Has SingPost Benefitted From Alibaba Partnership?

Singapore Post (SingPost) recently reported a 2.2 percent year-over-year (YoY) rise in revenues to $368.7 million in 2Q19, but its net profit fell to $25.1 million during the same period. One of the main causes for the drop in the net profit was the $3.6 million loss recorded in the “Share of Results of Associated Companies and Joint Venture” line item. This compares to a profit of S$4.9 million during the same period last year. Management pointed out that the loss during 2Q19 was caused by 4PX, its associate company in China which was responsible for managing the warehouse and infrastructure expansion in the country. SingPost also pointed out that the investment loss in China was the result of the expansion of eCommerce volumes.

This takes us back to one of the original investment objectives laid out by SingPost when it announced its first partnership with Alibaba (BABA) in May 2014, and it was to enable the Company to expand overseas through Alibaba’s networks. According to the US Securities and Exchange (SEC) securities filing by BABA, it acquired a 10 per cent share capital of SingPost which was worth $313 million (Rmb1.5 billion) at that time, and the acquisition was completed two months later in July 2014.

The initial reactions from the analyst community to the May 2014 announcement were bullish in general. Most of them commented that it will provide SingPost to gain access to overseas markets through access of funds with BABA. Moreover, it will also allow SingPost to move into e-commerce, and leverage on BABA’s customer base to scale up its regional e-commerce logistics operations.

Back To Reality

What happened after four years of partnership with BABA? BABA disclosed in its FY18 annual filing with the SEC that Cainiao Network (which owns 4PX) was fully consolidated into its financials for the first time, and it posted revenues of Rmb6.8 billion (US$1.1 billion) in FY18. However, the cost of revenues ballooned by almost 1.8 times from Rmb59.5 million in FY17 to Rmb107 million in FY18. It did not break out the costs pertaining to Cainiao.

SingPost also disclosed in its 2Q19 press release that with effective on 01 November 2018, 4PX will complete its issuance of additional shares to Cainiao, and Quantium Solutions International (QSI), a subsidiary of SingPost, will dilute its equity shareholding down to 19.8 percent. This will also result in SingPost losing its significant influence over 4PX and will no longer be recorded as an associate company. The investment in 4PX will be classified as an equity investment measured at Fair Value Through Other Comprehensive Income (“FVTOCI”).

Did SingPost Shareholders Benefit Alibaba Partnership?

With the loss of significant influence over 4PX, where do the benefits of SingPost’s partnership with BABA come in? The new accounting treatment of SingPost’s stake in 4PX will not shed much light on how much losses incurred by 4PX going forward as the recording of profit and losses will go under the new line item of fair value which is another term that is highly debatable, and shareholders will need to get a better grasp of how management will present its financials going forward.

Interestingly, in the FY18 Annual Report by SingPost, it was noted that the line item showing the “Share of losses of associated companies in the joint venture” had a negative $3.1 million figure during FY18. This is more than the $1.2 million loss incurred in FY17 (SingPost financial year end is 31 March every year). This might indicate that SingPost needs more time to turnaround 4PX’s operations. The question is how much time and patience will shareholders be willing to give the management to help the former associate company recover?

Partnership With Lazada – A Key Driver?

Lazada, an e-commerce outfit that is owned by BABA operates an online shopping platform across Southeast Asia, offering merchants a one-stop marketplace solution to access consumers in six Southeast Asian countries including Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Vietnam.

According to BABA’s annual filing with the SEC, revenues from its international commerce retail business increased by almost one-fold from Rmb7.3 billion in FY17 to Rmb14.2 billion (US$2.3 billion) in FY18. The increase was due to an increase in revenue generated from Lazada and AliExpress, primarily driven by robust gross merchandise value (GMV) growth on these two marketplaces.

However, adjusted Earnings before Interest, Taxes, and Amortisation (EBITA) margin fell from 62 percent in FY17 to 53 percent in FY18. In absolute terms, adjusted EBITA rose by 38 percent to Rmb114.1 billion (US$18.2 billion) in FY18 compared to Rmb82.4 billion in FY17. The drop in the adjusted EBITDA margin was mainly due to its investments in Cainiao Network, and Lazada.

As for the breakdown of performance information pertaining to Lazada on SingPost’s books, there were no specific profit and loss figures being published. However, in its FY18 Annual Report, SingPost did note that Lazada has already moved its entire warehouse operations into SingPost’s Logistics Hub in Tampines. With this, the utilisation rate of the Logistics Hub’s warehouse space exceeded 90 percent in terms of its new eCommerce marketplace fulfilment activities. SingPost thinks that the partnership with Lazada will enable both to leverage each other’s strengths to serve the rising eCommerce demand in Southeast Asia.

Knowing this statement, shareholders shall wait for further disclosures of the financial performance and the value accretion benefits from SingPost’s partnership with Lazada.

Lack Of Clarity Of Partnership With Alibaba

Until now, the benefits of the partnership between SingPost and Alibaba are not exactly clear for many SingPost’s shareholders. Meanwhile, there appears to be inconclusive on exactly how SingPost would be able to achieve its fair share of the benefits when it tries to gain a foothold in China through Alibaba’s partnership. This is evidenced by the continuing losses suffered through its investment and partnership with Cainiao Networks. However, there appears to be some hope with the partnership with Lazada. But until SingPost shed more light on the financial implications pertaining to the partnership, shareholders will continue to hold management accountable for short-term losses from the partnership.

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