Pos Malaysia Berhadpshl

Global Markets Research ANCHOR REPORT ANCHOR

Asean logistics: Delivering the last mile

Logistics players ride the internet retail tide 6 October 2016

Research analysts Asean remains well behind regional peers when it comes to overall internet retail and last-mile delivery infrastructure. A tripling of Asean ASEAN Transport/Logistics postal volumes by 2020F combined with economies of scale for the more established players should result in even greater earnings growth. Top Ahmad Maghfur Usman - NSM [email protected] regional players are circling too, evidenced by deals from both Japan +603 2027 6892 (Yamato into GD Express) and Korea (CJ Express into Century Logistics). Riddhi Jain - NSFSPL We initiate at Buy on four stocks. SingPost is our top pick, given strong [email protected] earnings growth (three-year CAGR of 21%) driven by logistics and +91 22 672 35616 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

Production Complete: 2016-10-06 03:47 UTC

See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.

Asean logistics

EQUITY: ASEAN TRANSPORT/LOGISTICS

Delivering the last mile Global Markets Research

6 October 2016

Riding the internet retail tide

Anchor themes Asean’s secular growth story on Catalyst: Online shopping benefiting Asean’s last-mile delivery players. increasing online shopping Asean is still behind the curve when it comes to most things internet-related. penetration presents upside As internet shopping plays catch up with regional peers further north, we earnings potential for last-mile expect postal volumes at Asean courier players to triple by 2020F (giving a delivery players. 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 Nomura vs consensus couriers on which we initiate in this report, at 21-43% and 19-30%, Our earnings for Pos Malaysia respectively. and SingPost are well above consensus (by 8% and 30%, North Asia’s thirst for Asean internet players. respectively) as we are more We estimate Asean’s overall online retail sales (both C2C and B2C) will post a bullish on volume upside and five-year CAGR of 34% to hit USD36.1bn by 2020. Such outsized growth has economies of scale potential. not surprisingly sparked interest among the regional internet heavyweights.

Alibaba has invested USD1bn for a majority stake in Singapore’s Lazada, and Research analysts Japan’s Softbank is expanding further with Tokopedia (Indonesia’s leading online mall), in which Softbank started investing in 2012. The last-mile delivery ASEAN Transport/Logistics players have not been far behind, with some sizeable acquisitions from both Ahmad Maghfur Usman - NSM Japan (Yamato Holdings bought a strategic stake in GD Express) and Korea [email protected] (CJ Express acquiring a strategic stake in Century Logistics). +603 2027 6892 Riddhi Jain - NSFSPL Action: Bullish view on the sector with all Buys. Singpost as top pick. [email protected] We initiate on the sector with a Bullish view, and four Buy calls. We introduce +91 22 672 35616 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 Company Code Rating Mkt Cap Avg. TO Target Price Upside (USD mn) (USD mn) Price 4-Oct (%) 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% Source: Bloomberg, Nomura Research, * Initiating coverage

See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.

Nomura | Asean logistics 6 October 2016

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 Berhad...... 97 GD Express Carrier Bhd...... 111 Appendix A-1 ...... 125

Nomura | Asean logistics 6 October 2016

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)

Nomura's estimation of internet retail (including C2C) in ASEAN (LHS) (USDbn) % chg y-y (RHS) 40,000 % of internet retail to total retail sales (RHS) 36,155 45% 35,000 40% 30,000 27,811 35% 30% 25,000 20,755 25% 20,000 15,374 20% 15,000 11,140 15% 7,905 10,000 10% 5,000 5% 0 0% 2015F 2016F 2017F 2018F 2019F 2020F

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 Fig. 4: Asean ecommerce is still at its nascent stage Asean has still a lot more room to grow its online retail penetration 12 China 13.8% USA USA 9.2% 10 Japan Japan 7.2% 8 Singapore 4.1% Singapore Thailand 1.6% 6 Indonesia 1.2%

internet user internet Indonesia ASEAN ex Sing. 0.7% 4 Thailand Malaysia 1.0% Malaysia Ecommerce sales as a % 2 Vietnam China Vietnam 0.8% per visit site retail of Frequency of retail sales (2015) Philippines Philippines 0.5% 0 0% 5% 10% 15% 0% 5% 10% 15% Ecommerce sales as a % of retail sales Source: Euromonitor, Nomura research Source: Nomura research, Euromonitor, Statista, Similiarweb

Nomura | Asean logistics 6 October 2016

Fig. 5: Online shopping frequency quadrant Fig. 6: Frequency vs ARPU quadrant

10 1,800 9 USA 1,600 USA 8 Japan 1,400 7 1,200 6 1,000 Japan 5 ARPU ($) ARPU 800 4 Singapore China 600 3 400 2 China Thailand Singapore Malaysia Thailand Retail Sales per capita ($ '000) ($ capita per Sales Retail 200 1 Indonesia Philippines Indonesia Malaysia PhilippinesVietnam 0 0 Vietnam 0 2 4 6 8 10 12 0 5 10 15 Frequency of online shopping visits per internet user Frequency of online shopping visits per internet user Source: Nomura research, Statista, Similiarweb Source: Nomura research, Statista, Similiarweb

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.

Nomura | Asean logistics 6 October 2016

Fig. 7: Average parcels per urban population received Fig. 8: Parcel / express item delivery volumes (mn) # of 2014 2015 2016 2017 2018 2019 2020 consignments USA 55.1 (mn) Malaysia 56 59 69 80 93 107 122 China 48.3 Singapore 33 35 40 46 52 58 65 Japan 87.2 Indonesia 126 153 207 273 328 377 434 ASEAN 5.6 Vietnam 25 29 40 55 73 90 103 2.6 Philippines 45 54 76 103 136 169 195 Thailand 8.2 3.8 Thailand 55 65 88 116 140 161 185 Philippines 5.0 ASEAN 341 396 521 673 822 962 1,104 1.6 Vietnam 3.9 1.4 % chg y-y 2015 2016 2017 2018 2019 2020 CAGR Indonesia 5.1 Malaysia 6% 17% 17% 16% 15% 13% 16% 2.3 Singapore 6% 15% 14% 13% 10% 11% 13% Singapore 9.8 2020 6.1 Indonesia 22% 31% 24% 22% 15% 15% 23% 2015 Malaysia 7.7 Vietnam 14% 25% 24% 22% 20% 18% 29% 4.7 Philippines 20% 30% 35% 33% 24% 15% 29% Source: Nomura research, Universal Postal Union, Postal statistics, National statistics, Company data, World Bank, Demographia Thailand 18% 25% 24% 20% 15% 15% 23%

ASEAN 16% 32% 29% 22% 17% 15% 23% Source: Nomura research, UPU, Postal statistics, National statistics, Company data, regulatory bodies

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

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% Source: Nomura

Nomura | Asean logistics 6 October 2016

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)

Yamato Holdings' ASEAN expansion 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 Establishes a business collaboration and acquires a stake in GD Express. The acquisition was done through a placement exercise and buying 21-Jan-16 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 Establishes a collaboration to provide last mile delivery with Siam Cement Group where Yamato will have a 35% stake. Capital base is 25-Aug-16 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 Source: Company data, News releases

Nomura | Asean logistics 6 October 2016

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

Alibaba's ASEAN expansion Alibaba signed an MoU with Vietnam's Ministry of Industry and Trade, to promote the development of e-commerce and to facilitate Jun-09 international trade for Vietnamese SMEs. May-14 Alibaba buys 10.3% stake in Singapore Post for $249 million. Alibaba collaborates with Kasikorn Bank of Thailand to help Thai SMEs looking for new customers to introduce their products to the e- Aug-14 commerce marketplace. Feb-15 Alibaba announced that AliExpress, has signed a strategic agreement with DOKU, Indonesia’s largest online payment provider Alibaba teamed up with online service provider ReadyPlanet in Thailand, its first entrance into the Thai market. ReadyPlanet will become May-15 Alibaba’s first Thai reseller, likely to boost the small- and medium-sized business community in the nation. Alibaba announced another investment round in Singapore Post in July 2015, for additional 5% stake. This deal has been delayed thrice Jul-15 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-16 Alibaba 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. Without disclosing specific plans, Alibaba announed it will boost investment and development in ASEAN, by participating in the Sep-16 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. Dealoka, a mobile e-commerce app, received funding SB ISAT, a USD 50 million venture fund jointly established by Indosat, and Feb-15 Softbank to target Indonesian growth-stage startups. China’s Didi Chuxing and SoftBank Group are leading a new round of funding in South-east Asian ride-sharing service Grab that could top Aug-16 $600 million. Apr-16 Indonesia’s Tokopedia raised US$147 million from Softbank in the 7th round of funding.

Source: Company data, News releases

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

WACC Current Currency Target P/E EV/EBITDA P/E over Cash ROIC WACC spread 3 forward year CAGR 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% Source: Nomura research, Company data

Nomura | Asean logistics 6 October 2016

Fig. 13: LBC Express scores highly on our scoring. Followed Fig. 14: The plotted quadrant by SingPost Implied average forward P/E over Cash ROIC - WACC Implied P/E over Cash ROIC - 3.0 spread (FY +2 to FY+4) Pos WACC Spread Average Malaysia GD Score FY +2 FY +3 FY +4 FY +5 (FY+2-FY+5) 2.5 Express GD Express 2.8 3.0 3.6 2.5 1.6 2.7 The lower the LBC Express 3.0 1.6 1.1 0.8 0.5 1.0 forward P/E over Singapore Pos Malaysia 1.8 3.5 3.2 2.4 2.1 2.8 2.0 Cash ROIC - WACC Post Singapore Post 2.5 4.4 2.3 1.7 1.2 2.4 spread, the cheaper Median 2.6 3.2 2.7 2.0 1.4 2.5 the stock is. 1.5 Source: Nomura research, Company data Our 2 top picks

1.0 LBC Express 0.5 Maximum fundamental score is 4.0 points. The higher the better

0.0 0.0 1.0 2.0 3.0 4.0 Fundamental framework score (5-year forward horizon) Source: Nomura research, Company data

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.

Nomura | Asean logistics 6 October 2016

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.

Nomura | Asean logistics 6 October 2016

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

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 - For logistics, the most predominant market is - Purely Malaysia. Ties up with foreign courier providers for - for its mail and retail business, Geographic presence will be - Strongest presence in Asia in 12 countries Philippines itself, with inbound traffic a small fraction of outbound items. confined to Malaysia (ASEAN 6+others) total volumes. - Ties up with foreign courier providers as the last mile - Logistics and airport related services will be predominantly Malaysia. - Outside Asia, presence in US, UK, Canada, - For money remittance, LBC has partners and delivery provider on international inbound But on the air cargo side, it is looking to expand into ASEAN. Germany, Netherlands, Australia and NZ via agents in over 30 countries with a strong presence in South- subsidiaries and associates. east asia and North America

Strategy Strengths - Massive scale and pervasiveness - Largest market share at c85%, and significant - High B2B clientele base, which commands decent - Leveraging on the extensive nationwide postal network coverage, (Pop-lockers in every 2km radius in SG.) experience in the logistics business margins this gives massive reach to the retail base customers. - Upcoming automated Regional eCommece Logistics - Asset light operations model which helps to - Timely deliveries, making it the top courier provider in hub (2H16), with enhanced sorting and warehousing contain costs. Malaysia capabilities. - Warehousing and belly space available on - Sorting hub situated right smack at the centre of Klang - Synergies from recent spree of demand in Philippines. Valley acquisitions (eg TG expected to contribute 55% of logistics revenue in FY17F.) - Partnership with Alibaba. - Strong overseas growth.

Weaknesses - Corporate Governance issues - The looming PHP 1.82bn lawsuit filed by sister - Premium pricing a downside for the retail segment / walk - With the postal provider forming into a bigger entity, this makes (since last December) have dissipated, but concern LBC Development bank. ins coordination difficult the Board needs to work on the - The continuing related party transactions that the company - Branch network coverage not as extensive as Pos - Tied by social obligation to provide mail service at rural areas which recommendations from CG review. incurs and related corporate governance issues. Malaysia. are loss making. - Contracting margins from the current - The company does not pay dividends. - Feedback on postal delivery service are mostly negative, notably on transition costs. its poor punctuality

Opportunities - The aggressive growth potential of - The Philippines macro growth story, ecommerce growth - Growing branch outlet coverage through tie-ups, - Acquisition of KLAS Group, an integrated logistics and airport internet retail in the region. potential and underpentrated market in the ecommerce potentially with convenience stores and other service centre services provider will bring more synergy opportunities for the postal - Located in SG, it is at the centre of economic delivery segment. outlets such as MBE (Mail Boxes Etc) business in the ecommerce fulfillment play. activity, with supportive regulations - Coporate revenues anchored to Lazada's growth - More collaboration with Yamato Holdings for cross border - Joining both the postal and courier workforce into one entity brings and developed infra. - Philpost's declining reputation and service volumes following their recent acquistions in a cross border massive costs downside potential as redundancies are removed quality, which makes LBC the secondary go to trucking company (spanning from Singapore to China). postal provider.

Threats - Postal volumes disintegrating faster than - Too much dependence on the domestic market. - Inability to secure new land for its upcoming expansion - Cost synergy not materializing expected (Postal still contributes ~80% of - Raise in delivery fee charged by Cebu or other plan. - The logistics sector is a very fragmented and competitive industry operating profits.) vendors from whom belly space is leased. - Near to full utilization capacity creates a bottleneck - Capital allocation not efficiently managed - The delayed second investment by - Rising personnel cost. Alibaba falling through. - Potential Corporate Governance issues. - Greater than expected margin contraction. - Risings start-ups in last mile delivery.

Strategic partners Alibaba (10.3%) and potentially raising it to 15% from None Yamato Holdings (22.84%) / Singapore Post (11.23%) None second tranche Core business operations Largest ecommerce player in the world (by measure of Yamato: Largest courier provider In Japan / Singapore GMV) Post: Leading last mile player in Singapore with a global presence

Source: Company data, Nomura research

Nomura | Asean logistics 6 October 2016

Fig. 16: Financial metrics summary

CAGR 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% Source: Company data, Nomura research

Nomura | Asean logistics 6 October 2016

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%.

Nomura | Asean logistics 6 October 2016

Fig. 18: Our fundamental scoring system

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% 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

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% Source: Nomura research, Company data

Nomura | Asean logistics 6 October 2016

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.

Nomura | Asean logistics 6 October 2016

Fig. 20: Scoring card workings and final ranking

Forward assessment Historical assessment 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 Source: Nomura research, Company data

Nomura | Asean logistics 6 October 2016

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

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 Source: Nomura research

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

Historical Forward Total Total score ranking ranking 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 Implied P/E Implied EV/EBITDA Implied P/Op CF 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 Source: Nomura research, Company data

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).

Nomura | Asean logistics 6 October 2016

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

Historical ranking Score FY -4 FY -3 FY -2 FY -1 FY +1 FY +2 FY +3 FY +4 FY +5 3 year historical average

P/E over Cash ROIC - Cash ROIC Cash ROIC - WACC spread P/E WACC spread 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% Source: Nomura research, Company data

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

Forward Total Total score ranking 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 Implied P/E over Implied P/ Op CF Cash ROIC - WACC Cash ROIC WACC over cash ROIC Implied P/E Implied EV/EBITDA Implied P/Op CF spread spread spread 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 Source: Nomura research, Company data

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.

Nomura | Asean logistics 6 October 2016

Fig. 26: Where the rankings stack up Fig. 27: The plotted quadrant

Implied P/E over Cash ROIC - Implied average forward P/E over Cash ROIC - WACC WACC Spread Average spread (FY +2 to FY+4) Pos Score FY +2 FY +3 FY +4 FY +5 (FY+2-FY+5) 3.0 Malaysia GD Express 2.8 3.0 3.6 2.5 1.6 2.7 GD LBC Express 3.0 1.6 1.1 0.8 0.5 1.0 2.5 Express Pos Malaysia 1.8 3.5 3.2 2.4 2.1 2.8 The lower the Singapore Post 2.5 4.4 2.3 1.7 1.2 2.4 forward P/E over Singapore Median 2.6 3.2 2.7 2.0 1.4 2.5 2.0 Cash ROIC - WACC Post spread, the cheaper Source: Nomura research, Company data the stock is. 1.5 Our 2 top picks 1.0 LBC Express 0.5 Maximum fundamental score is 4.0 points. The higher the better

0.0 0.0 1.0 2.0 3.0 4.0 Fundamental framework score (5-year forward horizon) Source: Nomura research, Company data

Nomura | Asean logistics 6 October 2016

Fig. 28: Peer comparison

3 Year CAGR EBITDA Margins P/E (x) P/B (x) EV/EBITDA (x) Div yield % ROE (%) Price to FCF P/EG (3 USD mkt Target Currency Last price Rating Core ROIC/WACC Net Year Ticker Name cap Price EBITDA FCFF FY1F FY2F FY3F 1E 2E 3E 1E 2E 3E 1E 2E 3E 1E 2E 3E 1E 2E 3E ROIC 1E 2E 3E Earnings ratio Gearing CAGR) 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 Source: Bloomberg, Company data, Nomura research

Nomura | Asean logistics 6 October 2016

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

Products are out of stock 9%

The opening hours are not convenient 10%

The merchandise available does not include 13% what I am looking for

Prices are not competitive 16%

Long queues and slow checkout process 20%

Takes too much time, money and/or effort 23%

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 Fig. 31: Total retail ecommerce sales worldwide, 2015-2020 Retail ecommerce sales (LHS) (trn) Total retail sales (LHS) (trn) % change (RHS) $29 % change (RHS) $27.73 $4.5 30% % of total retail sales (RHS) $4.06 11.2% 26% $27 $26.29 $4.0 24% 23% $3.42 25% $24.86 $3.5 22% $25 10.2% 20% $2.86 19% $23.45 $3.0 20% $23 $22.05 9.2% $2.35 $2.5 $20.80 $1.92 15% $21 8.2% $2.0 $1.55 15% $1.5 13% 10% $19 7.2% 12% 10% 6.3% $1.0 9% $17 5.8% 6.0% 6.2% 7% 5% 5.8% $0.5 6.0% 5.5% $15 5.2% $0.0 0% 2015 2016 2017 2018 2019 2020 2015 2016 2017 2018 2019 2020 Source: Emarketer. Note: excludes travel and event tickets 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

Nomura | Asean logistics 6 October 2016

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)

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%

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.

Nomura | Asean logistics 6 October 2016

Fig. 34: GMVs disclosed and estimated of pure online retailers in Asean (USDmn) Shaded in pink are our forecasts

Traffic (mn) over the past 6 months (after Category 2012 2013 2014 2015 2016F Remarks 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) 193 Total annual spend/ internet user/ annum (USD) 41.0 57.7 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 12 China 13.8% USA USA 9.2% 10 Japan Japan 7.2% 8 Singapore 4.1% Singapore Thailand 1.6% 6 Indonesia 1.2%

Fig. 37: Online shopping frequency quadrant Fig. 38: Frequency vs ARPU quadrant

Nomura | Asean logistics 6 October 2016

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

Malaysia Electronics & Media Fashion 9% Food & Personal care Furniture & Appliances Toys, Hobby & DIY Indonesia 30% ASEAN Singapore 17% Malaysia Philippines Vietnam Thailand Singapore Vietnam Indonesia 12% Thailand Developed Philippines 26% 6% 0% 20% 40% 60% 80% 100% Source: Euromonitor, Nomura research Source: Euromonitor, Nomura research

Nomura | Asean logistics 6 October 2016

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 Fig. 42: Global international mail volume The rate of decline cushioned by direct mail over the past decade International mail volume saw a faster drop as usage of email increases (bn) Domestic mail volume (LHS) (bn) International mail volume (LHS) % chg y-y (RHS) 450 6% 8 % chg y-y (RHS) 4% 400 4% 7 2% 350 2% 6 0% 300 0% 5 -2% 250 -2% 4 -4% 200 -4% 3 -6% 150 2 -8% 100 -6% 50 -8% 1 -10% 0 -10% 0 -12% 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015F 2015F Source: UPU, Nomura research Source: UPU, Nomura research

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.

Nomura | Asean logistics 6 October 2016

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

Insert Media Email (↑9.5%), (↑0.0%), $0.8 $2.3 Other (↑2.9%), $3.5 Other Digital (↑42.9%), $5.0 Direct Mail (↑2.9%), $46.8 Display (↑23.3%), $24.9

Search (↑12.8%), Teleservices $27.3 (↑2.7%), $42.6

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

(bn) Domestic parcel volume (LHS) (bn) International parcel volume (LHS) % chg y-y (RHS) 8,000 16% 120 % chg y-y (RHS) 20% 7,000 14% 15% 12% 100 6,000 10% 10% 80 5,000 8% 5% 4,000 6% 60 0% 3,000 4% 40 2% -5% 2,000 0% 20 -10% 1,000 -2% 0 -4% 0 -15% 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015F 2015F Source: UPU, Nomura research Source: UPU, Nomura research

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.

Nomura | Asean logistics 6 October 2016

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) Fig. 47: Parcel / non basic mail postal items (mn) Asean's total volume despite a population size of 629mn is nowhere near Japan and US

ASEAN 4,667 ASEAN 396 Thailand 1,722 222 Vietnam 145 USA 9,721 Indonesia 853 Singapore 856 Malaysia 870 China 20,710

USA 151,024 China 4,580 Japan 7,370 Japan 18,030

Source: Company and Postal data, Nomura research 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 Fig. 49: Parcel mail handled in 2015 (mn) plotted against per urban population urban population and where we expect it to be by 2020. 100 900 USA 90 800 Japan 80 700 70 600 60 USA 500 50 China 400 40 300 30 Mail per urban population urban per Mail 200 Japan 20

Parcels per urban population urban per Parcels ASEAN by 10 100 ASEAN Global 2020 China 0 0 ASEAN 0 5,000 10,000 15,000 20,000 25,000 0 100,000 200,000 300,000 400,000 Mail size (mn) Non letter postal items/parcels Source: UPU, Company data, Nomura research Source: UPU, Company data, Nomura research

Nomura | Asean logistics 6 October 2016

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 Fig. 51: Parcel / express item delivery volumes (mn) # of 2014 2015 2016 2017 2018 2019 2020 consignments USA 55.1 (mn) Malaysia 56 59 69 80 93 107 122 China 48.3 Singapore 33 35 40 46 52 58 65 Japan 87.2 Indonesia 126 153 207 273 328 377 434 ASEAN 5.6 Vietnam 25 29 40 55 73 90 103 2.6 Philippines 45 54 76 103 136 169 195 Thailand 8.2 3.8 Thailand 55 65 88 116 140 161 185 Philippines 5.0 1.6 ASEAN 341 396 521 673 822 962 1,104 Vietnam 3.9 1.4 % chg y-y 2015 2016 2017 2018 2019 2020 CAGR Indonesia 5.1 2.3 Malaysia 6% 17% 17% 16% 15% 13% 16% Singapore 9.8 2020 Singapore 6% 15% 14% 13% 10% 11% 13% 6.1 2015 Indonesia 22% 31% 24% 22% 15% 15% 23% Malaysia 7.7 4.7 Vietnam 14% 25% 24% 22% 20% 18% 29% Source: Nomura research, UPU, Postal statistics, National statistics, Company data, Philippines 20% 30% 35% 33% 24% 15% 29% World Bank, Demographia Thailand 18% 25% 24% 20% 15% 15% 23% ASEAN 16% 32% 29% 22% 17% 15% 23% 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)

Vietnam, 25 , Philippines, 54 , 2% 5%

Thailand, 204 , 19% Singapore, 413 , 38%

Indonesia, 172 , 16%

Malaysia, 221 , 20% Source: Company data, Various Mail operators

Nomura | Asean logistics 6 October 2016

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 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% Source: Nomura

Nomura | Asean logistics 6 October 2016

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 Country Scope of universal service Monopoly Tariffs Indonesia Collecting, processing, transport and delivery of mail throughout the national Yes. Monopoly on letters up to 2 kg, postcards and Govt approval needed for universal territory at affordable rates. aerogrammes. services Malaysia Receipt, transport and delivery of letters up to 2 kilogrammes(registered, Yes. Only on letters up to 2 kg and parcels up to 20 kg. Govt approval needed for universal insured services) and parcels up to 20 kg at uniform rates throughout the services country. Money order is also included. Philippines The delivery of letters, parcels and other mail matters as a basic and strategic None Must be at least sufficient to finance public utility overall cost Singapore The basic mail services cover the conveyance of letters weighing 500g and None. Liberalized since 2007. Due to high capex barrier, Govt approval needed for universal below to any person in Singapore requiring such services, and the provision Singpost have a high market share of 95%. This is because services and maintenance of posting boxes and post offices throughout Singapore. Singpost is granted access to letterbox masterdoor keys, rights to issue national stamps and right to maintain the national postal code system. Thailand Postal and remittance services throughout the country at a uniform rate. The Yes. Monopoly on letters up to 2 kg and postcards Govt approval needed for universal universal postal service includes the following services: services i letter-post items up to 2 kg; ii books, newspapers, periodicals; iii parcels up to 20 kg.

Vietnam Postal of domestic and international letter-post items up to 2 kg, public press Yes. Monopoly on letters up to 2 kg Govt approval needed for universal distribution and other special obligations. services 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 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% Source: Company data

Nomura | Asean logistics 6 October 2016

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)

450 Total Parcels / 400 express, 54

350

300

250

200 389 370 348 150 282 240 222 100 179 50 Regulated 0 mail, 222 2008 2009 2010 2011 2012 2013 2014 Source: Company data Source: Nomura research, Company data

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.

Nomura | Asean logistics 6 October 2016

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) Fig. 59: Evolution of courier volumes(mn)

3,000 Domestic mail International mail 60 Domestic International

48.3 2,500 50 46.0 41.7 2,000 40 37.5 37.8 34.6 35.8 1,235 1,198 1,194 1,177

1,174 30.7 1,171 1,500 1,139 1,072 1,048

1,023 30 961

904 22.9 36 40 41 28 26 24

45 20.4 44

1,000 48 52 18.2 56 20 59

500 1,199 1,158 1,152 1,148 1,148 1,147 999 971 1,095 905 1,027 845 10 5.4 5.8 5.4 5.8 5.4 5.3 6.6 6.3 6.4 6.5 6.8 0 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: Company data, MCMC, Nomura research Source: Company data, MCMC

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

Courier revenue (top 10 players) 2.80

2.44 2.21 2.12 2.03 1.74 1.63 1.55 1.51 1.49

0.71

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 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%.

Nomura | Asean logistics 6 October 2016

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

2,000 Domestic mail International mail 1,800 1,181 1,164 1,155 1,142

1,600 1,131 1,114 1,055 1,051

1,400 1,017 918 892 853 850 843

1,200 830 822 221 229 224 1,000 180 224 223 175 169 156

800 130 135 129 131 142 150 146 600 960 952 935 931 917 891 882 400 880 861 789 758 724 719 701 684 200 672 0

FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 Source: Nomura research, Company data

Nomura | Asean logistics 6 October 2016

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.

Nomura | Asean logistics 6 October 2016

Fig. 63: Groupings of postal providers 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 II (target system, level II) Combine both group 1.2 and 2 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 IV (transitional system) Combine both group 4 and 5 Group 5 (transitional system) Ethiopia, Liberia 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) Destination Total undercharge Destination Total undercharge Austria 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 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)

Flow % of total international flows Within Western Europe 43 Between Western Europe and North America 15 Between Western Europe and Eastern Europe & Central Asia 9 Between North America and Asia Pacific 8 Between Western Europe Asia Pacific 8 Source: UPU. Note: Flows measured in kg

Nomura | Asean logistics 6 October 2016

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

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 Strengthening operational efficiency and effectiveness and e-commerce development

Caribbean Strengthening operational efficiency and effectiveness and e-commerce development

Source: UPU

Nomura | Asean logistics 6 October 2016

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

In-coming Mail Out-going Mail Total 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% Source: Company data, data.gov.sg

Nomura | Asean logistics 6 October 2016

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.

Nomura | Asean logistics 6 October 2016

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%.

Nomura | Asean logistics 6 October 2016

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.

Nomura | Asean logistics 6 October 2016

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 Dec-15 USD1.0mn na 2-10 https://www.carpal.me/ 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. GoGoVan Hong Kong, Singapore Last-mile, point-to-point delivery through mobile app, bridging customers and drivers. Services retail customers as well na na na na https://www.gogovan.sg/ as businesses. Has a large driver base 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., na 201-500 www.lalamove.com MindWorks Ventures, AppWorks Ventures, Crystal Stream, The Aria Group, Sirius Venture Capital)

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 Jan-14 USD32.6mn (B Capital Group, The Singapore: Lazada, Zalora, 51-200 https://www.ninjavan.co/en-sg day in Singapore (more than double y-y). 5000 parcels a day (with 200 drivers) in Malaysia with a 3-5 fold increase by Abraaj Group, Monk's Hill Qoo10, Shopee, Charles & year end. Ventures, Yahoo Japan, Monk's Hill Keith, Watsons, Guardian Ventures, Insas Berhad) 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 na na L'Oreal, Maybelline, na www.anchanto.com/ inventory management, etc. Does not do marketplace on-demand delivery Scotchbrite, 3M EasyParcel Malaysia, but potentially expanding into Web-based parcel consolidator and E-commerce shipping solutions provider Dec-15 na - Axiata Digital Innovation Fund na Indonesia, Singapore and Thailand

NeonRunner Malaysia Operates a fleet of motorcycle couriers and they specialise in point-to-point delivery. With over a 100 drivers, cater to na na na na https://www.neonrunner.com/ the needs of e-commerce firms, businesses and retail consumers. We find their response time too long, from previous personal experience. Ninja Van / Ninja Logistics Malaysia Provides services under two heads, Last mile delivery and Ninja Collect. Marketplace model. Supports ecommerce na na na na merchants primarily including Lazada. Has presence in Indonesia and Malaysia as well. PostCo Malaysia Designed to address the issue of customers missing deliveries. Has 30 designated collection points, mostly local na na na na https://www.postco.com.my/ 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. The Lorry Malaysia Offers on-demand cargo transportation services throughout Malaysia, connecting lorry and van owners with customers na na na na www.thelorry.com/ 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. 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 na na na na https://goget.my/ college students or retiress, the usual pay for a chore is around RM 20. aCommerce Indonesia, Thailand Offers end-to-end e-commerce solutions including building of websites, warehouse management, customer service, Jan-13 USD20.2mn (MDI Ventures, 501-1000 www.acommerce.asia/ returning fulfillment and cash on delivery for retailers, brands, and manufacturers in Southeast Asia. Good client list. DKSH,NTT DoCoMo Ventures, Businesses predominantly in Indonesia, judging from website traffic flow Asia Pacific Capital, Sinar Mas Digital Ventures (SMDV), MatahariMall, MAPeMall (the CyberAgent Ventures, Sumitomo ecommerce arm of Indonesia’s Corporation Equity Asia Limited, largest retailer, Mitra Ardent Capital, Inspire Ventures, JL Adiperkasa), BerryBenka, HP Capital) and L'Oreal Skootar Thailand Helps connect SMEs with available scooter messengers in the area, mainly for documents, but accept anything that na na na na www.skootar.com/ can be transported on a bike. Features tracking and rating systems for messengers. Rushbike Thailand Parcel and document delivery anywhere in central Bangkok in 60 minutes Oct-14 na (JFDI.Asia) na na www.rushbike.com Notify delivery status via SMS including photo and signature. Realtime position tracking. Go-Jek Indonesia Marketplace capacity model, one of the largest in Indonesia, with 200,000 motorcycle riders. Provide not only mail and USD550mn (NSI Ventures, Tokopedia, flipit.com 1001–5000 https://www.go-jek.com/ parcel transportation but also a host of other services like Bike Taxi, grocery and food delivery, salon and massage Sequoia Capital, KKR, Capital services at home etc. Group, Rakuten Ventures, Northstar Group, DST Global, Farallon Capital Management, Warburg Pincus, Formation Group)

Bizzy Indonesia Bizzy helps merchants make the shift to online and meet the logistical demands of B2B business customers, by na na na na integrating multiple shipments from multiple vendors, known as ‘crossdocking’, through the fulfillment centre of partner aCommerce. Kargo Indonesia Tech-logistic company in Indonesia providing businesses and people to have easy access and control to any logistic na na kargo.co.id services. Mostly inter-city shipments. Tracks cargo realtime on third party truckers' capacity. Jun-16 na Diano Nurjadin, East Ventures HandyMantis Indonesia HandyMantis offers ojek (bike taxi) rides, but its main bread and butter is in courier and personal delivery services. na na na na handymantis.com/ 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. Mober Philippines Last-mile, point-to-point delivery through mobile app, bridging customers and drivers. Services retail customers as well na na na na mober.ph/ as businesses. Minimum fare is P500 for a van. City Delivery Philippines Primarily an online food delivery service from local restaurants, it has now started to offer delivery of non-food items as na na na na corporate.citydelivery.ph/ well, partnering with pharmacies, flower shops, and supermarkets. Source: Company data, Nomura research

Nomura | Asean logistics 6 October 2016

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

Nomura | Asean logistics 6 October 2016

Fig. 70: Website traffic and referral sources

Average average number monthly visit Adjusted of traffic m-m duration number bounce % on % on traffic (after number of referred 1st 2nd 3rd 4th 5th Type (Jun-Aug) chg (mins) of pages rate desktop mobile bounce rate) referral traffic websites rank website address rank website address rank website address rank website address rank website address 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 Malay s ia Inc umbent 4,549,757 23% 2:00 2.4 36% 32% 68% 2,896,549 968,000 275 29% Aliexpress.com/Alibaba/Hkpost 24% Member s .lelong.c om.my 4% Lazada.com.my Gdexpress.com.my Inc umbent 464,888 -9% 3:43 3.9 44% 56% 44% 259,547 190,000 22 69% Member s .lelong.c om.my 12% Lazada.com.my 6% Zaloramalaysia.aftership.com 2% eshopelken.com 2% blogsmartusaha.com City linkex pres s .c om Inc umbent 152,817 -5% 4:41 10.2 26% 54% 46% 112,366 40,000 27 55% member s .lelong.c om.my 12% mighty utan.c om.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% member s .lelong.c om.my skynet.com.my Inc umbent 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% web.ecargo.asia 4% courierw orld.net abxexpress.com.my Inc umbent 113,689 -9% 3:01 3.5 27% 54% 46% 82,675 30,000 12 69% member s .lelong.c om.my 18% askmebuy.com 7% kerryexpress.com 2% cn.cari.com.my 1% Ali Baba nationw ide2u.com Inc umbent 69,041 -3% 3:44 5.4 25% 57% 43% 51,449 15,000 8 92% member s .lelong.c om.my 2% blog.smartusaha.com 1% padiini.com 1% my pos tonline.c om.my 1% purefit.my my .ta- q- bin.c om Inc umbent 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% wiwaa.com 5% superbuy.com 5% purplemonkey.com dhl.com.my Inc umbent 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.c om 7% 500.co 1% Pr oduc ky .c om 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% writehanded.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 Inc umbent 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.c o.id Indones ia Pos Inc umbent 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% matahar imall.c om 41% wagimanturbo.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 Inc umbent 1,206,000 -12% 3:11 2.7 31% 50% 50% 835,276 370,000 33 83% Lazada.com.ph 3% Onlinetrackingnumbers.com 2% metr ow idec our ier .c om 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 Inc umbent 163,683 26% 2:35 2.4 48% 55% 45% 85,459 45,000 12 18% seedow .net 17% fanshirt.co 11% footwearcollection.weebly.com 10% lif.paperblog.com my jamex pr es s .c om Inc umbent 6,470 -46% 3:09 3.1 25% 76% 24% 4,851 3,890 - apcargo.com.ph Inc umbent 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 Inc umbent 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 Inc umbent 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 Inc umbent 196,137 24% 1:27 1.6 69% 26% 74% 59,998 - - air21 Inc umbent 53,368 -45% 3:23 3.3 36% 63% 37% 34,177 15,000 3 38% mystart4.dealw ifi.com 32% lina-group.com 30% amazon.com express.2go.com.ph Inc umbent 26,608 37% 11:53 7.7 25% 74% 26% 19,964 - - wwwexpress.com.ph Inc umbent 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 Inc umbent 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 Ninjav an.s g Start-up 26,098 -34% 0:51 1.4 58% 27% 73% 10,867 15,000 4 48% Qoo10.sg 22% Deagos tini.s g 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 Source: Similiarweb, Nomura research

Nomura | Asean logistics 6 October 2016

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

120% Start-ups Incumbent Mober - Ezycourier 524 100% Neonrunner 899 Qourier 1,099 80% Gogovan (Singapore) 3,769

60% Thelorry 8,453 Ninjavan (Singapore) 15,000 40% GoJek 21,103 GoGet 25,000 20% Ninjavan (Malaysia) 74,156 15% 1% Xend 90,000 8% 10% 0% Acommerce (Indonesia) 120,000 Malaysia Indonesia Philippines Singapore Source: Similiarweb, Nomura research 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).

Nomura | Asean logistics 6 October 2016

• 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

June - August Traffic Source June - August Traffic Source Last mile provider traffic Country ranking Last mile provider traffic Country ranking Singapore Post 1,030,717 Singapore 1 LBC Express 305,324 Philippines 1 Pos Malaysia 279,680 Malaysia 1 JNE 198,534 Indonesia 1 Indonesia Pos 31,990 Indonesia 2 Indonesia Pos 80,866 Indonesia 1 ABX Express 369 Malaysia 5 Pos Malaysia 34,040 Malaysia 3 GD Express 23,446 Malaysia 2 Source: Similiarweb, Nomura research Skynet 16,405 Malaysia 1

Ninjavan 15,015 Malaysia 1 Source: Similiaraweb, Nomura research

Nomura | Asean logistics 6 October 2016

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.

Nomura | Asean logistics 6 October 2016

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.

Nomura | Asean logistics 6 October 2016

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 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% 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 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 Source: Statista

Fig. 77: Median age vs GDP per capita Fig. 78: …which would then translate to higher online spend The scatter plot below denotes more upside to per capita income as as indicated by the user penetration rate younger generation enters the workforce 60 60 USA USA Singapore Singapore 50 50

40 40

Japan Japan 30 30

20 20

10 China ($) capita per GDP Nominal 10 Malaysia China Malaysia Nominal GDP per capita ($ '000) ($ capita per GDP Nominal Philippines Indonesia Thailand Thailand Philippines Vietnam Indonesia Vietnam 0 0 20 25 30 35 40 45 50 0% 20% 40% 60% 80% Median age User penetration 2016 Source: Nomura, Statista 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.

Nomura | Asean logistics 6 October 2016

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 Fig. 80: Asean 6’s smart phone penetration vs China and Japan 100% Smartphone penetration in Asia 91% 88% 90% 85% 90% 80% 80% 70% 70% 60% 51% 60% 49% 47% 51% 51% 50% 44% 39% 37% 37% 36% 50% 40% 40% 30% 30% 20% 20% 10% 10% 0% 0% Japan USA China ASEAN 6 ASEAN China Japan

excl. Vietnam Thailand Malaysia Indonesia Singapore Singapore Philipinnes Source: Internet live stats, Nomura research 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.

Nomura | Asean logistics 6 October 2016

Fig. 81: Rapid growth of Internet banking penetration across Fig. 82: Credit card penetration across Asean Asean % of respondents using internet banking via PC or smartphone 300% 5 262% Indonesia 36 250% 5 Philippines 13 200% 170% 7 142% Vietnam 44 2011 150%

11 2014 100% Thailand 19 50% 33% 33% 26% 24 7% 6% Malaysia 41 3% 0% Singapore 56

94 USA China Japan Vietnam Thailand Malaysia

0 20 40 60 80 100 Indonesia Singapore Philippines Source: McKinsey & Company Source: Nomura research

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 Singapore Indonesia Malaysia Philippines Thailand Vietnam Affluent 92% 57% 68% 35% 29% 70% Mass affluent 93% 46% 52% 18% 27% 60% By income segment 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% By age group 40-49 95% 33% 35% 12% 13% 35% 50-64 81% 18% 35% 7% 5% 39% Country Average 94% 36% 41% 13% 19% 44% 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.

Nomura | Asean logistics 6 October 2016

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 Fig. 85: Share of China’s main SME B2B E-commerce platforms by revenue

Revenue (bn yuan) (LHS) % Growth (RHS) 35 18% 16.8% 16% 30 14.6% 13.4% 14% Others 25 13.1% 12.5% Toocle 12% 1% 27% 11.9% 20 10% Alibaba 9.3% Global Market 51% 8% 15 Group 6% 1% 10 Made-in- 4% China.com 5 Global 2% 2% DHGate 13 15 16 19 22 25 28 31 4% sources 5% 0 0% JQW.com HC360 2011 2012 2013 2014 2015 2016F 2017F 2018F 5% 4% Source: iresearch China Source: iresearch China

Nomura | Asean logistics 6 October 2016

Fig. 86: Some notable B2B names in Asia

Region Website name Total Visits in 85 past 6 months 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

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 Country Website name Total Visits in past Avg Visit Bounce Top Actual visits in Type 6 months (mn) Duration Rate Country % Base country 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 Source: Similarweb, Nomura Research

Nomura | Asean logistics 6 October 2016

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 Country Website name Total Visits in past Avg Visit Bounce Top Country % Actual visits in Type 6 months (mn) Duration Rate Base country

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 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

Traditional channel Multi Channel Omni channel

Customer Brick and mortar store Customer E-tailer (online and 24 hours) Customer Store (brick and mortar and online) Customer Brick and mortar store

Source: Nomura research

Nomura | Asean logistics 6 October 2016

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.

Nomura | Asean logistics 6 October 2016

Fig. 91: The changing dynamics of order fulfilment in the logistics supply chain

Traditional order fulfilment Challenges Given the single platform of distribution - inventory Inventory management not flexible as this involves thorough planning management is only a two way process between suppliers / depending on sales pipelines / forecasts manufacturers and retailers Inventory management has to be managed properly at the Higher unnecessary logistics costs physical shops Warehouse solely used for storage Warehousing capacity not fully optimized Although the shopping experience is more personalized, it sacrifices the Customer management will be more reactive convenience of time and lacks scale on marketing opportunities

Omni-channel supply chain fulfilment Challenges Seamless inventory management integrated across all Huge investment required. Needs scale to be economically feasible. Real ordering /booking channels and suppliers/ manufacturers. time monitoring infrastructure needed Dynamic inventory allocation across all omni-channels Delivery options to either stores/ homes/ parcel collection Last mile delivery challenges. High volume to ensure economies of scale points Warehouses could similarly function as showrooms or front Location accessibility facing roles 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

Easy return and exchange 52%

Flexible delivery options 54%

Enhanced search functionality 59%

Product variety and availability 64%

Fast delivery 71%

0% 10% 20% 30% 40% 50% 60% 70% 80%

Source: DHL-IDC Manufacturing Insights Survey, 2015

Nomura | Asean logistics 6 October 2016

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 Fig. 94: Which fulfilment models for online sales do you currently offer and plan to offer in the next 1–3 years? currently use and plan to use in the next 1–3 years? Most of the last-mile delivery processes are still directly to home with Back end supply chain are almost equally from various points, but most some at the store up points inventories are still offered at the store Currently offered 1-3 years No plans Currently offered 1-3 years No plans

Online order & direct to 63% 19% 18% home Stores 48% 20% 32% In-store order & direct to 56% 10% 34% home Shared distribution centers Mobile order & direct to 47% 25% 28% 48% 26% 26% for online & offl ine home

Online/mobile order & pick Direct ship from 44% 22% 35% 37% 25% 38% up in store manufacturer Online/mobile order & pick 21% 31% 48% up at warehouse Dedicated distribution Online order & pick up from 33% 34% 33% 18% 28% 54% centers for online a locker box

0% 50% 100% 0% 50% 100%

Source: DHL-IDC Manufacturing Insights Survey, 2015 Source: DHL-IDC Manufacturing Insights Survey, 2015

Fig. 95: Have you or are you looking to invest in these areas Fig. 96: What are the top challenges for implementing omni- of your supply chain? channel strategy? Most have started digitizing their supply chain Cost remains the key issue given the lack of economies of scale as the key pushback Started/Implemented Planned Nothing planned Automation in distribution 63% 13% 24% Business model to justify ROI 21% center

Mobility-driven shopping 55% 14% 31% Lack of metrics or incentives 14% Digitalization of stores 54% 15% 31% Low priority due to other 14% Click-and-collect models 54% 14% 32% initiatives

Same-day deliveries 52% 17% 31% Current infrastructure and 13% process challenge Cloud-based logistics/supply 43% 15% 41% chain services Cost pressure 13% Predictive logistics techniques 38% 29% 33%

0% 20% 40% 60% 80% 100% 0% 10% 20% 30%

Source: DHL-IDC Manufacturing Insights Survey, 2015 Source: DHL-IDC Manufacturing Insights Survey, 2015

Nomura | Asean logistics 6 October 2016

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

Retail stores 33% 13%

Distributors 22% 11%

Multi-channel 14% 24% Current channel Mix retailers (e.g., Walmart) Expected Growth rate Online marketplaces 14% 18% (e.g., Alibaba)

Independent 10% 23% online stores

Multibrand online 7% 11% retailers (e.g., Zalora)

Source: DHL-IDC Manufacturing Insights Survey, 2015

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.

Nomura | Asean logistics 6 October 2016

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.

Nomura | Asean logistics 6 October 2016

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

Country Population Internet Internet ARPU Retail Ecommerce Ecommerce Number of Retail Frequency of Bounce (2015) (mn) Users Penetration (USD) sales sales ($mn) sales as a % users website retail site rate (%) (2015) ratio ($mn) 2015 of retail transacting traffic in visit per (mn) 2015 sales (2015) online past 6 internet user (mn) months (times) (mn) 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% * 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.

Fig. 99: Online shopping frequency quadrant Fig. 100: Frequency vs ARPU quadrant

Nomura | Asean logistics 6 October 2016

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 Fig. 102: However, within Asean, the frequency statistics are infrequent visitor traffic by measure of percentage of encouraging population

12 90% High penetration low High penetration high USA frequency frequency Japan 80% 10 Malaysia Singapore 70% 8 60% 50% Vietnam 6 Singapore Philippines 40%

Indonesia population Thailand 4 Thailand 30% India Visits per internet user internet per Visits Malaysia Vietnam 20% 2 Indonesia India China Philippines Internetpenetrationasrate% of 10% Low penetration low Low penetration high 0 frequency frequency 0% 0% 20% 40% 60% 80% 100% 0 1 2 3 4 5 6 7 Internet penetration rate as % of population Frequency of visits per person Source: Nomura research, Internetlivestats, similarweb 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).

Nomura | Asean logistics 6 October 2016

Fig. 103: Online shopping habit quadrant Fig. 104: Average revenue per user (USD per annum)

50% Quickly browsing to Just browsing if there's 1,800 1,657 see any good deals anything interesting 48% Vietnam 1,600 46% 1,400 Thailand Indonesia 44% 1,200 878 42% China Philippines 1,000 Malaysia 743 40% India 800 600 38% 360 Bounce rate (%) rate Bounce USA Japan 400 36% 131 Singapore 200 76 34% 42 22 14 Wants to shop but 0 32% Knows what to buy browsing for the best and orders quickly deals 30% USA China 4:40 5:52 7:04 8:16 Japan Vietnam Thailand Malaysia Indonesia Singapore Duration (minutes) Philippines Source: Nomura research, Internetlivestats, similarweb, 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

80% 67% 70% 60% 49% 48% 50% 38% 40% 33% 32% 31% 30% 20% 14% 10% 4% 0% USA China Japan Vietnam Thailand Malaysia Indonesia Singapore Philippines 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.

Nomura | Asean logistics 6 October 2016

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 Fig. 107: The total customs value on a USD100 dress by Customs in Singapore (mn) country

60 Value-added tax Duty Other tax 4.83 50 $44 $39 40 3.65 $32 $29 2.99 30 2.60 20 2.18

1.53 1.56 10 $6 1.35 1.43 1.18 1.15 1.19 $0 0 Vietnam Thailand Malaysia Indonesia

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Singapore Philippines Source: data.gov.sg Source: AT Kearney

Nomura | Asean logistics 6 October 2016

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 Fig. 109: For first 7 months Y-Y, expenditure on clothes and declined for 19 consecutive months footwear is down 5% Annual Household Expenditure (12 month moving Living Expenditure Index (2015=100): Clothes and (JPY '000) average) Footwear 145 3,900 Long term mean Long term mean 135 3,800

3,700 125

3,600 115

3,500 105

3,400 95

3,300 85 Jul-01 Jul-02 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-00 Jul-01 Jul-02 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Source: CEIC, Nomura Research Source: CEIC, Nomura Research

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 Fig. 111: In Japan, Internet retail ratio has grown at a CAGR consistent declining trend of 13% since 2010

Internet retail as a % of total retail (JPY bn) Department Stores Sales Nationwide (12 month 11% 12% (LHS) 60% 8,500 moving average) 10% Mobile retail as a % of total 10% internet retail (RHS) 8,000 10% 9% 50% 50% 8% 48% 46% 7,500 8% 7% 44% 40% 6% 41% 7,000 6% 37% 6% 5% 30% 4% 32% 6,500 4% 26% 20% 6,000 20% 2% 10% 13% 5,500 0% 0%

Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Source: CEIC, Nomura Research Source: Euromonitor, Nomura Research

Nomura | Asean logistics 6 October 2016

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 Fig. 113: Total internet retail market share of top 10 Japan companies in Japan

Seven & I AEON Apple Japan CCU Lawson Inc FamilyMart Seven & I 6% Group Softbank 4% 3% 2% 2% 2% 6% 5% Start Today Yamada 2% Denki FamilyMart Rakuten 2% 1% 1% Amazon Senshukai Japan CCU 1% 1% 17% Bic Camera Amazon 1% Uny 1% 1% Isetan Others Mitsukoshi Rakuten 76% 1% Wal-Mart 20% Stores 1% Others 44%

Source: Euromonitor, Nomura Research Source: Euromonitor, Nomura Research

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.

Nomura | Asean logistics 6 October 2016

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.

Nomura | Asean logistics 6 October 2016

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 Fig. 115: FDI inflow breakdown as of 1H16 (USDmn) Asean's collective FDIs have exceeded China's since 2009 (USDbn) China ASEAN 6 Vietnam, $845, 7% 25 23.4 22.7 Philippines, 19.6 19.5 China, $1,481, 20 $4,076, 12% 34% 15 13.5 12.6 Malaysia, 10.5 10.4 $539, 5% 8.9 8.9 10 6.9 7.7 7.0 9.1 7.8 6.6 6.5 7.3 6.2 6.2 6.2 6.9 Indonesia, 4.1 5 5.0 $1,499, 13% 0 Singapore, Thailand, $1,508, 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 $1,901, 13% 1H2016 16% Source: JETRO 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.

Nomura | Asean logistics 6 October 2016

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. Sales increase (%) High growth potential Relationship with High receptivity for Reviewing production Reduction of costs Deregulations (%) Easy to secure labor (%) clients (%) high-value added and distribution (e.g., procurement/ force (%) products (%) networks (%) labor costs) (%) 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 - Source: Jetro survey

Fig. 117: Functions to invest into

Sales function (%) Production (high-value Production Logistics function (%) added products) (ubiquitous 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 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:

Nomura | Asean logistics 6 October 2016

Fig. 118: TPP members

Australia Mexico Brunei New Zealand Canada Peru Chile Singapore Japan United States

Malaysia Vietnam 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)

Answer Total Mfg Non-mfg Top 3 countries 1 Facilitation of trade and customs authorities 59 68.3 49.5 Vietnam Malaysia Singapore (65.8) (60.2) (56.6) 2 Market Access for Goods 33.6 34.2 32.8 New Zealand Australia Vietnam (59.7) (39.6) (34.5) 3 Rules of origin (Accumulation rules of origin that 25.4 32.1 18.6 Malaysia Vietnam Singapore enable the value and processing to be added (28.2) (27.5) (25.9) among multiple contracted countries, etc.)

4 Temporary entry of the business person 18.3 15.3 21.4 Singapore Vietnam New Zealand (24.3) (19.3) (16.10 5 Service (crossing border service, financial service 15.7 7.9 23.6 New Zealand Singapore Vietnam and telecommunication service) (29) (19.6) (15.80 6 Investment (indiscriminate principles between 10.1 3.6 16.8 New Zealand Australia Vietnam investors and resolution of conflict procedures, (16.1) (14) (9.7) etc.) 7 Intellectual property 9.8 8.5 11.1 New Zealand Singapore Australia (24.2) (11.1) (10.4) 8 Competition policy and state-owned enterprise 8.1 5.2 11.1 New Zealand Malaysia Australia (14.5) (11.2) (7.9) 9 e-commerce 7.3 5.8 8.9 New Zealand Australia Vietnam (25.8) (9.8) (6.3) 10 TBT(Technical Barriers Trade) 4.5 4.9 4.1 New Zealand Malaysia Singapore (16.1) (4.9) (3.7) 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.

Nomura | Asean logistics 6 October 2016

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.

Nomura | Asean logistics 6 October 2016

Fig. 120: Yamato’s and CJ express acquisitions (last mile / cross border logistics focus)

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 Source: Company data, News releases

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.

Nomura | Asean logistics 6 October 2016

Fig. 121: Alibaba and Softbank’s acquisition trail (online shopping)

Apr-16 Alibaba buys a controlling stake in Singapore-based e-commerce platform Lazada for $1 billion.

Softbank's ASEAN expansion Jun-13 Softbank Ventures Korea invested an undisclosed amount in Tokopedia. This is the 5th round of funding for Tokopedia.

Source: Company data, News releases

Nomura | Asean logistics 6 October 2016

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

GD Express (MYRmn) Pos Malaysia (MYRmn) LBC Express (PHPmn) Singapore Post (SGDmn) 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% Source: Nomura research, Company data

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

GD Express Pos Malaysia LBC Express Singapore Post 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% Source: Nomura research, Company data

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.

Nomura | Asean logistics 6 October 2016

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 (%)

GD Express Singapore Post 25 GD Express Singapore Post 45 Pos Malaysia LBC Express Pos Malaysia LBC Express 40 20 35 30 15 25 20 10 15 10 5 5

0 0 FY-5 FY-4 FY-3 FY-2 FY-1 FY-5 FY-4 FY-3 FY-2 FY-1 FY +1 FY +2 FY +3 FY +4 FY +5 FY +1 FY +2 FY +3 FY +4 FY +5 FY Source: Nomura research, Company data Source: Nomura research, Company data

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

7% 5.9% 6% US

3.1% 3% China

2% Japan 1.3% 1.3% 1% fulfilment cost as a % of GMV GMV of a % as cost fulfilment 0% 0 500,000 1,000,000 1,500,000 Volume density per km - Number of mails annually Yahoo Japan Rakuten Amazon JD.com per square km Source: Company data, Nomura research Source: Nomura research, Company data, Demographia

Nomura | Asean logistics 6 October 2016

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 Fig. 129: Upside growth in urbanization 2-4 players) vs mail density per population Singapore Post's superior margin is due to its high mailing volume density Vietnam, Indonesia, Thailand and China have high growth potential on the where urbanization rate stands at 100%. back of rising urbanization 3.5 30% Singapore Vietnam 3.0 25% Indonesia China 2.5 Thailand 20% Malaysia 2.0 15% 1.5 EBIT margins EBIT Malaysia Philippines 10% Singapore Thailand USA 1.0 China USA Philippines 5% (%) rate growth Urbanization 0.5 Indonesia Japan Vietnam Japan 0% 0.0 0 200 400 600 0 50 100 150 Postal items/Urban Population Urbanization rate (%) Source: Nomura research, company data, UN data, World Bank. Note: EBIT margins Source: Nomura research, company data, UN data, World Bank are based on the mail and last-mile delivery businesses only. For Singapore, it is only represented by SingPost’s mail division.

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.

Singapore Post SPOS.SI SPOST SP

EQUITY: TRANSPORT/LOGISTICS

Major player in a thriving market Global Markets Research

Scale, synergies and e-retail to propel growth 6 October 2016 Rating Starts at Buy Target Price SGD 2.11 Action: Initiate at Buy, with TP implying 41% upside. Starts at We initiate coverage of SingPost with a Buy call, as we believe that currently Closing price SGD 1.50 several positive forces are in perfect alignment to push the stock upwards. 4 October 2016 The group’s changing focus from postal to logistics and ecommerce delivery Potential upside +41.1% 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, Anchor themes and we see a promising path ahead. With scale, infrastructure and Our top pick for three reasons. wide-spread network partners at We choose SingPost as our top pick for three reasons: 1) Strong volume the entity level, and surging growth, supported by surging ecommerce retail demand, especially because demand led by e-retail at the macro-regional level, Singapore geography-wise SingPost is located at the intersection of ASEAN trade. 2) Its Post is in a sweet spot, with massive scale and impeccable infrastructure give it an edge over competitors sharp revenue growth and in capitalizing the opportunities offered by the last-mile delivery segment. 3) earnings ahead. Consolidation synergies from recent acquisitions such as Trade Global and

Jagged Peak are expected to kick in with the group entering the integration Nomura vs consensus phase this year, which should propel overseas revenues further (currently Our top- and bottom-line 44% of total). We strongly believe that its partnerships with Alibaba and its numbers are ahead of the Street subsidiary Lazada are big positives for the company as well. SingPost we feel, by 7-15% and 8-37%, finds itself today at the right place, at the right time, with the right capabilities. respectively.

Valuation: Justified on recovering ROE; decent dividend yield of 5%. Research analysts 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 ASEAN Transport/Logistics three-year historical averages of 14x and 19x (reflecting current valuations Ahmad Maghfur Usman - NSM too). We think the stock deserves better valuations, given the high earnings [email protected] growth (+19% 5-year CAGR) driven by the logistics and ecommerce fulfilment +603 2027 6892 segments coupled with its recovering ROE (+20% by FY19). Initiate at Buy. Riddhi Jain - NSFSPL

[email protected] +91 22 672 35616 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

Key company data: See next page for company data and detailed price/index chart.

See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.

Nomura | Singapore Post 6 October 2016

Key data on Singapore Post Relative performance chart 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 Source: Thomson Reuters, Nomura research Cash dividends -128 -167 -160 -175 -220 Equity issue 331 17 0 0 0 Notes: 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 Performance Net cashflow 180 -458 -88 8 27

(%) 1M 3M 12M Beginning cash 404 584 127 39 47

Absolute (SGD) 6.4 -2.3 -11.8 M cap (USDmn) 2,361.4 Ending cash 584 127 39 47 74

Absolute (USD) 5.7 -4.0 -7.7 Free float (%) 66.8 Ending net debt -346 154 328 320 293

Rel to MSCI Singapore 3.7 -1.2 -13.5 3 -mth ADT (USDmn) 7.7 Balance sheet (SGDmn) Income statement (SGDmn) As at 31 Mar FY15 FY16 FY17F FY18F FY19F Year-end 31 Mar FY15 FY16 FY17F FY18F FY19F Cash & equivalents 584 127 39 47 74 Revenue 920 1,152 1,420 1,626 1,859 Marketable securities 0 0 0 0 0 Cost of goods sold -740 -970 -1,202 -1,354 -1,512 Accounts receivable 164 210 185 211 242 Gross profit 180 181 219 272 347 Inventories 6 4 5 5 6 SG&A 9 7 -7 -12 -20 Other current assets 43 26 27 27 27

Employee share expense Total current assets 798 368 256 291 349 Operating profit 189 189 211 260 327 LT investments 744 892 920 932 946 EBITDA 223 221 256 315 392 Fixed assets 330 517 725 752 769 Depreciation -35 -32 -45 -55 -65 Goodwill 0 0 0 0 0

Amortisation Other intangible assets 317 583 581 579 577 EBIT 189 189 211 260 327 Other LT assets 23 55 55 56 57 Net interest expense -1 -6 -11 -15 -15 Total assets 2,211 2,416 2,538 2,611 2,699 Associates & JCEs 7 9 10 12 14 Short-term debt 17 71 159 159 159

Other income Accounts payable 352 386 422 475 531 Earnings before tax 195 192 210 257 326 Other current liabilities 46 44 53 53 53 Income tax -33 -34 -37 -46 -58 Total current liabilities 415 501 634 687 744 Net profit after tax 162 158 173 211 268 Long-term debt 221 209 209 209 209

Minority interests -2 -4 -5 -5 -6 Convertible debt Other items 0 0 0 0 0 Other LT liabilities 107 144 145 149 153 Preferred dividends -15 -15 -15 -15 -15 Total liabilities 743 854 987 1,045 1,105 Normalised NPAT 145 139 153 191 247 Minority interest 4 11 12 12 13 Extraordinary items -3 95 1 0 0 Preferred stock 347 347 347 347 347 Reported NPAT 143 234 154 191 247 Common stock 427 447 449 449 449 Dividends -128 -167 -160 -175 -220 Retained earnings 683 750 742 758 785

Transfer to reserves 15 67 -6 16 27 Proposed dividends

Valuations and ratios Other equity and reserves 7 7 0 0 0 Reported P/E (x) 22.7 13.8 21.0 17.0 13.1 Total shareholders' equity 1,464 1,550 1,539 1,554 1,581 Normalised P/E (x) 22.3 23.3 21.1 17.0 13.1 Total equity & liabilities 2,211 2,416 2,538 2,611 2,699 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 Liquidity (x) Price/cashflow (x) 13.8 24.6 12.4 11.0 9.1 Current ratio 1.92 0.73 0.40 0.42 0.47 Price/book (x) 2.2 2.1 2.1 2.1 2.0 Interest cover 373.4 31.0 19.2 16.9 21.3

EV/EBITDA (x) 14.1 16.3 14.7 12.0 9.6 Leverage EV/EBIT (x) 16.6 18.9 17.7 14.4 11.4 Net debt/EBITDA (x) net cash 0.70 1.28 1.02 0.75 Gross margin (%) 19.5 15.8 15.4 16.7 18.6 Net debt/equity (%) net cash 9.9 21.3 20.6 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 Per share Net margin (%) 15.5 20.3 10.9 11.7 13.3 Reported EPS (SGD) 6.60c 10.81c 7.13c 8.81c 11.42c Effective tax rate (%) 16.9 17.8 17.8 17.8 17.8 Norm EPS (SGD) 6.71c 6.41c 7.07c 8.81c 11.42c Dividend payout (%) 89.8 71.4 103.9 91.8 89.1 FD norm EPS (SGD) 6.71c 6.41c 7.07c 8.81c 11.42c ROE (%) 15.2 20.2 12.9 15.9 20.2 BVPS (SGD) 0.68 0.72 0.71 0.72 0.73 ROA (pretax %) na 10.1 9.2 10.7 13.1 DPS (SGD) 0.06 0.08 0.07 0.08 0.10

Growth (%) Activity (days)

Revenue 25.2 23.3 14.5 14.3 Days receivable 59.5 50.7 44.4 44.5

EBITDA -1.2 15.9 23.0 24.5 Days inventory 2.0 1.4 1.3 1.4

Normalised EPS -4.6 10.4 24.6 29.5 Days payable 139.2 122.6 120.8 121.4

Normalised FDEPS -4.6 10.4 24.6 29.5 Cash cycle 0.0 -77.6 -70.5 -75.0 -75.6 Source: Company data, Nomura estimates Source: Company data, Nomura estimates

Nomura | Singapore Post 6 October 2016

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 Quantium Solutions-regional platform Famous Holdings - SG-based freight forwarder in General Storage- the self-storage for warehousing and distribution 6 countries solutions business

Stake: 100% at present (34% to be acquired Stake: 63% Stake: 100% by Alibaba in October 2016)

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 Pupose: The Store House has four storage Purpose: Expansion of freight forwarding network facilities in Hong Kong

Jagged Peak - US based ecommerce Trade Global- US e-commerce services provider Shenzhen 4PX IT - China based solutions provider ecommerce solutions provider

Completed acquisition of 71.1% Completed acquisition of 96.4% Increased stake from 18% stake in March 2016 stake in November 2015 to ~36% in February 2016

Purpose: To help SingPost move into US Purpose: To enable SingPost’s clients in Asia Pacific and Europe while allowing Jagged Peak to to expand their businesses to the US Purpose: 4PX's capabilities in warehousing, extend its retail clients’ access to Asia- express delivery and freight forwarding, will Pacific. help capitalise on the rapid growth in China’s eCommerce activities. Source: Nomura research, company data

Nomura | Singapore Post 6 October 2016

Fig. 131: Acquisitions/ Divestments/ Collaborations done by SingPost in past 3 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. S$78.4mn SingPost now holds a 11.2 per cent strategic stake in GDEX. 15-Feb-16 Shenzhen 4PX Acquisition 18% Total stake now increased to 36% to leverage on rapid S$36mn growth of China's ecommerce activities. 15-Oct-15 TradeGlobal (US) Acquisition 96% To leverage on TradeGlobal's strong end to end ecommerce S$236mn solutions network in US. 9-Oct-15 Jagged Peak (US) Acquisition 71% To gain access to Jagged Peak's ecommerce logistics S$22.5mn platform for high velocity consumer products in US. 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 S$1.4mn points. 28-Aug-15 Morning Express & Acquisition 33% To improve tangibale eCommerce logistics and last mile S$7.1mn Logistics (HK) delivery capability in Hong Kong. 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 Acquisition 80% To expand freight forwarding network in Europe. S$12.6mn (NLD) 19-Jun-15 PT Trio SPecommerce Joint Venture 33% To provide a one-stop e-commerce solution for both brands S$0.9mn Indonesia (TSI) and retailers in Indonesia. 19-Jun-15 DataPost Pte Ltd Divestment 90% DataPost and Novation were engaged in document S$39.3mn management and transactional mail printing services. The divestment is to focus on ecommerce related businesses in 19-Jun-15 Novation Solutions Ltd Divestment 100% the region. S$24.4mn 17-Jun-15 Hubbed Holdings Pty Ltd Acquisition 30% To add flexibility to SingPost's ecommerce delivery service S$4.42mn (AUS) in Australia by using Hubbed's network of 680 newsagents. 14-Jan-15 Famous Pacific Shipping Acquisition 90% FPS is NZ-based freight forwarder and the acquisition S$8mn (NZ) would both broaden SingPost's freight network and establish an entry point into the New Zealand Freight Market. 15-Dec-14 Couriers Please (AU) Acquisition 100% To facilitate SingPost's last mile delivery franchise in S$98mn Australia. 20-Oct-14 Taobao Marketplace Collaboration NA Taobao customers in Singapore can now use POP station Southeast Asia 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 S$12.12mn synergising their operations with Singpost operations in terms of end to end logistics. 29-Jan-14 TRAS-Inter Co. (JPN) Acquisition 100% To expand SingPost's freight forwarding presence in Japan. S$3mn 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.

Source: Company data, Nomura research

Nomura | Singapore Post 6 October 2016

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.

Source: Company data, Nomura research

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.

Nomura | Singapore Post 6 October 2016

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

28% Line haul 33% 37% 44% Local Last mile 56% delivery Overseas 53% 68% 72%

2014 Sorting 6% 2015 Collection 2016 4%

Source: Company data Source: Logisym

Nomura | Singapore Post 6 October 2016

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).

Nomura | Singapore Post 6 October 2016

Fig. 138: Postal volumes have been consistently declining Fig. 139: Postal business contributes less than 50% of revenue but close to 80% of operating profit

Postal Articles Handled (Mn) Postal Logistics eCommerce 2,100 100% 8% 1% 1,900 20% 80% 1,700 49% 1,500 60%

1,300 40% 79% 1,100 44% 900 20%

700 0% Revenue Operating profit 1991 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 Source: Company data, Singapore Statistics Source: Company data, Nomura research

Fig. 140: Logistics leading the way Fig. 141: We expect high capex for FY17F and a stable maintenance capex thereafter

Postal Logistics eCommerce

80% Revenue mix has been changed considerably with Postal declining and logistics improving on 70% the back of e-Commerce led volumes

60%

50%

40%

30%

20%

10%

0% FY10 FY11 FY12 FY13 FY14 FY15 FY16 Source: Company data, Nomura research Source: Company data, Nomura research

Fig. 142: Revenue shows clear seasonality with Q3 peaking Fig. 143: Logistics and ecomm margins are pattern bound on the holiday season too Except postal which consistently declines due to higher international contribution (Rev SGD mn) 2014 (LHS) 2015 (LHS) Postal (LHS) eCommerce (LHS) 40 10 260 2016 (RHS) 350 Logistics (RHS) 9 250 300 30 8 240 250 20 7 230 6 220 200 10 5 210 150 0 4 200 100 -10 3 190 2 50 -20 180 1 170 0 -30 0 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q Source: Company data Source: Company data

Nomura | Singapore Post 6 October 2016

Fig. 144: Cash ROICs and ROEs have dwindled owing to acquisitions, but we sense a recovery ahead

Cash ROIC ROE 50% 45% 40% 35% 30% 25% 20% 15% 10% 5%

FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 Source: Company data, Nomura research

Fig. 145: Revenue and margin forecasts (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% Source: Company data, Nomura estimates

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.

Nomura | Singapore Post 6 October 2016

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.

Nomura | Singapore Post 6 October 2016

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 (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 Source: Nomura research

Fig. 147: Implied valuations 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 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.

Nomura | Singapore Post 6 October 2016

Fig. 148: Nomura vs consensus BBG High BBG Average BBG Low Nomura 1,600 1,400 1,200 1,000 800 600 400 200 0 -200 Core Revenue EBITDA Core Earnings Capex Free Cash Flow Source: Nomura research, Bloomberg

Fig. 149: Where we are against consensus and why?

(SGD mn) 2017F 2018F 2019F Remarks Core Revenue NMR 1,420 1,626 1,859 With ecommerce momentum building up, and Singpost Core Revenue BBG Avg 1,322 1,472 1,621 handling increasing volumes for big players like Lazada, we Core Revenue BBG High 1,441 1,638 1,967 have factored in steep growth rates in logistics & ecommerce Core Revenue BBG Low 1,220 1,307 1,337 segment. Also, historically revenue peaks in 3Q which we Difference (NMRvs BBG Avg) 7% 10% 15% believe consensus has omitted to build in.

EBITDA NMR 256 315 392 Our EBITDA lies close to Median consensus level. We have EBITDA BBG Avg 227 253 265 built in conservative cost assumptions, with y-y decline in EBITDA BBG High 299 338 293 margins this year (especially in logistics and ecommerce), but EBITDA BBG Low 186 211 231 recovery from FY 2018F on the back of cost control efforts of Difference (NMRvs BBG Avg) 13% 24% 48% the group.

Core Earnings NMR 153 191 247 Higher on account of Higher Revenue and EBITDA numbers. Core Earnings BBG Avg 142 163 180 Core Earnings BBG High 161 192 215 Core Earnings BBG Low 131 142 150 Difference (NMRvs BBG Avg) 8% 17% 37%

Capex NMR 250 80 80 Our Capex assumptions are on the higher side of consensus, Capex BBG Avg 149 68 53 more so for FY17 as we believe the construction of SPC Mall Capex BBG High 260 100 38 and the logistics Hub would continue to pull funds. Moreover, Capex BBG Low 26 31 65 the 1Q17 numbers are a quarter of our full year forecast. Difference (NMRvs BBG Avg) 68% 17% 51%

Free Cash Flow NMR 11 213 277 Our FCF is below the street owing to our higher Capex Free Cash Flow BBG Avg 74 168 226 assumption (See above). Free Cash Flow BBG High 270 215 320 Free Cash Flow BBG Low (51) 147 176 Difference (NMRvs BBG Avg) -85% 27% 23% Source: Nomura research

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.

Nomura | Singapore Post 6 October 2016

Fig. 150: One-year forward P/E trend Fig. 151: One-year forward EV/EBITDA trend 30 21.5

19.5

25 17.5

15.5 20 13.5

11.5 15 9.5

7.5 10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Feb-12 Feb-13 Feb-14 Feb-15 Feb-16 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 BEst EV / BEst EBITDA (Next Ann) Mean: 12.7x BEst P/E Ratio (Next Ann) Mean: 17.6x -1 stdev: 10.19x +1 stdev: 15.16x -1 stdev: 14.1x +1 stdev: 21x -1.5 stdev: 8.9x -1.5 stdev: 12.4x +1.5 stdev: 22.7x +1.5 stdev: 16.4x Source: Bloomberg 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.

LBC Express Holdings Inc

LBC.PS LBC PM

EQUITY: TRANSPORT/LOGISTICS

Riding on the macro growth story Global Markets Research

Market leader in the local market 6 October 2016 Rating Starts at Buy Target Price PHP 17.05 Action: Initiate with a Buy rating. TP implies 56% upside. Starts at We initiate coverage of LBC Express (LBC), a courier and cargo company in Closing price PHP 10.92 the Philippines, with a Buy rating and TP of PHP17.05. With 85% market 4 October 2016 share and being a preferred choice over state-owned Philippines Post Potential upside +56.1% (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 Anchor themes (FY16F/FY17F: 23%/26%) justifies its demanding valuation. Management The anticipated economic growth appears confident in LBC’s ability to serve growing demand. trajectory in the Philippines, Catalysts: Philippines macro growth story and strong e-Commerce led combined with the increase in online retail penetration, bodes volumes. well for this dominant last-mile Long-term catalysts include the macro growth story in the Philippines and delivery player. robust volume growth driven by rising penetration of ecommerce retail.

Currently, more than 20% of its Corporate Logistics segment is driven by Nomura vs consensus Lazada volumes. While this itself is a major driver, LBC also serves other The stock is not covered by any major corporate players such as Samsung. We expect the Corporate segment other broker. 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. Research analysts

Valuation: Bullish with a DCF-based TP of PHP17.05. ASEAN Transport/Logistics 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 Ahmad Maghfur Usman - NSM [email protected] Development Bank lawsuit as a conservative buffer, thus factoring in an +603 2027 6892 impending damage claim of PHP1.46bn (our TP is 6% lower due to this Riddhi Jain - NSFSPL adjustment). Our TP implies FY17F P/E of 25x and FY16F/FY17F EV/EBITDA [email protected] of 17x/14x. +91 22 672 35616

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

Reported net profit (mn) 416 797 970 1,154

Normalised net profit (mn) 491 797 970 1,154

FD normalised EPS 34.41c 55.91c 68.00c 80.90c

FD norm. EPS growth (%) -16.9 62.5 21.6 19.0

FD normalised P/E (x) 31.7 N/A 19.5 N/A 16.1 N/A 13.5 EV/EBITDA (x) 15.9 N/A 10.7 N/A 8.4 N/A 6.4 Price/book (x) 9.3 N/A 6.3 N/A 4.5 N/A 3.3 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

Source: Company data, Nomura estimates

Key company data: See next page for company data and detailed price/index chart.

See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.

Nomura | LBC Express Holdings Inc 6 October 2016

Key data on LBC Express Holdings Inc Relative performance chart 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 Capital expenditure -428 -331 -300 -300 -300 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 Source: Thomson Reuters, Nomura research Cash dividends 0 0 0 0 0 Equity issue 0 1,369 0 0 0 Notes: 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 Performance Net cashflow 19 451 238 377 1,488

(%) 1M 3M 12M Beginning cash 509 528 979 1,217 1,594

Absolute (PHP) -8.2 -16.6 -12.6 M cap (USDmn) 322.7 Ending cash 528 979 1,217 1,594 3,082

Absolute (USD) -11.5 -19.1 -15.7 Free float (%) 14.5 Ending net debt 369 179 -85 -1,294 -2,782

Rel to MSCI Philippines -7.1 -14.2 -23.4 3 -mth ADT (USDmn) 0.0 Balance sheet (PHPmn) Income statement (PHPmn) As at 31 Dec FY14 FY15 FY16F FY17F FY18F Year-end 31 Dec FY14 FY15 FY16F FY17F FY18F Cash & equivalents 528 979 1,217 1,594 3,082

Revenue 7,056 7,686 9,015 10,654 12,640 Marketable securities Cost of goods sold -6,124 -6,805 -7,641 -9,026 -10,705 Accounts receivable 894 1,025 1,202 1,421 1,686

Gross profit 932 882 1,374 1,628 1,936 Inventories SG&A -217 -152 -217 -260 -309 Other current assets 1,803 2,206 2,443 2,463 2,484

Employee share expense Total current assets 3,225 4,211 4,863 5,479 7,251

Operating profit 714 730 1,157 1,368 1,627 LT investments EBITDA 991 989 1,443 1,697 2,005 Fixed assets 637 763 746 688 633

Depreciation -276 -259 -286 -329 -378 Goodwill

Amortisation Other intangible assets 257 276 307 336 314 EBIT 714 730 1,157 1,368 1,627 Other LT assets 762 710 710 710 710 Net interest expense -30 -42 -43 -9 -6 Total assets 4,880 5,960 6,626 7,213 8,908

Associates & JCEs Short-term debt 774 1,084 1,038 205 205

Other income Accounts payable 1,565 1,830 1,644 1,943 2,305 Earnings before tax 684 688 1,114 1,359 1,621 Other current liabilities 551 659 659 659 659 Income tax -107 -221 -342 -416 -494 Total current liabilities 2,890 3,573 3,341 2,807 3,169 Net profit after tax 577 467 773 944 1,126 Long-term debt 123 74 95 95 95

Minority interests 13 24 25 26 27 Convertible debt

Other items Other LT liabilities 542 685 743 870 1,024

Preferred dividends Total liabilities 3,554 4,332 4,178 3,772 4,288 Normalised NPAT 590 491 797 970 1,154 Minority interest -14 -41 -43 -45 -48

Extraordinary items -447 -74 0 0 0 Preferred stock Reported NPAT 143 416 797 970 1,154 Common stock 112 1,426 1,426 1,426 1,426

Dividends Retained earnings 134 174 996 1,992 3,173

Transfer to reserves 143 416 797 970 1,154 Proposed dividends

Valuations and ratios Other equity and reserves 1,094 68 68 68 68 Reported P/E (x) 108.6 37.4 19.5 16.1 13.5 Total shareholders' equity 1,340 1,669 2,491 3,486 4,667 Normalised P/E (x) 26.4 31.7 19.5 16.1 13.5 Total equity & liabilities 4,880 5,960 6,626 7,213 8,908 FD normalised P/E (x) 26.4 31.7 19.5 16.1 13.5

Dividend yield (%) na na na na na Liquidity (x) Price/cashflow (x) 185.7 26.1 25.6 10.2 8.7 Current ratio 1.12 1.18 1.46 1.95 2.29 Price/book (x) 11.6 9.3 6.3 4.5 3.3 Interest cover 23.5 17.5 27.0 155.3 278.7

EV/EBITDA (x) 16.1 15.9 10.7 8.4 6.4 Leverage EV/EBIT (x) 22.3 21.5 13.3 10.4 7.8 Net debt/EBITDA (x) 0.37 0.18 net cash net cash net cash Gross margin (%) 13.2 11.5 15.2 15.3 15.3 Net debt/equity (%) 27.5 10.7 net cash net cash net cash EBITDA margin (%) 14.0 12.9 16.0 15.9 15.9

EBIT margin (%) 10.1 9.5 12.8 12.8 12.9 Per share Net margin (%) 2.0 5.4 8.8 9.1 9.1 Reported EPS (PHP) 10.06c 29.20c 55.91c 68.00c 80.90c Effective tax rate (%) 15.6 32.1 30.7 30.6 30.5 Norm EPS (PHP) 41.41c 34.41c 55.91c 68.00c 80.90c Dividend payout (%) 0.0 0.0 0.0 0.0 0.0 FD norm EPS (PHP) 41.41c 34.41c 55.91c 68.00c 80.90c ROE (%) na 27.7 38.3 32.4 28.3 BVPS (PHP) 0.94 1.17 1.75 2.45 3.27 ROA (pretax %) na 15.6 22.3 24.8 28.4 DPS (PHP) 0.00 0.00 0.00 0.00 0.00

Growth (%) Activity (days)

Revenue 15.9 8.9 17.3 18.2 18.6 Days receivable 45.6 45.2 44.9 44.9

EBITDA -47.6 -0.1 45.9 17.6 18.1 Days inventory 0.0 0.0 0.0 0.0

Normalised EPS -16.9 62.5 21.6 19.0 Days payable 91.0 83.2 72.5 72.4

Normalised FDEPS -16.9 62.5 21.6 19.0 Cash cycle 0.0 -45.5 -38.0 -27.6 -27.6 Source: Company data, Nomura estimates Source: Company data, Nomura estimates

Nomura | LBC Express Holdings Inc 6 October 2016

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 Weaknesses - Largest market share at c85% and significant experience in the - The looming PHP1.82bn lawsuit filed by sister entity LBC logistics business. Development Bank. - Asset-light operations model which helps it to contain costs. - The continuing related-party transactions that the company incurs - Warehousing and belly space available on demand in the and related corporate governance issues. Philippines. - The company does not pay dividends. - Follow-on offering expected in 1H FY17 to improve free float. Opportunities Threats - The Philippines’ macro growth story, ecommerce growth potential - Too much dependence on the domestic market. and an under-penetrated ecommerce delivery segment. - A rise in delivery fees charged by Cebu or other vendors from whom - Corporate revenues anchored to Lazada's growth. belly space is leased. - Philpost's waning reputation and service quality, which make LBC - Rising personnel costs. the secondary go-to postal services provider. - Potential corporate governance issues.

Source: Nomura research

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.

Nomura | LBC Express Holdings Inc 6 October 2016

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.

Nomura | LBC Express Holdings Inc 6 October 2016

• 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

Net outstanding amount due from Ultimate parent (PHP Mn) 1,200 Net oustanding amountdue from Affiliates (PHP Mn) 1,070

1,000 951 886 798 783 800

600 548

400

200

0 2014 2015 1H2016 Source: Company data, Nomura research

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

Nomura | LBC Express Holdings Inc 6 October 2016

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.

Nomura | LBC Express Holdings Inc 6 October 2016

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 Fig. 155: Geography-wise operational breakup, based on the 19%, with the strongest growth coming from corporate group’s foreign currency denominated net assets (as of end logistics driven by Lazada-contributed volumes 2015)

(PHPmn) Retail Logistics Corporate Logistics USA Saudi Kuwait Other Arabia 1% 20,000 Money remittance 2% Middle East 1% 1% 18,000 Canada 16,000 3% 14,000 12,000 10,000 8,000 6,000 4,000 Philippines 92% 2,000 0 FY13 FY14 FY15 FY16F FY17F FY18F FY19F FY20F Source: Company data, Nomura estimates 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.

Nomura | LBC Express Holdings Inc 6 October 2016

Fig. 156: More than two-thirds of adults in the Philippines are unbanked, preferring remittance centres to banks (as of 2014)

Banking penetration rate 90% 81% 78% 80%

70%

60%

50%

40% 36% 31% 31% 30%

20%

10%

0% Malaysia Thailand Indonesia Philippines Vietnam 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).

Nomura | LBC Express Holdings Inc 6 October 2016

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 Fig. 158: We are bullish on LBC’s cash ROIC, and estimate a years, and stabilise thereafter, as the group tries to control cash ROIC of 26% next year costs EBITDA Margin EBIT Margin Forecast GP Margin ROE Cash ROIC 50% 45% 40% 36% 36% 36% 35% 36% 45% 35% 38% 40% 30% 32% 35% 33% 39% 28% 25% 30% 26% 24% 20% 25% 29% 26% 16% 16% 16% 20% 25% 15% 14% 13% 23% 15% 15% 20% 19% 10% 13% 13% 10% 9% 10% 9% 5% 5% 0% 0% FY13 FY14 FY15 FY16F FY17F FY18F FY19F FY20F FY13 FY14 FY15 FY16F FY17F FY18F FY19F FY20F Source: Company data, Nomura estimates Source: Company data, Nomura estimates

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.

Nomura | LBC Express Holdings Inc 6 October 2016

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% (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 growth 3.8% 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 Source: Nomura research

Fig. 160: Implied price multiple valuations (x) based on our DCF derived TP

FY16F FY17F FY18F FY19F FY20F 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 Source: Company data, Nomura estimates

Pos Malaysia Berhad PSHL.KL POSM MK

EQUITY: TRANSPORT/LOGISTICS

Entering a new phase of growth Global Markets Research

Acquisition to bring revenue and cost synergies 6 October 2016 Rating Starts at Buy Target Price Action and valuation: Initiate at Buy. Starts at MYR 4.85 We initiate on Pos Malaysia with a Buy rating, with our SOTP-based TP of Closing price MYR4.85 implying FY18F/FY19F P/Es of 21x/19x, in line with logistics and 4 October 2016 MYR 3.77 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 Potential upside +28.6% integrated logistics business.

Formidable powerhouse in the making, not fully priced in by consensus. Anchor themes We see cost and revenue synergy opportunities following the acquisition of Pos Malaysia stands to benefit KLAS Group, a formidable integrated logistics provider with operations in air from revenue synergies with the cargo, trucking, haulage as well as airport-related services. The low hanging acquisition of integrated logistics fruits on these synergies will be centred on integrated supply chain fulfilment. provider KLAS Group, which we This brings a valuable supply chain proposition for clients, where Pos think the market has yet to factor Malaysia had only been serving the last-mile portion. We believe that in. This should enable Pos Malaysia to provide consensus has yet to factor in consolidated earnings, which explain why our comprehensive solutions to FY17-19F earnings estimates are 38% / 72% / 58% above consensus. ecommerce players.

Riding on the ecommerce last-mile delivery theme. We see Pos Malaysia benefiting on the increase in online spending Nomura vs consensus penetration resulting in higher postal volumes. As the national postal provider, Consensus has yet to factor in Pos Malaysia stands to benefit as the beneficiary of the influx of Alibaba’s consolidated earnings thus our goods (those below 2kg) channelled through the international postal mail earnings estimates are well above consensus. 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. Research analysts

Catalysts: Promising structural changes. We have yet to factor in two major catalysts in store: 1) postal tariff hikes, and ASEAN Transport/Logistics 2) review of the postal land bank plots. These are both complicated processes Ahmad Maghfur Usman - NSM that require parliamentary approval and with the general election on the [email protected] horizon, this could be put on the backburner for now, in our view. +603 2027 6892 Riddhi Jain - NSFSPL [email protected] Year-end 31 Mar FY16 FY17F FY18F FY19F +91 22 672 35616 Currency (MYR) Actual Old New Old New Old New Revenue (mn) 1,713 2,161 2,775 2,970

Reported net profit (mn) 59 112 177 198

Normalised net profit (mn) 67 112 177 198

FD normalised EPS 8.59c 14.31c 22.59c 25.25c

FD norm. EPS growth (%) -35.4 66.7 57.8 11.7

FD normalised P/E (x) 43.9 N/A 26.3 N/A 16.7 N/A 14.9 EV/EBITDA (x) 13.1 N/A 9.6 N/A 6.5 N/A 5.8 Price/book (x) 2.6 N/A 1.6 N/A 1.6 N/A 1.5 Dividend yield (%) 2.1 N/A 1.9 N/A 3.0 N/A 3.3 ROE (%) 5.3 7.7 9.5 10.1

Net debt/equity (%) net cash net cash 0.3 3.3

Source: Company data, Nomura estimates

Key company data: See next page for company data and detailed price/index chart.

See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.

Nomura | Pos Malaysia Berhad 6 October 2016

Key data on Pos Malaysia Berhad Relative performance chart 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 Other operating cashflow -129 -49 -86 -109 -98 Cashflow from operations 106 240 184 377 433 Capital expenditure -104 -112 -550 -387 -405 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 Source: Thomson Reuters, Nomura research Cash dividends -38 -70 -63 -56 -88 Equity issue 0 0 818 0 0 Notes: Debt issue 0 50 57 0 0

Convertible debt issue

Others CF from financial acts -38 -20 812 -56 -88 Performance Net cashflow 6 131 -361 -65 -60

(%) 1M 3M 12M Beginning cash 439 446 577 216 150

Absolute (MYR) 9.9 41.2 2.7 M cap (USDmn) 715.4 Ending cash 446 577 216 150 90

Absolute (USD) 8.8 36.7 9.8 Free float (%) 58.6 Ending net debt -478 -60 5 66

Rel to MSCI Malaysia 10.3 40.3 -0.6 3 -mth ADT (USDmn) 1.6 Balance sheet (MYRmn) Income statement (MYRmn) As at 31 Mar FY15 FY16 FY17F FY18F FY19F Year-end 31 Mar FY15 FY16 FY17F FY18F FY19F Cash & equivalents 446 577 216 150 90 Revenue 1,467 1,713 2,161 2,775 2,970 Marketable securities 6 85 85 85 85 Cost of goods sold -1,232 -1,525 -1,858 -2,322 -2,454 Accounts receivable 361 416 587 755 797 Gross profit 235 188 303 454 517 Inventories 11 11 13 14 15 SG&A -88 -102 -147 -200 -232 Other current assets 81 80 125 125 125

Employee share expense Total current assets 904 1,168 1,026 1,129 1,112 Operating profit 147 86 156 254 285 LT investments 31 31 31 31 31 EBITDA 235 188 303 454 517 Fixed assets 656 665 1,483 1,670 1,842 Depreciation -88 -102 -147 -200 -232 Goodwill 5 5 224 224 224

Amortisation Other intangible assets EBIT 147 86 156 254 285 Other LT assets 84 0 61 61 61 Net interest expense 14 13 5 -6 -7 Total assets 1,681 1,869 2,826 3,115 3,270

Associates & JCEs Short-term debt 49 99 150 150 150

Other income Accounts payable 462 618 804 1,005 1,062 Earnings before tax 161 99 161 248 278 Other current liabilities 1 0 1 1 1 Income tax -57 -32 -49 -71 -80 Total current liabilities 512 717 955 1,156 1,213 Net profit after tax 104 67 112 177 198 Long-term debt 0 0 6 6 6 Minority interests 0 0 0 0 0 Convertible debt 0 0 0 0 0

Other items Other LT liabilities 46 36 53 53 53

Preferred dividends Total liabilities 558 753 1,014 1,215 1,272 Normalised NPAT 104 67 112 177 198 Minority interest 0 0 4 4 4

Extraordinary items -4 -8 0 0 0 Preferred stock Reported NPAT 100 59 112 177 198 Common stock 269 269 905 905 905

Dividends -70 -63 -56 -88 -99 Retained earnings

Transfer to reserves 29 -4 56 88 99 Proposed dividends

Valuations and ratios Other equity and reserves 854 847 903 991 1,090 Reported P/E (x) 29.6 50.0 26.3 16.7 14.9 Total shareholders' equity 1,123 1,116 1,808 1,896 1,995 Normalised P/E (x) 28.4 43.9 26.3 16.7 14.9 Total equity & liabilities 1,681 1,869 2,826 3,115 3,270 FD 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 Liquidity (x) Price/cashflow (x) 27.8 12.3 16.0 7.8 6.8 Current ratio 1.77 1.63 1.07 0.98 0.92 Price/book (x) 2.6 2.6 1.6 1.6 1.5 Interest cover na na na 43.5 40.1

EV/EBITDA (x) 10.9 13.1 9.6 6.5 5.8 Leverage EV/EBIT (x) 17.4 28.7 18.6 11.7 10.6 Net debt/EBITDA (x) net cash net cash net cash 0.01 0.13 Gross margin (%) 16.0 11.0 14.0 16.4 17.4 Net debt/equity (%) net cash net cash net cash 0.3 3.3 EBITDA margin (%) 16.0 11.0 14.0 16.4 17.4

EBIT margin (%) 10.0 5.0 7.2 9.1 9.6 Per share Net margin (%) 6.8 3.4 5.2 6.4 6.7 Reported EPS (MYR) 12.73c 7.54c 14.31c 22.59c 25.25c Effective tax rate (%) 35.3 32.3 30.2 28.7 28.8 Norm EPS (MYR) 13.29c 8.59c 14.31c 22.59c 25.25c Dividend payout (%) 70.6 106.7 50.0 50.0 50.0 FD norm EPS (MYR) 13.29c 8.59c 14.31c 22.59c 25.25c ROE (%) 9.2 5.3 7.7 9.5 10.1 BVPS (MYR) 1.43 1.43 2.31 2.42 2.55 ROA (pretax %) na 6.8 8.0 9.1 9.3 DPS (MYR) 0.09 0.08 0.07 0.11 0.13

Growth (%) Activity (days)

Revenue 16.8 26.1 28.5 7.0 Days receivable 83.0 84.7 88.2 95.4

EBITDA -19.9 60.8 50.1 13.8 Days inventory 2.6 2.4 2.1 2.1

Normalised EPS -35.4 66.7 57.8 11.7 Days payable 129.6 139.6 142.2 153.7

Normalised FDEPS -35.4 66.7 57.8 11.7 Cash cycle 0.0 -44.0 -52.5 -51.8 -56.2 Source: Company data, Nomura estimates Source: Company data, Nomura estimates

Nomura | Pos Malaysia Berhad 6 October 2016

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 Weaknesses - Leveraging on extensive nationwide postal network - Feedback on postal delivery service is mostly negative, coverage, this gives massive reach to retail base customers. notably on its poor punctuality, but there has been a marked - Default provider of government-related transaction points, improvement. such as payment of traffic summonses and tax payments. - Tied by social obligation to provide mail services in rural - Low postal rates an attractive pull factor for consumers. areas which are loss making. - Given the lower tier country grading by the Universal Postal - The postal staff workforce is highly unionised and this could Union, resulting to low terminal due payments, Pos Malaysia bring inflexibility to the Group towards any cost restructuring. has been able to compete in securing more transhipment volumes on mails routed to Europe and other parts of the world.

Opportunities Threats - Acquisition of KLAS Group, an integrated logistics and - The logistics sector is a very fragmented and competitive airport services provider, will bring more synergy industry. opportunities for the postal business in the ecommerce - Liberalisation of the postal service industry. 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.

Source: Nomura research

Nomura | Pos Malaysia Berhad 6 October 2016

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 number of postal mails (LHS) (mn) Number of transactions by Pos Niaga (LHS) (mn pieces) % chg y-y (RHS) 160 % chg y-y (RHS) 40% 1,600 20% 140 30% 1,400 15% 120 1,200 10% 20% 5% 100 1,000 0% 10% 80 800 -5% 0% 600 -10% 60 -10% 400 -15% 40 -20% -20% 200 -25% 20 0 -30% 0 -30% FY07 FY08 FY09 FY10 FY13 FY14 FY15 FY16 FY07 FY08 FY09 FY10 FY13 FY14 FY15 FY16 FY17F FY18F FY19F FY20F FY21F FY17F FY18F FY19F FY20F FY21F

FY12 (15 months) (15 FY12 months) (15 FY12 Source: Nomura research, Company data Source: Nomura research, Company data

Fig. 164: Pos Laju (courier arm) % chg in volume y-y

45% 42% 40% 35% 28%28% 30% 25%26% 25% 25% 21% 22% 20% 20% 15%15%15% 15% 10% 5% 5% 0% FY08 FY09 FY10 FY13 FY14 FY15 FY16 FY17F FY18F FY19F FY20F FY21F FY12 (15 months) (15 FY12

Source: Nomura research, Company data

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.

100

Nomura | Pos Malaysia Berhad 6 October 2016

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.

101

Nomura | Pos Malaysia Berhad 6 October 2016

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

102

Nomura | Pos Malaysia Berhad 6 October 2016 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.

103

Nomura | Pos Malaysia Berhad 6 October 2016

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.

104

Nomura | Pos Malaysia Berhad 6 October 2016

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 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% Source: Company data, Nomura estimates

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

105

Nomura | Pos Malaysia Berhad 6 October 2016 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:

106

Nomura | Pos Malaysia Berhad 6 October 2016

Fig. 166: Breakdown of opex and costs between the Group MYRmn unless stated otherwise 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% Source: Nomura research, Company data

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.

107

Nomura | Pos Malaysia Berhad 6 October 2016

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 MYRmn unless stated otherwise 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% Source: Company data, Nomura estimates

108

Nomura | Pos Malaysia Berhad 6 October 2016

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 MYRmn unless stated otherwise 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 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.

109

Nomura | Pos Malaysia Berhad 6 October 2016

Fig. 169: Implied price multiple valuations (x) based on our DCF derived TP

FY17F FY18F FY19F FY20F FY21F 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 Source: Nomura estimates, Company data

Fig. 170: Historical 5 year +2 forward P/E Fig. 171: Historical 5 year +2 forward EV/EBITDA

25.0 12.5 23.0 11.5 21.0 10.5 19.0 9.5 17.0 8.5 15.0 7.5 13.0 6.5 11.0 5.5 9.0 4.5 7.0 3.5 5.0 2.5 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Jan-13 Jan-14 Jan-15 Jan-16 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Mar-13 Mar-14 Mar-15 Mar-16 Feb-12 Feb-13 Feb-14 Feb-15 Feb-16 Nov-12 Nov-13 Nov-14 Nov-15 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Aug-12 Dec-12 Aug-13 Dec-13 Aug-14 Dec-14 Aug-15 Dec-15 Aug-16 May-13 May-14 May-15 May-16

BEst P/E Ratio (Next Ann) Mean: 14.04x -1 stdev: 11.4x BEst EV / BEst EBITDA (Next Ann) Mean: 5.1x -1 stdev: 3.8x +1 stdev: 6.4x +1 stdev: 16.7x -1.5 stdev: 10x +1.5 stdev: 18x -1.5 stdev: 3.2x +1.5 stdev: 7.02x

Source: Bloomberg 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.

110

GD Express Carrier Bhd

GDEX.KL GDX MK

EQUITY: TRANSPORT/LOGISTICS

A formidable regional player in the making Global Markets Research

The best in class 6 October 2016 Rating Starts at Buy Action and valuations: High valuation backed by high ROICs; BUY. Target Price MYR 2.21 We initiate coverage of GD Express with a Buy rating and DCF-derived TP of Starts at MYR2.21. Our TP implies FY17/ FY18F PEs of 80x /63x, vs the peer averages Closing price MYR 1.74 of 16x / 14x. We believe this premium valuation is justified given its high cash 4 October 2016 ROIC – WACC spread (FY17F: 18.2%) and EBITDA margins (FY17F: 21%), Potential upside +27% 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 Anchor themes portion of the B2B client base which bring in more economies of scale on We expect e-commerce to be the volume. We forecast an earnings CAGR of 25% over the next five years delta driver, led by volume (FY16-21F), on the back of our forecast 20% CAGR in volumes boosting growth. Decongestion at its parcel sorting hub should help profitability margins on improved economies of scale. improve cost efficiencies and Riding on the rapid rise in e-commerce volumes; capacity expansion. enable margin 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 Nomura vs consensus Shopping venture. Volumes in the past could have been higher, had it not Our FY17F earnings are in line been constrained by a capacity bottleneck which was addressed two months with consensus, but we are more ago by converting its parking space (40,000 sqft) as an extension to its bullish than the Street for existing sorting centre. This move, according to management, should boost FY18/19F by 13%/19%, given our higher volume assumptions. capacity by 28%-40%, which we expect will benefit GDEX.

Catalyst: Yamato collaboration; regional expansions. Research analysts 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 ASEAN Transport/Logistics partner. Yamato has recently stepped up its regional expansion into Thailand Ahmad Maghfur Usman - NSM and acquired a Malaysia-based cross-border trucking company thus giving it [email protected] operational reach into China. We see scope for revenue synergies with +603 2027 6892 potential cross-offerings. Riddhi Jain - NSFSPL [email protected] Risks: Intensifying competition and macro slowdown impacting on spending. +91 22 672 35616

Year-end 30 Jun FY16 FY17F FY18F FY19F

Currency (MYR) Actual Old New Old New Old New Revenue (mn) 220 266 326 398

Reported net profit (mn) 34 43 55 67

Normalised net profit (mn) 35 43 55 67

FD normalised EPS 2.53c 3.12c 3.96c 4.87c

FD norm. EPS growth (%) 22.0 23.1 26.9 23.2

FD normalised P/E (x) 68.7 N/A 55.8 N/A 44.0 N/A 35.7 EV/EBITDA (x) 46.7 N/A 36.7 N/A 28.2 N/A 22.3 Price/book (x) 6.2 N/A 5.6 N/A 5.1 N/A 4.7 Dividend yield (%) 0.6 N/A 0.6 N/A 0.8 N/A 1.0 ROE (%) 13.0 10.6 12.2 13.7

Net debt/equity (%) net cash net cash net cash net cash

Source: Company data, Nomura estimates

Key company data: See next page for company data and detailed price/index chart.

See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.

Nomura | GD Express Carrier Bhd 6 October 2016

Key data on GD Express Carrier Bhd Relative performance chart 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 Other operating cashflow -4 -6 -20 -29 -32 Cashflow from operations 21 41 34 41 55 Capital expenditure -7 -4 -9 -4 -29 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 Source: Thomson Reuters, Nomura research Cash dividends 0 -1 -1 -15 -19 Equity issue 0 217 0 0 0 Notes: 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 Performance Net cashflow 22 243 40 43 25

(%) 1M 3M 12M Beginning cash 42 65 307 347 390

Absolute (MYR) 15.2 8.1 52.6 M cap (USDmn) 583.5 Ending cash 65 307 347 390 415

Absolute (USD) 14.1 4.6 63.2 Free float (%) 30.0 Ending net debt -36 -282 -315 -346 -363

Rel to MSCI Malaysia 15.6 7.1 49.3 3 -mth ADT (USDmn) 0.1 Balance sheet (MYRmn) Income statement (MYRmn) As at 30 Jun FY15 FY16 FY17F FY18F FY19F Year-end 30 Jun FY15 FY16 FY17F FY18F FY19F Cash & equivalents 65 307 347 390 415 Revenue 197 220 266 326 398 Marketable securities 0 0 0 0 0 Cost of goods sold -156 -174 -209 -253 -306 Accounts receivable 49 48 53 58 65 Gross profit 40 46 57 73 91 Inventories 2 1 1 2 2 SG&A -9 -9 -12 -14 -18 Other current assets 7 11 13 16 19

Employee share expense Total current assets 122 367 414 466 501

Operating profit 32 36 45 59 74 LT investments EBITDA 40 46 57 73 91 Fixed assets 46 47 54 60 87

Depreciation -9 -9 -12 -14 -18 Goodwill

Amortisation Other intangible assets EBIT 32 36 45 59 74 Other LT assets 21 21 20 20 19 Net interest expense 0 5 9 10 10 Total assets 189 435 489 545 607

Associates & JCEs Short-term debt 5 6 8 11 13

Other income Accounts payable 3 2 2 3 4 Earnings before tax 32 41 54 68 84 Other current liabilities 13 18 22 26 32 Income tax -3 -6 -11 -14 -17 Total current liabilities 21 26 32 40 49 Net profit after tax 29 35 43 55 67 Long-term debt 24 19 24 33 39

Minority interests 0 0 0 0 0 Convertible debt

Other items Other LT liabilities 3 3 3 3 3

Preferred dividends Total liabilities 48 49 60 77 91

Normalised NPAT 29 35 43 55 67 Minority interest

Extraordinary items 0 -1 0 0 0 Preferred stock Reported NPAT 28 34 43 55 67 Common stock 62 69 69 69 69

Dividends Retained earnings

Transfer to reserves 28 34 43 55 67 Proposed dividends

Valuations and ratios Other equity and reserves 80 318 360 399 447 Reported P/E (x) 85.0 69.9 55.8 44.0 35.7 Total shareholders' equity 141 387 429 469 516 Normalised P/E (x) 83.7 68.7 55.8 44.0 35.7 Total equity & liabilities 189 435 489 545 607 FD 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 Liquidity (x) Price/cashflow (x) 112.7 59.0 71.7 59.1 43.4 Current ratio 5.82 14.23 12.99 11.53 10.26 Price/book (x) 17.0 6.2 5.6 5.1 4.7 Interest cover 2,268.7 na na na na

EV/EBITDA (x) 58.6 46.7 36.7 28.2 22.3 Leverage EV/EBIT (x) 74.6 58.9 46.3 35.1 27.7 Net debt/EBITDA (x) net cash net cash net cash net cash net cash Gross margin (%) 20.6 20.7 21.4 22.4 23.0 Net debt/equity (%) net cash net cash net cash net cash net cash EBITDA margin (%) 20.6 20.7 21.4 22.4 23.0

EBIT margin (%) 16.1 16.4 17.0 18.0 18.6 Per share Net margin (%) 14.4 15.7 16.2 16.8 16.9 Reported EPS (MYR) 2.05c 2.49c 3.12c 3.96c 4.87c Effective tax rate (%) 9.5 14.1 20.0 20.0 20.0 Norm EPS (MYR) 2.08c 2.53c 3.12c 3.96c 4.87c Dividend payout (%) 0.0 0.0 0.0 0.0 0.0 FD norm EPS (MYR) 2.08c 2.53c 3.12c 3.96c 4.87c ROE (%) 23.7 13.0 10.6 12.2 13.7 BVPS (MYR) 0.10 0.28 0.31 0.34 0.37 ROA (pretax %) 28.6 28.6 33.5 39.6 42.5 DPS (MYR) 0.01 0.01 0.01 0.01 0.02

Growth (%) Activity (days) Revenue 24.0 11.7 21.2 22.4 22.0 Days receivable 75.3 80.5 68.6 62.2 56.6 EBITDA 22.7 12.4 25.4 28.0 25.2 Days inventory 3.4 3.0 2.3 2.4 2.4 Normalised EPS 18.7 22.0 23.1 26.9 23.2 Days payable 8.5 5.4 3.7 3.8 3.8 Normalised FDEPS 18.7 22.0 23.1 26.9 23.2 Cash cycle 70.3 78.1 67.2 60.8 55.2 Source: Company data, Nomura estimates Source: Company data, Nomura estimates

112

Nomura | GD Express Carrier Bhd 6 October 2016

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 Weaknesses - Prudent cost and capex approach. - A small share of retail base customers. - An established brand with high service reliability. - Not up-to-date on technology for the convenience of its retail - Increasing online shopping volumes drive margin expansion. consumers. - Sorting capacity strategically located within the proximity of KL. - Limited network coverage, compared with Pos Malaysia. Opportunities Threats - Scope for revenue synergies with potential cross-offerings with - Competition between start-ups and incumbent providers. Yamato and Singapore Post. - Regional ambitions into Indonesia.

Source: Nomura research

113

Nomura | GD Express Carrier Bhd 6 October 2016

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

35% ROE Cash ROIC

30%

25%

20%

15%

10%

0% FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17FFY18FFY19FFY20FFY21F

Source: Nomura research, Company data

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

114

Nomura | GD Express Carrier Bhd 6 October 2016 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 Fig. 175: Tonnage volumes handled During peak season, daily sorting capacity can be bumped up to 120k We expect tonnage volumes handled to increase by 20% over the next items per day but this may prove to be challenging if It has to be done few years consistently. Daily sorting capacity - '000 items/day Tonnage volume handled (LHS) 120% 250 (RHS) % chg y-y (RHS) 120,000 25% 200 100% Utilization (LHS) 22% 200 20%20% 20%20% 100,000 19% 17% 20% 80% 16% 16% 16% 150 80,000 15% 15% 60% 100 100 100 60,000 78 100 40% 72 10% 60 60 60 40,000 30 30 30 50 20% 20,000 5%

0% - - 0% FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17F FY18F FY19F FY20F FY17F FY18F FY19F FY20F Source: Nomura research, Company data Source: Nomura research, Company data

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.

115

Nomura | GD Express Carrier Bhd 6 October 2016

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%.

116

Nomura | GD Express Carrier Bhd 6 October 2016

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 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 Establishes a business collaboration and acquires a stake in GD Express. The acquisition was done through a placement exercise and 21-Jan-16 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 Establishes a collaboration to provide last mile delivery with Siam Cement Group where Yamato will have a 35% stake. Capital base is 25-Aug-16 THB633mn Acquires Overland Total Logistics, a cross border trucking company with a line haul network spanning from Singapore to China (6,000 31-Aug-16 km) Source: Company data, Nomura research

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.

117

Nomura | GD Express Carrier Bhd 6 October 2016

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

120% Start-ups Incumbent Mober - Ezycourier 524 100% Neonrunner 899 Qourier 1,099 80% Gogovan (Singapore) 3,769

Fig. 179: Last mile providers for Ali Baba/ Ali Express Fig. 180: Last mile providers for Lazada’s volumes volumes

June - August Traffic Source June - August Traffic Source Last mile provider traffic Country ranking Last mile provider traffic Country ranking LBC Express 305,324 Philippines 1 Singapore Post 1,030,717 Singapore 1 JNE 198,534 Indonesia 1 Pos Malaysia 279,680 Malaysia 1 Indonesia Pos 80,866 Indonesia 1 Indonesia Pos 31,990 Indonesia 2 Pos Malaysia 34,040 Malaysia 3 ABX Express 369 Malaysia 5 GD Express 23,446 Malaysia 2 Skynet 16,405 Malaysia 1 Source: Similiarweb, Nomura research Ninjavan 15,015 Malaysia 1

Source: Similiaraweb, Nomura research

1 18

Nomura | GD Express Carrier Bhd 6 October 2016

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 MYRmn unless stated otherwise 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% Source: Nomura research, Company data

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.

119

Nomura | GD Express Carrier Bhd 6 October 2016

Fig. 182: Cost assumptions and margin trend MYRmn unless stated otherwise 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% Source: Nomura research, Company data

120

Nomura | GD Express Carrier Bhd 6 October 2016

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

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% Terminal growth 2.5%

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 Source: Nomura research

Fig. 184: Implied valuations

FY17F FY18F FY19F FY20F FY21F 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 Source: Nomura research

121

Nomura | GD Express Carrier Bhd 6 October 2016

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 Fig. 186: Stock price and cash ROIC trend - Blue Dart

1.8 Last Price (LHS) Cash ROIC (RHS) 33% 8,000 Last Price (LHS) Cash ROIC (RHS) 75% 1.6 31% 7,000 65% 1.4 29% 6,000 1.2 27% 55% 5,000 1.0 25% 4,000 45% 0.8 23% 3,000 0.6 21% 35% 0.4 19% 2,000 25% 0.2 17% 1,000 0.0 15% 0 15% Jul-11 Apr-10 Oct-12 Apr-15 Jun-09 Jan-14 Jun-14 Mar-13 Feb-11 Feb-16 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Nov-09 Sep-10 Dec-11 Aug-13 Nov-14 Sep-15 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 May-12 Source: Nomura research, Company data, Bloomberg Source: Nomura research, Company data, Bloomberg

Fig. 187: Revenue and core PATAMI trend – Blue Dart Fig. 188: Revenue and core PATAMI trend – GD Express

Revenue (LHS) Revenue (LHS) 45,000 3,500 450 80 Core PATAMI (RHS) Core PATAMI (RHS) 40,000 400 70 3,000 35,000 350 60 300 30,000 2,500 50 25,000 250 2,000 40 20,000 200 30 15,000 1,500 150 100 20 10,000 1,000 50 10 5,000 0 0 0 500 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 2009 2010 2011 2012 2014 2015 2016 FY17F FY18F FY19F 2017F 2018F 2019F Source: Company data Source: Company data

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.

122

Nomura | GD Express Carrier Bhd 6 October 2016

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 Cash ROIC Spread = Cash ROIC - WACC Net margin EBITDA margin 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% Source: Nomura research, Company data

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

100

90 Blue Dart

70 GD Express Blue Dart 60 GD Express 50

40 GD Express ForwardP/E

30 Pos Malaysia Blue Dart SingPost 20 SingPost Pos Malaysia Pos Malaysia 10 SingPost

0 0% 10% 20% 30% 40% 50% 60% Cash ROIC-WACC Spread Legend: FY-5 (pink) , FY-1 (red), FY+ 1 (Grey) Source: Nomura research, Bloomberg

123

Nomura | GD Express Carrier Bhd 6 October 2016

Fig. 191: Forward P/E trend

BEst P/E Ratio (Next Ann) Mean: 42.4x 65 -1 stdev: 32.6x +1 stdev: 52.2x -1.5 stdev: 27.7x +1.5 stdev: 57.1x

15 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Jun-14 Jun-15 Jun-16 Feb-15 Feb-16 Aug-14 Dec-14 Aug-15 Dec-15 Aug-16 Source: Bloomberg

124

Nomura | Asean logistics 6 October 2016

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.

125

Nomura | Asean logistics 6 October 2016

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.

Important Disclosures Online availability of research and conflict-of-interest disclosures Nomura research is available on www.nomuranow.com/research, Bloomberg, Capital IQ, Factset, MarkitHub, Reuters and ThomsonOne. Important disclosures may be read at http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx or requested from Nomura Securities International, Inc., on 1-877-865-5752. If you have any difficulties with the website, please email [email protected] for help.

The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues, a portion of which is generated by Investment Banking activities. Unless otherwise noted, the non-US analysts listed at the front of this report are not registered/qualified as research analysts under FINRA rules, may not be associated persons of NSI, and may not be subject to FINRA Rule 2241 restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account.

Nomura Global Financial Products Inc. (“NGFP”) Nomura Derivative Products Inc. (“NDPI”) and Nomura International plc. (“NIplc”) are registered with the Commodities Futures Trading Commission and the National Futures Association (NFA) as swap dealers. NGFP, NDPI, and NIplc are generally engaged in the trading of swaps and other derivative products, any of which may be the subject of this report.

Any authors named in this report are research analysts unless otherwise indicated. Industry Specialists identified in some Nomura International plc research reports are employees within the Firm who are responsible for the sales and trading effort in the sector for which they have coverage. Industry Specialists do not contribute in any manner to the content of research reports in which their names appear.

Distribution of ratings (Global) The distribution of all ratings published by Nomura Global Equity Research is as follows:

51% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 37% of companies with this rating are investment banking clients of the Nomura Group*. 0% of companies (which are admitted to trading on a regulated market in the EEA) with this rating were supplied material services** by the Nomura Group.

43% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 54% of companies with this rating are investment banking clients of the Nomura Group*. 0% of companies (which are admitted to trading on a regulated market in the EEA) with this rating were supplied material services by the Nomura Group

6% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 10% of companies with this rating are investment banking clients of the Nomura Group*. 0% of companies (which are admitted to trading on a regulated market in the EEA) with this rating were supplied material services by the Nomura Group.

As at 3 October 2016. *The Nomura Group as defined in the Disclaimer section at the end of this report. ** As defined by the EU Market Abuse Regulation

Explanation of Nomura's equity research rating system in Europe, Middle East and Africa, US and Latin America, and Japan and Asia ex-Japan from 21 October 2013 The rating system is a relative system, indicating expected performance against a specific benchmark identified for each individual stock, subject to limited management discretion. An analyst’s target price is an assessment of the current intrinsic fair value of the stock based on an appropriate valuation methodology determined by the analyst. Valuation methodologies include, but are not limited to, discounted cash flow analysis, expected return on equity and multiple analysis. Analysts may also indicate expected absolute upside/downside relat ive to the stated target price, defined as (target price - current price)/current price.

STOCKS A rating of 'Buy', indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of 'Neutral', indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of 'Suspended', indicates that the rating, target price and estimates have been suspended temporarily to comply with applicable regulations and/or firm policies. Securities and/or companies that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage. Investors should not expect continuing or additional information from Nomura relating to such securities and/or companies. Benchmarks are as follows: United States/Europe/Asia ex- Japan: please see valuation methodologies for explanations of relevant benchmarks for stocks, which can be accessed at:

126

Nomura | Asean logistics 6 October 2016 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.

SECTORS A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months. A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months. A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next 12 months. Sectors that are labelled as 'Not rated' or shown as 'N/A' are not assigned ratings. Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX 600; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia. Japan/Asia ex-Japan: Sector ratings are not assigned.

Explanation of Nomura's equity research rating system in Japan and Asia ex-Japan prior to 21 October 2013 STOCKS Stock recommendations are based on absolute valuation upside (downside), which is defined as (Target Price - Current Price) / Current Price, subject to limited management discretion. In most cases, the Target Price will equal the analyst's 12-month intrinsic valuation of the stock, based on an appropriate valuation methodology such as discounted cash flow, multiple analysis, etc. A 'Buy' recommendation indicates that potential upside is 15% or more. A 'Neutral' recommendation indicates that potential upside is less than 15% or downside is less than 5%. A 'Reduce' recommendation indicates that potential downside is 5% or more. A rating of 'Suspended' indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the subject company. Securities and/or companies that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage of the Nomura entity identified in the top banner. Investors should not expect continuing or additional information from Nomura relating to such securities and/or companies.

SECTORS A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive absolute recommendation. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative absolute recommendation.

Target Price A Target Price, if discussed, indicates the analyst’s forecast for the share price with a 12-month time horizon, reflecting in part the analyst's estimates for the company's earnings. The achievement of any target price may be impeded by general market and macroeconomic trends, and by other risks related to the company or the market, and may not occur if the company's earnings differ from estimates.

Disclaimers This document contains material that has been prepared by the Nomura entity identified on page 1 and/or with the sole or joint contributions of one or more Nomura entities whose employees and their respective affiliations are also specified on page 1 or identified elsewhere in the document. 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 including: Nomura Securities Co., Ltd. ('NSC') Tokyo, Japan; Nomura International plc ('NIplc'), UK; Nomura Securities International, Inc. ('NSI'), New York, US; Nomura International (Hong Kong) Ltd. (‘NIHK’), Hong Kong; Nomura Financial Investment (Korea) Co., Ltd. (‘NFIK’), Korea (Information on Nomura analysts registered with the Korea Financial Investment Association ('KOFIA') can be found on the KOFIA Intranet at http://dis.kofia.or.kr); Nomura Singapore Ltd. (‘NSL’), Singapore (Registration number 197201440E, regulated by the Monetary Authority of Singapore); Nomura Australia Ltd. (‘NAL’), Australia (ABN 48 003 032 513), regulated by the Australian Securities and Investment Commission ('ASIC') and holder of an Australian financial services licence number 246412; P.T. Nomura Indonesia (‘PTNI’), Indonesia; Nomura Securities Malaysia Sdn. Bhd. (‘NSM’), Malaysia; NIHK, Taipei Branch (‘NITB’), Taiwan; Nomura Financial Advisory and Securities (India) Private Limited (‘NFASL’), Mumbai, India (Registered Address: Ceejay House, Level 11, Plot F, Shivsagar Estate, Dr. Annie Besant Road, Worli, Mumbai- 400 018, India; Tel: +91 22 4037 4037, Fax: +91 22 4037 4111; CIN No: U74140MH2007PTC169116, SEBI Registration No. for Stock Broking activities : BSE INB011299030, NSE INB231299034, INF231299034, INE 231299034, MCX: INE261299034; SEBI Registration No. for Merchant Banking : INM000011419; SEBI Registration No. for Research: INH000001014 and NIplc, Madrid Branch (‘NIplc, Madrid’). ‘CNS Thailand’ next to an analyst’s name on the front page of a research report indicates that the analyst is employed by Capital Nomura Securities Public Company Limited (‘CNS’) to provide research assistance services to NSL under a Research Assistance Agreement. ‘NSFSPL’ next to an employee’s name on the front page of a research report indicates that the individual is employed by Nomura Structured Finance Services Private Limited to provide assistance to certain Nomura entities under inter-company agreements. THIS MATERIAL IS: (I) FOR YOUR PRIVATE INFORMATION, AND WE ARE NOT SOLICITING ANY ACTION BASED UPON IT; (II) NOT TO BE CONSTRUED AS AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY IN ANY JURISDICTION WHERE SUCH OFFER OR SOLICITATION WOULD BE ILLEGAL; AND (III) BASED UPON INFORMATION FROM SOURCES THAT WE CONSIDER RELIABLE, BUT HAS NOT BEEN INDEPENDENTLY VERIFIED BY NOMURA GROUP. Nomura Group does not warrant or represent that the document is accurate, complete, reliable, fit for any particular purpose or merchantable and does not accept liability for any act (or decision not to act) resulting from use of this document and related data. To the maximum extent permissible all warranties and other assurances by Nomura group are hereby excluded and Nomura Group shall have no liability for the use, misuse, or distribution of this information. Opinions or estimates expressed are current opinions as of the original publication date appearing on this material and the information, including the opinions and estimates contained herein, are subject to change without notice. Nomura Group is under no duty to update this document. Any comments or statements made herein are those of the author(s) and may differ from views held by other parties within Nomura Group. Clients should consider whether any advice or recommendation in this report is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice. Nomura Group does not provide tax advice. Nomura Group, and/or its officers, directors and employees, may, to the extent permitted by applicable law and/or regulation, deal as principal, agent, or otherwise, or have long or short positions in, or buy or sell, the securities, commodities or instruments, or options or other derivative instruments based thereon, of issuers or securities mentioned herein. Nomura Group companies may also act as market maker or liquidity provider (within the meaning of applicable regulations in the UK) in the financial instruments of the issuer. Where the activity of market maker is carried out in accordance with the definition given to it by specific laws and regulations of the US or other jurisdictions, this will be separately disclosed within the specific issuer disclosures.

127

Nomura | Asean logistics 6 October 2016

This document may contain information obtained from third parties, including ratings from credit ratings agencies such as Standard & Poor’s. Reproduction and distribution of third-party content in any form is prohibited except with the prior written permission of the related third-party. Third-party content providers do not guarantee the accuracy, completeness, timeliness or availability of any information, including ratings, and are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, or for the results obtained from the use of such content. Third-party content providers give no express or implied warranties, including, but not limited to, any warranties of merchantability or fitness for a particular purpose or use. Third-party content providers shall not be liable for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including lost income or profits and opportunity costs) in connection with any use of their content, including ratings. Credit ratings are statements of opinions and are not statements of fact or recommendations to purchase hold or sell securities. They do not address the suitability of securities or the suitability of securities for investment purposes, and should not be relied on as investment advice. Any MSCI sourced information in this document is the exclusive property of MSCI Inc. (‘MSCI’). Without prior written permission of MSCI, this information and any other MSCI intellectual property may not be reproduced, re-disseminated or used to create any financial products, including any indices. This information is provided on an "as is" basis. The user assumes the entire risk of any use made of this information. MSCI, its affiliates and any third party involved in, or related to, computing or compiling the information hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of this information. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind. MSCI and the MSCI indexes are services marks of MSCI and its affiliates. The intellectual property right and any other rights, in Russell/Nomura Japan Equity Index belong to Nomura Securities Co., Ltd. ("Nomura") and Frank Russell Company ("Russell"). Nomura and Russell do not guarantee accuracy, completeness, reliability, usefulness, marketability, merchantability or fitness of the Index, and do not account for business activities or services that any index user and/or its affiliates undertakes with the use of the Index. Investors should consider this document as only a single factor in making their investment decision and, as such, the report should not be viewed as identifying or suggesting all risks, direct or indirect, that may be associated with any investment decision. Nomura Group produces a number of different types of research product including, among others, fundamental analysis and quantitative analysis; recommendations contained in one type of research product may differ from recommendations contained in other types of research product, whether as a result of differing time horizons, methodologies or otherwise. Nomura Group publishes research product in a number of different ways including the posting of product on Nomura Group portals and/or distribution directly to clients. Different groups of clients may receive different products and services from the research department depending on their individual requirements. Figures presented herein may refer to past performance or simulations based on past performance which are not reliable indicators of future performance. Where the information contains an indication of future performance, such forecasts may not be a reliable indicator of future performance. Moreover, simulations are based on models and simplifying assumptions which may oversimplify and not reflect the future distribution of returns. Certain securities are subject to fluctuations in exchange rates that could have an adverse effect on the value or price of, or income derived from, the investment. With respect to Fixed Income Research: Recommendations fall into two categories: tactical, which typically last up to three months; or strategic, which typically last from 6-12 months. However, trade recommendations may be reviewed at any time as circumstances change. ‘Stop loss’ levels for trades are also provided; which, if hit, closes the trade recommendation automatically. Prices and yields shown in recommendations are taken at the time of submission for publication and are based on either indicative Bloomberg, Reuters or Nomura prices and yields at that time. The prices and yields shown are not necessarily those at which the trade recommendation can be implemented. The securities described herein may not have been registered under the US Securities Act of 1933 (the ‘1933 Act’), and, in such case, may not be offered or sold in the US or to US persons unless they have been registered under the 1933 Act, or except in compliance with an exemption from the registration requirements of the 1933 Act. Unless governing law permits otherwise, any transaction should be executed via a Nomura entity in your home jurisdiction. This document has been approved for distribution in the UK and European Economic Area as investment research by NIplc. NIplc is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. NIplc is a member of the London Stock Exchange. This document does not constitute a personal recommendation within the meaning of applicable regulations in the UK, or take into account the particular investment objectives, financial situations, or needs of individual investors. This document is intended only for investors who are 'eligible counterparties' or 'professional clients' for the purposes of applicable regulations in the UK, and may not, therefore, be redistributed to persons who are 'retail clients' for such purposes. This document has been approved by NIHK, which is regulated by the Hong Kong Securities and Futures Commission, for distribution in Hong Kong by NIHK. This document has been approved for distribution in Australia by NAL, which is authorized and regulated in Australia by the ASIC. This document has also been approved for distribution in Malaysia by NSM. In Singapore, this document has been distributed by NSL. NSL accepts legal responsibility for the content of this document, where it concerns securities, futures and foreign exchange, issued by their foreign affiliates in respect of recipients who are not accredited, expert or institutional investors as defined by the Securities and Futures Act (Chapter 289). Recipients of this document in Singapore should contact NSL in respect of matters arising from, or in connection with, this document. Unless prohibited by the provisions of Regulation S of the 1933 Act, this material is distributed in the US, by NSI, a US-registered broker-dealer, which accepts responsibility for its contents in accordance with the provisions of Rule 15a-6, under the US Securities Exchange Act of 1934. The entity that prepared this document permits its separately operated affiliates within the Nomura Group to make copies of such documents available to their clients. This document has not been approved for distribution to persons other than ‘Authorised Persons’, ‘Exempt Persons’ or ‘Institutions’ (as defined by the Capital Markets Authority) in the Kingdom of Saudi Arabia (‘Saudi Arabia’) or 'professional clients' (as defined by the Dubai Financial Services Authority) in the United Arab Emirates (‘UAE’) or a ‘Market Counterparty’ or ‘Business Customers’ (as defined by the Qatar Financial Centre Regulatory Authority) in the State of Qatar (‘Qatar’) by Nomura Saudi Arabia, NIplc or any other member of Nomura Group, as the case may be. Neither this document nor any copy thereof may be taken or transmitted or distributed, directly or indirectly, by any person other than those authorised to do so into Saudi Arabia or in the UAE or in Qatar or to any person other than ‘Authorised Persons’, ‘Exempt Persons’ or ‘Institutions’ located in Saudi Arabia or 'professional clients' in the UAE or a ‘Market Counterparty’ or ‘Business Customers’ in Qatar . By accepting to receive this document, you represent that you are not located in Saudi Arabia or that you are an ‘Authorised Person’, an ‘Exempt Person’ or an ‘Institution’ in Saudi Arabia or that you are a 'professional client' in the UAE or a ‘Market Counterparty’ or ‘Business Customers’ in Qatar and agree to comply with these restrictions. Any failure to comply with these restrictions may constitute a violation of the laws of the UAE or Saudi Arabia or Qatar. NO PART OF THIS MATERIAL MAY BE (I) COPIED, PHOTOCOPIED, OR DUPLICATED IN ANY FORM, BY ANY MEANS; OR (II) REDISTRIBUTED WITHOUT THE PRIOR WRITTEN CONSENT OF A MEMBER OF NOMURA GROUP. If this document has been distributed by electronic transmission, such as e-mail, then such transmission cannot be guaranteed to be secure or error-free as information could be intercepted, corrupted, lost, destroyed, arrive late or incomplete, or contain viruses. The sender therefore does not accept liability for any errors or omissions in the contents of this document, which may arise as a result of electronic transmission. If verification is required, please request a hard-copy version. Nomura Group manages conflicts with respect to the production of research through its compliance policies and procedures (including, but not limited to, Conflicts of Interest, Chinese Wall and Confidentiality policies) as well as through the maintenance of Chinese walls and employee training. Additional information regarding the methodologies or models used in the production of any investment recommendations contained within this document is available upon request by contacting the Research Analysts listed on the front page. Disclosures information is available upon request and disclosure information is available at the Nomura Disclosure web page: http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx Copyright © 2016 Nomura International (Hong Kong) Ltd. All rights reserved.

128

Nomura Asian Equity Research Group

Hong Kong Nomura International (Hong Kong) Limited 30/F Two International Finance Centre, 8 Finance Street, Central, Hong Kong Tel: +852 2536 1111 Fax: +852 2536 1820

Singapore Nomura Singapore Limited 10 Marina Boulevard Marina Bay Financial Centre Tower 2, #36-01, Singapore 018983, Singapore Tel: +65 6433 6288 Fax: +65 6433 6169

Taipei Nomura International (Hong Kong) Limited, Taipei Branch 17th Floor, Walsin Lihwa Xinyi Building, No.1, Songzhi Road, Taipei 11047, Taiwan, R.O.C. Tel: +886 2 2176 9999 Fax: +886 2 2176 9900

Seoul Nomura Financial Investment (Korea) Co., Ltd. 17th floor, Seoul Finance Center, 136, Sejong-daero, Jung-gu, Seoul 04520, Korea Tel: +82 2 3783 2000 Fax: +82 2 3783 2500

Kuala Lumpur Nomura Securities Malaysia Sdn. Bhd. Suite No 16.5, Level 16, Menara IMC, 8 Jalan Sultan Ismail, 50250 Kuala Lumpur, Malaysia Tel: +60 3 2027 6811 Fax: +60 3 2027 6888

India Nomura Financial Advisory and Securities (India) Private Limited Ceejay House, Level 11, Plot F, Shivsagar Estate, Dr. Annie Besant Road, Worli, Mumbai- 400 018, India Tel: +91 22 4037 4037 Fax: +91 22 4037 4111

Indonesia PT Nomura Indonesia Suite 209A, 9th Floor, Sentral Senayan II Building Jl. Asia Afrika No. 8, Gelora Bung Karno, Jakarta 10270, Indonesia Tel: +62 21 2991 3300 Fax: +62 21 2991 3333

Sydney Nomura Australia Ltd. Level 25, Governor Phillip Tower, 1 Farrer Place, Sydney NSW 2000 Tel: +61 2 8062 8000 Fax: +61 2 8062 8362

Tokyo Equity Research Department Financial & Economic Research Center Nomura Securities Co., Ltd. 17/F Urbannet Building, 2-2, Otemachi 2-chome Chiyoda-ku, Tokyo 100-8130, Japan Tel: +81 3 5255 1658 Fax: +81 3 5255 1747, 3272 0869

Caring for the environment: to receive only the electronic versions of our research, please contact your sales representative.