Land Transport Sector: OCBC Investment 2016-04-12: New regulations unsurprising

Land Transport Sector: OCBC Investment 2016-04-12: New regulations unsurprising COMFORTDELGRO CORPORATION LTD S52.SI  SMRT CORPORATION LTD S53.SI 

Land Transport Sector: New regulations unsurprising 

  • Leveling playing field 
  • NTA wants more changes 
  • Maintain NEUTRAL 

Changes in regulations impact drivers more than operators 

  • Yesterday, LTA announced new regulations for private hire car drivers and vehicles with a focus on protecting commuter safety, and are expected to take effect by 1H17. 
  • One key aspect is the introduction of private hire car driver’s vocational license (PDVL), requiring all private hire car drivers to be registered with LTA, undergo relevant training (~10 hours), pass requisite tests, and attend refresher course every six years, among many other new requirements that draw similarities with the existing taxi regulations, albeit less stringent. 
  • In addition, the existing taxi driver vocational license (TDVL) course is also revamped to close the gap with the new PDVL, with changes expected to take effect from May 16. Some changes include reducing TDVL course from ~60 hours to ~25 hours and refresher course every six years from 6 or 9 hours to 3 or 5 hours, respectively. 
  • In our view, these changes only help level the playing field in relation to requirements on drivers, but not helping in closing the gaps relating to requirements and standards imposed on the two different business models. 

Playing field not exactly that level yet 

  • In response, service providers of private hire car, Grab and Uber, expressed support for the new regulations. 
  • Rightfully so, especially since the introduction of new regulations is a signal that the government supports such business innovation that helps fill demand and supply gaps where traditional taxis are unable to during peak periods. Singapore’s National Taxi Association (NTA), however, thinks more changes are needed to level the playing field in areas of cost and pricing between taxi operators and private hire car service providers. These areas include compliance requirements such as insurance coverage and emission standards imposed on taxi operators (but not on private hire car services), which costs are subsequently passed on to the taxi drivers and commuters. 
  • Pricing was also an untouched area, where private hire car services can adjust pricing according to market demand and supply but traditional taxi operators are not allowed to do so. 
  • Strict taxi availability standards such as the minimum daily mileage required of traditional taxi operators continue to be not applicable for private hire car services. 

CDG still our sector top pick 

  • In all, while the new regulations and changes are good for the industry, they are not surprising to us, though we were expecting more steps taken by the government to level playing field in areas of competitiveness of business models, which ultimately affects profitability. 
  • Therefore, we do not rule out the possibility of further changes or introduction of new measures. 
  • Maintain NEUTRAL on land transport sector for now. 
  • CDG [BUY; FV: S$3.40] is still our top pick within the sector given the expected improvement in cash flow and possibly higher dividends post bus reform, while SMRT [HOLD; FV: S$1.51] continues to face pressures on increasing maintenance-related expenses. 

Eugene Chua OCBC Securities | http://www.ocbcresearch.com/ 2016-04-12
OCBC Securities SGX Stock Analyst Report BUY Maintain BUY 3.40 Same 3.40
HOLD Maintain HOLD 1.51 Same 1.51