AMID the buzz over Malaysia’s potential for an e-commerce boom in recent years, a number of local logistics companies have taken a bet on that upsurge to drive their business growth going forward. But that boom has yet to fully arrive.
Malaysia’s online retail spend per capita still lags that of some regional neighbours, with online retail sales comprising a meagre 2.5% of total retail sales in 2015, according to data from brokerage and investment firm CLSA. That appears to be on the low side, considering the corresponding percentage is 10% in the US and 25% in China.
The question marks are now hanging over these e-commerce plays among local logistics players and whether the push into e-commerce will ultimately pay off for their shareholders, and if it does, when.
“It would depend on the respective strategy at play,” says Tan Kim Yong, deputy managing director of freight-forwarding firm TASCO Bhd. “It is still unknown who will [ultimately] be the winners and the losers.”
Some players, like GD Express Carrier Bhd (GDEX), have already seen gains from this segment. Revenue for the first quarter ended Sept 30, 2016 (1Q2017), surged 12.7% year on year to RM58 million, while net profit jumped by roughly a third to RM8.1 million.
In its regulatory filing, GDEX attributed the improvements to the e-commerce segment, which boosted demand for its courier services. It also expressed optimism that the growth in e-commerce will support its earnings prospects amid intensifying competition and an uncertain economy.
“Four years ago, the e-commerce contribution to our business was zero. Today, it is at 25%,” says GDEX managing director and CEO Teong Teck Lean over the phone. “It’s a beautiful segment to see.”
Based on last Friday’s closing, GDEX shares were trading at a price-earnings ratio (PER) of over 62 times, far above the industry average of around 15 times.
Another player seen riding the nascent growth is Pos Malaysia Bhd, which credited the 41% year-on-year increase in pre-tax profit for the first half of the financial year ending March 31, 2017, to rising demand for e-commerce deliveries. Last Friday, the counter was trading at just over 28 times PER.
But apparent beneficiaries of e-commerce growth like GDEX and, to some extent, Pos Malaysia, are exceptions so far, various analysts say. While the numbers for overall e-commerce activity may be showing growth, it has only benefited selected companies, according to one analyst.
In addition, the buzz may have also led to expectations getting ahead of reality. While exciting, the e-commerce space is intensely competitive, especially in the last-mile delivery niche, says TASCO’s Tan. It is, in essence, a volume game, and the volume has not yet boomed — for Malaysia, at least.
“In our experience, that last-mile delivery niche is getting very competitive and it may not be as lucrative as many people may think,” he tells The Edge. “The rates are also not that great.”
On the flip side, GDEX’s Teong sees the competition as a signal that there is great growth potential in the e-commerce space. “It needs time, but the growth is happening.”
Warehousing evolving
The ripple effect from the advent of e-commerce globally has been felt. One notable change is how it is reshaping the storage segment of the logistics scene, with a noticeable trend of evolving design and sizes.
The warehousing sector is now rushing to adjust so it can cater for demand from the e-commerce segment, according to Datuk Stewart LaBrooy, executive chairman of AREA Management Sdn Bhd, which is a subsidiary of AREA Advisors Pte Ltd, a Singapore-based regional real estate private equity and advisory firm.
“Our discussions with e-commerce operators show that they are doubling their space requirements every year,” LaBrooy says via email. “Logistics operations are undergoing a transformation from small warehouses to larger units where operations can be consolidated for cost reasons.”
One such example was Deutche Post DHL’s mega warehouse in Shah Alam, which it built in late 2014 as part of a RM100 million expansion plan in Malaysia. With roughly one million sq ft in warehouse space, the facility reportedly doubled the German-based courier firm’s capacity when it was completed.
More mega warehouses are coming onto the market. In Ampang, AREA has a 1.2 million sq ft warehousing facility set for completion in 2018. The grade-A warehouse is also slated to become the first three-level warehouse to be built in Ampang, says LaBrooy.
Over in Shah Alam, Singapore-based Mapletree Investments Pte Ltd, through a local subsidiary, is building a 2.5 million sq ft warehouse complex, which, LaBrooy says, underscores “the demand for new warehouse designs [in order] to cater for the new logistics operations starting to emerge”.
And the industrial property market is sufficiently mature to absorb the incoming supply, according to Siva Shanker, head of investments at Bursa Malaysia-listed Axis Real Estate Investment Trust (REIT), which invests primarily in commercial, industrial and office properties.
While bigger warehouses mean bigger supply, the demand is there as most of them are purpose-built for clients, Siva notes. “Supply and demand in the industrial property segment is as close to equilibrium as can be achieved,” he says. “There is little speculation in this property sector.”
Another shift is in the design. Given the fast-moving nature of e-commerce products, warehouse operators need to be able to keep their stocks moving. That leads to automated storage and retrieval systems (ASRS), which use technology to automate placement and retrieval of loads from their storage locations, Labrooy says.
“Automation with ASRS is now being seriously evaluated by many of the leading logistics operators in Malaysia, who recognise that the largest part of their cost is labour and not rent,” he adds.
‘No going back’
Changing trends in the warehousing segment aside, what lies ahead for the logistics players looking at the e-commerce scene? For TASCO’s Tan, the industry has passed a point of no return and can only move further in that direction.
“There is no going back — this (e-commerce) is the way of the future. Everyone has to join the crowd,” he says.
One possibility is more mergers and acquisitions that may see the consolidation of logistics firms that may be motivated to take up stakes in peers in other countries to improve their network potential.
“Online marketplaces will also be looking at similar acquisition possibilities to improve their logistics,” says an analyst.
A notable example is GDEX’s major shareholder Yamato Holdings, Japan’s top parcel delivery firm that is also listed on the Tokyo Stock Exchange. Yamato acquired a 10% stake for RM217.3 million in January via a placement exercise.
GDEX also counts postal operator Singapore Post as a substantial shareholder with a 11.23% stake, while Chinese e-commerce giant Alibaba Group Holding Ltd is a sizeable shareholder in Singapore Post with a 14.4% stake.
Elsewhere, South Korea’s CJ Express recently emerged as the largest shareholder in Century Logistics Holdings Bhd (CLHB) with a 31.44% stake that cost RM174.79 million. The shares were sold by CHLB’s existing shareholders, including founder and executive chairman Datuk Phua Sin Mo, at a 39% premium.
“It makes business sense,” says a local research analyst tracking the sector, noting that consolidation basically means lower cost owing to economies of scale. “To the e-commerce guys, taking up a sizeable stake means they may also have some influence over the management of their logistics partner.”
Additionally, from the e-commerce players’ perspective, being a shareholder in a logistics partner means they may be able to reap dividends from the business they are giving to that partner.
In fact, there is already some consolidation seen in Malaysia and around the Southeast Asian region, especially in the last-mile delivery niche, says TASCO’s Tan.
That said, there are business realities on the other side of the coin vis-à-vis the pursuit of economies of scale via consolidation, he says. He adds that it also makes business sense for e-commerce firms to retain a handful of courier partners to spread risk.
“Of course it is not ideal to deal with too many parties along the supply chain,” he says over the phone. “But in our experience, they [the e-commerce players] also want sustainability and have a handful of last-mile couriers as part of their risk management strategy.”
Save by subscribing to us for your print and/or digital copy.
P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.