Wealth Insights Series: Logistics - Exploring Potential Investment Paradigms in the Logistics Sector

Logistics space; unexplored by investors yet continues to play a significant role in the Sri Lankan economy.

Asia Securities, a leading financial services firm in Sri Lanka, hosted the eighth instalment of its “Wealth Insights” series of investor events on Wednesday, 12th December. The event, titled “Exploring Potential Investments Paradigms” focused on exploring the Logistics industry and potential investment opportunities, while bringing together industry veterans with institutional and high net worth investors. The session focused on unearthing deeper insights into sector dynamics that should better inform investment decisions.

Asia Securities’ Logistics sector analyst, Mangalee Goonetilleke, presented highlights from the sector report covering ports, integrated logistics and modern logistics. She noted that the sector is the second largest contributor to the country’s economy and plays a significant role across its diverse segments. Commenting on port operations, Mangalee noted that despite Sri Lanka’s strategic location, with capacity expansion and a deep-water terminal being constructed in India, Sri Lanka may lose its growth momentum, in particular as the Colombo port is operating at near full capacity. As such, she noted that operations of the East Container Terminal is essential. On the integrated logistics side, she highlighted that contribution from the three main sectors of the economy has changed over the past 30+ years with the service sector accounting for nearly 63% of the economy compared to 44% in 1980. As such, logistics sector requirements have changed from transporting mainly agriculture-related goods to providing solutions for a more varied economy. She noted that some of the key sectors driving the integrated logistics space currently are the wholesale and retail trade, FMCG, construction and textiles. Her presentation also touched upon ride-hailing, the up and coming segment of logistics that focuses on better utilisation of the existing vehicle fleet. She noted that the country’s high private vehicle ownership, lack of expansion in public transportation, increasing smartphone usage, and convenience are some of the key factors driving demand for services from PickMe and Uber. In addition, the tech platform used by these companies enables them to provide an array of ancillary services similar to that of the regional peer Go-Jek, resulting in an overall market opportunity much larger than ride-hailing. In terms of investments in the logistics sector, she concluded that apart from the two listed companies on the stock exchange, an investor can gain exposure to the sector through investments in conglomerates, which operate sizable logistics businesses.

The presentation was followed by a panel discussion consisting of prominent industry figures; Mr. Ajit Gunewardene, Chairman, PickMe, Mr. Jagath Pathirane, CEO, Expolanka Freight (Private) Limited, Mr. Ruwan Waidyaratne, Managing Director, Hayleys Advantis Limited, and Mr. Tissa Wickremasinghe, COO, Hambantota International Port Group (Pvt) Ltd.

Commenting on the Port operations, Mr. Wickremasinghe noted that demand in maritime operations are changing as global trade, and with it resource demand, is shifting towards developing nations, which bodes well for Sri Lanka. At Hambantota, the key driver of business will be the bunker tank farm. In addition, it will operate as a multi-purpose port tapping into China Merchant’s expertise as the second largest port operator in the world. At Colombo port, CICT and its deep-water terminal allowed Sri Lanka to maintain its position in the maritime space as the only deep-water terminal in South Asia. This addition was a timely move as the ultra large carriers entered the trade around the same time period. However, with the port operating at near full capacity, he noted that it is imperative that the East Container Terminal is developed over the next year.

On the local logistics space, Mr. Wadiyratne noted that changes in consumer behaviour and technology has changed the logistics landscape calling the larger players to rethink their strategies. In addition, he noted that start-ups in the logistics space are beginning to disrupt the existing practices of the larger players, as smaller parcel sizes are moved at a more frequent pace today. He further noted that there is increased adoption of third-party logistics solutions among local companies and that growth opportunities are available in sectors such retail, FMCG and textiles. Speaking of the global shipping industry, Mr. Waidyaratne noted that consolidation of global shipping lines has resulted in far greater bargaining power for the liners and as such ports are now under pressure to be able to handle the large volumes at hand of the shipping companies. At the same time, he noted, it has also brought in relative stability to shipping rates.

Commenting on the freight forwarding business, Mr. Pathirane also noted that the impact from shipping alliances has had an impact across the shipping agency and freight forwarding industry. With stagnant growth in cargo volumes, shipping companies have contracted their space to maintain more stable rates. He noted that while this had an impact on margins, much of it has been mitigated by entering into long-term service contracts. On the other hand, as one of the key players in the multi-country consolidation (MCC) operations in Sri Lanka, Mr. Pathirane noted that the industry is still in its infancy with further potential for growth. Commenting particularly on the textile industry, he noted that many of the manufacturing hubs are located in South Asia, and hence believes that Sri Lanka has the potential to act as a free port for the supply of raw material to these destinations and also be an assembly point for finished goods.

On the ride-hailing business, Mr. Gunawardene noted that the key drivers of the business are mobile phone penetration which would in turn drive usage of smartphones, and growth in income which creates a level of affordability and aspiration for comfort, reliability and safety in mobility. While there is further growth potential in the ride-hailing business in Sri Lanka, he noted that as a tech-based business which sits on a large customer database, the opportunity to offer ancillary services apart from ride-hailing and food delivery services is substantial, similar to the super-app offering by likes of Go-Jek. In addition, with the recent launch of ‘PickMe Truck’, he believes there is potential for growth in the logistics space, with the opportunity to increase the utilisation of many smaller delivery vehicles that otherwise remain idle.

About Asia Securities
Asia Securities is a leading financial services firm in Sri Lanka, providing clients with equity brokerage, research, investment banking and wealth management services. Its origins date back to 1990, with the founding of its associate, Asia Securities (Pvt) Ltd – now ranked among the top 3 equity brokerage firms in Sri Lanka. Through its subsidiaries and affiliates, the firm serves Multi-national and Local Corporates, Financial Institutions, Public Sector Entities, Multilateral Development Banks, High Net-worth Individuals, Family Offices, and Retail Investors across multiple geographies. Asia Securities is the local partner for several leading global financial services firms.