The Global Economy
According to the United Nation’s (UN) World Economic Situation and Prospects 2019 report, in 2018, global economic growth remained steady at 3.1% when calculated at market exchange rates, or 3.7% when adjusted for purchasing power parities. A fiscally induced acceleration in the US offset slower growth in some other large economies, including Argentina, Canada, China, Japan, Islamic Republic of Iran, Turkey and the European Union (EU).
Despite these slowdowns, economic growth accelerated in more than half of the world’s economies in both 2017 and 2018. Developed economies expanded at a steady pace of 2.2% in both years and growth rates in many countries have risen close to their potential, while unemployment rates in several developed economies have dropped to historical lows. Among the developing economies, the regions of East and South Asia remain on a relatively strong growth trajectory, expanding by 5.8% and 5.6%, respectively in 2018. Many commodity exporting countries, notably fuel exporters, are continuing a gradual recovery, although they remain exposed to volatile prices.
However, there are growing signs that global growth may have reached a peak. Estimates of global industrial production and merchandise trade growth have been tapering since the beginning of 2018, especially in trade-intensive capital and intermediate goods sectors, signalling weaker investment prospects. The annualized expansion of global industrial production slowed to 3% in the first nine months of 2018, compared to 3.5% growth in 2017. World merchandise trade growth averaged 3.7% in the nine months to September, compared to 4.7% growth in 2017. At the same time, several developed economies are facing capacity constraints, which may constrain growth in the short term.
Leading indicators point to some softening in economic momentum in many countries in 2019. The Organization for Economic Cooperation and Development (OECD) Composite Leading Indicator for the 36 members of the OECD plus 6 large non-member countries (Brazil, China, India, Indonesia, the Russian Federation and South Africa) has drifted down since the end of 2017. According to Moody’s Analytics Survey of Business Confidence, expectations about business conditions and investment intentions over the next six months have also weakened. Both the ifo World Economic Survey and Ipsos Global Consumer Confidence Index indicate a moderation of economic activity in the coming months. These expectations are closely associated with heightened uncertainty, both in terms of financial market volatility and global economic policy uncertainty.
At the global level, growth is expected to moderate slightly to 3% in both 2019 and 2020. Slower growth in China and the US will be largely offset by continued recovery in some developing regions and economies in transition that have been hardest hit by the commodity price collapse of 2014/15. Among developed economies, US growth is projected to decelerate notably as the impulse from fiscal stimulus wanes and the effects of higher interest rates are increasingly being felt. While steady growth is projected for the EU, the risks are tilted to the downside, including a potential fallout from Brexit.
Among developing and transition economies, the gradual moderation of growth in China is likely to continue, with policy support partly offsetting the negative impact of trade tensions. Several large commodity-exporting countries, such as Brazil, Nigeria and the Russian Federation, are projected to see a moderate pickup in growth in 2019–2020, albeit from a low base. The prospects for commodity exporters remain clouded by several factors. The price collapse in 2014/15 has left a legacy of higher levels of debt and depleted fiscal buffers, severely constraining policy space. While prices have partly recovered, they remain highly volatile and subject to wide fluctuations, as exemplified by the sharp decline in oil prices in the fourth quarter of 2018.
The Malaysian Economy
The Malaysian economy grew by 4.5% in the first quarter of 2019 (4Q 2018: 4.7%), driven mainly by the expansion in domestic demand. On a quarter-on-quarter seasonally-adjusted basis, the economy grew by 1.1% (4Q 2018: 1.3%).
Domestic demand remained the key driver of growth. It expanded by 4.4% in the first quarter (4Q 2018: 5.7%), driven by firm household spending amid weaker capital expenditure.
• After three consecutive quarters of robust spending, private consumption growth moderated but remained strong at 7.6% (4Q 2018: 8.4%). This mainly reflected the normalisation in spending following the frontloading of purchases during the tax holiday period. Nonetheless, household spending continued to be supported by income and employment growth.
• Public consumption expanded at a faster pace of 6.3% during the quarter (4Q 2018: 4.0%), attributable to higher growth in spending on supplies and services.
• Gross fixed capital formation (GFCF) contracted by 3.5% (4Q 2018: 0.6%), weighed down by weaker private and public sector investment. By type of assets, investment in structures declined by 1.3% (4Q 2018: 1.3%) amid subdued property market activity. Capital expenditure on machinery and equipment registered a larger contraction of 7.4% (4Q 2018: -1.3%), affected mainly by a decline in transport equipment spending. Investment in other types of assets also declined by 2.2% (4Q 2018: 4.5%) due mainly to lower research and development (R&D) spending.
• Private investment growth slowed to 0.4% (4Q 2018: 5.8%). Investment activity was affected by heightened uncertainty surrounding global trade negotiations and prevailing weaknesses in the broad property segment. Nevertheless, spending on large multi-year projects provided some support to investment growth, particularly in the primary-related manufacturing and utilities services sub-sectors.
• Public investment declined further by 13.2% (4Q 2018: -5.9%), on account of lower capital spending by the Federal Government and public corporations.
On the supply side, moderation across most sectors was partially offset by a rebound in growth of the agriculture sector.
• The services sector growth moderated as the wholesale and retail trade sub-sector registered slower growth following the post-tax holiday normalisation. However, this was partially offset by higher car sales following the release of new models. Growth in the finance and insurance sub-sector was sustained, supported by higher insurance premiums relative to claims which offset slower financing. The utilities sub-sector recorded an improvement given higher demand for electricity, particularly from households amid warmer weather conditions. The information and communication sub-sector remained supported by demand for data communication services.
• Growth in the manufacturing sector moderated, mainly driven by the slowdown in the electronics and electrical (E&E) and primary-related clusters. The slower growth in the E&E cluster was due to lower global demand for semiconductors. The implementation of stricter vehicle emission standards in the European Union (EU) and expiring tax rebates for cars in China weighed on demand for automotive semiconductors. Growth in the primary-related cluster also moderated as unplanned closure of gas facilities in Sarawak in February affected the production of refined petroleum products, particularly liquefied natural gas. Meanwhile, recovery in the production of palm-oil based products led to an improvement in the consumer-related cluster during the quarter.
• The agriculture sector’s growth rebounded due to the strong recovery in oil palm yields from the adverse weather last year. Additionally, natural rubber production improved as higher rubber prices spurred more tapping activities during the quarter.
• Growth in the mining sector declined further as oil production was affected primarily by unplanned facility closures in Peninsular Malaysia and Sabah. Growth was also weighed by weaker natural gas production as operations were affected by unplanned closure of gas facilities in Sarawak.
• The construction sector registered lower growth reflecting slower activities in the non-residential, civil engineering and special trade sub-sectors. The near completion of large petrochemical projects resulted in a lower growth for the civil engineering sub-sector. The special trade sub-sector’s growth moderated due mainly to declining early works from transportation projects transitioning to mid-phase. In the non-residential and residential sub-sectors, growth remained weak due to the oversupply of commercial properties and a high number of unsold residential properties.
The global economy is expected to expand at a more moderate pace in 2019. The temporary boost to US growth from fiscal stimulus is expected to fade, while domestic demand in the euro area is slowing. Economic activity in the Asian region is also expected to be lower, given softer external demand. Nevertheless, in China, active counter-cyclical policy will provide some support to the outlook as the government seeks to manage the external headwinds. On balance, risks to the outlook remain tilted to the downside. Policy support in China could lead to stronger-than-expected growth and spill-overs to emerging markets. However, downside risks predominate from prolonged weaknesses in the euro area, further delays and uncertainties in Brexit negotiations, as well as a potential escalation of trade disputes.
Against the backdrop of a challenging global environment, growth in the Malaysian economy is expected to remain broadly sustained for the year. Growth will be supported by continued expansion in domestic demand amid a moderate support from the external sector. Private sector spending is expected to remain the key driver of growth. Although consumer sentiments have moderated from its recent peak, household spending will be underpinned by continued income and employment growth. Investment activity is estimated to improve, driven by ongoing capacity expansion in key sectors, with additional support from new manufacturing investments, as reflected by the high investment approvals. Nevertheless, overall growth may be partially weighed down by lower public sector spending. Risks to growth remain tilted to the downside, arising mainly from external uncertainties such as further weakening of global growth and heightened financial market volatility. On the domestic front, unexpected interruptions in commodity production could also affect Malaysia’s growth prospects.
The container port business in Malaysia is largely controlled by two publicly traded companies - Westports Holdings Bhd, which wholly owns Westport, and MMC Corp Bhd, which has a 70% stake in the Port of Tanjung Pelepas Sdn Bhd (PTP) and wholly owns Johor Port Bhd, Northport (M) Bhd, Penang Port Sdn Bhd and Tanjung Bruas Port Sdn Bhd.
According to data from the Ministry of Transport, Malaysian ports handled a total container throughput of 24.94 million twenty-foot equivalent units (TEUs) in 2018. Almost half of the volume recorded last year was handled by Port Klang, which saw its container throughput grew 2.7% year-on-year to 12.31 million TEUs, from 11.97 million TEUs the year before, making it the 12th busiest container port in the world.
Westports’ latest annual report states that it handled as much as 9.5 million TEUs last year, which translated into a net profit of RM533.47 million on revenue of RM1.61 billion. Gateway containers increased by 18% to 3.3 million TEUs as its container terminal supported and reflected favourable domestic economic activities while transhipment volume registered a slight increase to 6.2 million TEUs. In FY2018, Westports accommodated 6,966 container vessels and the company is berthing more and new ultra-large container vessels. Westports cited the OOCL United Kingdom, which is the world’s largest container vessel, made its maiden call at Westports last year.
In recent years, Westports had invested RM2.5 billion in the latest state-of-the-art terminal operating equipment and constructed contiguous linear berth with a deep draft, which would enable its terminal to support clients’ plans of deploying ever larger vessels. Westports said 62% of its containers in FY2018 were destined for countries and regions within intra-Asia. These containers were loaded at a port in Asia and were subsequently shipped to a destination port within Asia as well. Its intra-Asia container volume grew by 14% to 5.9 million TEUs and it underpinned Westports overall throughput growth. Westport expects to achieve higher overall container throughput in 2019 with growth coming from both gateway and transhipment containers.
Westports’ market share in Port Klang rose from 75% in 2017 to 77% in 2018 (transhipment: from 81% to 82%; gateway: from 65% to 70%), implying Northport’s volume had declined. Among the 10 Malaysian ports, Westports’ gateway was the star performer with its highest market share at 38% (2017: 34%, past a 10-year average of 29%).
Meanwhile, a jump in contribution from its port operations boosted MMC Corp Bhd's earnings in the first quarter. Net profit in the three-month ended March 31, 2019, rose 29.4% to RM53.5 million compared with RM41.3 million a year ago. Revenue slipped 10.7% to RM1.28 billion mainly due to lower contribution from its construction and engineering businesses. Last year, its ports handled 14.2 million TEUs, which in turn, generated 60% of MMC’s revenue of RM4.98 billion and a chunk of its net profit of RM267.04 million.
For the quarter under review, MMC’s port operations generated a revenue of RM780.4 million, or an increase of 19.2% compared with RM654.5 million reported in the previous corresponding quarter. The segment’s net profit rose by 55% to RM103.9 million compared to RM67 million posted a year ago. In a filing to Bursa Malaysia, the group attributed the increase in the segment’s net profit to higher contribution from Johor Port Bhd and Northport (M) Bhd, as well as a full consolidation of Penang Port Sdn Bhd’s result.
After many years of losses, Penang Port Sdn Bhd (PPSB) recorded an operating profit of RM197 million for 2018 on a revenue of RM490 million. PPSB is gearing up for a better year ahead with several expansion projects for its North Butterworth Container Terminal (NBCT). With a RM500 million capital expenditure for the next five years, NBCT is set to shed its image as a feeder port.
For a start, a RM150 million expansion plan has been approved to upgrade its present facilities to accommodate bigger ships. The current berth would be expanded from 1.5km to 3km, and two additional entrances to NBCT would be built to ease the congestion and cater for future growth volume. The RM150 million is basically for strengthening the berth which would increase its capacity by 300,000 TEUs. The balance of RM350 million would be used to purchase two new cranes costing around RM60 million each with the remainder to be used for other projects, primarily to increase capacity. The plan was to increase the present 1.6 million TEUs to 7.4 million TEUs by 2023.
Bintulu Port Holdings Bhd (BPHB) plans capacity expansion of its Bintulu International Container Terminal (BICT) to cope with rising demand as it has recorded double-digit growth in container throughput for three consecutive years. BICT handled 349,792 TEUs last year, representing 13.1% growth over 2017 and the highest ever volume recorded, according to BPHB group chief executive officer Datuk Mohammad Medan Abdullah. The strong growth had strengthened BICT as the No. 1 container port in Sarawak and Sabah in terms of container throughput and connectivity.
According to BPHB, the impressive throughput was driven by increased import and export due to active economic development in Sarawak Corridor of Renewable Energy (SCORE), particularly the Samalaju Industrial Park (SIP), increasing trend towards containerisation of cargo and more transhipment volumes from Sabah and Sarawak. Of the total containerised cargo handled at BICT, 23.7% (82,930 TEUs) were transhipment cargoes.
2018 saw BICT attracting more shipping connectivity to intra-Asia ports with the introduction of the new container shipping routes by SITC Container Lines (Sarawak) Sdn Bhd. BICT is now directly connected to Indonesian ports such as Makassar, Balikpapan and Semarang as well as more ports in China, such as Shanghai,Xiamen and Shokou. At present, BICT is connected to regional and global container trade lanes through nine major shipping lines. Three of the shipping lines – Evergreen Marine Corp (M) Sdn Bhd, SITC Container Lines and Harbour-Link Line Sdn Bhd – offer direct shipping services to the intra-Asia ports, thus boosting BICT’s connectivity offering to customers.
In terms of capacity, BICT is currently operating at 78% capacity with the utilisation expected to improve further in 2019 in line with expected increase in container volume. Short-term measures to improve operational efficiencies and service delivery on container sector include tackling specific bottleneck at the container yard, berth window management and allocating the general cargo wharf into container feedering operation.
Competition in the domestic logistics scene is heating up, against the backdrop of rising demand for parcel and larger goods deliveries in Malaysia. While greater competition is good for the end-consumers, many logistics players have been hit by margin erosion as a result.
Logistics and warehousing player Tasco Bhd’s net profit more than halved to RM3.14 million for the third quarter ended December 31, 2018, from RM8.17 million a year earlier, due to lower earnings from its domestics business solutions (DBS) segment. Quarterly revenue fell 3.63% to RM184.69 million from RM191.66 million previously. The DBS segment recorded a 43.8% decline in profit before tax (PBT) to RM6.2 million from RM11.1 million. Within the DBS segment, the contract logistics division’s PBT fell 64.7% to RM3.5 million from RM9.9 million, mainly caused by lower PBT recorded in warehouse and in-plant business. Tasco also noted that the PBT of warehouse and in-plant business declined by RM5.1 million (151.3%) and RM1.4 million (76%), respectively.
According to Tasco, low warehouse occupancy in the southern region coupled with high operating expenses incurred for newly secured convenience retail business and reduced revenue from a regional distribution centre in KLIA caused PBT of warehouse business to drop significantly. Meanwhile, its haulage business declined by RM500,000 (15.5%), mainly attributable to increase fleet maintenance expenses.
For the cumulative nine months ended December 31, 2018, Tasco’s net profit fell 55.16% to RM10.92 million or 5.46 sen per share, from RM24.36 million or 12.18 sen per share last year while revenue was up 3.09% to RM557.43 million from RM540.71 million. Tasco said the downside risks for the group continue to include rising operational costs — such as labour costs, sales and service tax, higher interest costs and keen competition for cargo in the traditional core businesses.
Tasco is expecting better days ahead following its venture into the cold chain and consumer segments. The group moved into the cold chain segment in early 2017 after acquiring Gold Cold Transport Sdn Bhd for RM188 million. There is growing demand for its cold chain services, which oversees the transportation of ice cream and fast food. As for Tasco’s expansion into the consumer retailing business, the inclusion of convenience stores and petrol station stores in its logistics network will benefit the group moving forward. Tasco went into the consumer business by forming a joint venture (JV) in late 2017 with Yee Lee Corp Bhd, which is involved in the manufacturing and distribution of fast-moving consumer products.
Recently, Tasco announced that a Japanese government fund, Japan Overseas Infrastructure Investment Corporation for Transport and Urban Development (JOIN), is taking up a 30% stake in the group’s wholly-owned unit, Tasco Yusen Gold Cold Sdn Bhd, for RM125 million. Tasco Yusen has a combined temperature-controlled storage capacity of 37,000 pallet space at the Berjaya Industrial Logistics Centre in Shah Alam and Westports Logistics Centre in Westports. The investment from JOIN is strategic in nature and will allow Tasco to establish a partnership with the Japanese Government in the cold chain and convenience retail logistics segments, which could potentially provide Tasco with greater access to other markets in which JOIN has a presence. JOIN's investment would also bring knowledge and expertise to enable Tasco to grow its cold chain business and contribute to Tasco Yusen.
Pos Malaysia Bhd closed its latest financial year in the red, incurring its third and largest quarterly loss of the year in the fourth quarter (Q4) ended March 31, 2019. The group swung to a net loss of RM141.13 million in Q4 from a net profit of RM29.03 million a year earlier, while revenue sank 9% to RM594.70 million. It attributed the weak results mainly to lower revenue contribution from the courier and logistics segments, higher “other expenses” from a RM39.62 million impairment loss on goodwill in Pos Logistics and increased cost of sales and operating expenses.
For the full financial year, Pos Malaysia chalked up a net loss of RM165.75 million against a net profit of RM93.25 million in the preceding year. Revenue dropped to RM2.36 billion from RM2.47 billion previously, on continued weak mail, international and logistics business performance at Pos Malaysia and Pos Logistics.
The losses from mail is a result of a continuing double-digit contraction in mail volume and bill payments, reflecting the increasing substitution of letters with electronic media while the impairment of goodwill in Pos Logistics is a result of a performance that was below expectations due to competitive market conditions. Pos Malaysia is working closely with regulators for an overall tariff rebalancing to update the tariff that was last revised in 2010 accordingly to reflect the growing costs to serve the nation with an increase of 17% new postal addresses. The group expressed confidence that its fortunes would be reversed once the government approved the rate hike.
An absence of income tax expense helped GD Express Carrier Bhd (GDex) book a net profit of RM5.43 million in the third quarter ended March 31, 2019, more than double the RM2.62 million it recorded the year before. However, pre-tax profit declined 53.68% to RM4.26 million in the quarter from RM9.19 million last year despite higher revenue growth, due to a 13.89% or RM9.24 million increase in operating expenses to RM75.74 million from RM66.5 million. The higher expenses offset the 6.22% or RM4.57 million revenue growth it recorded in the quarter to RM77.97 million from RM73.4 million.
For the nine-month period ended March 31, 2019, GDex’s net profit rose 32.03% to RM22.58 million from RM17.11 million, as revenue climbed 7.62% to RM235.29 million from RM218.63 million the year before. Pre-tax profit, however, was down 7.54% to RM28.23 million from RM30.54 million as operating expenses climbed 13.39% in the period to RM222.11 million. The slight improvement in revenue reported in the current quarter and financial period ended March 31, 2019 was mainly due to contribution from e-commerce business, even though there was a slower pace of parcel volume growth. The decline in profit before tax was mainly due to the deterioration of revenue yield and business margin as a result of the entrance of new players with competitive pricing.
Commenting on the challenging market environment, GDex said the group will continue to review its cost rationalisation and operational efficiency while looking at innovative ways to overcome the competition. It will also keep investing in resources and infrastructure to expand its domestic and regional network, besides proactively seeking further strategic investment opportunities to enhance its business sustainability.
Industry analysts opined that the disappointing earnings were due to intensifying price competition following the emergence of logistics start-ups. Malaysia’s e-commerce market is expected to grow to US$3.8 billion in 2018, according to BMI Research, and the National e-Commerce Strategic Roadmap is projecting e-commerce here to grow at an average rate of 11% a year. With such accelerated growth, the logistics needed to serve a rapidly increasing number of customers is astounding. Naturally, the industry is experiencing a bottleneck, particularly in the last-mile delivery portion.
Aiming to take a slice of the booming e-commerce logistics cake, a slew of high profile Hong Kong-based logistics start-ups, including Lalamove and GoGoVan, have expended into Malaysia. Hong Kong-founded newcomer Pickupp was the latest to join the fray last April. Meanwhile, Grab, the dominant ride hailing operator in the Asean region, has also started its delivery services, adding to the already crowded and competitive field.
Closer to home, Ezyhaul, a Singapore-headquartered logistics technology start-up, has set a lofty goal of having at least 3,000 trucks registered on its platform within the next 12 months. Currently, Ezyhaul’s network in Malaysia consists over 1,000 trucks of various capacities. Another Singapore-headquartered last-mile logistics start-up Ninja Van also expanded into Malaysia two years ago. It has been working with several big-name brands in the region, like e-commerce websites Lazada, Zalora, and Qoo10, as well as popular online marketplaces like Shopee and retailers like Charles & Keith, Watsons, and Guardian.
While volume is growing fast for last-mile delivery players, the delivery fees will have to be lowered to remain competitive with the start-ups entering the space. The competition in the parcel delivery space has also given online shopping platforms an advantage in negotiating better terms with the logistics players.
Analysts foresee more start-ups coming into the market over the next three years, fuelled by increasing volume and demand for last mile delivery services from e-commerce. It is not just about retailers getting the products out to the customers. There is also a growing demand for reverse logistics as more retailers offer free return services. Last-mile delivery is a growing segment as retailers that go online prefer to outsource rather than invest in picking, packing and distribution facilities. Increasingly, consumers are demanding same-day delivery and this could mean a shift towards local couriers closer to the end consumers.
Conventional logistics players should not underestimate these start-ups as they have the capability to scale quickly by leveraging on technology and could become more prominent players in the industry. While the volume from e-commerce is big, margins tend to be thin and there is a need to have the capacity to deliver large volume efficiently by using available technologies. Conventional players need to evaluate the gaps in current capabilities and invest in the right technologies to remain on the last-mile delivery bandwagon. Another area of opportunity is to leverage existing arrangements to serve networks outside of Klang Valley or other urban centres as these routes tend to be underserved and out of reach by smaller start-ups.