Unmasking Asia Thematic Research APRIL 2016
ASEAN Infrastructure: THE NEW OLD THING
SEE PAGE 125 FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS Co. Reg No: 198700034E MICA (P) : 099/03/2012
REGIONAL INFRASTRUCTURE
Unmasking Asia Thematic Research Series
Stress Test Series, September 2015 Regional: I So Wanna Be Resilient Hong Kong/China: The Devil’s in the Details… India: Asia’s Sanctuary Indonesia: Finding a Foothold Malaysia: Weathering Through The Philippines: Stress Cuts Profit But FCF Stays Positive Singapore: The Growth Conundrum
Thailand: Barely Resilient
Vietnam: Timely Deleveraging
Hong Kong/China Energy: Project Blue Sky, December 2015 Hong Kong/China Electric Vehicles: The Green Race, January 2016
ASEAN Infrastructure: The New Old Thing, April 2016
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Executive Summary
Is ASEAN Infrastructure The New Old Thing? In Vietnam, the government acknowledges that the state budget and other forms of development assistance may meet at most half of budgetary This report tackles the theme in two ways. From a strategy perspective, we needs over the next 10 years. That implies that Public Private Partnerships assess the needs and the sources of funding. We also look at each country are a necessity and not an option, offering new opportunities. from a sector perspective to identify gaps, whether they will be filled and, if not, what needs to happen for shortfalls to be met. This provides the basis In Thailand, there is sufficient domestic liquidity to fund spending as the for identifying opportunities and investment recommendations. Our focus is emphasis shifts to transport. This new focus reflects concerns over the threat on Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam. of high logistics costs to competitiveness. If projects can be successfully executed, logistics costs could drop 2%-points to 12%, significant for the Our principal findings are: manufacturing sector. Since the start of the year, the poor global cyclical environment has meant The Philippines has under-invested in recent years and has actually seen greater fiscal impetus on infrastructure spend. Even Singapore is set to deteriorating logistics performance in contrast to the rest of the region. accelerate development expenditure to 6% of GDP by 2020. Infrastructure spending is set to be a key focus of the incoming government Structurally, looking at asset turnover globally suggests few reasons to following the May elections, with transport again the emphasis. expect global growth to accelerate. And, given aggregate leverage, there In Malaysia and Singapore, it’s about improving the quality of infrastructure are few reasons to expect balance sheet expansion by developed markets rather than increasing the infrastructure capital stock per se. as well as China. The biggest theme in Malaysia is the build-out of the rail system over the But while ASEAN infrastructure needs are well known, funding remains the next 5-10 years to improve and enhance local and regional connectivity key question. We looked at savings rates against demographic and given the launch of the ASEAN Economic Community last December. urbanization trends and find there are reasons to expect rising domestic savings rates in coming years. It also helps that ASEAN balance sheets are Singapore continues to invest in extending its lead as a regional hub, both under-leveraged with capacity to expand. While foreign capital is needed, in LNG and in information and communication. Development expenditure domestic funding is set to be a big factor. in the budget is set to accelerate. Two of the countries have external funding needs. In Indonesia, Around the region, while we are seeing improving governance overall, government development budgets are up 33% CAGR since 2014, and much remains to be done. The practicalities of land acquisition remain a spending in the first two months is running at over 40% YoY. Even so, interest key risk throughout much of the region, particularly for executing transport rates and the currency have been well behaved this year. Power is projects. interesting in that our team reckons IRRs have not changed in recent years, The team’s best stock ideas are on page 2. even as they have dropped around the region. The team also sees opportunities in transport.
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ASEAN Infrastructure Best Ideas
Price Mkt Cap 3mth avg T/O PE (x) EPS growth (%) PB (x) DY (%) RoE (%) EV/EBITDA (x) Name Ticker Sector Analyst (lcl crcy) (USDm) (USDm) Rating 15 16F 15 16F 15 16F 15 16F 15 16F 15A 16F Indonesia Adhi Karya ADHI IJ Construction Pandu Anugrah 2,670 719 5 Buy 12.1 13.9 23 -13 1.1 1.7 1.3 1.0 14 13 5 7 Bumi Serpong Damai BSDE IJ Real Estate Aurellia Setiabudi 1,835 2,671 4 Buy 13.7 13.5 -36 2 1.8 1.6 0.8 0.7 15 13 1 1 Jasa Marga JSMR IJ Construction Pandu Anugrah 5,375 2,764 3 Hold 24.9 20.8 3 20 3.5 3.2 1.3 1.4 15 16 13 12 Pembangunan Perumahan PTPP IJ Construction Pandu Anugrah 3,750 1,373 2 Buy 26.8 20.2 27 33 6.2 5.0 0.9 1.1 26 28 10 8 Summarecon SMRA IJ Real Estate Aurellia Setiabudi 1,590 1,735 3 Buy 27.6 20.5 -40 35 3.8 3.3 1.3 1.5 15 17 2 2 Waskita Karya WSKT IJ Construction Pandu Anugrah 2,090 2,145 5 Buy 22.0 22.3 81 -2 2.4 2.7 0.5 0.7 17 13 14 14 Malaysia Gamuda GAM MK Construction Li Shin Chai 5.0 3,029 5 Buy 17.1 18.0 -7 -5 1.8 1.9 2.4 2.4 12 10 23 20 IJM IJM MK Construction Li Shin Chai 3.6 3,310 5 Hold 22.1 22.7 -14 -3 1.4 1.5 2.1 2.1 7 7 12 15 Sunway Construction SCGB MK Construction Li Shin Chai 1.6 534 1 Buy 16.5 13.5 12 22 4.7 3.8 2.5 2.6 33 31 9 7 Philippines DMCI Holdings DMC PM Industrials Rommel Rodrigo 12.8 3,661 2 Hold 15.5 13.7 0 13 2.8 2.6 3.9 4.4 19 20 11 9 Metro Pacific Inv’t MPI PM Financials Rommel Rodrigo 5.8 3,515 5 Buy 18.7 19.3 2 -3 1.5 1.4 0.6 0.6 8 7 20 19 Singapore Mapletree Ind Trust MINT SP REITs Joshua Tan 1.6 2,122 3 Buy na na na na 1.2 1.2 6.5 6.9 8 8 18 18 SingTel ST SP Telcos Gregory Yap 3.7 43,812 62 Buy 15.7 15.5 4 1 2.4 2.3 4.7 4.8 16 15 10 8 Thailand Advanced Info Service ADVANC TB Telcos Maria Lapiz 153 12,913 77 Buy 11.6 15.0 9 -22 9.4 11.2 8.5 6.6 82 68 7 9 Airports of Thailand AOT TB Transport Sittichai D. 376 15,248 40 Buy 33.5 26.4 32 27 4.9 4.3 1.4 1.5 15 17 16 18 CH. Karnchang CK TB Construction Maria Lapiz 25.3 1,214 11 Buy 33.5 29.5 29 13 2.1 2.0 1.2 1.4 7 7 22 21 Vietnam Cotec Construction CTD VN Construction Trung Thai Quang 178,000 374 0.4 Buy 12.1 9.8 100 23 2.6 2.2 2.8 3.1 22 24 5 6 Kinh Bac City Dev’t KBC VN Real Estate Trung THAI Quang 12,700 268 1 Buy 16.9 12.7 -17 33 0.9 0.8 0.0 0.0 6 7 20 15
Share price as at Apr 7, 2016 closing. Source: Maybank Kim Eng
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Table of Contents
ASEAN Infrastructure Best Ideas ...... p2
Global: That Wonderful Elusive Sustainable Balance Sheet Growth ...... p5
Indonesia: Stepping on the Gas ...... p20
Malaysia: Going Down a Different Road ...... p36
The Philippines: If You Have the Will, You’ll Have the Way ...... p50
Singapore: While We Were Sleeping… ...... p68
Thailand: Round 2! ...... p90
Vietnam: Still Below Potential ...... p106
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REGIONAL INFRASTRUCTURE
Five Takeaways
1. ASEAN infrastructure remains an area where we see sustained growth.
2. Indonesia (power and transport), Vietnam (PPP projects throughout), the Philippines
and Thailand (both transport) are areas of opportunity. Malaysia and Singapore will focus on quality rather than quantity.
3. Regulations and transparency need to continue to improve, particularly as transport infrastructure needs clear land acquisition processes to be put in place.
4. Logistics performance has been improving. The Philippines has lagged in recent years while Indonesia has seen the greatest improvement.
5. In ASEAN, we think the demographic and urbanization trends suggest rising domestic savings rates in the coming years. It also helps that ASEAN balance sheets are under- leveraged. While foreign capital is needed, domestic funding is set to be a big
factor.
Sadiq Currimbhoy [email protected] (65) 6231 5836
Willie Chan [email protected] (852) 2268 0631
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into some detail highlighting the rising foreign direct investment and intra- REGIONAL INFRASTRUCTURE regional investment in key projects across the region. This report focuses on just the ASEAN-6 where our country teams reckon we could see government spending of USD84b this year. Of this, Indonesia provides That Wonderful Elusive Sustainable the bulk at USD23b. After this is Vietnam at USD20b. Government efforts amount to USD14b in Singapore and USD9b in Malaysia. Thailand is set to be Balance Sheet Growth small this year (USD3b) but ramping up to an average of USD9b a year to 2020. The Philippines has disappointed in recent years by spending significantly less In our outlook report for this year, 6-for-16 (Jan 23), infrastructure build in than target. But the election provides an opportunity for new impetus. ASEAN was a consistent theme. From a strategy perspective too, with some indicators in the region consistent with recessionary readings, we felt there was Infrastructure Capital Stock greater impetus and necessity for governments to implement projects. From a macro perspective, to see where we are currently in the region, we used Since then, the global environment has remained lacklustre and the urge for IMF data on capital stock. government-led infrastructure spending has arguably increased. And there has been some response. In the Indonesia chapter, Head of Research Isnaputra Fig 1: Public + PPP capital stock per capita Iskandar and team report faster government action and realized spending up Public + PPP capital stock per capita in 2013 nearly 50% YoY. Even Singapore has gotten into the act. Our team highlights that Public PPP the government indicated public development expenditure could top SGD30b, or 40,000 6% of GDP, by 2020. 35,000 This report takes this analysis a step further by looking at Indonesia, Malaysia, 30,000 the Philippines, Singapore, Thailand and Vietnam and examining each of the sub-sectors within infrastructure, assessing if they will be implemented and 25,000 highlighting the investment opportunity. For each country, 5 takeaways are 20,000 offered in addition to sector analysis. 15,000
In this strategy chapter, we focus on whether the ASEAN balance sheet can 10,000 sustainably grow to fund and build the needed infrastructure. We focus on three things: 5,000 0 1. The Asean infrastructure opportunity; Lao
2. The proposition in a global context; and, India China Korea Japan
3. The funding ability of the region. Taiwan Vietnam Pakistan Malaysia Thailand Australia Germany Indonesia Singapore Cambodia Hong Kong
Philippines United States
ONE: UNDERSTANDING THE NEEDS United Kingdom Source: IMF – Investment and Capital Stock Dataset, Maybank Kim Eng
We know large parts of ASEAN are under-built. The ADB in its 2015 ASEAN The capital stock data is put together using national accounts and is measured Investment Report on Infrastructure and Connectivity estimates that the region in constant 2005 dollars. The IMF accumulates the annual investment spending needs USD110b per year until 2025 in infrastructure spend. The ADB report goes by any one country, applying estimated depreciation rates. The data is broken up into three components: one, public sector (which we assume is
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infrastructure); two, public-private partnerships (PPP, which is likely On an infrastructure capital stock to GDP basis, the picture is somewhat infrastructure given much is invested in power projects); and three, private different. More developed countries have lower infrastructure capital stock to sector (which we assume is not infrastructure but may be factories, etc). For GDP – essentially the built infrastructure has already resulted in much stronger our analysis, we assumed that infrastructure capital stock was the combination income growth to support it or is of better quality. More developing countries of both public and PPP. Removing PPP and looking only at public sector does not such as Malaysia and China (although we shall later disucss, we have some change the analysis much. concerns that this number may be overstated) have much higher levels, suggesting that some of the build has already occurred. For this report, we used two different metrics: one is capital stock per capita and capital stock as a percent of GDP. The latter we found more intuitive while The bulk of the ASEAN nations, however, continue to show very low levels of the former helps to also understand the degree of the problem. capital stock. In this report, each team goes into their individual needs. Power is clearly the focus in Indonesia and Vietnam. Interestingly, many discuss Unsurprisingly, the bulk of Asia and ASEAN is underbuilt. Singapore has amongst transport. the highest per capita capital stock. China’s infrastructure stock on this basis is not overly extended, though Malaysia has one of the highest levels in the region. Quality Versus Quantity On this metric, both have some way to catch up to Singapore. Within Asean, there are very low readings for Indonesia, the Philippines and The issue of “quality” deserves a close look as less quantity but more quality predictably, the ’Frontier markets’ of Vietnam, Cambodia and Laos. India, too, may be able to support higher economic activity. exhibits a very low infrastructure capital stock per capita. Fig 3: Quality of overall infrastructure & public capital stock+PPP as % of GDP Fig 2: Public + PPP capital stock as % of GDP Quality of overall Public + PPP capital stock as % of GDP 7.0 infrastructure % Public PPP Hong Kong Singapore 180 6.5 Japan 160 6.0 Germany United States Malaysia 140 5.5 Korea 120 Taiwan United Kingdom 5.0 100 Australia China 80 4.5 India Thailand 60 Indonesia 4.0 Lao 40 Pakistan Vietnam 3.5 20 Philippines Cambodia 0 3.0 0 20 40 60 80 100 120 140 160 180 Lao India China Korea Japan Public capital stock + PPP as % of GDP Taiwan Vietnam Pakistan Malaysia Thailand Australia Germany Indonesia Singapore Cambodia Source: IMF – Investment and Capital Stock Dataset, World Economic Forum, Maybank Kim Eng Hong Kong Philippines United States
United Kingdom Using Quality of Infrastructure data from the World Economic Forum, we plotted Source: IMF – Investment and Capital Stock Dataset, Maybank Kim Eng quality with infrastructure capital stock as a percent of GDP. The data is part of the Global Competitiveness Report. Not surprisingly, the developed world and
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Asia’s city states have the highest quality of infrastructure. And, while they Fig 4: Quality of overall infrastructure & private capital stock as % of GDP have a high infrastructure capital stock per capita (Figure 1), they also have a Quality of relatively lower level of infrastructure as a share of GDP (Figure 2 and 3). overall 7.0 infrastructure Unfortunately, we do not have history to see how infrastructure capital stock Hong Kong Singapore evolves over time from both a “quantity” and “quality” perspective. Only the 6.5 quantity metric is available. But this is instructive. Japan 6.0 Germany Taiwan Malaysia Korea The Big Curl? 5.5 United States Australia While not shown here, infrastructure capital stock in Singapore exceeded 108% 5.0 United Kingdom China of GDP in 1990 and based on the latest 2013 data, it’s below 70%. We do not 4.5 know the quality then, but there has always been the approach of “build it and Thailand India Indonesia they will come.” This continues today and Singapore still has a very proactive 4.0 economic infrastructure plan to be a regional hub. It is home to 50% of Pakistan Lao Southeast Asia’s data centres and is expanding capacity. 3.5 Vietnam Cambodia Philippines From an aggregate perspective, this suggests that there is a “Big Curl” – 3.0 initially, capital stock to GDP surges dramatically even as quality perhaps only 50 70 90 110 130 150 170 190 210 Private capital stock as % of GDP slowly improves. Eventually, there is less need for physical infrastructure build, but a need to improve and optimize. Source: IMF – Investment and Capital Stock Dataset, World Economic Forum, Maybank Kim Eng
On this logic, China and Malaysia are in this “curl-phase”. This comes out in the We were a bit surprised by the low readings in China given the expansion of Malaysian chapter put together by Suhaimi Ilias, Wong Chew Hann, Tan Chi Wei many private sector companies. One possibility is companies that are classified and Chai Li Shin. They discuss the emphasis on improving the efficiency and as government should really be considered private sector. Even so, aggregating quality of infrastructure. both suggests that while the capital stock has increased, there is still more to China’s response has been natural: with less physical build-out ahead, One Belt, do. The difficulty for China is leverage, as we shall see later. One Road has the potential to allow companies that were previously building in China to build elsewhere. And, the rest of ASEAN, and India too, have significant Importance of Institutional Systems scope to increase both quantity metric (which tends to exceed GDP) and The ability to bridge such quantity and quality gaps is also a function of the quality. strength of a country’s institutions. That is, are the socio, political and legal Why Quality Matters – checking the data systems and structures in place so that the “right” projects are identified and executed? Naturally, such ’quality‘ measures may not be accurate. So, we plotted quality For example, one concern over the preceding analysis is that some capital stock against the private sector capital stock to GDP. The logic was that better quality data may be overstated due to leakage and slippage. As the capital stock data infrastructure will attract more private investment. uses GDP components, if project values are over-stated due to corruption and In Asia, which is still dominated by low-margin manufacturing, a small change in other losses then the value of the capital stock will also be too high. logistics costs can mean much higher potential returns. And higher returns In our previous work (Big Ideas: The Charts Of ASEAN, Chart 32, Corruption attract private sector capital. The chart below shows this to be the case. Percentiles), we used data from Transparency International. We converted the rankings data into percentiles: the higher the percentile, the higher the rank
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and so the stronger the institutional system. In ASEAN, the highest score is Fig 6: Corruption Percentiles Singapore. 2005 Percentile 2010 Percentile 2015 Percentile Our cross-check is again to use private sector capital stock: the higher the 100% ranking, the more the private sector would want to come into the country and build capital stock. The chart below shows this is largely the case. 90% 80% Fig 5: Corruption percentiles & private capital stock as % of GDP 70% Corruption 60% percentiles Singapore 50% 100% Germany UK HK Japan 40% 90% Australia 30% US 80% Taiwan 20% 70% 10% Malaysia Korea 60% China 0% USA
50% Laos
Philippines India China India South… Thailand Japan Taiwan Vietnam Malaysia Thailand
40% Australia Myanmar Indonesia Singapore Cambodia Hong Kong Pakistan Philippines 30% Vietnam Indonesia Source: Transparency International, Maybank Kim Eng 20% Cambodia Lao 10% As a case in point, throughout the country chapters, there is a great emphasis on transport infrastructure, including road and rail. Thailand and the Philippines 0% 50 70 90 110 130 150 170 190 210 stress the needs in this space. In Thailand’s case, 93% of the Expedited Project List is in rail and roads. Like other countries, the key is to be able to secure land Private capital stock as % of GDP Source: IMF – Investment and Capital Stock Dataset, Transparency International, Maybank Kim Eng access and each team in this report discusses the latest developments. In Indonesia, the Philippines and Vietnam, land acquisition is a central issue and By using rankings and percentiles, we are looking for improvements in score by progress is discussed in the country chapters. In the Philippines, countries relative to other countries over time. Our underlying thinking is that underinvestment in recent years has created significant bottlenecks. Michael institutional improvements are keys to attracting capital in a competitive global Bengson and Luz Lorenzo reckon that when the new president is elected in May, environment. And, as such, we want to see consistent improvements from both infrastructure will almost certainly be a top priority. There, a new law was an absolute, and relative to the rest of the world, perspective. passed last month (the “Right-of-Way Act”) and implementation will be the key. The biggest improvements in recent years have been in Indonesia and the Philippines. India, too, has shown encouraging improvement. The readings for Why Technology Matters Cambodia, Myanmar and Laos remain very low. Our bias is that technology is the enemy of corruption. We think the success of individuals using social media to expose misbehaving leaders and companies and corrupt practices is set to continue. Other similar use of information (such as Wikileaks and as we write, the Panama Papers) to reveal leakages, wrongdoings
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and malfeasance serves to put pressure on decision makers to behave in a way Fig 7: Logistics Performance Index and change since 2010 that minimizes losses for society. LPI score 2014 In Asia, the rapid digitization (Big Ideas: The Charts Of ASEAN, Chart 16, Getting 4.5 Ready for the e-consumer) could serve to accelerate this trend. Indeed, in each of the country sections, what is clear is that communication capex and Singapore 4.0 Canada EU - 8 US penetration rates are high and are set to continue to increase as more and more Japan HK countries move to 4G. In short, the price of information is falling at a rapid pace Korea Malaysia AU TW in the region. 3.5 China Thailand Indonesia Inter-connectedness and Trade Infrastructure 3.0 Vietnam Philippines India Mexico And that information is more easily shared and traded as ASEAN is increasingly inter-connected (see also the Undersea pipe chart in the Singapore chapter). Cambodia 2.5 Bangladesh Lao But while communication infrastructure is being built out, physical logistics infrastructure is lagging. Myanmar There are some estimates of logistics costs as a percent of GDP and in Thailand, 2.0 -0.3 -0.2 -0.1 0.0 0.1 0.2 0.3 0.4 this exceeds 14%. In the US, it is 8.3% as reported by the Council of Supply Chain Change of Logistic performance index between 2010-2014 Management Professionals. Given that Thailand on the previous metrics has both Source: World Bank, Maybank Kim Eng more and better quality infrastructure than many other ASEAN countries, we estimate logistics costs in other countries could be nearer 20%. The Intra-regional trade perspective The following chart shows the Logistics Performance Index (LPI). The LPI includes 6 different metrics including customs, infrastructure, international With the launch of the ASEAN Economic Community earlier this year, there is shipments, logistics quality and competence, tracking and tracing and much expectation of a surge in intra-regional trade. While intra-regional trade is timeliness. not much more than 20% of total trade, in the EU and for NAFTA, this exceeds 40%. The y-axis shows the latest reading as of 2014. The x-axis shows the increase in points since 2010. So, one would want to be in the top right hand corner, Looking at the LPI, the bulk of European countries have the highest readings. improving logistics performance that is at a high level. Cambodia and Indonesia Within NAFTA, Canada and the US have very high readings but Mexico is similar show the greatest improvements in LPI over that 4-year period. In Indonesia’s to many ASEAN countries. So, logistics matters, but it is possible to have high case, the improvements were driven by customs performance and logistics intra-regional trade even if not all the countries have the strongest quality. Even so, were the total LPI improvement from 2010 to 2014 be infrastructure. In Mexico’s case, this may be because the key manufacturing replicated, it would still lag Thailand and Malaysia (which are very close to each areas are close enough to transportation networks to benefit trading partners. It other and similar to China). So, further investment needs to occur. India and the still takes many years for businesses to identify, maximize and get comfortable Philippines have been, on this metric, going backwards. with cross-border risk. ASEAN’s case may not be dissimilar. As manufacturing is still a key driver of growth, and many are low-margin businesses, any logistics improvements can increase margins and profits significantly.
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However, we reckon intra-regional trade will move much faster than the pace Fig 8: Asset turnover in the US, Europe, Japan & Asia seen in NAFTA, where it took almost 10 years for merchandise trade to double. US asset turnover Europe asset turnover We base this on three reasons: Japan asset turnover Asia asset turnover 1. The adoption of technology and communication infrastructure through 95% many countries lowers significantly the cost of market research, testing out new products, access to consumers and businesses. This is 90% particularly important in an environment where product cycles are becoming shorter. 85% 2. The demographic patterns on young consumers mean a growing consumer base. 80% 3. The mediocre outlook for the global economy pushing governments to invest more into infrastructure build-out. This is the subject of the 75% next section. 70%
TWO: SUSTAINABLY EXPANDING BALANCE SHEETS IS THE 65% SCARCE COMMODITY 60% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E Source: Factset, Maybank Kim Eng Who can Expand Their Balance Sheet and Where? Since the Global Financial Crisis in 2008, the balance sheet in the key countries A great deal continues to be written about the lack of global growth. Rather has been generating fewer sales. We could posit any number of reasons, but one than use macro data, we wanted to use company data. And we reckon one of these is that Quantitative Easing (or QE) helped keep weak companies from reason for the weak global growth environment is the following figure. The going bust. Another is that the QE meant a rush of capital to Emerging Markets chart shows asset turnover for the key countries globally – defined here as just which resulted in excess capacity being built. The bottom line is that lower sales divided by average total assets. The universe is the listed non-financial asset turns has meant downward pressures on returns on capital. companies in the relevant benchmarks. These are aggregated by adding all the sales and dividing by total average assets. Effectively, we are measuring how The Asia deterioration, across the board and so including the ASEAN countries, much sales the balance sheet generates as if all the non-financials were one has been dramatic. company. What does this mean for returns on capital relative to the cost of capital?
As asset turns have fallen, we compared returns on invested capital (RoIC) for the non-financials against long term bond yields in each of the developed regions. The logic is that a large gap between the returns and cost of capital will be able to drive self-sustaining growth. Our RoIC calculation is a simplification using the ROE decomposition framework: it’s simply net profit divided by invested capital.
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The US Japan
The US-listed sector provides a relatively comforting picture. Despite lower In contrast, and perhaps unsurprisingly, Japan’s return on invested capital looks asset turnover, record operating margins have meant the RoIC in the US has held much more linked to the exchange rate (red line on reverse scale below) than up well compared to bond yields. In the chart below, the yellow line is RoIC domestic bond yields. Demographic and domestic debt issues are so large that while the grey line is the US 10-year bond yield. This gap has allowed US growth Japanese returns do appear to be a function of the exchange rate and the self- to continue to grow. With a wider gap, companies would be expected to sustaining nature of returns is therefore questionable. continue to invest for growth. Fig 10: Japan RoIC, 10-year government bond & real effective FX rate Fig 9: US RoIC, 10-year government bond & US$ real effective FX rate Japan RoIC Japan 10 yr govt bond BIS Japan REER (RHS, reverse scale) US RoIC US 10 yr govt bond BIS US$ REER (RH, reverse scale) 10% 40 16% 80 9% 50 14% 85 8% 60 12% 90 7% 6% 70 10% 95 5% 80 8% 100 4% 90 6% 105 3% 100 4% 110 2% 1% 110 2% 115 0% 120 0% 120 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015F 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015F Source: Factset, Bloomberg, Maybank Kim Eng Source: Factset, Bloomberg, Maybank Kim Eng Europe The positives are balanced by some potential negatives. First, despite very low interest rates, thanks to low asset turnover, returns have not exploded to the Europe is also interesting as the demographic picture changes with aging upside. Indeed, companies have focused on cost cuts. Operating margins are at populations. Lower bond yields have not meant higher RoICs in Europe. Asset record highs and this may not be sustainable, particularly as the more cyclical turns have been declining as elsewhere but the economy has been poor and for and globally related sectors of the economy suffer. Second, credit spreads have this universe of companies, part of the reason for improvement has been the widened for High Yield and some Investment Grade debt and these could impact exporters. growth and therefore, returns. Finally, the red line shows the US$ real effective The red line again shows the Euro REER, on the right hand reverse scale. The exchange rate (right hand reverse scale). This has risen sharply in recent years annual nature of the analysis means there are unfortunately too few data points and back to levels prior to the GFC. The US$ strength has yet to feed into the but the weakening Euro has likely been improving returns of listed companies. RoIC of US companies in aggregate but is worrisome enough for Fed Chair Janet The European Central Bank (ECB), seeing weak inflation data and a soft Yellen to sound very dovish. Nevertheless, the US is a relative bright spot. economy, has been increasingly aggressive.
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Fig 11: Europe RoIC, 10-year government bond & real effective FX rate Fig 12: Debt to GDP distribution in Europe, US & Japan Europe RoIC German 10 yr govt bond 2007 2014
Euro REER, BIS (RH reverse scale) Total Private Total Total Total Private Total Total 14% 60 Sector Debt Government Debt Sector Debt Government Debt to GDP Debt to GDP to GDP to GDP Debt to GDP to GDP 12% 70 %) (%) (%) (%) (%) (%) Europe
10% Germany 117 64 181 109 75 184 80 France 151 64 215 181 96 277
8% Belgium 167 87 254 209 107 316
90 Spain 206 36 242 185 99 284
6% Italy 113 100 213 121 132 253
Netherlands 221 43 264 241 68 309 100 4% UK 184 44 228 161 88 249
110 2% US 228 56 283 211 97 308
Japan 175 167 342 188 230 418
0% 120 Source: BIS, Eurostat, World Bank, Maybank Kim Eng
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015F The stretched balance sheets could limit the ability of the developed world to Source: Factset, Bloomberg, Maybank Kim Eng drive sustainable growth. While debt to GDP may continue to rise, the Japan One implication of more aggressive policy by the ECB and the Bank of Japan is experience suggests that it is not a guarantee that growth will accelerate. 1 the risk of currency wars given how returns in Japan and Europe have moved in Rather, it may push more countries to reign in fiscal deficits , putting more recent years. Interestingly, negative interest rates in neither Japan nor Europe pressure on monetary policy makers. But interest rates are already negative in have done much to weaken their own exchange rates further. And that could Europe and Japan, and yet to indicate any success. In short, the policy impact returns of exporters and could prevent self-sustaining growth. All this credibility problem for central banks may persist for some time. before we get to the margin pressures on banks when there are negative interest rates. The China Factor And the Liabilities Side is a Problem Too We have found using the ROE decompositions useful in understanding Chinese returns. In previous work, we have highlighted the decline in asset turns and We also need to consider the liabilities side of the balance sheet. Here, the therefore in returns on invested capital. macro data, by including household and government debt, shows developed The chart below compares RoIC for the listed Chinese non-financials universe. economies are potentially too stretched. While interest rates have trended down, the returns on capital have fallen at a The table below shows this. For every country, aggregate non-financial debt to much faster pace. Indeed, the gap is amongst the lowest. The excess capacity is GDP is higher than before the GFC. Germany stands out as the least leveraged such that there are not enough returns to get companies to invest and expand economy. Furthermore, in Germany, the UK and US, the private sector has their balance sheets again. deleveraged. But this has been more than balanced by a surge in government debt as fiscal deficits rose sharply. In other countries, both the private and public sector debt to GDP rose, and sometimes as nominal GDP remains very 1 In this context, “People’s QE” is understandable: if companies don’t invest, then weak in some countries. governments need to invest in social and other infrastructure projects and this needs to also be monetized by the Central Bank.
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Fig 13: China RoIC, 10-year government bond & real effective FX rate THREE: FUNDING SUSTAINABLE GROWTH
China RoIC China 10 yr govt bond BIS China REER, RH reverse scale The persistent question is how infrastructure spend will be funded. That is, can 18% 80 the liability side of the domestic balance sheet expand to match the asset side? 16% 90 14% We approach this via looking at two separate sources: 12% 100 1. The potential for domestic leverage in ASEAN; and, 10% 2. The outlook for domestic savings 110 8% 6% 120 The State of Leverage in ASEAN 4% 130 2% Unlike the developed world, and indeed China, ASEAN is under-leveraged. The 0% 140 table below shows the breakdown of aggregate debt to GDP for Asia by household, non-financial corporate and government debt. The bulk of ASEAN is 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
2015F underleveraged and can expand their balance sheet. The levels in Indonesia, the
Source: Factset, Bloomberg, Maybank Kim Eng Philippines, Thailand and nearby India are very low and there is significant scope to expand leverage. Insofar as these returns reflect the environment in China, it is difficult to expect too much from Chinese growth in coming years. We also plotted the RMB Fig 14: Debt to GDP distribution in Asia, as of September 2015 REER. While we are hesitant again to say that the currency has been driving Total Total Total Total returns down, it is interesting that the strong RMB could be impacting returns Household Non-Financial Corp Govt China * 39 166 44 249 negatively too. Instead, China is more likely to want to export its excess Hong Kong 67 218 5 290 capacity to the rest of the world adding to global disinflationary pressure. Indonesia 17 24 27 68 India 10 50 68 128 The problem for China, frequently discussed by us and others, is also leverage: Korea 87 106 42 235 the post GFC credit boom added roughly 100%-points of debt to GDP, resulting in Malaysia 70 68 55 193 an aggregate leverage ratio of 250%. So, while China has some infrastructure Philippines 10 29 53 92 quality improvements to do, a debt-fuelled boom may mean good money is Singapore 61 86 104 251 Thailand 71 52 31 154 being thrown at bad and this raises much greater longer term concerns (see The Source: BIS, Philippines Central Bank and Department of Finance, Maybank Kim Eng, China’s * denotes Cycle, Bank Cost of Capital and the Importance of AUDJPY, March 10, 2016). private sector observations of much higher non-banking sector lending.
The bottom line is the evolution and sustainability of returns in the developed world and China gives little confidence that growth is set to recover sharply. And there is therefore a greater probability of a low global interest rate Can we see credit booms? environment. The negative is that currencies may stay volatile and this means Indeed, if interest rates globally are to stay low for a prolonged period of time, that domestic savings will need to fund some of ASEAN’s infrastructure build. and disinflationary pressure persists, then interest rates in markets such as This is the subject of the next section. India, Indonesia and Vietnam may ultimately be too high. Domestically, infrastructure spending that reduces bottlenecks and allows inflation to be more manageable could mean that interest rates can fall and do so substantially and sustainably. That has the potential to translate into a domestic credit boom.
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Fig 15: Current account, fiscal account, interest rate, inflation & capital The Outlook for Savings Rates adequacy Current account Fiscal account Interest rate Inflation Capital But while domestic credit plays a role, there is also the potential of higher (% of GDP) (% of GDP) (%) YoY (%) Adequacy (%) savings rates. 10-yr Govt 2015E 2016E 2015E 2016E Latest 2015E bond For ASEAN as a whole, the Prime Savers Ratio, that is the percentage of the Hong Kong 3.1 2.3 1.9 0.8 1.2 3.1 14.0 population aged 40-60, is set to rise for a further 15 years. This age group Australia -4.6 -4.2 -1.9 -2.5 2.5 1.7 10.4 contains those with higher earnings but also who save as retirement approaches. Taiwan 14.6 13.8 -0.2 -1.4 0.8 2.4 9.0 Korea 7.7 7.5 0.0 0.1 1.8 1.0 11.6 Malaysia 3.0 2.0 -3.2 -3.2 3.8 4.2 12.7 Fig 16: Demographics trends in ASEAN China 2.7 2.7 -3.5 -3.0 2.9 2.3 11.3 (%) Thailand 8.9 5.3 -3.0 -2.5 1.7 -0.5 13.9 ASEAN (%) Vietnam 0.7 0.3 -5.4 -5.0 6.9 1.7 13.3 28 280 Indonesia -2.1 -2.3 -2.4 -2.5 7.7 4.5 19.2 India -1.1 -1.0 -3.5 -3.9 7.5 5.2 5.5 26 Philippines 2.9 3.6 -0.9 -1.9 4.3 0.9 13.9 24 230 Singapore 19.7 20.0 -0.1 0.3 1.8 -0.8 13.8
Source: Bloomberg, World Bank, Maybank Kim Eng Estimates 22
180 20 The table above also shows that the need for external savings has dropped 18 sharply. Current account deficits are now surpluses in many countries helping to 130 2 create net domestic savings and no reliance on foreign capital . Even in 16 Indonesia, where there is a current account deficit, import growth in US$ terms as of February 2016 has been falling – down 17% y-o-y (3 month moving average) 14 80 overall and down 42% y-o-y (3MMA, again) in for non-oil imports so the 12 correction could be faster than expectations. 10 30 Indeed, the team region wide is starting to see more domestic funding of many 1950 1960 1970 1980 1990 2000 2010 2020F 2030F 2040F 2050F infrastructure projects. For example, in Thailand, our Head of Research Maria Prime savers ratio Dependency ratio (RHS) Mid-young ratio (RHS) Lapiz reports excess liquidity of THB2.4t (or USD68b). Source: UN Population Database, Maybank Kim Eng But foreign and private capital will be needed. In Vietnam, Head of Research Lien Le Hong makes the point that the government admits that the state budget Drivers of Savings and other forms of development assistance may meet only half of the budgetary needs over the next 10 years. Private Public Partnerships are therefore “a We also wanted to understand the drivers of savings. An IMF paper on World MUST, and not an option.” Saving by Francesco Grigoli, Alexander Herman and Klaus Schmidt-Hebbel tries to test the drivers of savings using data across countries over time. Their model tests a number of variables including real interest rates, the level of incomes, growth rate, terms or trade, the flow of private sector credit among others. We found two variables they used particularly interesting: one, old-age 2 Government deficit or G-T) + (Current Account surplus or X-M) = (Excess Domestic Saving dependency ratio (or the % of the population aged 65 and above) and the other, or S-I)
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urbanization rate. These are slower moving in nature and also are areas where Second: Savings and Urbanization we see material changes in ASEAN. The population is young with very low old- age dependency ratio and the region is also seeing rising urbanization. In the IMF results, there is also a negative empirical relationship between savings and urbanization. The theoretical relationship, in contrast, is First: Savings and old age dependency ambiguous. This surprised us and we plotted it above for ASEAN, again excluding Singapore and the Philippines. Again, we are looking if there is a simple In the regression result from the IMF paper, which uses a global database, the relationship and are not really econometrically modelling savings behaviour in authors find a negative sign: that is, higher old age dependency means lower the region. savings rates. This is intuitive but we wondered if it really applied to ASEAN given the young population. Fig 18: Gross saving as % of GDP & urban population % of total
Fig 17: Gross saving as % of GDP & old age dependency ratio Gross saving ASEAN (% of GDP) Gross saving 45 (% of GDP) ASEAN 40 45 35 40 30 35 25 30 20 25 2 15 y = -0.0098x + 1.1904x - 1.9437 20 R² = 0.5382 10 15 5 y = -0.6413x2 + 12.416x - 28.495 10 R² = 0.1863 0 5 0 10 20 30 40 50 60 70 80 Urban population % total 0 4 6 8 10 12 14 16 Source: World Bank - World Development Indicators, Maybank Kim Eng Old age dependency ratio The relationship seems to be positive but again, the best fit is polynomial and Source: World Bank -World Development Indicators, Maybank Kim Eng there is a rollover at high levels of urbanization. So, it could that at the early So, given fewer observations, we did a simple scatter diagram to see what the stages of urbanization, households save more as earnings are higher than rural link looked like in ASEAN. This is shown in Figure 17, but we excluded Singapore incomes and there is a need to save in order to secure a property. Plus, there is as we use the same sample for the next analysis on urbanization and the city- also the need to send money back to rural areas, save for education, etc. Over nation has 100% urbanization and the Philippines where repatriation means time, as urbanization levels rise, there is less need to do this and the costs of much higher levels of gross savings. living in the city rise. On this simplified basis, there does not seem to be a very strong link between The chart shows that it’s at around the 60% urbanization level where savings gross savings and old age dependency ratio. So it is possible there are other rate peak out. While each country is different, and the caveat is that there are factors at play given the young population. The best fit we tried was a many forces at play, the bulk of ASEAN is very much below these levels. polynomial where savings rates seem to rise with old age dependency but then What is also interesting is the range of savings rates in the region (so the scale fall thereafter. The key level appears to be around 10%. of the y-axis) and how much it moves. Even though all the countries are put
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together, it’s still the case that increases in percentage points in Savings rates Financial Infrastructure, Risk Perception and a look at are common for any one country! IRRs This leads us to the table below which shows current incomes and savings rates against old age dependency and urban population as a % of total. For the more Naturally, in some countries, financial market deepening, the development of developed nations, including China and North Asia, the rise in old age liquid bond markets and the insurance sector among other factors will also be dependency ratios could be large factors driving future savings, and indeed, how key drivers and this will take some time. strong future growth can be. A Little IRR Analysis Fig 19: GDP, old age dependency ratio, gross saving (% of GDP) & urbanization (%) Ultimately, it’s about whether risk perceptions are declining over time. GDP Old age dependency Gross savings Urban population (USDb) ratio (%) (% of GDP) (% of total) We wanted to understand how the required IRRs of similar projects were 2015 2013 2020F 2013 2013 changing over time. We chose 2010 compared to today and asked teams in 4 key Australia 1,241 22 25 25 89 countries to fill out the table below. The idea is that a declining IRR trend for Cambodia 18 6.1 7.6 11 20 China 11,385 12 17 50 53 similar projects would be consistent with falling risk perceptions. The table was Hong Kong 308 19 27 26 100 filled out by Isna in Indonesia, Maria in Thailand, Chi Wei in Malaysia and India 2,183 8.3 9.8 32 32 Michael in The Philippines. Indonesia 873 7.6 8.6 31 52 Japan 4,116 40 48 22 92 The results are spread over the next two pages and hopefully will help our Korea 1,393 17 22 34 82 readers get used to reading tables that connect across 2 landscape pages! Malaysia 314 7.9 10.0 30 73 Philippines 299 7.0 8.0 45 45 The bottom line is that IRRs have fallen in Malaysia, the Philippines and Singapore 294 14 21 47 100 Thailand, but have actually stayed very high in Indonesia. If we continue to see Thailand 374 14 18 27 48 the improvements in transparency (Figure 6) and logistics (Figure 7), and even a Vietnam 199 9.3 12 30 32 little clarity on land acquisition, the relative gap between Indonesia and United Kingdom 2,865 26 29 12 82 United States 17,968 21 26 18 81 elsewhere is arguably too high. Indeed, we think that infrastructure in Indonesia
Source: World Bank - World Development Indicators, IMF World Economic Outlook, Maybank Kim Eng is set to attract both regional and global capital in the coming years.
The Rest of the Report In ASEAN though, we think the demographic and urbanization trends suggest that there is a case to expect rising domestic savings rates in coming years. A The rest of the report contains outlooks from each of our country teams in 2%-point increase in Savings Rates for the ASEAN countries below means Indonesia, Malaysia, The Philippines, Singapore, Thailand and Vietnam. USD47.4b in additional savings. In the context of the ADB’s USD110b a year Each team looked at the individual sectors within infrastructure to assess target for all of ASEAN, this is a significant proportion of funding needs. current and future plans and assess its viability and the ability to execute. They In sum, there is a reasonable chance that both the credit and savings part of the then offered their highest conviction stock opportunities. A summary of the ASEAN balance sheet can sustainably fund the asset growth part. stock lists for equity investors is on page 2.
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Fig 20: IRRs Around the Region Indonesia Malaysia Thailand Philippines 1. What were the Around 11-15% in USD. Project IRRs were around 10%. 10-16%. Around 14% WACC. IRRs of greenfield projects in 2010?
2. What sort of Coal fired power plants, but we suspect Both coal and gas plants. Natural gas, coal fired, and co-generation Coal-fired power plants, diesel power projects do that this also applied to other types of power plants. plants and hydro power plants. reflect (ie, coal plants. fired, etc)?
3. What risks are PLN was and has been the off-taker. PPAs are structured in ringgit and have IPPs have highly insulated power purchase These are long-term Power Supply considered fixed tenures (25 years for coal, 21 years agreements under Thailand's single-buyer Agreements between a privately owned The selling price was in USD. reflected in this for gas). industry structure. EGAT shoulders generator and a distributor (either an calculation (eg, IPP did not carry fuel-price risk. essentially all of the grid's demand risk electric cooperative or a privately owned Power projects are usually financed by sometimes, the with payments to IPPs consisting of two distribution utility) approved by the The tenor of the contract is different ringgit bonds (usually >10 year tenures, deals would only components including Availability payment regulator. The rates are in Philippine from one power plant to another: 30 years and Malaysia has a deep bond market), be done in USD and Energy payment. Availability payment Pesos and the PSAs provide for full pass- for mine-mouth coal power plants, 25 issued upon PPA signing just prior and with are designed to compensate IPPs for their through of fuel cost. Project financing is years for non-mine-mouth ones and 20 construction. guarantees), etc? fixed investment costs including debt available and all Peso-denominated. Note years for gas-fired power plants. IPPs do NOT bear fuel price risk. service obligations , fixed operating costs there are many electric cooperatives and Given the IRR, private sector interested in as well as Fx risk. AP is the main revenue private distribution utilities in the One IPP had to take on a little demand the projects normally worked together stream that will generate return for power Philippines. Some have very good credit risk, but IPPs in general, bore no demand with foreign financial institution. The plant. The energy payment is for standings such as Meralco, Visayan Electric risk, and capacity payments are paid upon latter helping to lower the cost of fund. compensated IPP variable cost of and Davao Light and Power. Some do not, fulfillment of availability targets. production (fuel consumption and other particularly among the electric The government didn’t provide blanket The offtakers Tenaga (Peninsular Msia) variable opex). This payment structure cooperatives. guarantee for IPP projects, and this and Sabah Electricity (Sabah, 80% owned means that IPPs' returns over a project stance remains until now. In the past, for by Tenaga), have no history of defaults. lifecycle are dependent on the plant being the 10,000MW project the government available and largely independent of the provided full guarantee. However, this plant's actual dispatch level. only applied to the 10,000MW project and So, the key risk for Thailand's IPP is the not to IPP ones. plant outage.
4. Are there any Land acquisition was a very big issue then Low execution risk, construction tends to Nope. Low execution risk, construction The risks have changed with the other relevant (the law was passed only in 2012). The be completed when financing is secured. tends to be completed because financing restructuring of the power sector points (execution timing was very uncertain to complete the is secured before the project is rolled out. beginning in 2001. In the 1990s, it used to risk? Project land acquisition and the pricing could IPPs have been around in Malaysia since be that IPPs entered into Build-Operate- refinanced upon skyrocket from initial estimates. early-1990's. Regulatory framework is The regulatory framework is quite Transfer projects with the state-owned completion?) mature, and industry players and mature, so we see no other risk rather National Power Corp, which is a stronger financiers are all very familiar with the than plant outage. credit than a company. Also, the returns segment. were even higher in the early 1990s as there was a power crisis and the government at the time wanted to address the issue as soon as possible by attracting private sector capital.
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Fig 20 – cont’d: IRRs Around the Region Indonesia Malaysia Thailand Philippines 5. What are the Around 11-15% in USD for coal- and gas-fired power 6-8% project IRR. A private sector guides that 6-7% for new Around 12.6% WACC. IRRs of greenfield plants, and 15% for geothermal ones, which carry gas IPP but we see this as being theoretical projects now? higher risk. because really the gas supply in Thailand is running out. LNG, especially after the price collapse could be a good substitute but as of now the government has just approved the proposal to allow a 3rd party to do LNG terminal and importation because state-owned PTT is not keen as return is not attractive.
6. Are these IRR for coal and gas power plants are relatively Yes, still applies to coal and gas Not comparable. Yes, this applies to the same type of comparable to unchanged. The case is different for geothermal ones plants. Regulatory framework projects. the ones we are as the government has already increased the IRR in hasn't changed. using for 2010? order to attract investments.
7. What risks are The structure remains the same i.e. IPPs sell their Risk parametres are largely Rising competition for the bidding will Same risk structure. What has considered (so electricity to PLN in USD during tenor of their unchanged, but the perception of pressure the new project IRR. In particular changed is the availability of has there been contracts and they don’t carry fuel-price risk. the level of risk borne by Malaysia we notice influx of interest from Japanese financing from local banks has any change?) IPPs hasbeen lowered. Five more producers who have very competitive increased significantly due to the The main difference is the pass of land acquisition years of unblemished track record funding costs. However, with power high level of liquidity in the bill, which - despite slow implementation - should at the off-takers, and financing is demand weak and local community Philippine financial system. provide stronger legal basis than before. generally not difficult to secure. aversion against new coal fired power Another development is that the government has plant the roll out of 2015 PDP could be simplified the process, one of them being no approval There is also a little bit of public delayed. from Minister of Energy and Mineral Resources is pressure. required if PLN has to buy electricity at the highest price of the range. Hence regulator is demanding lower IRRs from operators. Another point to note is that with declining energy subsidy (energy subsidy has declined 60% since President Jokowi took power), will this translate into lower – or at least fixed – IRR going forward?
8. Any other The private sector has voiced its concern that after There is a general concern by Thailand is running out of gas, so they will It used to be that the PSAs were relevant points? adjusting for cost of fund, their net return is only ~2%. industry players that project IRRs have to import LNG and that will push the negotiated bilaterally. However, the They look pessimistic that they can compete with might have gotten too low (cost of gas pool price up. While the more Department of Energy issued a foreign players from Japan and China, etc which have capital is usually in the 6-8% expensive LNG cost would drive up gas circular in 2015 mandating electric lower cost of fund. range). Players are clamouring for generation cost, IPPs' earnings would not cooperatives and distribution utilities higher project IRRs. be affected by the higher LNG prices given to undergo a “Competitive Selection Some local banks are reluctant to fund power projects the pass-through clauses in PPAs with Process” for their requirements. for the following reasons: 1) they question PLN’s Some concerns also on recent EGAT. However, there is the question of payment sustainability amid lack of guarantee from direct awards (open tender how much subsidization should EGAT bear. the government, 2) they already have high exposure previously), particularly to a to PLN through other channels, and 3) as the projects previous state-owned entity. are done in USD, funding should be is USD as well, but local banks can’t compete in USD funding with foreign banks. Source: Maybank Kim Eng Research. Isnaputra Iskandar (Indonesia), Tan Chi Wei (Malaysia), Maria Lapiz (Thailand) and Michael Bengson (The Philippines)
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INDONESIA INFRASTRUCTURE
1. Infrastructure rollout in full throttle
2. Government has flagged strong commitment
3. Projects are not heavily reliant on government funding
4. Land acquisition: has the risk really receded?
5. Top picks: PTPP, WSKT, BSDE
Isnaputra Iskandar, CFA [email protected] (62) 21 8066 8680
Pandu Anugrah [email protected] (62) 21 8066 8688
Aurellia Setiabudi [email protected] (62) 21 8066 8691
Anthony Lukmawijaya [email protected] (62) 21 8066 8690 UNMASKING ASIA 20
INDONESIA INFRASTRUCTURE 1. Infrastructure rollout in full throttle
The government has set targets for all types of infrastructure development, Stepping on the Gas from power to water supply, until 2020, with no priority given to any. This is understandable, as the lag can be seen almost everywhere: 1) domestic toll roads grew by just a 5% CAGR in the past five years, half that of national car Indonesia urgently needs infrastructure to support economic growth and sales; 2) an electrification ratio of 84% is one of the lowest in ASEAN; 3) port competitiveness. It made good progress in the past two years, when its ranking dwelling time is five days on average, the worst in ASEAN; and 4) domestic in the Global Competitiveness Report by the World Economic Forum climbed by cement per capita of 240kg is much less than Malaysia’s 600kg, suggesting 16 places. In the latest report, it is down slightly, from 34 to 37 among 140 under-construction. countries. Infrastructure - where its ranking slipped to 62 from 56 - is still one of Of all the segments, we think power will provide the best opportunities for its main problems. investors. This is because: 1) power generation is open to private investors; Rankings aside, progress has been made in legislation in the last 3-4 years, 2) electricity prices are set in USD, reducing currency-mismatch risks; and 3) starting with a land-acquisition bill in 2012. This was followed by a higher Indonesia has abundant sources of energy, especially low-CV coal. The next budget for infrastructure and kick-off of the MRT project in Jakarta. attraction, we think, will be toll roads, with their main draw being periodic tariff adjustments. We also think that property companies will gain from infrastructure development.
2. Government has flagged strong commitment
Since President Jokowi took over at the end of 2014, the budget for infrastructure has increased by a 33% CAGR, to IDR314t in 2016. On the flip side, energy subsidies have been cut by a 45% CAGR to IDR102.1t. The higher budget suggests that over 2% of GDP will be spent on infrastructure development, one of the biggest ever. In order to accelerate spending, the government has resorted to budget pre-funding and faster tendering. Realised spending until beginning of February was up 40-50% YoY.
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3. Projects are not heavily reliant on government 5. Top picks: PTPP, WSKT, BSDE funding In our view, the main beneficiaries of infrastructure development would be toll-road and construction companies. JSMR should be able to clinch toll- Government funding is important, but that is mainly for land acquisitions road construction contracts. Construction companies, ADHI, PTPP, WIKA and and basic infrastructure such as bridges and water dams. For bigger projects WSKT, could benefit from almost all types of development, ranging from such as power plants, high-speed railways and toll roads, the government power plants to ports and toll roads. Our top picks are those with strong has limited funding capacity. For such projects, it normally engages SOEs order books: WSKT and PTPP. and/or private companies, mostly through public private partnerships (PPP). Our rough estimates suggest that funding by SOEs and private companies will Property developers should also profit from any infrastructure boom. We account for more than 50% of total project values. prefer those with mass-market exposure such as BSDE, CTRA and SMRA and a strong presence in major cities. BSDE is our top pick for its ample land bank The government will still not provide blanket guarantees for projects run by and strong balance sheet. Another beneficiary could be GIAA, from SOEs and/or private companies. It will continue to support them through passenger-traffic growth, fleet expansion and the development of new other mechanisms, such as accelerating land acquisitions process and faster airports across the country. We don’t think that the latter has been fully permit issuance. We welcome this as it reflects fiscal prudence. Anecdotal appreciated by the market. evidence also suggests that an absence of government guarantees is not a big deterrent to investors. Infrastructure development could even change other corporates’ operations and cost base. This is already being played out in the power sector, where
major coal producers, ADRO, ITMG, PTBA and UNTR, have jumped onto the 4. Land acquisition: has the risk really receded? power-development bandwagon, mostly for business diversification. We forecast their earnings in 4-5 years will be less volatile than now. There have been notable improvements in land-acquisition regulations. A law was passed in 2012 which provides legal support for completing land acquisitions within specific periods. The government also allows private parties to acquire land on their own if they believe that they can do it more quickly than the government. Passage of the law is one thing, implementation another. There is no universal interpretation of the law, which leads to disputes and contentions. Quick action by the government to address this is required, as delays may dent confidence in the law. The Batang power project is the most high- profile case of a stalemate caused by conflicting interpretations of the law. Still, we think that foreign investors remain interested.
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Focus Charts
35,000MW power programme for completion in 2020 Government’s infrastructure targets for 2019
Source: PLN Source: Bappenas Typical sources of projects for SOE contractors Better clarity on land acquisition under the new land bill
Source: Ministry of Finance, Ministry of Public Works & Maybank KE Source: Jasa Marga
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Indonesia Infrastructure Facts & Forecasts Expenditure Sector State in 2010 Current State 2020 Targets 2015 2016 Forecast (2016-2020) Power Coal: 12,031 Coal: 25,627 Coal: 46,155 No official data Estimated capex of IDR30t for Total funding for 2016-20 available. 4,212MW new power capacity. will be IDR1,127t: (capacity in MW) Oil: 2,724 Oil: 2,923 Oil: 2,991 1) power plants Gas: 3,363 Gas: 3,795 Gas: 7,349 Estimated 2015 total (IDR814t); and spending of IDR27t on Nuclear: 0 Nuclear: 0 Nuclear: 0 2) transmission and 3,782MW of new power electrical power sub- Hydro: 3,840 Hydro: 3,911 Hydro: 6,261 capacity. stations (IDR313t). Combined cycle: 7,806 Combined cycle: 9,584 Combined cycle: 19,269 Other Renewables: 1,108 Other Renewables:1,399 Other Renewables:1,799
Total: 30,872 Total: 47,239 Total: 83,824
Peak load (MW): 18,756 Peak load (MW): 36,787 Peak load (MW): 50,531 Electricity sales (TWh): 146 Electricity sales (TWh): 219 (by 2019) Electrification ratio (%): 66 Electrification ratio (%): 84 Electricity sales (TWh): N/A Electrification ratio (%): 96.9 (by 2024)
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Sector MKE View: Achievable Challenges Reasons & Response Opportunities
Power 2016 Land acquisitions still the biggest obstacle. Delays caused by land acquisitions, securing Indonesia’s electrification ratio is lower than (capacity in MW) PLN's 2015-2024 business plan fuels and funding. neighbours’. It also has abundant energy resources. calls for 4,212MW of new Government responsible for acquiring land, power capacity in 2016: which doesn’t help, given its typically slow Government passed land-acquisition bill in Government has to iron out land-acquisition 2,885MW for PLN & 1,327MW execution. 2012, but implementation has been patchy problems in order to build confidence. Construction for IPPs. due to conflicting interpretations of the law, of Batang power plant, foreign-funded, is a among others. landmark case for FDIs. Should be achievable as funding has been resolved by In the most high-profile case which the Opportunities on funding side too, as most, if not PLN. government eventually won, the law was all, projects will be financed by foreign financial challenged by the local community. This institutions, given their more competitive costs of 2020 delayed the construction of the Batang power funds. Government ambitiously eyeing plant, the largest in South-East Asia. 35GW new power capacity by Coal companies (ADRO, ITMG, PTBA and UNTR) to 2020. PLN to build 30% and In order to accelerate land acquisitions, the benefit not only from their investments in power IPPs, 70%. government allows the private sector to sector but also from selling coal to the power plants. acquire land if it believes it can do it faster. Most new plants (56%) will be While positive, we don’t think it will fully Construction companies (ADHI, PTPP, WIKA and coal-fired. Rest will use gas, oil eliminate problems. WSKT) should be other beneficiaries. Among and renewable energy. construction companies, WIKA has highest exposure Despite hiccups, we don’t see declining to the power sector. This doesn’t mean other We think the 35GW programme interest from foreign investors. Batang is a construction companies (ADHI, PTPP and WSKT) may be delayed by land- good example. cannot replicate its success in the sector. acquisition hiccups. However, since 70% will be added by Other big power projects such as 2,000MW IPPs, execution should be Tanjung Jati B awarded to UNTR and Java 7 better than PLN. projects suggest still-strong interest.
We estimate a maximum 70% of the target will be completed by 2020.
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Indonesia Infrastructure Facts & Forecasts Expenditure Sector State in 2010 Current State 2020 Targets 2015 2016 Forecasts (2016-2020) Transport Air 59.3m air travellers 82.5m air travellers in 2015 Within transportation we think Garuda Indonesia alone Estimated industry new-plane N/A land transport will offer better spent IDR1.3t on aircraft down payments of IDR5.7t 560 commercial planes 782 commercial planes as of opportunities than air and sea. pre-deliveries. Using its Mar 2016 This is because the government domestic market share IDR11t capex by Angkasa Pura 230 airports in 2010 is working on regulations of of 40%, this implies II alone for airport 237 airports as at end-2015 land transport, such as industry down payments development legalizing presence of of IDR3.3t for new application-based planes. transportation operators, which will change dynamics of the IDR7t for airport industry. We believe this will development by Angkasa have impact to listed Pura I&II companies such as Blue Bird and Express Taxi.
252 airports by 2019
299 airports in 15-20 years’ time
Land - Roads National public roads National public-road 2,650km of new multi-lane Full funding by Ministry Full funding by Ministry of Estimated expenditure of Paved roads: 277,755km estimates roads of Public Works with Public Works with estimated IDR125t Dirt roads: 209,559km (2% CAGR for 2005-2010) estimated IDR25-50t for IDR25-50t for road (source: Bappenas) Paved roads: 303,000km road development. development. Dirt roads: 230,000km
Land - Toll roads 728km 936km 400-500km of new toll roads by Estimated capex of Estimated capex of IDR20t by Substantial projects in the 2020 IDR10t, mainly by Jasa Jasa Marga, Citra Marga pipeline involving more Marga and Waskita Nusaphala Persada and than IDR100t for Completion of 2,000km Trans Karya Waskita Karya. completion of Trans Java, Sumatra by 2025 Trans Sumatra, Balikpapan Additional IDR3-5t may be - Samarinda (Kalimantan), spent by Hutama Karya on Greater Jakarta and Bitung - Manado in North Sulawesi. Trans Sumatra south section. Part of the funding requirement may be shifted to 2020-2025 if land acquisitions are delayed.
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Sector MKE View: Achievable Challenges Reasons & Response Opportunities
Transport Air 2016 Delays in new airports the biggest Lack of airport development in Indonesia may Local airline fleet expansion and airport development to catch Government targets 87.5m air travellers risk. Current airport capacity, impede growth. up with air travel. for 2016. YTD arrivals suggest a shortfall. especially in big cities, is close to 100%. Ministry of Public Transportation plans to build Garuda Indonesia could benefit from growing demand for air At least 50 planes will be delivered to 15 new airports over 2015-2019, revitalise 100 travel as it is the largest full-service legacy carrier. Garuda Indonesia and Lion Air in 2016. Airport expansion may not be airports and increasing runway capacity for accompanied by new runways, which 15. Cardig Aero Services provides aviation support services, food Kertajati airport, run by regional will be problematic. solutions and facility management. government, under construction. Should be Low fuel prices have given airline companies completed by 2017. Runway development typically the financial ability to add new planes and New airport construction and capacity expansion could indirectly Two other new airports could be stalled by problems in land open new routes. benefit all listed SOE construction companies such as Waskita completed this year, in East Java and acquisition. Karya, Wijaya Karya, Adhi Karya and Pembangunan Perumahan. Banten. Airports with low economic feasibility would be developed by Ministry of Public Transportation. 2020 If annual passenger traffic grows 5%, till Angkasa Pura will develop larger and/or 2020, passengers could reach 105m. international airports. Would require
We estimate Garuda & Lion Air will take financing. delivery of at least 295 new planes by 2020 as Lion Air alone plans to operate 780 by 2028.
At least 15 new airports will be completed by 2020.
Land - Roads Development of regional border roads in Quality of roads may not meet Government awarding higher budgets and Better access and potentially lower logistics costs may result in Kalimantan-Malaysia and border roads international standards, requiring speeding up execution faster distribution of goods.
within Kalimantan. high maintenance costs For Trans Papua, better road network would create opportunities for investment in agribusiness and mining. Road development outside Java Island. Beneficiaries: all listed SOE contractors of ADHI, WIKA, WSKT, Trans Papua with total length of 827km and PTPP Land - Toll roads Construction of remaining concessions of Execution, particularly in areas with Progress in stalled toll roads, after a spate of Property development alongside new toll roads. Toll-road Trans Java: 697km with investment high population densities M&As in 2015 by companies with stronger completion typically results in new property development and value of IDR45t. funding capability. improved logistics costs.
Listed property companies in Greater Jakarta: Bumi Serpong Full connectivity of Trans Java with Enforcement of regulations on land Dama, Alam Sutra and Summarecon Agung total 1,000km. Partial completion of acquisition. Listed property company in Trans Java: Surya Semesta Internusa Trans Sumatra. More toll roads in Greater Jakarta. Beneficiaries: all listed SOE contractors of ADHI, WIKA, WSKT, and PTPP
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Indonesia Infrastructure Facts & Forecasts Expenditure Sector State in 2010 Current State 2020 Targets 2015 2016 Forecasts (2016-2020) Land - Rail (km) National railway and 6,714km (4,678km in 6,714km - no change from To add 3,400km by 2019-2020. Estimated IDR10-20t Estimated IDR10-20t More than 1,000km targeted commuter lines operation) 2010 (4,718km in operation) required from annual required from annual across the country with (Cawang – Soeakarno budget budget estimated investment of Hatta & regional rail) IDR106t. To be developed by Ministry of Public Transportation
Part of the funding requirement may be shifted to 2020-2025 on potential delays in land acquisition.
Light Rail Transit - Nascent stage. Awaiting 180km for inner Jakarta with - - Estimated spending of IDR10- (LRT) – Inner city of revisions of Presidential 1st phase to be completed in 20t on 1st phase for Asian Jakarta Decree on participation of 2018. Games Regional State-Owned Enterprises.
LRT Greater Jakarta Construction of 1st phase 73km for Greater Jakarta - Initial spending of IDR1-2t Investment of IDR34t for for first-stage LRT. entire project
LRT Palembang - Nascent stage of construction 25km for Palembang, South - IDR700b-1.5t IDR7.2t Sumatra
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Sector MKE View: Achievable Challenges Reasons & Response Opportunities Land - Rail (km) National railway and Greater Jakarta commuter line, from city Funding highly dependent on annual Enforcing land-acquisition laws would hasten Train-carriage procurement. Historically, commuter line to airport, costing IDR3,800b budgets allocated to Ministry of Public execution. carriages are from Japan or SOE producer, (Cawang – Soeakarno Transportation. PT Industri Kereta Api. Hatta & regional rail) As intra-city railway will be mainly funded by Ministry of Public Transportation, Land acquisitions may not be difficult for Beneficiaries: all listed SOE contractors of budget may be limited. low-density population areas, but ADHI, WIKA, WSKT, and PTPP development of commuter lines might face Additional funding may come from soft resistance from land owners. loans from France, Japan & Germany.
Light Rail Transit Potential completion of Presidential Funding shortfall most obvious, as capex Development of intra-city transport would Regional SOE, Jakarta Propertindo, is the (LRT) – Inner city of Decree revisions. Existing regulations only requirement is substantial. alleviate traffic congestion. LRT Jakarta developer. Will likely invite SOE Jakarta allow for the appointment of SOE contractors to build it. companies without the involvement of Regional SOEs may need government’s Regional governments to give top capex priority regional governments while the project capital injections, dedicated regional to this, through regional SOEs. Potential development of convenience stores falls under the regional government of budgets or third-party loans. at terminals. Jakarta.
Regional government would want to take full charge of project.
Potentially half the length target of 50km LRT Greater Jakarta SOE contractor, Adhi Karya, appointed as Potential hurdle in land acquisitions, Government has taken bigger role in acquiring Funding pretty much secured from bank sole contractor. although requirements are small. land to connect the commuter line with the loans and ADHI’s recent rights issue. interchange of higher-speed rail. Set to be completed in 2018-2019 with Although facility will be built elevated, Ministry of Public Transportation to repay all funding of IDR34t. terminal development may be delayed by construction expenses beginning 2017. hurdles in land acquisition. For 2016, 1st stage will be development of ADHI to benefit, given direct appointment by pillars with 10-25% completion. the President as main contractor.
We foresee completion by 2020. Further development possible, to connect with Tangerang, Banten province.
LRT Palembang Assuming completion of 20-30% pa, project Potential delays in construction, hindered Aims to finish project before Asian Games in LRT development to reignite economic should be 100% finished by 2018. by land acquisition. 2018. growth for Palembang.
This would translate to IDR1.4-2.2t Potential opportunities in businesses that spending per year. Feasibility is high, as support city development, such as F&B and infrastructure would be built mainly above property. ground, with minimal land-acquisition needs. Waskita Karya is main contractor.
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Indonesia Infrastructure Facts & Forecasts Expenditure Sector State in 2010 Current State 2020 Targets 2015 2016 Forecasts (2016-2020) High speed railway - Needs several permits 150km to be completed in 2019 - Expenditure hinges on Estimated investment of Jakarta – Bandung progress of permit IDR60t, of which IDR30t is for issuance. Construction construction may reach less than 5%, translating to small capex . of IDR500b-1t Sea (incl ports) - Expansion of ports and 24 ports to be given priority Capex for SOE seaport Based on capex plans of Government aims to spend construction of new ones in operators: IDR14t SOE port operators, 2016 IDR40t on new ports in 2016- three parts of eastern capex should reach 2020. Indonesia IDR14.5t
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Sector MKE View: Achievable Challenges Reasons & Response Opportunities High speed railway Potentially low project delivery in 2016, as Land acquisitions and timely issuance of Administrative procedures, particularly permits Property development in vicinity. Listed full permits have not been secured. permits. Financial closure for China soft from relevant ministries. company Summarecon has 400ha of land loans might hinge on completion of all bank. High chance of delays, from the need to legal procedures. WIKA will likely become acquire land in several sections. 2019 the main contractor, given its indirect WIKA will be sole contractor. target could be delayed to 2020. minority ownership. Sea (incl ports) Largest new port of Kalibaru in Jakarta set Economically unfeasible, small seaports to Most major seaports will be developed by the Development of alternative international for completion in 2016. be built by Ministry of Public SOE port operator, Pelindo. ports in Subang, West Java. Transportation. As funding is mainly from Consortium of SOE companies constructing the government, allocations may be Government has given top priority to To support industrial area of Cikarang, Kuala Tanjung Port in North Sumatra. This limited. development and refurbishment of seaports to where most exporting automotive plants are will operate as a bulk terminal. Investment cut logistics costs through "sea toll road" located. may top IDR17t. SOEs to take charge of larger port concept. development. Would impinge on their New Subang Port is under feasibility study. Four new ports altogether: Kuala Tanjung capital positions. Will likely be chosen to replace Cilamaya (North Sumatra), Bitung (North Sulawesi), Port worth IDR35t, which was cancelled Sorong (Papua) & Kalibaru. Mega seaports to function as alternatives given its overlapping location with oil & gas to international ones such as Subang projects. Seaport. Their development is stalled by bureaucratic red tape. Beneficiaries: all listed SOE contractors of ADHI, WIKA, WSKT, and PTPP
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Indonesia Infrastructure Facts & Forecasts Expenditure Sector State in 2010 Current State 2020 Targets 2015 2016 Forecasts (2016-2020) Communication Telecom Mobile SIMs: 242.7m (100.8%) 343.2m (134.2%) 370.3m (138%) Big 3 spent c.IDR38t, Total capex of IDR45t, Total capex of IDR190t. Pre-paid: 98.1% Pre-paid: 98.5% Pre-paid: 98.0% mainly on 3G mainly for 4G LTE IDR130t by TLKM. Post-paid: 1.9% Post-paid: 1.5% Post-paid: 2% modernisation and early deployment. TLKM 2G: 201.5m 2G: 190.8m 2G: 86m 4G deployment. TLKM expected to spend IDR32t, 3G: 41.2m 3G: 147.9m 3G: 240.9m spent IDR26t, EXCL EXCL and ISAT IDR6-7t 4G: - 4G: 4.4m 4G: 43.5m IDR5t, ISAT IDR7t. each.
Internet/ Mobile data users: 33.3m or 140.1m or 40.8% of mobile 261.3m or 70.6% of mobile subs. Around IDR1t, for funding Completion of Palapa Ring II digitalisation 13.70% of mobile subs. subs. early- stage construction for West, Central and East of Palapa Ring II, an (6.3k km) Indonesia. Will under-sea fibre-optic involve another IDR7.5t. network. Mainly for West (2k km) and Central (2.7k Palapa Ring II to operate by km) Indonesia. 2019. Water Access to potable water Access to potable water Access to potable water Access to potable water Access to potable water Access to potable water (% of population): 44.2% (% of population): 68.9% (% of population): 100.0% (% of population): Capex (% of population): Capex pa (% of population): IDR278t: pa is about IDR55t is about IDR55t public sector 78%, private Sanitation (% of population): Sanitation (% of population): Sanitation (% of population): sector 22% 55.5% 62.4% 100.0% Sanitation (% of Sanitation (% of population): population): Capex pa is Capex pa is about IDR54t Sanitation (% of population): about IDR54t IDR274t: public sector 73%, private sector 27%
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Sector MKE View: Achievable Challenges Reasons & Response Opportunities Communication Telecom Development of backbone. Lower network quality outside Java. Government plans to revise regulations on Digital content such as social apps and interconnection fees. Lower fees would video streaming. Indonesia’s demographics Also spectrum auctions of 2,100Mhz and High interconnection fees. encourage telcos other than TLKM to expand supportive of high data consumption. 2,300Mhz to provide additional capacity. networks outside Java. Rising e-commerce to benefit telco High smartphone penetration with strong Government plans to auction 3G spectrum in operators. demand for digital content and higher near term. usage of 4G LTE`. Start-up digital companies.
Transportation apps gaining popularity, given lack of public infrastructure in big cities such as Jakarta and Bandung. Internet/ digitalization
Water Access to potable water (% of Main obstacle is funding as 70-80% will Over-ambitious annual targets of 6-8% If the sector is fully open to private population): come from state and regional increases of population for access to drinkable investments, local banks (BBCA. BBNI, BBRI governments. water and 8-9% for sanitation. In past 5 years, and BMRI) could have funding 2016: 70% only increased 1.1 % and 1.4% p.a., opportunities. 2020: maximum 80% Given low commodity prices, not sure if respectively. the government has enough funds to support projects. In the past the government had increased Sanitation (% of population): access to drinkable water and sanitation at around 1-2% p.a., which is slow due to as we 2016: 63-64% mentioned earlier lack funding. This is because 2020: maximum 75% main problem is funding, as 70-80% is from state and regional government budgets.
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Indonesia Infrastructure Facts & Forecasts Expenditure Sector State in 2010 Current State 2020 Targets 2015 2016 Forecasts (2016-2020) Housing Housing ownership in urban Housing ownership in urban No targets for housing Government allocated Government allocated IDR7.6t. Government to allocate areas at 67.90% areas at 69.08% ownership in both urban & IDR7.7t to subsidised IDR38t. rural. housing. Housing ownership in rural Housing ownership in rural areas at 87.31% areas at 88.26% Housing backlog at 6,000,000 We estimate private We estimate private sector We estimate private units (existing demand + sector will supply contributed IDR34t. sector will contribute Housing backlog at 13,600,000 Housing backlog at additional annual demand – IDR30t. IDR170t. units 13,339,526 units supplied houses) Expect urbanisation to House ownership at 78% House ownership at 82.63% House ownership: N/A continue, further altering household Number of households at Number of households at Number of households at composition in urban 34,670,000 39,170,000 43,670,000 (gov’t target) and rural areas.
Slum-housing ownership at Slum-housing ownership at Slum-housing ownership: 2016 13% 10% target is 9%.
House purchases using House purchases using House purchases using mortgages at 18% mortgages at 26% mortgages: No target
Of the government’s 1m Of the government’s 1m Of the government’s 1m housing units per-year housing units per-year housing units per-year programme, 400,000 units programme, 660,474 programme, 1m pa achieved achieved By 2025, government expects 50% population lives in urban 56% population lives in urban 65% of the population to live in areas. areas urban areas.
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Sector MKE View: Achievable Challenges Reasons & Response Opportunities Housing Houses built in 2016 should High mortgage rates and low banking Mortgage rates are being lowered and loan- Long-term property-market growth from burgeoning exceed 2015 levels, in line with penetration. tenure ratios relaxed. young population. economic recovery. Bigger budgets for subsidised housing. Private developers to benefit from volume rather With that, government should than ASP growth, as developers had already enjoyed be able to build 1m housing Targeting lending to primary home owners significant ASP growth in the past 5 years which was units a year by 2020. rather than investors. higher than income growth. As such, we think the upside for further ASP growth is limited. Lower property taxes. More interest in mass-market supply, a segment supported by the government.
We prefer developers with exposure to this: Bumi Serpong Damai, Ciputra Development and Summarecon Agung. These also have a strong presence in major cities.
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MALAYSIA INFRASTRUCTURE
1. The rail thing: biggest area of business opportunities
2. Eyes on government debt
3. Improve and enhance network connectivity
4. Tapping into China’s excess capital and capacity
5. Top picks: Gamuda & Sunway Construction Group
Wong Chew Hann [email protected] (603) 2297 8686
Suhaimi ILIAS [email protected] (603) 2297 8682
Tan Chi Wei [email protected] (603) 2297 8690
Chai Li Shin [email protected] (603) 2297 8684 UNMASKING ASIA 36
MALAYSIA INFRASTRUCTURE 1. The rail thing: biggest area of business opportunities
Railway is a notable area of under-development / under-investment in Going Down a Different Road Malaysia. Therefore it is the biggest investment theme and area of business opportunity within the infrastructure space in the next 5-10 years. At least around MYR115b or 10% of 2015 GDP is earmarked for railway projects up to Malaysia already has a developed and advanced ecosystem of physical social and 2020-2025. The key railway infrastructure projects include: economic infrastructure, covering roads, bridges and highways, airports and • MYR76b Klang Valley Mass Rapid Transit i.e. KVMRT1 (MYR23b), KVMRT2 seaports, power, water, and information & communication technology (ICT), as (MYR30b) and KVMRT3 (MYR23b) well as healthcare, education and housing. • MYR3.5b Klang Valley Light Railway Transit Phase 2 (KVLRT2 i.e. Kelana Nonetheless, two of the six thrusts of the 11th Malaysia Plan (11MP, 2016-2010) Jaya Line extended to Putra Heights; Ampang Line extended to are related to infrastructure i.e. “strengthening infrastructure to support Puchong) economic expansion” and “improving the wellbeing for all”. • MYR10b Klang Valley Light Railway Transit Phase 3 (KVLRT3 i.e. Bandar Strengthening infrastructure to support economic expansion is not just about Utama-Shah Alam-Klang) pump-priming to boost growth amid the challenging external and domestic • environment. It is about efficiency and quality of the infrastructure, as well as MYR8b Gemas-Johor Bahru Double Track getting the biggest bang for the buck from the investment, not just in terms of • MYR0.5b KL Monorail Extension (Brickfields-Old Klang Road) multiplier effect during the construction phase but more importantly generating • productivity-driven growth and creating business opportunities. Consequently, MYR8b Freight Relief Line (Seremban - Port Klang - Serendah) the targeted outcomes include: building an integrated transport system; • MYR8b Express Rail Link (ERL) extension to Malacca improving the coverage, quality and affordability of digital infrastructure; and • expanding logistics to enhance trade facilitation. KL-Singapore High Speed Rail • Improving the social infrastructure and narrowing the urban-rural infrastructure Upgrade in Klang Valley Commuter Rail gap underpins the effort to improve the population’s wellbeing. Among the • KTMB Subang-Klang Freight Line infrastructure-related projects and targets are the Pan-Borneo Highway; rural • high-speed broadband; 99% of population served by clean and treated water; East Coast Railway e.g. MYR0.2b to upgrade East Coast rail lines construction of 3,000km of surfaced rural roads; building 653,000 affordable and (Gemas-Mentakab, Jerantut-Sg Yu, Gua Musang-Tumpat); Kuantan- low-cost houses; and universal access to quality healthcare. Mentakab double-track • Underscoring the commitment to infrastructure, the Development Expenditure Sarawak Railway Line (320km between Similajau in Bintulu and Tanjung allocation for 11MP is up 13% to MYR260b after the drop in actual spending to Manis in Mukah) MYR216b in 10MP (2011-2015) vs MYR222b in 9MP (2006-2010). Further, • Johor Bahru & Penang LRT development spending on physical projects was spared the axe in the revised budgets 2015 and 2016, which were curtained due to the fall in crude oil price. As a result, operating spending will be cut instead.
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2. Eyes on government debt 4. Tapping into China’s excess capital & capacity
Rail infrastructure accounts for over one-third of Malaysia’s infrastructure Malaysia can benefit from lower capital and construction costs by tapping investment in 2016-2020, pointing to high public sector financing into China’s surplus capital and excess capacity situation as Chinese requirement. The government’s debt-to-GDP ratio is already very close to companies search for business and investment opportunities overseas. This is the 55% self-imposed limit (end-2015: 54.5%), which it has committed to further supported by the positive announcements by Chinese Premier Li observe as an integral part of its fiscal consolidation together with the Keqiang during his visit to Malaysia at end-2015, which in essence endorse budget deficit reduction to achieve a near-balanced budget by 2020. This and support more China investments into Malaysia, underscoring the cordial limits the room for on-balance sheet financing by the government. and constructive diplomatic ties between the two countries. As a result, the attention is on off-balance sheet funding through Malaysia is seeing rising FDI from China. Chinese companies are increasingly government-guaranteed debt (GG) issued by government-owned visible in Malaysia’s construction and property sectors, and are invested in infrastructure-related special purpose vehicles like Danainfra Nasional manufacturing (e.g. solar photovoltaic, metals), energy (e.g. China General Berhad and Prasarana Nasional Berhad. Over the past four years, GG debt Nuclear Power’s acquisition of Edra Global Energy; Shendong Hengyuan has been relatively stable at around 15-15.5% of GDP after rising from the Petrochemical’s acquisition of 51% stake in Shell Refining), education (e.g. recent low of 9.0% in 2008. In managing GG debt, the government favours Xiamen University Malaysia – first overseas branch campus of a Chinese the "user pay” model for Public Private Partnership (PPP)/Private Finance state-owned university) and ICT (e.g. Huawei’s Global ICT Training Centre in Initiative (PFI) projects (e.g. tolled highway projects), with the possibility of Cyberjaya and Regional Data Hosting Centre in Nusajaya). China’s railway soft loans secured by foreign - especially Chinese - contractors (e.g. railway construction and engineering companies are the frontrunners in upcoming projects) and the potential for financing from the Asian Infrastructure railway projects like the Gemas-JB double track and the KL-Singapore High Investment Bank. Speed Rail.
3. Improve and enhance network connectivity 5. Top picks: Gamuda, Sunway Construction Group
The focus on rail infrastructure is to improve and enhance urban public We prefer construction players with niche expertise and a strong track transport connectivity and network given the target to ramp up urban public record in infrastructure projects. They would be the key beneficiaries of the transport modal share to 40% for Greater KL and to 20% for other cities by slew of infrastructure job awards in 2016. Our Top BUY pick remains Gamuda 2020 following the marginal increase to 17.1% in 2015 from 16.9% in 2010. It as we expect successful rollout of the Penang Transport Master Plan project is also to de-congest roads and highways by making railway the logistical as a major positive. It could also clinch additional jobs from the mega rail mode of choice for freight transport as well as to connect and develop projects including KVLRT 3 and Gemas-JB double track rail. Sunway industrial areas and ports. Construction Group is our preferred mid-cap pick given its favourable pure construction exposure and as it is poised to benefit from the infrastructure There is also the need for better external connectivity, in view of the launch mania that could lead its orderbook to a record high in 2016. of the ASEAN Economic Community in Dec 2015, Malaysia’s signing of the Trans- Pacific Partnership Agreement (TPPA), and the trade and business
opportunities from China’s One Belt, One Road initiatives. Key enabling investments include KL-Singapore High Speed Rail and ports with industrial and commercial developments, e.g. Kuantan Port & Malaysia-China Kuantan Industrial Park; Melaka Gateway.
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Focus Charts
Malaysia Plan: government development expenditure (MYRb) Government debt (% of GDP) 300 80% 260 68.4% 68.4% 68.2% 69.9% 70% 63.2% 64.7% 250 230 230 62.7% 222 216 15.2% 15.4% 15.5% 15.4% 60% 13.2% 52.3% 50.5% 11.8% 12.2% 200 49.5% 48.8% 50% 10.2% 9.9% 9.4% 9.0% 150 40%
30% 100 50.8% 51.1% 51.5% 53.3% 53.0% 52.7% 54.5% 20% 42.1% 40.6% 40.1% 39.8% 50 10%
0 0% 9MP (2006-2010) 10MP (2011-2015) 11MP (2016-2020) 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Allocation Actual Spending Govt Debt Govt-Guaranteed Debt (Contingent Liability)
Source: Malaysia Plans, Ministry of Finance Source: CEIC Gov’t development expenditure vs operating expenditure (% chg) Rising China FDI into Malaysia (USDb) reflecting China’s surplus capital & excess capacity
30 1.1 25 1.0 20 0.9 15 0.8 10 0.7 0.6 5 0.5 0 0.4 (5) 0.3 (10) 0.2 (15) 0.1
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 0.0 2016E Operating Expenditure Gross Development Expenditure 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: Bank Negara Malaysia, Ministry of Finance Source: CEIC
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Malaysia Infrastructure Facts & Forecasts Expenditure Sector State in 2010 Current state 2020 targets 2015 2016 Forecasts (2016-2020) Power Coal, oil, fossil fuels, Peninsula Malaysia: 21,817MW Peninsula Malaysia: Peninsula Malaysia: 24,145MW Peninsula Malaysia + Peninsula Malaysia + Sabah: Around MYR50b for hydro, renewable capacity, 45% reserve margin 20,657MW capacity, 22% capacity, 23% reserve margin Sabah: MYR11.5b (all MYR10b (all private sector) Peninsula Malaysia + energy reserve margin (new capacity private sector) Sabah Sabah: 1,111MW, 42% reserve insufficient to offset old Sabah: 2,137MW, 60% reserve Sarawak: MYR700m (state) margin power plants taken offline) margin Sarawak: MYR700m Over MYR10b for (state) Sarawak if the two new Sarawak: 1,347MW, 23% Sabah: 1,423MW, 45% reserve Sarawak: c.10,000MW (the new hydro dams proceed reserve margin margin (localised loads) hydro dams will only proceed upon demand) 53 MW of installed capacity in Sarawak: 5,778MW, >100% renewable energy (2009) reserve margin 2,080 MW of installed capacity (commissioning of Bakun and in renewable energy i.e. 38% Murum, 2 large-scale hydro biomass; 24% mini hydro, 17% plants) solid waste, 12% biogas, 9% solar photovoltaic 243 MW of installed capacity in renewable energy (2014) i.e. 66% solar photovoltaic, 23% biomass, 6% mini hydro, 5% biogas
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Sector MKE view: Achievable Challenges Reasons & Response Opportunities
Power Coal, oil, fossil fuels, No risk for 2016. Construction Some controversies towards direct awards. New capacity is to maintain reserve margin, Structuring and financing of capex requirements. hydro, renewable of power plants is a multi-year and grid integrity. energy event, and will be completed Structural issues such as localised once started. distribution of loads in East Malaysia The regulator is already quite holistic with making it uneconomical for operators. capacity planning. Up to 2020, Peninsula Malaysia and Sabah projects should Has been moving towards open tenders until proceed. recent years.
Sarawak is after wholesale customers, and thus rollout depends on the commodity cycle.
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Malaysia Infrastructure Facts & Forecasts Expenditure Sector State in 2010 Current state 2020 targets 2015 2016 Forecasts (2016-2020) Transport Air (incl. ports) Passengers handled 61.3m in Passengers handled 85.1m in Upgrading airport MYR0.05b MYR0.042b About MYR0.25b 2010 2015. KLIA2 started infrastructure in Langkawi, operations in 2014. Kedah, Kelantan and Mukah and air navigation system in KLIA to cater for increasing passengers.
Expanding air freight capacity via new regional cargo hub at the old LCCT and upgrading cargo handling systems at KLIA and Kota Kinabalu International Airport. Aircraft financing Total fleet size was roughly Total fleet size of 239 Moving target, but the country MYR0.5b MYR1.1b Between MYR4b-7b 200 normally acquires 12-15 new depending on size of aircraft per year. aircraft acquired
Land - Roads 137,200 km of roads in 2010, 230,300km of roads in 2015, No official targets. MYR1.6b MYR6b MYR50b 43.7 km per 100 sq km land 69.6km per 100 sq km land area. area. The major road projects in the Greater KL planned include Rural road coverage was Duke Highway phase 2 and East 45,905km in 2009. Klang Valley Expressway (EKVE), Damansara-Shah Alam Elevated Expressway (DASH), Sungai Besi-Ulu Kelang Elevated Expressway (SUKE), DUKE Highway Phase 3, Jalan Tun Razak traffic dispersal.
Intercity road projects include Pan Borneo HIghway Sarawak, West Coast Expressway, Central Spine Road, Kota- Bahru-Kuala Krai Highway, and East Coast Highway.
3,000km rural roads to be built.
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Sector MKE view: Achievable Challenges Reasons & Response Opportunities
Transport Air (incl. ports) Largely achievable. Expenditure Execution issues, with cost overruns and Passengers handled have been growing as KLIA Capex financing. Malaysia Airports is also focusing on relates mainly to system numerous construction delays at KLIA2. positions itself as a low-cost carrier hub. developing its commercial revenues. upgrades, not major expansion. National carrier MAS is undergoing its latest round of restructuring. Relationship Current expenditure forecasts between AirAsia and Malaysia Airports is far relate mainly to minor from ideal. upgrades, and would materially change if proposals for a third terminal at KLIA take off.
Aircraft financing Achievable, this is the normal Rates have to be competitive; aircraft Part of replacement cycle and also to cater to Airlines like to hedge USD exposure to MYR if the rate for Malaysian-based financing is in USD and competes globally organic growth that normally tracks GDP. forward rates are attractive. airlines. Our visibility is for the for financing. AirAsia and Malindo also have a huge order next two years, and we think pipeline that they have committed to and have the momentum is pretty strong. to take in these aircraft.
Land - Roads Achievable. Construction of the Financing for construction of non-tollable Tollable road projects would be funded New roads especially rural-urban roads would spur Pan Borneo Highway Sarawak, highways is dependent on the government. privately via PPP/PFI form under BOT economic development in rural areas including DASH, SUKE, WCE, EKVE and concessions. industrial, commercial and property developments. DUKE extension is starting or As for the tollable roads, financial have started. sustainability depends on traffic volumes However, the non-tollable roads such as Pan achieved. Borneo Highway and Central Spine Road would Aside from the on-going highway have to be financed by the government via projects, more urban roads to bonds. alleviate congestion and rural- urban roads to boost rural area growth would be proposed.
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Malaysia Infrastructure Facts & Forecasts Expenditure Sector State in 2010 Current state 2020 targets 2015 2016 Forecasts (2016-2020) Transport – cont’d Land - rail 1,665 km of rail lines. 2,250km of rail lines. Target to achieve public MYR7.5b MYR8.5b MYR90b transport modal share for Annual ridership of urban rail Annual ridership of urban rail Greater KL to 40% and other in Greater Klang Valley was in Greater Klang Valley was capital cities to 20% by 2020. 171m. 226m. In Greater KL, KVMRT 2, KVLRT Public transport modal share Public transport modal share 3 will start construction soon. for urban areas was 16.9%. for urban areas was 17.1%. As for the other cities, there are Kota Kinabalu BRT and In the Greater KV, Penang LRT. construction of KVMRT 1 and KVLRT 2 is completing soon. As for inter-city rail, the works As for intercity rail, the Ipoh- on the Gemas-JB double track Padang Besar double track rail could start soon. In terms rail and Padang Besar-Gemas of inter-region rail, the KL-SG double track rail have been high speed rail is now under completed. planning stage and is targeted to be completed in 2020. Other potential rail projects that could be revived include the East Coast Railway.
Sea (incl. ports) 10 federal container ports: 10 federal container ports: No masterplan for ports in About MYR1b About MYR1b About MYR5b 24m TEU capacity 31m TEU capacity Malaysia. However, there are talks for a third port in Port Klang and a deep-sea port in Melaka. Total capacity could approach c.40m TEUs
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Sector MKE view: Achievable Challenges Reasons & Response Opportunities Transport – cont’d Land - Rail KVMRT 1 has been progressing Government financial conditions, given the Implementation depends largely on availability Public transportation operators are also focusing on smoothly. Major civil work current environment of low crude oil prices of financing. Public infrastructure projects developing property and retail opportunities in an packages for KVMRT 2 have been and fiscal consolidation targets to achieve a that are not profitable are mainly financed by attempt to improve their financial standing. awarded, and construction near-balanced budget by 2020. government guaranteed corporate bonds. should begin soon. Increasing demand for rail infrastructure would also Gemas-JB double track rail and KL-SG high be beneficial to related local suppliers and services Tender results for KVLRT 3 and speed rail could be financed by soft loans providers. Gemas-JB double track rail secured by foreign contractors. should be announced by 4Q 2016, with construction Aside from financing, other issues that could potentially beginning in 2017. lead to implementation delay include land acquisition, construction difficulties, poor The KL-SG high speed rail construction project management and a depends on progress of shortage of foreign workers. government-to-government negotiations. Malaysia has demonstrated strong execution and construction capabilities via the Project Delivery Partner under KVMRT 1 that is close to full completion soon.
Sea (incl. ports) On track. Private sector Structural issues such as suitable location Port Klang (handles >50% of the country's Structuring and financing of capex requirements. initiative. Third port at Port (with natural breakwater and deep depth) throughput) will face capacity constraint by Klang is likely to proceed and and building of new infrastructure at the 2025, hence, the construction of a third port could be awarded to a new location. should start by 2020. concessionaire.
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Malaysia Infrastructure Facts & Forecasts Expenditure Sector State in 2010 Current state 2020 targets 2015 2016 Forecasts (2016-2020) Communication Telecom 120% mobile penetration. 150% mobile penetration. Fixed broadband penetration MYR6.5b MYR7.2b About MYR32b 95% 3G penetration 27% 60% smartphone penetration.
Fixed broadband penetration 3G penetration 85%. 56% 4G penetration 50%.
Fixed broadband penetration 75%.
Internet / 0.5m sq ft of data centre about 1.5m sq ft of data 5m sq ft of data centre space MYR0.3b MYR0.3b About MYR2b digitalization space centre space
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Sector MKE view: Achievable Challenges Reasons & Response Opportunities
Communication Telecom Largely achievable. Mobile Potentially punitive spectrum fees Regulator has generally been holistic and The industry is already very entrenched, and players have in fact affecting capex plans of operators. business friendly, and pro-investment. But penetration rates are high. Capex largely revolves accelerated 4G rollout. Fixed- recent incident regarding spectrum fees has around technology upgrades (eg 3G to 4G, fibre line players are also actively affected its reputation. broadband to homes). expanding coverage.
Internet / Achievable. Expansion plans Bandwidth is still a slight concern as both The data centre industry is one of the entry Data centres are not particularly costly in the Digitalisation generally revolve around the domestic fibre footprint and Malaysia's point projects under the government's overall scheme of things. A data-centre themed REIT satisfying potential demand, international connectivity are not yet Economic Transformation Plan for income and has yet to take off in Malaysia. thus projects are seldom optimal. job creation. disrupted once construction begins.
However, 5m sq ft data centre space by 2020 is perceived by operators to be a highly ambitious target, and is thus not likely to be met.
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Malaysia Infrastructure Facts & Forecasts Expenditure Sector State in 2010 Current state 2020 targets 2015 2016 Forecasts (2016-2020) Water 94.2% clean water coverage in 95.1% clean water coverage Target 99% clean water MYR0.5b MYR1.5b MYR7.5b 2010. in 2014. coverage.
Non-revenue water at 36.3% Non-revenue water at 36.6% Reduce non-revenue water to in 2010. in 2013. 25%.
(Note: Non-revenue water is Water treatment production Remaining five states are the difference between the capacity was at 18,421 MLD expected to migrate to the new volume of water put into a licensing regime. water distribution system and Six states have migrated to the volume that is billed to the new licensing regime. customers)
Water treatment production capacity 16,779 m litres per day (MLD)
Three states have migrated to the new licensing regime (sale and leaseback from the federal government) from a concession regime previously. Housing Urbanisation; 71% urban population in 2010. 74.3% urban population in Urban population to reach 77% MYR2.29b MYR2.588b MYR12.5b affordable & low- 111,000 affordable & low- 2015. by 2020. cost housing cost houses built between 102,200 affordable & low- 653,000 affordable & low-cost 2005 and 2010. cost houses built between houses to be built in 2016- 2011 and 2015. 2020.
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Sector MKE view: achievable Challenges Reasons & response Opportunities Water Langat 2 water treatment plant Financing from federal government. Migration to new licensing regime transfers Apart from new water treatment capacity, capex construction is in progress. ownership of water assets to the federal would be mainly in pipe replacement to reduce non- government. revenue water. Pipe replacement in Selangor would pick up to reduce NRW This should see increased investment in water post full-migration into new infrastructure to improve services, with a new licensing regime. water tariff-setting mechanism potentially being introduced. Increasing migration to the new licensing regime would protect long term financial sustainability and ensure improvement of the water industry.
Housing Urbanisation; Affordable housing target is Tightening of housing loan approvals could Partnering property developers shifts the Increasing demand for mortgages for affordable affordable & low-cost achievable as the government slow down take-up of affordable housing burden of financing away from the housing to offset slowdown in the property market. housing is partnering property projects. government. End demand is however an developers to launch affordable increasing problem as banks tighten up on housing projects. Development credit approval criteria. costs are thus borne by property developers.
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PHILIPPINES INFRASTRUCTURE
1. Significant investment needed in transport infrastructure projects
2. Land acquisition remains the issue; political will is needed
3. Multiplier effects if inadequacies in transport infrastructure are
addressed
4. Regulatory risks evident in some PPP projects like water
5. Metro Pacific Investments (MPI PM, BUY, TP PHP7.00) best play
Michael Bengson [email protected] (632) 849-8840
Luz Lorenzo [email protected] (632) 849-8836 UNMASKING ASIA 50
When the new president elected in May formulates the 2017-2022 PDP, PHILIPPINES INFRASTRUCTURE infrastructure will almost certainly be a top priority. For the past five administrations, infrastructure has been the focus but each government faced various constraints. The key issue going forward will be the speed of implementation. Current low interest rates, ample liquidity and low leverage If You Have The Will, You’ll Have The Way should support faster implementation. PPP projects have partially compensated for persistent government Transport infrastructure is the one key area that is severely lacking investment underspending. Due to past successes, these have expanded beyond power in the Philippines. There are 14 transport Public Private Partnership (PPP) generation. In the current list of PPP projects, an estimated PHP303b have been projects costing an estimated PHP636b (~USD13b) that have yet to be awarded. awarded and PHP1,308b are in the pipeline. The projects in the pipeline will be A law was passed in 2000 to expedite the right-of-way for national government left for the next government to execute, with over 90% addressing the transport infrastructure projects. Yet land acquisition and right-of-way remain the key deficit. Again, political will in passing legislation and streamlining processes is stumbling blocks for transport-infrastructure projects. While the government important in moving these projects forward. can expropriate land and property by applying eminent domain, this is in practice an extremely slow process as negotiations can drag on with one or more land owners. In some instances, we understand the proponents of these PPP projects (2011-2016) projects make part of the land acquisitions themselves to break the deadlock. PHPb AWARDED 303.3 One example was the MCX, also called the Daang-Hari- SLEX link road project, PPP projects for implementation which encountered right-of-way issues and thus was delayed. MCX is a USD54m Transport 251.2 4km, 4-lane expressway, which cuts through the New Bilibid prison reservation Water 24.4 connecting the city of Bacoor, Cavite to the South Luzon Expressway. The Others 27.6 project was awarded in Dec 2011 but it was not completed until 2015. This is not ideal! PIPELINE 1,308.5 Projects under procurement 556.6 We note that a new law was passed in March 2016 (RA No. 10752 or “The Right- Transport 486.1 of-Way Act” intended to improve the process of land acquisition. We believe Water 18.7 this is a good step. However, much depends on the implementation. Others 51.8 In the light of growth issues among the more developed markets, the Philippines could truly lead GDP growth and is one of the few countries which can afford an Projects for roll-out 66.1 expansionary fiscal budget. If spending on infrastructure were boosted, we Transport 66.1 believe the country’s GDP growth would be as high as 7-8% from a baseline of 5-
6% growth. This is partly a function of political will. Every new government For approval of relevant government bodies 641.4 issues its own economic blueprint, known as the Philippine Development Plan Transport 619.9 (PDP). The 2011-2016 PDP set ambitious targets by aiming to expand GDP by an Others 21.4 average of 7-8% for the period with significant contributions from a sustained increase in public infrastructure spending as a ratio to GDP. The target public Projects with ongoing studies 44.6 infrastructure ratio was 4.0% (PHP668b) for 2015 and 5.1% for 2016. However, Transport 44.6 public infrastructure spending growth reached only ~2.4% (~PHP400b) in 2015 Sources: PPP Center, Maybank ATRKE while GDP growth averaged 6.4% in 2011-2015.
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1. Transport and water distribution mainly public 3. Private sector leads in power, telecoms and housing
Transport: Horrendous traffic jams and airport /seaport congestion are Power: Private investment in the power generation sector ramped up testament to the severe deficiencies in transport infrastructure. This is still significantly following the restructuring of the industry in 2001. The largely the purview of the government although in Luzon island major toll restructuring process has worked out quite well and there is confidence in roads are PPP projects. Over 90% of the PHP1,308b PPP projects in the the regulatory framework. Also, we note there are more players and a pipeline address the transport infrastructure deficit. significant pipeline of power generation projects. There is better access to Peso-denominated financing, partly due to the high level of liquidity in the Water: The privatization of water distribution services in Metro Manila was a Philippine financial system. As a result, the typical WACC of a coal-fired key success story, particularly for the East Zone. We note that Manila Water, power generation project has declined from ~14% in 2010 to ~12.6% the operator of the East Zone, was able to reduce non-revenue water presently. The returns for those who participated in the privatization of (leakages and / or pilferages) from ~60% in 1997 to ~11% presently. Also, state-owned plants were significantly higher in some cases. there were no issues with the regulatory framework back then. So it was all the more unexpected when regulatory issues erupted in 2013. The issue is Similarly, the Renewable Energy Act of 2008 was successful, resulting in whether or not corporate income tax is a “recoverable” expense and has rapid buildout of wind, solar and other renewable energy capacity, and an been brought before the Philippine Supreme Court. There were concerns this existing pipeline of greenfield renewable energy projects. would affect investor perception of other PPP projects in other sectors but However, the restructuring of the sector may have worked too well as we this did not happen. estimate the risk of an oversupply of baseload power plants in the Luzon grid In the rest of the country, water distribution is still largely the responsibility by 2019. A possible opportunity relates to the construction of an LNG of the government. The main issue is developing new sustainable water regasification facility needed upon depletion of the Malampaya natural-gas sources to replace the prevalent practice of tapping ground water that leads field by 2024. Attractiveness of the project depends on whether the to subsidence and also in many cases may not be potable because of government offers the right incentives and policy support. extensive developments above ground. Telecoms: Private investment, first introduced in the 1990s, has grown since and has resulted in high mobile penetration (114% in FY15). However, we note broadband penetration and download speeds remain relatively low. 2. Multiplier effects if glaring inadequacies in transport There are presently only two players in the telco sector, the result of infrastructure are addressed consolidation. Being an archipelago, the cost of backhaul in the Philippines is expensive. Also, unlike other countries, there is no National Broadband Prolonged travel and delivery time is keeping costs of living and businesses Network. As a result, telcos have to build all the infrastructure themselves. elevated. This was highlighted in 2014 when congestion in the main Manila However, there is a niche opportunity in wireless broadband, particularly seaport increased delivery periods by months. Today, there are daily LTE 4G on the 700 MHz frequency. Also, more private investment is required reminders, especially for Metro Manila motorists and commuters, of the to expand broadband service coverage and increase download rates. Another delays caused by the lack of mass transport systems and alternate roads. possible growth area is financial technology (fin-tech). Globe Telecom and The decrepit state of airports is an obstacle to growing the tourism industry. Smart Communication have invested in the Automatic Fare Collection Boosting investment is appropriate as the multiplier effects on lowering the System, which involves the use of a stored-value card and micro cashless costs of living and for businesses will be substantial, as well as accelerating payment system. The card can be used to buy load for prepaid mobile development of other industries, notably tourism. It can also lead to services. decongestion of Metro Manila and spur development in provincial areas.
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Housing: public expenditure on housing has been estimated at less than 1% of government spending. A highly fragmented private sector-led industry has been unable to cope with the quantity and quality of housing units required resulting in a big gap in meeting housing needs. This is evident in the prevalence of slums in urban areas, especially in Metro Manila. In rural areas, there are fewer slum areas but houses are not built of durable materials so are more vulnerable to natural and man-made disasters.
4. Regulatory risks evident in some PPP projects
The Metro Manila water distribution system served as a model PPP undertaking but in late 2013 the regulator reinterpreted key provisions of the concession agreements. This led to international arbitration that is still ongoing. Implementation of straightforward provisions in toll-road concessions has been delayed, apparently for political reasons. Due to delays in government deliverables, a hospital renovation PPP project was returned to the government.
5. MPI best infra play
Metro Pacific Investments Corp (MPI PM, BUY, TP PHP7.00) is the most direct infrastructure play. It derives earnings from toll roads (North Luzon Expressway, Manila-Cavite Expressway, Subic-Clark-Tarlac Expressway), electricity distribution (Manila Electric Co), water distribution (Maynilad Water Services Inc), rail mass transit (LRT1) and hospitals. Regulatory risk on its PPP projects has taken several forms. One is the ongoing second round of arbitration of Maynilad with the water regulator on whether income taxes should be included in the tariff. Another is delays of two to three rounds of scheduled toll rate hikes for NLEX and CAVITEX. Despite these setbacks, MPI continues to bid for PPP projects but makes proposals using conservative assumptions to factor in regulatory risks.
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Focus Charts
Government infrastructure spending / GDP (%) Vehicle sales and YoY growth
6.0 350000 40.0 5.1 Vehicle sales YoY Growth 30.0 ACTUAL TARGET 300000 5.0 20.0 4.0 250000 10.0 4.0 3.5 200000 0.0 (%) 3.0 Units (%) 2.5 2.4 -10.0 2.2 2.2 2.3 2.2 150000 -20.0 2.0 100000 -30.0 50000 1.0 -40.0 0 -50.0 - 2012 2013 2014 11M15 2016 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Sources: National Economic Development Authority, Department of Budget and Sources: Chamber of Automotive Manufacturers of the Philippines Inc, Association of Vehicle Management, Maybank ATRKE Importers and Distributors Inc, Maybank ATRKE``
Toll roads Growth in number of users / subscribers of major ICT services 250,000 10.0% 120.00 40 NLEX average daily traffic Fixed (wired)-broadband subscriptions 200,000 Mobile-cellular telephone subscriptions 35 5.0% 100.00 Fixed-telephone subscriptions 150,000 Percentage of Individuals using the Internet (%) 30 100,000 Vehicle entries 0.0% 80.00 25 50,000 Growth Rate
No. of Vehicle Entries 0 -5.0% 60.00 20 (%) 2010 2011 2012 2013 2014 2015 15 5,000 15.0% 40.00 NLEX vehicle-kilometers travelled 10 4,000 10.0% Users / Subscribers, in Millions 20.00 3,000 5 5.0% 2,000 Kilometers travelled - 0 1,000 0.0% KM in thousands Growth Rate
0 -5.0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2010 2011 2012 2013 2014 2015 Source: Metro Pacific Investments Corp Sources: Philippine ICT Statistics Portal, International Telecommunication Union (ITU)
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Philippines Infrastructure Facts & Forecasts Expenditure Sector State in 2010 Current State 2020 Targets 2015 2016 Forecasts Energy Coal, oil, fossil fuels, The Luzon grid accounted for FY14 GWh consumption grew The Department of Energy (DOE) Capex for power plants, Capex for the San Buenaventura Capex for coal-fired thermal ~74% of total power by a CAGR of 3.3% from FY10. is projecting electricity demand particularly the 97 MW coal-fired power station in power projects may cost consumption in the With regard to plant mix, we to grow by a CAGR of 4-5% up to Avion and 414 MW San Mauban. Quezon (460 MW) and as much as USD2.5m/MW Philippines. note that coal rose to ~43% of 2030. This is for the guidance Garbriel nat-gas power other coal-fired power projects if the plant equipment is generation from 34.4% in of private power generation facilities. Also, may ramp up beginning in 2016. sourced from Japanese In FY10, Philippines’ power FY10. companies in planning capacity construction of SMC suppliers. consumption was 67,743 GWh build-out. Global Power’s coal-fired First Gen Corp may decide and peak demand was 10,375 In FY14, the country’s power power projects in Limay whether or not to invest in an The planned LNG MW. Total installed capacity consumption was 77,261 GWh The DOE has talked about Bataan (300 MW) and LNG regasification terminal in regasification terminal was 16,359 MW. and peak demand was 11,822 setting a mandated capacity mix Malita, Davao de Sur (300 2016. Note there are ~2,700 may cost as much as MW. Total installed capacity by plant type with a minimum MW) started. MW of nat-gas power plants, USD1b. This would be a GWh consumption breakdown was 17,944 MW. of 30% for nat-gas, which is which source the fuel from the completely private- by grid: much higher than the existing Malampaya offshore field. sector-led project. GWh consumption breakdown contribution. However, it is However, the field may be Luzon: 74.3% by grid: uncertain whether the depleted by 2024 so there is a Visayas: 13.3% implementation will be strictly need to develop an alternative Mindanao: 12.4% Luzon: 74.4% enforced. source such as LNG. However, Visayas: 13.3% the infrastructure must be built GWH generation breakdown Mindanao: 12.3% Coal accounted for 43% of the first. down by plant type: country’s FY14 GWh production GWH generation breakdown and 32% of installed capacity. Note there must be enough lead Coal: 34.4% down by plant type: This will grow further given the time for the regasification Nat-gas: 28.8% existing pipeline of committed facility to be completed before Geothermal: 14.7% Coal: 42.8% and indicative projects, which the Malampaya field is depleted Hydro: 11.5% Nat-gas: 24.2% comprise mostly coal-fired in 2024. Oil-based: 10.5% Geothermal: 13.3% power plants. However, there Other RE: 0.1% Hydro: 11.8% is a growing concern among Oil-based: 7.4% stakeholders that this may be Other RE: 0.5% too much, particularly in light of the UN Climate Conference in Paris in Dec’15.
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Sector MKE View: Achievable Challenges Reasons & Response Opportunities Energy Coal, oil, fossil fuels, With regard to the demand- The most pressing need is to develop an There are new players in the sector who are The development of an LNG regasification terminal thermal supply situation we note there alternative to the Malampaya field, which growing their power-generation business and is an opportunity if the right incentives and policy is a comfortable reserve margin may be depleted by 2024. Note this one adding to supply. However, as some of the are put in place to support the project. in the Luzon grid and we field supplies all the nat-gas requirements projects have not started construction yet, an believe there is the risk of an of the country. One alternative is LNG. oversupply situation may be averted if these oversupply of baseload power However, the infrastructure must be built projects are “phased-in”. Also, there is capacity by 2019. for this to be an option and it will have to always the risk of delay with regard to power be developed predominantly by the private projects in the Philippines due to any one of There is ~5,000 MW of baseload sector. The key for this project is a the following reasons : 1) slow development capacity, which will come on government policy supporting nat-gas / of the transmission infrastructure; 2) inability line in Luzon by 2019. This is LNG such as the setting of a mandated to secure permits and / or an Environmental based on the list of “committed capacity mix. Compliance Certificate; and 3) unable to projects” from the Department secure long-term offtake contract with a of Energy and certain projects distribution utility. “announced”, which have a good chance of happening, although unfunded at this point.
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Philippines Infrastructure Facts & Forecasts Expenditure Sector State in 2010 Current State 2020 Targets 2015 2016 Forecasts Nuclear Hydro Hydro plants, including The Department of Energy The DOE has an aspirational target Relatively small. Relatively small. Run-of-river hydro projects impoundment dams and run-of- continues to push for the of growing installed capacity of are typically less than 100 river type hydro had a total development of run-of-river renewable energy by ~9,000 MW by MW and the cost to develop installed capacity of 3,400 MW in hydro power projects through the 2030 from ~5,000 MW in 2010. is as much as USD4-5m/MW. 2010. incentives provided in the Most of this will come from hydro Renewable Energy Act such as the power at ~5,000 MW. feed-in tariff.
Other Renewables Geothermal power plants had a Geothermal power projects are The DOE has an aspirational target Greenfield geothermal total installed capacity of 1,966 eligible for tax incentives as of growing geothermal power power projects are typically MW in 2010. provided by the Renewable capacity by ~1,500 MW by 2030. small at less than 100 MW Energy Act. and cost as much as USD5m/MW to develop.
Solar There was a rush of building of A total of 550 MW of solar power solar power capacity as the capacity is eligible for feed-in tariff capacity quota for feed-in tariff (PHP9.68/KWh for the first was increased to 550 MW. This allocation and PHP8.69/KWh for the includes the 50 MW quota in the second allocation). first allocation and an additional 500 MW in the second allocation.
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Sector MKE View: Achievable Challenges Reasons & Response Opportunities Nuclear Hydro Run-of-river hydro has significant potential in the Philippines but these projects may be located in remote areas with little infrastructure. They are eligible for feed-in tariff (up to fixed quota) and tax incentives.
Other Renewables Geothermal has significant potential in the Philippines as the country is located within the Pacific Rim of Fire, an area with significant tectonic / volcanic activity. However, the economic feasibility of such projects is a bit challenged now that energy prices (coal and oil) are at low levels. Note that geothermal projects are not eligible for feed-in tariff.
Solar Solar power development is an attractive opportunity in the Philippines given the elevated feed-in tariff and declining price of solar panels. However, we understand the feed-in tariff quotas for the first and second allocations are nearly taken up.
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Philippines Infrastructure Facts & Forecasts Expenditure Sector State in 2010 Current State 2020 Targets 2015 2016 Forecasts Transport Air (incl ports) Annual international and 95.94m as of 2014 As published in the official 2011- According to national The government is targeting Conservatively, if GDP domestic passenger traffic 2016 Philippine Development government budget data, 5.1% of GDP in total grows on average by 5% 48.08m 1,232m kg as of 2014 Plan and updated in 2013, the total infrastructure and infrastructure and other capital over the next six years of end-target is 74.32m. other capital outlays in outlays in 2016 or PHP760b. the new administration Annual international and 236.440 as of 2014 11M15 was PHP368b, However, the likelihood of and assuming inflation of domestic cargo traffic 1,111m End-of-plan target is 1,677m kg +23% YoY. underspending remains, 2%, as well as the share of kg Still, this is only about although perhaps less so in an infra spending remaining End-of-plan target is 274.88 2.4% of GDP, well below election year. For transport PPP at 5% of GDP, public- Ninoy Aquino International thousand the official 4% target for projects, there are two ongoing sector infra spending Airport domestic and 2015. Had the target construction projects for a toll could reach PHP1,036b in international flights 200,100 been met, total national road and an airport. The total 2021. Currently, there are government project cost of the Mactan-Cebu 14 transport PPP projects infrastructure and other International Airport passenger where costs have been capital outlays would terminal building is PHP18b. estimated at a total of have reached PHP531b. PHP636b that have not yet been awarded.
Land - Roads Total length of arterial roads 3,654 kilometres of arterial As published in the official 2011- San Miguel Corporation, a The NAIA expressway with with roughness index of 3.0 roads as of 2014 2016 Philippine Development major PPP proponent, estimated cost of PHP24b is (km) 1,400 in 2011 Plan and updated in 2013, the estimates 2015 spending almost complete. Other PPP 92.7% paved roads as of 2014 end-target is 6,600 kilometres on three ongoing toll transport projects that have Proportion of paved roads (out road projects at been awarded but are in pre- of the total 31,242 km) 80.9% 99.4% permanent bridges as of End-of-plan target is 100% PHP30.2b or about 8% of construction activities total 2014 the government’s total seven and have combined total Proportion of permanent End-of-plan target is 100% infra spending. project cost of PHP231b. bridges along national arterial roads, 96.3% Land - Rail Annual ridership of passengers 243.58m as of 2014 As published in the official 2011- 219.27m 2016 Philippine Development 1.11 as of 2015 Plan and updated in 2013, the Ratio of revenue to operation end-target is 270.10m and maintenance cost (farebox ratio) 1.05 End-of-plan target is 1.15
Sea (incl ports) Cargo throughput 168.24m MT 217.11m MT as of 2014 As published in the official 2011- 2016 Philippine Development Number of water transport 54m as of 2014 Plan and updated in 2013, the passengers 52m end-target is 228.37m MT
End-of-plan target is 75m
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Sector MKE View: Achievable Challenges Reasons & Response Opportunities Transport Air (incl ports) While the official target for The most obvious shortfalls in transport Underspending on the part of the government The greatest opportunities come from the PPP public-sector infrastructure infrastructure are: is due to more care in disbursement of funds transport projects. As these carry much regulatory spending is 5.1% of GDP, we following an adverse ruling from the Supreme risk, companies guard against these by making believe what is achievable is (1) The lack of quality mass transit that Court in 2014, weak coordination among conservative bid assumptions as a buffer against 2.5-3.5%, which translates to an has led to a surge in new vehicle sales government agencies, land acquisition issues delay in deliverables by the government. As major estimated PHP360-500b. For and increased sharply the travel time and red tape, among others. Since 1986, transport infrastructure projects such as those transport PPP projects, we within Metro Manila and other urban different governments have manifested offered in the PPP programme will eventually assume no new ones will be centres. varying degrees of political will that have increase land values in the vicinity, most bidders go awarded as the current (2) Delay in building new roads to improve helped to accelerate or slow down into a consortium or are conglomerates that will administration is about to end connectivity among various locations. infrastructure development. Because of the benefit from several aspects of the project. its term while the new (3) Inability to keep pace with the forthcoming May presidential elections, there administration is likely to have increase in passenger and cargo traffic is uncertainty on what the pace will be in the to settle down first after taking at airports and seaports so that next six years. However, we believe that office in Jul-16. For the passenger arrivals and departures are because there has been such a glaring deficit transport PPP projects that not delayed, as is the withdrawal of in transport infrastructure, it will be among have been awarded, we goods. the top priorities of the new government. estimate 5% of project cost will (4) Safety on air and sea vessels as a be spent this year for those in result of lack of equipment and/or pre-construction activities or inadequate observance of safety PHP12b. For those with ongoing regulations. construction, about PHP30b. Land – Roads Land acquisition / Right-of-Way A new law was passed in March 2016 (RA No. 10752 or “The Right-of-Way Act” intended to improve the process of land acquisition.
Land - Rail Land acquisition / Right-of-Way A new law was passed in March 2016 (RA No. 10752 or “The Right-of-Way Act” intended to improve the process of land acquisition.
Sea (incl ports)
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Philippines Infrastructure Facts & Forecasts Expenditure Sector State in 2010 Current State 2020 Targets 2015 2016 Forecasts Communication Telecoms/mobile There are two major players in Still two major players in the Increase CMTS coverage as a 2015: Combined capex of 2016: Combined capex of PLDT We understand SMC will the mobile and wireline telecommunications sector: percentage of total PLDT and Globe Telecom and Globe Telecom forecast at launch a wireless telecommunications market: PLDT and Globe Telecom. San municipalities from 94.7% in was PHP75.33b PHP81.3b. Both companies broadband service PLDT and Globe Telecom. San Miguel Corp (SMC) increased its 2009 to 100% in 2016. continue to upgrade their offering before the end of Miguel Corp bought a stake in stake in Liberty Telecom after The bulk of the spending network with regard to data the year. The investment Liberty Telecom in 2009 in acquiring the stake of Qatar was related to expansion capacity. may cost up to USD1b, partnership with Qatar Telecom. SMC group plans to and upgrade of network which was the figure Telecom. launch a wireless broadband for wireless data. under discussion with service offering before the end Telstra previously. ~102% mobile (SIM) penetration of 2016 and is open to other using FY11 numbers. possible partners after JV talks with Telstra broke down Smartphone penetration was recently. ~15% for Globe Telecom in 2011. Mobile (SIM) penetration was ~114% in FY15.
Smartphone penetration was ~40% for both Globe Telecom and PLDT in FY15.
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Sector MKE View: Achievable Challenges Reasons & Response Opportunities Communication Telecoms/ Mobile SMC may launch a wireless LTE 4G wireless infrastructure is lacking. A renewed push by SMC in the wireless broad Wireless broadband service using LTE 4G on the 700 broadband service offering Wireless data traffic is increasing band space may spur competition and MHz frequency is a niche opportunity in an otherwise before the end of the year. significantly for both Globe Telecom and investment, thereby increasing Internet slow growing sector. PLDT. This is partly driven by the rising download speed, which is currently one of the penetration rate of smartphones. slowest in the region. Having said that, the Another area of possible growth is “Fin-tech”. Note industry is already quite competitive despite that Globe Telecom and Smart Communication GLO and TEL launched Fiber to the Home having only two players. invested in the Automatic Fare Collection System (FTTH) broadband services late last year. (AFCS) PPP. The new payment system, which was But this service is only available in There are also a number of challenges for any rolled out, involves the use of a stored value card selected areas in Metro Manila. new entrant in the Philippines: 1) no tower (Beep) and micro cashless payment system, which sharing; 2) low ARPU; and 3) high can also be used for purchases in certain retail For the incumbents there is a lack of interconnectivity costs. Regarding capex, the establishments. The card can be used to buy load for available spectrum in the 700 MHz band, Philippines being an archipelago means the prepaid mobile services. However, the revenue which could be used for LTE 4G broadband cost of back haul is significantly more potential is still unclear. services (90 MHz of the 700 MHz frequency expensive than in other countries. Also, band is held by SMC group companies). increasing coverage can be delayed to some extent by the many permits needed to construct a cell site.
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Philippines Infrastructure Facts & Forecasts Expenditure Sector State in 2010 Current State 2020 Targets 2015 2016 Forecasts Internet/ Download speed of ~1 mbps in Household download speed of Improve cost efficient broadband The government is digitalization/ 2011 based on Akamai 3.64 mbps in May 2015 (ranking service delivery, network evaluating setting up a big data 176 out of 202 countries) based infrastructure expansion and Universal Access and on Ookla. upgrades through increased Service Fund, which can competition based on Philippine be used for the Digital Strategy 2011-16. development of broadband • Lowering of Herfindahl- infrastructure, particularly Hirschman Index, which is a in underserved measure of market communities. The plan concentration. involves allocation of • Average price for basic ~PHP2b in spectrum users’ broadband Internet falls by 5% fees collected by the NTC annually. for the UASF. The • Investment in infrastructure spectrum users’ fees are expansion and development currently remitted to the increase by 10% annually. National Treasury.
Universal broadband Internet The Department of service: Science and Technology • For businesses: all CBDs to plans a free Wi-Fi Internet have broadband coverage with service. Once fully average download speeds of 20 deployed, the project will mbps for customers by 2016. serve 105,000 concurrent • For households, broadband users with 256 kbps each with average download speed with data volume based on of at least 2 mbps to be a Fair Usage Policy. The available to 80% of customers budget for the project is throughout the country. ~PHP1.41b.
Universal basic broadband Internet by 2016 to all barangays through publicly shared access.
Universal broadband Internet access for public schools by 2016.
Increase the percentage of households with broadband connection from 13.8% in 2008 to 25.8% in 2016.
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Sector MKE View: Achievable Challenges Reasons & Response Opportunities
Internet/ N/A digitalization/ big data
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Philippines Infrastructure Facts & Forecasts Expenditure Sector State in 2010 Current State 2020 Targets 2015 2016 Forecasts Housing Provision of socialized housing Updates are available only at The 2016 target of the National A 2009 estimate puts With a budget of PHP3,001b in With fiscal space, it is units, 10% of population. the end of the plan period. Housing Authority and Socialized government spending on 2016 total national government possible government Housing Finance Corporation is housing at less than 1% of expenditures, 1% or PHP30b spending on housing will Total housing need, which is to provide 578,756 socialized total national would be the upper limit to increase its share of housing backlog and housing housing units. government housing spend. expenditures. for new households, was 3.7m expenditures. If this units. Total housing need in 2016 is proportion still holds, We estimate the companies in The companies in our estimated at 5.8m units. Official 2015 public sector our property universe will property universe are target is to provide 1.47m housing spend would increase spending by about 9% currently working on housing units for the entire plan have been less than to PHP106b. reducing their receivables period. PHP20b, perhaps flattish and inventory levels. We YoY. expect an acceleration in residential capex as The private sector is the interest rates are main provider of housing expected to remain needs but it has not been subdued while household able to close the gap, incomes are expected to hence the continuing rise with declining large housing backlog. unemployment.
The six listed companies in our property universe are among the largest in the country but operate in a heavily fragmented industry. Between 2010 and 2015 their residential project costs almost tripled to around PHP100b.
Water Metro Manila East Zone: The two Metro Manila water Marginal improvements in FY15 capex of PHP12.2b FY16 forecast capex for Manila PHP200b capex in the Non-revenue water: 11% concessionaires depend on a concessionaires’ KPI over the for the two Water and Maynilad of East Zone from 2013-2037 Billed volume: 409.8m mcm single source of raw water: 2013-18 rate rebasing period. concessionaires PHP23.9b. Angat dam PHP239b capex in the Metro Manila West Zone: West Zone from 2013- Non-revenue water: 51% Metro Manila East Zone: 2037 Billed volume: 373.8m mcm Non-revenue water: 13% Billed volume: 476.7m mcm
Metro Manila West Zone: Non-revenue water: 34.3% Billed volume: 498.3m mcm
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Sector MKE View: Achievable Challenges Reasons & Response Opportunities
Housing The government has fallen Underspending on the part of the The obvious shortfalls are in socialized The greatest opportunities are in providing decent below its spending target for government is due to more care in housing as is evident from the presence of mid-income housing as this portion of the populating several years and may do so disbursement of funds following an adverse slums in urban areas, especially in Metro is expected to broaden as the economy grows. This is again but perhaps to a smaller ruling from the Supreme Court in 2014, Manila. still inadequately served, especially in provincial extent as it is an election year. weak coordination among government areas. Affordability is improving in a low-interest agencies, land acquisition issues and red rate environment amid rising incomes. tape, among others. In rural areas, there are fewer slum areas but The companies in our property housing units are not built of durable universe have been materials so are more prone to destruction in opportunistic in launching Since 1986, different governments have natural disasters. residential projects as they are manifested varying degrees of political will bringing down inventory and that have helped to accelerate or slow receivable levels. We think they down infrastructure development. Because Many housing units, both in urban and rural are likely to achieve our modest of the forthcoming May presidential areas, are situated in disaster-prone locations targets. election, there is uncertainty on what the because of inadequate planning or zoning. pace will be in the next six years.
Water Programmed capex can now be 24/7 water supply is lacking outside Metro Investment spending in the East and West The greatest opportunity is in the development of implemented as the new rates Manila. Also, there is underinvestment in Zones was delayed because of regulatory bulk water supply projects, particularly outside for 2013-18 have been the development of new water sources and issues with regard to water rates. This needs Metro Manila. Also, there is the opportunity in the implemented in 2015. the upgrade / expansion of the distribution to be resolved before new investments can be upgrade and expansion of the water distribution networks outside Metro Manila. made in the two concession areas. The MWSS infrastructure outside Metro Manila. Capex post-2018 subject to the approved implementation of the new rates for outcome of the next five-year 2013-18 rate rebasing period mid last year. rate rebasing. Having said that, we do not expect any significant change from the existing plan.
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SINGAPORE INFRASTRUCTURE
1. NIRC provides recurring-income support for higher public spending.
2. Investing to enhance productivity and promote sustainable growth.
3. Jump in development expenditure to benefit social infrastructure.
4. Rail, LNG, airports & infocomm are needle-moving projects.
5. Stock picks: SingTel & MINT.
Gregory Yap & Singapore Research Team [email protected] (65) 6231 5848
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SINGAPORE INFRASTRUCTURE
While We Were Sleeping…
Singapore underinvested in its infrastructure from early 2000. Development spending was SGD12b in 2010, before spiking to SGD19-20b in FY15/FY16 or 5% NIRC Supplements Government Revenue of GDP. This is about to change. Deputy Prime Minister Tharman (SGD b) 80 Shanmugaratnam indicated that public development expenditure could top Total Operating revenue SGD30b (6% of GDP) by the end of this decade. 70 Development expenditure Operating expenditure Every Singaporean is drilled that the country is not endowed with natural 60 resources; they are also vaguely aware that there are no cheap suburbs to retire Net Investment Returns Contribution to. It is no state secret that after 50 years of prudent spending and market 50 pricing of public goods and services, a large pool of reserves has accumulated. 40 Somewhat publicised but not fully appreciated is that Singapore’s foreign reserves compensate for its lack of natural resources. Investment income from 30 these foreign reserves now supplements the government’s budgets through Net Investment Return Contribution (NIRC). 20 The Constitution was amended in 2008 to embrace the NIRC Framework. From 10 FY09, this allows the government to spend up to 50% of expected long-term real 0 returns from the net assets of GIC and MAS. Temasek joined the framework in 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E FY16. In the FY16 budget, NIRC income is SGD14.7b, up from SGD9.9b in FY15, against operating revenue of SGD68.44b. Under the previous Net Investment ` Source: Accountant-General’s Dept Income Contribution (NIIC) Framework in 2000-2008, the contribution was below SGD4b.
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1. Creating ecosystems for enhancing productivity and ii. Proactive economic infrastructure development. Singapore’s spending on social infrastructure may be patchy but not economic promoting sustainable growth infrastructure development. While the region’s development initiatives are aimed at resolving crippling bottlenecks, Singapore Three ways in which Singapore’s infrastructure are different from the rest of builds infrastructure proactively to attract/retain foreign ASEAN are: investments. Its reclamation and extensive development of Jurong i. Singapore’s spending is moving beyond providing amenities and basic Island raked in billions of investments from leading global oil and social/economic infrastructure. These are done with. Singapore chemical companies. Work on Changi Airport’s Terminal 5 and already has established extensive infrastructure networks. Power plants Terminal 1 expansion commenced even before Terminal 4 is and distribution grids, water plants, roads and housing are well designed completed. Singapore has also been working on water and maintained, now among the best in the developed world. This is independence decades before its 2061 water agreement with consistent with findings in our earlier section, which suggest that Malaysia expires. Singapore fares well both in the quality and quantity of its iii. Funding. Public finance is in good shape, more so with the adoption infrastructure. Still, the government plans to raise its development of NIRC. Private-public partnerships (PPPs) play a role by marking budget from SGD12b (3.7% of GDP) in 2010 to SGD30bn in 2020 (6%). It services to market and enhancing efficiency. Extraneous risks aside, has a record of investing judiciously to cultivate ecosystems and create clarity on the framework should minimise execution missteps for new streams of income or through raising factor productivity. For PPPs. Accordingly, cost of capital is also low and IRRs should be example, the oil industry is now 5% of GDP and Singapore has become lower than the region. the undisputed oil hub in Asia. Behind this success is its “plug and play”
infrastructure and complete supply-chain integration. 2. Rebalancing priorities Fig 21: Total development expenditure as % of GDP A rebalance of infrastructure priorities may shift more investments to social- (%) oriented projects. Previously, Singapore’s economic agenda overwhelms its 9.0 8.6 social programme. The 2010-2013 flash floods, long queues for public Total Dev Expd as % of GDP 8.0 housing, spiralling prices of HDB flats and congestions at public hospitals 7.0 were evidence of the underspending. A groundswell of disenchantment 7.0 during the 2011 general elections was a timely reminder that the social 6.0 5.7 fabric needed strengthening. Congestions in public transportation, long 6.0 5.5 5.0 waiting times for public housing and snaking queues at hospitals had an 4.7 4.9 5.0 4.5 economic cost. They compelled the government to slow down its intake of 3.9 foreigners and foreign labour. 4.0 3.7 3.6 3.4 3.4 3.3 3.5 3.2 Along with transport, healthcare is of priority. New hospitals, generous 3.0 2.5 2.6 subsidies for the pioneer generation & lower-income families and mandatory healthcare insurance to reduce large-bill outlays are new initiatives. Its 2013 2.0 1997 2000 2003 2006 2009 2012 2015 plan targeted one new public hospital a year on average up until 2020,
Source: Accountant-General’s Dept, SingStats representing a 40% increase in public-hospital beds. From 2010-2015,
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healthcare development expenditure has increased almost 3-fold to A third runway has also been planned. Changi Airport is currently highly SGD1.6b. profitable with revenue of SGD2.1 b and net profit of SGD780m. Changing demographics, annual smog problems from the region and global iii. LNG. Developing an LNG hub is of economic and strategic interest. It is warming are additional hot spots. Addressing these would require raising a matter of timing, in our opinion. About 95% of the feedstock used to spending on transportation, public housing, connectivity, elder-friendly generate energy is currently gas piped from Malaysia and Indonesia. facilities, flood alleviation, food centres and community centres etc. But it Long-term “take or pay” fuel contracts will expire only in early 2020. As by no means suggests that economic infrastructure will take a back seat. current legislation forbids power producers from entering into new contracts to import piped gas, demand for LNG ought to accelerate Fig 22: Economic and social development expenditure towards early 2020. Singapore is Asia’s oil and gas trading and pricing Total Dev Expd (LHS) hub. Adding LNG broadens its offerings but a second LNG terminal is (SGD b) (%) % of social dev expd to total dev expd (RHS) crucial for this. The recent softness in commodity prices has been a 25 70 % of econ dev expd to total dev expd (RHS) setback but the clock is ticking and the investment looks imminent. The success of LNG and LNG trading could add meaningfully to GDP. 60 20 iv. Infocomm. Singapore is already ranked the second most network-ready country in the world, by the World Economic Forum. It hosts 50% of 50 South-East Asia’s data centres. To cement its position, it is forging 15 ahead with a Smart City platform that will tout an ultra-high-speed 40 digital super-highway and super connectivity. Already served by 15 submarine cable systems with a total capacity of 114 Tbps, the new 10 30 trustworthy ICT platform should extend its lead. Its aim is to create 80,000 new jobs, increase today’s 4% contribution to GDP by two-fold and infocomm export revenue by 3x. 5 20 1997 2000 2003 2006 2009 2012 2015 Source: Accountant-General’s Dept
4. Pricing, operating model and cost of capital
3. Projects that move the needle Singapore prices its public goods at full cost recovery, with an eye on long- term financial sustainability. Where possible, they are pegged to market i. Rail. Rail’s reliability should stay at the top of the new agenda. Stage 3 prices. For example, its water tariffs consider the cost of its entire water of the 42km SGD20.7b Downtown Line, when completed in 2017, should system such as water collection, reservoir management, the treatment, take some pressure off existing tracks. Traffic may also be diverted to a reclamation & desalination of water and their associated costs. Today, new SGD18b 30km Thomson Line as it opens in stages from 2019. Singaporeans are familiar with the concept of paying market prices for Solutions for bus transport are faster and easier to implement. By public goods. transiting to an operator model, the government has more latitude to The government has experimented with various models of executing add operating assets and increase service frequency and accessibility. infrastructure development. It has corporatised ports, divested energy ii. Airport. Although Changi Airport’s Terminal 4 will only be completed in generation assets and instituted PPP for water desalination. Changi Airport 2017, work has started on the SGD1.7b expansion of Terminal 1 and a and PSA are highly profitable. Power producers are broadening and new Terminal 5. Passenger capacity will increase to 135m by mid-2020. increasing their investments in Singapore. The models of bus and railway
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operations are being calibrated. But statutory boards mainly use direct 5. Equity selection: usual suspects contracting because the results have been satisfactory. As the prices of goods and services reflect market prices, there is a higher Unfortunately, the dichotomy between the real economy and equity markets probability of adequate returns of capital for infrastructure projects (ROIC > almost ensures that stock selections are uninspiring. Well-executed WACC). And with PPPs mostly working successfully, we see no problems in infrastructure development directly and indirectly promotes economic attracting further capital inflows. In recent government open tenders for bus production and precipitates foreign investments. This creates a positive routes, more than 10 bids were thrown in by various countries. Foreign bus business climate and promotes lending. Given its genesis as a development operators were willing to bid lower than the Singaporean incumbents. This bank, DBS (SELL, TP SGD12.68), an active infrastructure financier around implies general recognition of low execution risks and accompanying the region, stands to be a key beneficiary. However, we are concerned expectations of low returns for operating in Singapore. about the intermediate term asset quality cycle and rates it a SELL. Direct proxies for the airport are SATS (HOLD, TP SGD3.82) and SIA Fig 23: PPP Projects in Singapore Engineering (HOLD, TP SGD3.61). In the infocomm space, Singtel (BUY, TP SGD4.40) should be the biggest beneficiary as it owns about 17% of the data Public Sector Agency/Private No. PPP Project Sector Partner Project Description centres in Singapore. Keppel DC Reit (Unrated) is another potential beneficiary. 1 Singapore Sports Hub Singapore Sports Council/ 35-ha site development to replace Singapore Sports Hub National Stadium for 25 years. Opened For construction companies, the slack from residential property demand may Consortium in Jun 2014. be taken up by spending to improve social amenities. This is a fragmented 2 ITE College West Institute of Technical Education/ To design, build, maintain and operate Gammon Capital ITE College West for 27 years. Opened industry, comprising small and medium-sized contractors. Opportunistic in Jul 2010. players with access to capital may surface to consolidate capabilities and 3 SingSpring Desalination Public Utilities Board/ SingSpring Supply 30m gallons of water per day scale to bid for and undertake bigger projects. Plant Pte Ltd for 20 years. Opened in Sep 2005. Stretching the investment theme further, higher foreign investments should 4 Tuaspring Desalination Public Utilities Board/ Tuaspring Supply 70m gallons of water per day Plant Pte Ltd for 25 years. Opened in Sep 2013. entice more better-paid expatriates, giving impetus to rental demand for residential property. New business formation should be positive for 5 Keppel Seghers Ulu Public Utilities Board/ Keppel Supply 32m gallons of NEWater per Pandan NEWater Plant Seghers NEWater Development day for 20 years. Opened in Mar 2007. landlords. We favour AREIT (HOLD, TP SGD2.23) and MINT (BUY, TP Co Pte Ltd SGD1.71). 6 Sembcorp NEWater Public Utilities Board/ Sembcorp Supply 50m gallons of NEWater per Plant NEWater Pte Ltd day for 25 years. Opened in May 2010. 7 Incineration Plant National Environment Agency/ Design, build, own and operate new Keppel Seghers Engineering incineration plant next to Tuas South Singapore Ptd Ltd Incineration Plant, which can incinerate 800 tonnes of refuse per day for 25 years. Opened in Jan 2009. 8 TradeXchange Singapore Customs/ Create one-stop integrated logistics CrimsonLogic Pte Ltd information port. Develop, operate and maintain software for 10 years from 2007-2017.
Source: Centre for Liveable Cities Singapore, MND
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Focus Charts
Gas Demand-Supply Balance Rail Growth Not Keeping Pace With Population Growth (metric tonnes per annum) (no. of persons, kilometres) ('000 persons) (km) 6,000 190 Total Population (LHS) Rail length (RHS)
170
150 5,000 130
110
4,000 90 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: BG Group, Wood Mackenzie, Poten & Partners Source: LTA, SingStats
Submarine Cable Map Total Housing Stock (no. of units) (000 units) EC Public Private 60
50
40
30
20
10
0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E
Source: TeleGeography Source: HDB, URA, Maybank KE
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Singapore Infrastructure Facts & Forecasts Expenditure Sector State in 2010 Current State 2020 Targets 2015 2016 Forecasts Energy Coal, oil, Fossil Fuels, In 2005, natural gas was 74.7% Natural gas is 95.5% of fuel Most natural gas is piped from Not much visibility. Energy projects are typically -SGD500m for Thermal of fuel mix. Petroleum mix. Petroleum products down Malaysia and Indonesia. undertaken by or in partnership development of second products 23.1%. to 0.7%. Due to falling energy with private sector. Government terminal LNG to play bigger role as it can prices, much-talked- undertakes preparatory work In 2001, natural gas was just Consumption of electricity is be imported easily. LNG about second LNG such as land reclamation. 26%. 46.4t WH/year: households 7t, provides fuel diversification and terminal has been slow industries 7t, commerce 17t. security. to get off ground. LNG Terminal 2 might be an exception, like Terminal 1. Of licensed generation To promote LNG usage, power Feasibility studies for Terminal 1 capacity of 12,889MW, gas is producers no longer allowed to started in 2005. But during the 95.5%. import piped gas for energy global financial crisis in 2009, generation from 2006. the terminal became 9,718 MW is from combined economically unviable. cycle cogen/tri-gen plants. Ban will be reviewed when LNG imports reach 3Mtps or in 2018, Government took over its whichever earlier. development and ownership out of strategic interests. It might To store and export LNG, work now just do the same with on a first LNG terminal costing second terminal. SGD1.7b on a 40 ha plot on Jurong Island commenced in 2013.
Given its strategic importance, government has been increasing capacity ahead of demand. Currently, 3 tanks, a secondary jetty, regasification facilities have LNG throughput capacity of 6 Mtpa.
Aim is 11 Mtpa by 2018. Maximum capacity is 16 Mtpa.
Second terminal could be in the works, in Eastern Singapore to support new industrial sites and power plants in that area.
Government hopes to develop Singapore into an LNG hub.
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Sector MKE View: Achievable Challenges Reasons & Response Opportunities Energy Coal, oil, Fossil Fuels, Singapore’s electricity market Lack of feedstock diversification and Generators have locked in long-term piped LNG a key business opportunity. Will diversify Thermal in oversupply since 2013. Likely locked-in long-term contracts. gas/LNG supplies. Current contracts are based feedstock for energy generation. Enhances Singapore to remain so for couple of on “take or pay”. Domestic demand for LNG as oil trading and commodity hub. years. Singapore’s heavy reliance on piped natural not expected to take off until these contracts gas from Indonesia and Malaysia is end. LNG industry already attracting strong attention. Not positive for power untenable from security standpoint. Although much of Singapore’s gas requirements are generators but good for power Government keen to develop LNG and stop Several contracts will expire over next six locked in by long-term agreements, 9 bidders have consumers. companies from importing piped gas. years. applied for the coveted LNG aggregator/buyer licence. In the long run, more secure LNG supply & liberalisation should create a more stable and Singapore's demand for Gas demand is expected to transparent market. May help Singapore be 1.1-2.9m tpa by 2020, 2.9-5.2m tpa by 2022 and become LNG hub. 6.9-9m tpa by 2025.
Singapore wants to develop an electricity An LNG hub here could spark supporting industries futures market. Aims to open electricity for LNG tracking, PPG terminal, cold energy market to full competition by 2018. utilisation & LNG bunkering services.
Also wants to provide a clearer roadmap on Second SGD500m LNG terminal put on backburner electricity demand in next 10-15 years to aid due to low crude prices. For international traders, planning of capacity. additional products provide opportunities for portfolio optimisation.
Risks are Indonesia and Malaysia have been in this space longer. Japan and China have similar ambitions.
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Singapore Infrastructure Facts & Forecasts Expenditure Sector State in 2010 Current State 2020 Targets 2015 2016 Forecasts Energy – cont’d Nuclear Study started on whether But concluded that nuclear Still SGD63m set aside for nuclear-based electricity can risks exceeded benefits. Nuclear Safety Research & be added to energy mix. Education Program. Hydro
Other Renewables
Solar Installed capacity of solar PV Aims to raise adoption of solar Solar the most viable renewable systems doubled in 2014 YoY, power to 350MWp by 2020 or 5% energy. driven by additional 13.7 of peak electricity demand. MWac of capacity spread over Being in the tropics, Singapore’s 248 new installations. annual solar irradiance is 1,150 kWh/M2/year. SGD580m There are 636 solar blueprint to grow clean energy. installations with grid connected capacity of 25.5MWac. 93% installed by non- residential users.
Transport Government spent Development budget lowered to SGD10.3b on all transport SGD8.8b from SGD10.3b after development projects. completion of some airport work last year. Air (incl ports) Changi Airport had four Following closure of budget Terminal 4 can handle 16m Changi Airport Changi Airport Development terminals with combined terminal, remaining three passengers pa. Opening in 2017. Development Fund Fund raised by SGD1b. passenger handling capacity of terminals can handle 66m introduced with a budget 73m pa. passengers a year. Completion of Project Jewel in of SGD3b. 2018 will add over 50k sqm of Budget terminal with Terminal 4 under construction retail space to Terminal 1 and passenger handling capacity of at the previous budget raise its annual passenger 7m closed in 2012. terminal. Terminal 1 being handling capacity by 3m to 24m. expanded, dubbed Project Changi Airport handled 42m Jewel. Terminal 5 will add 50m passengers in 2010. passenger handling capacity by Airport handled 55m mid-2020s. Airport will passengers in 2015. introduce third runway for commercial use by early 2020s. Passenger handling capacity will double to 135m by mid-2020s.
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Sector MKE View: Achievable Challenges Reasons & Response Opportunities Energy – cont’d Nuclear
Hydro
Other Renewables
Solar Continuous review of policy Land scarcity limits most installations on Government studying feasibility of harnessing Of alternative sources of energy, solar appears most framework to encourage solar rooftops. solar energy at its reservoirs and land-based credible. installations. facilities Needs to manage intermittency of solar Solar capacity expected to increase from 43.8MW in power. Needs to ensure sufficient back-up power to 2015 to 350MW by 2020. Should contribute up to 20% manage intermittency. of energy by 2050, from less than 1%.
Government studying possible enhancement of solar capacity to 600MW by 2020 instead of 350MW.’
Transport
Air (incl ports) Execution risks typically No shortfall, especially with T4. Development of T5, even before T4 is Planned airport expansion will support long-term minimal. T4 should open as completed, to stay ahead of the curve. Part of growth of aviation companies. Direct proxies for scheduled in 2017. government efforts to ensure that Changi airport expansion are SATS and SIA Engineering. Airport keeps its top global ranking since tourism has big spinoffs for the economy. SATS a dominant ground handler and provider of inflight meals. SIA Engineering provides aircraft Government also wants to ensure that maintenance, repair and overhaul services with lion’s Singapore benefits from airspace liberalisation share of maintenance business. in ASEAN. While positive, we believe long-term outlook has Government-owned Changi Airport is highly been priced in. profitable with FY3/15 revenue of SGD2,150m, net profit of SGD782m and ROEs CapitaLand could benefit from Project Jewel. So of 13.2%. could CMT, as CapitaLand is its asset sponsor.
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Singapore Infrastructure Facts & Forecasts Expenditure Sector State in 2010 Current State 2020 Targets 2015 2016 Forecasts (2016-2020) Transport – cont’d Land - Roads 3,377km of roads. In 2010, 3,496km of roads. Aims to use only 9,700 ha or 13% 2016 budget of SGD260m for North-South Expressway 8,300 ha or 12% of land was of land for land transport North- South Expressway. expected to cost SGD8b. used for land transport Construction work started on infrastructure by 2030. infrastructure. 21.5km North-South Expressway. Will include Completion of integrated Started construction of Marina express bus lanes and cycling transport hubs. One in Bukit Coastal Expressway, a 420m routes. Panjang (2017) and one in undersea tunnel scheduled for Yishun (2019). completion in 2013. Continuing upgrade of roads and commuter facilities. Contract to build Next Generation Electronic Road Pricing (ERP 2) system recently awarded to an NCS-led consortium. Due in 2020. The new satellite-based system exemplifies Singapore’s use of technology to manage urban congestion.
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Sector MKE View: Achievable Challenges Reasons & Response Opportunities Transport – cont’d Land - Roads Low execution risks for roads. No shortage of planned road expansion. Roads are generally fine. Congestions First two bus packages awarded to two foreign bus tolerable partly due to Electronic Road Pricing operators under competitive tendering. 10-11 bidders To transit to a Government For buses, government will transit to GCM and quota system for cars. But new roads participated in each tender. Contracts awarded to Contracting Model (GCM) when where bus companies operate fleets on have to be judiciously planned as opportunity UK-based Tower Transit and Go Ahead Group with licences for current operators designated routes and government owns costs of land are high. annual values of SGD126m and SGD100m expire this year. Of the 12 bus bus assets. respectively. packages under the new Bus and rail services among the public’s regime, three will be awarded Should solve many problems over time as biggest bugbears. Service While it is difficult to estimate project IRRs due to a via tendering and nine retained quality of transport services should no reliability/timeliness and overcrowding are lack of disclosures, we believe these bids should be by incumbents. longer be compromised by operators’ key frustrations. Government and transport profitable. profitability considerations. operators under pressure to raise capacity. Government wants to own all Equity market eagerly awaiting transition to new bus assets. Transition details Government also prepared to pump in Shortage of taxis during peak hours. business model. As listed bus operators have been for the nine packages retained capital to expand bus fleets to ease Prohibitive costs of private car ownership losing money, a migration should boost bottom lines. by incumbents remain under capacity constraints and ply routes deemed have led to strong demand for taxi services. negotiation. unprofitable. Market also looking for windfalls from the sale of New taxi entrants such as Uber and Grab operating assets to the government. We are less Singapore’s taxi market is Government allows app-based new taxi introduced private car hiring in recent years sanguine. Government’s FY16 budget contains under threat from new players to supplement traditional cabbies. to satisfy demand. planned expenditure of only SGD225m for the entrants, Uber and Grab. It may draft new regulations for new purchase of bus assets vs the two bus operators’ entrants to address public concerns over assets of SGD1b. safety and service standards. Overall, we are less bullish on benefits to the operators in the transition process. The strong run-up in stock prices of ComfortDelGro and SMRT since early 2014 also suggests positives have been priced in.
While incumbent taxi operators are under structural threat, competitive landscape remains benign for the time being, thanks to strong underlying commuter demand.
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Singapore Infrastructure Facts & Forecasts Expenditure Sector State in 2010 Current State 2020 Targets 2015 2016 Forecasts (2016-2020) Transport – cont’d Land - Rail Total rail length of 159 km Total rail length increased to By 2030, rail should reach Key rail expenditure in Key rail budget for 2016: Of the SGD65.5b budget with Phase 2 of Circle Line 200km in 2015 with opening of almost 360km. 2015: Tuas West extension for rail projects under turning operational. Downtown Line Stages 1 and Tuas West extension (SGD0.25b), Downtown Line development, SGD38.7b 2. East West Line extension to Tuas (SGD0.57b), Downtown (SGD1.1b), Thomson East Coast has yet to be spent. First announced Kuala Lumpur West to be ready in 2016. Line (SGD1.6b), Thomson Line (SGD2.8b). (KL)-Singapore High Speed Rail Government adding train cars East Coast Line (HSR). and upgrading network to Downtown Line Stage 3 to be (SGD1.65b). raise capacity. opened in 2017.
To finalise commercial model Thomson-East Coast Line to and procurement approach for open in phases from 2019. KL-Singapore HSR by 2016. Jurong Region Line and Cross Island Line will open in 2025 and 2030 respectively.
KL-Singapore HSR completion in 2022.
Sea (incl ports) Handled 27.68 TEUs. Handled 30.6m TEUs. SGD3.5b for Phases 3-4 of Pasir Budget 2016 provides SGD600m SGD3.5b 57 berths at Tanjong Pagar, Panjang Terminal, will add 15 for reclamation of Tuas Keppel, Brani and Pasir berths and 6,000m quay length. Terminal Phase 1 Panjang, with capacity of 35m Cranes can arch across 24 rows TEUs of containers. Handling capacity to reach 50m TEUs.
Plans for mega port in Tuas to consolidate all terminals.
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Sector MKE View: Achievable Challenges Reasons & Response Opportunities Transport – cont’d Land - Rail Tuas West extension due to be While rail congestion has improved with Rail overcrowding and service unreliability 120km of the 360km of rail lines to be built by 2030 completed this year. the ramp-up in capacity in recent years, have been incurring public’s wrath. yet to be awarded. We expect operating contracts to system reliability remains poor. be free of legacy contractual issues. Downtown Line Stage 3 on Current licensing regime requires rail track for completion in 2017. Still no progress in transition to a more operators to own or buy over rail assets at This project presents growth opportunities for rail sustainable business model. some point but operators have little incentive operators, though we cannot rule out competition to incur capex to improve capacity. As rail from foreign operators. companies are for-profit organisations, maintenance has also been neglected. Transition remains a work in progress. Announcement of details could catalyse stocks. As the largest rail Recognising this, government has introduced a network operator, SMRT should benefit the most. new rail financing framework. It will take charge of capacity expansion, and plan, design & build train systems. Operators will provide maintenance.
Government and rail operators have been working on migrating from old licences to a new and sustainable model in recent years. Progress slow.
Sea (incl ports)
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Singapore Infrastructure Facts & Forecasts Expenditure Sector State in 2010 Current State 2020 Targets 2015 2016 Forecasts (2016-2020) Communication Telecoms/mobile 3 infrastructure-based players 3 infrastructure-based players Regulator dangling one more 2015: Combined capex of 2016: Combined capex of three Two contenders for fourth <10 retail service providers 17 retail service providers facility-based operator licence three telcos at SGD2.4b telcos forecast at SGD3.1b network reportedly and discounted-price spectrum seeking SGD250m-1b in Market penetration: 143.6% Optical-fibre Next Generation to new entrant through an funding. IDA has (mobile including 4G), Nationwide Broadband auction. projected capex of 101.8% (wired residential Network (NGNBN) championed, SGD400-700m for fourth household broadband as of Mar sponsored and funded by Interest from two broadband network. 2011 following changes in government. Up to SGD1b in companies operating in methodology) financial incentives to telcos Singapore: MyRepublic and to cooperate in necessary Consistel. MR reportedly raising Optical fibre broadband plans infrastructure and promote USD250m and Consistel, up to only launched in 2H10. Data fibre optics. USD1b. became available only in mid- 2011 NGNBN will increase carrying NGNBN to be enhanced through a capacity and transport speeds Heterogeneous Network that for data in Singapore allows devices to use best tremendously. network needed for tasks at hand and seamless switching Market penetration: between networks. 148.4% (mobile including 4G), 102.8% (wired residential Masterplan recommends building household broadband), a nationwide sensor network to 63.3% (total residential + gather data on public safety, corporate optical fibre monitoring the environment and broadband) building systems and managing traffic through the deployment of Aggregation Gateway Boxes.
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Sector MKE View: Achievable Challenges Reasons & Response Opportunities Communication Telecoms/ Mobile Government expected to Singapore a premium telecom market. If bidders emerge for the fourth As cost of access falls for consumers, more could be auction spectrums this year in 2 148% mobile penetration, one of the licence/spectrum, they will be the first new enticed to consume content. There should be rounds: one for incumbents and highest in the region. 3 operators serving a challenger since 1998. explosion of demand for video content. Would expect one for new entrants. small market. But consumers are still more investments in video content creation by paying above-region access costs for voice, ecosystem players, such as StarHub’s recent SMS and data. Also tied to contracts as long investment in MM2, a movie producer, distributor and as 2 years. More competition needed. investor.
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Singapore Infrastructure Facts & Forecasts Expenditure Sector State in 2010 Current State 2020 Targets 2015 2016 Forecasts (2016-2020) Communication – cont’d Internet/digitalization Number of data Number of data Singapore’s data centres host an /big data centres/players: 40/28 centres/players: 47/28 estimated 50% of the region’s capacity. A widely-held view is Data usage: 5.33 petabytes Data usage: 10.68 petabytes Singapore has reached a gateway (2Q12) HH wired broadband subscriber status on par with HK, allowing it HH wired broadband subscriber growth: 102.8% to be a bridge between China growth: 102.9%(1Q13) and the world. Strategic initiative to develop a “digital harbour”. Robust More international companies communications using Singapore to serve infrastructure, national sensor customers in China. Chinese network and complementary companies also using Singapore infrastructure such as data to serve customers in Europe or centres promote a vibrant North America. cloud computing ecosystem.
Reinforces Singapore’s position as regional telecommunications hub with the fastest broadband speeds and largest Internet exchanges.
In the 1990s, there were 3 major data centres: Equinix (US), Global Switch (UK) and Singtel (SG).
Now 47 centres, owned and operated by 28 players, with 249 MegaWatts of IT power supply.
9 more centres under construction, with most to be completed in 2016. This will boost IT power capacity by 47% to 364 MW.
Biggest players are Singtel (17% market share by number of data centres), followed by Equinix, Fujitsu, Keppel and Tata with 6% each.
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Sector MKE View: Achievable Challenges Reasons & Response Opportunities
Communication – cont’d Internet/digitalisation 9 new data centres under Although booming, many data centres are Property consultancy, Cushman & Wakefield, Structure Research expects Singapore’s data /big data construction that will raise likely to be inefficient in use of energy and not alarmed by dip in occupancy. colocation market to grow from USD963.2m in 2014 capacity IT power supply by space. to USD1.265b in 2016, +15%. Also sees opportunities 47%. Sustained demand from growing tech/network in upgrading of data centres. Infocomm Development Authority (IDA) content companies such as Facebook, Netflix, Industry utililsation only launched Green Data Centre Roadmap to Uber. Major banks and insurers also Data centres could create jobs and provide economic estimated to be 70% but improve data-centre energy consumption outsourcing to data centres to comply with multipliers. Although not big direct hirers, they oversupply may actually be and efficiency. MAS requirements. enable the digital economy and support a complex forming in the market. and high-value supply chain of products and services. A set of standards needed for operating data C&W expects occupancy to be back to 70% by centres in a tropical climate. Part of the 2018, and a return to a landlords’ market with masterplan recommends feasibility studies positive rental reversions once supply is fully of building data centres underground. taken up.
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Singapore Infrastructure Facts & Forecasts Expenditure Sector State in 2010 Current State 2020 Targets 2015 2016 Forecasts (2016-2020) Housing, urbanisation and environment Housing and Singapore had 1.17m housing We estimate 1.33m units as of Aggressive home building is urbanisation units in 2010: public 898.5k, end-2015: public 985.9k, ECs expected to continue. We ECs 10.4k, private 258.2k. Low 18.3k, private 327.4k. Ramp- expect housing stock to increase private-home vacancy rate of up in home building and slow by 41.5k units: public 22.1k, ECs 5.0%. demand in recent years 4.4k, private 15.0k a year for swelled stock in the private next three years. Should result 10,000 ha or 14% of land used market. in surplus, fulfilling for housing. government’s aim of building In each of past two years, ahead of demand. In 2010, strong population private developers and HDB growth, underbuilding in prior completed almost 50,000 Official target: 13,000 ha or 17% years and low mortgage rates homes a year. Home prices of land used for housing in 2030. bumped up private and public were 8% lower than their peak housing prices. in 3Q13.
To reign in prices, government introduced eight rounds of cooling measures from late 2009.
Environment Global warming has raised Singapore’s preferred solution is temperatures and created to talk to the Indonesian freak weather patterns. government and distribute masks. Has not started Floods or droughts, scorching reviewing infrastructure to heat and smog from forest tackle smog. fires from Indonesia could create pollution and health problems.
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Sector MKE View: Achievable Challenges Reasons & Response Opportunities Housing, urbanisation and environment Housing and Private developers and HDB No shortfalls. Housing market has tipped With spiralling home prices under control, As evident from the dip in social expenditure/GDP, urbanisation likely to add 51,800 housing into oversupply. market is increasingly concerned about the government may have underspent. Finance units this year. impending oversupply. Minister hinted that government spending could jump. Pace of construction may be slowed to let demand catch up. We see a surge in spending on flood alleviation, drainage, sewage, new food centres & neighbourhood improvements. Such work typically undertaken by small construction companies.
In anticipation of oversupply, property stocks have been sold down. Now at 30-50% discounts to RNAV. We see home prices bottoming in 2017 and recommend positioning ahead of the turn.
As population ages & to keep the city vibrant, government may have to spend on upgrading, improving & refreshing housing estates.
As industry is fragmented and companies are not well served by banks, it is possible to nurture a few such companies as market consolidators.
Environment Smog from forest fires may be aggravated by dry weather and global warming.
Infrastructure can be improved to alleviate the distress. For example, better connectivity between buildings and public amenities. Schools may need more enclosed facilities.
We see more government expenditure in the future.
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Singapore Infrastructure Facts & Forecasts Expenditure Sector State in 2010 Current State 2020 Targets 2015 2016 Forecasts (2016-2020) Housing, urbanisation and environment – cont’d Healthcare Hospital beds in 2010: public New initiatives in 2013 Overcome bed shortages in Development FY16 development expenditure Aims to add one new 8,881, private 1,402 included more public-hospital public hospitals, which are expenditure of SGD1.4b, of SGD1.6b, +14% YoY. hospital a year on Hospital beds in 2014: public beds, better subsidies for running at >85% occupancy. 3x more than 2010’s FY16 public healthcare average, up until 2020, 9,602 (+8.1%), private 1,628 elderly & lower-income groups Increase affordability and SGD0.5b. expenditure to increase by +40%. (+16.1%) and mandatory healthcare accessibility for lower-income SGD1.8b or 19.0% YoY, the Beyond 2020, plans for Hospital admissions per bed in insurance to reduce large groups and elderly via targeted highest increment. four more new hospitals. 2010: public 38.7, private 67.2 hospital bill outlays. government subsidies. Hospital admissions per bed in 80% of primary healthcare Reduce outlays for large hospital 2014: public 39.8 (+2.8%), services provided by private bills by introducing mandatory private 72.1 (+7.2%) practitioners and 20% by life insurance coverage. government polyclinics. Opposite is true for more costly hospitalisation care. Citizens aged 65 and above have doubled from 220k in 2000 to 440k. Expected to balloon to 900k by 2030. 20- 72% of population above 65 years old found to be admitted to hospitals at least once a year vs 4-15% for <65 years old. Water Reservoirs accounted for 5% of Sources of water: water Reservoirs still to make up 5% of Development spending of Development expenditure of land use in 2010. catchment, imports, land use by 2030. Water needs SGD1,363m SGD1,245m desalination, reclaimed to be met by treated or Sales of potable water 476.1 water. desalinated water. cu m: domestic 59%, non- Treated water to meet 40% of domestic 40%. Sales of potable water 506.3 demand by 2020 and 50% by cu m: domestic 58%, non- 2060. 516m cubic metres treated domestic 42%. (2008) Long-term target: desalination 571m cu m treated water to meet 25%.
New water:16% Building 3rd desalination plant in Industrial water: 4% Unaccounted-for water: 5% Tuas for SGD217m for 49.6 cu New water :18% m/year. Largest NEWater plant in Industrial water: 4% Changi built in 2010, capacity SingSpring’s capacity is 41.5 cu 50mgd. Treated water has capacity to m/year and Tuaspring, 96.7 cu m/year meet 30% and desalinated water, 25% of Singapore’s Fifth treatment plant water needs. completing in 2016 with capacity of 83.2m cu m/year. JV between Beijing Water and United Engineers. Concession for 2016-48. First year’s rate is SGD0.276.
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Sector MKE View: Achievable Challenges Reasons & Response Opportunities
Housing, urbanisation and environment – cont’d Healthcare
Water Development on track. Water is not only needed for human Water key for national security. Singapore Balancing security with cost of water production. As survival but also by many industries. Non- intends to be fully self-sufficient by 2061. open tenders are transparent, winning bidders are households consume 42% of Singapore’s either cost-efficient, prepared to accept lower water. Agreement with Malaysia on water imports returns or possess breakthrough technologies. runs out in 2061. This currently provides c.60% While water self-sufficiency is no longer an of Singapore’s water needs. issue, cost of water production has to be managed to maintain Singapore’s cost Government should continue to develop competitiveness. Singapore’s selling price treatment or desalination plants and look out to industries is already among highest in for technology changes to minimise the region. production costs.
Cost of water production tied to energy costs. As technology improves, so should production costs.
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THAILAND INFRASTRUCTURE
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1. Transport this time: rail, motorways, ports
2. But naturally problematic. Expect delays in completion
3. Power & telco exciting
4. Strong PPP platform needed for road projects
5. Stock picks: ADVANC, AOT & CK
Institutional Research Team & Tim Leelahaphan [email protected] [email protected] (66) 2658 6300 UNMASKING ASIA 90
THAILAND INFRASTRUCTURE Thailand is ranked in the middle …of ASEAN WB Infra Index Round 2!
Over 1990-2015, a total of USD52b infrastructure projects were rolled out in Thailand: 43% in power and 42% in telecoms, according to the World Bank. The private sector executed 77% of these projects under various forms of private- public participation (PPP). BOO and BTO were the most common. Some were successful in generating positive IRRs; others were not. For example, the early IPPs, which were essentially government divested assets, generated IRRs of 16- 17%. Private-sector projects yielded 12-15%. Among telcos, ADVANC and DTAC generated 11.8% and 9.3%, respectively, on 2G BTO concessions. TRUE - formerly TelecomAsia, the BTO concessionaire for Bangkok’s fixed-line network - produced a negative 3.89% over 2001-2012. The lessons learned seem to be: 1) Source: World Bank single contracts work better; 2) counter-party state agencies matter; and 3) multiple concessions in allied businesses have low chances of generating positive returns. Thailand’s ICT Ranking Ambitions
The last build-out has put Thailand in the middle of the pack in ASEAN, at 30th position in the World Bank’s Infrastructure Index, out of 160 countries. More would need to be done to take the country to the next level. Unfortunately, execution has been slow. Thailand’s seven governments since 2006 had each vetted this long list of infrastructure plans that was due for rollout a decade ago. We dub this the Megaproject List (MPL). The MPL has hardly changed its shape and form, though its capex has varied between THB2.5t and THB3.6t or USD70-103b. The current military government has earmarked THB1.6-1.9t or USD45-54b for projects to be expedited through 2016-2020, 53% under PPP. Funding by the private sector is not an issue, given THB2.4t of excess liquidity and 51.9% leverage for the non-financial sector. All the government needs to do is to pave the way for the private sector to proceed, in our view. To that end, the 1992/2013 PPP Act has been amended, mainly to facilitate negotiations.
Our top infrastructure picks are ADVANC (4G telephony), AOT (tourism/ people connectivity) & CK (civil work, mass transit and utilities). Source: National Broadcasting & Telecommunications Commission
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1. Transport this time: rail, motorways, ports Fig 24: Thailand’s infrastructure rollout 1990-2015 Implemented 2016-2020 EPL Thailand’s seven governments since 2006 had each vetted this long list of Sector USD m % share USD m % share infrastructure plans that was due for rollout a decade ago. We dub this the Airports 455 1% 1,465 3% Megaproject List (MPL). Earmarked for expedited implementation are 20 Power 22,988 43% na na projects with a combined value of THB1.61.9t or USD45-54b, 53% under PPP Natural gas* 1,350 3% 616 1% schemes. We call this the Expedited Project List (EPL). The value is a range Railroads ** 2,772 5% 32,898 63% because of recent uncertainties over the structure of the TH-CN high-speed Roads 2,247 4% 15,811 30% train. The Thai government may end up implementing this project; if so, the Seaports 199 0% 111 0% time take could be shorter, potentially lowering the budget. Because there Telecom 22,138 42% 426* 1% is already a THB95.4b budget earmarked for land Water & Sewerage 831 2% 568 1%
appropriation/expropriation we take this as a positive indicator that the * LNG Terminal 2 commercial in 2017, 5m-tonne capacity projects are likely to go ahead. ** Railroads include 5 mass transit projects, USD11.258b & original TH-CN hi-speed train plan Source: MKE-ISR The energy and telco focus during the 1990-2015 rollout put Thailand on a sound economic footing. Resulting from that, 83% of Thai households are now electrified, with phone penetration hitting 108% by 2010. In addition, The current rollout involves 2,647km of roads for completion within five with the private sector undertaking most of the projects, multiplier effects years. Accounting for 20% of today’s road network, this is liable to cause were faster. We think power reliability allowed power-sensitive industries traffic disruptions and hence, delay completion. such as petrochemicals to flourish. This resulted in a multiplication of Yet, this is not the same as foot-dragging. The emphasis on transport industries that, inter alia, turned Thailand into ASEAN’s auto-manufacturing underscores the government’s concerns about the threat of high logistics hub. costs to Thailand’s economic competitiveness, particularly as manufacturing It could be different this time around. By our estimates, 63% of the EPL are accounts for 84% of its GDP. About 96% of the sector’s output is moved by rail projects - including the high-profile TH-CH and TH-JP high-speed trains - land. If transport projects are executed successfully, we estimate that and 30% roads, mainly motorways. As these types of projects have long lead logistics costs could drop by 2ppts to 12.1% of GDP by 2020, saving Thai times, returns are generally difficult to estimate. Thus, a successful industries THB260b per year. execution with private sector participation needs a strong PPP platform whereby risk/reward is well-shared. There is already a THB95.4b land appropriation allocated for these projects so that is a positive indicator that 2. Delays in completion are common for transport it is likely to go ahead. As the amended PPP Act should iron out kinks in the negotiation process, we believe rollout can begin this year. Terms of reference should start coming out by mid-2Q16. However, we see several physical limitations to construction work, including materials, manpower, seasonal weather and the availability of good-sized civil contractors. This implies potential delays in project completion, which have to be factored into risk/return-sharing agreements; otherwise, there could be serious glitches and uncompensated cost overruns. Thailand’s history of transport infrastructure rollout is littered with contractors’ court cases – the most prominent being the
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Suvarnabhumi International Airport and Airport Link - and compensation From the EPL, we count THB990b worth of projects for rollout under PPP. claims, some stuck with the court for over a decade. The government is amending the 1992/2013 PPP Act to accelerate the negotiation process. Acting under urgency, we are a bit concerned that it will fail to calibrate the sharing of risks/rewards properly, which could 3. Power & telco remain exciting, but are outside EPL generate problems down the road. However, the odds appear stacked in the private sector’s favour. Material prices are likely to remain low. Funding is Our comprehensive list of infrastructure projects includes power and telco likely to remain cheap, given a sluggish economy and excess liquidity of projects that have fallen more into the private sector’s domain, thanks to THB2.4t in the system. Based on our estimates, liquidity should remain PPP’s record of smooth rollout. Power should top the agenda in the medium ample even at the peak of loan drawdowns in 2020, the year of completion term due to the need to replace old gas-fired plants with other fuel types. for myriad projects. Coal is the second fuel of choice as it is cheap and readily available. Of late, however, new coal-fired power projects such as the 800MW plant on the southern island of Krabi met with strong resistance from the local 5. There are now will, funds & stocks to play community over environmental pollution. This will take time to sort out.
LNG is more expensive and PTT is the natural developer of its terminals, The 2016-2020 infrastructure rollout in Thailand should benefit from the though it is reluctant because of unattractive returns (WACC equals IRR). longevity of this current military government and high PPP participation. Alternative energy is an option and we have a whole array: solar, wind, The latter should ensure follow-through and fiscal discipline. In our universe, biomass and municipal/industrial waste. Solar is by far the most popular and we see 35 stocks that could benefit. Our top picks are ADVANC (4G we have both industrial and community projects. Capacity is set to treble by telephony), AOT (tourism/people connectivity) & CK (civil work, mass-transit 2036 from 1,420MW in 2015. This is the best growth prospect in ASEAN. concessions, power & water). We pick these companies for their high cash- There remain substantial investment opportunities in alternative energy flow generation (AOT, ADVANC) and its diversified businesses and strong because Thailand has limited other fuels. Imported hydropower from Laos execution (CK). Although CK looks leveraged at 21.6x net debt/EBITDA, this and Myanmar could fill the gap but this has to be paced due to delivery has to be qualified. It has quasi-utilities in its portfolio with long-term risks. Runoff on the Mekong River has been fluctuating wildly due to purchase contracts, especially in power and water. damming in China.
Telco is another area awaiting major investments. Mobile operators’ 4G Fig 25: Financial snapshot of our top infrastructure picks build-out is expected to cost THB140b. The bulk will be spent in 2016. After that, there will be a host of developments from cables to data centres and WACC EVA Spread Net debt/EBITDA apps, to advance the country’s aim of scaling up the ICT Development Index Current 5-Y Avg Current 5-Y Avg Current 5-Y Avg from 74th to 60th by 2017. ADVANC 8.7% 11.4% 28.3% 31.1% 0.8 0.1
AOT 9.3% 10.8% 4.1% -4.4% -0.7 0.7 4. Strong PPP platform is key CK 5.3% 8.9% -3.8% -8.4% 21.6 35.7
Source: MKE-ISR In the past, PPP was deployed predominantly in the power and telco sectors. It worked well because EGAT, as the main partner in power, is a very strong, well-run state enterprise. Telco had a clear addressable market and concession owners left operators alone most of the time. PPP remains viable for power and telco projects, in our view.
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Focus Charts
Power generation by fuel type (PDP 2015 plan) Airport of Thailand’s passenger capacity
(GWh) Million pax 300,000 180 Import Hydro Coal/Lignite Renewable 5Y CAGR (2015-2020): 11.4% 160 Gas Nuclear Others 250,000 140 Suvarnabhumi Don Muang Phuket Chiang Mai +104% 120 200,000 51 Hat Yai Chiang Rai 47 48 48 47 100 54 50 58 80 150,000 67 59 59 60 100,000 18 18 18 18 18 40 17 16 20 11 13 15 50,000 5 0 26 27 23 21 24 27 26 18 24 22 21 2014 2015 2016 2017 2018 2019 2020 2015 term 0 Long- 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Anticipated savings in logistics costs Ample domestic liquidity to finance projects over the next five years
18% (THBb) (THBb) 3,000 3,000 15.2% 14.7% 14.4% 16% 14.2% -2% Excess liquidty Gov't Borrow PPP Borrow 14.1% 14.1% 13.9% 1.4% 13.5% 2,500 2,500 14% 1.3% 13.2% 12.7% 1.3% 1.3% 1.3% 1.3% 12.1% 1.3% 1.2% 1.2% 1.1% 12% 1.1% 2,000 2,000 6.3% 5.9% 5.5% 5.5% 5.5% 5.5% 10% 5.4% 5.2% 5.0% 4.8% 4.4% 1,500 1,500 8% 6% 1,000 1,000
4% 7.5% 7.5% 7.6% 7.4% 7.3% 7.3% 7.2% 7.1% 7.0% 6.8% 6.6% 500 500 2% Transportation Inventory holding Logistic administration 0% 0 0 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E * Assume 2.3% growth on excess liquidity based on 6Yr CAGR ** Gov't Borrow factors in budget
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Thailand Infrastructure Facts & Forecasts Expenditure Sector State in 2010 Current State 2020 Targets 2015 2016 Forecasts (2016-2020) Power Power development plan (PDP 2015) Total: 164,829 Total: 192,189 Total: 260,764 (year 2025) Total: New capacity over 2015-2036 = 57,459MW
Gas: 72% Gas: 67% Gas: 51% Gas: +22,847 (THB800b, USD1m/MW) Total generation (GWh) Coal: 18% Coal: 18% Coal: 23% Coal: +7,390 (THB181b, USD0.7m/MW)
Renewables: 2% Renewables: 5% Renewables: 18% Renewables: +12,105 (details below)
Hydro & imports: 4% Hydro & imports: 8% Hydro & imports: 8% Hydro & imports: +13,117(mostly imports, so low capex)
Renewable plan (AEDP) 3,788 (2013) 7,963 19,684 (year 2036) Total: +12,105 (c. THB750b, USD1.8m/MW)
(capacity in MW) Solar: 823 Solar: 1,420 Solar: 6,000 Solar: +4,580(THB502b, USD3m/MW)
Wind: 223 Wind: 234 Wind: 3,002 Wind: +2,768 (THB126b, USD1.3m/MW)
Hydro:109 Hydro:3,079 Hydro:3,282 Hydro:+204(THB4b, USD0.6m/MW)
MSW: 47 MSW: 132 MSW: 550 MSW: +418(THB15b, USD1m/MW)
Biogas: 265 Biogas: 373 Biogas: 1,280 Biogas: +907(THB32b, USD1m/MW)
Biomass: 2,321 Biomass: 2,727 Biomass: 5,570 Biomass: +2,843 (THB74b, USD0.75m/MW)
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Sector MKE View: Achievable Challenges Reasons & Response Opportunities
Power Power development Implementing agency, EGAT, Lack of decisiveness on fuel type a More public hearings on clean-coal technology Private companies with WACC below 7.9% (PTT) can plan (PDP 2015) has financial capacity. Can handicap technically build LNG terminal. Government is execute 30% of new capacity Use LNG in gas power plants but government supportive. A 5m-tonne terminal can support over Thailand’s gas reserves can last only 5-7 has to subsidise so that WACC exceeds IRR 3,000MW power capacity, based on our estimates 38% of new capacity will be for years. Coal is its next option but there is IPPs/SPPs public resistance to coal-based plants in Government now allows third-party operators Existing LNG terminals are in Laem Chabang. Due for new locations to operate LNG terminals expansion (see Port Development section) 19% hydro-power imports mainly from Laos with some LNG the next option but country cannot Private sector more interested in renewables from Myanmar rely on PTT alone for terminal investments as capacity is small and investments bite- as returns are not promising. sized
Grid capacity is main constraint for Less urgency for __ as current reserve renewables margins are already high at 17% vs desired 15%. Low need for new capacity. 35-40% increases needed over next 10 years.
Renewables Will happen but some areas Regulatory constraints as some projects, EGAT, the monopoly operator of the power Contracts for smart grid more than likely to go to might face delays especially those classified as community grid, now in charge of developing a smart foreign companies as local EPCs do not have solar projects, are undertaken by JVs. grid for managing and smoothening out the competency Projects have to go through another series load system and increasing the mix from of approval renewables. Private-sector interest in renewables is already high. Solar is crowded. Low-speed wind turbines are more Grid constraints as some locations do not suitable for Thailand’s slow wind velocity of have adequate grids 4.5km/hour.
Listed renewable stocks are GUNKUL (also an EPC), DEMCO (also an EPC), EGCO, SPCG, EA, TSE, SUPER, CHOW, SOLAR, BCP, IFEC and RATCH.
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Thailand Infrastructure Facts & Forecasts Expenditure Sector State in 2010 Current State 2020 Targets 2015 2016 Forecasts (2016-2020) Transport Air Suvarnabhumi Phase 2: Suvarnabhumi Phase : Suvarnabhumi Phase 2: THB52b: AOT (SOE) to invest Approved by Cabinet; two Commercial operation by 2020 out of seven contracts to raise capacity to 60m pax Don Muang Phase 3: THB27.4b: AOT (SOE) to invest already out for bidding; from 45m construction starts in Jun U-tapao airport : 2016 Don Muang Phase 3: AOT will build new Terminal 3. THB620m for current expansion (small) Will connect airport’s rail to the new Red Line mass transit Tentative budget for repair and maintenance depot is Don Muang Phase 3: under PPP; COD likely in THB15b Pending Cabinet approval 2019/2020 DM Phase 2 just finished No data for major terminal expansion Completion expected in 2021. U-tapao airport : Capacity +12m pax, +310 Allows 12 flights per day flights/day Major expansion for commercialisation pending U-tapao airport: approval from Cabinet and Plans to construct bays and waiting for EIA aviation bridges to accommodate more than 62,000 flights a year and 5m pax by 2020. A 15-year development plan
Land – Roads Interprovincial motorway to Interprovincial motorway to Interprovincial motorway to Interprovincial motorway to hook up with motorway to hook up with motorway to hook up with motorway to hook up with motorway to BKK BKK and IE: THB161b BKK and IE: 126km of BKK and IE: Starts this year and IE: Another 354km linking motorway now link Eastern 3 routes; within the East, Seaboard, an industrial zone, north/north-eastern and West to Bangkok COD in 2019-20
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Sector MKE View: Achievable Challenges Reasons & Response Opportunities Transport Air Suvarnabhumi Phase 2: Suvarnabhumi Phase 2: Suvarnabhumi Phase 2: Suvarnabhumi Phase 2: Highly likely to meet 2020 Potential construction delays Suvarnabhumi running at 120% capacity. With Expect Phase 3 to start right away as traffic is likely target. its tourism goals, government is very to ramp up quickly Bigger airport might invite more noise- amenable to hasten airport expansion Don Muang: compensation claims; negotiations should Ancillary services have to increase with capacity and Phase 3Expect delays in be pro-active. Rising LCC penetration may limit room to aircraft. approval absorb ‘extra” traffic of Suvarnabhumi. Changes in government may delay projects. ASEAN’s air liberalisation set for 2016/17. Thailand U-tapao airport: Don Muang: aims to stake claim to ASEAN tourism hub t Small expansion should be Don Muang: Discussions intensifying completed this year Terminal specifications not yet clear; In 2020, Suvarnabhumi’s passenger capacity could neither is the budget Trying to raise efficiency of existing terminals; surpass HKIA’s at estimated 74m pax Major expansion could take also trying to optimise traffic and ease longer U-tapao airport: constraints Don Muang: Speed of government approval and limited Rising LCC penetration in Thailand. LCCs raising sources of funds. U-tapao airport: capacity and aircraft by 12% and 10% annually Navy insists on taking complete control of the As U-tapao is a navy base, there are several airport, though it will seek assistance from Optimising traffic and reducing constraints hurdles to clear before commercialisation AOT of parts of it can happen U-tapao airport: Well-placed to cater to eastern tourism flows, helping ease constraints in Bangkok airports. Current users of the airport are AAV, China Southern Airlines and Bangkok Airways but at low frequencies
Eastern region receives 13-15% of tourism flows and growing
U-tapao could facilitate executive movements from Eastern Seaboard to Trat Special Economic Zone that borders Cambodia Land – Roads Interprovincial motorway to be Interprovincial motorway to be ultimately Interprovincial motorway to be ultimately Interprovincial motorway to be ultimately hooked up ultimately hooked up with BKK hooked up with BKK and IE: Availability of hooked up with BKK and IE: with BKK and IE: and IE: Put under PPP fast- contractors for north/north-eastern and tracking. Expect tenders out by west links because these traverse long Negotiations with private sector under PPP THB161b funding for PPP fast track with negotiations 2H16 distances and available contractors are need to be fine-tuned. in nine months small Government may have to assume a bit more Traffic gridlock starting to form in industrial zone in risk to make the project attractive Chonburi/Rayong, especially towards the port
Motorway can shorten travel between north-east, central and west and resort destinations
Land transport is the most common mode of logistics at 96% of total or 185,883mt km. Also expensive at THB1.72/t km vs THB0.93 for trains.
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Thailand Infrastructure Facts & Forecasts Expenditure Sector State in 2010 Current State 2020 Targets 2015 2016 Forecasts (2016-2020) Rail Bangkok Mass Transit Three routes now operational One line will open this year, To complete all five mass- Total cost 131b THB245b funding for PPP, excluding newly completed Purple Line, an extension transit lines with 136km by Purple Line Two lines already approved 2022 Two lines approved this year. THB106b will be under PPP Two pending approval: Red & fast track. Land-appropriation budget of THB12b from Orange fiscal budget
Inter-city dual- Single-track rail, 1m gauge Now seeking PPP partners to Expect implementation in 2016 THB145b, funding by PPP and fiscal budget tracking railway start work on five routes
Hi-speed train to Private sector has expressed 2020/2021 THB250b from private sector tourist destinations interest: CP Group and BTS (Huahin & Rayong) Group
TH-CN Hi-Speed Train JV talks with Chinese partner Expect implementation in 2016 Fiscal budget reduced from THB530b to THB200b (BKK/Nong Khai) failed. Thai government will and COD in 2019 pursue project on its own. Route has been shortened to 250km from 873km and budget reduced TH-JP railway Needs approval from Cabinet Expect implementation in 2016 THB449b (Bangkok-Phitsanulok- and EIA Chiang Mai)
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Sector MKE View: Achievable Challenges Reasons & Response Opportunities Rail Bangkok Mass Transit Expect delays by 3-5 years Handover of sites typically slow Government just approved 2 new lines: Pink Completed Purple Line could raise trips by another and Yellow. Expect terms of reference by 147K/day from 260 in 2015 as distance doubles to Physical limitations, causing traffic 2H16. It has also allocated land-appropriation 47km. congestions and gridlock budget Extension can benefit operator of Purple Line 1, Civil contractors have financial access but PPP can provide access to private-sector listed BEM Plc labour may be in shortage. capital Cut commuters’ travel time and transportation costs Potentially problematic concession terms by est. 15%.
Reduce car ownership
Push urbanisation and economic production to outer ring of Bangkok in the northwest direction.
New residential sites could open up and drive land values by as much as 25%, going by previous routes.
Positive for branded residential developers with “limited” land banks such as LPN Development.
Commercial complexes could also expand as new neighbourhoods are formed Inter-city dual-track Delays of no less than five years Finding PPP partners will be difficult No information available Reduce traffic gridlock and lower logistics costs from railway because the economics is difficult to assess 14.1% of GDP to 12.1% by 2020, saving THB260b per year. Hi-speed train to Achievable if private sector’s Negotiating benefits No information available Connecting resorts with Bangkok should stimulate tourist destinations interest is real tourism. (Huahin & Rayong) 3% of foreigners now visit Huahin province and 13- 15%, the east. All use bus transport. TH-CN Hi-Speed train Long delays Government will roll out project; physical Government intent on rolling out this project Project duplicates the dual-track SRT while (BKK/Nong Khai) resources limited with fiscal budget; this will crowd out other travellers are increasingly serviced by LCCs No land-appropriation budget government-funded projects
TH-JP railway Achievable but may also be Design, environmental impact and cost- Continued talks Significant opportunity as this is a new route that (Bangkok- delayed as undertaking is huge sharing still being discussed ends in Myanmar’s deep seaport in Dawei that opens Phitsanulok-Chiang and greenfield up to the Indian Ocean. Dawei Development Area is Mai) a major initiative to create a huge industrial complex in Myanmar. Will be managed by an SPV owned by governments of Thailand, Myanmar and Japan.
Listed Thai companies developing Phase 1 are ITD and ROJNA
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Thailand Infrastructure Facts & Forecasts Expenditure Sector State in 2010 Current State 2020 Targets 2015 2016 Forecasts (2016-2020) Ports Port development Two main projects approved Start in 2016 THB4b by Cabinet: port Terminal A and container terminal (Phase I)
Water Water system In 2011, not 2010, Thailand Intensifying drought risks will To avoid repetition of THB70.5b spent on ad- THB900b on “urgent” water-management projects reeled under worst floods in further disrupt agricultural devastating floods and intense hoc solutions 50 years. Central plains output and manufacturing in drought as in 2006 inundated for 175 days the lower north and central regions, including Bangkok Regulate water supply to ensure all users receive predictable supply
Internet and telecommunication Internet Broadband penetration 14% Penetration rose to 31% in Increase broadband capacity to Mostly private-sector initiatives under licensing scheme 2015 2,000-3,000gbps from 500gbps 300,000m submarine cables with 53% penetration Expenditure from private sector not available connecting islands Drafting digital-economy policy National broadband project to connect 30K households will cost THB15b. To be rolled out by state-owned TOT Increase Internet users from and CAT 16m to 40m No data available for submarine cables Provide wifi access to 30,000 rural households by 2017 Very thin data on data centres planned by private sector. WHA announced plans to build 10 and ILINK, 2 Install additional submarine fibre-optic links
Add data centres to Thailand’s current 14, 13 in Bangkok Telecom Mobile penetration 108% Penetration rose to 140% in Increase 4G penetration from THB148b, based on announced capex of ADVANC, DTAC 2015. below 10% and TRUE
4G auction completed, in Another spectrum auction in which TRUE won 25MHz and 2018 for 850MHz, 1800MHz and ADVANC, 15MHZ. 2600MHz
4th winner, JAS, defaulted on payment. Need to re-auction 10MHz on 24 Jun 2016
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Sector MKE View: Achievable Challenges Reasons & Response Opportunities Port Port development Able to implement on time Community resistance has been resolved Increased public relations to promote Laem Chabang Port is a major jumping-off point for understanding auto, machinery parts, petroleum and petrochemical exports. In 2015, the port handled 6.6m TEUs
Higher handling capacity calls for parallel expansion of ancillary facilities and terminal operators by private sector. Listed terminal operators for Eastern Seaboard are JWD and NYT Water Water system Likely to take a long time to No fewer than 10 agencies have their say None. Government resorts to quick fixing of Engage private sector in water supply using the BTO start. Urgent budget has been on management problems model used by listed EASTW and TTW instituted since 2012. Secure water for industrial and agricultural Unclear sources of funding: annual Private sector’s interest is limited to proposes. budgets, debt or PPP construction of dams Prevent and minimise flood/drought damages which normally produce financial losses of THB100b a year. EIA and HIA approval. Difficulties in financing, given high budget requirements Internet and telecommunication Internet Submarine fibre-optic project Delays in implementation due to unclear Clearer policy; improvements in security of e- Increasing 4G penetration will promote use of by private companies likely to policy payment system Internet and Internet transactions start Opportunities in e-commerce. Digital economy may take some time e-commerce now valued at THB2.1t, 15% of nominal GDP
Digital advertising expected to rise 25% to THB10b this year mainly via Facebook and Youtube
Telecom Adding subscribers will be Fierce competition among operators Clearer policy from regulators; improvements Need for data centres. Listed ILINK, LOXINFO, BJC challenging. in security of e-payment system and WHA (plan for 10 centres) are looking to expand
Demand for smart warehouses to support e- commerce
More applications and solutions
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Thailand Infrastructure Facts & Forecasts Expenditure Sector State in 2010 Current State 2020 Targets 2015 2016 Forecasts (2016-2020) Housing and urbanisation Housing Number of households at Number of households 24.7m Number of households to grow THB10b housing loans to THB70b: THB30b loans for developers of projects with 21.7m Population 65.7m by 2.5% per year low-income earners for units not exceeding THB1.5m each homes not exceeding Population at 63.9m People per household 2.66 Population to grow by 1% per THB3m THB40b of 30-year housing loans for low-income earners year seeking first homes at prices not exceeding THB1.5m People per household at 2.95 Housing inventory 160,000 units Low-cost housing scheme to Housing inventory at 125,000 help low-income earners units Property stimulus targeting low-income earners Target of 40,000 units this year with up to THB1m loan/unit facility
Bring mortgage rejection rates below 20% from 25% Urbanisation 2.38 persons/household in 2.13 persons/household in Bangkok Metropolis Bangkok Metropolis
Condos = 54% of housing sold Condos = 60% of housing sold
Average size of one-bedroom Average size of one-bedroom condos= 45sqm condos = 30sqm
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Sector MKE View: Achievable Challenges Reasons & Response Opportunities Housing and urbanisation Housing Property market should grow High mortgage rates and low banking Lower interest rates Banks should benefit by 10% in 2016 penetration Ease in credit quality Developers which focus on low-price housing
Stringent bank lending
Urbanization Smaller households; more Lack of public transportation Government to build more mass transit and Services and development should target smaller vertical living; smaller condos rail households
2.0 persons/household in Services for ageing population, considering fast Bangkok Metropolis nuclearisation of the Thai household. Hospital operator VIBHA plans to build care centre for the Condos = 62% of housing sold aged
Average size of one-bedroom condo = 28sqm
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VIETNAM INFRASTRUCTURE
1. Irrefutable need to speed more on infrastructure, urgently!
2. Public Private Partnership now a MUST, not a choice
3. Transport particularly under strain, so is power
4. Land acquisition & red tape are stumbling blocks
5. Top picks: KBC & CTD
Lien Le [email protected] (84) 8 44 555 888 ext 8181
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VIETNAM INFRASTRUCTURE
Most improved competitiveness index… Still Below Potential 100
80 Vietnam stood out in recent years for its stabilised macros and faster growth. Its 68 56 long-term growth potential is even more convincing, as it prepares to add to and 60 52 upgrade its infrastructure, which has lagged its socio-economic development. 47 Challenges are, in our view, accessing new sources of funds, refining planning 37 40 3132 33 processes, responding to rapid urbanisation and developing stronger institutions 20 to encourage private financing. The government has taken measures to improve 20 18 the investment environment and incentivise foreign and private investors through more transparent and attractive public-private partnerships or PPPs. 0 Although progress remains slow, we are hopeful that things will speed up under Thailand Malaysia Indonesia Philippines Vietnam a new cabinet, which will be formed in 2Q16. 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 Source: World Economic Forum, the lower the score the better
Transport, power, water and energy have better growth potential. For the time being, water supply and treatment not open to private participation. Much of it …but still behind ASEAN-5 as infrastructure ranks is still being regulated by municipal authorities. Investment opportunities in only higher than the Philippines water mostly lie in loans provided to listed companies like CII VN and REE VN, 120 which have water projects in southern Vietnam, or via owning their shares. Vietnam is still in need of more oil and gas as it has to import over two thirds of 100 91 90 81 its refined oil and lacks gas for industrial and individual uses. But investments in 76 oil and gas fields are likely to slow down in the foreseeable future, amid weak 80 62 crude prices. 56 60 48 44 40 25 24 20
0 Thailand Malaysia Indonesia Philippines Vietnam 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16
Source: World Economic Forum, the lower the score the better
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1. Irrefutable need to spend more, urgently! 2. Public Private Partnership now a MUST, not a choice
Vietnam posted one of the highest and most stable growth rates in the Estimates vary but general consensus points to USD200-300b of funds region in recent years, notwithstanding runaway credit growth, inflation and required for infrastructure development in 2016-2020 and at least similar non-performing loans in the banking system. Its GDP growth ranged from quantums for 2020-2025. This is more than double the annual investments in 5.35% to 8.48%, averaging 6.8% between 2001 and 2015, one of the highest the last decade. in the world. FDI has also climbed, to a record high recently. Challenges have surfaced to force Vietnam to reconsider funding for its Urbanisation growth, at 3% each year, has added 1m to its urban centers, infrastructure investments: presenting planning and financing challenges. Vietnam’s infrastructure is • Its fiscal deficit has widened to over 5% again in the last five years, as woefully inadequate, to meet this rapid urbanisation and rising demand from spending increased faster than revenues. Vietnam has turned to higher FDI companies. public debt to fund these deficits. Although public debt is still below the So far, Vietnam has relied heavily on its state budgets for development. 65% ceiling allowed by the National Assembly, its rapid increase – the However total investments increased at 12.1% on average during 2005-2015, bulk in general obligation bonds backed by tax payments rather than at a lower pace of 18.4% by total fiscal spending - composed of investment revenue bonds backed by infrastructure revenue streams - has and recurring expenditure. Investment over total fiscal spending dropped to heightened the country’s credit risk and borrowing costs. only 18% in FY15, before returning to 21% in the 2016 fiscal year as Vietnam
still faces a serious lack of infrastructure in transport, energy, power, water and telecom. Fig 26: Public debt has been rising to fund fiscal deficits
60.0 57.1 54.8 51.6 Fig 25: Insufficient investment spending on infrastructure 50.0 48.5 46.7 60% 30% 44.7 45.0 36.2 40% 20% 30.0
20% 15.0 10% 0%
0.0 2008 2009 2010 2011 2012 2013 2014E 2015F -20% 0% 2005 2006 2007 2008 2009 2010 2011 2012 2013* 2014E*2015E* Source: SBV, MoF, IMF, WB Fiscal spending - Investment growth (LHS) Fiscal spending - Current expenditure growth (LHS) • Vietnam’s allocation of Official Development Assistance funds have dwindled. ODA is a cheaper source of funds which used to account for Investment/total fiscal spending (RHS) Source: MoF, *2013-15: estimated by MoF, not finalised at National Assembly meetings yet 30% of its infrastructure financing. Vietnam’s upgrade to “middle-
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income” status from low-income in 2013 hastened the decline. Its ODA 3. Transport is particularly under strain; so is power entitlement will be completely removed by 2018. This adds to its urgency to find new sources of long-term financing. Of the USD200-300b of infrastructure spending needed in 2016-20, transport The government admits that the state budget and other forms of could take up 40%, 2.5x higher than in 2011-2015. Vietnamese still rely development assistance may meet only 40-50% of its infrastructure heavily on roads, predominantly local roads, and not so much on urban roads budgetary needs in the next 10 years. The shortfall may, in part, be met by or highways. The country’s railway system is outdated, with no major private investors, including foreign ones. improvements since 1970s. Inland waterways are popular, thanks to over 40,000 km of natural waterways, which have somewhat limited the This implies that Public Private Partnership or PPPs are now a MUST, not an development of large deep-sea ports. Air transport has only been used more option. Past infrastructure projects had already adopted early forms of in recent years, with the allowance of private low-cost airlines. Most local build-operate-transfer, build-transfer, build-transfer-operate, build-own- and national airports are fully utilised. Due to huge capital requirements, operate, build-lease-transfer, build-transfer-lease and operate-manage. transport is more open to PPPs, mostly through BOT and BT. However, costly What has been lacking are reforms in consumer pricing, enterprise and time-consuming land clearance, bureaucracy and unattractive toll fees restructuring and regulations to establish the credit-worthiness of have been holding back private bidding for projects. With the Ministry of infrastructure enterprises. Transportation being the most efficient ministry in restructuring state- Decree 78 was issued in 2010, to allow for and facilitate 38 pilot owned transport companies in the past three years, we expect transport to infrastructure projects under PPPs. This was followed by Decree 15, which continue to lead the transformation in infrastructure PPP. provides for more PPPs in infrastructure projects from 10 Apr 2015. Decree After transportation, power is the next sector where liberalisation has 15 aims to plug shortfalls in previous regulations. It allows for more picked up in the last three years. PPPs have been rather popular in this investment types and widens the scope of projects to include telecom and sector, more so for small hydro-power plants due to lower rates of technology. To supplement, a Public Investment Law, the first in Vietnam, investment and simplified selling-price negotiations in power purchase was passed on 18 Jun 2014 to take effect on 1 Jan 2015. More recently, a agreements. However, due to more severe El Nino effects and the improper revised Budget Law was also passed, effective from FY2017. These are construction of dams which precipitated light earthquakes near the Song attempts to improve the efficiency and transparency of planning and Tranh 2 power plant, power plants in the pipeline have been granted to executing public/public-private investments and thereby, ease fiscal investors with a larger capital base and proven technical capability & track constraints. records. Electricity demand in Vietnam has been growing by double digits in Even then, various non-state infrastructure companies cite consumer pricing the last 10 years, averaging 11.2%. Supply is constrained by: 1) financial as a hurdle, rendering the returns of PPPs unappealing. As consumer-pricing difficulties at state-owned enterprises such as Vinacomin and the Song Da reforms are likely to take longer, requiring the readiness of the masses to Group; 2) a lack of gas supply due to delays in the Block B Omon pipeline; accept higher toll fees for better roads etc, the onus is on the state to and 3) time-consuming, complex power-purchase-agreement negotiations provide clear and predictable rules for cost computation. These include and finalisation. To meet its shortfall, Vietnam has been importing from timelines for and assistance with land clearance, pricing mechanisms and China. Its shortage could worsen in the next 2-3 years and more incentives budget support. The new cabinet may have no choice but to accommodate would have to be dangled to accelerate investments in new plants. the demands of private investors in its bid to sustain economic growth, retain FDIs and attract new ones rather than risk Vietnam losing out to Myanmar, Bangladesh, Pakistan etc.
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4. Land acquisition & red tape are stumbling blocks 5. Top picks
Lengthy land clearance has long been the main stumbling block for most For exposure to infrastructure, we recommend: KBC VN (industrial-park infrastructure projects in Vietnam. The acquisition, compensation and developer), CTD VN (civil contractor) and HPG VN (steel maker). clearance of land for infrastructure projects are the responsibility of municipal governments, under the 2013 revised Land Law and Decree 37/2014. Implementation and progress, however, depend much on interpretation of the law by city/provincial authorities, as well as their capability. That said, investors and contractors have secured stronger legal backing over the years for the timely handover of land to implement their projects. Delays that affect the returns of their projects could result in monetary or other forms of compensation by the city/provincial authorities eg toll-fee concessions or longer fee-collection periods. But their negotiation and finalisation can be lengthy. Three developments are expected to be game-changers. Firstly, fiscal constraints have reduced the ability of the local authorities to pay penalties for their late handover of land. In late 2014, the Hochiminh City People’s Council was notified that it had to pay up to USD100,000/day for delays in handing over land for the Ben Thanh – Suoi Tien metro project. Over in Hanoi, the Hanoi City People’s Council was sued for USD10m by Japanese contractors for late land handover for the Nhat Tan bridge project. Secondly, Decree 15/2015 on PPPs specifies the categories and criteria for bidding process of all infrastructure projects. This would leave out incapable “pre-assigned” contractors/investors as it had been popularly the case before. Local authorities would also need to improve and upgrade themselves to work with more sophisticated, highly demanding capable contractors/investors. Last but not least, there are stronger calls for ongoing reforms at ministerial and municipal levels and among state-owned enterprises to hold responsible individuals liable for poor performances regardless of rank and seniority. This may create an environment in which all stakeholders work towards cutting bureaucracy and shortening the procedures for land clearance.
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Focus Charts
State budget may meet 50-60% of infrastructure needs only Aims to reach ASEAN-4 standards for ease of doing business by 2016 60.0 Infrastructure development, Starting a business USDb - by State funding Dealing with Resolving insolvency construction permits Infrastructure development, to be filled up by private investors 40.0 USDb - Total requirements by MoIP Enforcing contracts Getting electricity Infrastructure development, USDb - MKE forecasts 20.0 Trading across borders Registering property
Paying taxes Getting credit
- Protecting minority investors 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E 2016F 2017F 2018F 2019F 2020F Vietnam Asean - 4, average
Source: MoF, MoIP, World Bank, MKE Source: World Bank
Steady pick-up in FDI disbursements Most urgent shortages are in power sector
USDm 4,000 3,500 250 Generation (b kwh) 3,050 Actual demand incl. wastage during transmission 3,000 2,850 200 2,700 (b kwh) 2,500 2,540 2,500 150 2,000
100
1,000 50
0 0 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E Source: GSO, MoIP Source: various, MKE, on-going construction is not sufficient to meet demand
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Vietnam Infrastructure Facts & Forecasts Expenditure Sector State in 2010 Current State 2020 Targets 2015 2016 Forecasts (2016-2020) Power Total designed capacity: Total designed capacity: Total designed capacity: Not disclosed. For every 5,000 MW addition Adjusted VII master plan 20,000MW 35,000MW 60,000MW For 5,000MW capacity each year, USD5-6b is provides for Total production: 90b Total production in 2015: Total production needed: 265- added in 2015, average required. USD7.9b/year in 2016-20. kwh/year 159b kwh/year, +11.23% YoY 278b kwh/year construction period was MKE estimates USD5-6b 3 years for thermal- Disbursements in 1H16 likely pa Power generation by type: Average growth in 2011-15: Total production needed: 352- power and 5-7 years for will slow down, in anticipation hydro (46%), thermal-coal 10.37%/year 379b kwh by 2025 or 80,000 large hydro-power of new Cabinet in 2Q. Adjusted VII master plan (15%), thermal-gas (34%), MW; 506-559b kwh by 2030 or plants. Investments likely to resume provides for others (5%) (DO/FO & diesel) Power generation by type: 140,000MW MKE estimates for 2015: only from 2H16 USD10.8b/year in 2020- hydro (42%), thermal-coal USD2-3b of USD5b has 30. MKE estimates USD5- Direct investments or via (34%), thermal-gas (19%), Power generation by type: been disbursed so far. VII master plan just signed on 6b pa subsidiaries of state-owned others (5%) (DO/FO & diesel) hydro (34%), thermal-coal 18 Mar 2016, confirming which corporations: EVN, PVN, Song (43%), thermal-gas (13%), projects are approved, aka to Our assumptions are more Da Group EVN, PVN & Song Da still the others (9%) (DO/FO & diesel & be implemented during 2016- conservative due to: 1) major investors. More private renewables) 30 caution over reliability of investors in Phu My, Hiep hydro power; 2) pollution Phuoc, Mong Duong 2, Vinh Foreign and/or private caused by coal-fired Tan 1 thermal power plants investors other than EVN, PVN plants; 3) uncertainties and other small hydro-power and Song Da are expected to over timeline for new gas projects (5% of capacity) account for 30-40% of total supply from Block B production capacity Omon; and 4) concerns over ability to ensure security of nuclear power Coal, oil, Fossil DO/FO & diesel-fired power DO/FO & diesel-fired plants Dry gas supply may grow 40% by Coal-fired plants’ capex Coal-fired plants’ capex not Gas-related capex Fuels, Thermal plants accounted for only 5% are insignificant (<5%) 2020 once Block B Omon is not disclosed, est. disclosed, est. same as in FY15 unlikely significant due to of total capacity completed. Ground-breaking in USD1.5-2b or USD1.5-2b Block B Omon’s delays Existing gas-fired plants early Apr 2016. Output mostly Coal-fired plants consumed consumed 9b cu m in FY15 or for power plants in the pipeline Gas-fired plants’ capex Gas-fired plants’ capex not 9.4m tonnes or 21% of total 90% of total production in the south. not disclosed. Should be disclosed likely to be produced insignificant as there is negligible due to delays in Investors still state-owned 80m tonnes of coal needed for no gas supply yet, from Block B Omon Investors mostly state-owned EVN, PVN. Sector has started 25,800MW coal-fired plants in the delayed Block B EVN, PVN to appeal to private investors 2020 pa, double current 20Omon project who participate more through production. More imports may JVs with EVN or PVN in Hiep be unavoidable. Phuoc, Phu My, Vinh Tan 1, Mong Duong 2 Mixed group of investors. More foreigners in the pipeline, mostly in JVs with EVN/PVN/Lilama: Van Phong by Sumitomo and Hanoinco; Vung Ang 2 by One Energy & Lilama. Standalone foreign investors: Nam Dinh 1 by Tai Kwang; Dung Quat by SembCorp; Long Phu 2 by Tata Power.
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Sector MKE View: Achievable Challenges Reasons & Response Opportunities
Power Vietnam historically falls short in Master plan for new plants spells out Substantially clearer guidance on power Investors positive on double-digit growth in demand for construction of power plants due to type of plants, capacity and purchase agreements between power plants electricity. All approved power plants until 2030 have identified bureaucratic red tape and lack of gas investors. New investors normally and EVN. investors. for gas plants and environmental- have to "buy" the project(s) or team pollution concerns for coal plants. up with existing approved investors. 5% of electricity now sold in open market vs FDIs in manufacturing – at two-thirds of total FDIs - could be fixed volume and prices under purchase further improved once access to electricity improves. Total spending this year estimated at Approved plants may take years to agreements with EVN. Listed companies such USD2-3b, FY15F levels. finalise power purchase agreements as NT2, PPC, VSH said to be more efficient, with EVN. Compounded by time- selling 10-20% of electricity generated in open 2016-2017 electricity shortage could be consuming land clearance. market. acute. Maximum 12% IRR for power projects Adjusted master power plan VII (to 2030) has No choice but to accelerate in power purchase agreements more realistic adjustments/assumptions for investments, especially by private signed with EVN. May not be growth and type of power generation. investors. attractive in local currency. Many companies have suffered from Government may liberalise generation and sizeable FX losses for borrowings in distribution, reduce monopoly in distribution foreign currencies. of electricity and lower wastage during transmission, estimated at 10-11%.
Coal, oil, Fossil Gas-related investments have to Coal-fired plants want to import coal Shortage of electricity implies urgent need Thermal power will likely grow the fastest, as electricity Fuels, Thermal continue as capex requirements are themselves while government for new gas supply. 2/3 of refined oil still demand is expected to surge while hydro power seems to have huge for LNG imports for gas-fired prefers state-owned Vinacomin to imported. Urgent need to construct new oil so many constraints. plants, especially in the south. import then re-sell to these plants. refineries Vinacomin and its subsidiaries are After the signing of master plan VII on 18 Mar 2016, expect Actual disbursements for Block B Omon main producers and previously main Most gas-fired power plants are bankable. clearer guidance from the government may be slow in 2016 but may need to be exporters of coal Obstacle is supply of materials: who will accelerated from next year as gas import the coal, where will gas come from for feedstock is needed for major plants in new projects? the south
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Vietnam Infrastructure Facts & Forecasts Expenditure Sector State in 2010 Current State 2020 Targets 2015 2016 Forecasts (2016-2020) Nuclear Experimental, not yet commercialised
Hydro 46% of total electricity 42% of total installed To increase to 20.2K MW by Not disclosed, estimated at Not disclosed, estimated Not disclosed, estimated supply. capacity. 2020 from 16.3k MW in 2015. USD0.5-1b the same as in FY15 or at USD0.5-1b Less favoured due to weather USD0.5-1.0b Investors mostly state (EVN, Recently added large hydro conditions, soil impact and lack Song Da), private investors. power plants: Son La of financial resources for large 2,400MW, largest in SEA. plants Mostly small hydro-power Investor is EVN plants of 20-30MW EVN invested in about 50%, Ongoing construction of Lai remainder by independent Chau 1,200MW. Investment is power producers (IPPs) USD1.8-2.0b, also by EVN
Investors mostly state (EVN, Song Da), private investors.
Mostly small hydro power plants of 20-30MW
Other Renewables Minor Minor 3% by 2020 n/a n/a n/a 4% by 2025 and 8% by 2030 Wind-power: private investors
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Sector MKE View: Achievable Challenges Reasons & Response Opportunities Nuclear 1st nuclear power plants Safety & security concerns after Fukushima Status unclear Government seems keen on nuclear energy given approved but feasibility study incident environmental issues for coal-fired plants & lack of is on hold because of safety gas supply for gas-fired plants. and security considerations
Hydro Likely can add 4,000MW or 25% As with other types of power plants, Clearer guidance on PPA. Faster liberalisation About 50% of new capacity in the pipeline will be capacity in 2016-20 as hydro is negotiations for power purchase of power sector built by private investors, mostly unlisted. technically more feasible. agreements are lengthy, especially for above 30MW plants. Deters investors and Opportunities more on financing side for bankers. Vietnam has been ahead in bankers constructing the largest hydro power plants in SEA.
Investment rate is mostly comparable with coal-fired plants: USD1.2-1.5m/MW
Other Renewables Few wind power plants High investment rate. Not clear Not clear
But Cong Ly wind power plant with 99.2 MW capacity costs USD250m or USD2.5m/MW, 2x more than hydro or thermal power plants. Power purchase agreement with EVN also said to be not attractive enough
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Vietnam Infrastructure Facts & Forecasts Expenditure Sector State in 2010 Current State 2020 Targets 2015 2016 Forecasts (2016-2020) Transport Air (incl ports) Fewer than 45m 69.4m/year 91m/ year or +32% from Aircraft purchases: No details Vietnam Airlines reportedly passengers/year current levels VND21,208b or buying 35 planes for USD0.95b for 7 units by VND100,000b or USD4.4b Vietnam Airlines, listed in 2014. Vietjet Air signed a USD9.1b contract with Airbus in Feb Jetstar is 66.9% owned 2014 to buy 62 units, with by Vietnam Airlines. rights to buy 30 and lease 8. In Nov 2015, it signed another Exact number for contract worth USD3.6b for Vietjet Air not 30 Airbus plans: A321 neo & available. A321 ceo
Long Thanh new international airport costs USD16b till 2025
Land - Roads Inadequate due to lack of Limited highways 3 metro lines in Hanoi and Not available Not available Metro: USD4.7b for 3 ongoing efficient investments Hochiminh scheduled for metro lines in Hanoi & Ongoing metro lines: 2 first completion in 2019-20 Hochiminh lines in Hanoi (Nhổn – Hanoi station, Cát Linh – Hà Đông, 2020-30: at least USD8.3b for USD2.2b investments), first lines 2 and 5 in Hochiminh. Investors: not applicable line in Hochiminh (Bến Thành No estimates for remaining 4 – Suối TIên, USD2.5b) lines in Hanoi, but should be at least USD5-6b
Investors in Hochiminh: JV More state investments, funded Investors: Official between Sumitomo and by Official Development Development Assistance, Cienco 6, listed in Dec 2015. Assistance Public-Private Partnership
Investors in Hanoi: Official Development Assistance from Chinese government
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Sector MKE View: Achievable Challenges Reasons & Response Opportunities Transport Air (incl ports) IPOs of airports & airliners Lack of transparency and still-poor Aviation infrastructure highly under- Airliners' fleet expansion, new airports, airport customer service by airlines and airport developed upgrading/expansion IPO of Vietjet Air in 2Q16 is operators. expected to raise USD800m Although lagging, Vietnam is arguably the best Long Thanh Airport could face strong located in SEA since Hochiminh is closest to Capacity improvements should competition from airports in Singapore, most Asian cities be intensive for large Bangkok, Kuala Lumpur and Hong Kong city/provincial airports. Huge demand for low-cost airlines domestically and regionally. Vietjet Air has Funding secured for new started to fly longer haul, to Singapore, international Long Thanh Thailand, Taiwan etc. Airport Phase 1. Construction likely to commence in 2018 after land clearance.
Land - Roads Started 2 metro lines in Hanoi Hochiminh’s first metro line is on time for The 2 biggest cities with high population Although open to PPPs, more likely to be undertaken out of 6 planned. 1 metro line 2020 but Hanoi’s is likely to be delayed by densities have under-developed their public by the state, which will rely more on commercial in Hochiminh out of 6 planned. slow and costly land clearance. Cat Linh – transport for years. Metro appears to be the loans Ha Dong line’s investment has jumped to most efficient for most passengers. Scheduled for completion in nearly USD900m from previous forecast of 2019-20 USD552m. This may not be the end. Despite close scrutiny by city authorities and the media to ensure progress, Hanoi’s project Hochiminh’s first Ben Thanh – Suoi Tien progress has been slow line may also cost 2.5x more, at USD2.5b, up from USD1.1b estimated in 2007
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Vietnam Infrastructure Facts & Forecasts Expenditure Sector State in 2010 Current State 2020 Targets 2015 2016 Forecasts (2016-2020) Transport – cont’d Land - Rail No statistics available. Old railway system. Limited Hochiminh – Nha Trang & Hanoi N/A N/A New railways (Hochiminh – Railway system mostly capacity and speed – Vinh high-speed railways are Nha Trang & Hanoi – Vinh) are outdated. Not a popular mode improvements. High-speed under feasibility study. Each still under feasibility study. of transport. Rail use limited trains only compatible with a about USD10b. To be proposed to small amount of cargoes, completely new rail system. for National Assembly approval as most goods are still moved before 2020 USD2.3b under BOT & Official by trucks Congress did not approve Development Assistance for replacement of north-south upgrade of Hanoi – Hochiminh railway with USD56b++ railway, aka north-south investment or more than 25% railway of GDP.
Instead, approved shorter Hanoi – Vinh, Hochiminh – Nha Trang routes, each estimated to cost USD10b. Under feasibility study. To be proposed to the National Assembly for approval before 2020
In Nov-Dec 2015, 24 subsidiaries of Vietnam Railway Corporation were privatised. Operational improvements after IPOs. No major capex. Capex funded by parent holdings or through PPPs Sea (incl ports) 259m tonnes/year 427m tonnes/year 640m tonnes/year, mostly NA NA USD3-4b for the 2 new deep through 2 new deep-sea ports: seaports Investors: more local, private Investors: more local, in Haiphong, North and Cai Mep private. Earlier foreign – Thi Vai, South investors in logistics, transport & ports hit by 2008 Attracting more foreign financial crisis investors due to large investments required for deep- sea ports
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Sector MKE View: Achievable Challenges Reasons & Response Opportunities Transport – cont’d Land - Rail Still under feasibility study Funding of USD10b each needed for Hanoi – Still under feasibility study Not clear Vinh and Hochiminh – Nha Trang new railways. Modern technology needed for these high-speed trains
Sea (incl ports) Most new capacity came from Huge investments for deep-sea ports, each To meet rising demand from higher trade Funding port development upgrades & expansion. costing millions of USD following FTAs in the years to come
Development of new deep-sea Connectivity between ports and main roads ports delayed by large funding Accelerate land clearance for investments and requirements and lower-than- improve connectivity with main roads expected throughput due to slowdown in global trade.
Major projects may be resumed in 2016-17 as existing ports are fully deployed. Little left other than going further deep-sea.
Improvements by provinces/cities to connect ports with industrial parks & residentials.
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Vietnam Infrastructure Facts & Forecasts Expenditure Sector State in 2010 Current State 2020 Targets 2015 2016 Forecasts (2016-2020) Communication Telecom Fixed telephone coverage: Fixed telephone coverage Fixed telephone coverage: 20- Total IT spending in Total IT spending in 2016F: 5% CAGR 16% of population declined to 6% due to 25% 2015F: VND110,000b VND121,000b Mobile phone subscriptions: transition Unclear but likely more 125% of population Mobile phone subscriptions: Nationwide telecom revenue: IT spending split Investors in telecom investments by private 147% USD15-17b or 6-7% GDP between government & infrastructure still mostly sector eg FPT VN via FPT Investors mostly state-owned private sector. No state-owned telcos such as Telecom companies for Investors mostly state-owned No clear guidance on opening official statistics but Viettel, Mobifone, Vinaphone. infrastructure/backbone companies for of sector to more investors, government said to have development infrastructure/backbone although government did agree spent more as private From 2016, all telcos are development to sell its 50.2% stake in FPT sector is not willing to required to contribute 1.5% of Telecom in 2015. This signalled spend much on IT revenue to public telco fund greater willingness to reduce regulation/control Investors in telecom infrastructure still mostly state-owned telcos such as Viettel, Mobifone, Vinaphone Internet/ Fixed broadband coverage: 4% Fixed broadband coverage: Fixed broadband coverage: 15- N.A. N.A. N.A. digitalization Internet penetration: 31% 6% 20%
Internet penetration: 48% Mobile broadband coverage: (2014 data) 35-40% Internet penetration: 55-60%
Water Still very much regulated by Less but still much regulated Operating structures as per N.A. N.A. USD3.3b for water supply municipal authorities. by municipal authorities. 2015. & treatment in cities Statistics very scarce and only. Money from inconsistent Huge water wastage, Ministry of Construction, officially 25% but unofficially Ministry of Resources & Investors mostly assigned city- 40%. Difference is mostly due Environment and Finnish owned water companies to absence of central government, a long-time database. Data collected & donor to water projects compiled by individual in Vietnam companies
Investors mostly assigned city-owned water companies, which then turn to partnerships with private investors. They retain controlling interest of half to two thirds of stakes
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Sector MKE View: Achievable Challenges Reasons & Response Opportunities
Communication Telecom 2016 could still be a slow year Fixed lines may be in permanent decline Still much regulated Not clear for telecom infrastructure Indirect opportunities via listed company FPT VN, spending. Ministry of IPO of Mobifone, 2nd largest and 2nd most which owns 45% of FPT Telecom. FPT wants to Information and profitable telco, scheduled for 2H16. No purchase a 50.2% stake in FPT telecom when the Communications spending details yet state divests. Divestment approved in 2H15. increased only 5.5% in 2015, 10% below plan. Awaiting more information on Mobifone IPO (2015 revenues USD1.4b, earnings USD330m) 5% CAGR in total spending over 2016-20
Internet/ 4G is next big thing this year Broadband Internet fixed-line subscriptions Vietnam aims to modernise IT infrastructure Broadband Internet fixed lines, digital services digitalisation may fall behind government target, if not with tax incentives as it considers this a "high 10% CAGR in total spending budgeted properly and invested on time tech" sector. However, as with telecom, over 2016-20 Internet infrastructure spending seems behind 4G launched in Hochiminh, Vung Tau and its potential as the spending is by state- Phu Quoc in Jan 2016. 3G not popular due owned enterprises, Mobifone, Vinaphone, to perceived slow speeds. Wifi more Viettel frequently used as widely free in cities
Water City/province-owned Water has to be sold to provincial water Liberalisation still slow Mostly funding opportunities for projects. Direct companies are granted companies for final distribution investment opportunities still limited. projects. They then sell stakes Water is still subsidised, even though to investors for funding but Poor water supply/distribution, mostly by subsidies have stopped for petroleum and normally retain 51% to 2/3 of state-owned enterprises, leads to power the shares. abnormally high wastage
Very low transparency
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Vietnam Infrastructure Facts & Forecasts Expenditure Sector State in 2010 Current State 2020 Targets 2015 2016 Forecasts (2016-2020) Housing Housing numbers scarce Housing numbers still scarce n/a n/a n/a n/a Urbanisation 17.5 sqm of residential floor 21.5 sqm of residential floor 25 sqm of residential floor per VND1,000,000b in gross 10% growth 10% CAGR per head per head head construction output
Investors mostly private- Investors mostly private- Investors mostly private-sector sector listed developers sector listed developers listed developers
Likely achievable due to more stable interest rates
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Sector MKE View: Achievable Challenges Reasons & Response Opportunities Housing Urbanisation Social housing driven by private Social housing, while aggressively led by Access to land and a confusing land-title Affordable social housing with higher quality, led by sector, with tax incentives private sector, might still be registry system are major impediments to private developers, should be where the greatest from government. Previously "undersupplied" in next 5-10 years, if increasing social-housing stock opportunities lie. Backed by mass demand and by state-owned developers government does not encourage more affordability with bad reputations for supply housing quality.
Guidance is often provided for social/affordable housing to promote accommodation for mass market eg minimum 20% area has to set aside for social housing for plots that are bigger than 10 ha
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Regional Offices
REGIONAL TAN Chi Wei, CFA Vishal MODI PHILIPPINES Suttatip PEERASUB (603) 2297 8690 [email protected] (91) 22 6623 2607 [email protected] (66) 2658 6300 ext 1430 Sadiq CURRIMBHOY • Power • Telcos • Banking & Financials Luz LORENZO Head of Research [email protected] Regional Head, Research & Economics (63) 2 849 8836 • Media • Commerce WONG Wei Sum, CFA (65) 6231 5836 [email protected] Abhijeet KUNDU [email protected] (603) 2297 8679 [email protected] • Strategy WONG Chew Hann, CA • Property (91) 22 6623 2628 [email protected] Sutthichai KUMWORACHAI • Utilities • Conglomerates • Telcos (66) 2658 6300 ext 1400 Regional Head of Institutional Research LEE Yen Ling • Consumer Lovell SARREAL [email protected] (603) 2297 8686 [email protected] (603) 2297 8691 [email protected] • Energy • Petrochem • Building Materials • Glove • Ports • Shipping Neerav DALAL (63) 2 849 8841 ONG Seng Yeow (91) 22 6623 2606 [email protected] [email protected] Regional Head of Retail Research CHAI Li Shin, CFA • Software Technology • Telcos • Consumer • Media • Cement Termporn TANTIVIVAT (65) 6231 5839 (603) 2297 8684 [email protected] (66) 2658 6300 ext 1520 [email protected] • Plantation • Construction & Infrastructure SINGAPORE Rommel RODRIGO [email protected] Ivan YAP (63) 2 849 8839 • Property TAN Sin Mui [email protected] (603) 2297 8612 [email protected] Gregory YAP Director of Research • Automotive • Semiconductor • Technology (65) 6231 5848 [email protected] • Conglomerates • Property • Gaming Jaroonpan WATTANAWONG (65) 6231 5849 [email protected] • SMID Caps • Ports/ Logistics (66) 2658 6300 ext 1404 Kevin WONG • Technology & Manufacturing • Telcos [email protected] Katherine TAN ECONOMICS (603) 2082 6824 [email protected] • Transportation • Small cap • REITs • Consumer Discretionary YEAK Chee Keong, CFA (63) 2 849 8843 Suhaimi ILIAS [email protected] LIEW Wei Han (65) 6231 5842 Chief Economist [email protected] • Banks • Construction VIETNAM (603) 2297 8676 [email protected] Singapore | Malaysia • Offshore & Marine LE Hong Lien, ACCA (603) 2297 8682 [email protected] • Consumer Staples Michael BENGSON Head of Institutional Research LEE Cheng Hooi Regional Chartist Derrick HENG, CFA (63) 2 849 8840 Luz LORENZO [email protected] (84) 8 44 555 888 x 8181 (603) 2297 8694 (65) 6231 5843 [email protected] Philippines [email protected] [email protected] • Transport • Property • REITs (Office) • Conglomerates (63) 2 849 8836 • Strategy • Consumer • Diversified • Utilities [email protected] Tee Sze Chiah Head of Retail Research Joshua TAN Jaclyn JIMENEZ (63) 2 849 8842 THAI Quang Trung, CFA, Deputy Manager, Tim LEELAHAPHAN (603) 2297 6858 [email protected] (65) 6231 5850 [email protected] [email protected] Institutional Research Thailand Cheah Chong Ling • REITs (Retail, Industrial) • Consumer (84) 8 44 555 888 x 8180 (66) 2658 6300 ext 1420 (603) 2297 8767 [email protected] John CHEONG, CFA [email protected] [email protected] (65) 6231 5845 [email protected] Arabelle MAGHIRANG • Real Estate • Construction • Materials JUNIMAN HONG KONG / CHINA • Small & Mid Caps • Healthcare (63) 2 849 8838 Chief Economist, BII [email protected] Le Nguyen Nhat Chuyen Howard WONG Head of Research Ng Li Hiang • Banks Indonesia (852) 2268 0648 (84) 8 44 555 888 x 8082 (62) 21 29228888 ext 29682 (65) 6231 5840 [email protected] [email protected] [email protected] • Banks THAILAND [email protected] • Oil & Gas - Regional • Oil & Gas Maria LAPIZ Head of Institutional Research Benjamin HO INDONESIA NGUYEN Thi Ngan Tuyen, Head of Retail Research STRATEGY Dir (66) 2257 0250 | (66) 2658 6300 ext 1399 (852) 2268 0632 [email protected] (84) 8 44 555 888 x 8081 Isnaputra ISKANDAR Head of Research [email protected] Sadiq CURRIMBHOY • Consumer & Auto [email protected] (62) 21 8066 8680 • Consumer • Materials • Ind. Estates • Food & Beverage • Oil&Gas • Banking Global Strategist Jacqueline KO, CFA [email protected] Sittichai DUANGRATTANACHAYA (65) 6231 5836 [email protected] (852) 2268 0633 [email protected] • Strategy • Metals & Mining • Cement • Consumer Staples & Durables (66) 2658 6300 ext 1393 TRINH Thi Ngoc Diep Willie CHAN Rahmi MARINA [email protected] Ka Leong LO, CFA (84) 4 44 555 888 x 8208 (62) 21 8066 8689 Hong Kong / Regional (852) 2268 0630 [email protected] • Services Sector • Transport [email protected] [email protected] (852) 2268 0631 [email protected] • Consumer Discretionary & Auto Yupapan POLPORNPRASERT • Technology • Utilities • Construction • Banking & Finance Mitchell KIM (66) 2658 6300 ext 1394 MALAYSIA (852) 2268 0634 [email protected] Aurellia SETIABUDI [email protected] PHAM Nhat Bich • Internet & Telcos (62) 21 8066 8691 • Oil & Gas (84) 8 44 555 888 x 8083 WONG Chew Hann, CA Head of Research [email protected] [email protected] Ning MA Tanawat RUENBANTERNG (603) 2297 8686 [email protected] • Property • Consumer • Manufacturing • Fishery • Strategy (852) 2268 0672 [email protected] (66) 2658 6300 ext 1395 • Insurance Pandu ANUGRAH [email protected] Desmond CH’NG, ACA (62) 21 8066 8688 • Banks & Diversified Financials NGUYEN Thi Sony Tra Mi Stefan CHANG, CFA (603) 2297 8680 [email protected] (84) 8 44 555 888 x 8084 (852) 2268 0675 [email protected] Sukit UDOMSIRIKUL Head of Retail Research [email protected] • Infra • Construction • Transport• Telcos [email protected] • Banking & Finance • Technology (66) 2658 6300 ext 5090 • Port operation • Pharmaceutical Warren LAU Janni ASMAN [email protected] • Food & Beverage LIAW Thong Jung (62) 21 8066 8687 (852) 2268 0644 [email protected] Mayuree CHOWVIKRAN (603) 2297 8688 [email protected] [email protected] • Technology – Regional (66) 2658 6300 ext 1440 • Oil & Gas Services- Regional • Cigarette • Healthcare • Retail TRUONG Quang Binh [email protected] (84) 4 44 555 888 x 8087 ONG Chee Ting, CA INDIA Adhi TASMIN • Strategy [email protected] (603) 2297 8678 [email protected] (62) 21 8066 8694 Jigar SHAH Head of Research Padon VANNARAT • Rubber plantation • Tyres and Tubes • Oil&Gas • Plantations – Regional [email protected] (91) 22 6623 2632 [email protected] (66) 2658 6300 ext 1450 Mohshin AZIZ • Plantations • Oil & Gas • Automobile • Cement [email protected] (603) 2297 8692 [email protected] Anthony LUKMAWIJAYA • Strategy • Aviation - Regional • Petrochem (62) 21 8066 8690 Anubhav GUPTA Surachai PRAMUALCHAROENKIT [email protected] YIN Shao Yang, CPA (91) 22 6623 2605 [email protected] (66) 2658 6300 ext 1470 (603) 2297 8916 [email protected] • Aviation • Metal & Mining • Capital Goods • Property [email protected] • Gaming – Regional • Media • Auto • Conmat • Contractor • Steel
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Definition of Ratings Maybank Kim Eng Research uses the following rating system BUY Return is expected to be above 10% in the next 12 months (excluding dividends) HOLD Return is expected to be between - 10% to +10% in the next 12 months (excluding dividends) SELL Return is expected to be below -10% in the next 12 months (excluding dividends)
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Malaysia Singapore London New York Maybank Investment Bank Berhad Maybank Kim Eng Securities Pte Ltd Maybank Kim Eng Securities Maybank Kim Eng Securities USA (A Participating Organisation of Maybank Kim Eng Research Pte Ltd (London) Ltd Inc Bursa Malaysia Securities Berhad) 50 North Canal Road 5th Floor, Aldermary House 777 Third Avenue, 21st Floor 33rd Floor, Menara Maybank, Singapore 059304 10-15 Queen Street New York, NY 10017, U.S.A. 100 Jalan Tun Perak, London EC4N 1TX, UK 50050 Kuala Lumpur Tel: (65) 6336 9090 Tel: (212) 688 8886 Tel: (603) 2059 1888; Tel: (44) 20 7332 0221 Fax: (212) 688 3500 Fax: (603) 2078 4194 Fax: (44) 20 7332 0302
Stockbroking Business: Hong Kong Indonesia India Level 8, Tower C, Dataran Maybank, Kim Eng Securities (HK) Ltd PT Maybank Kim Eng Securities Kim Eng Securities India Pvt Ltd No.1, Jalan Maarof nd Level 30, Sentral Senayan III, 22 Floor 2nd Floor, The International, 59000 Kuala Lumpur Three Pacific Place, Jl. Asia Afrika No. 8 16, Maharishi Karve Road, Tel: (603) 2297 8888 1 Queen’s Road East, Gelora Bung Karno, Senayan Churchgate Station, Fax: (603) 2282 5136 Hong Kong Jakarta 10270, Indonesia Mumbai City - 400 020, India
Tel: (852) 2268 0800 Tel: (62) 21 2557 1188 Tel: (91) 22 6623 2600 Fax: (852) 2877 0104 Fax: (62) 21 2557 1189 Fax: (91) 22 6623 2604
Philippines Thailand Vietnam Saudi Arabia Maybank ATR Kim Eng Securities Inc. Maybank Kim Eng Securities Maybank Kim Eng Securities Limited In association with 17/F, Tower One & Exchange Plaza (Thailand) Public Company Limited 4A-15+16 Floor Vincom Center Dong Anfaal Capital Ayala Triangle, Ayala Avenue 999/9 The Offices at Central World, Khoi, 72 Le Thanh Ton St. District 1 Villa 47, Tujjar Jeddah Makati City, Philippines 1200 20th - 21st Floor, Ho Chi Minh City, Vietnam Prince Mohammed bin Abdulaziz Rama 1 Road Pathumwan, Street P.O. Box 126575 Tel: (63) 2 849 8888 Bangkok 10330, Thailand Tel : (84) 844 555 888 Jeddah 21352 Fax: (63) 2 848 5738 Fax : (84) 8 38 271 030 Tel: (66) 2 658 6817 (sales) Tel: (966) 2 6068686 Tel: (66) 2 658 6801 (research) Fax: (966) 26068787
South Asia Sales Trading North Asia Sales Trading Kevin Foy Andrew Lee Regional Head Sales Trading [email protected] [email protected] Tel: (852) 2268 0283 Tel: (65) 6336-5157 US Toll Free: 1 877 837 7635 US Toll Free: 1-866-406-7447
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ASEAN Infrastructure: THE NEW OLD THING
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