RHB Regional Infrastructure Conference

Transcription

1 Sector Update, Construction RHB Regional Infrastructure Conference Overweight (Maintained) Macro Risks Growth Value We remain OVERWEIGHT on the construction sector. Views of the speakers featured in our RHB Regional Infrastructure Conference in KL on 5 Aug 2014 are consistent with ours the growth prospects of infrastructure development in the region are strong. Our top themes and corresponding stock picks are the Klang Valley MRT (Gamuda), piling (Pintaras Jaya) and public housing (Protasco). Southern Corridor High-Speed Rail (HSR). It takes only 90 minutes to travel from one end of the Southern Corridor HSR to the other end. A HSR connectivity will generate massive economic spin-offs to both cities. It is not yet decided if the Southern Corridor HSR will adopt conventional rail or Meglev technology. Penang Undersea Tunnel. The project will be carried out in three phases. It boasts participation from two leading Chinese construction groups. The contractors will receive land and rights to reclaim land measuring a total of 110 acres in Penang Island and a 30-year concession to collect toll at the tunnel for works done. Infrastructure growth in Asean. Industry experts estimate infrastructure needs in Asean to be at USD60bn per annum. Good governance, capital market development and commitment from the Government are crucial to ensuring that wealth from natural resources will be channelled into infrastructure development. Sector risks. These include: i) the Government dialing back on its commitment and timeliness in the implementation of Lines 2 and 3 of the Klang Valley MRT project, ii) constraints on construction resources, and iii) an escalation in input costs. Strong growth prospects and plenty of opportunities. Views of the three speakers are consistent with ours the growth prospects of infrastructure development in the region, including Malaysia, are strong. There are plenty of opportunities in terms of new infrastructure projects that will keep players busy for many years to come. Our top three themes and corresponding stock picks are: i) the Klang Valley MRT Gamuda (GAM MK, BUY, FV: MYR5.61), ii) piling Pintaras Jaya (PINT MK, BUY, FV: MYR4.88), and iii) public housing Protasco (PRTA MK, BUY, FV: MYR2.43). Joshua Ng joshuang@rhbgroup.com P/E (x) P/B (x) Yield (%) Company Name Price Target Dec-15F Dec-15F Dec-15F Rating Ahmad Zaki Resources MYR0.72 MYR BUY Eversendai Corp MYR1.02 MYR BUY Gamuda Bhd MYR4.78 MYR BUY Hock Seng Lee MYR1.90 MYR NEUTRAL IJM Corp MYR6.52 MYR BUY Kimlun Corporation MYR1.55 MYR BUY Naim Holdings MYR3.89 MYR BUY Pintaras Jaya MYR4.27 MYR BUY Protasco MYR1.75 MYR BUY WCT MYR2.26 MYR NEUTRAL Source: Company data, RHB estimates See important disclosures at the end of this report Powered by EFA TM Platform 1

2 RHB Regional Infrastructure Conference Speakers And Topics Infrastructure a recurring theme in Malaysia and the region. Our inaugural RHB Regional Infrastructure Conference in KL on 5 Aug 2014 attracted participation from 103 fund managers, and about 30 representatives from various publicly listed companies, a government-linked corporation and a government agency. The three speakers we featured and their respective topics were as follows: i) Mr Tonny Yeap - Head, Special Projects & Technology, of Land Public Transport Commission (SPAD) who spoke on the Southern Corridor HSR Between KL and Singapore, ii) Dato Zarul Ahmad Mohd Zulkifli Chairman of Consortium Zenith BUCG Sdn Bhd who spoke on the Penang Undersea Tunnel, and iii) Mr Stuart L. Dean CEO of General Electric for Asean who spoke on the Infrastructure Growth In Asean. Southern Corridor HSR Between KL and Singapore Highlights. Among the key takeaways from the session are: i) It takes only 90 minutes to travel from one end of the Southern Corridor HSR to the other end, ii) A HSR connectivity will generate massive economic spin-offs to both cities, and iii) It is not yet decided if the Southern Corridor HSR will adopt conventional rail or Meglev technology. 90 minutes on Southern Corridor HSR from KL to Singapore. Assuming a top speed of 350 km per hour (kph), theoretically, one could travel from one end of the 330-km Southern Corridor HSR to the other end within 90 minutes on an express/non-stop service. Coupled with travel time between HSR terminals and central business districts, waiting time prior to departure and time spent at the immigration check point (that add up to about one hour), the entire journey will take about 2.5 hours. This compares with door-to-door travel time of about five hours by car and double-tracking train service (under construction) and 3.6 hours by plane. There will also be transit services that stop at five transit points along the alignment. While the final alignment has yet to be decided, SPAD hinted that its preferred alignment runs from KL to Singapore via Seremban, Melaka, Muar, Batu Pahat and Nusajaya (see Figure 1). Figure 1: Preferred Southern Corridor HSR Alignment Source: SPAD See important disclosures at the end of this report 2

3 Massive economic spin-offs. A HSR connectivity between KL and Singapore will enhance the competitiveness of two of the largest cities in South-East Asia in the international arena. A World Bank study shows that businesses located within daily reach of major national/regional hubs of commerce and information, will attract more businesses as well as a large pool of talent and labour. A HSR connectivity will also increase tourist arrivals and leisure travelling between the two countries, as well as boost real estate development and redevelopment potential, and hence real estate values. During the construction phase, the project will create thousands of jobs in the construction sector. Upon commencement of operations, massive manpower will be needed to operate and maintain the infrastructure, creating jobs for the population. Conventional HSR or Maglev? SPAD and its counterpart in Singapore have yet to decide on the rail technology for the Southern Corridor HSR. They have two options, namely, conventional HSR (top speed of 350 kph) and Maglev (top speed of 500 kph, but more costly). Similarly, project financing (reportedly at about MYR40bn) has yet to be decided. However, if other HSR projects in the world are a guide, the Southern Corridor HSR project is quite likely to be largely public-funded (it is unclear at this point how the costs will be shared between Malaysia and Singapore). Administratively, the Southern Corridor HSR may be challenging as it is a crossborder HSR project. At present, cross-border HSR projects are still considered rare with only two in the world, namely, the London - Paris HSR and Shenzhen - Hong Kong HSR projects. Penang Undersea Tunnel Highlights. Among the key takeaways from the session are: 1) The Penang Undersea Tunnel project will be carried out in three phases, 2) The project boasts participation from two leading Chinese construction groups, and 3) Consortium Zenith BUCG Sdn Bhd will receive land and rights to reclaim land measuring a total of 110 acres in Penang Island and a 30-year concession to collect toll at the tunnel for works done. Three highways and an undersea tunnel. Known as the Penang Undersea Tunnel, this massive road network project (reportedly carrying a price tag of MYR6.3bn) in Penang Island actually comprises three highways and an undersea tunnel, to be implemented in three phases as follows (see Figure 2): 1) Phase 1A An alternative 10.5-km dual carriageway running parallel to the existing northern coastal road from Tanjung Bungah to Teluk Bahang, 2) Phase 1B A 4-lane dual carriageway connecting Bandar Baru Ayer Itam/Farlim to Lebuhraya Tun Dr. Lim Chong Eu, 3) Phase 2 A by-pass from Persiaran Gurney to Lebuhraya Tun Dr Lim Chong Eu, and 4) Phase 3 A third link between the Island and Mainland, from Persiaran Gurney to Seberang Perai. Figure 2: Phases Of Penang Undersea Tunnel Source: Consortium Zenith BUCG Sdn Bhd See important disclosures at the end of this report 3

4 Strong Chinese partners. The project boasts participation from two leading Chinese construction groups, namely, Beijing Urban Construction Group (BUCG) (as consortium partner) and China Railway Construction Corporation (CRCC) (as engineering, procurement, construction and design contractor). BUCG has a long list of completed high-profile projects to its name, including the Beijing Bird s Nest Olympic Stadium and Beijing Capital International Airport Terminal 3. As for CRCC, the group has constructed more than 100 motorways with a total length in excess of 22,600 km in China to-date. Among the prominent projects it has completed are the Xiamen Xiang an Undersea Tunnel and the Jinshuigou Super-Major Bridge of the Yumenkou-Yanliang Expressway. Payment in kind. Consortium Zenith BUCG Sdn Bhd will receive from the Penang State Government land and rights to reclaim land measuring a total of 110 acres in Penang Island and a 30-year concession to collect toll at the tunnel for works done. Already, the consortium has accepted two parcels of reclaimed land measuring a total of nine acres valued at MYR305m as payment for the feasibility studies and detailed design works, which it expects to be completed by early Infrastructure Growth In Asean Highlights. Among the key takeaways from the session are: 1) Industry experts estimate infrastructure needs in Asean to be at USD60bn per annum, and 2) Good governance, capital market development and commitment from the Government, are crucial to ensuring that wealth from natural resources will be channelled into infrastructure development. A USD60bn question. On the back of a growing population and expanding middle class, industry experts estimate infrastructure needs in Asean to be at USD60bn per annum. These are basically in the areas of power, roads, water/sanitation, railways, airports and ports. Certain countries in the region have so much catch-up to do in terms of investment in certain infrastructure, for instance, water/sanitation in Indonesia and Myanmar, as well as for power in Cambodia and Myanmar. Electrification (access to electricity as a percentage of population) in the two countries stands at only 24% and 13% respectively. Infrastructure development funded by wealth from natural resources. Generally, countries within Asean do have the money to be spent on infrastructure development, given the enormous wealth generated from the abundance of natural resources. However, a few conditions will have to be put in place to ensure that the money will go into infrastructure development. Firstly, good governance with a level playing field for players must prevail to attract private investment in infrastructure (in the form of privatisation, public-private partnership, etc. Secondly, capital market development will have to continue to enable recycling of the region s surplus savings within the region (instead of going to US Treasuries, for instance). Last but not least, Governments in the region should be prepared to fund the lion s share of the national infrastructure requirements (as much as 60% based on the opinion of certain industry experts). Conclusion Strong growth prospects and plenty of opportunities in infrastructure development in Malaysia and the region. The views of the three speakers featured in our RHB Regional Infrastructure Conference in KL on 5 Aug 2014 are consistent with ours the growth prospects of infrastructure development in the region, including Malaysia, are strong. There are plenty of opportunities in terms of new infrastructure projects (such as the Southern Corridor HSR and the Penang Undersea Tunnel in Malaysia) that will keep players busy for many years to come. We believe picking the right themes is crucial to a winning investment strategy in construction stocks. This is subject to the availability of meaningful proxies to the themes, and decent upside to our valuations for the proxies. Our screening produces three top themes with meaningful proxies that exhibit decent upside to our valuations. They are: i) the Klang Valley MRT Gamuda, ii) piling Pintaras Jaya, and iii) public housing Protasco. We believe the best proxy to the Klang Valley MRT project is Gamuda, as it has secured, via a 50:50 MMC-Gamuda JV, the choice parts of Line 1 of the project (and most likely Lines 2 and 3 as well). See important disclosures at the end of this report 4

5 It plays the roles of: i) the project delivery partner (PDP) for the elevated portion, from which the JV earns a PDP fee amounting to 6% of the elevated portion s contract value of about MYR14bn, and ii) the main contractor of the tunnelling portion that the JV is involved with, for which we assume a margin of 12% over the corresponding contract value of MYR8.3bn. The prospects for the piling segment are strong, backed by: i) the MYR73bn Klang Valley MRT project, ii) a proliferation of high-rise developments amid rising land scarcity in prime locations that require extension piling, and iii) the chronic shortage of piling capacity in the market, which should boost piling rates. We believe the best proxy to the piling segment is Pintaras Jaya, given its advantages over its rivals including its: i) full range of piling machines, tools and accessories, ii) in-depth knowledge of ground conditions, and iii) ability to secure cash discounts for key inputs. We believe that margins from public housing projects are attractive given: i) that the contracts are awarded largely on a directly-negotiated basis, and ii) the inherently relatively low execution risks for these simpler building jobs. We believe the best proxy to public housing is Protasco, as it has already bagged two public housing projects worth a total of MYR667m. Sector risks. These include: i) the Government dialing back on its commitment and timeliness in the implementation of Lines 2 and 3 of the Klang Valley MRT project, ii) constraints on construction resources, and iii) an escalation in input costs. See important disclosures at the end of this report 5

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