Industry Overview

7. INDUSTRY OVERVIEW 7. INDUSTRY OVERVIEW
———————————:;[, r”;::O I ‘1″”\’i <” I ,’,j,~ f, Ie [-, 21 April 2015 Tile Board of Directors Xin Hwa Holdings Berhad No.2, Jalan Permatang 2
Kempas Baru 81200 Johor Bahru Dear Sirs/Madams, Executive Summary of the Strategic Analysis of the Logistics Industry in Malaysia This Executive Summary of the ‘Strategic Analysis of the Logistics Industry in Malaysia’ is prepared by Protege Associates Sdn. Bhd. (“Protege Associates”) for inclusion in the prospectus of Xin Hwa Holdings Berhad (“XHH”) to the Securities Commission Malaysia in relation to its proposed listing on the Official List of Bursa Malaysia Securities Berhad. 1.0 Malaysia Economic Overview The Malaysian economy registered a strong finish in 2014. It expanded at a faster pace of 6.0 percent in 2014 on the back of continued expansion in domestic demand and an improvement in external trade performance. Despite the positive results revealed in most of Malaysia’s key economic indicators for 2014, the Malaysian Government is mindful of a potentially continuing weak energy and commodity prices which may be a major economic headwind for the local economy. In the near future, the growth in the Malaysian economy is expected to be anchored again by domestic demand. The Malaysian economy is expected to grow by between 4.5 to 5.5 percent in 2015.
2.0 An Introduction to the Logistics Industry Logistics is widely known as the act of managing the efficient and cost effective flow and storage of goods (such as raw materials, in-process stocks and finished goods) and related information from the point of origin to the point of consumption for customers covering inbound, outbound, internal and external movements as well as reverse product flows. I I7. INDUSTRY OVERVIEW (CoTlf’d)
Logistics services can be divided into physical and non-physical activities. Physical activities mainly comprise transport and storage activities while non-physical activities consist of activities such as designing supply chain, selecting contractors and negotiating on freightage. There are various activities involved in the logistics process flow namely procurement, inbound logistics, production operations, outbound logistics, sales and marketing and after­sales services.
Figure 1: Activities in the Logistics Process Flow
Source: Protege Associates 1) Procurement This scope involves the acquisition of inputs or raw materials. Logistics service providers may be involved in activities such as sourcing for vendors and gathering reievant information on the location of vendor. 2) Inbound logistics The handling and delivery of goods from the raw material suppliers to the production facility are covered under this scope. Logistics service providers may be involved in activities such as handling and consolidating goods, selecting transport mode and carrier, warehousing as well as securing customs clearance at ports. 3) Production operations Logistics service prOViders may also be reqUired to undertake certain production operations such as packaging and inventory management. 4) Outbound logistics The handling and delivery of goods from the production facility to the distribution networks or end-users are covered under this scope. Like inbound logistics, outbound logistics also involves the handling and consolidation of goods, selection of transport mode and carrier and warehousing. In addition, logistics service providers may also be involved in other activities such as designing the distribution network. 7. INDUSTRY OVERVIEW (CoIII’d)
,. ‘. “”n I “”‘.””. 5) Sales and marketing Under this scope, logistics service providers may be involved in activities such as account management as weli as credit processing and invoicing. 6) After-sales services They may also be activeiy involved in activities such as handling returned goods and obtaining feedbacks from customers. The flow of information in activities of logistics services can also be from the point of destination to the point of origin. This typically occurs in reverse logistics that involves all activities after the point of sale. For example, a defective product under a product warranty period may be sent back to the manufacturer via the distributor -moving in reverse through the supply chain network. 3.0 Market Segmentation In terms of industry structure, the logistics industry comprises of transport service providers and logistics service providers. Given that XHH, through its subsidiary companies, is primarily involved in cargo (goods or produce transported by a vessel or vehicle) logistics by land, Protege Associates will provide a write-up on the logistics industry in Malaysia involving cargo focusing mainly on road transport. J 7. INDUSTRY OVERVIEW (Coll/’d)
Figure 2: The Industry Structure of the Logistics Industry
_ PiI’rticipation by XUH Notes: 1) 3PLs denotes third party logistics providers that provide multiple logistics services which are generally integrated or ‘bundled’in nature for use by their customers; 2) 4PLs denotes fourth party logistics providers that are generally estilblished as a separate entity through long-term contract orjoint venture between a primary customer and one or more partners to manage allaspectsofthe customer’ssupplychain; and 3) leT denotes information and communications technology Source:Ministry ofInternationalTrade andIndustry(“MIT!”), XHH andProtegeAssociates 1) Transport service providers The movement of goods across the country and around the world is generally known as cargo transportation. There are various modes of transport and the principal modes of transport are road, rail, air and sea transport. Transport service providers are generally the carriers or providers of these principal transport modes. They consist of the operators of road, rail, air and sea transport, multimodal operators and terminal operators. The decision on the selection of transportation mode is highly dependent on factors such as cost, space availability and urgency. 7. INDUSTRY OVERVIEW (Coll/’d)
2) logistics service providers; logistics service providers are often referred to as transport intermediaries. They are providing support to the principal transport modes by offering various types of logistics service, either directly or indirectiy. There is a range of services that logistics service providers can provide. The logistics service providers can be categorised according to the type of services provided namely facilitation services, distribution services, integrated logistics services (“llS”) and business support services. Through its subsidiaries, XHH is a road transport operator invoived in the transportation of goods or haulage operations on the road using goods vehicles such as trucks, prime movers and trailers and a logistics service provider that is involved in the provision of facilitation services, distribution services and IlS. Facilitation service providers are invoived in assisting and/or easing the logistical process flows. Examples of facilitation services providers are custom brokers, freight forwarders, consolidators, non-vessel operating common carriers, ship brokers and shipping agents. Distribution service providers are involved in delivering of goods from the point of origin to the final consumers. The primary activities of distribution services are warehousing, transportation, inventory management and courier services (by domestic and regional distribution and courier companies). ILS providers act as a ‘one-stop centre’ for their customers’ logistic needs by being involved in various segments across the logistics value chain. 3Pls and 4Pls are typically providers of IlS. I 7. INDUSTRY OVERVIEW (Collt’d)
A number of ILS providers have emerged in Malaysia. This group of ILS providers undertakes activities that comprise of freight forwarding, warehousing, transportation and other value added services on an integrated basis along the logistics value chain. XHH is an ILS provider. Malaysian Investment Development Authority (“MIDA”) grants tax incentives to companies providing ILS that meet the following criteria: • Incorporated under the Companies Act, 1965;
• At least 60 percent of its equity is held by Malaysians;
• Provides the following three principal activities:
• Freight forwarding;
• Transportation;
• Warehousing; and
• At least one of the following activities:
• Distribution;
• Other related and value-added services (e.g. bulk breaking, consolidation, labelling/re-Iabelling, packing/re-packaging, palletising, procurement, product assembly/installation, quality control, testing, etc.); or
• Supply chain management;

 

 

• Should have the following minimum infrastructure:
• Commercial vehicies: 2.0 units; and
• Warehousing facilities: 5,000 square metres (“m”’) As of 31 December 2.014, a total of 58 companies had been granted the ILS incentives.

A logistics company that provides integrated and door-to-door logistics services along the logistics value chain as a single entity on a regional or global scale is granted by the Malaysian Government an international ILS (“IlLS”) status that allows it to expand its activities to Association of Southeast Asian Nations (“ASEAN”) countries. A qualified logistics company with the IlLS status will be issued with a Customs Agent Licence. 7. INDUSTRY OVERVIEW (ColiI’d)
The IlLS status is granted by MIDA to a locally incorporated company with the following conditions: • Provides the following three principal activities:
• Freight forwarding, including customs clearance;
• Transportation;
• Warehousing; and
• At least one of the following activities:
• Distribution;
• Other related and value-added services/activities; or
• Supply chain management;

 

 

• Manage at least:
• 20 units of commercial vehicles; and
• S,OOO m’ of warehouse space;

 

• Employ majority Malaysians and preference must be given to local professionals;
• Use Malaysia as a hub for logistics supply chain services in the region;
• Have good networks with logistics service providers abroad in order to provide seamless ILS for the regional market;
• Substantial usage of leT infrastructure throughout the logistics chain and value-added activities; and
• Compulsory attendance of Customs Agent course conducted by the Royal Malaysian Customs Department (“RMCDU ) (staff who have attended this course are exempted from this requirement)

As such, Protege Associates is of the opinion that IlLS Status companies have a wider geographical presence as compared to logistics companies that focus more on the Malaysian market such as XHH. I 7, INDUSTRY OVERVIEW (Conl’d)
The logistics industry provides crucial business support to many end-user markets, Any end­user market that requires storage capacity as well as the handling and movement of goods from one point to another from the point of origin to the point of consumption generally requires transport and logistics services, Given its role as an important enabler of trade, it is not surprising that there are numerous and diverse end-user markets for the logistics industry. The end-user markets for the logistics industry include but are not limited to agriculture, food and beverage, construction, electrical and electronics (“E&E”), furniture, medical devices, oil and gas, plastic products, steel products, telecommunications and toys.
4.0 Market Dynamics Scorecard for the Logistics Industry in Malaysia
RM148.82 billion Revenue)
2014 Estimated Industry Size (Industry 2014 Estimated Industry Growth Rate 2019 Forecast Industry Size (Industry RM253,21 billion Revenue)
2014 Estimated Number of Industry Players There are a total of more than 12,000 logistics Industry players in Malaysia, Around 7,700 logistics industry players are directly involved in cargo transport by road, 2015 Demand Conditions • On-going Implementation of Initiatives
• Expansion in the Global and Local

,Economies -• Changing Structure of Malaysia’s Exports • A Very Broad Range of End-user Markets
• The Growing Prominence of E-commerce

2015 Supply Conditions • Encouraging Support from the Malaysian Government
• A Strategic Logistics Hub with Business Friendly Logistics Ecosystem
• Positive Developments in ICT Help to Support Growth
• Weaker Oil Prices Ease Pressure on Cost of Operations
• Intense Price Competition
• Challenging Environment for the Hiring of Goods Vehicle Drivers and Relatively Low­Skilled Workers

 

7. INDUSTRY OVERVIEW (Coll/’d)
Source: Protege Associates
5.0 Historical Performance and Growth Forecast of the Logistics Industry in Malaysia The logistics industry in Malaysia entered 2015 on a stronger footing as it managed to register a double digit growth for 2014. The logistics industry in Malaysia expanded by an estimated 1I.2 percent from RM133.83 billion in 2013 to RM148.82 billion in 2014. The growth in the local logistics industry was largely attributed to the continuing expansion in the global and local economies. The growth in Malaysia’s trade volume has also led to a rise in demand for transport and logistics services. Figure 3: Historical, Estimated and Forecast Industry Size (Industry Revenue) of the Logistics Industry in Malaysia, 2014-2019 300.00 14.0 2014 2015 2016 2017 2018 2019 Year (j’J:{4Hndustry Size (RM billion) __Annual Growth (%)
Notes: 1) 2)  CAGR (2014-2019) ~ 11.2 percent The base year is 2014  Source: Protege Associates  -122­ 9
7. INDUSTRY OVERVIEW (Colll’d)
B “” “C’ ,(,'” ” ” ” I ,.,,,,,,, I , The logistics industry in Malaysia is expected to continue registering a double digit growth throughout the forecast period from 2015 to 2018. In 2019, it is expected to register a slower pace in growth of 9.5 percent on the back of expected slower demand for transport and logistics services. The logistics industry in Malaysia is expected to receive further boost from the expected growth in Malaysia’s external trade which can heip to spur import-export forwarding, shipping and air cargo related business. In addition, the continuing rolled-out of capital intensive projects under the Economic Transformation Programme (“ETP”) is also expected to drive the growth in the logistics industry in Malaysia. The industry is projected to expand from RM148.82 billion in 2014 to RM253.21 billion in 2019 and register a CAGR of 11.2 percent. On a closer look at the road transport market within the logistics industry in Malaysia, the market grew by 4.3 percent to reach RM29.93 billion in 2014 as the expanding local economy has helped to drive the demand for road transport. Moving forward, the market size (market revenue) of the road transport market in Malaysia is expected to expand from RM29.93 billion in 2014 to RM37.33 billion in 2019 and register a CAGR of 4.5 percent. Figure 4: Historical, Estimated and Forecast Market Size (Market Revenue) of the Road Transport Market in Malaysia, 2014-2019 , —-_._..__._­40.00 35.00 30.00 25.00.­NC t;!§ ‘” 0 20.00 ~~ • :;:;!”. 15.00 10.00 5.00 0.00 L-­Notes:
4.7 4.6 4.6 4.5 g4.5 ~ ~ 04.4 .. ro 4.4 C 0 C
4.3 ‘” 4.3 4.2 4.2 2014 2015 2016 2017 2018 2019 Year BiIIiIIII Market Size (RM billion) ………. Annual Growth (%) _
1)  CAGR (2014-2019) = 4.5 percent  2)  The base year is 2014  Source: Protege Associates  10
7. INDUSTRY OVERVIEW (Conl’d)
The Malaysian Government’s commitment and willingness to encourage and promote heavy investments in key land infrastructures, most notably the North-South Expressway (“NSE”), has proVided crucial impetus for the growth of road transport in Malaysia. Other notable land infrastructures in Malaysia include the East Coast Expressway (“ECE”) and the Pan Borneo Highway. The ECE, which runs from Karak, Pahang to Kuala Terengganu, Terengganu, plays a major role in linking the West Coast to the East Coast of Peninsular Malaysia while the Pan Borneo Highway is a road network on Borneo Island that connects Sabah and Sarawak with Brunei. Due to their links to many major cities and towns all over Malaysia, these land infrastructures have helped to promote internal road transportation and regional integration. It facilitates the active movements of goods. The number of new registered goods vehicles increased from 40,742 units in 2012 to 40,765 units in 2013. In the first three quarters of 2014, the total number of new registered goods vehicles stood at 31,9S7 units. The goods vehicles consist amongst others, vans, rigid lorries, rigid tanker lorries, tippers or dumpers, prime movers, semi-trailers and trailers. Total goods vehicles increased from 1,032,004 units in 2012 to 1,116,167 units in 2013. As of 30 September 2014, total goods vehicles in Malaysia stood at 1,148,308 units. This development augurs well for the prospect of the road transport market in Malaysia.
6.0 Competitive Landscape of the Logistics Industry in Malaysia The logistics industry in Malaysia is highly fragmented with the estimated presence of more than 12,000 industry players that are involved in various scopes of logistics activities in 2014. Logistics industry players in Malaysia are generally concentrated in key logistics spots such as: • Johor (Pasir Gudang, Port of Tanjung Pelepas, Senai) • Labuan;
• Malacca;

• Negeri Sembilan (Nilai);
• Pahang (Kuantan);
• Penang;
• Sabah (Kota Kinabalu);
• Sarawak (Bintulu, Kuching, Miri);
• Selangor (Kuala Lumpur International Airport (“KUA”), Port Klang, Shah Alam); and

11 II I7. INDUSTRY OVERVIEW (Cont’d)
• Terengganu (Kemaman). The logistics industry players in Malaysia can be distinctly divided into three types namely listed local, non-listed local and foreign-owned industry players. 1) Listed local logistics industry players; This group refers to local logistics industry players which are currently public listed companies. They are typically well-capitalised companies and generally have more financial resources than their unlisted local counterparts. This group of logistics industry players generally strives to leverage on their financial strength to further expand their existing logistics capability, capacity, infrastructure, fleets, workforce and/or range of service offerings. They are also likely to be more willing to make investment in technology that can improve productivity and cost efficiency. Their level of service offerings are likely more integrated with the involvement in many activities across the industry value chain. With their relatively high logistics capability and capacity, they are in a good position to service many different end-user markets. Besides that, they also generally have a strong presence in Malaysia through their various offices established in key logistics spots across the Peninsular Malaysia and/or East Malaysia. This enables them to reach out and provides services to a larger geographical area. Due to their listing status, they enjoy a higher corporate profile as compared to their non­listed local counterparts. Among some of the known listed local logistic industry players are Century Logistics Holdings Berhad (“Century Logistics”), Harbour-Link Group Berhad, Integrated Logistics Berhad, NCB Holdings Berhad, See Hup Consolidated Berhad, Tiong Nam Logistics Holdings Berhad (“Tiong Nam”), Transocean Holdings Berhad and Vinson Holdings Berhad. I I7. INDUSTRY OVERVIEW (Collt’d)
2) Non-listed local logistics industry players; and This group is considered to be the most fragmented in the local logistics industry. There are quite a number of established industry players in this group which have comparable logistics infrastructure and fleet size as well as being capable of offering ILS albeit at an operating scale which may not be as large as those undertaken by their listed local counterparts. However, the majority from this group of industry players generally owned fewer assets, have a smaller workforce and have a lower corporate profile. Non-listed local logistics industry players generally embark on a niche business strategy that can optimise their growth potential with their relatively small resources. They are likely to be more selective in the scope of logistics activities that they want to participate in and target a specific geographical area. Besides that, they generally have a high degree of customer focus and rely heavily on their deep local knowledge to stay competitive. Among some of the known non-listed local logistics industry player are Click Logistic Sdn Bhd, E.H. Utara Holdings Sdn Bhd, Interway Transport Sdn Bhd (“Interway Transport”), Lee Ting San Lorry Transport Sdn Bhd, PKT Logistics Group Sdn Bhd, Tanjong Express (M) Sdn Bhd C’Tanjong Express”), Tri-Mode System (M) Sdn Bhd and XHH. 3) Foreign-owned logistics industry players This group refers to logistics industry players in Malaysia which are majority-owned by foreigners. Foreign-owned logistics industry players are generaliy the extension or Malaysia’s business arm of established multinational parent logistics industry players. As such, they are able to ride on the logistical experience and expertise of their respective parent companies to accelerate their industry learning curve. They also seem to be able to generate business leads from the local business arm of their parent company’s customers. However, the scope and scale of their logistics operations are very much subject to the internal business strategy deployed by their respective parent company. Their logistics capability, capacity and infrastructure generally vary from one to another depending on the intended strategy. Among some of the known foreign-owned logistics industry player are CEVA Freight Holdings (Malaysia) Sdn Bhd, DHL Global Forwarding (Malaysia) Sdn Bhd, FPS Famous Pacific Shipping Sdn Bhd, Hankyu Hanshin Express (M) Sdn Bhd and Menlo Worldwide (Malaysia) Sdn Bhd. 13 7. INDUSTRY OVERVIEW (COIII’d)
J otA ” 1<, Protege Associates has also provided a closer look at the level of fragmentation involving logistics industry piayers in Malaysia that are competing with XHH in terms of cargo transport by road, storage and warehousing services as well as shipping and forwarding agencies services. [Note: ‘shipping and forwarding agencies’ refer to freight forwarding and brokerage services (including custom house brokerage); ship brokerage services including ship leasing brokers, packing, crating, inspecting, sampling and weighting services to shippers of shipping organisations; and care of animals pending transport] It was estimated that there were around 7,700 industry players in Malaysia that were involved in cargo transport by road in 2014 with an estimated 15 percent of them based in Johor. Logistics industry players involved in cargo transport by road were mainly individual proprietorships and private limited companies. There were estimated to be around 250 logistics industry players in Malaysia that were involved in the provision of storage and warehousing services in 2014 with an estimated 5 percent of them based in Johor. These logistics industry players were mainly private limited companies. The value of fixed assets owned by these logistics industry players as at end of 2014 was estimated to be more than RM1.60 billion. Lastly, the number of logistics industry players in Malaysia involved in shipping and forwarding agencies services in 2014 was estimated to be around 1,500. It was estimated that around 15 percent of them were operating in Johor. These logistics industry players were mainly private limited companies. XHH was incorporated as a private limited company under the Companies Act, 1965 with the Companies Commission of Malaysia on 18 January 2013. It was subsequently converted to a public limited company on 26 June 2013. XHH is an investment holding company and is engaged in the provision of management services. Through its subsidiaries, it is an ILS provider involved in land transport operations, warehousing and distribution operations and other services. Its land transport operations incorporate cargo transportation services and container haulage services whereas other services incorporate freight forwarding and customs brokerage services as well as manufacturing and fabrication of trailers. For the financial year ended 31 December 2014, XHH recorded revenue of RMllO.6 million and profit before tax of RMI8.4 million. I 7. INDUSTRY OVERVIEW (Colll’d)
“”, ,”””‘” i , ‘i, ~ ” ~ L\ Protege Associates has used the following criteria when selecting industry players for comparison with XHH: • Has a business premise or establishment (example gratia (“e.g.”) office/warehouse) in Johor;
• Registered revenue of RM50 million and above;
• Involved in the provision of road transport; and
• Involved in the provision of warehousing services;

After taking into consideration the above criteria, Protege Associates has selected five industry players namely Century Logistics, Interway Transport, Konsortium Logistik Bhd (“Konsortium Logistik”), Tanjong Express and Tiong Nam. 1) Century Logistics Century Logistics is currently listed on the Main Market of Bursa Malaysia Securities Berhad (“Bursa Securities”). It is recognised as an ILS provider by MIn and the Ministry of Finance (“MOF”). It is principally an investment holding company. Services offered by the subsidiary companies of Century Logistics include halal logistics services, integrated logistics management, international freight forwarding, oil and gas logistics, procurement logistics services, project logistics and tax exemption consultancy, shipping, chartering and bunker services, supply chain management, transport management and distribution as well as warehouse management services. For the financial year ended 31 December 2014, Century Logistics recorded revenue of RM275.2 million and profit before tax of RM42.4 million. 2) Interway Transport Interway Transport was registered as a private limited company with the Companies Commission of Malaysia on 15 November 1975. It is involved in the provision of transportation services. For the financial year ended 31 December 2013, Interway Transport recorded revenue of RM63.4 million and profit before tax of RM6.8 million. 7. INDUSTRY OVERVIEW (Col/I’d)
3) Konsortium Logistik Konsortium Logistik and its subsidiary companies (“Konsortium Logistik Group”) is principally engaged in the provision of total logistics services and inventory solutions, which include the provision of container haulage services, bulk liquid distribution services, inland container depot services, freight forwarding, shipping agency and chartering services, warehousing and distribution services as well as insurance agency. For the financial year ended 31 March 2014, Konsortium Logistik recorded revenue of RM347.2 million and loss before tax of RM32.0 miilion. 4) Tanjong Express Tanjong Express was registered as a private limited company with the Companies Commission of Malaysia on 22 July 1991. It is involved in the provision of transportation services and hire of lorries. For the financial year ended 31 December 2013, Tanjong Express recorded revenue of RM98.3 million and profit before tax of RM5.3 million. 5) Tiong Nam Tiong Nam is currently listed on the Main Market of Bursa Malaysia Securities Berhad. It is an investment holding company. Services offered by its subsidiary companies include letting and trading of diesel and petrol, letting of forklift and trucks, management of cold room storage and distribution services, courier and related services, property letting and property development as well as transportation, distribution, warehousing and related services. For the financial year ended 31 March 2014, Tiong Nam recorded revenue of RM345.3 million (from services rendered) and profit before tax of RM54.2 million (from logistics and warehousing services segment). 7. INDUSTRY OVERVIEW (Colll’d)
,; ,.;,,, f. I “,,,,, tJ,,-, 6.1 Estimated XHH’s Market Share The revenue generated by XHH for the financial year ended 31 December 2013 was RM97.9 million which is equivalent to 0.07 percent of the estimated industry size (industry revenue) of the logistics industry in Malaysia in 2013. The market share is derived from dividing XHH’s revenue of RM97.9 million for the financial year ended 31 December 2013 with the industry size (industry revenue) of the logistics industry in Malaysia in 2013 which stood at RM133.83 billion. The estimated market share of the five industry players selected for comparison ranges from 0.05 percent to 0.23 percent -further reflecting the fragmented nature of the industry. Figure 5: Estimated Market Share of Selected Industry Players in the Logistics Industry in Malaysia, 2013
Tanjong Express 31-12-2013 98.3 0.07

 

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Notes: 1/.’ Revenue generated from services rendered 1) The list ofselected industry players above is not exhaustive 2) The above market shares only provide an indication and are not considered diredly comparable due to the following reasons: a) Therevenueofallindustryplayersare notfromthesamefinancialyearend b) The revenue may be at the group level c) Not all companies carry out activities which are completely similar to each other or in the same geographical area 3) Themarketshare ofeachIf}dustryplayeriscalculated bydiVidingtherevenue ofeachindustry player in the financial year ended 2013 with the size of the logistics industry in Malaysia in 2013 which was RM133.83 billion 4) The next financial year end for Konsortium Logistik alter 31 December 2012 was 31 March 2014. Sources: The annual report of Century Logistics and Tiong Nam, Companies Commission of Malaysia, XHH and Protege Associates The revenue generated by XHH for the financial year ended 31 December 2014 was RMlIO.6 million which is eqUivalent to 0.07 percent of the estimated industry size (industry revenue) of the logistics industry in Malaysia in 2014. The market share is derived from dividing XHH’s revenue of RMlIO.6 million for the financial year ended 31 December 2014 with the industry 17 7. INDUSTRY OVERVIEW (Conl’d)
size (industry revenue) of the logistics industry in Malaysia in 2014 which is estimated to be RM148.82 billion. Figure 6: Estimated Market Share of Selected Industry Players in the Logistics Industry in Malaysia, 2014
* Revenue generated from selVices rendered 1) The list ofselected industry players above is not exhaustive 2) The market share of 1nterway Transport and and Tanjong Express are not prOVided as their financial figures for the financial year ended 2014 are not yet available 3) The above market shares only provide an indication and are not considered directly comparable due to the following reasons: a) Therevenueofallindustryplayersare notfromthe samefinancialyearend b) The revenue may be at the group level c) Not all companies carry out activities which are completely similar to each other or in the same geographical area 4) The market share of each industry player is calculated by dividing the revenue ofeach industry player in the financial year ended 2014 with the size of the logistics industry in Malaysia in 2014 which is estimated to be RM148.82 billion. Sources: The annual report of Century Logistics and Tiong Nam, Companies Commission of Malaysia, XHH and Protege Associates XHH’s revenue registered for the financial year ended 31 December 2014 is equivalent to 0.37 percent of the estimated market size (market revenue) of the road transport market in Malaysia in 2014. The market share is derived from dividing XHH’s revenue of RM 110.6 million for the financial year ended 31 December 2014 with the market size (market revenue) of the road transport market in Malaysia in 2014 which is estimated to be RM29.93 billion. v[iompany No.: l032J02P I 7. INDUSTRY OVERVIEW (Cont’d)
7.0 Demand and Supplv Conditions Demand and supply conditions refer to market factors that can positively or negatively affect future industry size (industry revenue) and growth by specifically altering demand or supply dynamics. These demand and supply factors can include trends, key developments or events that spur market expansion, leading to increase in sales or revenues, or developments that negatively affect market growth. The following figure depicts the demand and supply conditions affecting the value and growth of the logistics industry in Malaysia and highlighting the impact on the present industry situation in the country. Figure 7: Demand and Supply Conditions Affecting the Logistics Industry in Malaysia, 2015 Expansion In the Global and Local Economies Demand
+ Changing Structure of Mal’av5;ia’s EXDorts Demand + A Very Broad Range of End-user Markets Demand + “The Growing,Prominence dE-commerce + Encouraging Support from the Malaysian Government Supply + A Strategic Logistics Hub with Busine§scfriendly Logistics Ecosystem
Positive Developments in ICT Help to Support Growth Supply + Weaker Oil Prices Ease Pressure on Cost of Operations
+ Intense Price Competition Supply Challengi(1’g Environment for the Hiring’Of Goods Supply Drivers and Relatively Low-skilled Workers Vulnerability to Meteorological Changes and Natural Disasters Supply Vulnerability ofTransportatign Terminal Operations to Supply Workers’ Rights Activism, Strikes and Protests
Source: Protege Associates 7.1 Demand Conditions On-going Implementation of Government Initiatives The on-going implementation of several government initiatives such as the Government Transformation Programme (“GTP”) and ETP is expected to boost business sentiment, which can provide the impetus for the creation of more opportunities to the local logistics industry and encourage more logistics activities. 19 I 7. INDUSTRY OVERVIEW (Conl’d)
Expansion in the Global and Local Economies Cargo transportation is mostly generated by economic activities and the logistics industry is likely to respond to fluctuations in these activities and the resultant level of trade among nations. Any unfavourable global and local economic conditions may lead to the deterioration of logistics service providers’ businesses -leading to the potential delay, cancellation or reduction of plans to transport goods. However, industry players in the Malaysian logistics industry have reasons to be optimistic as both the global and local economies are projected to continue expanding in the near future. Changing Structure of Malaysia’s Exports As the country continues to evolve from a major commodities exporter to primarily an exporter of manufactured goods, the composition of exports had gradually shifted from agricultural and mining products to manufactured products. It is not surprising that manufactured products remain the largest component of Malaysia’s total export as of today. Two notable trends have emerged in Malaysia’s export structure since 2000 namely: a) the gradual move away from a heavy concentration in E&E products exports towards non-E&E manufactured products and commodities; and b) diversification of Malaysia’s export markets. The two trends are expected to continue during the forecast period and bode well for the growth of the logistics industry in Malaysia as the country’s exports are less dependent on any specific product or economy. A Very Broad Range of End-user Markets Transport and logistics services are essentially the critical supporting business activities used for the movement of goods among all the stakeholders within an industry supply chain (including the final consumers). As almost every single industry will require storage and/or transportation services, either through a single mode or multimode of transport, it is unsurprising that the logistics industry in Malaysia can look forward to demand from a very broad range of end-user markets. By having a very broad range of end-user markets, the logistics industry in Malaysia is able to mitigate the risk of over-reliance on a single end-user market and stand to have more room for market expansion. 20 7. INDUSTRY OVERVIEW (Collt’d)
‘.,.”,. r”e””( . The Growing Prominence of E-commerce E-commerce has been developing rapidly all across the world including Malaysia. It is becoming more and more common for materials of various kinds to be ordered electronically and primarily, via the Internet under both the business-to-business and business-to-consumer model. The growing prominence of e-commerce has helped to popularise armchair shopping and carve out a new market for stakeholders in the logistics industry. 7.2 Supply Conditions Encouraging Support from the Malaysian Government The logistics industry is one of the eight non-government services sub-sectors earmarked for greater development and promotion under the Third Industrial Master Plan (“IMP3”) that covers the period from 2006 to 2020. The Malaysian Government has clearly recognised the importance of the logistics industry in assisting the country towards achieving long-term global competitiveness. Besides that, the Malaysian Government also grants tax incentives in the form of Pioneer Status (“PS”) or Investment Tax Allowance (“ITA”) to approved ILS companies in order to create an efficient and competitive logistics industry and encourage the integration and consolidation of various transport intermediaries. A Strategic Logistics Hub with Business-friendly Logistics Ecosvstem Malaysia is located strategically within the ASEAN region. It has the most number of ASEAN neighbours among all the ASEAN countries. As such, Malaysia is considered an ideal logistics gateway to the ASEAN markets. Malaysia has also earned a reputation of having one of the most well developed infrastructures among the industrialising countries of Asia with a network of well-maintained highways in Peninsular Malaysia and international ports that facilitate almost 95 percent of Malaysia’s trade. It also has over 600 industrial parks as well as a large base of relatively young and well-educated talent with multi-lingual capability. All these have helped to prOVide a boon to regional and logistics operations in the country and catalyse the growth in the local logistics industry. 7. INDUSTRY OVERVIEW (Collt’d)
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Positive Developments in ICT Help to Support Growth The logistics industry in Malaysia, like its counterparts from all around the world, has benefited from the positive developments in ICT that help to facilitate effective and efficient supply chain management as well as optimising the business value of IT within the logistics operations. The rapid development of ICT can also help to enable new supply chain structures and produce new services. Direct trade can be enhanced by easier access to information for suppliers and actual users while the ‘virtual logistics chain’ services have emerged to facilitate interested parties to check for relevant logistics information and communicate in real time from an Internet-based communications system with a centralised database.
Weaker Oil Prices Ease Pressure on Cost of Operations Logistics industry players, in particular transport operators, stand to enjoy relatively low fuel cost following weaker oil prices. Fuel is a major cost component for these industry players (transport operators) as it is mostly used to power their transportation vehicles. With cheaper fuel, transport operators are in a better position to price their services competitively and protect their profit margin. The cost savings enjoyed from weaker oil prices can be passed to customers leading to potentially higher uptake in the services offered by logistics industry players.
Intense Price Competition The level of price competition in the local logistics industry is intense. This is due mainly to the high level of fragmentation in the industry. As a result, there is a constant downward pressure on the pricing of services offered by logistics industry players in order to secure customers -creating an unhealthy business environment. I 7. INDUSTRY OVERVIEW (Con/’d)
Challenaina Environment for the Hiring of Goods Vehicle Drivers and Relatively Low-skilled Workers There is currently a shortage of goods vehicle drivers while the attrition rate involving relatively low-skilled workers in this industry is considered to be relatively high particularly among the local workers. It also does not help that goods vehicle driving jobs as well as jobs requiring low-skilled workers are often held in low esteem by the younger population for reasons such as low wages, long hours, shift duties, limited career progression and/or for being viewed as a less glamorous job. As such, industry players in the local iogistics industry face an uphill task in recruiting goods vehicle drivers and relatively low-skilled workers. In another development, there is a continuing upward pressure on the cost of employing workers. The ‘Minimum Wage Policy’ was implemented in the country with immediate effect from 1 January 2013.
Vulnerabilitv to Meteorological Changes and Natural Disasters Meteorological changes and natural disasters at both origin and destination markets (for cargo transportation) can result in the closure of transportation terminals and routes and dampen economic activities that disrupt logistics operations -leading to loss of revenues and business opportunities as affected transportation services are delayed, postponed or cancelled. For example, Typhoon Utor was blamed for the massive floods in Johore, Malacca, Pahang and Negeri Sembilan during the period from 18 December 2006 to 13 January 2007 that disrupted land cargo transportation activities. Besides that, major transport routes into Kedah and Perlis were shut down by a series of floods in November 2010. On a more recent note, Kelantan was hit by the worst floods in the history of the state in December 2014. 7. INDUSTRY OVERVIEW (Col/I’d)
E\ .,.’ “u ,, Vulnerability of Transportation Terminal Operations to Workers’ Rights Activism, Strikes and Protests Transportation terminals such as seaports and airports are considered key national assets that can help to drive the local economy. However, their status as a strategic national infrastructure makes them an unwelcome target for workers’ rights activism (particularly by terminal workers), strikes and protests. There were many incidences in the past whereby these activities had resulted in the disruption of key transportation terminals’ operations. The logistics industry players in Malaysia, like their counterparts from ali around the world, face potential disruptions and loss of businesses from any closure of transportation terminals as well as delay or cancellation of cargo transportation services. 5uch incidences in the past have only raised the level of external risk that logistics industry players are exposed to. 8.0 Industry’s Reliance on and Vulnerability to Imports The logistics industry in Malaysia has continued to rely heavily on foreign transport services. The deficit in the transportation services account (including cargo transportation services) in the country’s balance of payments (“BOP”) widened to RM32.90 billion in 2014 as compared to RM30.28 billion in 2013. Figure 8: Net BOP in the Transportation Services Account of Malaysia,
2011-2015
Notes:  1)  P denotes preliminary  2)  f denotes forecast  3)  The BOP is in accordance with the Sixth Edition of the Balance of Payments Manual by the  International Monetary Fund  Sources: Department ofStatistics Malaysia and Bank Negara MalaySia

7. INDUSTRY OVERVIEW (Colll’d)
,. ” .~ “” I , OJ c,”0′ , ~j”””, , The growing deficit from 2011 to 2014 as depicted in Figure 8 reflects the industry’s heavy reliance on and vulnerability to foreign logistics services. The growing deficit trend is expected to continue in 2015. The deficit in the transportation services account is expected to further widen to RM33.15 billion for that year. There are clearly opportunities for imports substitution and the need to create a strong domestic capacity in providing logistics services as well as expanding the exports of logistics services. 9.0 Substitute Products or Services The logistics industry still plays a crucial role in today’s supply chain management and transportation of physical cargo. In terms of transport services, one mode of transportation may not be an absolute substitute for another. Cargo may also be transported via a combination of different modes of transportation. The mode of choice for cargo shippers is dependent on various factors such as cost, capability, route and speed. Meanwhile, logistics services are still Widely required to provide support to the principal transport mode(s). However, not every logistics services may be required. The extensiveness and/or choices of logistics services required are subject to various factors such as supply chain strategy, operating cost structure, the involvement of cross-border trades and etc. On another note, it needs to be pointed out that the dematerialisation and electronic distribution of ‘info-products’ (via the Internet) may lead to a reduction in the volume of certain cargo movement. For examples, the direct delivery of products such as videos and software via the Internet rendered it unnecessary to engage transport and/or logistics services. Nevertheless, the reduction in the volume of the cargo movement due to such dematerialisation and electronic distribution is expected to be relatively small and exceeded by the vast potential cargo traffic generated by a wider sourcing of supplies through Internet trading. 7. INDUSTRY OVERVIEW (Colll’d)
, ,'” ‘.” c, 10.0 Relevant Laws and Regulations Governing the Market and Peculiarities of the Market 10.1 Customs In Malaysia, the RMCD is the government agency that is responsible for administrating the nation’s indirect tax poiicy. Examples of law and regulation administered by RMCD are the Customs Act 1967, the Goods and Services Tax Act 2014, the Excise Act 1976 and Free Zones Act 1990.
10.2 Relevant Laws and Regulations for Road Transport The main law and reguiation that is governing road transport in Malaysia is the Road Transport Act 1987. Agencies such as Road Transport Department (“RTD”), Road Safety Department (“RSD”) and the Institute of Road Safety Research (“MIROS”) are tasked to perform the relevant enforcement and regulatory duties. The country is also a signatory to various international conventions and protocols. LandPublic Transport Commission (“SPAD H) Logistics industry players in Malaysia need to apply for the necessary licences from the SPAD (in Peninsular Malaysia) and Commercial Vehicles Licensing Board (“CVLB”) (in Sabah and Sarawak) for their goods vehicles. The SPAD, which comes directly under the purview of the Prime Minister, was officially established on 3 June 2010 under the Suruhanjaya Pengangkutan Awam Darat Act 2010 to playa central roie in improving road-and rail-based pubiic and cargo transport in Malaysia. With the gazetting of the Land Pubiic Transport Act 2010 on 31 January 2011, the SPAD gained its full powers in drawing poiicies, regulating all aspects of train, bus and taxi services as well as road-and rail-based cargo transport and powers to audit, investigate, suspend or revoke licence, seize vehicles and penaiise operators. The SPAD was also tasked with implementing a re-registration of all commercial vehicle iicences previously issued by the CVLB under the CVLB (Amendment) Act 2010. In addition, the iicensing regime for commercial vehicles has been changed from a one-vehicle-one-licence regime to a new one-operator-one-licence system effective from 1 January 2012. The new system enables operators to use any vehicle in their fleet for designated routes rather than a licence for each vehicle in their fleet. The SPAD has also issued out a circular regarding the process for the issuance of Operator Licence. Z6 I 7. INDUSTRY OVERVIEW (CoIlI’d)
There are two classes of licence for goods vehicles namely Carrier A and Carrier C. Carrier A licences are issued to vehicles carrying items for rent or hire and Carrier C licences are issued to vehicles carrying privately owned items. Carrier A licence can be divided into two according to the types of service namely container (“KA”) and other than container. The commercial vehicles used by logistics industry players in Malaysia to transport container bulk, bulk liquid and general haulage and cargo must be registered with the RTD. Meanwhile, logistics industry players that are transporting scheduled wastes are required to obtain a licence from the Department of Environment (“DOE”) in accordance with the Environmental Quality (Scheduled Wastes) Regulations 1989. For logistics industry players that are interested in transporting nuclear and radioactive materials, a Class D Licence needs to be obtained from the Atomic Energy Licensing Board (“AELB”). 10,3 Occupational Safety and Health Regulations All legislations related to occupational safety and health in Malaysia are administrated and enforced by the Department of Occupational Safety and Health (“DOSH”) under the Ministry of Human Resources, Malaysia. The three major legislations governing the enforcement activities on occupational safety and health are the Occupational Safety and Health Act (“OSHA”) 1994, the Factories and Machinery Act (“FMA”) 1967 and the Petroleum Act (Safety Measure) 1984. Logistics industry players in Malaysia need to comply with occupational safety and health regulations particularly the OSHA 1994. Legislative framework to promote, stimulate and encourage high standards of health and safe working culture among all Malaysian empioyees and employers through self-regulation schemes are provided by OSHA 1994. All occupational activities in the logistics industry such as cargo transportation activities are subject to OSHA 1994. 7. INDUSTRY OVERVIEW (Colll’d)
:.”(, f There are seven regulations under OSHA 1994 enforced by DOSH namely: • Classification, Labelling and Safety Data Sheet of Hazardous Chemicals Regulations, 2013;
• Control of Industrial Major Accident Hazards Regulations, 1996;
• Employers’ Safety and Health General Policy Statements (Exception) Regulations, 1995;
• Notification of Accident, Dangerous Occurrence, Occupational Poisoning and Occupational Disease Regulations, 2004;
• Safety and Health Committee Regulations, 1996;
• Safety and Health Officer Regulations, 1997; and
• Use and Standards of Exposure of Chemicals Hazardous to Health Regulations, 2000.

 

10.4 Quality Standards Compliance to national and international standards is gaining prominence among logistics industry players in Malaysia against the backdrop of a globalisation trend. Besides meeting the requisite requirements set by each government, if any, any voluntary compliance can also go a long way towards boosting the confidence of potential end-user markets. In Malaysia, the national standard and accreditation body is the Department of Standards Malaysia (“STANDARDS MALAYSIA”). The Standards of Malaysia Act 1996 governs the approval of a standard as a Malaysian Standard (“MS”). Meanwhile, the International Organisation for Standardisation (“ISO”) is a widely recognised network of national standards bodies as well as the world’s largest deveioper of voluntary International Standards. XHH has obtained IS09001:2008 Quality Management System certification for the provision of logistics and transportation services. Compliance with quality standard by XHH reinforces its commitment in providing quality services to the end-users.
7. INDUSTRY OVERVIEW (Con!’d)
” ., ~ “n l ” i.,”(, , t.'” E” ,., 10.5 Liberalisation of Services under ASEAN Framework Agreement on Services (“AFAS”) The services sector which includes the logistics industry is undergoing liberalisation under the AFA5 to facilitate the establishment of free flow of services in the A5EAN region by 2015. The AFA5 was signed by A5EAN Economic Ministers on 15 December 1995 in Bangkok, Thailand. The competition in the local and A5EAN logistics industry is anticipated to increase significantly with the liberalisation trend and global logistics industry players are poised to position themselves strategically in this region. As such, the local logistics industry need to be well prepared to compete regionally and globally and strive to engage in supply chain management directly with their customers on a global basis. 11.0 Prospects and Outlook of the Logistics Industry in Malaysia The logistics industry in Malaysia is projected to continue expanding during the 2015-2019 forecast period. Figure 9: The Forecast Industry Size (Industry Revenue) of the Logistics Industry in Malaysia, 2015-2019 300.00 ‘”‘ c /’,g 250.00 :c ,~_. ….., ~ 150.00 iii 1:” 100.00 / 1;;i: 50.00 c… 0.00 +’—–”’—r—~~–~—–“‘—-“‘-.___–____; 2018 20192015 2016 2017 Year Source: Protege Associates The positive outlook on the demand for transport and logistics services in Malaysia stems mainly from the on-going implementation of government initiatives, expansion in the global and local economies, changing structure of Malaysia’s exports, the presence of a very broad range of end-user markets and the growing prominence of e-commerce. The Malaysian Government is also bullish on the growth prospect of the overall volume of cargo transport. 29 7. INDUSTRY OVERVIEW (Colll’d)
,  ,'” _, ”  <‘  f  “‘,,, I’ ~ L  \  Figure  10: Selected  Projections  of  Cargo  Transport  Performance  in  Malaysia, 2020

Total Cargo Throughput in Malaysian Ports
751.0 million tonnes Total Container Throughput in Malaysian Ports 36.6 million Source: Economic Planning Unit, MITl and Ministry of Transport, Malaysia On the supply side, although the industry is expected to be boosted by the encouraging support from the Malaysian Government, the position of Malaysia as a strategic logistics hub with business-friendly logistics ecosystem, positive developments in ICT that help to support growth and weaker oil prices that ease pressure on the cost of operations, it faces various challenges ahead. Intense price competition is expected to persist due to the high level of fragmentation. Besides that, the logistics industry in Malaysia is also expected to face a chailenging environment for the hiring of goods vehicle drivers and relatively low-skilled workers. Its operations are also vulnerable to meteorological changes and natural disasters as well as any workers’ rights activism, strikes and protests at transportation terminals. Moving forward, the industry size (industry revenue) of the logistics industry in Malaysia is projected to expand from RM148.82 billion in 2014 to RM253.21 billion in 2019 and register a CAGR of 11.2 percent. The local road transport market is also projected to register continuing growth from 2015 to 2019. The market size (market revenue) of the road transport market in Malaysia is projected to reach RM37.33 billion in 2019. 7. INDUSTRY OVERVIEW (Cont’d)
,,'”o.” (, .\0″ “K’ \ Figure 11: The Forecast Market Size (Market Revenue) of the Road Transport Market in Malaysia, 2015-2019
Year Source: ProtegeAssociates Protege Associates has prepared this report in an independent and objective manner and has taken adequate care to ensure the accuracy and completeness of the report. We believe that this report presents a true and fair view of the industry within the boundaries and limitations of secondary statistics, primary research and continued industry movements. Our research has been conducted to present a view of the overall industry and may not necessarily reflect the performance of individual companies in this industry. We are not responsible for the decisions and! or actions of the readers of this report. This report should also not be considered as a recommendation to buy or not to buy the shares of any company or companies. Thank you.
SEOW CHEOW SENG Managing Director Protege Associates Sdn. Bhd. 31

 

 

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