GD Express. MALAYSIA EQUITY Investment Research CBRS. Initiating Coverage. Brighter Prospects as Volume Kicks in LOGISTICS

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1 PP/10551/10/2008 MALAYSIA EQUITY Investment Research CBRS LOGISTICS Ahmad Maghfur Usman +60 (3) Initiating Coverage GD Express NEUTRAL Price Target Private Circulation Only Maintain RM0.77 RM0.64 Brighter Prospects as Volume Kicks in Stock Profile/Statistics Bloomberg Ticker GDX MK Equity KLCI Issued Share Capital (m) Market Capitalisation (RMm) week H L Price (RM) Average Volume (3m) YTD Returns (%) 0.01 Net gearing (x) 0.13 Altman Z-Score ROCE/WACC 0.56 Beta (x) 0.58 Book Value/share (RM) 0.13 Major Shareholders (%) GD Express Holdings GD Holdings International Wing Tat Lau 8.37 Share Performance (%) Month Absolute Relative 1m m m m month Share Price Performance Backed by strong revenue growth momentum over the past couple of years, GDEX is poised for a turnaround after heavily investing in machineries and equipments for the streamlining of its processes. We expect double digit growth in its revenue and income as higher consignment volume kicks in. We initiate coverage on GD Express (GDEX) with a fair value of RM0.64 derived from a 1x PEG price multiple based on 27% CAGR over the next 2 years and a P/Sales of 3.3X. We are NEUTRAL on GDEX in view of its illiquid nature and seemed well supported at current level. Massive capital expenditure. GDEX has allocated a vast amount of its IPO funding for the development of its network and infrastructure. Since its listing in 2005, GDEX has invested an approximate total of RM23m for the expansion of its network base, fleet size, IT upgrades, and the development of its machineries & equipments. These investments will overall enhance the Group s operational processes, thus allowing faster turnaround time of its deliveries and operations as consignment volumes increases. Move to gain higher margins on Customised Logistics Solutions. Backed by a passive stream of revenue from its conventional delivery services and on the exponential growth of its Customised Logistics Solutions (CLS), GDEX will shift its focus in acquiring more customers for the latter segment where profit margins are typically higher. Despite revenue from its CLS division only accounting for 12.7% of the Group s turnover, GDEX is confident that it will gain new customers this year. Since 2001, the Group s CLS division has grown at a CAGR of 72%. Bottom-line to grow at a CAGR of 24% for FY07 to FY10. We estimate that top-line earnings will grow at a CAGR of 18% over the next three years while bottom-line to increase at a CAGR of 24% as consignment volume kicks in Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Dec-07 But Overvalued. With a forward PE of 72.5X based on EPS for the FY08f, GDEX is still overvalued compared to its peers which is currently trading at the range of 15X PE. We derive our valuation from a 1x PEG multiple based on EPS CAGR of 27% over the next 2 years and incorporating a P/Sales of 3.3X (averaged between FY06-FY09). This gives us a fair value of RM0.64 based on the average valuation of 12M rolling EPS and Sales per Share of 1.18sen and 29.46sen respectively. Hence, we initiate with a NEUTRAL as downside appears rather limited due to its illiquid nature. FYE June (RMm) FY06 FY07 FY08f FY09f FY10f Turnover Net Profit % chg y-o-y -46.2% 73.0% 27.6% 27.3% 17.3% Consensus Net Profit EPS (sen) DPS (sen) Dividend Yield (%) 0.0% 0.0% 0.0% 0.0% 0.0% ROE (%) 3.7% 6.0% 7.1% 8.3% 8.9% ROA (%) 2.9% 4.5% 5.4% 6.4% 7.0% PER (x) P/BV (x) P/Sales (x) EV/EBITDA (x)

2 COMPANY OVERVIEW Turnaround under new management. GDEX is a local courier service provider providing express delivery services and customised logistics solutions (CLS). GDEX commenced operations in 1996, and underwent a management revamp in 2000 (i) amid a declining revenue trend, (ii) burgeoning account receivables, (iii) high operating costs and (iv) mounting debts with unpaid salaries to its employees. Since then it has expanded its express delivery businesses aggressively under the helm of its new CEO, Mr. Teong Teck Lean and Deputy CEO, Mr. Leong Chee Tong. Part of the management exercise was acquiring the Group s IT base under the name of GD Tech for the full ownership of its IT software system which is critical to the Group s businesses. Currently the Group has 100% ownership of GD Tech (which engages in the development of its IT infrastructure), GD Venture (for the operating and maintenance of the Group s fleet of trucks and vans) and GDSB (which is essentially in charge of its core businesses). The recent resignation of Mr. Teong as CEO should not have any major impact to the Group s operations and strategy, as Mr. Leong will assume the role. Mr. Teong meanwhile remains as executive deputy chairman, to focus on the strategic planning of the Group. For the time being, there will not be any replacement for the Deputy CEO. Figure 1: Shareholding structure of GDEX Core business of the Group. The Group s businesses are separated into 2 segments, the (i) Express Delivery Service and the (ii) Customised Logistics Solutions (CLS) provider. 1) Express Delivery Service Provider: This business is structured through the principles of the hub and spoke concept, whereby customers documents and parcels are collected by the respective stations thereafter sent to a Central Clearing Hub located at the Group s HQ located at Petaling Jaya. These documents and parcels are then re-sorted and redirected to its respective destinations across the network for the final delivery to the destined recipients. Figure 2: Express Delivery Service Provider workflow

3 2) Customised Logistics Solutions: CLS is part of the Group s lucrative businesses with higher profit margin as compared to the conventional express delivery business. This segment essentially involves the customisation of clients unique logistical needs. Major services provided by the Group within the scope of its CLS division are as follows: Security Handling. The delivery of valuable items whereby its shipments are closely monitored. Mailroom Handling. Outsourcing of mailroom activities which handles both incoming and outgoing mails and parcels whereby the Group stations its staff at customers mailrooms in handling the processes. Project Handling. Handling of customer s goods from arrival to distribution. This service provides a whole range of services which includes the delivery of documents and parcels, bulk breaking and repackaging and other distribution services. Figure 3: Customised Logistics Solutions for Project Handling Higher revenue on parcel consignments. In terms of volume, 65% of the total consignments received currently are for the delivery of documents. Despite the lower volume for its parcel shipment, it contributes about 62% to Group s sales mostly via the delivery of packages from Volumetric Weight (DIM) Calculation. This is the applicable form of measurement amongst express delivery providers. With this calculation, the Group is able to charge according to the size of the package despite its weight. With the DIM calculation, a 1kg package with a length of 30cm, width of 25cm and a height of 20cm is equal to 2.5kg. Figure 3: DIM calculation

4 Revenue mostly from West Malaysia. Up to 50% of the Group s revenue is generated from consignments sent within West Malaysia, while East Malaysia accounts for 22%. Revenue generated from deliveries to specific destinations on a project basis (mainly from its CLS division), Singapore, International delivery and within the same stations account for 17%, 1.50%, 4.6% and 3.6% respectively. Figure 4: Percentage of revenue by destination Diversified source of revenue contribution. Although the Group s top 10 customers only represents less than 0.1% of total customers, they contribute about 23% in revenue mainly through the CLS division. Its top 10 customers have been maintaining a relationship with the Group for more than 3 years. These include MNCs such as DIGI, RHB, and FedEx. Almost 95% of the Group s clients are corporates or SMEs, while the remaining are retail customers. As service quality and assurance on prompt delivery forms an essential ingredient to the business model, the risk of customer churn is a norm in the express delivery industry. However, the Group will continue to maintain and strengthen its relationship with customers on loyalty programs and promotional activities. Figure 5: Customer segments Type of Customers No. of Customers Percentage of Customers Percentage of Sales Contribution Top 10 customers % 23.0% Customers > RM10,000 per month % 19.0% Customers < RM10,000 and > RM1,000 per month % 29.0% Customer < RM1,000 per month % 29.0% Total In-house R&D and fleet maintenance. The setup of its in-house R&D and fleet maintenance allows further cost cutting of the Group s operations as they continue to improve workflow efficiency. As proven, the establishment of the new automated conveyer belt system and its new scanning system was designed solely by its R&D department. While at the same time, its repair and maintenance division has also benefited the Group by monitoring its fleet fuel consumptions and substantial savings on the repair and maintenance costs of the Group s vehicles.

5 INDUSTRY OVERVIEW Declining growth over recent years, but gearing up on economic growth. As the mode of information flows in line with information technology advancement, the use of electronic mediums such as s and webdownloads has affected the volume of personal mails. As depicted in Figure 6 below, the decline of 0.12% in 2005 reflects more the over-weighted category of postal deliveries as compared to courier deliveries. As the Malaysian economy continues to expand, the courier service facilitates the overall competitiveness of companies all over Malaysia, as one of the top 20 trading nation worldwide. Recent trend has shown an increase on the volume of delivery consignments driven by the growing economy. With volumes for domestic express delivery registered a growth of 68% and 35% respectively for documents and parcels to date since 2006, the delivery of documents abroad declined by 9% due to the increasing usage of the internet medium. However on the other hand, international parcel deliveries have increased slightly by 6.8% since Figure 6: Growth of postal and courier deliveries Source: MCMC, Industry Figure 7: Growth of document express delivery Figure 8: Growth of parcel express delivery Source: MCMC, Industry Moderate revenue growth amidst intense competition amongst international players. The courier industry in Malaysia is a combination of home grown local companies and international companies totalling 113 companies. Common international names such as DHL, FedEx, TNT and UPS capture 32%, 26%, 16% and 4% of a total market share of RM1.1bn respectively. On the other hand, home grown companies namely, City Link Express (City Link), Nationwide Express (Nationwide) and GDEX garnered 7%, 6% and 4% respectively. Total revenue amongst the courier companies has grown by 7.6% since GDEX, being one of the largest local public listed courier companies has grown its market share from 2% in 2005 to 4% in 2006.

6 Figure 9: Market share by revenue in 2006 (RM1.1bn) Source: MCMC, Industry KEY HIGHLIGHTS Growing network base and fleet size. Over the years, the Group s network base has grown from 72 stations in 2005 to 91 stations in Its existing stations of 92 comprises of 50 branches, 3 affiliates and 38 agents and an additional foreign subsidiary in Singapore. Through its current existing network, the Group runs a fleet size of 222 vehicles, which are serviced by its own in-house repair and maintenance department running through routine checks on its mileage, engines and tires. Figure 10: Growth of network base Figure 11: Growth of fleet size FY2005 FY 2006 FY2007 1Q08 Branches Affliates Agents Foreign Subsidiaries 1 1 Total Faster turnaround time with its newly installed automated conveyer system. The Group has recently installed 2 new automated conveyers for the implementation of its new hub-management system and parcel sorting operations. The 2 new conveyers are for parcel and document sorting with each costing RM0.72m and RM0.24m respectively that have been operating over the past 6 months. The whole project of these 2 new sorting system costs a total RM1.6m as the Group underwent major renovation of its warehouse for the fitting of both these system including scanning machines and computer hardwares. The replacement of its old manual conveyer system has reduced workforce significantly and process turnaround time by avoiding manual sorting of documents. With the new installation of the new conveyer belt, the Group s maximum capacity in handling consignment volume has increased by threefold with the additional number of unloading bays increasing from 9 to 22 bays for its parcel sorting system.

7 Figure 12: Newly installed automated conveyer system, the Parcel sorting system KEY ISSUES Still loss making in Singapore. The Group has setup an office in Singapore in Q307 which will subsequently open a new gateway to tap multinationals and international companies conducting cross border businesses with Malaysia. However, despite its high revenue growth, the operating costs of the office in Singapore are much higher during its expansion phase. Management is expecting to breakeven by Figure 13: Profit contribution from Singapore (RMm) Bad debts. With respect to its unpredictable nature of collecting receivables from its customers, which is a norm in the express delivery services because of the large number of customers, the Group has suffered major write-offs last year. We estimate this was primarily caused by the burgeoning account receivables incurred during FY05 as its receivables collection period peaked at 234 days, causing a loss amounting RM0.46m in FY07. However, since FY05, the Group has made an aggressive policy for collections and estimates that writeoffs for the FY08 would likely be much less compared to FY07. GDEX s allowance for doubtful debts has been maintained at an average of 16% over the past 3 years. Being on the conservative side, we have incorporated our estimates for future write-offs to be within the level of RM0.17m RM0.24m over the next 3 years in forecasting the Group s earnings.

8 Figure 14: Write-offs for the period FY05-FY07 FYE June FY2005 FY2006 FY2007 FY2008f FY2009f FY2010f Accounts receivables (RMm) Allowance for doubtful debts (RMm) % against accounts receivables 14% 17% 16% 16% 16% 16% Number of days collection of receivables (days) Write-offs of trade receivables (RMm) Percentage of write-offs against allowance for doubtful debts (%) 9.3% 0.0% 19.0% 9.5% 6.0% 5.0% Source:, Company EARNINGS CATALYST Fuel surcharge from 10% to 15%. The Domestic Members of the Association of Malaysian Express Carriers have announced that it has revised the existing Security and Fuel Surcharge from 10% to 15% on total invoice charged to its customers due to higher fuel charges. While management has indicated that higher petrol prices will hurt margins, they believe this will allow GDEX to charge higher delivery rates as consumers are still willing to pay for the extra charges. When compared to international delivery service providers such as Fedex and DHL, local delivery companies are charging relatively lower premiums. We believe that with 15% fuel surcharge, the Group s revenue will continue to increase at a CAGR of 18% over the next 3 years (FY07- FY10F), as consignment volume kicks in. Revenue to grow at CAGR of 18% for FY07-FY10. The Group s revenue has grown tremendously at a CAGR of 31% over the past 7 years since Mr. Teong Teck Lean took over the helm as its new CEO. GDEX continues to increase its market share as the courier delivery service industry remains at its infancy stage. The increase in revenue was contributed by the increase of the Group s CLS businesses where it is able to charge higher rates, while its conventional express delivery services continues to expand its market share. This subsequently translates to a net profit growth of 222% since FY03 after three consecutive years of negative profits. On the revenue proportionate level, according to business segments, as much as 76.5% are generated from the conventional courier services, while 12.7% are from its CLS division which had grown tremendously over the past 7 years at CAGR of 72.4%. Going forward, we project top-line growth at a CAGR of 18% for FY07-FY10 based on the Group s q-o-q revenue growth trend, translating to bottom-line earnings CAGR of 24% over the same period. Figure 15: Revenue and PAT growth for FY2000-FY2010f Source:, Company See important disclosures at the end of this publication See important disclosures at the end of this publication 8

9 Potential savings of RM1.08m. Towards the beginning of the FY09, GDEX may be moving to its warehouse which is currently rented out. This could substantially result in costs savings of up to RM1.08m being the existing rental of one of its current facilities. Once implemented, the expansion is estimated to cost around RM6m. We have yet to incorporate the rental savings and capex for the expansion as its current warehouse setup has still room to accommodate growth in volume. Expansion of fleet, branches and training of agents. Over the next 2-3 years, GDEX will limit the expansion of its network to not more than 5 branches, as the Group feels that its existing network is sufficient to handle nationwide coverage. In addition, the Group will continue to increase its fleet size by trucks each year as it is part of the Group s policy in maintaining a young fleet to ensure reliability of its service and to attain optimal fuel performance. With respect to affiliates and agents, the Group has no further intention to increase these two networks as they only contribute revenue of less than 1%. Figure 16: Revenue growth of CLS segment ^ figures for FY05 and FY06 unavailable Data Figure 17: QoQ revenue trend Source:, Company Data

10 VALUATION We derive our target price on a PEG multiple of 1x at an EPS CAGR of 27% over the next 2 years to incorporate its growing trend in bottom-line earnings and P/sales ratio of 3.3X due to its sales growth. As the Group s shares remain tightly held with the addition of low liquidity, we initiate at a NEUTRAL call at a fair value of RM0.64 based on the average valuation of 12M rolling EPS and Sales per Share of 1.18sen and 29.46sen respectively. FYE June (RMm) FY06 FY07 FY08f FY09f FY10f Turnover EBITDA Depreciation Net Interest Income Exceptional Items Associates PBT Net Profit EPS (sen) DPS (sen) M argin EBITDA 10.7% 12.2% 14.0% 13.8% 13.7% PBT 3.8% 4.5% 5.4% 5.6% 5.8% Net Profit 2.6% 3.6% 3.9% 4.1% 4.2% R OE 3.7% 6.0% 7.1% 8.3% 8.9% ROA 2.9% 4.5% 5.4% 6.4% 7.0% B alance Sheet Fixed Assets Current Assets Total Assets Current Liabilities Net Current Assets LT Liabilities Shareholders Funds Net Gearing (%) net cash -2.2% -10.4% -6.1% net cash

11 Guide to Investment Ratings Buy: Share price may exceed 10% over the next 12 months Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain Neutral: Share price may fall within the range of +/- 10% over the next 12 months Take Profit: Target price has been attained. Look to accumulate at lower levels Sell: Share price may fall by more than 10% over the next 12 months Not Rated: Stock is not within regular research coverage All research is based on material compiled from data considered to be reliable at the time of writing. However, information and opinions expressed will be subject to change at short notice, and no part of this report is to be construed as an offer or solicitation of an offer to transact any securities or financial instruments whether referred to herein or otherwise. We do not accept any liability directly or indirectly that may arise from investment decision-making based on this report. The company, its directors, officers, employees and/or connected persons may periodically hold an interest and/or underwriting commitments in the securities mentioned. All Rights Reserved. No part of this publication may be used or re-produced without expressed permission from. Published and printed by :- OSK RESEARCH SDN. BHD. ( V) (A wholly-owned subsidiary of OSK Holdings Berhad) Chris Eng Kuala Lumpur Hong Kong Singapore Shanghai Malaysia Headquarters O SK Investment Bank Bhd. Hong Kong Office OSK Asia Securities Ltd. Singapore Office DMG & Partners Securities Pte. Ltd. Shanghai Office OSK Asia Securities Ltd. 20 th Floor, Plaza OSK , 12/F, #22-01 Ocean Towers , 12/F, Jalan Ampang World-Wide House 20 Raffles Place World-Wide House Kuala Lumpur 19 Des Voeux Road S ingapore Des Voeux Road Malaysia Central, Hong Kong T el : +(65) Central, Hong Kong Te l : + (60) Te l : + (852) Fax : +(65) Te l : + (852) Fax : +(60) Fax : + (852) Fax : + (852)