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Transportation New Market Environment Taking Shape: P.R.I.C.E

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2019 Outlook Transportation New market environment taking shape: P.R.I.C.E. Jay JH Ryu +822-3774-1738 [email protected] Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. Contents [Summary] 3 I. Price 4 II. Regulations 8 III. Innovation 12 IV. Cost & Consolidation 20 V. Environment 24 [Conclusion] 30 VI. Top picks 36 CJ Logistics Jeju Air [Summary] Earnings to steadily trend upward Share prices to rebound based on steady earnings (Wbn) (x) OP (L) P/B (R) 1,500 High oil prices; Oil price decline; Air cargo Minimum 2.5 Global Global shipping greater Oil rebound; wage hike; Slowdown in Chinese housing financial Inventory market logistics price LCC growth; oil price stimulus bubble crisis restocking restructuring momentum rebound M&As growth 1,000 2.0 500 1.5 0 1.0 -500 -1,000 0.5 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q18 Source: Mirae Asset Daewoo Research 3| 2019 Outlook [Transportation] Mirae Asset Daewoo Research I. Price: Price hikes materializing Parcel delivery value • Government policies aimed at improving working conditions for parcel delivery workers should weigh on chain margins. • The delivery fee registration system should depress parcel delivery firms’ back margins, which should eventually squeeze margins of online retailers. B2C parcel delivery value chain: From consumers to delivery personnel W2,500 Delivery fee registration system Back margins down by W770 Consumer W1,730 Conditions for price hikes Online retailers Back margins, including packaging fees, etc. Parcel delivery W800-1,000 Government target Government announces firm ban on back margins in 2017 Fixed costs (trucks, labor, depreciation, etc.) Delivery Insufficient room for personnel commission hikes for delivery workers Monthly revenue of W5mn (based on 300 boxes) Margins below 2% Source: Mirae Asset Daewoo Research 4| 2019 Outlook [Transportation] Mirae Asset Daewoo Research I. Price: Price hikes materializing Weakening competition • The consolidation of the parcel delivery market is accelerating. and industry • Dream Logistics (M/S of 5%) discontinued operations in August, further increasing market concentration. consolidation • Parcel delivery firms began to raise prices in 2H18. Parcel delivery market share trends Parcel delivery fee trends (%) (W) CJ Logistics Hanjin Lotte (Hyundai) 60 3,800 Top 5 average Overall average Logen Korea Post Other 3,600 50 3,400 Pickup in online shopping 40 3,200 Smaller firms to 3,000 increasingly suffer 30 from higher labor 2,800 costs Global economic recovery; inventory restocking 20 2,600 Market 2,400 consolidation 10 2,200 0 2,000 2015 2016 2017 2018F 2019F 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18F 19F Source: Korea Logistics Business Directory, Mirae Asset Daewoo Research Source: Korea Logistics Business Directory, Mirae Asset Daewoo Research 5| 2019 Outlook [Transportation] Mirae Asset Daewoo Research I. Price: Price hikes materializing Growing cost pressures • Parcel delivery firms’ earnings are increasingly diverging amid minimum wage hikes. • CJ Logistics: Margins declined recently due to large-scale investments. • Hanjin (002320 KS/CP: W39,900): Earnings are expected to improve, driven by stevedoring and parcel delivery. • Lotte Global Logistics: Losses expanded due to higher overseas labor costs. Parcel delivery firms’ OP margins: Differentiation even Minimum wage trend among leading players (W) (%) (%) 15,000 Minimum wage (L) 20 6 CJ Logistics Hanjin Lotte Global Logistics Growth (R) 18 16.4% 5 12,000 16 4 10.9% 14 3 9,000 12 8,350 7,530 10 2 6,470 6,030 6,000 5,580 8 5,210 1 6 0 3,000 4 -1 Lotte weighed down 2 by multiple factors 0 0 -2 2014 2015 2016 2017 2018 2019 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Press reports, Mirae Asset Daewoo Research Note: 2018 data for CJ Logistics and Lotte Global Logistics are based on 1Q-3Q results; 2018 data for Hanjin are based on 1-2Q results. Source: Company data, Mirae Asset Daewoo Research 6| 2019 Outlook [Transportation] Mirae Asset Daewoo Research I. Price: Market slowdown and price increases Airlines: Earnings • Passenger demand remains largely robust, but downward pressure continues to linger. slowdown accelerating • Ticket prices have risen sharply on the back of higher fuel surcharges. • Amid a market slowdown, price hikes driven by cost-push factors are unlikely to take place. • Actual ticket prices are anticipated to remain flat for a while. Outbound passenger demand vs. income growth Average yield by airline (%) (%) (W/km) 40 Korea outbound travel growth (L) 4.5 180 Korean Air Asiana Airlines Real disposable income growth (R) Jin Air Jeju Air 4 30 160 3.5 Supply/demand Fuel surcharge improvement increases 20 3 140 2.5 10 2 120 0 1.5 100 -10 1 0.5 80 -20 0 -30 -0.5 60 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 3Q18 Source: Bloomberg, KTO, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research 7| 2019 Outlook [Transportation] Mirae Asset Daewoo Research II. Regulations: Lower market barriers New market entrants • Four new airline companies have applied for business licenses. Aero K, Fly Gangwon, Air Premia, and Air Philip • New market entrants are expected to increase as license requirements are eased. New airlines entering the market Commencement of operations Model Capital Hub Major shareholders Notes Cheongju Hanwha Airbus A320 Atinum Investment (22%), Aero K 1H19 W45bn International withdrew (8 aircraft) Bubang (10%) Airport capital Yangyang TonyMoly (W1.5bn), B737-800 Fly Gangwon Feb. 2019 W40bn International Shinsegae DF (10) Airport (W1bn) B787-9 or Incheon Air Premia 1H20 A330-NEO W37bn International (7) Airport B737-900 Daegu International Chairman of Coway Holdings Air Daegu 2H19 W60bn (5) Airport W30bn Donghwa Electronics CRJ200 W10bn Air Pohang Feb. 2018 W12bn Pohang Airport (2) North Gyeongsang Province and Pohang (W2bn) Gwangju Airport, ERJ-145 Air Philip Jun. 2018 W7bn Muan (3) International Airport Prime Air TBD CJR200 Uncertain Ulsan Airport Source: Company data, press releases, Mirae Asset Daewoo Research 8| 2019 Outlook [Transportation] Mirae Asset Daewoo Research II. Regulations: Supply growth to continue LCC supply could • Supply from existing LCCs is expected to increase by 11~17% (if Jin Air continues operations). increase by up to 30% • If new players commence operations, supply could grow by 16-30% in 2019. LCC fleet growth outlook End- 2018 2019 Airline Aircraft 2017 New End New End Jeju Air B737-800 31 8 39 8 47 B737-800 21 1 22 0 (5) 22 (27) Jin Air B777-200ER 4 0 4 0 (4) 4 (8) Jin Air total 25 5 (1) 30 (26) 5 (9) 35 B737-800 19 5 24 1 25 Tway Air B737-MAX 8 4 4 Tway Air total 19 5 24 5 29 Air Seoul A321-200 6 1 7 7 A320-200 8 8 LCCs A321-200 17 17 Air Busan A321LR 2 2 A321neo Air Busan total 23 25 2 27 B737-700 3 -2 1 1 B737-800 14 2 16 16 Eastar Jet B737-900ER 2 0 2 2 B737-MAX 8 2 2 2 Eastar Jet total 19 2 21 21 LCC total Total 157/166 (11%/17% YoY) (factoring out/in Jin Air) Aero K A320 Mid-sized aircraft 8 increase: 5-13% Expected new Air Premia B787-9 or A330neo 10 LCCs Fly Gangwon B737-800 7 Source: Company data, Mirae Asset Daewoo Research 9| 2019 Outlook [Transportation] Mirae Asset Daewoo Research II. Regulations: New funding for Coupang Coupang raised an • Amid the introduction of the 52-hour work week, Coupang adopted a crowd delivery system, Coupang Flex. additional US$2bn in • Aiming to expand capacity via on-foot/vehicle deliveries: Higher costs vs. lighter workload for in-house personnel. funding from SoftBank • Coupang recently received a US$2bn investment from SoftBank (9984 JP/CP: JPY8,902), which valued the company at W9tr. • With daily delivery volume of 1mn parcels and 2018 annual revenue of W5tr, Coupang accounts for 10% of the domestic parcel delivery market (in terms of volume). • Restructuring at small-sized parcel delivery firms is likely to accelerate. Coupang Flex is a new crowd delivery service Coupang to turn around over the long term Lighter workload for in-house delivery personnel (Wbn) (%) Revenue (L) 6,000 0 Apply for Coupang Flex OP (L) OP margin (R) 5,000 -10 Opportunities to earn 4,000 ? over W25,000 per hour! -20 3,000 -30 2,000 Flex -40 1,000 -50 0 -1,000 -60 2013 2014 2015 2016 2017 2018F Source: Coupang, Mirae Asset Daewoo Research Source: Coupang, Mirae Asset Daewoo Research 10| 2019 Outlook [Transportation] Mirae Asset Daewoo Research II. Regulations: Coupang’s logistics business launch Third-party logistics vs. Coupang established a logistics subsidiary Coupang Logistics Service (third-party logistics). high costs • 1) The company is expected to register delivery trucks as commercial vehicles; high costs are a concern. • 2) The company is in need of a commercial truck transportation business license to build a logistics center in an industrial complex in Daegu. • 3) If the company directly hires delivery personnel, cost pressures could increase further due to the 52-hour work week regulation. • Risks: Issues related to the registration of trucks as commercial vehicles, limitations of EV trucks, initial demand limited to North and South Gyeongsang Province Coupang delivery personnel’s working conditions have worsened Coupang to deploy EV trucks for logistics services Source: Press materials, Mirae Asset Daewoo Research Source: Coupang, Mirae Asset Daewoo Research 11| 2019 Outlook [Transportation] Mirae Asset Daewoo Research III.
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