The Positives

• Public Transport Services revenue/EBIT grew by 12%/30% YoY. This improvement is attributed to SG operations, which saw higher operated milage from bus services and higher ridership and average fare from rail services. Increase in average fares was due to the c.4.2% increase in fares, which came into effect in January 2019.
• New schemes rolled out to retain drivers. Dynamic pricing and profit sharing schemes were initiated to increase drivers’ revenues and boost competitiveness as a P2P operator, thereby helping CD retain their fleet of drivers.

The Negatives

• 1Q19 Taxi FY18 revenue/EBIT fell by 5%/6% YoY due to keen competition from private hire operators in SG and China. Smaller fleet size and the entrance of GoJek in SG weighed down revenues in SG this quarter. In China, the take-up rate for double-shift has fallen from 70% to 50%. This is due to the quantity incentives provided by ride-hail operators upon the completion of a specified number of trips – it provides a further incentive to drive with a ride-hailing operator if the cabbie already drives for long hours. 

Outlook

The overall outlook is positive. Revenues will be lifted by the full year contribution from acquisitions. Public Transport Services is expected to continue driving earnings growth in FY19 and assist in the narrowing the losses at DTL. Figure 1 summarizes the list of acquisitions conducted in the last 12 months. CD has a strong balance sheet with a net cash position.

Figure 1: Summary of acquisitions

The results of the public consultation regarding the proposal of two license classes – street-hail and ride-hail service operator license (SSOL/RSOL) – is still under deliberation. If these two licenses come to pass, it would mean that ride-hail operators, Grab and GoJek can apply for the SSOL, which will require them to maintain a fleet; but also allows their drivers to take street hail jobs like taxi operators.

In 1Q19, CD rolled out several initiatives/schemes to tackle the various pain points faced by the industry:

• Voluntary profit-sharing scheme which offers 25-35% rental rates for a 15% share of fare takings aimed making driving for shorter hours (<8 hours) economically profitable for drivers which allows prospective drivers who only have a few spare hours to monetise their time, thereby increasing the number of drivers
• Dynamic pricing through ComfortRIDE which address existing cabbies’ concerns of missing out on higher fares during peak hours. This will help remove one possible incentive of switching to driving as a private hire under Grab or GoJek as cabbies can now benefit from both street hail as well as enjoy fares that are more competitive during peak periods. This initiative will likely benefit CD in terms of retaining their existing drivers and possibly attracting more drivers to drive with them.

We view these initiatives favourably as CD continues to reposition the business to remain competitive and maintain market share.

In previous years, the management made a conscious decision to delay the replacement of taxi fleet due to weakening revenues. CD started ordering more taxis to replenish the fleet size in 2018 with taxis scheduled to be delivered periodically. Lower COEs at the start of 2019 prompted the management to accelerate the pace of replacing the taxis. Diesel taxis with higher COE (S$40k) were replaced with hybrid taxis with lower COEs (S$20k). CD was able to capitalise on the lower COEs while fulfilling the demand for hybrid taxis, which allowed CD to earn higher rental commanded by hybrids. The company received 300 taxis in 1Q19 and will receive another 300 taxis in 2Q19. The average age of taxis is currently 19 months.

Figure 2 summaries the performance and outlook for the key segments and geographies

Maintain ACCUMULATE with an unchanged target price of $2.72

We maintain our accumulate call with an unchanged target price of S$2.72. Our target price gives an implied FY19e forward P/E multiple of 16.8 times.