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abcGlobal Research
KLN is a solid company with a good track record and strong positioning in Hong Kong
where it is the No 1 third-party logistics (3PL) provider. It is well positioned to capitalize
on growth in the Chinese domestic market, and the business it conducts there, it is
arguably conducting well. But we believe there is a disconnect between KLN’s valuation,
market expectations and the realities of operating an asset heavy, contract logistics-led
freight forwarding model.
Contract logistics is a low margin, competitive business: KLN’s profitability is largely
driven by Hong Kong logistics and its warehousing business, where it acts as landlord.
These account for, we calculate, c58% of its net profit. This is a structurally mature, low
growth market, but defensible. Mainland China logistics accounts for just 21% of KLN’s
profit, equating to a 4% margin. This is an industry standard margin – so KLN is faring no
better nor worse than peers. Mainland China is an attractive market for growth;
underpenetrated, with massive inefficiencies to be capitalized on by 3PLs. But it is
competitive and fragmented, and scale does not necessarily confer an advantage when
tendering for contracts. There is definite potential in China, but translating growth into
profitability may not be simple. KLN’s asset heavy model means it will need to invest to
fulfil growth ambitions, while the rationale for property ownership in mainland China
where space is not scarce, is less obvious.
Initiate at UW(V) and target price of HKD11.75: Since listing on 18 December 2013,
KLN shares have risen 27.3%. It trades ahead of its peer group at 22.9x 2014e PE vs. the
sector average of 20.5x. We forecast 8.1% earnings growth for 2014-15e for KLN. To put
into context, this compares to CH Robinson and KNIN, two much higher return
companies, on 19.8x and 23.6x 2014e earnings with forecast CAGRs of 9.6% and 6.9%
over 2014-15 respectively. Our peer multiple-based valuation gives us a target of
HKD11.75 per share (20.7x 2014e earnings).
Kerry Logistics Network (636 HK)
Initiate at UW(V): The world’s local logistics provider
Growth driven by mainland China, profitability driven by Hong Kong
Yet the reality is that contract logistics is a low margin business and growth is likely to be hotly contested
Initiate with an Underweight (V) rating and multiple-based HKD11.75 target price
Industrials Air Freight & Logistics Equity – Hong Kong
Company report
Index^ HANG SENG INDEXIndex level 21,976RIC 0636.HKBloomberg 636 HK
Source: HSBC
Underweight (V) Target price (HKD) 11.75 Share price (HKD) 12.98 Forecast dividend yield (%) 0.9 Potential return (%) -8.6
Note: Potential return equals the percentage difference between the current share price and the target price, plus the forecast dividend yield
Dec 2012 a 2013 e 2014 e
HSBC EPS 0.00 0.53 0.57 HSBC PE 24.3 22.9
Performance 1M 3M 12M
Absolute (%) 27.0 Relative^ (%) 34.3
Note: (V) = volatile (please see disclosure appendix)
Free float (%) 42Market cap (USDm) 2,825Market cap (HKDm) 21,935
Source: HSBC
28 January 2014
Julia Winarso* Analyst HSBC Bank plc +44 20 7991 2168 julia.winarso@hsbcib.com
Mark Webb* Head of Conglomerate and Transport Research, Asia Pacific The Hongkong and Shanghai Banking Corporation Limited +852 2996 6574 markwebb@hsbc.com.hk
Satheesh Kailasam* Associate Bangalore
View HSBC Global Research at: http://www.research.hsbc.com
*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations
Issuer of report: HSBC Bank plc
Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
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Financials & valuation Financial statements
Year to 12/2012a 12/2013e 12/2014e 12/2015e
Profit & loss summary (HKDm)
Revenue 19,295 20,659 22,165 23,596EBITDA 1,657 1,879 2,046 2,195Depreciation & amortisation -367 -438 -460 -486Operating profit/EBIT 1,555 1,941 1,586 1,709Net interest -38 -55 -52 -42PBT 1,657 2,031 1,664 1,803HSBC PBT 1,392 1,531 1,664 1,803Taxation -305 -337 -369 -404Net profit 1,069 1,384 958 1,035HSBC net profit 804 884 958 1,035
Cash flow summary (HKDm)
Cash flow from operations 871 1,209 1,425 1,562Capex -1,468 -1,182 -813 -843Cash flow from investment -1,693 -1,602 -813 -843Dividends 0 -177 -177 -192Change in net debt 835 708 -790 -562
Balance sheet summary (HKDm)
Intangible fixed assets 1,774 1,774 1,774 1,774Tangible fixed assets 6,599 6,908 7,261 7,618Current assets 7,389 7,960 8,529 8,857Cash & others 2,940 3,167 3,457 3,518Total assets 22,468 23,948 25,000 25,821Operating liabilities 8,887 4,801 4,913 5,026Gross debt 1,965 2,900 2,400 1,900Net debt -975 -267 -1,057 -1,618Shareholders funds 8,358 12,679 13,783 14,627Invested capital 3,934 8,674 9,195 9,705
Ratio, growth and per share analysis
Year to 12/2012a 12/2013e 12/2014e 12/2015e
Y-o-y % change
Revenue 20.3 7.1 7.3 6.5EBITDA 15.5 13.4 8.9 7.3Operating profit 22.5 24.8 -18.3 7.8PBT 20.5 22.6 -18.1 8.3HSBC EPS 6.3 8.1
Ratios (%)
Revenue/IC (x) 6.1 3.3 2.5 2.5ROIC 33.3 19.1 13.8 14.0ROE 10.2 8.4 7.2 7.3ROA 6.7 7.6 5.6 5.7EBITDA margin 8.6 9.1 9.2 9.3Operating profit margin 8.1 9.4 7.2 7.2EBITDA/net interest (x) 43.3 34.4 39.4 52.9Net debt/equity -8.8 -1.7 -6.1 -8.8Net debt/EBITDA (x) -0.6 -0.1 -0.5 -0.7CF from operations/net debt
Per share data (HKD)
EPS reported (fully diluted) 0.00 0.83 0.57 0.61HSBC EPS (fully diluted) 0.00 0.53 0.57 0.61DPS 0.00 0.11 0.11 0.12Book value 0.00 7.65 8.16 8.66
Valuation data
Year to 12/2012a 12/2013e 12/2014e 12/2015e
EV/sales n/a 1.0 1.1 1.0EV/EBITDA n/a 10.6 11.7 10.8EV/IC n/a 1.2 1.4 1.3PE* n/a 19.5 22.9 21.2P/Book value n/a 1.4 1.6 1.5FCF yield (%) n/a 0.3% 2.9% 3.4%Dividend yield (%) n/a 1.0% 0.9% 0.9%
Note: * = Based on HSBC EPS (fully diluted)
Price relative
Source: HSBC Note: price at close of 27 Jan 2014
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Jan-14Kerry Logistics Network Rel to HANG SENG INDEX
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“Asia Specialist, China Focus, Global Network”
Kerry Logistics Network Limited (KLN) is
headquartered in Hong Kong and is the largest
Hong Kong-based international third-party
logistics (3PL) provider. It also has extensive
operations across Greater China and other
countries in Asia. It is principally engaged in
integrated logistics and international freight
forwarding. It currently has more than 400 service
locations across 35 countries and territories in
Asia, Australia, Europe and the Americas. KLN
was listed on the HKSE on 18 December 2013
under the ticker 636 HK. It is 42.5% owned by
Kerry Properties Ltd which itself is listed on the
HKSE (683 HK) and 23.8% by Kerry Group Ltd.
This gives KLN a 33.4% free float.
Shareholding structure
Source: KLN, Bloomberg, HSBC
Public shareholders
Other shareholders
of KPL
Kerry Logistics Network
Limited (KLN)
~23.8% ~42.5%
~44%~56%
Kerry Properties
Limited (KPL)
Kerry Group Limited
~33.4%
Directors and subsidiaries
~0.3%
Overview
Growth driven by mainland China, profitability still driven by Hong
Kong
But contract logistics is a low margin business and growth is likely
to be hotly contested
Initiate with an UW(V) rating; target price at HKD11.75
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It’s complicated Revenue breakdown (2012) *
*Revenue including intersegment revenues
Source: KLN, HSBC
EBIT breakdown (2012)*
*Segment revenues include intersegment revenues
Source: KLN, HSBC
Total revenue by geography (2012) *
*Integrated Logistics and International Freight Forwarding divisions combined
Source: KLN, HSBC
HSBC estimate of recurring profit breakdown in 2012
Source: Company and HSBC estimates
KLN is a beneficiary of the increasing complexity
of supply chains and outsourcing trends. KLN
offers supply chain solutions to simplify and
streamline operations for its customers in order to
cut costs and to allow them to focus on their own
core competences. It benefits from the mismatch
in supply and demand, orders and production and
sales and inventory that its customers seek to
minimise.
Investment view
KLN is a solid company with a good track
record and strong positioning in Hong Kong
where it is the No 1 3PL provider. It is well
positioned to capitalize on growth in the Chinese
domestic market, and the business it conducts
there, it is arguably conducting well. But we
believe that there is a disconnect between the
valuation of the company, market expectations
and the realities of operating an asset heavy,
contract logistics led freight forwarding model.
Contract logistics is low margin, competitive
business: KLN’s profitability is still largely driven
by Hong Kong logistics and its warehousing
business, where it acts as landlord. These account
for, we calculate, c58% of its net profit. This is a
structurally mature, low growth market, but
defensible as there is no new warehousing space
coming onstream until 2016 and it is not a
particularly attractive market for new entrants. We
calculate its Hong Kong margins to be 19.4%,
Logistics operations
39%
HK w arehouse
3%
Intl freight forw arding
58%
Logistics operations
51%
HK w arehouse
28%
Intl freight forw arding
21%
PRC45%
Hong Kong13%
Taiw an10%
South and South East
Asia13%
Europe16%
Others3%
HK53%
AAT5%
PRC21%
CCT12%
TJ Log8%
Other-1%
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structurally inflated by the pure warehousing and
landlord business.
Mainland China logistics accounts for just 21% of
KLN’s profit, equating to a 4% margin. This is an
industry standard margin – so KLN is faring no
better nor worse than peers. Mainland China is an
attractive market for growth; with a high
urbanisation rate, underpenetrated, with massive
inefficiencies to be capitalized on by 3PLs. But it
is competitive and fragmented, and scale does not
necessarily confer an advantage when tendering
for contracts. There is definite potential in China,
but translating growth into profitability will not
necessarily be simple. KLN’s asset heavy model
means it will need to invest to fulfil growth
ambitions, while the rationale for property
ownership in mainland China where space is not
scarce, is less obvious.
Kerry is a well-recognized brand within Hong
Kong, China and to a lesser extent wider Asia.
Though the Asian market is immature, it is very
competitive. KLN may offer more sophisticated
solutions than local players and has a well-
recognised brand within Asia. With over 40 of the
top 100 Interbrand ranked brands as its customers,
we believe KLN is well positioned to grow with
these multinationals and the local market. While
the market offers high growth, we envisage that
over time smaller players will too become more
sophisticated and services more commoditised, as
has occurred in the US and European markets,
margins will come structurally under pressure.
Market share in contract logistics does not have
much bearing on profitability or ability to win
new contracts, unless a player is dominant in a
certain market, but rather local knowledge,
customer relationships and the ability to get things
done have a much greater bearing.
Given its heritage, KLN has a natural bias
toward property ownership, more so than its
global peers who have gravitated toward more asset
light models. KLN owns approximately 55% of its
39m square feet of logistics facilities under
management with a significant proportion of this
(c26%) in Hong Kong KLN believes asset
ownership in Asia can be of strategic advantage in
securing customers where the quality and security
of leased warehouses can be variable. It provides
the flexibility of making specific modifications and
avoids exposure to significant rental escalation
clauses in long duration leases which can be
difficult to write into customer contracts.
KLN’s asset heavy approach has benefitted it in
Hong Kong as space is at a premium property and
prices have risen, but the rationale for property
ownership mainland China is less obvious – which
is where KLN is largely focusing its growth and
investment ambitions. There is therefore a risk that
growth could come at the expense of margins and
returns.
Sale and lease back potential: We remain
unconvinced by KLN’s asset heavy strategy as it
expands outside of Hong Kong. But we do
recognise that should KLN see significant growth
opportunities in the future we see the potential for
KLN to free up capital through sale and
leasebacks.
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Moving forward
Going forward, KLN plans to maintain and
increase its leading market position in China and
Asia. It has significant expansion plans in
mainland China, with an additional 12% of
managed GFA under construction. We believe in
the near term this will remain its primary focus
though it will also seek to build out further across
Southeast Asia and to take advantage of the
removal of tariffs by 2015 in the ASEAN region.
Its freight forwarding arm, while well positioned
in Greater China, remains small versus
competitors and KLN will seek to grow both
organically and through acquisition to build out
coverage and density of volumes in order to bring
greater scale economies and purchasing power.
These volumes may also tie into its integrated
logistics division.
Margins
KLN has an overall EBIT margin of 7% (2013e),
significantly higher than its forwarder-contract
logistics peers at an average of 3-4%. Our analysis
suggests that this is largely as a result of a
function of its relatively low ownership costs as it
does not depreciate investment property but
instead revalues annually. The flip side of having
high margins due to high asset intensity is lower
returns on invested capital. KLN’s 2014e ROIC is
7.1% versus KNIN on 22.5% and DSV on 13.8%
on our estimates.
As a percentage of revenue, we calculate KLN’s
ownership costs (depreciation and leases) were
around 3.5% in 2012. Analysis of peers suggests
more normalized ownership costs are 5.5-7% of
revenue. Adjusting for this results in EBIT margin
of 5-5.5%, though this is still at the higher end of
the peer range. KLN also owns a 79.5% stake in
Kerry Siam Seaport and as ports have structurally
high margins (typically 30%+) this is likely to be
inflating the overall margin. KLN discloses
neither the revenue nor the EBIT of Kerry Siam
Seaport, but on the basis that it comprises a
significant proportion of the Southeast Asian
revenue our best estimate is that it could be
contributing HKD100-200m in EBIT.
Post these two adjustments we get normalized
margins of 4.5-5%. The Asian logistics market is
still immature and despite being high growth, as
has occurred in Europe and the US, we would
expect margins to come down over time.
Forecasts
We forecast core net profit growth of 8.3%, 8.4%
and 8.1% over 2013-15, respectively. This
compares to a CAGR of 10.7% over 2010-12,
which has been heavily driven by acquisitions and
the full consolidation of Kerry TJ Logistics (Not
rated). We calculate underlying EBIT growth of
6% in 2012 excluding acquisitions and c5% in
1H13. While we make no assumption for
acquisitions, and our growth rate is higher than
has been the organic trend, we note that KLN has
added a significant amount of square footage
through 2013 and has 6% of its existing portfolio
under construction – which will come onstream
largely in 2014. We also assume KLN will lease
new facilities. Our central assumptions are that
the capex has been largely front-end-loaded into
2013 and that the growth from the opening of
these new facilities will materialize in 2014 and
2015. After this, we assume growth rates
normalize to 5-6%.
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KLN financial summary
HKDm 2010 2011 2012 2013e 2014e 2015e
Revenue 10,880 16,034 19,295 20,659 22,165 23,596 Adj op profit* 805 1,139 1,290 1,441 1,586 1,709 Net profit 833 871 1,069 1,384 958 1,035 Core net profit** 665 741 816 884 958 1,035 Growth* Revenue 47.4% 20.3% 7.1% 7.3% 6.5% Adj EBIT 41.6% 13.2% 11.7% 10.1% 7.8% Core net profit** 11.4% 10.1% 8.3% 8.4% 8.1% Margins* EBITDA 9.3% 9.0% 8.6% 9.1% 9.2% 9.3% Adj EBIT 7.4% 7.1% 6.7% 7.0% 7.2% 7.2% Other* ROIC 5.3% 6.8% 6.5% 6.7% 7.1% 7.4% Asset turn 0.7x 0.8x 0.9x 0.9x 0.9x 0.9x Net debt/EBITDA
2.1x 1.5x 2.0x -0.1x -0.5x -0.7x
Fixed charges coverage
34.9x 20.6x 20.4x 17.1x 19.0x 22.5x
**Core net profit is not a standard measure under HFRSs. It represents the profit attributable to the company’s shareholder before the after-tax effect of change in fair value of investment
* HSBC calculations
Source: KLN, 2013-15 are HSBC estimates
Risks to our forecasts
The company has not provided much disclosure in
the way of forecasts. We have therefore had to make
significant assumptions in preparing our forecasts.
We have made assumptions as to the number
of new facilities constructed each year and the
size and cost of these facilities. These could
be materially incorrect.
We have not accounted for any possible
future acquisitions due to the uncertain nature
and timing yet the company has a stated
strategy of (and has been growing through)
acquisition in the past few years.
Our assumptions for domestic consumption
and demand growth could be too high or low
and will depend on global GDP and Chinese
governmental policy decisions.
We have not assumed a material impact from
the introduction of VAT in China on services.
Competition could intensify, pressuring
margins or costs base inflation could be
higher than we forecast.
Working capital intensity could be higher
than we anticipate as KLN seeks to grow with
big customers.
Valuation
Initiate at UW(V); TP HKD11.75: Since listing
KLN shares have risen 27.3%. It trades ahead of
its peer group at 22.9x 2014e earnings vs. the
sector average of 20.5x. We forecast 8.1%
earnings growth for 2014-15e for KLN. In
context, this compares to CH Robinson and
KNIN, two much higher return companies on
19.8x and 23.6x 2014e earnings with forecast
CAGRs of 9.6% and 6.9% respectively. Our peer
multiple-based valuation gives us a target price of
HKD11.75 per share (20.7x 2014e earnings).
Under our research model, the Neutral rating band
for volatile Hong Kong stocks equals the local
hurdle rate of 8.5% plus or minus 10ppt. Our
target price of HKD11.75 implies a potential
negative return of 8.6%, including a forecast
dividend yield of 0.9%. This is below the Neutral
band; therefore, we initiate with an Underweight
(V) rating. Potential return equals the percentage
difference between the current share price and the
target price, including the forecast dividend yield
when indicated.
Core valuation (based on 2014 forecasts)
Multiple Valuation (HKDm)
PE 21.0x 20,116 EV/EBIT 14.0x 19,990 EV/EBITDA 10.5x 19,453 Average 19,853 Price per share HKD 11.75
**EBIT/EBITDA adjusted for minority interests (25% of the earnings stream). To derive the equity value we add a net cash of HKD1.14bn (2014e) and add in the market value of the associates HKD2.2bn.
Source: HSBC estimates
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Implied KLN valuation based on our target price
2013e 2014e 2015e
PE 19.5 20.7 19.2 EV/EBITDA 10.6 10.6 9.7 EV/EBIT 13.8 13.7 12.4
Source: HSBC estimates
Summary comp table (x)
Ticker CP^ Rating EV/EBIT EV/EBITDA PE 13e 14e 13e 14e 13e 14e
DPW DPW GR 26.5 N 11.9 13.3 8.1 9.2 17.1 17.4 TNTE TNTE NA 6.7 UW (V) 15.1 11.6 9.0 7.8 36.6 21.3 KNIN KNIN VX 123.7 UW 16.6 17.2 13.2 14.0 25.1 23.6 PWTN PWTN SW 150.0 UW 19.4 23.3 14.1 16.5 39.3 33.3 DSV DSV DC 181.0 N 13.5 14.5 11.2 12.0 19.6 18.4 KLN 636 HK 13.0 UW (V) 13.8 15.1 10.6 11.7 19.5 22.9 FDX FDX US 140.2 NR* 13.3 11.9 7.4 7.2 22.7 17.2 UPS UPS US 97.9 NR* 14.4 14.1 11.4 11.4 21.3 18.4 UTI WW UTIW US 17.2 NR* 36.1 17.9 15.8 10.0 85.3 31.5 CH Robinson
CHRW US 59.1 NR* 13.3 12.6 12.3 11.6 21.8 19.8
Exp-editors
EXPD US 43.6 NR* 13.4 11.8 12.4 11.0 25.0 22.2
Win-canton
WIN LN 1.5 NR* 11.6 10.9 7.6 7.4 9.3 9.7
Sino-trans
598 HK 3.3 NR* 9.1 7.7 6.0 5.2 16.8 13.7
Note: UTI WW is a January ending company, FedEx is a May ending company and Wincanton is a March ending company. Hence the values have been calendarized.
^Current price in local currency
*NR = Not rated
Source: HSBC estimates for DPW, TNTE, PWTN, DSV, KNIN and KLN. Bloomberg consensus for FDX, UPS, UTI WW, CH Robinson, Expeditors, Wincanton and Sinotrans; Prices as of 23 January 2014 for DPW, TNTE, KNIN, PWTN, DSV, FDX, UPS, UTI WW, CH Robinson, Expeditors and Wincanton; as of 24 January for KLN and Sinotrans
Risks
Upside risks to our rating and target price include:
Better-than-expected economic development
in China could lead to an increase in domestic
consumption which would positively impact
KLN’s customers and its own volumes.
A decrease in trade restrictions or embargoes in
key countries in which KLN operates.
Positive changes in government policies within
China to stimulate domestic consumption.
Increase in outsourcing trends stimulating Asia-
outbound volumes.
Accretive acquisitions.
A positive movement in property values in
Hong Kong or mainland China.
Better-than-expected general trading or
significant new contract wins.
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The economy
Transportation and logistics are driven by global
GDP and local consumption. KLN is engaged in
logistics operations across Asia and provides most
of its freight forwarding services intra-Asia and
Asia-Europe. An economic upturn within China in
particular could lead to a general increase in
domestic consumption and international trade.
Equally, an upturn in the global economy and
within mature markets could stimulate outbound
volumes from Asia and have knock-on effects on
Asian economies.
Shifts in outsourcing trends
Increases in customer outsourcing strategies to
and within Asia would be beneficial for KLN as a
3PL provider in terms of contacts wins and
volumes. These trends could impact outbound
volumes out of China, in particular the Asia-
Europe and Asia-US freight forwarding activities
of KLN. In addition this could impact the
activities of KLN’s associates CCT and AAT as
well as its fully consolidated Kerry Siam Seaport
in Thailand.
Property ownership and leasing One of KLN’s strategies is property ownership in
key markets and it has significant investment
property holdings in Hong Kong. It is therefore
significantly leveraged to movements in asset
prices and rental yields.
Consolidation and acquisitions
The sector with highly fragmented; therefore
significant consolidation could have a positive
effect. KLN has historically grown through
acquisitions and though this can be risky, it could
also be accretive in adding density, new
geographies and areas of expertise.
Other points to note:
There is an unclear allocation of space within
investment property between own and tenant use
which distorts pure logistics margins and makes
peer comparison difficult. Furthermore KLN has
numerous related companies, as part of the Kerry
Group. Transactions could occur that are not at
arms-length, which could be disadvantageous to
minority shareholders.
Risks
Economic upturn could lead to higher domestic consumption and
higher international trade
With significant investment property holdings in Hong Kong, an
increase in property prices would be positive for the share
Reduction in trade barriers and embargoes would be beneficial
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KLN has a significant minority interest balance.
Although it purports to exercise control over these
companies, it may not necessarily be the case. It
consolidates Kerry TJ Logistics although it holds
just 36.5% of its share capital.
In previous periods the company has failed to
comply with Section 122 of the Companies
Ordinance which requires accounts to be submitted
to shareholders and presented at an AGM no more
than nine months after the balance sheet date. The
directors of the company could be subject to
imprisonment or fine although the company has
stated that this is unlikely as it believes none of the
directors willfully committed this breach.
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Overview
KLN is headquartered in Hong Kong and is the
largest Hong Kong-based international 3PL
provider, based on warehouse square footage. It also
has extensive operations across Greater China and
other countries in Asia. It is principally engaged in
integrated logistics and international freight
forwarding. It currently has more than 400 service
locations across 35 countries and territories in Asia,
Australia, Europe and North America.
Shareholders
KLN is 23.8% owned by Kerry Group Ltd and
42.5% owned by Kerry Properties Ltd (KPL), in
which Kerry Group has a 56% stake.
Kerry Logistics Network
Largest 3PL provider in Hong Kong….
…contract logistics led freight forwarder…
…with an asset heavy approach
Key statistics
1. From Armstrong report
Source: KLN
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Shareholding structure
Source: Bloomberg, Kerry, HSBC
Details on Kerry / Kuok Group companies can be
found in Appendix 1. History
KLN developed its first warehouse in Hong Kong in
1981 and in 1996 became a direct wholly-owned
subsidiary of KPL which was then listed on the
Stock Exchange of Hong Kong. KLN has grown
both organically and through acquisition with
notable acquisitions being:
2000: Freight forwarding company in Hong Kong,
which marked its venture into freight forwarding
2002: Kerry Logistics (UK) Ltd, a freight
forwarding arm in the UK
2005: A 70% equity interest in Kerry EAS
Logistics, a leading logistics company in China
2008: An initial 18.52% stake in Kerry TJ
Logistics, a company that is listed on the TWSE.
It now owns c36.5%.
Activities
KLN’s core activities are Integrated Logistics (IL)
and International Freight Forwarding (IFF). It also
has three infrastructure investments, a 25%
interest in Chiwan Container Terminal Co, Ltd
(CCT), a 15% interest in Asia Airfreight Terminal
Company Limited (AAT) and a79.5% interest in
Kerry Siam Seaport Limited in Thailand (fully
consolidated)
Public shareholders
Other shareholders
of KPL
Kerry Logistics Network
Limited (KLN)
~23.8% ~42.5%
~44%~56%
Kerry Properties
Limited (KPL)
Kerry Group Limited
~33.4%
Directors and subsidiaries
~0.3%
Milestones of Kerry Logistics
Source: KLN
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Revenue breakdown (2012)*
*Revenue including intersegment revenues
Source: KLN, HSBC
EBIT breakdown (2012)*
*Segment revenues includes intersegment revenues
Source: KLN, HSBC
Operating margin
2010 2011 2012
Logistics operations 9.6% 8.5% 9.1% HK warehouse 56.8% 56.7% 58.3% Intl freight forwarding 1.4% 2.7% 2.5% Operating margin* 7.4% 7.1% 6.7%
Note: Revenues including intersegment revenues
*Group operating margin post central costs
Source: KLN, HSBC calculation for total operating margin
Integrated Logistics (IL)
KLN provides third-party integrated logistics
services for manufacturers, retailers and other
customers worldwide. Its logistics services include
storage and value-added services as well as returns
logistics to manufacturers, retailers and other
customers out of regional and local logistics centres.
KLN also operates trucking and distribution
services to transport goods to local and national
distribution centres and retail outlets as well as to
transport cargo from airports and ports and can
provide door-to-door distribution in each of its
major markets in Asia. It also offers express
services for LTL (less-than-truckload) cargo in
China, Taiwan, Thailand and Vietnam. It uses a
mixture of owned vehicles and subcontractors.
The chart below shows an example of how KLN
provides value-added services to a fashion
industry customer.
Logistics operations
39%
HK w arehouse
3%
Intl freight forw arding
58%
Logistics operations
51%
HK w arehouse
28%
Intl freight forw arding
21%
Services offered to customers in the fashion and lifestyle industry
Source: KLN, HSBC
> > > > >Inspection, Quality Control and Safety Tests
Labeling and Security Tagging
Garment-On-HangerStorage
Pre-retailPreparation
Packing Creaseless Garment Delivery
Returns Management and Clearance Sales
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KLN typically operates 1-3 year contracts with a
renewal option. It also operates much longer
contracts, typically where it has invested in
building specific property, modifications or
specialised equipment. It charges a monthly fee
based on a unit rate and variable rate dependent
on the quantity of services provided. Most
contracts are volume driven with a floor and
contain price adjustment clauses.
Within its IL division, KLN has a 79.5% interest
in Kerry Siam Seaport Ltd in Thailand where it
manages an onshore inland container depot. It
also operates a rail terminal in Adelaide and a
trading business in Hong Kong where it trades
food goods, beverages and pharmaceuticals.
KLN also operates Hong Kong warehouses
where it leases warehousing space to customers
and to its logistics arm. It has nine warehouses in
Hong Kong with a total gross floor area (GFA) of
5m square feet and a valuation of HKD5,194m (as
at 30 September 2013). Most of the warehouses in
Hong Kong are used as joint warehouses and
logistics centres. There has been a gradual increase
in space used by the logistics arm; if KLN can
achieve higher returns from conversion for
logistics use it reallocates this space – we discuss
this division in more detail later in the report.
Intercompany revenues of HK warehouse division as % of total HK warehouse revenue
Source: KLN, HSBC
Generic warehousing by nature is property
management and is a service that most contract
logistics players provide. Costs are depreciation,
rates, utilities and some labour. However KLN
does not depreciate its investment property – which
is largely its Hong Kong warehouses. The Hong
Kong warehouse margin at c57-58% compares
with other property company margins of 80%+.
Having shared warehousing space allows KLN to
optimise seasonality patterns which may vary
from customer to customer.
Types of shared warehousing uses
General cargo warehouses Specialty warehouses
1) Provides long-term or short-term leases of certain warehouse units
1) Mainly cold storage for temperature-controlled food
2) Long-term leases are generally for 2-3 years
2) Also storage for bonded goods and dangerous goods
3) Monthly charge by type and size of leased space
3) Monthly warehousing fee by volume of goods stored and certain handling fees
4) Maintenance, handling and transportation - generally sole responsibility of customers
Source: KLN, HSBC
Property angle
As part of its IL business, KLN manages a variety of
self-owned and leased logistics facilities including
warehouses, a port terminal and rail terminal.
Completed logistics facilities
Gross floor area sq ft (’000)
Attributable owned
Total owned
Leased % owned*
China 4,369 4,941 6,298 44% HK 5,537 5,537 817 87% Macau 15 0% Taiwan 843 2,312 4,887 32% Thailand 4,397 5,538 3,240 63% Vietnam 893 893 171 84% Singapore 437 481 16 97% Malaysia 119 221 299 43% Philippines 12 0% India 268 773 458 63% Bangladesh 13 0% South Korea 11 0% Others 806 806 1,268 39% Total 17,669 21,502 17,505 55%
*Based on total GFA owned (not attributable)
Source: KLN, HSBC
0%
5%
10%
15%
20%
25%
30%
35%
40%
2010 2011 2012 1H13
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We believe that asset ownership is a natural focus
for KLN due to its history and parentage.
The company has stated that its asset ownership is a
core strength as it believes many customers based in
Asia seek the security and flexibility of asset
ownership from their logistics providers. In Asia,
quality of warehouses can be a concern, and not all
warehouses available on lease are good quality. That
KLN owns its assets and is responsible for their
maintenance and upkeep can provide comfort to
customers over the quality of its assets. This also
allows it to meet customers’ demands for long-term
service agreements with certainty of space and it can
also offer better customisation of warehouses to
meet their needs and avoids significant rental
escalation which can be difficult to work into
customer contracts. The merits of this argument are
subject to debate; it is possible to take out long leases
and to also lease properties and customise the
installations to customers’ needs. Indeed many of
KLN’s global brand customers, with no cultural bias,
we believe are likely to be asset-ownership agnostic
though security and quality of warehousing space are
important.
Many of KLN’s peers (K+N, DHL, DSV) have
taken a divergent strategy – moving away from
asset ownership, choosing to free up capital and
where possible to sign back-to-back lease
contracts with customers.
Around 55% of KLN’s logistics space is owned
with a bias toward Hong Kong. We think that
KLN’s asset heavy positioning, particularly in its
core market of Hong Kong, has key advantages.
Space for new warehouses is hard to come by and
having the space is a competitive advantage and
one of the key reasons behind KLN’s No 1
position in the Hong Kong market. That property
prices have increased significantly in Hong Kong
is also a bonus.
As KLN expands out of Hong Kong, we would
expect the relative proportion of leased space to
grow. Should KLN need to free up capital in the
future for expansion, there remains the potential
for sale and leasebacks on its estate.
Investment property
KLN’s properties held for long-term rental yields
and/or capital appreciation where less than 50% is
occupied by KLN are classified as investment
properties. Other properties are classified as
property, plant and equipment. Approximately
4.6m square feet of GFA are treated as investment
property in Hong Kong.
Property investment (GFA) by location as of 30 Sept 2013
Source: KLN, HSBC
The majority of this investment property by both
floor space and value are situated in Hong Kong.
KLN’s Hong Kong portfolio comprises nine
warehouses, five of which are located in Kwai
Chung, close to Hong Kong’s container terminals.
As we highlight above, these properties are
partially used as investment properties (i.e., the
space leased out to third-party tenants) and partly
for KLN’s own logistics business. Based on
KLN’s segmental disclosure, we estimate that
roughly 35% of revenues are generated from
KLN’s own logistics business. Given the Hong
Kong investment properties make up substantially
all of the portfolio, our analysis will focus on the
Hong Kong market.
HK67%
China (ex -HK)15%
Vietnam13%
S'pore5%
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Investment property portfolio
Property Completion Interest GFA Year % ’000 sq ft
Kerry Warehouse (Chai Wan) 1986/88 100% 535 Kerry TC Warehouse 1 1991 100% 180 Kerry Warehouse (Shatin) 1988 100% 432 Kerry Warehouse (Sheung Shui) 1991 100% 356 Kerry Warehouse (Fanling 1) 1994 100% 284 Kerry Warehouse (Kwai Chung) 1981 100% 287 Kerry TC Warehouse 2 1997 100% 491 Kerry Warehouse (Tsuen Wan) 1998 100% 592 Kerry Cargo centre 1999 100% 1,443 HK Sub-total 4,599 EAS Building 1994/95 70% 150 4 Blocks of Buildings (Tianjin) 1980 70% 72 Level 18, Block B, Wuhan Int'l 1990 70% 8 Unit C, L22, Dihao Plaza (Hainan)
1990 70% 2
Block 1, No 64 Boashan Rd (Qingdao)
1990 70% 5
Shenzhen Kerry Futian Logistics 2006 100% 269 Kerry Fuzhou Logistics Centre 2004 100% 109 Kerry Hefei Logistics Centre 2008 100% 204 Kerry Chongqing Logistics Centre - Phase 1
2011 100% 225
Mainland China sub-total 1,044 Kerry Vietnam Logistics Centre 2010/11 100% 671 Kerry Danang Logistics Centre 2011 100% 115 Kerry Hung Yen Logistics Centre 2010 100% 108 Vietnam sub-total 893 Kerry Tampines Logistics Centre 2012 100% 371 Singapore sub-total 371 Total 6,907
Source: KLN, HSBC
Industrial property market in Hong Kong
Demand for warehouse space in Hong Kong is
essentially driven by the space required for
logistics services. This primarily relates to the
export of goods manufactured in the Pearl River
Delta and elsewhere in Asia and the import of
goods for consumption in Hong Kong. As
illustrated by the air cargo throughput at Hong
Kong International Airport and the container
throughput at key China ports, demand has been
relatively lacklustre over the past two years. We
believe the outlook for air cargo and container
throughput in Hong Kong remains relatively soft.
HSBC’s Economics team forecasts that Hong
Kong private consumption will grow 3-4% pa
during 2013-15; it forecasts exports from Hong
Kong will grow 6-8% pa over the same period
(Global Economics Quarterly Q1 2014, 20
December 2013). We argue private consumption
and exports provide a reasonable proxy for the
volume growth rate of container and air cargo
over this period.
HKIA and China container port throughput growth
Source: Hong Kong International Airport, CEIC, HSBC
While demand has been relatively soft (and we
expect it to remain so), the supply outlook is
highly constrained. Jones Lang Lasalle estimates,
after a relatively large addition to warehouse
space in 2012, that there will be no new
warehouse space opened in 2013-15. Based on
data provided by Jones Lang Lasalle indicating
60m square feet of warehousing space in Hong
Kong, we calculate KLN has an 8% market share.
Net increase of Industrial property space in Hong Kong (GFA ’000 sq ft)
Source: Jones Lang Lasalle, HSBC
-20%
-10%
0%
10%
20%
30%
40%
50%
Jan-
10
Jul-1
0
Jan-
11
Jul-1
1
Jan-
12
Jul-1
2
Jan-
13
Jul-1
3
HKIA China key ports
-1,000
0
1,000
2,000
3,000
4,000
5,000
6,000
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
e
2014
e
2015
e
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Industrials property rentals in HK (HKD psf per month)
Source: Jones Lang Lasalle, HSBC
We calculate that KLN’s EBIT margin for its
warehouse business averaged 57% in 2010-1H13.
This margin appears to be relatively low – HSBC’s
Real Estate team estimates for its property investor
coverage in Hong Kong that the average EBIT
margin is c80% (HK Real Estate: Seeking shelter
from stronger headwinds, 27 January 2014). It is
unclear why KLN’s property investment margin is
so low. As this margin has remained relatively
consistent throughout the period 2010-1H13, we
assume it continues throughout the forecast period.
International Freight Forwarding (IFF)
KLN’s freight forwarding services are
predominantly international freight services
between Asia and Europe and intra-Asia. This
includes air and ocean freight forwarding as well
as cross-border road freight forwarding services.
KLN’s IFF business is relatively small versus some
of its larger global peers with revenue of USD1.5bn
versus Kuehne & Nagel at USD17.4bn in 2012.
Freight forwarding benefits from economies of
scale in the sense that higher volumes lead to
better rates negotiated with carriers which in turn
means either better margins or better ability to
compete for volumes on price. KLN typically
takes on no more than 12-month commitments in
airfreight (though when required it charters full
aircraft) and typically does not give volume-based
commitments to carriers in sea freight. KLN owns
more than 6,500 vehicles.
KLN’s IFF margins at 2.7% (2013e) are broadly
standard for the freight forwarding industry.
These compare with Kuehne & Nagel at 3.3% and
DHL at 3.2%. The company does not disclose
gross profit per unit as is standard for the industry;
therefore it is difficult to evaluate how these
compare versus peers. As the company grows its
volumes further, we would expect to see some
productivity benefits and some small uplift to
margins from better negotiated rates with carriers.
However, the Asia-Europe and Intra-Asia routes
are highly competitive and some of these benefits
could be given back to customers in order to gain
further volumes. As freight forwarding is an asset-
light business, we believe adding volumes at the
expense of margin can still enhance returns.
As part of its stated strategy, KLN is looking to
grow its freight forwarding business both
organically and through acquisition. Acquisitions
in freight forwarding can be difficult as they are
people and relationship-driven businesses,
therefore acquisitions need to add further niche
businesses or geographies.
KLN offers a cross-border freight forwarding
service – Kerry Asia Road Transport (KART).
This is an open platform to connect China to
selected countries across the ASEAN region. It
owns 150 trucks to run this service and illustrates
KLN’s capabilities in efficiently dealing with
cross-border cargo transportation across Asia
(which can involve significant administration
particularly when dealing with LTL cargo). This
road network should give it a strategic advantage
when the tariff free policy is achieved for all
product trades among ASEAN countries in 2015.
0
2
4
6
8
10
12
1Q04
3Q04
1Q05
3Q05
1Q06
3Q06
1Q07
3Q07
1Q08
3Q08
1Q09
3Q09
1Q10
3Q10
1Q11
3Q11
1Q12
3Q12
1Q13
3Q13
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Key routes run by KART
Source: KLN, HSBC
Customer profile
KLN services regional and local operations of
global brands as well as local and regional
customers. It has 40 of the top 100 Interbrand
brands as its customers. However it is does not
have an over-reliance on a single customer, with
its top-five customers representing 7.8% of its
revenue (in 1H13).
As per the company website, KLN recently
secured a contract from ASOS in China to support
the company’s e-commerce platform in Shanghai
and managing freight from the UK hub into
China. In the past, it has announced the following
contract wins:
Samsonite, Thailand to manage its supply chain
to deliver to more than 40 department stores and
retail outlets in Bangkok and major cities
including Phuket, Pattaya and Chiang Mai;
Daimler North East Asia Trading and
Services Co Ltd (a fully-owned subsidiary of
Daimler, China) – it is building an automotive
parts logistics facility;
Continental Tyres, Thailand to manage the
company’s warehouse storage and local
transportation and express distribution across
the country;
Hugo Boss Logistics for Greater China;
IKEA in Thailand; and
Marks & Spencer in Greater China.
Thailand
Vietnam
Hanoi
Lao Bao
Danang
Ho Chi Minh City
Malaysia
Singapore
Kuala Lumpur
Penang
Bangkok
Myanmar LaosVientiane
Cambodia
KumingChina
Nanning
Shenzhen
Shanghai
Phnom Penh
Route 1
Route 2
Route 3
Route 4Route 5
International freight forwarding
Air freight Ocean freight Cross-border road freight
Services provided 1. Air transportation of high-value goods, perishable goods and time-sensitive shipments
2. Air charter services for urgent shipments or planned project cargo
1. Transportation of full container load (FCL) and less than container load (LCL) cargo by sea
2. Project logistics services for outsized cargoes and heavy lifts
Cross-border trucking solution through Kerry Asia Road Transport (KART)
Operations 1. Procurement of air cargo space from airlines based on actual shipment needs 2. Terms of supply contracts is typically no more than 12 months
1. Procurement of ocean cargo space from shipping lines based on actual shipments 2. Cargo consolidation to increase utilisation of containers
1. KART was launched in 2007 and provides cross-border long-haul trucking connecting countries across ASEAN region2. KART was expanded to connect ASEAN region and China in 2011
Fleet and infrastructure IATA agent with access to space procurement for air cargo routes worldwide
Booking agent for a number of shipping lines with direct access to space allocation
Fleet of more than 150 self-owned trucks dedicated for KART services
Routes operated 1. Intra-Asia routes, such as between China and Hong Kong
2. Routes between Greater China and the UK
1. To many ports worldwide
2. Major lanes include those among ASEAN countries
1. Two routes between ASEAN and China
2. Three routes between ASEAN countries
3. Covers Singapore, Thailand, Vietnam, Cambodia and Laos, as well as Kunming, Shenzhen and Shanghai in China
Source: KLN, HSBC
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Demand drivers Total revenue by geography (2012) *
*Integrated Logistics and International Freight Forwarding divisions combined
Source: KLN, HSBC
The IL division is driven largely by new contract
wins and domestic consumption within China in
particular and other Asian countries in which it
operates. KLN’s results are therefore highly
geared to the demand for new products
manufactured or sold by its customers and the
demand for international brands of the growing
middle classes. It is therefore influenced by GDP
growth, income level and inflation, availability of
consumer credit, consumer confidence, import
taxes and rate of urbanisation.
In 2012 the Asia-Pacific 3PL market was 40% larger
than the 3PL markets in North America and Europe.
It has been the fastest growing market in the world,
with growth driven by outsourcing and offshoring
operations to lower cost countries.
GDP growth estimates by major regions (CAGR)
*Asia Pac excluding Greater China and Japan
Source: KLN (which sources Armstrong report), HSBC
Logistics spend growth by major regions (CAGR)
*Asia Pac excluding Greater China and Japan
Source: KLN (which sources Armstrong report), HSBC
China
Hong Kong is a relatively mature market. Therefore
growth expectations are more muted than in
mainland China and will be broadly GDP driven
with some gearing to increasing postponement
(assembly/packaging of goods at the last minute).
In mainland China, GDP growth and high
urbanisation rates make for a favourable backdrop.
Within Asia Pacific, the penetration rate of 3PL
providers is relatively low versus the US and
Europe. Furthermore in Greater China, the logistics
spend as a percentage of GDP is high, suggesting the
potential for greater efficiencies from improving
infrastructure and deployment of best practices.
3PL revenue by major region (USDbn)
Source: KLN (sourced from Armstrong report), HSBC
See Appendix 2 for detail on China’s 3PL market
structure, shortcomings and initiatives taken by
the government.
PRC45%
Hong Kong13%
Taiw an10%
South and South East
Asia13%
Europe16%
Others3%
18.9%
9.5%
13.5%
3.3% 3.2%
-1.0%
7.9%
4.9% 3.6%2.2% 1.5% 1.0%
-5%
0%
5%
10%
15%
20%
GreaterChina
AsiaPacific*
S.America
N.America
Japan Europe
2007-12 2012-15e
16.3%
7.6%10.3%
0.2%
2.7%
-2.6%
8.0%
5.0% 3.6%2.3% 1.5% 1.0%
-5%
0%
5%
10%
15%
20%
GreaterChina
AsiaPacific*
S.America
N.America
Japan Europe
2007-12 2012-15e
211
154 151
40
245
171 156
44
289
193 161
49
0
50
100
150
200
250
300
350
Asia Pacific North America Europe South America
2010 2012 2015e
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Greater China has higher logistics spend as % of GDP vs. other regions…
*Excluding Greater China and Japan
Source: KLN. HSBC
…and Asia Pacific has much lower 3PL penetration rate than the US and Europe (2012)
Penetration rate is the percentage of current 3PL revenue out of total potential 3PL market
Source: KLN (sourced from Armstrong report), HSBC
In terms of net revenue, KLN is one of the biggest
players within Greater China, after Sinotrans and
DHL. It is the largest player in terms of total GFA
of managed warehouses. Although it
predominantly specialises in Asia-Europe and
intra-Asian forwarding it is the second largest
player in Asia-US and US-Asia forwarding.
The IFF division is influenced by outbound
volumes to Europe and intra-Asia as well as
inbound volumes from Europe to Asia. Volumes are
driven by GDP growth in both Europe and Asia as
well as shifting trade lanes and outsourcing or near
sourcing of manufacturing. While labour cost
inflation has seen some relocation of manufacturing
from China to lower cost countries within Asia, this
is not necessarily negative to KLN if it also has
operations in those countries. What could be more
problematic is if a trend of near-sourcing continues
or picks up pace towards lower cost Eastern
European countries or Mexico.
Profit and margin by country
Note that KLN did not disclose in the prospectus the
recurring net profit contribution by country / territory
nor the EBIT margin by country / territory.
However, in the notes to the accountants report it
discloses Hong Kong profits tax, China taxation
and overseas taxation. In addition, Kerry TJ
Logistics (2608 TT, Not rated) is separately listed
and reports its results.
From this information we can calculate a rough
estimate of profit by country/territory based on the
following assumptions:
HK effective tax rate of 16.5%, China
effective tax rate of 25%;
All material recurring profit is recognised
either through the current or deferred tax
charge;
All deferred tax on changes to in fair value of
investment properties attributable to the
company’s shareholders relates to China; and
There are no material differences between
recurring profit reported by Kerry TJ
Logistics and the recurring profit relating to
this business reported by KLN.
0%
5%
10%
15%
20%
0
500
1000
1500
2000
NorthAmerica
GreaterChina
Europe AsiaPac*
Japan SouthAmerica
Logistics spend in USDbn (LHS)Logistics spend as % of GDP (RHS)
0%
5%
10%
15%
20%
25%
US Europe Asia Pacific
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HSBC estimate of recurring profit breakdown in 2012
Source: Company, HSBC estimates
Our estimates indicate that 58% of recurring is
generated in Hong Kong, with 53% from its
Logistics, freight forwarding and warehouse
business and 5% from its stake in HKIA air cargo
terminal AAT. The contribution from mainland
China is 33% with 21% from the logistics, freight
forwarding and warehouse business and 12%
from container port CCT.
Using this approach, we can also estimate the
profit before tax margin excluding associates. The
Hong Kong pre-tax margin of 21% is inflated by
the HK warehouse business that had a 2012 EBIT
margin of 58%. If we strip this out, we estimate
pre-tax (ex-associates) margin for logistics and
freight forwarding is 6%.
While the China pre-tax profit margin (ex-
associates) looks low at about 4%, this figure is in
line with the global logistics sector.
HSBC estimate of PBT margin (ex-associates) in 2012
Source: Company, HSBC estimates
Strategy
KLN’s stated strategy is to:
Maintain and increase its leading market
position in Greater China and Asia. It is
specifically seeking to further penetrate
China, Hong Kong, Taiwan, Thailand and
Vietnam and increase its market share in
India, Indonesia, Malaysia, Singapore and the
Philippines.
Grow its international freight forwarding
coverage organically and through
acquisitions, particularly in the Americas
region.
Offer sophisticated integrated logistics
solutions underpinned by local capabilities.
To further invest in IT and human capital.
Key strengths and opportunities
KLN’s leading position and strong links in the
Hong Kong property market are a key strategic
advantage given the space limitations and
limited new land released by the government.
Strong brand recognition within Asia which
makes it a trusted partner of many global
companies.
Long-standing relationships with a wide and
diversified customer base
HK53%
AAT5%
PRC21%
CCT12%
TJ Log8%
Other-1%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
HK Taiwan PRC Other
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High Asian exposure and presence within fast
growing and underpenetrated markets.
Experienced management team with a proven
track record.
Proprietary IT systems globally deployed and
compatible with customer ERP systems.
Early-mover advantage in building a road
network (KART) to capitalise on the removal of
tariffs in the ASEAN free trade area by 2015.
Key challenges and risks
Continuing to develop value-added services
to tie in volumes and customers and to offset
margin pressure.
Maintaining its quality differentiation and
perception among customers as other players in
the market become increasingly sophisticated.
Expanding through acquisition is risky,
particularly in freight forwarding where the
assets are intangible and labour and
relationships can leave.
KLN’s bias towards owning assets leaves it
exposed to decreases in asset prices. If trade
or consumption patterns shift, then KLN may
be left with assets that are underutilised.
There is on-going margin pressure in freight
forwarding. The intra-Asian market is highly
competitive and volumes are lacklustre on the
Asia-Europe trade lanes, which makes for a
difficult operating environment. KLN will
need to continue to make productivity
improvements through IT investment.
As most contracts have a volume-related
element KLN is subject to volume risk and
changing demand for its customers’ products.
Conclusion
Hong Kong is a stable mature market where we
believe KLN has a strong strategic positioning.
Mainland China offers growth opportunities,
though this market is competitive and there are
political risks. KLN remains subscale in
international freight forwarding and has the
potential for growth and margin expansion through
productivity improvements. But pure forwarding is
heavily commoditised and we believe KLN will
make the greatest gains where it can tie these
forwarding volumes to its logistics business.
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Competitor analysis in Greater China (2012) Net revenue (USDm) Total GFA of warehouses (m sq ft)*
*DHL Supply Chain and Global Forwarding
Source: KLN (which sources Armstrong report), HSBC
*For third-party logistics providers
Source: KLN (which sources Armstrong report), HSBC
0
200
400
600
800
1000
1200
1400
Sinotrans DHL* Kerry CEVA Panalpina0
5
10
15
20
25
Kerry Sinotrans CEVA IDS Group Wuhu Annto
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Third-party logistics
Logistics is the process of getting something from
A to B in the form, quantity and timeframe
required. This is more than simply transportation.
3PL is doing something for someone or an
organisation that they do not want to do, or do not
have the capability of doing themselves. Since the
1990s, as supply chains have become more
complex, with global sourcing and offshoring of
operations, manufacturing and distribution there
has been growth in 3PL providers that can often
provide cheaper, more efficient solutions than
companies may be able to themselves.
The logistics of logistics
Outsourcing is driven by the increasing complexity of supply
chains
This plays to the strengths of logistics providers that have the
expertise to simplify and standardise
But the contract logistics and freight forwarding markets are
heavily fragmented, becoming increasingly commoditised and
competition is often fierce
Business model of a 3PL provider
Source: DSV presentation
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Key drivers of 3PL market growth
Source: KLN (sourced from Armstrong report), HSBC
As the demand for 3PL has grown, so too has the
range of services provided. 3PL providers
generally aim to be a one-stop-shop for their
customers, believing the greater the range of
services offered, the more integrated they are in
their customers’ business, the higher the switching
costs and the more pricing power they have in
what is essentially a very low margin industry.
The range of activities is wide: extending from the
very basic warehousing in multiple user facilities
to pick and pack, inventory management, delivery
and returns to highly customised solutions such as
the above wing services that DHL provides for
British Airways or UPS’s management of the
London 2012 inbound logistics.
3PL market growth by industry – Fortune 500 Global
Source: KLN (sourced from Armstrong report), HSBC
DP-DHL estimates the total size of the contract
logistics market was EUR154bn in 2011. KLN’s
integrated logistics segment had revenues of
HKD6.9bn (EUR677.2m). This is just 0.44% of
the global market.
A fourth-party logistics provider (4PL) is an
integrator that assembles the services, resources
and capabilities of its own organization and others
to design and build comprehensive supply chain
solutions, in essence managing other 3PLs,
truckers, forwarders, customs house agents etc.
Most of the larger contract logistics players also
have freight forwarding arms. There has been a
dual principle in the creation of these arms, some
of the larger freight forwarders (KNIN, Panalpina,
DSV) – international transport managers (ITM)
have created contract logistics divisions as a way
to try to tie in volumes to their forwarding
Increasing supply chain
complexity
Regulatory compliance
Offshoring and
outsourced manufacturi
ng
Core competency
focus
Expanding IT requirements
Need regional
and local market
expertise
Operational efficiencies
Cost reductions
Low-cost country
sourcing
0%
2%
4%
6%
8%
10%
12%
0
20
40
60
80
Tech
.
Auto
mot
ive
Reta
iling
Elem
ents
Gro
cerie
s
Indu
stria
l
Heal
thca
re
Cons
Goo
ds
Oth
ers
2005 (LHS) 2013e (LHS)2005-13e CAGR (RHS)
Logistics supply chain
Source: HSBC
> > > >Accept goods
at seaport/ airport
Overland trucking to distribution
centre
Unloading, unpacking, entry into inventory
system
Assembly, repacking, relabeling,
repairs
Overland delivery to
retail stores
Returns Management and Clearance Sales
Returns
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business and to try to reduce price pressure on
these volumes. Others, such as KLN (which
focuses more on value-added warehousing and
distribution (VAWD)), have developed freight
forwarding capabilities as an add-on service for
their contract logistics customers. These two
activities are a natural fit and complementary, but
it is often only when tied together that they add
the most value. Generic low value-add services
are low return and customers can be transitory.
Third-party logistics value-added services
Both - 3PL/4PL Domestic and Intl Transport management
Value-added warehousing and distribution
4 PL/Lead Logistics Provider
Cargo insurance Bonded facilities
Call Centres Carrier contracting/brokering
Easily deployable IT and work processes
Consolidation/ deconsolidation
Customs brokerage Installation/Removal
EDI Handling Duty drawback processing
JIT/Kanban
Exception Handling Freight forwarding Kitting/Pick & Pack Financial services Incoterms
management Light manufacturing/assembly
Food Grade/Temperature controlled
Letters of credit Order fulfilment
Hazmat skills Merge-in transit Reverse logistics ISO certification Multimodal
transportation Subassembly
Inventory/vendor management
Project logistics
Lean management skills
Transportation execution
Order management Transportation network planning/optimization
Pool distribution Radio frequency/RFID Security processes Sourcing/procurement skills
Supply chain systems
Source: KLN (sourced from Armstrong report), HSBC
A fragmented industry
The 3PL industry is very fragmented at a global
level and arguably also at a local level. This
means that price competition is intense.
In the third-party contract logistics market, the top
10 players have just a 21.4% market share (refer
table below). There are a few ‘global’ players,
with the biggest being DHL with a c8% market
share, having achieved significant scale post the
merger with Exel in 2005. There are regional
specialists too – KLN is the largest international
3PL based in Hong Kong with the largest
portfolio of logistics facilities based on warehouse
square footage managed in Greater China and
ASEAN. And there are many local companies
operating the odd warehouse or a limited local
distribution network.
Contract logistics market, 2011
DHL 7.8% CEVA 2.4% KNIN 2.2% Hitachi 1.7% Wincanton 1.4% Penske 1.3% Sankyu 1.2% UPS SCS 1.2% CAT 1.1% Rhenus 1.1% Top 10 total market share 21.4% Figures are estimated except for DHL, CEVA and KNIN; as at May 2012
Source: Deutsche Post 2012 Annual Report (which sources Transport Intelligence), HSBC
The freight forwarding industry is also highly
fragmented, with the biggest global player in
airfreight having just 6.8% of the market and the
biggest sea freight player having 2% of the market
(refer tables below). Again, there are global
players, regional specialists and players that
operate on just one or a handful of trade lanes.
Airfreight market is fragmented; top 10 players account for c26% of the market (2011)
DHL 6.8% DB Schenker 3.5% KNIN 3.0% Panalpina 2.9% UPS 1.8% Nippon Express 1.7% CEVA 1.7% Agility 1.5% Expeditors 1.5% Sinotrans 1.4% Top 10 total market share c26%
Source: Rolland Berger strategy consultants, HSBC
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Ocean freight market is even more fragmented; top 10 account for 9% of the market (2011)
KNIN 2.0% DHL 1.5% DB Schenker 1.0% Panalpina 0.9% Expeditors 0.7% Agility 0.5% Nippon Express 0.5% SDV 0.5% Sinotrans 0.5% DAMCO 0.4% Top 10 total market share c9%
Source: Rolland Berger strategy consultants, HSBC
Competitor analysis
KLN is naturally much more Asia exposed than
its global peers.
Regional exposure (2012)
*HK+PRC+Taiwan+South and South East Asia have been combined into Asia-Pacific for comparison purposes. A small percentage of ‘others’ (c3%) has been reported. The details of that segment is not known
^DHL Supply chain
Source: Respective company reports, HSBC
KLN is also a contract logistics led freight
forwarder as opposed to KNIN, Panalpina and
DSV who are more focused on forwarding
operations with contract logistics serving to tie in
volumes.
Revenue contribution of contract logistics and freight forwarding (2012)
KLN KNIN PWTN DSV DP-DHL* CEVA
Contract Logistics 41% 21% 14% 11% 49% 54% Freight forwarding 59% 78% 86% 89% 51% 46%
*Taken into account just supply chain and freight forwarding divisions in calculating the percentages
Source: Respective company reports, HSBC
Integrated Logistics
Like peers, in KLN’s IL division, each contract is
negotiated individually; therefore it is difficult to
generalize as to how precisely the business
charges for its services. Some contracts may
charge for warehousing space, plus, a charge per
piece picked and packed, others may be an all-
encompassing contract with some volume linked
element. Duration of contracts varies as does the
degree of risk that KLN will assume to fulfill its
obligations – which may include building or
customization of facilities for some customers.
Open book vs. closed book
As is common in the industry – KLN has a mixture
of open and closed book contracts – with a greater
bias towards closed book. DHL, by contrast, reduces
its risk by maintaining an approximate 50/50 mix. In
some cases contracts can start as open book but then
progress to closed book.
Open book: A typical cost plus model. The
customer has visibility over project costs and the
3PL provider makes a margin. There may be some
cost linked incentives but typically this type of
contract provides good visibility for both parties
and limits risk, but also limits upside for the 3PL
provider.
Closed book: The 3PL provider agrees with a set
price and charging mechanism for the contract with
the customer. It is then up to the 3PL provider to run
the contract as efficiently as possible – with the
upside being generated through tight cost
management and some volume linked clauses.
Contract duration
The duration of a contract will vary from
customer to customer. The more specialized,
customized and value added, which typically
mean greater ramp-up costs for the 3PL, the
longer the contract. In most cases contracts can
last 3-5 years with some spanning 10 years or
more. In cases such as these, 3PL players will try
0% 20% 40% 60% 80% 100%
Kerry*
DHL SC^
KNIN
Panalpina
CEVA
Asia Pacific Americas Europe/Middle East/Africa Others
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to structure back-to-back contracts with
warehouse leases and client contracts.
Margins
Contract logistics is generally a low margin business.
The aim is to be become so integral to a customer
that their switching costs are high, which generates a
degree of pricing power. But for the most basic
warehousing functions, switching costs can be low
and therefore unless there is a shortage of
warehousing space or a company holds a dominant
position, there is perpetual pricing pressure and
customers typically demand more for less.
In a typical five-year contract:
Y1: Contract begins, project has ramp-up costs
Y2: Margins increase
Y3: Decent margins but a renegotiation clause – a
customer may demand more for less
Y4: Margin may come down from Y3
Y5: Contract retendered – many companies
including local players may tender and in order to
retain price may need to be lowered.
Adjusted operating profit margin – Contract logistics (2012)
*This is the operating profit for the contract logistics division for CEVA - which has 2 divisions (freight management and contract logistics). The exact bifurcation of special items and depreciation is not provided. The number provided here is based on equal split assumed for special items and depreciation between the 2 divisions
**This includes Logistics operations + HK warehouse
***KLN Logistics is only for KLN Logistics and excludes HK warehouse numbers
Source: Respective company reports, HSBC
KLN has overall margins of 7% (2013e),
significantly higher than its forwarder-contract
logistics peers making on average of 3-4%. Our
analysis suggests that this is largely as a function
of its relatively low ownership costs.
Ownership costs as % revenue
For Exel periods 2001-04 prior to its acquisition by DHL
Ownership costs defined as depreciation + operating leases
KNIN has a much greater bias towards freight forwarding
Source: Respective company data, HSBC
It does not depreciate investment property but
instead revalues annually (and strips
movements out to report core net profit). It
has HKD6.3bn investment property on its
balance sheet versus HKD6.4bn in property,
plant and equipment.
It has an HKD3.8bn interest free loan (as at
June 2013) from its parent company to fund
property purchases and expansion.
As a percentage of revenue, we calculate KLN’s
ownership costs (depreciation and leases) at
around 3.5% in 2012. Analysis of peers suggests
more normalized ownership costs are 5.5-7% of
revenue.
If we adjust KLN’s ownership costs to reflect
more normalized costs (c5.5% revenue), this
would reduce margins significantly, though they
remain at the higher end of the peer range at 5-
5.5%. KLN also owns Kerry Siam Seaport and as
ports have structurally high margins (typically
30%+), this is likely inflating the overall margin.
0%2%4%6%8%
10%12%14%
CEVA
*
KNIN
Sche
nker
DHL
DSV
KLN*
*
KLN
- Log
istic
s***
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
2009 2010 2011 2012CEVA Kerry Exel KNIN
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KLN discloses neither the revenue nor the EBIT
of Kerry Siam Seaport, but on the basis that it
comprises a significant proportion of the South
East Asian revenue, our best estimate is that it
could be contributing HKD100-200m in EBIT.
Post these two adjustments we calculate
normalized margins of 4.5-5%.
KLN – EBIT margins post adjustment for ownership costs and Seaport
Normalised ownership costs approximated at 5.5% revenues
We estimate c HKD600m revenue for Kerry Siam Seaport and HKD150m EBIT
Source: Respective company data, HSBC estimates
Margins for peers have been broadly declining,
which illustrates the pressure on price over time
as contracts are renegotiated and the market
matures. Although the Asian market is immature,
we believe over time as it matures and other
players become more sophisticated the same will
happen to margins.
Adjusted operating margin – Contract logistics
Tibett and Britten, Exel and TDG are no longer separately reported. They have been acquired. Hence, the historical values for them have been taken from Factset and adjusted for exceptional items
For Exel, have taken the group adjusted operating margin
Source: Respective company data, Factset, HSBC adjustments
International transport management
In its most simplest form, freight forwarding is the
buying and selling (brokerage of space) with
freight forwarders able to buy in bulk and sell to
small and medium sized customers who do not
want to deal directly with airlines/container
shipping companies, do not need a full container
(LCL), can achieve a better price by using a
forwarder or want end-to-end logistics solutions
(door-to-door as opposed to port-to-port).
But generic freight forwarding is very
commoditized and therefore forwarders have
developed other add-on services to increase the
invoiced amount, such as documentation and
customs brokerage, insurance, and compliance.
Price pressure has reduced the generic freight
component of an invoice; whereas the general
space brokerage used to be 70% of an invoice it is
now around 30-40%.
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
2010 2011 2012 2013 2014 2015KLN EBIT margin Ownership cost adjusted Seaport adjusted
-5%
0%
5%
10%
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
KNIN Tibett and BrittenTDG DSVDHL contract logistics ExelCEVA Wincanton
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Kuehne & Nagel’s GP/TEU (in USD)
Source: Kuehne & Nagel, HSBC
Freight forwarders have to grow in order to stand
still. In every given year there is around 2% price
pressure and 2-3% cost base inflation. This means
that forwarders need volumes to grow c5% pa in
order to maintain their bottom line. In addition, they
have to generate 3-5% productivity improvements
(usually driven by IT enhancements). In an
environment of anemic growth, particularly on the
Asia-Europe trade lane, growth is not easy to come
by, which makes the competition even more fierce.
Growth drivers
Forwarding is a GDP-driven business but GDP
multipliers have decreased significantly since
2008 (pre-2008 2-2.5x GDP for sea freight),
reflecting the almost completion of containerization
and the significant reduction in availability of
cheap consumer credit. We see sea freight
volumes growing at 1-1.5x GDP with a lower
multiplier in the near term as European countries
continue to unwind their debt burdens.
GDP multipliers trending down since 2010
Source: KNIN, HSBC
Around 98% of air cargo is handled by freight
forwarders, but in the sea freight market, carriers
still deal with customers directly and freight
forwarders have just a c35-40% market share.
However this has been increasing as customers
increasingly look for door-to-door delivery rather
than just port-to-port. KNIN forecasts that
forwarders will have 50% market share by 2016.
Industry trends
Near-sourcing and shifting production:
Since the early 1990s there has been a shift to
outsourcing of production to lower cost
countries such as China which has meant the
lengthening and increased complexity of
supply chains. However in recent years high
labour cost inflation has seen a shift in
production towards still emerging economies
such as Vietnam, the Philippines and
Bangladesh. Furthermore as transportation
costs have increased due to high oil prices, a
trend of more near-sourcing (Eastern Europe
and Mexico) has emerged. Though it is
difficult to quantify the impact that this has
had on volumes to date, it looks like a trend
that could continue.
300
350
400
450
500
2007 2008 2009 2010 2011 2012
-2
-1
0
1
2
3
4
5
2005 2006 2007 2008 2009 2010 2011 2012
Container multiplier Airfreight multiplier
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Modal shift: High oil prices and greater
sophistication of technology and supply chain
solutions are behind a modal shift from air
freight to sea freight. Air freight typically grows
at 1-2ppt below sea freight.
Lighter shipments: As technology has
advanced there has been a shift towards lighter
shipments (due to smaller components and tech
products). As forwarders charge by weight but
productivity is determined by shipments
processed, this has put pressure on margins.
The need to add value, especially in mature
markets: We see industry players such as
KNIN moving away from multi user facilities in
places like the US, preferring where possible to
secure back-to-back contracts with core
customers. KNIN has been withdrawing from
facilities and exiting low margin contracts with
customers where they do not provide other tie in
services.
Market share does not matter unless land
and space is limited: Similarly, there is an
ongoing debate as to whether being global
matters as local companies with local
knowledge and relationships often have an equal
footing when it comes to tendering for contracts.
Many global companies do however want to
work with a trusted partner, with globally
recognized and accepted practices.
There is no one-size-fits-all approach to
asset ownership: Flexibility is key and asset
ownership is generally not a value proposition to
customers. Most of the industry players have
shied away from ownership.
Customer quality matters: Even if contracts
and leased facilities are structured back-to-
back, it is the 3PL provider that takes on the
risk of the facilities and labour if the customer
goes bankrupt - as was evidenced with DHL
and Arcandor in 2009 (as per DP DHL
annual report).
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Financials
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Divisional summary
Year to Dec (HKDm) 2010 2011 2012 2013e 2014e 2015e
Revenue by segment
Logistics operations 4,541 6,903 8,052 9,384 10,590 11,713 yoy growth % 52% 17% 17% 13% 11% HK warehouse 615 654 705 740 770 800 yoy growth % 6% 8% 5% 4% 4% Total integrated logistics 5,156 7,557 8,756 10,124 11,360 12,514 yoy growth % 47% 16% 16% 12% 10% Total GFA managed (m sq ft) 25 32 32 37 41 44 yoy growth % 28% 0% 16% 10% 8% Revenue/sq ft 206 236 274 274 279 285 yoy growth % 14% 16% 0% 2% 2% Intl freight forwarding 6,654 9,589 11,908 12,028 12,388 12,760 yoy growth % 44% 24% 1% 3% 3% Inter-segment eliminations (930) (1,111) (1,370) (1,493) (1,583) (1,678) yoy growth % 20% 23% 9% 6% 6% Total revenues 10,880 16,034 19,295 20,659 22,165 23,596 yoy growth % 47% 20% 7% 7% 6% Operating profit by segment Cost/sq ft 175 206 238 239 245 251 yoy growth % 18% 15% 0% 3% 2% Logistics operations 434 589 730 863 953 1,031 Margin 9.6% 8.5% 9.1% 9.2% 9.0% 8.8% HK warehouse 349 371 411 422 439 456 Margin 56.8% 56.7% 58.3% 57.0% 57.0% 57.0% Total integrated logistics 783 959 1,141 1,285 1,392 1,487 Margin 15.2% 12.7% 13.0% 12.7% 12.3% 11.9% Operating costs 6,558 9,333 11,608 11,703 12,017 12,352 yoy growth % 42% 24% 1% 3% 3% International freight forwarding 96 256 300 325 372 408 Margin 1.4% 2.7% 2.5% 2.7% 3.0% 3.2% Central costs (74) (76) (151) (169) (178) (186) yoy growth % 3% 99% 12% 5% 5% Total operating profit 805 1,139 1,290 1,441 1,586 1,709 yoy growth % 42% 13% 12% 10% 8% Margin 7.4% 7.1% 6.7% 7.0% 7.2% 7.2%
** We forecast a time weighted average square footage. As at 30 June 2013 the company had 36m sq ft under management. This has subsequently risen to 39m sq ft.
Source: KLN, HSBC estimates 2013-15
Income statement
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We forecast revenue and operating profit by
segment: logistics operations, Hong Kong
warehouse (combined Integrated Logistics) and
International Freight Forwarding.
Logistics operations
KLN does not disclose segmental revenue by
geography. However different countries will have
different revenue drivers which impact the overall
growth and margin mix. We have approximated
the revenue mix from the breakdown of square
footage – estimating c35% of the Hong Kong
warehouse space is used internally by the logistics
division. Clearly there is a difference in revenue
per square foot by region, with Hong Kong rents
inherently much higher than those in mainland
China, Thailand and Taiwan.
We estimate that just 15% of logistics revenue
comes from Hong Kong, with 27% from mainland
China, 19% from Taiwan and 23% from Thailand.
As KLN expands away from Hong Kong, the
revenue per square foot of its logistics operations
will likely go down but the revenue per square
foot of its entire property portfolio will likely
increase as we expect its integrated logistics and
value-added services to outpace its Hong Kong
warehouse growth.
HSBC estimated split of revenues (2012)
Source: HSBC estimates
KLN has c2.3m square feet of logistics facilities
under development – c6% of its current total
square footage, with 1.3m square feet in China.
These facilities are due for completion over 2014-
15. It added 4m square feet in 1H13, mainly in
mainland China.
Logistics facilities under development
Approximate GFA owned
Total _______ Attributable _______ ’000 sq ft ’000 sq ft %
China 1,326 1,326 100 Thailand 878 792 75.9-100 Vietnam 119 119 100
Total 2,323 2,237
Source: KLN, HSBC
Below we show our forecasts for growth in square
footage – we assume that KLN will continue to
pursue an ownership/leasing strategy. As KLN
invests outside of Hong Kong, we expect the leasing
proportion to increase (at present broadly 55/45).
Growth in square footage*
Source: KLN, HSBC estimates 2013-15
*Estimates are based on average time weighted square footage calculated
We note that near term KLN has substantial
facilities under development which we expect to
open largely in 2014. We therefore expect KLN to
grow ahead of the market; the Armstong report
forecasts an 8% CAGR over 2012-15 for the
logistics market in China and 5% in Asia Pacific
(ex-China and Japan). Longer term we assume its
growth will converge more towards market trends.
China27%
HK15%
Taiwan19%
Thailand23%
Others16%
0%
5%
10%
15%
20%
25%
30%
-
10
20
30
40
50
2010 2011 2012 2013e 2014e 2015e
Total GFA managed (m sq ft) - LHSyoy growth % - RHS
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Logistics spend growth by major regions (CAGR)
Source: KLN (sourced from Armstrong report), HSBC
* APAC excluding Greater China and Japan
Revenue
Hong Kong
The Hong Kong logistics market is relatively
mature and competitive. There is a shortage of
warehousing space which is why KLN believes it
has an advantage through ownership of its
properties in this market. We assume that this
market will grow broadly in line with domestic
consumption (with KLN leasing or purchasing
new space as and when it becomes available) as
well as inflation. This gets us to a broad
assumption of 4% revenue growth pa.
Mainland China
The logistics market in mainland China remains
immature and fragmented. There are less space
constraints than in Hong Kong but warehousing
space is not always easy to secure as local
authorities often prefer to give space for
development to offices or retail facilities. Revenue
growth here will depend on domestic
consumption, new contract wins and in
conjunction with this, the development of new
logistics facilities. KLN has 1.3m square feet of
logistics facilities under construction in China due
to be completed between 2014 and 2015. This
represents around 12% of its current square
footage in mainland China.
Contract wins and development of new facilities
are inherently difficult to forecast. The Armstrong
report forecast an 8% logistics spend CAGR over
2012-15 in China, though near term we assume
higher growth due to the current high investment
in new facilities.
Thailand
About 61% of the square footage in Thailand
relates to Kerry Siam Seaport Ltd, the volumes of
which are driven by imports and exports out of
Thailand to the US and Europe and within Asia.
Growth will therefore broadly correlate with
global imports and exports as well as with new
contract wins within Thailand. Revenues and
profitability of this asset are not disclosed but we
note that port assets tend to be high margin (e.g.,
DP World has an EBIT margin of 30%).
Revenues of the South East Asian region for 2012
were HKD2.3bn – assuming a 50% forwarding
split and a 30% EBIT margin suggest that profits
coming from Kerry Siam Seaport could be in the
region of HKD100-200m. We believe the
inclusion of the port within the logistics segment
is artificially inflating margins compared with
other logistics operators.
KLN is adding 878,000 square feet of logistics space
in 2014 in Thailand. This represents 10% of the total
square footage currently managed in Thailand. We
forecast c5% revenue growth pa.
Taiwan
We believe growth will be driven by new contract
wins and domestic consumption. We forecast
revenue growth of c5% pa.
16.3%
7.6%10.3%
0.2%
2.7%
-2.6%
8.0%
5.0% 3.6%2.3% 1.5% 1.0%
-5%
0%
5%
10%
15%
20%
GreaterChina
AsiaPacific*
S.America
N.America
Japan Europe
2007-12 2012-15e
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Margin dynamics
Within the logistics segment we expect margins to
structurally decrease as:
Services become more commoditized as
competitors become more sophisticated and
markets mature. While Asia remains an
immature and underpenetrated market, this has
been evidenced in Europe and the US over time.
Growth occurs away from the high margin
Kerry Siam Seaport.
New facilities could have higher depreciation
costs relative to much older facilities (and
investment property) in Hong Kong. If the
company increases its proportion of leased
facilities, this may give more flexibility but will
likely be more expensive and depress margins.
Hong Kong warehouse
We assume that the square footage remains
relatively static, that the utilisation is already
relatively high and that the amount used for the
logistics operations does not change materially
(though in practice KLN will take the warehousing
space and use it for logistics operations where the
returns are higher), and that there are no mix
effects from more specialty warehousing.
We therefore forecast rental income increasing in
line with Hong Kong inflation, at c4%, and static
margins.
International Freight Forwarding
Growth is governed primarily by Asia-Europe and
intra-Asia flows. KLN does not disclose its
exposure by trade lane. Global GDP multipliers
have contracted and growth should remain muted
as European economies continue to unwind their
debt burden. We forecast 2014-15 sea freight
volume growth just ahead of global GDP growth
at 4% and air volume growth at 2% as we believe
that the structural shift from air to sea will
continue. We also expect continued price pressure
as is typical in a brokerage business.
Given the unpredictability of timing and size we
do not forecast acquisitions.
All this considered we forecast revenue growth of
c3% pa.
The potential for margin expansion comes
through economies of scale and productivity
improvements; we estimate KLN could almost
double its volumes with existing customers
without adding headcount, though this would not
be possible with new customers.
Interest
KLN had a net debt position of HKD3.85bn (as at
30 June 2013), which included an interest-free
shareholder loan of HKD3.78bn. The shareholder
loan has subsequently been capitalized and repaid
as part of the IPO process. The company has a
mixture of floating and fixed interest rate debt and
is currently paying interest between 1.32% and
5.8% on interest bearing debt.
Associates
Share of results from associates is primarily made
up of the results from AAT (15% stake) and CCT
(25% stake).
The opening of Cathay Pacific’s own cargo
terminal in 4Q13 could have a negative impact on
AAT’s volumes.
Exceptionals
We include small one-off items that come as a
course of doing business (general asset sale gains
and losses) within EBIT. We do however classify
the revaluations of investment property as
exceptional items and strip these out to give a better
idea of the underlying performance of the company.
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Tax
We forecast an effective tax rate of 22%, 22.2%
and 22.4% over 2013-15 (excluding property
gains) in line with prior years and increasing
progressively due to as the company grows further
in China and the tax rate trends towards 25%.
Minority interests
Minority interests relate to companies that KLN
controls and consolidates but does not fully own.
These are principally:
Kerry TJ Logistics 36.46%
Kerry EAS Logistics 70%
Kerry Siam Seaport 79.52%
Net profit and core net profit
We forecast earnings growth of 8.3%, 8.4% and
8.1% for 2013-15, respectively. This compares to
a CAGR of 10.7% over 2010-12, which was
driven by acquisitions and the full consolidation
of Kerry TJ Logistics (Not rated). We calculate
underlying EBIT growth of 6% in 2012 excluding
acquisitions and c5% in 1H13. While we make no
assumption for acquisitions, and our growth rate
is higher than has been the organic trend, we note
that KLN has added a significant amount of
square footage through 2013 and has 6% of its
existing portfolio under construction – which will
come onstream largely in 2014. We also assume
KLN will lease new facilities. Our central
assumptions are that the capex has been largely
front-end-loaded into 2013 and that the growth
from the opening of these new facilities will
materialize in 2014 and 2015. After this, we
assume growth rates normalize to 5-6%.
Risks to our forecasts
The company has not provided much
disclosure in the way of forecasts. We have
therefore had to make significant assumptions
in preparing our forecasts.
We have made assumptions as to the number
of new facilities constructed each year and the
size and cost of these facilities. This could be
materially incorrect.
We have not forecast acquisitions due to the
uncertain nature and timing; yet the company
has a stated strategy of (and has been)
growing through acquisition in the past few
years.
Our assumptions for domestic consumption
and demand growth could be too high or low
and will depend on global GDP and Chinese
governmental policy decisions.
We have not assumed a material impact from
the introduction of VAT in China on services.
Competition could intensify, pressuring
margins. Furthermore, cost base inflation
could be higher than we forecast.
Working capital intensity could be higher
than we anticipate as KLN seeks to grow with
big customers.
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Income statement
Year to Dec (HKDm) 2010 2011 2012 2013e 2014e 2015e
Revenue 10,880 16,034 19,295 20,659 22,165 23,596 yoy growth % 47% 20% 7% 7% 6% Total costs (excl D&A) 9,865 14,599 17,638 18,780 20,119 21,401 Adj EBITDA 1,015 1,435 1,657 1,879 2,046 2,195 D&A 210 296 367 438 460 486 Adj EBIT 805 1,139 1,290 1,441 1,586 1,709 EBIT margin 7.4% 7.1% 6.7% 7.0% 7.2% 7.2% Exceptionals 176 130 265 500 EBIT 981 1,270 1,555 1,941 1,586 1,709 Interest income 11 13 25 29 32 35 Interest expense (23) (55) (63) (84) (84) (76) Net finance costs (12) (43) (38) (55) (52) (42) Share of profit from associates 209 148 140 145 130 135 PBT 1,178 1,375 1,657 2,031 1,664 1,803 Adj PBT 1,002 1,245 1,392 1,531 1,664 1,803 Income tax expense (200) (254) (305) (337) (369) (404) Tax % of adjusted PBT 20.0% 20.4% 21.9% 22.0% 22.2% 22.4% Net profit 978 1,121 1,352 1,694 1,294 1,399 Attributable to company's shareholders 833 871 1,069 1,384 958 1,035 Non-controlling interest 145 251 282 311 337 364 as % of net income 18% 25% 26% 26% 26% 26% Adj net income attributable to company's shareholders
657 740 804 884 958 1,035
Core net profit^ 665 741 816 884 958 1,035 yoy growth % 11.4% 10.1% 8.3% 8.4% 8.1% Basic EPS 0.83 0.57 0.61 Adj EPS 0.53 0.57 0.61
^ Core net profit is not a standard measure under HFRS. It represents the profit attributable to the company’s shareholders before
the after-tax effect of change in fair value of investment properties
Source: KLN, HSBC estimates for 2013-15
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Leverage
There is a wide spectrum of leverage profiles
among the logistics players. The Swiss freight
forwarders (Panalpina and K+N) tend to sit with
very conservative net cash balances and K+N is
likely to pay a special dividend in 2014. DSV on
the other hand, tries to maintain an efficient
capital structure with a target leverage ratio of 2x
net debt/EBITDA. After having to raise equity in
2009, DSV reduced its gearing policy from 3-3.5x
net debt/EBITDA.
Post IPO, KLN sits with a small net cash balance.
It could comfortably releverage or sale and
leaseback its freehold properties. However we are
not aware this is something management is
considering at present.
Balance sheet ratios comparison
2013e 2014e 2015e
Net debt/EBITDA (x)
KLN -0.1 -0.5 -0.7 Panalpina -2.1 -2.1 -2.0 KNIN -1.2 -1.3 -1.5 DSV 1.9 1.3 0.7 DP-DHL 0.4 0.3 0.2
Interest cover - EBIT KLN 17.1 19.0 22.5 Panalpina 15.4 n/m n/m KNIN n/m n/m n/m DSV 8.3 9.6 12.8 DP-DHL 9.8 8.8 10.2
Cash % of sales KLN 14% 14% 15% Panalpina 5% 6% 7% KNIN 7% 8% 9% DSV 3% 5% 8% DP-DHL 5% 5% 6%
Net debt/equity KLN -1% -6% -8% Panalpina* -47% -49% -53% KNIN* -44% -49% -53% DSV 87% 51% 24% DP-DHL 17% 13% 8%
*net cash
Source: HSBC estimates
Net debt/EBITDA
Source: KLN, HSBC estimates for 2013-15
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
2010 2011 2012 2013e 2014e 2015e
Balance sheet
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Debt breakdown and funding profile
Total borrowings (HKDm)
Source: KLN, HSBC
Maturity of bank loans
Note: As of 30 June 2013
Source: KLN, HSBC
Breakdown of bank loans (HKDm)
Source: KLN, HSBC. Excludes KPL loan
Working capital
Forwarders tend to maintain a conservative capital
structure as a result of the big swings in working
capital that can occur due to big changes in freight
rates, customers getting into difficulty or changes in
customer mix (with bigger customers demanding
longer payment terms). The low growth environment
in Europe in particular has led to intense competition
for volumes, the result being customers offered
longer payment terms which has stretched cash
flows for some forwarders.
KLN has seen its debtor days increase notably,
particularly in 1H13, due to an increase in
customer size with longer payment terms and a
change in the revenue contributions.
Average trade receivables turnover days
Source: KLN, HSBC
The increase in the revenue contribution by the air
and ocean freight consolidation operations (which
have longer credit terms) has driven an increase in
payables days.
-
2,000
4,000
6,000
8,000
2,010 2,011 2,012 2013e 2014e 2015eBank overdraftsLoan from non-controlling interestsLoans from fellow subsidiariesBank Loans
Within 1 y ear22%
Betw een 1 and 2 y ears
10%
Betw een 3 and 5 y ears
66%
Ov er 5 y ears
2%
0
500
1,000
1,500
2,000
2,500
3,000
3,500
2010 2011 2012 1H13Current unsecured Current securedNon-current unsecured Non-current secured
0
10
20
30
40
50
60
70
80
2010 2011 2012 1H13
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Average trade payables turnover days
Source: KLN, HSBC
Covenants
Some covenants exist with regard to the
company’s bank debt which preclude the
company from changing the general nature of its
business or disposing of a material part of its
assets. There are also financial covenants,
including consolidated tangible net worth, ratio
of consolidated total financial indebtedness to
aggregate consolidated tangible net worth and
minority interests, and ratio of consolidated total
liabilities to aggregate consolidated tangible net
worth and minority interests.
0
5
10
15
20
25
30
35
40
45
50
2010 2011 2012 1H13
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Balance sheet
As at 31 Dec (HKDm) 2010 2011 2012 2013e 2014e 2015e
Intangible assets 835 1,186 1,774 1,774 1,774 1,774 Investment properties 4,999 5,143 5,768 6,179 6,179 6,179 Leasehold land and land use rights 409 576 539 539 539 539 Property, plant and equipment 4,503 4,989 5,999 6,308 6,660 7,017 Associates 818 1,002 939 1,128 1,258 1,393 Available for sale investments 51 52 61 61 61 61 Non-current assets 11,614 12,949 15,079 15,988 16,471 16,963 Inventories 131 110 110 124 133 142 Accounts receivable 2,029 2,405 3,389 3,719 3,990 4,247 Prepayments and deposits 481 954 936 936 936 936 Tax recoverable 5 11 9 9 9 9 Restricted and pledged bank dep. 16 5 5 5 5 5 Cash and bank balances 2,211 2,908 2,940 3,167 3,457 3,518 Current assets 4,871 6,392 7,389 7,960 8,529 8,857 Total assets 16,486 19,341 22,468 23,948 25,000 25,821 Accounts payable 788 1,287 1,663 1,758 1,870 1,983 Deposits received and acc. charges 1,525 2,066 2,260 2,260 2,260 2,260 Loans from fellow subsidiaries 3,491 3,891 4,182 Amount due to imm. holding co. 75 94 65 65 65 65 Amount due to a related company 5 7 4 4 4 4 Taxation 129 83 117 117 117 117 ST bank loans 417 694 601 601 601 601 Bank overdrafts 21 16 26 26 26 26 Current liabilities 6,451 8,137 8,917 4,830 4,942 5,055 Loans from non-controlling interests 83 131 222 222 222 222 Long term bank loans 237 405 1,365 2,300 1,800 1,300 Deferred taxation 466 443 490 490 490 490 Retirement benefit obligations 311 320 349 349 349 349 Non-current liabilities 1,097 1,300 2,425 3,360 2,860 2,360 Share capital 1 1 1 109 109 109 Retained profits 5,458 6,315 7,361 8,245 9,026 9,870 Other reserves 1,083 1,082 996 4,326 4,649 4,649 Shareholders’ equity 6,542 7,398 8,358 12,679 13,783 14,627 Non-controlling interests 2,395 2,506 2,768 3,078 3,415 3,778 Total Equity 8,937 9,904 11,126 15,757 17,198 18,405
Total liabilities and shareholders’ equity 16,486 19,341 22,468 23,948 25,000 25,821
Source: KLN, HSBC estimates for 2013-15
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Quality of earnings
Quality of earnings even adjusted for property
revaluations has been volatile – mainly due to
swings in working capital.
Quality of earnings
Calculated as operating cash flow less depreciation adjusted for property revaluations
Source: KLN, HSBC estimates for 2013-15
Working capital
As the forwarding side of the business continues to
grow and KLN takes on large customers with longer
payment terms, we would expect the working capital
intensity of the business to naturally increase.
Capex
KLN spent on average HKD975m pa on property,
plant and equipment over 2010-12. The company
aims to make investments in new facilities when it
has identified a specific customer or has built
sufficient volumes in areas such that it can be
confident of achieving good utilisation of its new
sites upon opening. Capex can be lumpy depending
on winning new contracts or identifying suitable
sites or properties. We expect the company to look
to build around 3-4 significant facilities pa in
mainland China.
We estimate maintenance capex of c2% sales in
line with peers and then assume investment in 4
facilities pa at around HKD100m per facility and
around 250,000 square feet per facility. Due to the
time lag between capex for construction and
completion, revenue growth does not necessarily
follow the capex profile.
Capex/Sales
Source: KLN, HSBC estimates for 2013-15
Capex/Depreciation
Source: KLN, HSBC estimates for 2013-15
-
0.2
0.4
0.6
0.8
1.0
1.2
2010 2011 2012 2013e 2014e 2015e
0%
1%
2%
3%
4%
5%
6%
7%
8%
2010 2011 2012 2013e 2014e 2015e
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
2010 2011 2012 2013e 2014e 2015e
Cash flow
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Capital commitments
KLN has HKD461m in capital commitments in
terms of property plant and equipment and
acquisition of subsidiaries as at 30 June 2013.
Free cash flow profile
Though the company intends to grow its IF division
through acquisition, we do not forecast acquisitions
due to the uncertainty in nature and timing.
Based on this, plus inherently lower capex and
more muted working capital outflows, the cash
flow profile of KLN improves significantly in
2014 and 2015.
Free cash flow (post investment capex and acquisitions) (HKDm)
Source: KLN, HSBC estimates for 2013-15
(400)
(200)
-
200
400
600
800
1,000
2010 2011 2012 2013e 2014e 2015e
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Cash flow statement
Year to Dec (HKDm) 2010 2011 2012 2013e 2014e 2015e
Profit before taxation 1,178 1,375 1,657 2,031 1,664 1,801 Share of results of associates (209) (148) (136) (145) (130) (135) Interest income (11) (13) (28) (29) (32) (33) Dividend income from AFS investments (2) (2) (0) Finance costs 23 55 63 84 84 76 Others (152) (112) (187) (500) - - D&A 210 296 367 438 460 486 Operating cash flow before WC changes 1,038 1,451 1,736 1,879 2,046 2,195 Increase in inventories and accounts receivable, prepayments and deposits
(425) (269) (703) (344) (280) (266)
Increase/(decrease) in current liabilities, 163 204 179 95 112 113 Change in net pension liabilities (10) (20) (25) Dec in contingent payment for acq. of sub. (8) Net cash generated from operations 765 1,367 1,179 1,630 1,878 2,042 Interest paid (18) (49) (58) (84) (84) (76) Income tax paid (140) (298) (250) (337) (369) (404) Net cash generated from op. activities 607 1,019 871 1,209 1,425 1,562 Additions of PP&E (604) (853) (1,468) (1,182) (813) (843) Additions of investment properties (4) (0) Purchase of AFS investments (3) Purchase of leasehold land and land use rights (4) (102) (22) Proceeds from sale of PP&E 42 101 84 35 Proceeds from sale of investment in associates 2 6 1 Proceeds from sale of an AFS investment 1 Dividend income from AFS investments 2 2 0 Dividends received from associates 159 31 296 Increase in balance with associates (0) (39) (71) Decrease in balance with associates 9 8 32 63 Interest received 11 13 28 29 32 33 Acquisition of subsidiaries 65 (194) (492) (411) Increase in investments in associates (55) (53) (107) Change in restricted and pledged bank dep (15) 11 0 Net cash used in investing activities (388) (1,024) (1,665) (1,573) (782) (809) Increase in loans from fellow subsidiaries 299 394 285 Decrease in loans from fellow subsidiaries (2,400) Repayment of bank loans (123) (351) (927) (1,600) (500) (500) Drawdown of bank loans 302 770 1,771 2,535 Dividends of subsidiaries paid to non-controlling interests
(6) (66) (80)
Capital injection from non-controlling interests 33 13 Drawdown of loans from non-cont interests 2 60 90 Repayment of loans from non-cont interests (1) (13) Settlement of recharge of share based payment with immediate holding company
(104)
Acquisition of additional interest in subsidiaries (42) (151) (256) Disposal of partial interest in subsidiaries 0 Dividends paid to shareholders (177) (192) (207) IPO net proceeds 2,056 323 Net cash generated from financing activities 431 676 793 591 (354) (692) Change in cash and cash equivalents 650 671 (2) 227 290 62 Effect of exchange rate changes 63 26 33 Cash and cash eq at the beg of the year 1,498 2,211 2,908 2,940 3,167 3,457 Cash and cash eq at the end of the year 2,211 2,908 2,940 3,167 3,457 3,518
Source:: KLN, HSBC estimates for 2013-15
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Valuation methodology
KLN is a predominantly Asian contract logistics
led freight forwarding business with some
express/road activities and a Thai port as well as a
holding in a container and airfreight terminal.
There is no pure play listed peer which is why we
use a broad peer group of US and European
freight forwarders, global integrators, European
contract logistics operators as well as Chinese
state owned logistics hybrids to derive our
valuation.
KLN’s peer group is trading over a broad range of
multiples reflecting divergent returns profiles and
growth expectations. We take the average 2014e
PE, EV/EBIT and EV/EBITDA multiples across
the sector and apply these to KLN’s 2014
estimates, adjusting for the value of associates
(CCT and AAT HKD2.2bn) and minority interests
(KLN fully consolidates Kerry TJ Logistics
although it only owns 36% ). This gets us to our
target price of HKD11.75.
Under our research model, the Neutral rating band
for volatile Hong Kong stocks equals the local
hurdle rate of 8.5% plus or minus 10ppt. Our
target price of HKD11.75 implies a potential
negative return of 8.6%, including the forecast
dividend yield of 0.9%. This is below the Neutral
band; therefore, we initiate with an Underweight
(V) rating. Potential return equals the percentage
difference between the current share price and the
target price, including the forecast dividend yield
when indicated.
We then cross-check this valuation range with
EV/IC vs. ROIC and historic peer multiples.
Core valuation (based on 2014 forecasts)
Multiple Valuation (HKDm)
P/E 21.0x 20,116 EV/EBIT 14.0x 19,990 EV/EBITDA 10.5x 19,453 Average 19,853 Target price -HKD 11.75
**EBIT/EBITDA adjusted for minority interests (25% of the earnings stream). To derive the equity value we add a net cash of HKD1.14bn (2014e) and add in the market value of the associates HKD2.2bn.
Source: HSBC estimates
Implied KLN valuation based on our target price
2013e 2014e 2015e
P/E 19.5 20.7 19.2 EV/EBITDA 10.6 10.6 9.7 EV/EBIT 13.8 13.7 12.4
Note: these are headline multiples that include the book value of associates/JV and minority interests rather than the market value
Source: HSBC estimates
Valuation
KLN is more asset heavy than peers, making multiple comparison tricky
We cross-check our multiple-based valuation with listed peers
We arrive at a target price of HKD11.75 and initiate with an UW(V) rating
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Challenging peer analysis
Peer comparison is imperfect and KLN’s peers are
trading at a range of multiples which we reflect in
our valuation range presented above.
Comparative analysis is challenging as:
There is a shortage of listed logistics
companies within Asia and those that exist
(Sinotrans) are state owned hybrids.
Some of the listed logistics companies are
undergoing significant restructuring and/or
earnings are distressed.
Listed logistics companies in Europe and the US
are forwarding rather than contract logistics led.
Most of the significant stand-alone contract
logistics-led players within Europe that could
have been relevant have been acquired.
Listed logistic peers have gravitated towards a
more asset-light model and shy away from
property ownership, unlike KLN.
KLN has higher margins than peers
benefitting from low ownership costs
(investment properties are not depreciated).
The flip side of having high margins due to
high asset intensity is lower returns on
invested capital. KLN’s 2014e ROIC is 7.1%
versus KNIN on 22.5% and DSV on 13.8%.
KLN has a high degree of minority interests –
representing c26% of net income.
We present below a multiples comparison table
for what we believe to be the most relevant peers.
Within this, we have a mixture of:
Pee
Peer multiples
Ticker CP^ Rating ___________ PB (x) ____________ ________ Dividend yield ________ 13e 14e 15e 13e 14e 15e
DPW DPW GR 26.5 N 3.2 3.0 2.7 3.2% 3.4% 3.6% TNTE TNTE NA 6.7 UW (V) 1.7 1.6 1.5 1.1% 1.9% 2.5% KNIN KNIN VX 123.7 UW 5.8 5.4 5.0 3.1% 3.2% 3.4% PWTN PWTN SW 150.0 UW 4.5 4.2 3.9 1.4% 1.7% 1.8% DSV DSV DC 181.0 N 5.0 4.0 3.4 0.7% 0.8% 0.8% KLN 636 HK 13.0 UW (V) 1.4 1.6 1.5 1.0% 0.9% 0.9% FDX FDX US 140.2 NR* 2.5 2.2 2.0 0.4% 0.5% 0.6% UPS UPS US 97.9 NR* 31.2 32.8 28.5 2.5% 2.7% 2.9% UTI WW UTIW US 17.2 NR* 2.3 2.1 1.8 0.3% 0.4% 0.3% CH Robinson CHRW US 59.1 NR* 8.0 7.6 7.9 2.3% 2.5% 2.7% Expeditors EXPD US 43.6 NR* 4.2 4.0 3.5 1.4% 1.7% 1.9% Wincanton WIN LN 1.5 NR* n/m n/m n/m 0.0% 0.0% 0.0% Sinotrans 598 HK 3.3 NR* 1.2 1.2 1.1 1.2% 1.4% 1.6% Average** 3.9 3.6 3.3 1.4% 1.6% 1.8%
Note: UTI WW is a January ending company, FedEx is a May ending company and Wincanton is a March ending company. Hence the values have been calendarized.
^Current price in local currency
*NR = Not rated
**PB average excludes Sinotrans and UPS. Dividend yield averages includes all the values
Source: HSBC estimates for DPW, TNTE, PWTN, KNIN, DSV, KLN. Bloomberg estimates for FDX, UPS, UTI WW, CH Robinson, Expeditors, Wincanton and Sinotrans
Prices as of 23 January 2014 for DPW, TNTE, KNIN, PWTN, DSV, FDX, UPS, UTI WW, CH Robinson, Expeditors and Wincanton as of 24 January for KLN and Sinotrans
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Freight forwarding led contract logistics
players: Kuehne + Nagel, DSV, Panalpina
(European), Expeditors, UTI Worldwide, CH
Robinson (US)
Global integrators: Deutsche Post-DHL, TNT,
FedEx, UPS
Local contract logistics led players:
Wincanton (Europe)
Asian integrator: Sinotrans (though this also
provides marine transportation services)
We present below the earnings growth profile for
the peer group. KLN’s forecast earnings growth is
in the middle of the pack; slightly higher than
some of its European peers but lower in general
than its US peers and the asset heavy integrators.
Earnings growth
2012-13e 2013-14e 2014-15e 2012-15e CAGR
KLN 8.3% 8.4% 8.1% 8.2% Wincanton -22.8% -4.3% 10.0% -6.7% Sinotrans 28.7% 22.8% 19.4% 23.6% UTI -53.6% 173.2% 65.1% 27.9% CH Robinson -1.7% 10.0% 9.6% 5.9% DSV 4.8% 6.4% 6.1% 5.8% KNIN 10.1% 6.3% 6.9% 7.8% PWTN 67.7% 18.1% 22.3% 34.3% DP-DHL 27.5% -2.1% 13.8% 12.4% TNTE -36.8% 71.5% 34.9% 13.5% FedEx 4.9% 21.4% 23.4% 16.3% UPS 4.9% 15.5% 12.8% 11.0%
Source: HSBC estimates for KLN, DSV, KNIN, PWN, DP-DHL and TNTE. Bloomberg consensus for Wincanton, Sinotrans, UTI, CH Robinson, FedEx and UPS. Numbers have been calendarized
Peer multiples
Ticker CP^ Rating ______ EV/EBIT (x) _______ ____ EV/EBITDA (x) _____ ________ PE (x) ________ 13e 14e 15e 13e 14e 15e 13e 14e 15e
DPW DPW GR 26.5 N 11.9 13.3 11.7 8.1 9.2 8.3 17.1 17.4 15.3 TNTE TNTE NA 6.7 UW (V) 15.1 11.6 9.5 9.0 7.8 6.7 36.6 21.3 15.8 KNIN KNIN VX 123.7 UW 16.6 17.2 15.9 13.2 14.0 13.0 25.1 23.6 22.0 PWTN PWTN SW 150.0 UW 19.4 23.3 18.7 14.1 16.5 13.5 39.3 33.3 27.2 DSV DSV DC 181.0 N 13.5 14.5 13.4 11.2 12.0 11.2 19.6 18.4 17.3 KLN 636 HK 13.0 UW (V) 13.8 15.1 13.8 10.6 11.7 10.8 19.5 22.9 21.2 FDX FDX US 140.2 NR* 13.3 11.9 9.9 7.4 7.2 6.3 22.7 17.2 14.1 UPS UPS US 97.9 NR* 14.4 14.1 12.8 11.4 11.4 10.3 21.3 18.4 16.2 UTI WW UTIW US 17.2 NR* 36.1 17.9 10.6 15.8 10.0 7.1 85.3 31.5 19.3 CH Robinson CHRW US 59.1 NR* 13.3 12.6 11.9 12.3 11.6 10.9 21.8 19.8 18.0 Expeditors EXPD US 43.6 NR* 13.4 11.8 10.5 12.4 11.0 9.7 25.0 22.2 20.2 Wincanton WIN LN 1.5 NR* 11.6 10.9 10.8 7.6 7.4 7.1 9.3 9.7 8.8 Sinotrans 598 HK 3.3 NR* 9.1 7.7 6.5 6.0 5.2 4.5 16.8 13.7 11.5 Average** 15.6 13.9 11.9 10.7 10.3 9.0 28.3 20.5 17.2 Avg excl. high/low(1)
13.9 13.4 11.9 10.6 10.5 9.6 23.6 19.8 17.4
Avg excl. restructuring (2)
13.2 12.6 11.3 9.9 9.7 8.8 21.5 18.2 15.9
Avg just FF 14.2 14.0 12.9 12.3 12.2 11.2 22.9 21.0 19.4
Note: UTI WW is a January ending company, FedEx is May ending company and Wincanton is a March ending company. Hence the values have been calendarized.
(1) We exclude the two highest and lowest multiple peers
(2) Excluding companies undergoing significant restructuring or where earnings are distressed
^Current price in local currency
*NR = Not rated
Source: HSBC estimates for DPW, TNTE, PWTN, KNIN, DSV and KLN.. Bloomberg estimates for FDX, UPS, UTI WW, CH Robinson, Expeditors, Wincanton and Sinotrans;
Prices as of 23 January 2014 for DPW, TNTE, KNIN, PWTN, DSV, FDX, UPS, UTI WW, CH Robinson, Expeditors and Wincanton as of 24 January for KLN and Sinotrans
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Historical multiples
There were more contract logistics driven
businesses listed in the past than there are in the
present. We therefore look back to sense-check
our multiples and valuation. If we look back to
1999-2004, which was a period of significant
growth of contract logistics within Europe and the
US when Exel, Tibett and Britten and Wincanton
were listed (Wincanton still is), we get an average
multiple of EV/EBIT of 12.6x and PE of 17.1x.
Historical PE (x)
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Exel 26.5 34.3 23.9 17.2 21.4 20.0 Wincanton 18.6 13.3 7.3 15.1 11.3 20.7 15.2 15.2 16.2 19.6 19.7 12.4 4.5 Tibbett + Britten 10.7 14.7 15.9 15.8 17.2 Sinotrans 15.5 16.9 15.7 27.8 22.7 16.1 18.6 13.4 12.1 8.5 DSV 8.7 13.0 16.4 22.0 20.7 16.3 17.8 17.9 15.8 14.3 KNIN 13.2 11.8 11.0 11.4 15.2 18.5 21.4 22.5 17.8 19.5 22.2 23.4 24.5 PWTN 20.8 24.2 23.2 20.5 16.8 23.2 15.3 27.9 20.2 18.9 40.3 DP-DHL 13.8 7.8 10.1 6.6 5.4 8.4 19.3 11.1 16.4 13.8 10.7 11.9 TNTE 25.3 20.0 10.7 29.0 FedEx 20.4 20.4 19.1 18.6 17.2 16.3 16.7 17.1 19.0 19.0 15.1 14.2 UPS 26.3 25.6 21.1 19.8 17.3 18.0 24.4 18.6 16.3 16.7 Average 18.6 18.9 15.5 15.4 16.5 17.8 16.2 18.5 19.8 16.4 21.0 18.1 15.0 18.2
Source: Respective company reports, HSBC
Historical EV/EBIT (x)
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Exel 16.1 20.4 14.6 16.7 17.8 18.0 Wincanton 16.2 14.4 10.4 12.5 16.4 12.2 12.2 14.3 14.0 12.5 10.7 11.3 13.8 9.2 Tibbett 7.7 10.2 10.3 10.1 10.5 Sinotrans 0.6 0.7 2.2 3.9 5.1 3.1 3.7 3.4 DSV 7.7 9.8 12.5 16.5 15.0 14.7 13.5 13.1 12.8 12.4 KNIN 7.8 9.8 8.4 8.0 12.4 12.9 16.3 17.0 13.4 14.8 16.4 18.0 18.0 PWTN 15.0 16.0 16.3 13.8 11.0 15.9 8.9 13.3 12.4 11.6 25.8 DP-DHL 11.9 8.9 9.0 9.0 8.7 10.9 16.9 16.4 13.9 10.4 8.7 9.0 TNTE 14.6 10.6 6.2 15.9 FedEx 13.1 13.0 13.0 12.6 11.1 10.6 11.0 11.2 12.1 12.0 9.7 9.1 UPS 18.2 18.0 14.6 13.7 12.9 13.4 17.9 13.6 12.3 12.6 Average 13.3 13.2 11.7 12.1 12.9 12.1 12.2 11.7 13.1 11.8 12.9 11.4 10.8 12.8
Source: Respective company reports, HSBC
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EV/IC vs. ROIC
We plot EV/IC versus ROIC for the sector in order
to sense-check our valuation, bearing in mind the
difference in capital intensity of KLN’s model
versus its peers and given that this should be
reflected in its multiples. KLN has a ROIC of 7.1%
(on our 2014 estimates) versus KNIN of 22.5%.
From our line of best fit, on the basis of a 7.1%
2013e ROIC and an invested capital base of
HKD17.4bn this would imply a valuation of
HKD11.5 per share.
EV/IC vs. ROIC (2013e)
Source: Respective company reports, HSBC estimates
Acquisition multiples
Acquisition multiples are illustrative of the
significant deviation in valuation across the sector
but are not useful for analysis. Acquisition
multiples have ranged from 8-21x EBIT. In 2005
Deutsche Post-DHL acquired Exel Logistics for
27x EBIT (or 13x post the cost synergies it at the
time expected to extract).
y = 22.258x - 0.0733
0
1
2
3
4
5
6
0% 5% 10% 15% 20% 25% 30%
KNIN
PWTNCH Robn
DSV
ROIC
EV/IC
DP-DHL
TNTE
UTI
KLNWincanton
Third-party logistics acquisitions
Target company Acquirer Acquisition date Target company yearly revenue
(USDm)
EBIT multiplier EBITDA multiplier
American Backhaulers C.H.Robinson Dec-99 280 10.5 Tibbett & Britten Exel Dec-04 2600 6.8 Ozburn-Hessey Logistics Welsch, Carlson, Anderson & Stone Jun-05 302 9.2 Exel Plc Deutsche Post Dec-05 13* BAX Global Deutsche Bahn Jan-06 2734 10.7 Barthco International Ozburn-Hessey Jul-06 120 9 Jacobson Companies Oak Hill Capital Jun-07 375 11 EGL Apollo Management/CEVA Jul-07 3200 14.5 Geodis SNCF Jul-08 7043 9.6 Express Logistics Group Toll Holdings Oct-09 113 8 Summit Logistics Intl Toll Holdings Feb-10 261 9.3 ATC Technology Corp GENCO Distribution System Jul-10 476 6.6 Total Logistic Control Ryder Dec-10 250 7 TDG Norbert Dentressangle Mar-11 1100 5.8 Exel Transportation Services Hub Group Apr-11 717 20.8 Caterpillar Logistics Platinum Equity May-12 660 11 Turbo Logistics XPO Logistics Oct-12 124 8 Phoenix International C.H.Robinson Nov-12 807 12.5
*Post the cost-synergies expected to extract
Source: KLN, HSBC
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Investment property
Below we show JLL’s estimate of the capital
value of warehouse space in Hong Kong.
Industrial property valuation (HKD psf) and capitalisation yields in Hong Kong
Source: Jones Lang Lasalle, HSBC
Capital values are a function of rents and
capitalisation rate applied to these rents. Based on
a perpetuity formula, the capitalisation rate is
driven by a combination of the risk-free rate, the
perceived risk premium for holding property
investment assets, and perceptions of the likely
future annual growth in rent in perpetuity.
What’s in the capitalisation rate?
If property value =
rent (pre-tax) which is rent (pre-tax) Yield equivalent to WACC – g
Then: yield = WACC-g Where WACC = pre-tax real risk free rate (Rf pre-tax) + inflation +
risk premium and: g = annual growth in rents
Source: HSBC
We assume an average beta for Hong Kong-
warehouse property investors of 1.0. The current
HKD 10-year swap rate is 2.6%, though this may
be subject to upside risk. If we assume an equity
risk premium of 5% and that, from relatively high
levels, warehouse rents grow at a 3% CAGR, this
implies a capitalisation rate of 4.6% for
warehouse property should be applied to the post-
tax profit from these properties. If we apply a
capitalisation rate to pre-tax income (i.e. EBIT),
the appropriate pre-tax capitalisation rate, given
that rental income is taxable, would be 4.6%
divided by 0.835 (i.e. 1 - 16.5%) = 5.4%.
Finally, if we apply this capitalisation rate to
revenue, then the cap rate used should be 5.4%
divided by the warehouse division’s EBIT margin
of 57% which gives a capitalisation rate of 9.5%.
This compares to the current cap rate of 5.8%
(source: Jones Lang Lasalle). We argue given the relatively strong rental
performance in recent years, the upside risks to
HKD 10-year interest rates, plus the relatively
weak outlook for demand, that the capitalization
rate for Hong Kong industrial space should be
relatively high. Indeed, KLN’s relatively old
warehouse properties – some of which rely on
lorry loading bays on some or all of the floors –
suggests its capitalization yield should be higher
than the levels suggested by JLL’s basket of
industrial space assets.
HSBC appraised valuation by country/territory
Source: HSBC estimates
Given the relatively low EBIT margin generated
by KLN’s portfolio of assets, we estimate a
capitalization rate of 9.5% should be applied to
KLN’s 2013 revenues to value the property assets.
Therefore, based on our forecast of gross revenue
from this division of HKD730m, we value KLN’s
property assets at HKD7.7bn.
0%
1%
2%
3%
4%
5%
6%
7%
8%
0
500
1,000
1,500
2,000
2,500
1Q04 3Q05 1Q07 3Q08 1Q10 3Q11 1Q13HKD psf (LHS) Yield % (RHS)
HK88%
China (ex -HK)6%
Vietnam3%
S'pore3%
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HSBC’s Real Estate team argues that property
investors should trade at approximately a 30%
discount to appraised valuation (the investors are
trading at 40-45% discounts currently) (HK Real
Estate: Seeking shelter from stronger headwinds,
27 January 2014). If we applied a 30% discount to
our appraised valuation of KLN’s property portfolio,
then it implies a value of HKD5.4bn, which equates
to 15x 2013e post-tax profit from the Hong Kong
warehouse division.
Below we show our valuation of KLN’s investment
properties under three scenarios.
Base case – as we discuss above
Low – we assume HKD 10-year interest rates
of 3.6% versus 2.6% now
High – we assume warehouse rents grow in
perpetuity by 4% rather than the 3% we
assume in the base case
The risks to this valuation include a sharp decline in
demand for space by logistics companies in Hong
Kong, a significant strengthening of the HK/US
dollar and a rise in the HKD 10-year interest rate.
HSBC appraised valuation scenarios
Low Base High
HKD 10-yr 3.6% 2.6% 2.6% ERP 5.0% 5.0% 5.0% l-t growth 3.0% 3.0% 4.0% Post-tax cap rate 5.6% 4.6% 3.6% Pre-tax 6.6% 5.4% 4.3% Yield on revenue 11.6% 9.5% 7.4% Appraised value (HKDm) 6,292 7,683 9,864 Fair value to KLN (HKDm) 4,405 5,378 6,905 Implied PE (x) 13 15 20
Source: HSBC estimates
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Appendices
.
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Kerry / Kuok Group
About: Private, diversified conglomerate with interests in shipping and transportation, food industries, real estate, media, financial activities, hotels, etc.
Owned by Kuok family (started as Kuok Brothers Limited in 1949). Robert Kuok is the chairman of the group
Key Group members Perlis Plantations Berhad (PPB) Federal Flour Mills Berhad (FFB) Jerneh Insurance Corporation Sdn. Berhad Hexagon Holdings Berhad Wilmar International Limited Transmile Group Pacific Carriers Limited (PCL) Allgreen Properties Limited Shangri-La International Hotel Management Limited Kerry Properties Limited South China Morning Post (SCMP) Kerry Logistics Limited
Source: Various news reports
Appendix 1
.
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China’s 3PL market structure
China's market structure 1. An estimation of over 10,000 3 PL service providers
2. Usually small/medium sized operating in only one province
3. Expectation of market consolidation led by large 3PLs
Current deficiencies 1. Vast disparity in quality of urban against rural transportation infrastructure makes managing logistics more complicated and costly
2. Without good transportation infrastructure, costs are higher
3. High warehousing and inventory carrying costs due to higher levels of inventory owing to longer delivery cycle times
Objectives of China's 12th 5 year plan 1. Aggressively develop 3PL, integrate existing logistics resources, reduce costs
2. Promote agricultural products, bulk mineral products, key industrial areas
3. Develop regional distribution systems and logistics parks
4. Promote development of modern logistics management and improve standardization
Source: Company presentation
Appendix 2
.
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Board of Directors
Name Position Profile
Yeo George Yong-boon Chairman/Executive Director
Mr. Yeo, age 59, is an Executive Director of the Company. He has been a Chairman since Aug 2012 and also deputy chairman and a director of KGL. From 1988 to 2011, Mr. Yeo served in the Singapore government as Minister of State for Finance, Minister of Information and the Arts, Health, Trade and Industry and Foreign Affairs. Prior to 1988 he has also served in various capacities in the Singapore Armed Forces.
Mr. Yeo is a member of the Foundation Board of the World Economic Forum, the Berggruen Institute on Governance, the Asia-Pacific Advisory Board of Harvard Business School, the International Advisory Board of IESE Business School and Economic Development Commission, Hong Kong.
Mr. Yeo was awarded the Philippines’ Order of Sikatuna, India’s Padma Bushan and Australia’s Honorary Officer of the Order of Australia. Mr. Yeo graduated from Cambridge University with a double first in engineering in 1976 and also obtained a master of business administration degree (Baker Scholar) from Harvard Business School in 1985.
Ma Wing Kai William Group Managing Director/Executive Director
Mr. Ma, age 52, is an Executive Director. He has been a director since June 1999 and designated as Deputy Chairman and Managing Director since April 2004. He joined the KHL Group in September 1990 and served as an executive director of KPL since March 2004. He has also been a director of Kerry TJ Logistics since November 2008. Mr. Ma currently serves in the Logistics Development Council, the Aviation Development Advisory Committee and the Advisory Committee on Admission of Quality Migrants and Professionals of the Hong Kong Government. He is also a member of the Advisory Board of the Asian Institute of Supply Chain and Logistics of the Chinese University of Hong Kong and the Logistics Services Advisory Committee of the Hong Kong Trade Development Council. Mr. Ma obtained a bachelor of science (management sciences) degree from the University of Lancaster, the United Kingdom in 1985, and completed an executive supply chain programme at Harvard Business School in 2000.
Erni Edwardo Executive Director Mr. Erni, age 52, is an Executive Director. He has been a director since 2011 and also President of the China region. He joined the company in January 1994 and has c20 years of experience in the logistics industry of China.
Mr. Erni currently serves as vice-chairman of several industry associations including the China Federation of Logistics & Purchasing, the Integrated Transport Federation of China Communications and Transportation Association, and China Association of Warehouses and Storage. Mr. Erni obtained a master of business degree in logistics management from the Royal Melbourne Institute of Technology, Australia in 2005 and has completed various management and professional study programmes - a training course held by the Harvard Business School in association with the School of Management at Fudan University in 2013, and management courses held by Tianjin University in 2011, Beijing University in 2009 and Tsinghua University in 2008.
Kuok Khoon Hua Executive Director Mr. Kuok, age 34, is an Executive Director. He has also served as a director of KHL since January 2010, as a director of Kerry Wines Limited, a subsidiary of KGL, since March 2011, as deputy managing director of KHL since January 2012, and director of KGL since August 2012. He is currently involved in the management of KHL, including KHL’s investment, legal, human resources and wine divisions.
Mr. Kuok obtained a bachelor’s degree in economics from Harvard University in 2003.
Source: Company
Appendix 3
.
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Board of Directors (cont’d)
Name Position Profile
Qian Shaohua Non- executive Director Mr. Qian, age 56, is a Non-executive Director. He has been a director of KPL since September 2007, re-designated as an executive director of KPL in July 2009 and was subsequently re-designated as a co-managing director of KPL in August 2013. He served as vice president of development at Shangri-La Asia Limited from February 2004 to September 2007 and as general manager of Zhongshan ProvinceTourism Group Company, a state owned enterprise primarily engaged in the business of tourism development, from January 1996 to May 2002.
Mr. Qian is also a member of the executive committee of KPL and is responsible for KPL’s property development business in China. Mr. Qian graduated from South China Normal University in 1986 and completed an advanced management programme at Harvard Business School in 2002.
Wong Yu Pok Marina IndependentNon-executive Director
Ms. Wong, age 65, is an Independent non-executive Director. Ms. Wong has served as an independent non-executive director of KPL since May 2008. She had worked with PricewaterhouseCoopers for over 30 years, specialising in PRC tax and business advisory services, and has extensive experience in advising both Hong Kong and foreign investors on the structuring of their businesses and investments in China Ms. Wong is a Fellow Member of the Hong Kong Institute of Certified Public Accountants and the Association of Chartered Certified Accountants. Ms. Wong obtained a higher diploma in Accountancy from Hong Kong Technical College (now known as Hong Kong Polytechnic University) in 1968 after completing a three-year full-time course in accountancy from 1965 to 1968.
Wan Kam To Independent Non-executive Director
Mr. Wan, age 60, is an Independent non-executive Director. He was a former partner of PricewaterhouseCoopers Hong Kong & China, and has been a practicing accountant in Hong Kong for over 30years with extensive experience in auditing, finance, advisory and management. He has also served as independent non-executive director in companies such as China Resources Ltd, Dalian Port, KFM Kingdom Holdings etc. Mr. Wan is a Fellow Member of Hong Kong Institute of Certified Public Accountants and the Association of Chartered Certified Accountants. Mr. Wan graduated from the accounting department of Hong Kong Polytechnic (now known as Hong Kong Polytechnic University) with a higher diploma in 1975.
Yeo Philip Liat Kok IndependentNon-executive Director
Mr. Yeo, age 67, is an Independent non-executive Director. He is the chairman and independent director of Ascendas India Trust since June 2007 and an independent non-executive director of City Developments Limited since May 2009. Mr. Yeo has been a member of the United Nations Committee of Experts on Public Administration, special adviser for economic development in the Prime Minister’s office of the Singapore Government and senior adviser for the Ministry of Trade and Industry, Singapore Government, senior adviser for Science and Technology, chairman of the Agency for Science, Technology and Research, in Singapore, chairman and co-chairman for the Economic Development Board. Mr. Yeo also served as the Permanent Secretary in the Ministry of Defence for Defence Research, Logistics and Industry from September 1979 to December 1985. Mr. Yeo obtained a bachelor’s degree in applied science in industrial engineering in 1970 and an honorary doctorate degree in engineering from the University of Toronto, Canada in 1997. He obtained a master of science degree in systems engineering from the University of Singapore in 1974 and a master of business administration degree from Harvard University in 1976.He received a doctor of medicine degree from Karolinska Institutet, Sweden in May 2006, an honorary doctor of science degree from Imperial College London, United Kingdom in November 2007, the Order of the Rising Sun, Gold and Silver Star from the Japanese Government in December 2007, the Distinguished Service (Star) award from the Singapore’s Labour Movement, National Trade Unions Congress in May 2008, an honorary doctor of letters degree from the National University of Singapore in July 2011 and an honorary doctor of law degree from Monash University of Australia in November 2011.
Source: Company
.
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Senior Management
Name Position Profile
Ang Keng Lam Senior Advisor Mr. Ang, age 66, has been a Senior Advisor since August 2012, prior to which he was the Chairman from July 2000. He has also been a Director from December 1991 to August 2012. He has been a director of KHL since September 1999 and the chairman of China World Trade Center Co, Ltd. Mr. Ang was a member of the National Committee of the Chinese People’s Political Consultative Conference from January 1998 to March 2013. Mr. Ang obtained a bachelor’s degree in engineering from the University of Western Australia and a master’s degree in business administration from the University of Toronto. He also attended and completed the International Advanced Management Programme at Harvard Business School in 1998.
Benjaathonsirikul Kledchai Executive Director of Thailand
Mr. Benjaathonsirikul, age 58, joined the Group in 2000 as an executive Director of Thailand. He is also a Director of Kerry Logistics (Thailand) Limited, a subsidiary of the Company, and other subsidiaries in Thailand. Mr. Benjaathonsirikul is also an independent director and an audit committee member of Shangri-La Hotel Public Company Limited in Thailand. He has over 20 years of experience in port logistics and transport-related businesses. Prior to joining the company, he has worked at Kerry (Thailand), Siam Seaport Terminal and at KSSP. He obtained a bachelor of laws degree from the University of Birmingham, United Kingdom in 1978.
Cheng Chi Wai Chief Financial Officer Mr. Cheng, age 49, joined the group in August 2009 as Chief Financial Officer. Mr. Cheng has more than 25 years of experience in auditing, financial control and corporate finance and previously worked in an international accounting firm and held key finance positions in several companies whose shares are listed on the Main Board of the Hong Kong Stock Exchange. Prior to joining KLN, Mr. Cheng was the Chief Financial Officer of Miramar Hotel and InvestmentCompany, Limited from March 2007 to July 2009 and the Chief Financial Officer of Water Oasis Group Limited from September 1999 to February 2007. Mr. Cheng is a Fellow of the Association of Chartered Certified Accountants, the Hong Kong Institute of Certified Public Accountants, as well as a chartered accountant and a chartered secretary. He obtained a bachelor of arts degree in accountancy from The Hong Kong Polytechnic University in 1996 and an executive master’s degree in business administration from The Chinese University of Hong Kong in 2008.
Hung Wai Shing Group Financial Controller Mr. Hung, age 48, joined the Group in September 1999, and is currently the group financial controller since January 2010. Mr. Hung joined the warehouse division of KPL in May 1991. He was transferred to the Hong Kongproperties division of KPL in August 1993 before joining KLN. Mr. Hung is a Fellow of the Hong Kong Institute of Certified Public Accountants. He obtained a bachelor of arts degree from City Polytechnic of Hong Kong (now known as City University of Hong Kong) in 1992.
Ko Fuk Yuen Kenneth Executive Director of International Freight Forwarding
Mr. Ko, age 42, joined the Group in April 2010 as the executive director of international freight forwarding. Mr. Ko is also a director of Kerry Freight (Hong Kong) Limited, a wholly-owned subsidiary of the Company, and responsible for the development of the global freight forwarding business of our Group. He has over 20 years of experience in the logistics industry. Prior to joining KLN, Mr. Ko was the managing director, Hong Kong and South China, of Agility Logistics Limited and has worked with Expeditors Hong Kong Limited. He has also worked at Cathay Pacific Airways Limited for 14 years from 1989 to 2003. He serves as a vice-chairman of the executive committee of Hong Kong Association of Freight Forwarding and Logistics Limited since 2011. Mr. Ko obtained a bachelor of management studies degree from the University of Hong Kong in 2003.
Lee Wai Shun Wilson Director of Information Technology
Mr. Lee, age 46, joined the Group in April 2004 as Director of Information Technology. He is the Director of Information Technology and is responsible for overseeing the global information technology development of the Group. He has over 20 years of experience in information system development and technology management. Prior to joining KLN, Mr. Lee worked with Li & Fung (Trading) Limited from 1991 to 1998 and his last position was a department manager. He was a system development and support manager of Gap Inc. from 1998 to 2000 and was an information systems and services director of Limited Brands, Inc. from 2000 to 2004. Mr. Lee obtained a bachelor of science degree from The Chinese University of Hong Kong in 1989 and a master of science degree in corporate governance and directorship from Hong Kong Baptist University in 2010.
Shen Chung-Kui Chairman of Kerry TJ Logistics Company
Mr. Shen, age 70, has been the chairman of Kerry TJ Logistics since November 2008 (when he joined the Group). He has over 30 years of experience in the logistics industry, ranging from trucking, container terminal, port and warehousing businesses. He is responsible for overseeing the Taiwan logistics operations of the Group. Prior to joining Kerry TJ Logistics, Mr. Shen worked as a senior operation manager (Taiwan region) of United States Lines from 1977 to 1987. He subsequently worked at United Terminals Ltd, from 1987 to 2004. Mr. Shen is currently the chairman of Taiwan Route-Permitted Truck Transportation United Association. Mr. Shen graduated from the Shipping and Transportation Management Faculty of the National Taiwan Ocean University in 1972. He also completed various training courses, including Dale Carnegie Course Training in San Francisco, United States in 1983, General Management Program at Ashridge College in London, United Kingdom in 1993 and Shipping Management research study at China Maritime Institute, Taiwan in 1988.
Source: Company
.
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Senior Management (cont’d)
Name Position Profile
Tan Kai Whatt Robert Managing Director of South and South East Asia
Mr. Tan, age 56, joined the Group in January 2004 as a director of a subsidiary of the Company. Mr. Tan is the managing director in charge of the South East Asia logistics operation of the Group (since January 2008) and is responsible for the development and expansion of our network in South and South East Asia. Mr. Tan has 18 years of experience in the logistics industry. Prior to joining the Group, Mr. Tan had worked with Newship Agencies Pte. Ltd since 1994 and was seconded to its Indonesia office as marketing manager from 1996 to 1999, and as general manager for its Singapore office from 1999 to 2001. He was then transferred to PACC Container Line Pte Ltd as a manager (marketing) in charge of feeder businesses in Malaysia from 2002 to 2003. Mr. Tan obtained his master’s degree from the Asian Institute of Management in the Philippines in 2003.
Wilcock Gary Managing Director of Europe
Mr. Wilcock, age 52, joined the Group in April 2002 following the Company’s acquisition of Trident InternationalLimited (now known as Kerry Logistics (UK) Limited, where he started his career in May 1982. He is the managing director in charge of the European logistics operations of our Group since December 2007. He is also a director of Kerry Logistics Holding (Europe) Limited, a wholly-owned subsidiary of the Company headquartered in Europe, and the managing director of Kerry Logistics (UK) Limited. He has more than 30 years’ experience in the logistics industry and in particular trading between the United Kingdom and Asia
Source: Company
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Notes
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Notes
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Disclosure appendix Analyst Certification The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Julia Winarso and Mark Webb
Important disclosures
Equities: Stock ratings and basis for financial analysis
HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations. Given these differences, HSBC has two principal aims in its equity research: 1) to identify long-term investment opportunities based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon; and 2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative, technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating. HSBC has assigned ratings for its long-term investment opportunities as described below.
This report addresses only the long-term investment opportunities of the companies referred to in the report. As and when HSBC publishes a short-term trading idea the stocks to which these relate are identified on the website at www.hsbcnet.com/research. Details of these short-term investment opportunities can be found under the Reports section of this website.
HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's existing holdings and other considerations. Different securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each research report. In addition, because research reports contain more complete information concerning the analysts' views, investors should carefully read the entire research report and should not infer its contents from the rating. In any case, ratings should not be used or relied on in isolation as investment advice.
Rating definitions for long-term investment opportunities
Stock ratings HSBC assigns ratings to its stocks in this sector on the following basis:
For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate, regional market established by our strategy team. The price target for a stock represents the value the analyst expects the stock to reach over our performance horizon. The performance horizon is 12 months. For a stock to be classified as Overweight, the potential return, which equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated, must exceed the required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock must be expected to underperform its required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). Stocks between these bands are classified as Neutral.
Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation of coverage, change of volatility status or change in price target). Notwithstanding this, and although ratings are subject to ongoing management review, expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without necessarily triggering a rating change.
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*A stock will be classified as volatile if its historical volatility has exceeded 40%, if the stock has been listed for less than 12 months (unless it is in an industry or sector where volatility is low) or if the analyst expects significant volatility. However, stocks which we do not consider volatile may in fact also behave in such a way. Historical volatility is defined as the past month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating, however, volatility has to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.
Rating distribution for long-term investment opportunities
As of 28 January 2014, the distribution of all ratings published is as follows: Overweight (Buy) 44% (34% of these provided with Investment Banking Services)
Neutral (Hold) 37% (32% of these provided with Investment Banking Services)
Underweight (Sell) 19% (30% of these provided with Investment Banking Services)
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HSBC & Analyst disclosures Disclosure checklist
Company Ticker Recent price Price Date Disclosure
KERRY LOGISTICS NETWORK 0636.HK 12.84 27-Jan-2014 1, 2, 5, 6, 7Source: HSBC
1 HSBC has managed or co-managed a public offering of securities for this company within the past 12 months. 2 HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next
3 months. 3 At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this
company. 4 As of 31 December 2013 HSBC beneficially owned 1% or more of a class of common equity securities of this company. 5 As of 30 November 2013, this company was a client of HSBC or had during the preceding 12 month period been a client
of and/or paid compensation to HSBC in respect of investment banking services. 6 As of 30 November 2013, this company was a client of HSBC or had during the preceding 12 month period been a client
of and/or paid compensation to HSBC in respect of non-investment banking securities-related services. 7 As of 30 November 2013, this company was a client of HSBC or had during the preceding 12 month period been a client
of and/or paid compensation to HSBC in respect of non-securities services. 8 A covering analyst/s has received compensation from this company in the past 12 months. 9 A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as
detailed below. 10 A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this
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Additional disclosures 1 This report is dated as at 28 January 2014. 2 All market data included in this report are dated as at close 24 January 2014, unless otherwise indicated in the report. 3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its
Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.
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Kerry Logistics Network (636 HK) Air Freight & Logistics 28 January 2014
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Industrials Colin Gibson Global Sector Head, Industrials +44 20 7991 6592 colin.gibson@hsbcib.com
Sean McLoughlin Analyst +44 20 7991 3464 sean.mcloughlin@hsbcib.com
Michael Hagmann Analyst +44 20 7991 2405 michael.hagmann@hsbcib.com
Mark Webb Analyst +852 2996 6574 markwebb@hsbc.com.hk
Parash Jain Analyst +852 2996 6717 parashjain@hsbc.com.hk
Shishir Singh Analyst +852 2822 4292 shishirkumarsingh@hsbc.com.hk
Walden Shing Analyst +852 2996 6751 waldenshing@hsbc.com.hk
Stephen Wan Analyst +852 2996 6566 stephenwan@hsbc.com.hk
Thomas Zhu, CFA Analyst +852 2822 4325 thomasjzhu@hsbc.com.hk
Carrie Liu Analyst + 8862 6631 2864 carriecfliu@hsbc.com.tw
Julie Wang Associate +8862 6631 2870 juliecywang@hsbc.com.tw
Brian Cho Head of Research, Korea +822 3706 8750 briancho@kr.hsbc.com
Paul Choi Analyst +822 3706 8758 paulchoi@kr.hsbc.com
Yeon Lee Analyst +822 3706 8778 yeonlee@kr.hsbc.com
Jena Han Analyst +822 3706 8772 jenahan@kr.hsbc.com
Thilan Wickramasinghe Analyst +65 6658 0609 thilanw@hsbc.com.sg
Kristy Lee Analyst +65 6658 0616 kristy.zx.lee@hsbc.com.sg
Puneet Gulati Analyst +91 22 2268 1235 puneetgulati@hsbc.co.in
Joerg-Andre Finke Analyst + 49 211 910 3722 joerg-andre.finke@hsbc.de
Richard Schramm Analyst + 49 211 910 2837 richard.schramm@hsbc.de
Juergen Siebrecht Analyst + 49 211 910 3350 juergen.siebrecht@hsbc.de
Christophe Quarante Analyst + 33 1 56 52 43 12 christophe.quarante@hsbc.com
Autos Niels Fehre Analyst +49 211 910 3426 niels.fehre@hsbc.de
Horst Schneider Analyst +49 211 910 3285 horst.schneider@hsbc.de
Carson Ng Analyst +852 2822 4397 carsonksng@hsbc.com.hk
Yogesh Aggarwal Analyst +91 22 2268 1246 yogeshaggarwal@hsbc.co.in Transportation Andrew Lobbenberg Analyst +44 20 7991 6816 andrew.lobbenberg@hsbcib.com
Julia Winarso Analyst +44 20 7991 2168 julia.winarso@hsbcib.com
Joe Thomas Analyst +44 20 7992 3618 joe.thomas@hsbcib.com
Wei Sim Analyst +852 2996 6602 weisim@hsbc.com.hk
Luciano T Campos +55 11 3371 8192 luciano.t.campos@hsbc.com.br
Shishir Singh +852 2822 4292 shishirkumarsingh@hsbc.com.hk
Achal Kumar Analyst +91 80 3001 3722 achalkumar@hsbc.co.in
Rajani Khetan Analyst +852 3941 0830 rajanikhetan@hsbc.com.hk
Jingyuan Zhai Associate +852 3941 7009 jocelynzhai@hsbc.com.hk
Construction & Engineering Neel Sinha Head of Equity Research, South East Asia +65 6658 0606 neelsinha@hsbc.com.sg
Pierre Bosset Head of French Research +33 1 56 52 43 10 pierre.bosset@hsbc.com
Tarun Bhatnagar Analyst +65 6658 0614 tarunbhatnagar@hsbc.com.sg
John Fraser-Andrews Analyst +44 20 7991 6732 john.fraser-andrews@hsbcib.com
Jeffrey Davis Analyst +44 207 991 6837 jeffrey1.davis@hsbcib.com
Claudia Navarrete Analyst +52 55 5721 2422 claudia.navarrete@hsbc.com.mx
Anderson Chow Analyst +852 2996 6669 andersonchow@hsbc.com.hk
Lesley Liu Analyst +852 2822 4524 lesleylliu@hsbc.com.hk
Raj Sinha Analyst + 971 4423 6932 raj.sinha@hsbc.com
Levent Bayar Analyst +90 212 376 46 17 leventbayar@hsbc.com.tr
Ashutosh Narkar Analyst +91 22 2268 1474 ashutoshnarkar@hsbc.co.in
Tobias Loskamp Analyst +49 211 910 2828 tobias.loskamp@hsbc.de
Specialist Sales Rod Turnbull +44 20 7991 5363 rod.turnbull@hsbcib.com
Oliver Magis +49 21 1910 4402 oliver.magis@hsbc.de
Billal Ismail +44 20 7991 5362 billal.ismail@hsbcib.com
Global Industrials Research Team
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