Weekly Analysts On Demand Series: Logistics Industry Overview and Your Stock Vote! #analystsondemand
This column is jointly written by @fayewang, @gordon_ong and @J_Chou
-Faye is both a fundamental analyst and economist by nature. She is a global thinker who’s open-minded and enjoys learning from the market.
-Gordon has a demonstrable interest in equity investments, financial markets, and negotiating deals. As @NTUInvestmentClub president, he has an understanding of what factors drive an organisation’s success.
-Jay has an interest in global macro trends, financial markets and equity research and enjoys applying a combination of the three in his investments. His eventual investing goal is to manage a risk parity portfolio and achieve true financial freedom.
Together, they are your analysts on demand!
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Disclaimer: this article simply provided analysis on stocks from the fundamental perspective, it does not represent any buy/sell recommendation from Investingnote. *All the dollar unit ($) in this article refer to SGD.
Picture retrieved from: Transport and Storage Services Industry Infographic
The Logistics and Transportation industry is a key cornerstone of Singapore’s economy, contributing $27.9billion or 6.9% of the country’s GDP. Its strategic location and world class infrastructure meant that Singapore is a leading logistical player in the Asia Pacific region, with World Bank ranking the nation as the No.1 Logistics Hub in Asia in the 2014 Logistics Performance Index. Currently, Singapore is a prime location for major logistics firms, with 20 of the top 25 global logistics firms such as DHL, Schenker, UPS etc. conducting their operations here. Breaking down by sectors, marine cargo is the largest contributor, generating 64.7% of total turnover in the industry followed by air cargo at 17.9% and warehousing and storage at 2.5%.
In 2016, the industry received a further boost from the Singapore government, as the Ministry of Trade and Industry launched the Logistics Industry Transformation Map (ITM) scheme which aims to optimise current logistics systems through more effective resource allocation and leveraging of technology e.g. deployment of federated lockers and cloud based supply chain management. The transformation of the industry is expected to value-add S$8.3 billion, and introduce 2,000 new PMET (professionals, managers, executives and technicians) until 2020.
Source: Logistics ITM Infographic, retrieved from:
Changi Airport is one of Asia’s largest cargo airports and the world’s 15th largest cargo hub by volume, handling up to 2 million tonnes of cargo annually. Global cargo market have been struggling to maintain sustained growth since the end of the global economic downturn in 2009, with air cargo volumes remaining flat due to slower rates of growth in key emerging markets, ongoing currency volatility and the reduce in demand for airfreight. In Asia, Singapore face stiff competition from its Asia Pacific competitors, notably China who has been growing at an annual rate of 13.6% and now dominate 48% of the transpacific cargo market. This has had a negative effect on local air cargo operators, with Singapore Airlines Group subsidiary SIA Cargo being unprofitable for seven of the past eight years, with yields in steady decline leading to consistent losses despite having scaled down on its operations. Nevertheless, recent events may suggest that the situation could be turning around. Changi has reported air cargo shipments rising 6.3 per cent in 2016 and a positive outlook is expected for 2017, and the recent launch of the S$140 million DHL Express South Asia Hub at Changi Airport further bolsters Singapore’s air freight industry.
Statistics retrieved from: SIA Investor Relations Annual News Release 2010-2017
Singapore boasts one of the busiest shipping ports in the world, and its status as a major transshipment hub has long been one of the bedrock of the nation’s economy. However, similar to air cargo, container throughput at Port of Singapore have seen a decline since 2014, with container throughput falling by 9 per cent due to increased regional competition and decrease in international trade amidst uncertain global market conditions. The global shipping industry has also seen a tumultuous 2016, with major Korean shipping line Hanjin declaring bankrupt and a wave of M&A consolidations amongst shipping companies. Recent developments by regional competitors also looks to threaten Singapore’s position. While the Port of Singapore has seen declining container throughput year on year, Malaysia’s Port Klang has seen an increase of 10.8 per cent in container throughput in 2016. Furthermore, China’s aggressive investments into Malaysian ports and rail links under its ‘One Belt One Road’ scheme which includes a new S$14 billion port to be completed in 2019 looks to further threaten Singapore’s position as the main trading port in Southeast Asia.
Despite the uncertain climate, there is still room for optimism as Singapore still holds a competitive advantage in terms of efficiency, security and the infrastructure of its ports. Looking towards the future, the country is improving its technology of its ports and shifting activities away from Tanjong Pagar and Pasir Panjang to Tuas by 2027 to improve competitiveness. The new Tuas port will carry nearly twice the capacity of the current ports, being able to hold 65 million Twenty-Foot Equivalent Units (TEUs) of containers annually, which will make it the largest port terminal in terms of capacity in the world.
Source: Karamjit Kaur et al. “Full steam ahead for new Tuas megaport”
Retrieved from: http://www.straitstimes.com/singapore/full...
Land Delivery and Storage
Statistics retrieved from: Singapore Statistics- Transport and Storage Services
Land based Storage and Warehousing and Postal and Courier sub-sectors are much smaller in scale as compared to their air and water counterparts, with annual operating receipts only constituting 4.3% of industry total. However, unlike air and water cargo, the land based sub-sectors have seen an increase in turnover for the past decade. For postal and courier sector, although traditional postal delivery continues to see a decline in demand, the rise of e-commerce will most likely lead to a steep rise in number of courier deliveries, hence overall turnover should see an increase in the foreseeable future. The warehouse and storage sector has been assisted by the growth in demand from the manufacturing sector but the looming supply glut caused by the introduction of new warehouse space in 2017 and tapering demands due to lacklustre global trading conditions may see a drop in turnover.
Advancement in Disruptive Technologies
The development of numerous disruptive technologies has revolutionized every step of the supply chain management process. For instance, the shift to a cloud based system and utilizing the Internet of Things has allowed for enhanced flexibility and efficiency in operational management. The increased use of automation and robotics has also allowed for more effective solutions such as advanced packaging labeling and streamlining warehouse sorting. Another notable advancement is the use of drones in last mile delivery, in which companies like Singpost have been looking into. Current developments of 3D/4D printing, Blockchain and self-driving cars are also set to further revolutionise the industry. Unfortunately, Singapore and Southeast Asia in general has been a laggard in implementing such technology, resulting in the region lacking a proper, cohesive logistics infrastructure that gives retailers an entry point into the region. Instead of a single network, each individual market requires separate contracts and localisation which proves expensive for the retailers and would eventually be passed on as additional cost to consumers. This potentially could slow the growth of the industry in the region. The Singapore government has been implementing steps to correct this, with the launch of The Logistics Industry Transformation Map in 2016 which aims to implement technological solutions such as the ones mentioned above would hopefully allow local logistics companies to catch up with the likes of USA and China. It is certain that technology will be the key future driver of the industry and companies that fails to innovate and keep up with current advancements will falter.
The rapid growth of E-commerce is a direct result of the advancement in technology (see: alternative payments) , further compounded by the increase in proportion of middle class in Asia Pacific, greater mobile and Internet penetration and increase in number of E-Commerce players. The global e-commerce market is projected to more than double by 2020, growing from US$1.7 trillion to US$3.6 trillion. China represents the world’s largest e-commerce market with US$590 billions of goods sold in 2015. In Singapore alone, total online spending is estimated to have reached S$2.6 billion in 2016 and is expected to hit S$3.4 billion in 2017. Given that the current logistical landscape in Singapore is unoptimised, the explosive growth in e-commerce demand for business to consumer deliveries of retail purchases represents an opportunity for the logistics services market to grow. Local venture capital funded start-ups such as Ninja Van and Anchanto have already taken initiative, capturing S$1.75 billion in market share in 2016 as compared to just 266 million in 2013, though increasing competition have resulted in decline of pricing power and reduced profitability. Market leader Singpost has set their sights even higher, restructuring its traditional approach and opening a S$182 million Regional eCommerce Logistics Hub with an aim to become a regional leader in ecommerce logistics. With Singapore’s extensive reach across the region, stable financial infrastructure and a tech-savvy population, the foundation is present for local logistics companies to capitalise on this opportunity.
Upsides & Downsides
1. Singapore’s prime location and significant economic influence in Asia.
Picture source: Ho Wah Foon, ‘China projects to hit Singapore’ ,retrieved from http://www.thestar.com.my/news/nation/2017...
According to the Singapore Logistics Association, history of Singapore’s freight forwards development can be traced back to the 19th century. Singapore locates at the heart of the Asia Pacific, and serves as the geographical linkage of Europe, India, China and the U.S. Prime location makes Singapore the ideal springboard for logistics and provides excellent connectivity that shapes Singapore as one of the busiest port worldwide. Approximate 80% of the world’s maritime trade among Europe, Asia and the U.S pass through the strait of Malacca, which is the linkage of Indian Ocean and Pacific Ocean and major economies in Asia area. Besides, its advanced technology, world-class infrastructure and efficient supply chain management jointly contribute to Singapore’s position as a global logistics hub. According to the Singapore statistics bureau, logistics industry contributed 5.3% of the total GDP in 2015. Changi airport is Asia’s second largest cargo airport that dealing with 2 million tons of cargo annually.
2. Collaborations between shippers and top global 3PLs (Third-party logistics).
Picture source: Digimag Industry Report 2017, Supply Chain Asia, retrieved from http://supplychainasia.org/wp-content/uplo...
The future trend of logistics inclined towards collaborative partnerships. According to the 21st annual third-party logistics study, services provided by leading 3PLs have benefited 75% of shippers who use logistic from cost deduction and efficiency improvement. Diligent effort was also made in the aerospace logistic subsector through collaborations with 3PLs including DHL, DB schenker, Kuehne +Nagel ad SDV, which are several top global logistic players based in Germany, Switzerland and France. Nowadays, 20 out of top 25 logistic players embarked their operations in Singapore, examples can be Sankyu (Japan), UPS (U.S) and Yusen Logistics (Japan). Additionally, the three-year collaboration between P&G and The logistics Institute - Asia Pacific focused on supply chain research. It seems like that the current pattern of Singapore’s logistic industry is sharing the pie, which indicates incumbents within the industry pursue efficiency by collaborating and sharing the network, and this pattern will lead to greater connectivity and low-cost competition.
3. People’s changing consumption preference.
With the penetration of e-commerce, growing number of consumers like online shops avidly. It sounds like clichés, but growing deliveries is prompting the evolution of the modern logistic industry. Last mile logistic refers to the segment where parcel is delivered from transportation hub to the final recipient, and it is a result of rising e-commerce. In Singapore, people who shopping online form a stream of logistic demand. Company like Singapore post launched robotics and automation such as unmanned vehicles in deliveries to ease the pressure manpower. Further innovation in logistics operation is foreseeable.
Picture source: ‘The trains and sea ports of One Belt, One Road, China's new Silk Road’, Strait Times, retrieved from http://www.straitstimes.com/asia/the-train...
1. PM Lee’s absence in China’s ‘One belt, one road ‘forum and possible influence of the project.
Infrastructure is the key pillar of China’s Obor plan, which intends to build a network of railways, ports and roads that links China closer to other Asian countries, Africa as well as Europe. The relationship between China and Singapore became more sensitive after the ‘Terrex incident ’and South China sea issue. Hence, the absence of Singapore’s prime minister Lee Hsien Loong in Obor forum should be a concern. Obor may provide an alternative to the traditional sea route of trade that go through Singapore, also, port & railway constructions in both Malaysia and Indonesia can bring Singapore threats to its advantageous logistic position.
2. Competition brought by Malaysia.
Malaysia is one of the biggest threats to Singapore’s logistic industry. As mentioned previously, China planned to invest in Malaysian ports construction through its Obor project. Once China accomplished the construction in Malaysia, numerous of trade may be shifted from Singapore to Malaysia. Malaysia and China have signed the contract for RM55Bil East Coast Railway Line (ECRL), and it functions as a channel that links Port Klang, Kuantan Port and others lied in the East Coast. In other words, after the complete of ECRL, China can ship their goods from Port Klang to Kuantan Port by using inland railway in Malaysia, in lieu of go through Singapore port. At the same time, goods can be transferred by the same route but with the reverse direction. It turns out that hundreds of millions of China-bound goods from Thailand, Middle East and Indonesia can be shipped through the Port Klang-ECRL-Kuantan route, and Singapore will suffer from the shifted trade, without which Singapore should has gained. Apart from development of new route, facilities of all existing ports in Malaysia will be enhanced by using the belt-road funds for various types of ships and services.
Singapore Post Limited provides postal, logistics, and retail services in Singapore and internationally.
Mail segment offers services for collecting, sorting, transporting, and distributing domestic and international mail.
Logistics segment offers a range of logistics solutions, including freight, warehousing, domestic and international distribution, and delivery services.
Retail & eCommerce segment provides various products and services, such as agency services, financial services, and front-end e-commerce solutions.
CWT Limited provides integrated logistics and supply chain solutions for small establishments and multinational corporations in Singapore and internationally.
Logistics Services segment provides warehousing, transportation, freight forwarding, cargo consolidation, collateral management, and container management services, as well as supply chain management services and container management services; This segment serves commodities, defense, food and beverage, freight forwarding, marine, and petrochemicals and chemicals industries.
Commodity Marketing segment offers physical trading and supply chain management services for base metals, including copper, lead, zinc, and other minor metals, as well as energy products, such as diesel, gasoline, naphtha, and distillates.
Company also offers Engineering Services and Financial Services, which occupies a lower proportion of revenue and net income.
$Poh Tiong Choon(P01)
Poh Tiong Choon Logistics Limited, together with its subsidiaries, provides logistics services to the petrochemical industry in Singapore. It operates through four segments: Transportation and Bulk Cargo, Warehousing, Trading, and Leasing.
The company offers transportation services for high value, sensitive, and chemical cargo in various forms, including conventional, general containers, bulk and bulk liquid containers; owns cargo vehicles comprising prime movers, trailers, and other vehicles, such as refrigerated trucks, tipper trucks, and general usage lorries, as well as heavy haulage equipment.
It also engages in the provision of bulk cargo handling and stevedoring services; and warehousing, drumming, and related services comprising drum filling of chemical products, open and covered warehouse storage, cold room storage, inventory management, and local and international freight management, as well as storage and distribution of loaded containers.
In addition, the company is involved in the sale of diesel fuel; rental of industrial property; property development activity; equipment leasing and general contracting activities; and providing terminal management services.
Keppel Telecommunications & Transportation Ltd, an investment holding company, provides integrated logistics services and supply chain solutions.
Logistics segment provides integrated logistics port operations, third-party logistics services, supply chain solutions, warehousing, distribution, container storage and repairs, and freight forwarding services primarily in Singapore, China, Malaysia, Indonesia, and Vietnam.
Data Centre segment provides data center co-location services, business continuity, disaster recovery, facility management, and real estate investment trust management services primarily in Singapore, Ireland, the Netherlands, Australia, the United Kingdom, Germany, and Malaysia. This segment also provides technical support services.
Keppel T&T Ltd is also involved in the food trading, shipping agency, and fund management activities; provides and trades in communications system and accessories; and develops and trades in industrial property rights. Keppel Telecommunications & Transportation Ltd is a subsidiary of Keppel Corporation Limited.
YCH Group Pte Ltd. provides integrated end-to-end supply chain management and logistics solutions for suppliers, manufacturers, brand owners, resellers, consumers, and original equipment manufacturers in the Asia Pacific.
It offers Intribution, a Web-enabled manufacturing logistics solution for managing the flow of raw materials, information, and financial transactions; Intrabution, a solution for consumer goods fulfillment, order management and fulfillment, and e-commerce fulfilment; and Retrogistics, a solution that manages the service and returns logistics for retailers when their products require after-sales parts replacement, warranty returns, and servicing, as well as provides parts and components inventory management, auto replenishment, and spare parts delivery to facilitate on-site after sales service.
The company also provides lead logistics provider and third party logistics services, such as freight management, transportation and distribution management, and warehousing and inventory management services.
The company was founded in 1955 and is based in Singapore. It also has operations in Malaysia, Thailand, Indonesia, China, Hong Kong, the Philippines, Australia, India, Vietnam, and Korea.
GKE Corporation Limited, an investment holding company, provides logistic services in Singapore and the People’s Republic of China. The company’s Third Party Logistics segment offers various logistics services, including non-ferrous metal storage, general warehousing, containers trucking, conventional transportation, project logistics, and international multimodal sea and air freight forwarding services.
Its Shipping Logistics segment is involved in building and chartering of vessels. The company’s Infrastructural Logistics segment produces and sells environmental friendly lightweight bricks, building materials, and cement products. It also provides crane services for loading and unloading of cargo.
The company was formerly known as Van der Horst Energy Limited and changed its name to GKE Corporation Limited in April 2012. GKE Corporation Limited was founded in 1995 and is based in Singapore.
As industry is dominated by large cap companies with unusually depressed earnings such as Singpost, average P/E ratios may be slightly skewered upwards. ROE is lower than STI ETF, showing that logistics sector underperformed the overall market. ROE of logistics sector usually range from 5% to 15%, showing that Singapore’s logistic companies are underperforming global counterparts.
Logistics industry margins are traditionally low. However, Singapore logistics were exceptionally low at 2.4% operating margin and 1.7% net margin due to slowdown of container volumes and increased competition both domestically and regionally. Businesses have also been negatively generating free cash flow.
Due to the significant capital expenditure and fixed assets required for logistics, high D/E ratio of 58.3%. Global logistics sector usually have D/E between 40% to 150%, hence Singapore’s logistics sector is still relatively unlevered. Revenue 3-year CAGR also decreased due to slowdown in logistics sector and Port of Singapore volumes since 2014.
For industry-specific ratios such as fixed mileage costs ratio, variable cost ratio and deadhead costs, I couldn’t find an industry average. However, investors will do well to search the financial statements of individual companies for such disclosures.
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