ISE18/14-15
| Subject: | economic development, postal reform, Hongkong Post, SingPost |
- Hongkong Post has been operating as a trading fund since August 1995. Apart from Hongkong Post, there are four other government departments operating as a trading fund in Hong Kong. They are Land Registry, Office of the Communications Authority, Companies Registry and Electrical and Mechanical Services Department. Of the five trading funds, Hongkong Post is the only one that is unable to meet its target rate of return between 2009-2010 and 2013-2014. Furthermore, Hongkong Post recorded losses totaling HK$167 million in the period from 2011-2012 to 2013-2014. Against this, the Government has announced that it would review the business operation of Hongkong Post.
- Singapore Post ("SingPost") is recognized as one of the most successful postal companies in the world. A series of postal reform had been implemented by the company in the late 2000s with a view to reducing reliance on the traditional mail business and expanding the e-commerce business. This issue of Essentials discusses the recent financial performance of Hongkong Post and gives a brief account of the postal reform undertaken by SingPost.
Hongkong Post
Historical development- Hongkong Post was changed to a trading fund operation in August 1995 under a resolution of the Legislative Council made pursuant to the Trading Funds Ordinance (Cap. 430). The Government aims to achieve the following objectives through this accounting arrangement: (a) providing the management of the trading fund with the financial flexibility for delivering government services and incidental services in a commercial manner; and (b) making the management clearly accountable for the performance of the trading fund's operations.
- At the commencement of its operation, Hongkong Post was financed by an initial capital injection of HK$2,101 million and a shareholder loan of HK$900.4 million both from the Capital Investment Fund. Hongkong Post repaid the shareholder loan in August 2005. On operation, Hongkong Post is required to generate sufficient revenue to: (a) finance its liabilities and expenses incurred in the provision of services; and (b) provide a reasonable return to its sole shareholder (i.e. the Government).
Financial performance
- The Table below shows that except for Hongkong Post, all the other four trading funds were able to achieve their respective target rates of return between 2009-2010 and 2013-2014. Hongkong Post further incurred losses between 2011-2012 and 2013-2014, amounting to HK$50 million in 2011-2012, HK$114 million in 2012-2013 and HK$3 million in 2013-2014 after a rise in postage fees, totaling HK$167 million. Hongkong Post has recently stated that it was unable to achieve the target rate of return in 2014-2015, but achieved an operating profit.
Table – Actual (vs target) rates of returnTrading Fund 2009-2010 2010-2011 2011-2012 2012-2013 2013-2014 Hongkong Post 6.6%
(8.4%)3.8%
(8.4%)-1.9%
(8.4%)-3.9%
(5.9%)-0.5%
(5.9%)Land Registry Trading Fund 38.5%
(8.3%)52.6%
(8.3%)19.7%
(8.3%)34.0%
(6.9%)15.8%
(6.9%)Office of the Communications Authority Trading Fund 32.2%
(8.5%)44.7%
(8.5%)48.8%
(8.5%)31.4%
(6.7%)26.0%
(6.7%)Companies Registry Trading Fund 35.3%
(8.3%)59.4%
(8.3%)54.9%
(8.3%)63.6%
(6.7%)72.5%
(6.7%)Electrical and Mechanical Services Trading Fund 49.1%
(8.5%)58.1%
(8.5%)45.5%
(8.5%)38.1%
(7.8%)31.7%
(7.8%)Note: Target rates of return are in brackets. For instance, as for Hongkong Post, the actual rate of return was -0.5% and the target rate of return was set at 5.9% in 2013-2014. Source: Financial Services and the Treasury Bureau (2015). - A standing mechanism has been put in place for the respective policy bureaux and the Financial Services and the Treasury Bureau to regularly monitor the financial performance of the trading funds. Noting the performance of Hongkong Post, the Financial Secretary in his 2015-2016 Budget Speech announced that the Government would review the business operation of Hongkong Post with the objectives of enabling the department to further support the development of the logistics industry in Hong Kong and expand its service offerings in response to market needs.
- Although Hongkong Post has attempted to diversify its revenue sources derived from the traditional mail business to other services such as the retail business and e-services to consumers,1Legend symbol denoting Examples of e-services offered by Hongkong Post are: (a) local Smart Post service with an e-mail notification function, (b) international iMail service for bulk posting of registered airmail, (c) counter collection service for online purchases, and (d) online posting platform to facilitate posting by internet traders to their customers. it still has room for improvement. A case in point is that in 2013-2014, 97% of revenue (equivalent to HK$5,092 million) still came from the traditional mail services.
Singapore Post
Historical development- SingPost was established in 1992 as a stock company and a full subsidiary of Singapore Telecom owned by the Singapore government. SingPost was later listed on the Singapore Stock Exchange in May 2003 in a bid to improve its services and enhance operational efficiency. Since then, SingPost has devoted much energy to implement a diversification and regionalisation strategy to enlarge its regional business and add new revenue sources such as e-commerce.
Transformation of SingPost
- SingPost began implementing a series of corporate restructuring measures in 2003 which included starting new services such as e-commerce and financial services,2Legend symbol denoting Examples are: (a) "Care-for-Life" insurance plan in conjunction with the partner Prudential; and (b) Visa Money Transfer remittance service which allows the transfer of money to Visa cardholders in selected countries such as Australia, China and Indonesia. aggressively growing the mail business, and increasing product lines and customer offerings3Legend symbol denoting SingPost has been offering the passport collection service at some 20 post offices since October 2010. with the aim to generate more revenue for financing future development. The management of SingPost saw the restructuring of the company as a response to the impacts of e-substitution, lifestyle changes and technology advancements affecting the global postal industry.
- Despite investment in greater efficiency, SingPost had since about 2007 been noting that the profits had started flattening out. At that time, the lion's share of the revenue and operating profit had been from the mail business.4Legend symbol denoting SingPost recorded a revenue of S$472.6 million (HK$2.9 billion) in 2007-2008, of which about 77% was contributed by the core business of mail. Logistics comprised 15% of the total revenue, while retail contributed the remaining 8%. The mail division also accounted for the bulk of SingPost operating profit, at 81%, compared to 6% by logistics, 6% by the retail business and the remaining 7% by property investment. The Board of Directors of SingPost considered that there was an inevitable decline in mail volumes caused by online alternatives, and hence a need to replenish a large part of the revenue from the mail business with some other revenue sources.
- In 2009, both the operating revenue and net profit of SingPost decreased by 3% as a result of a shrink in the mail business due to the global financial crisis in 2008. Yet, revenues from logistics services and hybrid mail, a service that combined elements of electronic and physical delivery, increased in 2008-2009. SingPost decided to take a step forward through acquiring the logistics company, Quantium Solutions, in May 2009, which allowed it to expand its regional footprint. It also began to concentrate greater regional growth in vPOST, the company's online shopping and shipping service.
- SingPost went on to invest in logistics-related companies as well as technology company Postea, which provided global postal and logistics solutions. Greater diversification changed SingPost's revenue composition. In 2009-2010, mail services accounted for about 68% of revenue, as compared to 77% in 2007-2008. Furthermore, the expansion in overseas business surged from a low of 0.3% of revenue to 11%. Increases in cash flow and improvements in revenue demonstrated that regional expansion and service diversification were the right paths towards better financial performance.
- In October 2011, SingPost underwent an organizational restructuring to strengthen its leadership. The goal was to broaden the company's horizons into new geographies and businesses. A new programme named "Ready for the Future" was rolled out in end-2011 to position SingPost as a world-class leader in providing mail, logistics and e-commerce solutions for Singapore and Asia Pacific. Specifically, the objectives of the Programme are to protect the core business and explore new innovative sources of revenue through investment and acquisitions into new services and markets. SingPost also places a heavy emphasis on human capital through providing a series of upskill training courses, purchasing new equipment and making use of advanced information technology to enhance labour productivity.
- Since then, SingPost has been steadily expanding its presence overseas, leveraging its subsidiaries and partners. SingPost now has five business pillars comprising mail, e-commerce, retail, logistics, digital services and financial services, and various subsidiaries engaging in different businesses:
(a) mail: Singapore Parcel which is a provider for courier service in Singapore and international shipping to more than 200 destinations worldwide; (b) e-commerce and retail: SP eCommerce which provides retailers with integrated end-to-end e-commerce solutions; vPost which is one of the largest online shopping and shipping services providers in Southeast Asia; and Omigo Marketplace which is an online marketplace for consumers; (c) logistics: Quantium Solutions which specializes in logistics services to businesses in Asia Pacific region; CouriersPlease which is a leading e-commerce courier service provider in Australia; and Lock+Store which is a leading self-storage operator in Asia; and (d) digital services and financial services: SAM which is a secure digital mailbox and a payment platform that offers 24/7 access. - SingPost's efforts in spearheading e-commerce logistics were recognized on the international stage in June 2014, as it won the World Mail Award5Legend symbol denoting The World Mail Awards are considered as the annual "Oscars" of the mail and express industry. The awards are presented to postal operators or service providers worldwide, which have been reviewed by a panel of judges comprising Universal Postal Union members, international postal industry leaders and users. Some of the award categories are: e-commerce, customer service and security. for e-commerce.
Financial performance
- SingPost has transformed from a domestic postal operator to a regional e-commerce logistics player in the past 12 years. After the initial public offering in 2003, SingPost's market capitalization has grown by 260%, and total shareholders' return over the period amounted to approximately 350%.
- SingPost has achieved a steady profit performance over the past few years. Net profit, which reflects the company's core operating performance, increased from S$149.6 million (HK$915.6 million) in 2010-2011 to S$157.2 million (HK$962.1 million) in 2014-2015. More importantly, SingPost's focus on the development of e-commerce and logistics beared fruit. E-commerce related revenue accounted for about 28% of the total revenue in 2014-2015.
- Given the healthy annual operating cash flows, SingPost paid an annual dividend of S$0.0625 (HK$0.38) per share between 2006-2007 and 2013-2014, and S$0.07 (HK$0.43) per share in 2014-2015. As SingPost is currently traded at S$1.9 (HK$11.6), the dividend yield is about 3.7%, which is much higher than the saving interest rate at 0.4%. Moreover, the share price of SingPost has more than tripled over the years, as compared to its initial public offering price at S$0.6 (HK$3.7).
Observations
- The management of SingPost takes note of the changing market conditions and formulates appropriate business strategies. Over the years, SingPost has invested heavily in e-commerce-related business to drive sales and formed logistics partnerships to help move products faster and farther at a lower cost. Highly praised by postal operators and service providers worldwide, SingPost won the World Mail Award for e-commerce in June 2014.
- Hongkong Post still relies on the traditional mail business to generate revenue. It has been unable to meet the target rate of return since 2009-2010 and recorded annual deficits between 2011-2012 and 2013-2014. As announced by the Financial Secretary, it may be opportune for the Government to review the operation of Hongkong Post with a view to diversifying its services to meet market needs.
Prepared by Jackie WU
Research Office
Information Services Division
Legislative Council Secretariat
10 August 2015
Endnotes:
References:
| 1. | Annual reports of Hongkong Post, various issues.
|
| 2. | Annual reports of the Singapore Post, various issues.
|
| 3. | Audit Commission. (2002) Director of Audit's Report No. 38: Chapter 6: Financial performance of the Post Office.
|
| 4. | Financial Services and the Treasury Bureau. (2015) Report of the Working Group on Long-Term Fiscal Planning (Phase Two).
|
| 5. | Hongkong Post. (2015) Official website.
|
| 6. | Kotha, R. & Joshi, H. (2013) Singapore Post: Transforming Mail Services in the Internet Age.
|
| 7. | Michael A. Crew, Paul R. Kleindorfer & James I. Campbell Jr. (2008) Handbook of Worldwide Postal Reform.
|
| 8. | Singapore Post. (2015) Official website. |