Public Transportation - CIMB Research 2016-02-10: Kicking the tires ~ Taxis vs. Uber/Grab

COMFORTDELGRO CORPORATION LTD C52.SI SMRT CORPORATION LTD S53.SI

Public Transportation Kicking the tires - Taxis vs. Uber/Grab

Drivers are at the centre of competition between TO and U/G. U/G driving works for casual drivers; serious drivers prefer taxiing for stability and profitability.
We expect the competition pressure for TO to ease ahead as U/G continue to cut incentives granted to drivers. We expect a new steady state to be reached soon.
The authority should reduce regulations on TO and TD and avoid excessive regulations on U/G, so that all parties’ interests could be maximized.

Maintain Overweight rating on the sector, with ComfortDelGro as our sector top pick.

We think the threat of Uber/Grab (U/G) is overhyped and the risk of rising taxi idle rates has subsided. We upgrade CDG from Hold to Add (TP: S$3.27).
Key re-rating catalysts include bus reform and earnings growth from the DTL. We maintain our Reduce call on SMRT (TP: S$1.40) as it faces strong near-term headwinds from the authority’s fare cut, ridership diversion to the DTL and rising rail maintenance cost.
We believe the market’s view that SMRT will get a good deal for rail reform is unwarranted.

The competition between taxi operators (TO) and private ride booking firms Uber/Grab is centred on drivers as both depend on drivers for profitability.
We interviewed over 30 U/G drivers and taxi drivers (TD) in Dec and Jan to compare taxiing and U/G driving from a driver’s perspective. With the drivers’ first-hand operating data, we plot the respective earnings of taxi and U/G drivers against their number of driving hours per week, shown in the main content of the report.

Our research shows that earnings from taxiing are more stable and usually higher than from U/G driving. Hence, taxiing should remain the choice for serious drivers who depend on driving to make a living. U/G driving works for casual drivers who are less concerned about earnings and for those who need a car for business/family use and want to defray the cost by earning an income out of it. U/G is also an option for drivers who are not qualified for taxiing due to taxis’ more stringent standards for drivers.

Heavy incentives were U/G’s weapons of penetrating the market. In the early days after U/G were launched, U/G drivers could easily earn incentives of S$1k-2k in a single week on top of fare income from commuters.
Such high incentives attracted a number of TDs to switch to U/G. Since then, U/G have been consistently cutting their incentives, a sign of U/G’s satisfaction with their driver pool.
The effective incentives for a U/G driver are much lower nowadays, at best S$200-300/week, according to our estimate.

With U/G expected to continue cutting drivers’ incentives for profit seeking/optimisation, we foresee more ex-TDs previously attracted by U/G rejoining the taxi business.
We believe the high taxi penetration rate and the lack of supply of cost-efficient cars have made Singapore a less easy market for U/G compared to elsewhere. Hence, it also makes sense for U/G to avoid excessive competition with TOs by focusing on different types of drivers, from a strategic point of view.

We predict that a new steady state will be reached soon.
At this point, drivers will select the operator, either TO or U/G, that best suits their needs: earnings-oriented drivers will drive taxis while flexibility-oriented drivers and drivers that are not qualified for taxiing will drive for U/G.

The authority’s ongoing review on U/G is likely to lead to regulatory changes to the whole taxi/private ride service industry.
We think the best way forward for the authority is to reduce the unnecessary restrictions on TOs and TDs and avoid excessive regulations on U/G. Such approach would maximize commuters’ interests and level the playground for drivers. It could also enlarge TOs’ potential driver pool, thereby improving their taxis hire-out rates.

Roy CHEN CIMB Securities | William TNG CFA CIMB Securities | http://research.itradecimb.com/ 2016-02-10

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