (LHS)

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Tonnage volume handled (LHS)

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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%.


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


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.










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.



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)


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


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


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



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



GD Express 23,446 Malaysia 2

Skynet 16,405 Malaysia 1

Ninjavan 15,015 Malaysia 1


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



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

Revenue 116.3 135.2 158.7 196.8 219.8 266.3 326.0 397.7 485.2 592.0 21.9% 21.9%

Daily sorting capacity ('000) 60 60 60 72 78 100 100 100 200 200 8.6% 20.7%

% chg y-y 100% 0% 0% 20% 8% 28% 0% 0% 100% 0%

Utilisation (%) 50% 58% 70% 70% 75% 70% 84% 101% 61% 73%

Sortings per day ('000) 29.8 34.6 42.0 50.4 58.5 70.2 84.2 101.1 121.3 145.6 20.0% 20.0%

Volume per annum ('000) 9,310 10,783 13,104 15,725 18,252 21,902 26,283 31,539 37,847 45,417 0 20.0%

Average weight per consignment (kg) 2.58 2.58 2.58 2.55 2.54 2.54 2.54 2.54 2.54 2.54 0.0% 0.0%

Tonnage 23,990 27,786 33,766 40,118 46,337 55,604 66,725 80,070 96,084 115,300 20.0% 20.0%

% chg y-y 17% 16% 22% 19% 16% 20% 20% 20% 20% 20%

Revenue per kg 4.70 4.90 4.74 4.79 4.89 4.97 5.05 5.13 1.6% 1.6%

% chg y-y 4% -3% 1% 2% 2% 2% 2%


120

Fig. 182: Cost assumptions and margin trend



Cost Assumtions FY12 FY13 FY14 FY15 FY16 FY17F FY18F FY19F FY20F FY21F 3 Year CAGR 5 Year CAGR

Transportation 22.8 26.5 32.9 37.0 40.8 49.7 60.8 74.0 90.2 109.8 21.9% 21.9%

Total fleet count (including delivery bikes) 1,318 1,454 1,728 2,053 2,439 2,897 3,442 18.8% 18.8%

Transportation cost per vehicle 28,079 28,753 29,616 30,356 31,115 31,893 2.6% 2.6%

% chg y-y 2% 3% 3% 3% 3%

Warehouse charges 1.0 1.0 1.0 1.2 1.2 1.2 1.2 1.2 1.2 1.2 0.0% 0.0%

% chg y-y 3% 0% 22% 2% 0% 0% 0% 0% 0%

Rental of premises 2.5 2.9 3.6 4.7 4.8 4.9 5.1 5.2 5.3 5.5 2.6% 2.6%

% chg y-y 19% 22% 31% 2% 2% 3% 3% 2% 2%

Staff costs 58.4 63.7 73.8 93.3 105.9 131.5 163.2 202.6 249.1 306.3 24.1% 23.7%

% chg y-y 9% 16% 26% 13% 24% 24% 24% 23% 23%

Cost per staff (MYR) 31.87 33.80 35.49 37.27 39.13 41.09 42.73 44.44 5.0% 4.6%

% chg y-y 6% 5% 5% 5% 5% 4% 4%

Staff Strength (#) 1,826 2,013 2,315 2,761 2,984 3,528 4,171 4,931 5,830 6,892 18.2% 18.2%

% chg y-y 19% 8% 18% 18% 18% 18% 18%

Others 13 14 14 20 21 22 23 23 24 24 2.6% 2.6%

% chg y-y

Total Opex 97.5 107.6 125.7 156.3 174.2 209.3 252.9 306.3 369.6 447.2 20.7% 20.7%

Margins FY12 FY13 FY14 FY15 FY16 FY17F FY18F FY19F FY20F FY21F

EBITDA 16.2% 20.4% 20.8% 20.6% 20.7% 21.4% 22.4% 23.0% 23.8% 24.5%

EBIT 11.8% 16.0% 16.4% 16.1% 16.4% 17.0% 18.0% 18.6% 19.5% 20.5%

PBT 10.6% 15.2% 16.0% 16.1% 18.6% 20.2% 21.0% 21.2% 21.7% 22.5%

Core PATAMI 7.5% 11.0% 15.4% 14.6% 15.9% 16.2% 16.8% 16.9% 17.4% 18.0%

Core ROE 16.8% 22.9% 25.1% 20.3% 9.1% 10.0% 11.7% 13.0% 14.6% 16.3%


121

Valuation and recommendation We initiate coverage of GD Express with a Buy rating and DCF-derived TP of MYR2.21.

Our TP implies 27% upside and FY17 / FY18F PEs of 80x /63x respectively vs its peer

averages of 16x / 14x. We believe this premium valuation is justified given its high cash

ROIC – double the number achieved by its peers due to its minimal capex infrastructure

and optimised efficiency at capital allocation. Profitability margins are also far superior

compared with its peers, given GDEX’s cost efficiencies and a higher portion of the B2B

client base which brings in more economies of scale on volume.

Fig. 183: DCF-derived TP methodology


Fig. 184: Implied valuations


FY15 FY16 FY17F FY18F FY19F FY20F FY21F…. FY30F…. FY39F

Operating cash flow 21 41 34 41 55 75 104 328 659

Capex -7 -4 -9 -4 -29 -18 -9 -76 -32

FCF 14 37 25 37 26 57 95 252 627

PV 14 37 23 31 20 40 61 74 83

WACC computation

Risk free rate 3.25%

Market risk premium 11.2%

Beta 0.80

Cost of equity 9.6%

After-tax cost of debt 4.0%

Long term weightage for equity 91.9%

Long term weightage for debt 8.1%

WACC 9.2%


NPV FY17-FY39 1,649

TV FY40 onwards 1,201

Total 2,850

Net cash FY7F 315

Net total 3,164

Cash from conversion of warrants 274

Interest savings on borrowings 11

Total valuation 3,449

Expanded share base 1,562

TP (MYR) 2.21


Core P/E 80.0 63.0 51.2 40.9 32.3

EV/EBITDA 54.9 42.5 33.7 26.3 20.5

P / Op CF 102.8 84.6 62.2 46.1 33.3

P/ FCF 139.5 93.7 130.6 61.0 36.3

FCF yield (%) 1% 1% 1% 2% 3%

P/B 8.0 7.4 6.7 6.0 5.3


122

Valuation perspective, what to look for? Analysing the two best players in this

class

Stock rerates on the back of strong cash ROIC

Riding on the current tailwind of increasing online shopping penetration – which we

believe will continue – we first analyse the two most fundamentally sound last mile

delivery players in Asia: 1) Malaysia-based GD Express and 2) India-based Blue Dart

Express. One thing in common between the two players is their steep valuations with

forward FY17 / 18 P/Es of 80x/63x (GDEX) / 55x/51x (Blue Dart), respectively.

Both have witnessed strong growth in profitability on the back of structural growth in

ecommerce handling volumes; as a result, their stock prices have seen a strong uptrend

over recent years.

Fig. 185: Stock price and cash ROIC trend - GD Express

Source: Nomura research, Company data, Bloomberg

Fig. 186: Stock price and cash ROIC trend - Blue Dart

Source: Nomura research, Company data, Bloomberg

Fig. 187: Revenue and core PATAMI trend – Blue Dart


Fig. 188: Revenue and core PATAMI trend – GD Express


Both GD Express and Blue Dart are among the best last mile delivery players, by

measure of their solid fundamentals. Optimised capex outlays, cost efficient business

models, along with improved economies of scale on the back of volume growth have

maximised the cash ROICs of the two courier players – well above their respective

WACC – and far ahead of their peers (Fig. 189). Put in perspective, this has helped to

maximise the dollar content of invested capital.

We believe this is the underlying key to share price outperformance in the long run.

15%

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123

Fig. 189: Comparison of best last mile players

Blue Dart and GD Express lead by measure of cash ROIC spread (against WACC), but a new contender - LBC Express is emerging


Are the high P/E multiples justified?

To identify whether a stock is cheap in the long run, one would need to look for a low P/E

stock combined with superior cash ROICs (against its WACC). Sometimes, this may be

hard to come by, especially for low P/Es. Therefore, companies with demanding forward

P/E multiples, at a glance, may appear to be excessive when it is actually not the case,

especially with GD Express. Therefore, we believe GDEX’s P/Es will continue to be

demanding as long as it is justified by its cash ROIC. We have discussed this in more

detail in our pecking order framework.

Given their superior cash ROICs, both GD Express and Blue Dart have witnessed

superior stock returns of 840% and 734% respectively since 2010, with P/E multiples

rerating from 32x to 58x for GD Express and from 32x to 63x for Blue Dart (Fig. 190)

Fig. 190: Cash ROIC spread vs forward P/E scatter plot

Higher the cash ROIC spreads, higher will be the P/E multiples

Legend: FY-5 (pink) , FY-1 (red), FY+ 1 (Grey)

Source: Nomura research, Bloomberg

FYE FY - 5 FY - 1 FY + 1 FY - 5 FY - 1 FY + 1 FY - 5 FY - 1 FY + 1 FY - 5 FY - 1 FY + 1

Blue Dart Express March 27% 66% 59% 17% 55% 49% 8% 7% 7% 12% 13% 12%

GD Express June 18% 28% 27% 9% 19% 18% 8% 16% 16% 16% 21% 21%

LBC Express Dec 19% 23% 9% 13% 6% 9% 13% 16%

UPS Dec 15% 15% 15% 6% 8% 8% 9% 9% 9% 16% 17% 17%

Pos Malaysia Mar 33% 12% 11% 21% 4% 3% 11% 4% 5% 20% 11% 14%

Singapore Post Mar 26% 10% 11% 21% 4% 4% 23% 12% 11% 36% 19% 18%

Fedex May 12% 11% 11% 1% 3% 3% 5% 8% 5% 13% 15% 14%

CJ Express Dec 5% 9% 10% -5% 3% 5% 2% 1% 2% 8% 6% 6%

Yamato Holdings Mar 8% 9% 9% 0% 1% 1% 2% 3% 3% 8% 8% 8%

Cash ROIC Spread = Cash ROIC - WACC Net margin EBITDA margin

Blue Dart

SingPost

Pos Malaysia

GD Express

Blue Dart

SingPost

Pos Malaysia

GD Express Blue Dart

SingPost

Pos Malaysia

GD Express

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124

Fig. 191: Forward P/E trend

Source: Bloomberg

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BEst P/E Ratio (Next Ann) Mean: 42.4x

-1 stdev: 32.6x +1 stdev: 52.2x

-1.5 stdev: 27.7x +1.5 stdev: 57.1x


125

Appendix A-1

Analyst Certification

We, Ahmad Maghfur Usman and Riddhi Jain, hereby certify (1) that the views expressed in this Research report accurately

reflect our personal views about any or all of the subject securities or issuers referred to in this Research report, (2) no part of

our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this

Research report and (3) no part of our compensation is tied to any specific investment banking transactions performed by

Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.

Issuer Specific Regulatory Disclosures

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.

Materially mentioned issuers

Issuer Ticker Price Price date Stock rating Previous rating Date of change Sector rating

Yamato Holdings 9064 JP JPY 2,325.5 05-Oct-2016 Neutral Reduce 01-May-2014 N/A

Softbank Group 9984 JP JPY 6,566 05-Oct-2016 Buy Rating Suspended 29-Oct-2014 N/A

Alibaba Group Holding BABA US USD 105.45 04-Oct-2016 Buy Not Rated 29-Oct-2014 N/A

GD Express Carrier Bhd GDX MK MYR 1.69 05-Oct-2016 Buy Not rated 06-Oct-2016 N/A

LBC Express Holdings Inc LBC PM PHP 11.88 05-Oct-2016 Buy Not rated 06-Oct-2016 N/A

Pos Malaysia Berhad POSM MK MYR 3.69 05-Oct-2016 Buy Not rated 06-Oct-2016 N/A

Singapore Post SPOST SP SGD 1.52 05-Oct-2016 Buy Not rated 06-Oct-2016 N/A

Rating and target price changes

Issuer Ticker Old stock rating New stock rating Old target price New target price

GD Express Carrier Bhd GDX MK Not rated Buy N/A MYR 2.21

LBC Express Holdings Inc LBC PM Not rated Buy N/A PHP 17.05

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.


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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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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.

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