ComfortDelGro (CD SP) - DBS Research 2018-03-26: Benefits If Competition Returns To Normalcy

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COMFORTDELGRO CORPORATION LTD C52.SI

ComfortDelGro (CD SP) - Benefits If Competition Returns To Normalcy

• Uber reported to sell South-East Asia ops to Grab.
• Development likely to have implications on ComfortDelGro/ Lion City Holdings deal.
• Various possibilities but base case: competition returns to normalcy, CD to benefit.
• CCS views, regulations an important factor to monitor.

What’s New 

• According to media reports, Uber is said to be reaching or has reached an agreement to sell its South-East Asia operations to Grab, which is to be announced as early as today. It has been reported that Uber will then own up to a 30% stake in Grab. This news does not come as a surprise and, if it materialises, puts an end to months of speculation that it was in the process of exiting the SEA markets.
• With respect to ComfortDelGro (CD), recall that it currently has a pending deal with Uber to acquire a 51% stake in the latter’s subsidiary, Lion City Holdings (LCH).
• LCH is a rental car business with operations based in Singapore, and is said to own/ operate a fleet of c.14,000 vehicles. At this juncture, the deal is under the Phase 2 review of the Competition Commission of Singapore (CCS).

Our initial views: 

• There are a number of scenarios and potential outcomes – Base case: competition cedes, bodes well for ComfortDelGro. There are multiple scenarios and various fluid factors at play here, given multiple parties and potential regulations. We present our initial thoughts, which is subject to changes. Our base case scenario is that with the exit of Uber, and competition cedes, we could see market normalcy returning with the absence of heavy discounting and promotion. This would bode well for ComfortDelGro.
• However, we are in early days, still bears monitoring pending developments. We present the various scenarios and our take. In our view, the outcome of Uber/Grab deal is likely to have an impact on the ComfortDelGro/LCH acquisition.
• While we present the scenario that ComfortDelGro/Lion City Holdings  deal will proceed, we think the chances are low given the potential combination of Grab/Uber and this could raise anti-competition concerns. In fact, in our earlier note on 20 Feb 2018 (ComfortDelGro: ComfortDelGro-Lion City Rental acquisition moves into Phase 2 of CCS review) commenting on CCS’ Phase 2 review of ComfortDelGro/Lion City Holdings deal, we believe a concern was the overarching news of the change in shareholding in Lion City Holdings.
• Besides the parties involved – ComfortDelGro, Grab and Uber - we opine that investors would have to take into account the regulatory approvals particularly from CCS and the Land Transport Authority (LTA).

Potential scenarios (not exhaustive) – 

1. ComfortDelGro/Lion City Holdings deal goes through: 
   1. ComfortDelGro ties up with Grab: +ve for ComfortDelGro. This scenario is likely to see ComfortDelGro owning the majority of the assets, with an eventual tie-up with Grab under JustGrab platform, which includes ComfortDelGro’s taxis, and ComfortDelGro/LCH’s fleet. However, this could potentially raise competition issues given market share dominance. At the existing stage and form, CCS/LTA is likely to raise concerns.
      Probability: Low due to anti-competition concerns 
   2. ComfortDelGro owns assets, UberFlash terminated; leaves ComfortDelGro without existing private hire vehicles (PHV) booking platform: -ve for ComfortDelGro. In our view, this leaves ComfortDelGro holding the assets but with a limited platform to utilise the assets, which will be negative.
      Probability: Low 
2. ComfortDelGro/Lion City Holdings deal terminated: 
   1. Competition increases: -ve for ComfortDelGro. ComfortDelGro/Lion City Holdings deal terminated due to change in ownership in Lion City Holdings, but Grab continues to intensify competition using its transport app as a “touch-base” with consumers, to further its ambition as a mobile payment app.
      Probability: Medium 
   2. Competition cedes: +ve for ComfortDelGro. With the exit of Uber, Grab is to become the dominant player among private hire car apps, thus ceding competitive pressure in Singapore and to refocus its efforts in regional SEA markets, instead of Singapore (assuming Grab/Uber deal is approved).
      Probability: Medium.

Andy SIM CFA DBS Vickers | http://www.dbsvickers.com/ 2018-03-26

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