Excerpts from analysts' report

CIMB analysts: Roy Chen & William Tng, CFA

Maintain Overweight rating on the land transport sector

taxi!Photo: http://www.vegannomadguide.com/We think the threat of Uber/Grab (U/G) is overhyped and the risk of rising taxi idle rates has subsided.

We upgrade ComfortDelGro (CDG) from Hold to Add (TP: S$3.27). Key re-rating catalysts include bus reform and earnings growth from the Downtown Line (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. 

Drivers have the say
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.

Taxiing suits serious drivers; U/G works for casual drivers
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.

U/G cutting incentives 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.

Competition pressure is likely to go downhill…

roychen9.14"If I were the Transport Minister
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 (photo) & William Tng, CFA

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.

… till a new steady state is reached
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.

Full report here

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