Asian Insights SparX KL-SG High Speed Rail Refer to important disclosures at the end of this report DBS Group Research . Equity 27 Jun 2019 KLCI : 1,676.61 Riding the HSR revival Success of Bandar Malaysia hinges on HSR Analyst Tjen San CHONG, CFA +60 3 26043972 [email protected] Holistic project financing is key QUAH He Wei, CFA +603 2604 3966 [email protected] Strong catalyst to revitalise property market STOCKS Top picks – IJM Corp, Gamuda, Matrix Concepts 12-mth HSR revival. Two key events unfolded in 2Q19 which could pave the Price Mkt Cap Target Price Performance (%) way for the recommencement of the Kuala Lumpur (KL)-Singapore(SG) RM US$m RM 3 mth 12 mth Rating high-speed rail (HSR) project in May 2020. First, MyHSR Corp called for a Technical Advisory Consultant (TAC) and a Commercial Advisory Gamuda 3.62 2,165 4.30 27.5 11.0 BUY Consultant (CAC) tender. Second is the revival of the Bandar Malaysia. IJM Corp 2.40 2,108 2.55 8.6 32.6 BUY Muhibbah 2.77 323 3.55 (6.1) (9.5) BUY The revival would be timely for construction as it will ensure a growth WCTEngineering Holdings Bhd 1.05 358 1.37 30.6 33.0 BUY agenda during the mid-term of the PH-led government. From an Kimlun Corp 1.40 113 2.16 15.7 2.9 BUY economic standpoint, the project would appear feasible given that the Sunway 2.02 631 1.91 9.2 8.6 HOLD KL-SG flight route remains the world’s busiest. MMCConstruction Corporation Group 1.13 833 1.49 10.8 (13.1) BUY Sunway Bhd 1.68 1,984 1.60 1.0 5.4 HOLD Holistic financing is key. We think the structure of the HSR project UEM Sunrise Bhd 0.82 896 0.85 (1.2) 14.0 HOLD (AssetsCo, InfraCo) and Opco) will be intact. However, the PDP Matrix Concepts 1.91 364 2.40 1.1 (5.5) BUY structure will likely be removed. The two key differentiating factors for Holdings Bhd contractors will be; i) experience and, ii) balance sheet strength. Larger Source: AllianceDBS, Bloomberg Finance L.P. contractors - Gamuda, IJM, YTL and Sunway Construction will be top contenders. We foresee strategic joint ventures (JVs) between some of Closing price as of 25 Jun 2019 these contractors and potentially foreign contractors/financiers. Landowners to benefit from proposed HSR stations The Indonesian experience. We conducted a case study of the Jakarta- Proposed station Company Land bank (acre) Bandung HSR project which was delayed for two years. However, the Ekovest, Iskandar Bandar Malaysia 485 structure of the KL-SG HSR project is different where foreign funding is Waterfront City only likely for the AssetsCo which receives a fixed train lease fee and takes no ridership risk. Also, Section 4 (Act 486) of the Land Act states Sepang-Putrajaya IOI Properties 310 that compulsory land acquisition for public purposes cannot be objected. Seremban Sime Darby Property 3,196 Revitalisation of property market. As the first cross-border HSR in Matrix Concepts 1,450 ASEAN, the huge income disparity between Malaysia and Singapore Melaka IOI Properties 1,070 could lead to significant economic spillover impact to less developed cities in Malaysia along the proposed HSR alignment. This is due to Muar Sime Darby Property 3,300 huge cost savings potential and shorter travelling time. Seremban and Batu Pahat Genting Plantations 600 Iskandar Puteri could see the highest migration and population growth, which in turn could result in appreciation of property prices. Our Iskandar Puteri UEM Sunrise 2,200 property proxies for HSR developments are Matrix Concepts Holdings, KL Kepong 501 Sunway and UEM Sunrise. This is by virtue of their large land bank within close vicinity to the proposed HSR stations. Sunway 1,079 Source: AllianceDBS, Bloomberg Finance L.P. ed: KK/ sa: WMT, PY, CS Asian Insights SparX KL-SG High Speed Rail The DBS Asian Insights SparX report is a deep dive look into thematic angles impacting the longer term investment thesis for a sector, country or the region. We view this as an ongoing conversation rather than a one off treatise on the topic, and invite feedback from our readers, and in particular welcome follow on questions worthy of closer examination. Table of Contents KL-SG HSR – An introduction 3 KL-SG HSR: POTENTIAL MIGRATION IMPACT ON PROPERTY VALUE AND CONSTRUCTION BENEFICIARIES 6 POTENTIAL CONSTRUCTION BENEFICIARIES 9 JAKARTA-BANDUNG HSR CASE STUDY 11 FINANCING 13 IMPACT ON PROPERTY MARKET 14 - Malaysian property market needs to be revitalised - Strong impetus to lift economic developments? - Commercial development – Greater KL - Industrial development – Johor - Tourism – Melaka - Residential migration – Transit-oriented developments KEY RISKS 27 VALUATION AND SECTOR COMPARISON (CONSTRUCTION) 28 VALUATION AND SECTOR COMPARISON (PROPERTY) 29 Company Guides 30 Note: Prices used as of 25 June 2019 Page 2 Asian Insights SparX KL-SG High Speed Rail KL-SG HSR: AN INTRODUCTION cost, provide updated ridership forecasts and assessments of the HSR’s benefits. HSR pre-GE14. The initial idea for the KL-SG HSR project took a more concrete shape when leaders of both countries met at a Second is the revival of the Bandar Malaysia project. On 19 April leaders’ retreat in October 2013. The idea was explored between 2019, Mahathir announced that the Bandar Malaysia project will both nations in the 1990s and was on the cusp of coming to be revived but with some changes. The original master fruition until the conclusion of Malaysia’s 14th General Elections developer, a consortium of Iskandar Waterfront Holdings Bhd (GE14) in May 2018. After the new government took over, this and China Railway Engineering Corp Sdn Bhd (IWH-CREC), had project was postponed until May 2020. 60 days to pay the original deposit sum of RM741m with an additional RM500m.The plan will also now include 10,000 In September 2018, both Malaysia and Singapore agreed to affordable housing units, a people’s park, Bumiputra (indigenous postpone the construction of the project until May 2020. Malays) participation throughout the project, and priority for Malaysia' Minister of Economic Affairs Datuk Seri Azmin Ali and local content and materials. Singapore Transport Minister Khaw Boon Wan exchanged legal documents pertaining to this, postponing the start of HSR’s Economic Affairs Minister Azmin added that the revived Bandar operations to 1 Jan 2031 instead of 31 December 2026. Malaysia project will be driven by the private sector and not receive government funding. The key focus of this project is to According to a study, the economic benefits of the HSR is make Malaysia a financial hub, apart from the other commercial estimated at RM 21bn of Gross Domestic Product (GDP) in the and residential content. year 2060 with 442,000 jobs created. This is on top of the multiple benefits of its construction estimated at RM 70bn, with Bandar Malaysia and HSR go hand in hand. In our view, the direct and indirect GDP impact of RM 29bn. It is estimated that success of Bandar Malaysia hinges on transport connectivity. the service will carry 22m passengers in year 10 of operations for Bandar Malaysia was initially earmarked for the HSR terminus all travel routes. (starting point). There were also supposed to be two underground stations at Bandar Malaysia for MRT2 before this HSR post-GE14. The Prime Minister of Malaysia Tun Mahathir was put on hold. The revival of Bandar Malaysia will likely be a Mohamad said in early April 2019 that he was exploring precursor to the eventual continuation of the HSR project in May proposals to reduce HSR’s total cost. He admitted that the 2020. project has potential economic benefits for both countries but it has to be feasible and sustainable. Further delays mean more compensation. The key question now is if the Singapore government will allow further deferment of However, in mid-April he changed his tune somewhat, focusing this project beyond May 2020 without additional compensation on improving the existing railway system through electrification from Malaysia. So far, Malaysia has paid Singapore SGD15m in and double tracking. His main rationale is that the HSR service compensation for the project’s delay. Any further delays would should be for travel of more than six hours, such as services from likely lead to much larger compensation. Johor to Penang, or even Thailand. Structure of HSR largely intact. The bulk of the project’s structure Is revival of HSR imminent? In our view, the revival of the HSR will still be relatively intact. However, financing and cost structure looks imminent given two key events in 2Q19. First, MyHSR will likely take precedence. In this report, we will attempt to sought a TAC via an open tender. This TAC will be tasked to make reasonable guesstimates on how the new government will review the technical aspects and recommendations following the structure this project. However, much of the report is still based Malaysian government’s revisions including alignment, stations on the previous structure. We believe the entity that offers the and HSR maintenance, as well as on the ground data collection most holistic financing solution for this project will have an upper activities such as topography survey data, soil investigation and hand. ground condition assessments. In May 2018, MyHSR called for a tender to appoint a commercial advisory consultant (CAC). The CAC will be required to develop a new business model that will enable optimal project life-cycle Page 3 Asian Insights SparX KL-SG High Speed Rail HSR offers shortest travel time Malaysia-Singapore HSR alignment Source: MyHSR Three services.