Kerry Logistic:Creating Value from Knowledge

Introduction: In a search for lower costs and better profitability, companies are broadening their manufacturing and supplier networks geographically; more non-core functions are being outsourced and supply chains are being redesigned to reduce working capital and improve responses to changes in customer demand. Managing this increased complexity is beyond the expertise of a lot of companies; however third-party logistics providers (3PL) are well positioned to offer services to help their customers address many of these goals.

Conclusion:Kerry Logistics has become a leading Asian 3PL provider by leveraging its warehouses and IT platform to offer increasing amounts of value added servicesto drive improvements in operating margins. Valuation is attractive vs. its global peer group. Our target price of HK$14.67is based on our SOTP valuation. Our valuation separates the Hong Kongwarehouse business, which we value at HK$3.15/share based on a 7% cap rate. The rest of the business we value at HK$11.52/share, which is 17X our 2016 core-EPS (ex-property revaluation and HK warehouses) of HK$0.68.

Three Reasons to Buy

Increasing Value-Added Services

The company has vertical specific knowledge in Lifestyle, Electronics, Food & Beverage, Fast Moving Consumer Goods, Industrial, Automotive,and Pharmaceutical & Healthcare,which it expects to leverage to win customers and to penetrate further into the customers’ supply chain and offer higher margin services.

Sector Tailwinds

The industry’s globalization trendsthat are resulting in more geographically distributed supply chains and manufacturing bases, policy-driven changes in logistics inChina, ecommerce and growing Asian consumption are all supportive of the industry growth.

Investment to Add to Sales Growth

The company is targeting 3-4 new self-owned logistics centres a year (approx. GFAof1m sq.ft), which should boostthe totalGFA by 2-3%.In addition,GFA will be added through leasing as well as M&A.The company should be able to deliver steady revenue growth of 7-10% over the medium term.

Risks

Logistics will be impacted by changes in economic growth in China and Asia.

The sector is attracting capital which is pushing up the cost of acquisitions and could result in warehouse overcapacity.

The company may not have the management capability to capture the opportunities in the sector.