Singapore Post Ltd - Eyeing the Chinese e-commerce market (OCBC)

Maintain HOLD

Previous Rating: HOLD

Current Price : S$1.045

Fair Value : S$1.14

Another step in regional expansion. Singapore Post (SingPost) recently announced that together with 4PX Worldwide Express, it will set up a joint venture called vPOST Hong Kong (vPOST HK) which will provide internet shopping, shipping, and logistics services. SingPost will invest HK$1.5m and take up a 50% stake in the JV. Recall that Quantium Solutions, a subsidiary of SingPost, had earlier invested S$11.5m for a 20% stake in Shenzhen 4PX Express which provides international express delivery services (excluding postal services), international freight forwarding, import/export of goods and technology. This is in line with SingPost's strategy to expand its inbound and outbound logistics and ecommerce market.

China's e-commerce market has huge growth potential. These investments give SingPost a platform for entry into the logistics and high-growth e-commerce market in countries such as China and Hong Kong. The growth potential of China is especially eye-catching (Exhibit 1); as its economy grows, more of its consumers and businesses are able to purchase goods as well as sell to other markets. According to AT Kearney, China's e-commerce market has grown at a compound annual growth rate of 90% over the past five years to more than US$32b in 2009 and is estimated to be worth US$175b in 20141 . Factors that will drive this trend include an increase in purchasing power among residents which would drive the growth of online shoppers, and the development of greater online security.

Asia Pacific market also holds promise. The outlook for the Asia Pacific market is also bright (Exhibit 2), driven by both businesses and consumers. According to the EMS unit at the Universal Postal Union2 , manufacturers are looking for the best-priced parts and companies are increasingly ordering such products to be shipped from Asia-Pacific. Moreover, as parts get smaller and lighter, shipping products becomes an increasingly attractive option due to lower costs.

But still just a small step. SingPost is taking the right direction but the group is still in the early stages of gaining a strong foothold in the Chinese market. Pending more details on its expansion strategy, we retain our DCF-based fair value estimate of S$1.14 and maintain our HOLD rating. Meanwhile, we like the stock for its decent dividend yield of 6.0% which is backed by stable operating cash flows and a strong financial position (net gearing stands at 0.5x and EBITDA/interest coverage of 18.1x as at 30 Jun 2011); investors may want to rotate into defensive stocks such as SingPost from a tactical asset allocation point of view, amidst the market uncertainty.