SINGAPORE COLD CHAIN LOGISTICS OPPORTUNITIES

Prelude

M&A activities in the ASEAN Logistics sector have gained momentum in recent years.  Between 2016-Q1/2017, the sector witnessed multiple related deals including the follow: (refer to Annex 1: M&A in Singapore, Malaysia, Vietnam and India, for compilation of deals listing)

• Singapore’s Yang Kee and PIL Singamas acquisitions of Axima (Australia) and Mumbai-based Apollo LogiSolutions  respectively;
• Malaysia’s Tasco’s acquisition of Gold Cold Transport to expand its cold chain capacity;
• Japanese Yamato’s ASEAN network expansion plan through equity stakes in Malaysia GD Express, OTL Group and Singapore Tidiki Logistics;
• Vietnam Mekong Capital ventured into cold chain logistics through ABA Corporation;
• Japanese Meito Transportation’s US$13.5m joint venture with local Vietnamese partner to build 39,000 tons of refrigerated storage; and
• India Stellar Value Chain and ColdEX expanding their pan-India network by acquiring Kelvin Cold Chain and raising funds from Asia Climate Partners respectively.

The strategic theme that runs through these deals is the need to expand geographically, either domestically or into the region, through acquisitions along the logistics verticals such as cold chain, reefer fleets, distribution centers or delivery services. 

Objectives

In this micro sector outlook article, we focus on Singapore Cold Chain Logistics, a subset of the larger Transport & Logistics industry, with a view to understand:

•      Global Cold Chain Market
•      Singapore Cold Chain Market
•      Sector Investment Thesis
•      Pre-Investment Criteria
•      Valuation Comparison

Methodology 

This article is based purely on available online published resources (Pg 17: Reference Source) and presented solely as the author’s personal reflections.

Disclaimer: The views, opinions and assumptions expressed in this article are those of the author and do not reflect the position of any firm, corporation or entity. Examples of statistics and analysis within this article are only highlights and examples. They should not be utilized in real-world analytic products as they are based only on very limited, dated and unverified open source information.

Global Cold Chain Market

Valued at US$190bn in 2017 with CAGR of 7%, the global cold chain market is estimated to reach US$233bn by 2020.  Here are some macro drivers.

Growing Asian Middle Class

By 2030, Asia will host 64% of global middle class accounting for 40%+ of global middle class consumption. With that comes about stronger demand for high quality food products (from all over the world), dining out experience and healthcare services, which are enabled through cold chain infrastructure.

Advent of Food Crisis

Food crisis ranked 4th on The World Economic Forum top global risks for the next 10 years.  Food losses amount to $750bn annually due to inadequate transportation, storage and handling processes. While temperature control of sensitive products is an understood concept, adoption and support from various local governments is still at its infancy, albeit its heightening awareness.

Cross Border Perishable Products Trade

Cold chain systems are crucial to the growth of global trade in perishable products and to the worldwide availability of food and health supplies. Each year, billions of tons of fresh food products and millions of dollars’ worth of U.S. exports are lost due to poor cold chain systems in developing markets.

Expansion of Organized Food Retailers

Modern retail sales have been growing at 10-15% globally, constituting major market share of large emerging economies. The demand for cold chain is driven by structured chain retailers typically in the tune of food franchises where food safety and quality are observed, as well as e-commerce grocery players.

Growth in Biopharma Industry

Over $260bn of annual biopharma sales are dependent on temperature control logistics for optimal efficacy. Biopharma is expected to grow at over 8%, doubling that of conventional pharma. The efficacy and safety of these products require dedicated cold chain systems.

Government Infrastructural Development

Cold chain development and efficiency is dependent on local country’s infrastructure and government policies eg. Investment in road building, stable power supply, airport cold storage facilities, trained labor force, ease of customs clearance and trade flow etc.  Recognizing this importance, and with private sector initiatives, much credited to large foreign cold chain players entering markets through FDI, governments in Asian economies are beginning efforts in this area.

Singapore Cold Chain Market

Estimated market value to be S$11bn by 2020 from S$8.7bn in 2015 at 4.8% CAGR, driven primarily by demands from the advanced and significant foodservice industry and its position as the region’s healthcare hub

Significant Volume of Structured Food Retailers

According to the Food Industry Asia report by Oxford Economics, F&B industry contributes S$14bn to GDP. In 2015, some 7,000 establishments generated S$9bn of sales.  The Food industry in Singapore is larger than Chemicals and Aerospace industries making it a significant sector not to be ignored despite general slowdown in retail sales due to manpower constraints and high rental.

Having one of the most advanced retail sectors in Asia, home to 30,000 franchises, 1,000 convenience stores, supermarkets and hypermarkets, Singapore’s high income population of $80,270 per capita is projected to reach US$9bn in food spending, US$33bn in e-commerce by 2020. 60% of Singaporeans eat out at least four times a week, 2010 National Nutrition Survey. Market demand for F&B will grow at average of 4.8% p.a.  A significant and developed food sector will increase demand for cold chain technology.

Regional Healthcare Hub

Asia’s pharma industry will generate $386bn in 2017.  Singapore as a healthcare hub estimates pharmaceutical sales at $800 million currently and likely to increase to $1 billion by 2020. Singapore represents an attractive opportunity for refrigerated logistics service providers to serve the growing pharmaceutical industry.

Top Logistics Hub in Asia

World Bank ranked Singapore as No.1 Logistics Hub in Asia (2014 Logistics Performance Index).  Singapore runs 6,500 weekly flights to 280 cities, 60 countries, 2 million tonnes of cargo handled annually, 200 shipping lines connected to 600 ports in 123 countries.  It’s status is further strengthened through efficient customs and business friendly import/export procedures with the airport goal of custom clearing 90% cargo shipments within 13 minutes. There is no import taxes and ocean freight rates to and from Singapore port is possibly one of the cheapest.

Singapore has made cross border movement of perishable products possible with its 8,000 sqm 18 temperature zones transit building by Coolport@Changi and 1,400 sqm with 75,000 tons capacity per year by Dnata to enable no-break in cold chain transition.  It is no surprise that 20 of 25 global logistics players eg. DHL, Kuehne+Nagel, Sankyu, Schenker, Toll, UPS, Yusen are present in Singapore with substantial operations.

The country plays a significant logistic hub role in ASEAN, which is home to 600m + population with middle income growth at ~11% from 2012-2023.  While many ASEAN countries may have the presence of cold chain logistics players, the lack of infrastructure and transparency in trade policies present a weak link to no-break cold chain process.

Sector Investment Thesis

Singapore Cold Chain sector presents untapped M&A opportunities

Strong Fundamentals

Singapore topped the scoreboard in the 2016 Top Markets Report on Cold Chain conducted across 20 international markets for cold chain expansion by US Department of Commerce. It was being assessed based on competitiveness index and economic statistics including: government/regulatory, labour force, infrastructure, demand, industry interest, population, food spending, pharma sales etc.  Contrary to popular belief that the Singapore market is limited and saturated, its Cold Chain sector has been independently observed to have strong fundamentals and competitive edges in reasons described in previous headers.

Premium on Specialty

“Companies with cold chain logistics and warehousing businesses are trading at 28.4x,” said Mr Freddie Lim, MD of Malaysia Tasco Bhd in Feb 2017 when compared to Tasco’s 10.8x as non-cold chain logistics player.  Cold chain, while high on CAPEX and operational complexities, commands high entry barrier, high price premium and plug into the significant and exciting growth segments of F&B and Biopharma.  Tasco acquired Gold Cold Transport as entry into cold chain logistics for 9x proforma EBITDA.  

Untapped Opportunities

While Malaysia ranked 8 in the 2016 Top Markets Report on Cold Chain, it recorded 12+ Logistics-related deals in 2016 to Q1/2017.  Refer to Annex 1 – Logistics M&A in Malaysia.  In Singapore, based on searchable published data while non exhaustive, there were only 2 records found over the same period.  See Annex 1.

The top 10 food cold chain logistics companies* in Singapore cater an approximate 165,000 pallet positions for Chilled, Frozen and Ambient products.  While a few are large public listed companies, majority are SMEs, family owned and with integrated products and services prime for meaningful expansion and/or consolidation. *HAVI Logistics and Martin Brower not included in this study

Pre-Investment Criteria

As a high CAPEX (over S$10m) and asset-led business, Cold Chain Logistics (CCL) success hinges on several criteria for investors and shareholders to optimize returns

Industry Veterans Needed

Direct industry experience is mandatory for the leadership team.  CCL is a high CAPEX and energy-intensive business, an industry veteran with in-depth know-how of cost management, LEAN practice, supply chain best practices and pricing mechanism would be critical.  Hiring criteria should place focus on industry executive who has track record in starting up and operating CCL rather than functional specialists.

Diversified Customer Base

Over reliance on any single customer or group of customers presents a huge risk.  While the food industry is expected to grow consistently, as a consumer-fronting business, it is subject to multiple risks beyond the Cold Chain process. An example was how Singapore Mandai Logistics’ business was impacted severely due to its dependence on parent company, PIN Corp’s business. It subsequently evolved from a cold chain specialist to 3PL in 2011 to diversify its customers base.

 

It may be worth investigating on how existing customers are secured and who in the management team has the fundamental network and influence over the customers.  Each account may be of significant inventory value with multiple distribution points and tens or hundreds of vendors. Switching cost from one CCL to another involved downtime risk, customer's and CCL backend and store-level IT/data set up, vendors coordination and quality process checks etc.

Differentiated Market Position

Logistics industry in general is highly commoditized and competitive. While CCL is a specialized and premium subset of the Logistics sector, in a high density and developed country like Singapore, the need for a differentiated market position for the target CCL will be important.  There are two areas to look into:

Value Adding Processes

•      Postponing food processing – eg. From frozen seafood to chilled temperature for processing
•     High Pressure Processing (HPP) – to prepare proteins for export through post packaging, non thermal pasteurizing to extend shelf life
•      X-ray product packages – to ensure safety and accuracy prior export; temperature sensitive ink on packaging to show when products are at optimal temperature
•      Slicing, portioning, assembling, R&D, cooking, semi-processing of food products

Technology Investment

•   Temperature and location tracking technology in reefer units eg. GPS-enabled sensors, Telematics etc.
•      Front and Backend IT infrastructure for real time shipment data
•     Integrated Point-to-Point inventory ordering and management technology for multiple-location clients

Valuation Comparison Across Markets

   We are unable to establish a relationship between higher trading multiples as a result of cold chain capability as most public listed companies across Asia under Logistics  counter have a relatively diverse portfolio of business functions.  However, we do believe that the Cold Chain Logistics sector is a significant market prime for consolidation and offers attractive investment fundamentals for M&As.  The following listing of Airfreight & Logistics stock in Singapore, Malaysia, India, Hong Kong and Thailand for comparisons.

Singapore Listco – Airfreight & Logistics (Industrials)

PE multiples of other Asian Listco

Logistics M&A in Singapore

Logistics M&A in Malaysia

Logistics M&A in Vietnam

Logistics M&A in India