Logistics company eyes road to China
Tiong Nam Logistics Holdings Bhd, which started cross-border trucking in early 2000, is now planning for longer routes cutting through Thailand, Vietnam and Laos to reach China.
Tiong Nam’s foray into this long-haul trucking route is not new.
It has been reported that logistics giants such as TNT and the Robert Kuok-owned Kerry Logistics Network, already have trucks connecting China with Asean.
But Tiong Nam is likely the first Malaysian logistics player to embark on this ambitious plan. The company says it is pursuing this strategy as the long-haul delivery service brings it better profit margins.
Presently, most of the logistics connections on these routes are handled through sea and air freight.
Tiong Nam executive director Victor Ong says the reasons for embarking on this plan is a combination of the improving road infrastructure and China’s and Asean’s e-commerce boom.
“We have been in the cross-border trucking segment for the past 15 years. Now we are expanding the reach to provide more options for our clients,” he tells StarBizWeek.
He says Tiong Nam has been working on a pilot project for almost two years and is targeting to start its first long-haul trucking service, dubbed the China-South-East Asia route, as early as April.
In a recent report by Hong Leong Investment Bank (HLIB) Research on Tiong Nam, the research house points out that long-haul trucking services are a viable alternative to air and sea freight.
In terms of timing, trucking is faster than sea freight and in terms of cost, it is cheaper than air freight. It is however more expensive than sea freight but takes only half the time.
Ong points out that land transportation from China to Malaysia can be as fast as five to six days compared with 10-12 days by sea.
On pricing, analysts are estimating that land transportation is three times cheaper than air freight but that the cheapest option remains sea freight.
“The key for e-commerce deliveries are usually tied to time-sensitive delivery demand,” an analyst says.
HLIB Research reckons that cross-border trucking would be the next phase of growth for Tiong Nam, and that this business would have a one-year gestation period.
Ong says Tiong Nam is spending about RM20mil in capital expenditure (capex) for trucks, land acquisition and warehousing.
Warehouses as distribution points across these routes are part of the plan.
As part of its capex plans, Tiong Nam has already acquired a 10-acre plot of land in Laos to build a warehouse there.
“We are planning to set up a distribution center in every country and we already have one in Thailand.
“The warehouse in Laos is targeted to be completed in 2018,” Ong says.
MIDF Research has pointed out that Tiong Nam has already signed on some clients for this new long-haul trucking service.
Ong declines to elaborate but says that main delivery items will be consumer products.
Improving infrastructure is enabling Tiong Nam’s new expansion.
“Only in the past few years, we are seeing infrastructure development in this part of the world, which has changed the landscape for cross-border transportation,” he says.
Potential margin improvement
Crucially, Ong says for the long-haul service, the firm could fetch margins of about 20% depending on the destinations compared to its current cross-border service.
This is higher than what it gets from its existing routes.
Tiong Nam currently serves the Singapore-Malaysia, Malaysia-Thailand and Singapore-Thailand routes but heavy competition has squeezed margins.
“There are many players servicing the Thailand-Malaysia-Singapore routes so margins are lower. We see that there is growth for the long-haul services,” Ong says.
Tiong Nam is one of the biggest domestic logistics players, having about 77 warehouses with a combined storage capacity of more than 4.87 million sq ft, with a 75% utilisation rate.
The Johor-based company has about 2,000 trucks of various capacities.
Aside from launching its first long-haul trucking services, Ong says Tiong Nam is also going to start its last-mile delivery service in April, that will further strengthen its position as an integrated logistics player.
“For this year, with these two new business segments, we are targeting to grow our topline and bottomline by about 10%,” he says.
Tiong Nam is currently trading at 8.3 times earnings, making it one of the cheapest stocks among logistics firms listed on Bursa Malaysia.
Competitors Century Logistics Holdings Bhd and Tasco Bhd are trading at 18.5 times and 12.8 times respectively. Smaller players like Freight Management Holdings Bhd and Xin Hwa Holdings Bhd are trading at earnings multiples of 10.7 and 12.4 times respectively. There are four “buy” calls on Tiong Nam, according to Bloomberg data.
An analyst points out though that Tiong Nam has a relatively high gearing level of 1.05 times.
However, Ong says the company is at a comfortable gearing level.
“The logistics sector is a high-capex industry, so the gearing of around one is a comfortable level for us,” he says.
On the firm’s planned real estate investment trust (REIT), Ong reckons that the listing could materialise this year and that the firm will submit its proposal to the authorities once all parties agree on the valuation.
Tiong Nam had said back in 2015 that it had plans to create a REIT out of its logistics assets.
“In the last few years, we were unable to agree on the valuations.
“But we are working on it and hope to conclude it by the end of this year,” he says.
MIDF Research says that the listing of its REIT could provide a rerating catalyst for the stock.
Aside from improving Tiong Nam’s balance sheet, Ong says that the listing of its REIT would provide capital for the firm’s expansion plan.
Besides its logistics assets, Tiong Nam owns 150 acres of land, mainly in Johor, that have been earmarked for property development.
For this year, the company is targeting to launch a landed housing project in Johor with an estimated gross development value of RM150mil.
Ong says that the company had RM167mil of unbilled sales as at Dec 31, 2016.
The subdued economic environment in 2016 has dragged the demand for Tiong Nam’s logistics services.
For the third quarter ended Dec 31, 2016, the company’s net profit fell by 22% to RM17.26mil from RM22.06mil a year earlier.
Revenue for the period fell to RM139.3mil compared to RM173.9mil previously.
While Ong acknowledges that 2016 was a tough year for the firm, he reckons that this year would be a better year, especially with new business segments and better economic growth.
“Logistics infrastructure in Malaysia is not very well developed, and there is still growth potential to tap into,” he says.