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BLOCK-SPACES: EXPOLANKA’S AIR FREIGHT STRATEGY

ECHELON | 14.06.2019

MARGINS ARE SHRINKING AS GLOBAL RETAILERS DEMAND SHORTER DELIVERY TIMES

Expolanka Holdings Plc is expected to grow profits 17% annually over the next three years, benefitting from China-US trade tensions as it expands in North America and Asia. However, rising global demand for air freight is challenging margins, according to a research report.

“(The group) is reporting consistent net profit growth, with more focus on the core logistics business driving revenue,” First Capital, an investment bank, said in a report. Expolanka generated Rs2.5 billion by diversifying non-core businesses and reinvested it in the freight forwarding and warehousing businesses.

“Expolanka has a global presence in all major apparel-sourcing regions to the US, which would provide a strategic benefit due to the prevailing trade tensions between the US and China,” First Capital said. Expolanka built a competitive advantage in global apparel logistics, driving group revenue from Rs19 billion in 2009 to Rs78 billion in 2018. It has 60 offices across 17 countries, and is now diversifying to pharmaceuticals, electronics retail and e-commerce to drive volume growth. The group has invested considerable resources to expand its presence in the US and across Asia with “Expolanka has a global presence in all major apparel-sourcing regions to the US, which would provide a strategic benefit due to the prevailing trade tensions between the US and China,” First Capital said. Expolanka built a competitive advantage in global apparel logistics, driving group revenue from Rs19 billion in 2009 to Rs78 billion in 2018. It has 60 offices across 17 countries, and is now diversifying to pharmaceuticals, electronics retail and e-commerce to drive volume growth. The group has invested considerable resources to expand its presence in the US and across Asia with major fashion brands entering high-value retail markets in China, Hong Kong and India. Expolanka is also expanding into Myanmar, Indonesia, the Philippines and Vietnam. According to First Capital, global demand for air freight grew at twice the pace of world trade’s 4.3% growth. Demand for air freight is outpacing availability. For Expolanka, managing yields is challenging in an environment of rising and fluctuating costs. The majority of Expolanka’s client base consists of the biggest brands in global fashion that demand on-time and direct-to-store delivery regardless of costs.

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“Due to fast fashion trends in Europe and the US, delivery times have become shorter over the years. In addition, with Expolanka now beginning to cater to pharmaceutical and tech companies, the need for air exports has grown much more significant,” First Capital says.

To maintain gross profit margins at 18% and net profit margins at 2%, Expolanka is establishing long-term partnerships with global cargo carriers and negotiating block-space agreements during peak periods. This allows the firm to maintain margins by avoiding ad-hoc bookings at substantial costs, according to First Capital. There are two types of blockspace bookings: soft and hard block-space. In soft block-space, freight forwarders have the option of cancelling the booking for a minimal penalty. In hard block-space bookings, the full rate has to be paid irrespective of utilization. Expolanka currently manages between the two methods, depending on the product category, and expected demand and orders.

First Capital is an investment bank offering services as Stock Brokers in Sri Lanka. The Company acts as a conduit between retail and institutional clients and the secondary market of the Colombo Stock Exchange. First Capital’s best-in-class research team provide a series of actionable trade recommendations, daily and periodic market commentaries and publications for Stock Brokers in Sri Lanka.