HLIB Research PP 9484/12/2012 (031413)

Construction (Overweight ) INDUSTRY INSIGHT 15 May 2017

The rail deal Highlights . Mega rail projects on the cards. We have identified 4 mega rail Jeremy Goh, CFA projects that will be rolled out over the next 2-3 years. These [email protected] include the East Coast Rail Link (ECRL), KL-Singapore High Speed (603) 2168 1138 Rail (HSR), -JB Electrified Double Track (EDT) and MRT3

Circle Line. Collectively, these mega rail projects will have a total cost of RM171bn. KLCON Index (341.7 pts) Pts Pts . ECRL: The eastern link. The 600km ECRL (RM55bn) will link 350.0 1800

Kelantan, Terengganu, and . Financing of will 330.0 1750 come from EXIM while CCCC will lead the 310.0 1700 construction works. SPAD has given its conditional approval for the 290.0 1650 ECRL which is now undergoing a 3 month public inspection. Final approval is targeted for June and construction is to begin in July. 270.0 1600 250.0 1550 . HSR: 2 nations, 1 journey. In Dec 2016, and Singapore KLCON (LHS) KLCI (RHS) 230.0 1500 inked a bilateral agreement to implement the 350km HSR. The JDP May-16 Jul-16 Oct-16 Dec-16 Feb-17 May-17 has been appointed and tenders for the asset company will be

called by year end while the infra works are expected in 1Q18. Stock Rating Price Target Media reports have placed the HSR’s cost at RM60bn. Gamuda BUY 5.40 5.74 . Gemas-JB EDT: The final stretch. The Gemas-JB section IJM BUY 3.54 3.91 (191km) is the final EDT stretch from the north to s outh of the MRCB Under Review 1.73 n.a. GKent BUY 4.18 4.73 Peninsular. A consortium of 3 state owned Chinese contractors was awarded the RM9bn job in Oct 2016. Work has yet to start due to issues with the state authorities.

. MRT3: Orbital link. Also dubbed the Circle Line, MRT3 will largely be underground, providing interchange stations with other radial rail lines (wheel and spooks concept). Currently at a feasibility study stage, the 45-48km MRT3 is said to cost RM50bn.

Risks . A pull out of Chinese investments and/or funding would impact some of these mega rail projects (e.g. ECRL and Gemas -JB EDT).

Rating Maintain OVERWEIGHT . While the bulk of these mega rail projects will be led by foreign contractors, we estimate that 39% could be undertaken by locals, potentially generating RM67bn worth of job flows. The significance of these mega rail projects to the construction sector should not be underestimated. To illustrate, domestic job wins to listed contracts hit a high of RM28bn in 2012 and RM56bn in 2016 when the MRT1 and MRT2 was rolled out.

Stock . Gamuda: Strong track record in rail jobs such as the Kaohsiung Picks MRT, Northern EDT, MRT1 and MRT2. Targets to add RM10bn to orderbook over the next 1-2 years from these rail jobs. . GKent: Only local player with expertise in rail related systems. Has experience with Ampang LRT extension systems, LRT3 PDP and MRT2 track works. . IJM: Beneficiary of ECRL via 60% stake in Port and 20% stake in MCKIP (industrial park). ECRL will have a station at Kuantan Port while MCKIP is located 12km away. . MRCB: In negotiations to develop a transport terminal for the HSR at Bandar Malaysia. Can leverage on its track record in Transit Oriented Developments (TODs).

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Prelude

The rail deal

History of mega rail projects. Several mega rail projects have been implemented in RM86bn worth of rail Malaysia over the past decade. Amongst these include the Electrified Double Track projects implemented in the from to Besar (RM12.5bn) and from Seremban to Gemas (RM3.5bn). past decade More urban rail networks were also constructed such as the LRT extension for both the Ampang and Kelana lines (RM7bn), LRT3 from Bandar Utama to (RM9bn), MRT1 Sg Buloh to (SBK Line) (RM22bn) and MRT2 Sg Buloh to Serdang to Putrajaya (SSP Line) (RM32bn).

More on the cards. Looking ahead, we have identified another 4 mega rail projects that are set to be rolled out over the next 2-3 years. Collectively, these 4 mega rail jobs 4 upcoming mega rail will have a staggering cost of RM171bn with total length of 1,189km. These include the projects worth RM171bn to East Coast Rail Link (ECRL), KL-Singapore High Speed Rail (HSR), Gemas-JB be rolled out… Electrified Double Track (EDT) and MRT3 Circle Line. While work has yet to commence for these 4 mega rail projects, most of them are at a pretty advanced planning stage to be rolled out. For example, (i) the main construction contract for the ECRL and Gemas-JB EDT has been awarded to Chinese contractors, (ii) both Malaysia and Singapore have inked a bilateral agreement for the HSR and (iii) feasibility studies are underway for the MRT3.

Figure #1 Upcoming mega rail projects Rail Project Type Length (km) Cost (RM bn) East Coast Rail Link Electrified Double Track 600 55 KL Singapore High Speed Rail High Speed Rail 350 57

Gemas-JB Double Track Electrified Double Track 191 9

MRT3 Circle Line Mass Rapid Transit 48 50 Total 1,189 171 HLIB estimates

Boost for contractors. Whilst the bulk of the works will be undertaken by foreigners, …potentially generating we conservatively estimate that these 4 mega rail projects could generate RM67bn RM67bn worth of work for (39% of contract value) worth of job flows to local contractors. To illustrate the local contractors significance of these mega rail projects, domestic contract awards to listed contractors hit a high of RM28bn in 2012 and RM56bn in 2016 when the MRT1 and MRT2 were rolled out respectively.

Figure #2 Domestic contract awards to listed contractors (RM bn)

60 56.4

50

40

30 28.0 21.9 20 17.9 15.6 15.4 11.9 10.0 10

0 2009 2010 2011 2012 2013 2014 2015 2016

HLIB compilation from Bursa announcements

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Highlights

East Coast Rail Link

Enabler for the east coa st. The East Coast Rail Link (ECRL) was first mooted during RM55bn ECRL will be the the tabling of Budget 2017. It has been identified as a high impact project aimed to largest EDT project in M’sia stimulate economic growth in the East Coast Economic Region (ECER) which covers an area of over 60,000 sq km. This will be done by linking the eastern Peninsular states of , Terengganu and Pahang to the western side at Selangor. At a cost of RM55bn, the ECRL will be the largest double tracking project in Malaysia.

Figure #3 Proposed alignment of the ECRL

Malaysia Rail Link

Ea stern connectivity. With a total length of 600.3km (including 65.9km in spur lines), the ECRL will have 23 stations (4 provisional). The rail line will link key cities including Connecting eastern states to Kota Bahru, , Cherating, Kuantan and Gombak as well as industrial Selangor in the west parks such as Kemaman, Kerteh and the upcoming Kuantan Port City. It will also connect to the KTM line in Wakaf Bahru and and Kelana LRT in Gombak. Roughly 50km of the ECRL’s alignment will involve hill and underground tunnelling with the single longest stretch from Gombak to Bentong (18km). End-to-end travel time via ECRL will take 4 hours compared to 10 hours currently via road.

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Malaysia-China bilateral effort. Malaysia Rail Link (MRL), which comes under the Financing and construction Ministry of Finance (MoF), was recently set up to oversee the implementation of the led by China ECRL. Upon completion, MRL will also be the operator and owner of the ECRL. In Nov 2016, a financing and EPC agreement was inked between Malaysia and China. Under the agreement, (i) the latter would provide financing for the project via Export-Import Bank of China and (ii) state owned China Communications Construction Company (CCCC) will lead the construction works.

Subcontract opportunity for locals. While CCCC will lead the ECRL’s construction, 30% of ECRL works could we see ample opportunities for local contractors to participate via subcontracts. Part of flow back to local the mutual agreement between Malaysia and China on the ECRL is to ensure some contractors degree of local participation by the former. Earlier in Jan, CCCC stated that it will call tenders soon for local contractors to participate in the ECRL. We understand that as much as 30% of the ECRL’s value could be earmarked for local participation. If so, the ECRL would present RM16.5bn in potential job flows for local contractors to undertake.

Timeline ahead. The ECRL has received conditional approval from the Land Public Undergoing public Transport Commission (SPAD) and is currently undergoing a 3-month (March to June) inspection; tenders in July public inspection for its proposed alignment. Should all go well, the final alignment is expected to be approved by end June and construction tenders to begin in July. The entire project is targeted for completion by July 2024 over a 7 year construction period.

Figure #4 Implementation timeline for ECRL

Malaysia Rail Link

KL-Singapore High Speed Rail

2 nations, 1 journey. The KL-Singapore High Speed Rail (HSR) is a strategic project between the governments of Malaysia and Singapore that aims to facilitate s eamless M’sia and S’pore agree to travel between the two capital cities. It will have a length of 350km, 335km of which will build HSR be in Malaysia and 15km in Singapore with 2 tracks in opposite directions. There will be a total of 8 stops at Singapore, , Batu Pahat, , , Seremban, Putrajaya and Bandar Malaysia. Both countries have agreed to construct and maintain the HSR within their own boundaries. This will be implemented by MyHSR Corp (a MoF subsidiary) and the Land Transport Authority (LTA) for Singapore.

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Figure #5 Proposed alignment of the HSR

Channel News Asia

Speeding up travel time. Existing train travel between KL and Singapore currently Fastest point-to-point travel takes up to 11 hours. This will be significantly reduced to just 90 minutes via HSR via HSR which is capable of hitting a maximum speed of 300km/h. Currently, the fastest mode of transportation between the CBD of both cities is via plane which has a point -to-point travel time of 4.2 hours. With the HSR, this will be shortened to just 2.5 hours . To facilities seamless travel, there are plans to co-locate the customs, immigration and quarantine (CIQ) checkpoints of both nations at Singapore, Puteri Iskandar and

Bandar Malaysia.

Figure #6 Point-to-point travel time between KL and Singapore

SPAD

Plans gaining traction. In July 2016, Malaysia and Singapore signed a Memorandum of Understanding (MoU) for the HSR followed by a bilateral agreement in Dec. Bilateral agreement signed; Subsequently in Feb 2017, the consortium comprising WSP Engineering, Mott JDP appointed MacDonald and Ernst & Young Advisory was appointed as the Joint Development Partner (JDP) for the HSR. As JDP, the consortium will provide project management, technical advice and develop safety standards for the HSR. It will also help MyHSR and LTA to prepare tender documents for the job. Checks on MyHSR’s website reveal that apart from the JDP’s appointment, 7 other contracts have also been dished out related to civil consultancy and technical advisory services.

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What lies ahead? Earlier this month, MyHSR CEO Mohd Nur Ismail said that the Tenders for AssetsCo by year government will call for a tender by year end to set up a privately financed asset end, infra by 1Q18 company (AssetsCo) for the HSR. AssetsCo will be responsible for the design, build, finance, operate and maintain the rolling stock and rail assets. Following this, infra tenders are expected to be called in 1Q18 with construction period until 2025. The HSR is targeted to commence operations in 2026.

Figure #7 Implementation timeline for the HSR

Channel News Asia

Local participation required. While no official figures on the HSR’s cost has been RM23bn worth of contract divulged, media reports have placed the price tag at RM60bn. This would translate into a per km cost of RM171m and based on this, the Malaysia stretch at 335km would be opportunities for locals worth RM57bn. MyHSR CEO recently commented that there has been a lot of international interest to bid for the infra tenders. He also added that foreign bidders are required to ensure a 40% content so local businesses can benefit. Under this scenario, the HSR should then generate RM23bn worth of job flow opportunities for local contractors to undertake.

Gemas-JB Electrified Double Track

Final part of the stretch. The idea of the Southern Electrified Double Track (EDT) Gemas-JB is the final stretch from Seremban to Bahru (JB) was mooted back in 2002. Construction of the first of the EDT from north to section from Seremban to Gemas, undertaken by India-based Ircon, began in 2008 south and was completed in 2013. Implementation of the stretch from Gemas to JB would complete the Southern EDT which also means that the entire rail line from JB to Padang Besar in the northern Peninsular woul d be double tracked. The proposed Gemas-JB EDT will span 191km with 9 stations. Upon completion, travel time from JB to KL will be reduced from 6 to 3.5 hours.

Figure #8 Past electrified double tracking projects in Malaysia

Double Track Railway Contractor Completed Length Cost (year) (km) (RM bn)

Rawang to Ipoh DRB-Hicom, Mitsui 2008 179 4.9

Sentul-Port Klang ext to Batu Caves YTL Corp 2010 7 0.5

Ipoh to Padang Besar MMC-Gamuda JV 2014 329 12.5 Seremban to Gemas Ircon 2013 94 3.5 Wikipedia

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Figure #9 Proposed alignment of the Gemas-JB EDT

The Star

Chinese consortium appointed. Public inspection and feedback on the Gemas-JB Consortium of 3 state owned EDT was conducted between Oct 2015 and Jan 2016 which received a 99.6% Chinese contractors approval for the project. Subsequently in Oct 2016, the Ministry of Transport awarded appointed the RM8.9bn project to a consortium of 3 Chinese state owned contractors – China

Railway Construction Corp (CRCC) (40%), China Railway Engineering Corp (CREC)

(30%) and CCCC (30%). A ground breaking ceremony for the project was scheduled for Dec 2016 but this was delayed due to certain issues with the state authorities.

Locals to participate. Although the Gemas-JB EDT will be undertaken by a Chinese consortium, CRCC has confirmed that the government would like to see 30% of the 30% of the works to go to works awarded to local contractors. If so, this would create RM2.7bn worth of contracts locals for them to undertake. CRCC also mentioned that SIPP Railway (a private vehicle controlled by the Sultan of Johor) will be the consortium’s local partner for the job, which will together appoint the respective local subcontractors.

MRT3 Circle Line

Circle line will be next. MRT3 is the last of the 3 lines that was proposed under MRT3 to provide interchange Greater KL’s MRT network. The MRT1 (SBK Line) will be fully operational in July 2017 points to other radial rail while construction has just started for the MRT2 (SSP Line). Also dubbed as the Circle lines Line, MRT3 will integrate all the other radial rail lines from the MRT, LRT, Monorail and KTM via its orbital alignment, commonly known as the “wheel and spokes” concept.

Still at the drawing board. In Sept 2016, MRT Corp mentioned that it had appointed Largely underground with and independent consultant to carry out an engineering feasibility study for the project estimated cost of RM50bn which was supposed to be completed in 1Q17. Although the exact alignment has not been finalised, it is said to cover key areas such as , KLCC, Bukit Bintang, TRX, Bandar Malaysia, KL Ecocity, Pusat Bandar Damansara, Mont Kiara and Sentul. MRT Corp also stated that the MRT3 will be largely underground as it will pass through areas with many high rise buildings. Media reports have stated that the MRT3 could span 45-48km in length and cost RM50bn to build.

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Figure #10 Rough alignment of MRT Circle Line by SPAD

SPAD

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Rating & Stock Picks

We believe that the rollout of these 4 mega rail projects will provide a significant boost Maintain OVERWEIGHT on to contract flows and hence maintain our OVERWEIGHT rating on the sector. Names construction that are expected to benefit from these mega rail projects include Gamuda (rail civil works), GKent (rail systems), IJM (Kuantan Port and MCKIP) and MRCB (TODs).

Gamuda (BUY, TP: RM5.74)

Gamuda has extensive rail Having undertaken jobs such as the Kaohsiung MRT (RM400m), Northern EDT experience (RM6bn), MRT1 (RM22bn) and MRT2 (RM32bn), we view Gamuda one of the prime beneficiaries from the upcoming mega rail projects. Its strong delivery as PDP and tunnelling contractor for MRT1 and MRT2 should place it a polar position to reprise its role as both PDP and tunnelling contractor for the MRT3. With its track record in mountain tunnelling involving the Berapit Tunnel (Northern EDT) and Penchala Tunnel (SPRINT Highway), we believe Gamuda stands a good chance to participate in the ECRL which cuts through the mountainous Titiwangsa range. Excluding the MRT3, management is gunning to add RM10bn to its current orderbook (RM17bn including PDP) over the next 2 years which includes the ECRL and Gemas-JB EDT.

George Kent (BUY, TP: RM4.71)

GKent is the only local player with expertise in rail related systems . It previously GKent has expertise in rail undertook the system works for the Ampang LRT extension (RM1.4bn). GKent is sytems currently the PDP (JV with MRCB) for the LRT3 (RM9bn) and is also executing the track works (JV with CCCC) for the MRT2 (RM1bn). Management highlighted that it will continue to focus on system related works and is eyeing on all of the 4 upcoming mega rail projects.

IJM Corporation (BUY, TP: RM3.91)

IJM has a 60% stake in Kuantan Port (KP) which is currently undergoing a 50% IJM to benefit from ECRL via capacity expansion from 26m to 39m tonnes. As one of the ECRL’s stations will be Kuantan Port and MCKIP located at Kuantan Port, this should benefit them in terms of cargo throughput. This benefit will be more prevalent should the ECRL be extended all the way to Port Klang which is part of the long term plan. If this happens, cargo can be transported from Port Klang to Kuantan Port via rail and subsequently shipped out instead of having to make a loop around Singapore Port to reach the South China Sea. Apart from that, IJM also has a 20% effective stake in the Malaysia China Kuantan Industrial Park (MCKIP) which is located 12km from Kuantan Port. Implementation of the ECRL with a station in Kuantan Port should help to further encourage more industries to set up shop in MCKIP. Lastly, we also view IJM as a beneficiary of the mega rail projects via potential construction job flows. In terms of rail track record, IJM has undertaken jobs such as the Seremban-Gemas EDT (RM343m), MRT1 (RM975m) and MRT2 (RM1.5bn).

Malaysian Resource Corporation (Under Review)

We see MRCB as a beneficiary of the upcoming mega rail projects by virtue of its MRCB to leverage on its expertise in Transit Oriented Developments (TODs). MRCB’s experience with TODs speciality in TOD includes KL Sentral, PJ Sentral, Sentral and Kwasa Damansara. It was recently reported that a consortium led by MRCB is in negotiations to build an integrated transport terminal in Bandar Malaysia to cater for the HSR. The transport terminal will provide an integration point between the HSR with the MRT2, MRT3, KTM and ERL. According to the masterplan, some 11-12% (55-60 acres) of Bandar

Malaysia’s land has been earmarked for the transport terminal. It was also reported that while IW H-CREC has been terminated as the master developer for Bandar

Malaysia, this will not impact the transport terminal as MRCB is in direct negotiations with the MoF to implement the project.

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Figure #11 Peer comparison Mkt Cap Price Target P/E P/B ROE Yield Stock Rating FYE (RM m) (RM) (RM) CY16 CY17 CY16 CY17 (CY17) (CY17) Gamuda 13,142 5.40 5.74 BUY July 18.1 15.8 1.8 1.6 9.9% 2.2% IJM 12,801 3.54 3.91 BUY Mar 20.8 18.1 1.3 1.3 6.5% 1.9% Under MRCB 3,765 1.73 n.a. Dec 58.0 44.6 1.5 1.5 2.4% 0.5% Review GKent 1,570 4.18 4.73 BUY Jan 16.8 14.8 3.9 3.4 23.3% 3.0% HLIB estimates For companies with non-Dec FYE, financials have been calendarised.

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Disclaimer

The information contained in this report is based on data obtained from sources believed to be reliable. However, the data and/or sources have not been independently verified and as such, no representation, express or implied, is made as to the accuracy, adequacy, completeness or reliability of the info or opinions in the report.

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This research report is being supplied to you on a strictly confidential basis solely for your information and is made strictly on the basis that it will remain confidential. All materials presented in this report, unless specifically indicated otherwise, is under copyright to Hong Leong Investment Bank Berhad. This research report and its contents may not be reproduced, stored in a retrieval system, redistributed, transmitted or passed on, directly or indirectly, to any person or published in whole or in part, or altered in any way, for any purpose. This report may provide the addresses of, or contain hyperlinks to, websites. Hong Leong Investment Bank Berhad takes no responsibility for the content contained therein. Such addresses or hyperlinks (including addresses or hyperlinks to Hong Leong Investment Bank Berhad own website material) are provided solely for your convenience. The information and the content of the linked site do not in any way form part of this report. Accessing such website or following such link through the report or Hong Leong Investment Bank Berhad website shall Published & Printed by be at your own risk. Hong Leong Investment Bank Berhad (10209-W) 1. As of 15 May 2017, Hong Leong Investment Bank Berhad has proprietary interest in the Level 23, Menara HLA No. 3, Jalan Kia Peng following securities covered in this report: 50450 (a) -. Tel 603 2168 1168 / 603 2710 1168 Fax 603 2161 3880 2. As of 15 May 2017, the analysts, Jeremy Goh, who prepared this report, have interest in the following securities covered in this report: (a) -.

Equity rating definitions BUY Positiv e recommendation of stock under coverage. Expected absolute return of more than +10% ov er 12-months, with low risk of sustained downside. TRADING BUY Positiv e recommendation of stock not under coverage. Expected absolute return of more than +10% ov er 6-months. Situational or arbitrage trading opportunity . HOLD Neutral recommendation of stock under coverage. Expected absolute return betw een -10% and +10% over 12-months, with low risk of sustained downside. TRADING SELL Negativ e recommendation of stock not under coverage. Expected absolute return of less than -10% ov er 6-months. Situational or arbitrage trading opportunity. SELL Negativ e recommendation of stock under coverage. High risk of negative absolute return of more than -10% ov er 12-months. NOT RATED No research coverage and report is intended purely for informational purposes.

Industry rating definitions OVERWEIGHT The sector, based on weighted market capitalization, is expected to have absolute return of more than +5% ov er 12-months. NEUTRAL The sector, based on weighted market capitalization, is expected to have absolute return betw een –5% and +5% over 12-months. UNDERWEIGHT The sector, based on weighted market capitalization, is expected to have absolute return of less than –5% ov er 12-months.

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