Study Visit Note

21 March 2019

East Study Trip East Malaysia Theme Play, The Next Big Bet? By Adrian Ng l [email protected] ; Nor Nazirah l [email protected]

Recently, we made a study trip to East Malaysia covering , Kuching, Bintulu including the Samalaju Industrial Park to investigate the progress of on- going developments as well as potential prospects in the above-mentioned cities. During our trip, we visited key players for meetings with their management and conducted site visits to Borneo Highway PDP, SURIA, GBGAQRS, Energy, CMS, NAIM, KKB, BIPORT, SERBA, PMETAL, and OM Sarawak. On the Pan Borneo highway which consists of 35 work packages in total, we foresee delay in the execution due to lingering issues like land acquisitions, relocations, and work coordination. As for updates on the Sarawak Pan Borneo highway; it is currently progressing with more traction at an overall progress of c.35% which we deem to be encouraging for a mega project with limited resources and logistic challenges. An interesting observation we gathered during our trip to Sarawak is the state government’s support in growing their local companies. Hence, we believe that local Sarawak players like Sarawak Energy, BIPORT, HSL, CMS, NAIM, and KKB could benefit from Sarawak state government’s effort in improving the livelihood of Sarawakians. It was also highlighted in today’s news that the Federal government will take over Pan Borneo from the existing PDP. We believe that it would have minimal impact to the existing work package contractors for Pan Borneo Sarawak as most of the work packages are awarded and progressing well, but it could further impact the timeline for Pan Borneo Sabah as it some of the work packages are not awarded yet. Recently, we made a study trip to East Malaysia covering Kota Kinabalu, Kuching, Bintulu and also the Samalaju Industrial Park to observe the progress of on-going developments and potential prospects. During our trip, we visited key players for meetings with their management and site visits to Borneo Highway PDP, SURIA, GBGAQRS, Sarawak Energy, CMS, NAIM, KKB, BIPORT, SERBADK, PMETAL, and OM Sarawak . Sabah, Land Below the Wind. As we boarded our flight from to Kota Kinabalu in the early morning, we could not help but noticed that our flight was packed with limited space to even store our hand-carried luggage. Kota Kinabalu International Airport’s (KKIA) is known to be the busiest airport after Kuala Lumpur International Airport (KLIA) and Kuala Lumpur International Airport 2 (KLIA2) due to strong tourism activities. To recap, KKIA handled passenger traffic movement of c.8.0m (Domestic: c.68%, International: 32%) back in 2017. During our journey from KKIA to Borneo Highway PDP’s Kota Kinabalu Outer-Ring Road Regional site office located in the Sepangar area, we noticed that the opposing traffic heading into town in the early morning was highly congested, reemphasizing the need for infrastructure projects like Pan Borneo Sabah. After concluding our visit to Borneo Highway PDP, SURIA and GBGAQRS’s site, we came back with mixed feelings for the development in Sabah. While we see strong development potential in the tourism sector that would benefit SURIA and GBGAQRS’s development in the Jesselton area which is crowded with Chinese tourists, the development of infrastructure, i.e. road and ports; in Sabah remains challenging as it requires much focus, attention and assistance from relevant parties. To illustrate, projects like Pan Borneo Sabah has only achieved progress of 11% for the 12 on-going work packages that was awarded to local contractors such as: (i) first letter of award issued in June 2016 for work packages WPC05 and WPC15, (ii) WP06 in December 2017, (iii) WP07 in December 2017, and (iv) WP08 in March 2018. We foresee delays in the execution of Pan Borneo Sabah highway underpinned by issues like land acquisition, relocations and work coordination given that it comprises 35 work packages in total. Sarawak, The Land of Hornbills. While Sarawak is named The Land of Hornbills, we name it The Land of Opportunities. This is largely due the state government’s allocation of RM11.0b to be spent on the infrastructure works like coastal highway (RM6.0b), water supply (RM2.8b), electricity connectivity projects (RM2.3b) and other projects over the next two years. During our ground visit in Kuching and Bintulu, we can feel the excitement from the local contractors which we visited i.e. CMS, NAIM and KKB as they are all geared-up to participate in the open tender for the above-mentioned projects, especially for the coastal highway project. Many contractors are vying for the impending awards from the state-funded mega infrastructure project given softer construction landscape in the peninsular whilst early work packages are expected to be awarded in coming weeks,

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East Malaysia Study Trip Study Visit Note

21 March 2019 according to an industry source (source: StarBiz). Currently, Sarawak Pan Borneo highway is progressing with more traction at an overall progress of c.35% which we deem to be encouraging for such mega project with limited resources and logistic challenges. Another interesting observation that we made during our trip to Sarawak is the state government’s support in growing their local companies. Hence, we came back feeling reassured with the prospects in Sarawak as we believe that the Sarawak state government possess the will to implement the above-mentioned infrastructure projects that is set to improve the livelihood of Sarawakians. We think Sarawak plays within our coverage such as HSL (UP, TP: RM1.25) is poised to ride on the state mega infrastructure project. HSL’s Managing Director recently made a statement that the company is eyeing for jobs in both coastal road and trunk road projects as well as the state water grid (source: StarBiz). We think investors should accumulate on price weakness as we anticipate more news flow and clarity on the projects award in the 1H19, to perk up positive sentiment and share price going forward. Sabah Pan Borneo Highway Borneo Highway PDP . We were hosted by the senior managements of Borneo Highway PDP, a Government-appointed project delivery partner (PDP) company and were grateful the opportunity to be part of its maiden engagement with the investment community, allowing us to gain better clarity over the progress of the projects. Our meeting was chaired by Tirmidzie Mansor (Head of Planning & Monitoring), where we were updated on the current progression of the Sabah Pan Borneo projects and key challenges and issues faced by the contractors. The Pan Borneo Highway Sabah is a multi-billion ringgit Federal Government’s project to upgrade road connectivity that was launched on 24 April 2016. The first phase of the Sabah portion of the highway is a two-lane dual-carriage way comprises 35 work packages, spanning over 706km at RM12.9b, slated to be completed by end of 2021. The 706km total distance of phase 1 stretch from Sabah-Sarawak border town Sindumin in the Southwest to Simpang Mengayau in the North and Ranau to Mile 32 in Sandakan, Lahad Datu and Tawau in Southeast. Three additional packages for phase 1. We understand from Borneo Highway PDP that aside from the initial 35 total packages, there are 3 additional packages, under a new directive by the state. However, details of the 3 additional packages are still scanty at present as it is still at design planning stage. YTD, 12 work packages have been awarded to local contractors with the biggest package tender, (WP06) worth RM900.0m awarded to non-public listed Sabah contractor, Pembinaan Azam Jaya Sdn Bhd. Total 12 packages awarded was worth a total of c.RM6.0b with the smallest package size worth RM65.0m. The WP06 work package which includes the work of engineering, design and procurement, is part of the Kota Kinabalu King Road (KKOR) spanning from Putatan to Inanam with total distance of c.21.8km. Construction work has commenced in January 2018 with completion slated for January 2021. So far, we reckon that the WP06 project is behind schedule with current progress only at 3.4% due to the delay in obtaining the Environmental Impact Assessment (EIA), hindering contractor to commence physical construction work. Sabah Pan Borneo progress to extend beyond 2021? We learn that the overall progress of the Sabah Pan Borneo Highway construction is currently behind schedule with the 12 awarded packages progress status currently ranging between nil-48.5%. We also note that the non-performing award package for WP15 has been terminated in July 2018, waiting to be retendered. As for the 23 remaining packages, we gather that 5 packages have received the green light from Ministry of Finance (MOF). Based on our initial expectations, we are expecting these 5 packages to be awarded in 1HCY19; however, a recent article by TheEdgeWeekly regarding a potential legal wrangling between and the Sabah government over control of the Pan Borneo highway has led to uncertainties in the market. Nevertheless, we expect the projects to be awarded later in 2HCY19. We gathered that 9 packages are ready for the tendering process, while the remaining 9 packages are under review. The main issue causing delay to the Pan Borneo Highway project in Sabah is owing to the land acquisition process and EIA approvals. Based on our understanding, out of the 12 packages already awarded to contractors, only 2 land acquisition packages have been cleared. We understand that the land compensation payment process is done at Sabah State government level channelled by the (MoF) . Hence, we believe that it would be highly ambitious for Borneo Highway PDP should they aim to complete the construction works for Sabah Pan Borneo highway by 2021 and extension of time is inevitable if they are unable to solve the land acquisition issues. Currently, contractors participating in Pan Borneo Sabah are mostly local contractors, i.e. Pembinaan Azam Jaya Sdn Bhd, Akif Jaya Sdn Bhd, Perwira Progresif Construction Sdn Bhd, Pembinaan Kekal Mewah Sdn Bhd and etc.

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Sabah Pan Borneo Highway Phase 1

Source: Borneo Highway PDP, Kenanga Research

Construction Site of Pan Borneo Highway Phase 1 Construction Site of Pan Borneo Highway Phase 1

Source: Kenanga Research Suria Capital Holdings (SURIA) – (Not Rated) Company background. Incorporated in 1983, Suria has risen and grew steadily into a diversified entity. Today Suria and its subsidiaries namely Sabah Ports Sdn. Bhd. (“Sabah Ports”-100% owned) and SCHB Engineering Services Sdn. Bhd. (“SCHB Engineering”-100% owned) work in synergy to offer services in the areas of Port Operations; Logistics and Bunkering Services; Property, Seaport Passenger Gateway and Construction. Collectively, Suria and its subsidiaries are known as Suria Group. We met up with SURIA’s management team at their HQ in Kota Kinabalu, led by Noorida Baharuddin, Chief Financial Officer with the presence of Datin Mariam Mahmun, Head Group Corporate Affairs & Communication and Soh Wan Ru, Head Group Corporate Planning & Development. We were briefed on the group’s port expansion plans namely Sapangar Bay Container Terminal Expansion, Sapangar Bay Conventional Cargo Terminal and Sapangar Bay Oil Terminal Jetty Extension as well as Sandakan Port Wharf Extension. The expansion plans will be funded through a combination of borrowing and corporate financing. Sapangar Bay Container Terminal Expansion. Prior to the outcome of the 13 th General Election, the Federal Government has approved an allocation of RM1.1b for the Sapangar Bay Container Port’s expansion works. Post expansion, the port’s current container handling capacity of 0.5m TEUs is expected to be boosted to 1.25m TEUs by 2026, more than doubled its current capacity. This would enable Sapangar Bay Container Port to provide more efficient services and realise its vision of becoming the regional transhipment hub for the BIMPEAGA and the larger ASEAN region. It will further provide great opportunity for connectivity to the vibrant East Asian economies such as China, Hong Kong, Japan and Korea. The expansion programme is part of the proposed comprehensive Sabah Ports 30-year Master Plan. Management assured that the government commitment is still intact following the 11 th Malaysia Plan Mid-term Review. Recent updates include RM50.0m fund has been channelled by the Federal government through the State Economic Development Investment Authority (SEDIA). SURIA guided that the RM50.0m allocation will be used for the pre-requisite expansion such as maritime or environmental studies before moving towards the designs and construction stage.

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Sapangar Bay Container Terminal Sapangar Bay Conventional Cargo Terminal

Source: Suria Capital Holdings, Kenanga Research

Relocation of Kota Kinabalu Port Operations and Sapangar Bay Integrated Port. Another major port development is the establishment of Sapangar Bay Integrated Port, which will incorporate the operations of Sapangar Bay Container Port, Sapangar Bay Oil Terminal and Sapangar Bay Conventional Cargo Terminal with the relocation of Kota Kinabalu Port operations to Sapangar Bay. Budgeted allocation for the construction of Sapangar Bay Conventional cargo is expected to be more than RM200.0m (internally funded), scheduled to be completed in 3 years before the existing general cargo operation can be relocated to Sapangar Bay. The relocation is required as Kota Kinabalu Port land is undergoing a major transformation that will see a mega development that includes the and mixed development, the future International Cruise Terminal and Sabah International Convention Centre.

Other infrastructure works to be carried out in near future includes Jetty Extension at Sapangar Bay Oil Terminal with total construction cost estimated at RM90.0m, to be completed within 2 years. Currently, its maximum handling capacity stands at 1.0m MT of bulk oil per annum with maximum vessel size deadweight tonne 30k dwt to be doubled to 60k dwt. At present, SURIA is embarking in a tender exercise to engage companies to construct the jetty extension this year.

Sapangar Bay Oil Terminal Jetty Extension Sandakan Port Wharf Extension

Source: Suria Capital Holdings, Kenanga Research Sandakan Port wharf extension completed . The wharf extension at Sandakan Port which commenced in September 2016 had been completed and was launched on 18 February 2019. The overall cost for the wharf extension at Sandakan Port was at RM129.0m, lower than the initial budget allocation of RM140.0m. The primary objective is to accommodate the anticipated growth in cargo throughput and vessel calls at the port. Meanwhile, the Ro-Ro ferry service connecting Kudat and Palawan, Philippines, which commenced in 2018 is expected to serve as a catalyst for future development in Sabah. All-in, we find SURIA’s expansion story to be exciting backed by their aspiration in becoming a regional transhipment hub for the BIMPEAGA and the larger ASEAN region with integrated facilities. However, we opine that for SURIA to achieve their ambition they would require massive support from both State and Federal government as the allocation of RM1.1b allocation from Federal Government would be crucial to their expansion. Gabungan AQRS (GBGAQRS) - (Not Rated) Company Background. The Group is principally engaged in construction and property development activities within Malaysia. The construction division, a key contributor to revenue and operating income, specialises in the construction infrastructure, residential and commercial buildings, as well as purpose-built buildings.

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We met up with GBGAQRS’ management represented by Ridhwan Effendy, Vice President & Investment and Patrick Thie, Senior Manager Development. We also visited One Jesselton Waterfront mixed commercial development at Kota Kinabalu and its subsidiary SEDCO Precast Sdn Bhd, Precast plant. YTD updates include current outstanding order-book standing at RM2.2b excluding an assumed sum of RM120.0m for the affected LRT3 jobs package as the exact value is still undergoing finalisation by Prasarana. We estimated a total external order-book of RM1.9b after stripping out its total internal orders of RM350m (unbilled orders as at Sep 2018, The Peak Bahru –RM80m and E’Island Residences-RM270m). One Jesselton Water is a joint-venture mixed development between GBGAQRS and SURIA, with an estimated GDV of RM1.8b. The project should sell well despite its steeper price range of RM1,200psf given its strategic location as it is the current Jesselton Point Ferry Terminal which is crowding with tourists. To recap, KKIA handled more than 2.0m international passenger traffic back in 2017 and during our stay at Le Meridien, Kota Kinabalu, we observed that it was packed with Chinese and Korean tourists. GBGAQRS through its wholly owned subsidiary Sinajasa Sdn Bhd holds 49% in one of the largest pre-cast components manufacturer in Sabah, SEDCO Precast Sdn Bhd, which operates on an 18.67-acre parcel of land in Tuaran, Sabah. The plant currently has an annual production capacity of 36,000 MT, which could be expanded to 150,000 MT per annum. Aside from gunning for construction jobs from the Pan Borneo Highway Sabah, the Group is also poised to secure significant orders for pre- cast components for the Pan Borneo Highway Sabah via SEDCO Precast Sdn Bhd. Furthermore, given the fact that the remaining 51% stake in SEDCO Precast is owned by the Sabah Economic Development Corporation, GBGAQRS is optimistic on its chances to secure orders for pre-cast components for the Sabah Pan Borneo highway. Jesselton Point Ferry Terminal SEDCO Precast Plant

Source: Gabungan AQRS,SEDCO Precast Sdn Bhd, Kenanga Research Sarawak Energy Sdn Bhd We met up with Sarawak Energy’s representatives led by Robin Kueh Kay Heng, Senior Manager Capital Market & Investor Relations to have a better clarity on their overall development across Sarawak. Sarawak Energy Berhad is an energy development company and a vertically integrated power utility with a vision to achieve sustainable growth and prosperity for Sarawak by meeting the region's need for reliable and renewable energy—providing electricity to 2.8m Sarawakians in urban and rural areas. Powering up through debt. We gather from management that the total outstanding borrowings of Sarawak Energy Group stand at c.RM20.0b, which also includes the borrowings of Sarawak Hidro, namely its RM5.5b sukuk Murabahah Programme and its RM1.0b Government-Guaranteed Sukuk Ijarah Programme. RAM reaffirmed the AAA rating with a stable outlook for the Sarawak Hidro Sukuk Murabahah Programme, premised on the Malaysian Government’s continued commitment to top up any shortfall in cash flow throughout the programme to help maintain the rating. The company has also successfully raised RM1.0b though private placement to meet its capital expenditure requirements via the sixth issuance from our Sarawak Energy Sukuk Musyarakah Programme. The issuance consisted of one tranche with carrying tenure of 15 years. Acquisition of Bakun Hydroelectric Plant (HEP). In August 2017, Sarawak Energy acquired Sarawak Hidro Sdn. Bhd. from the Ministry of Finance, making Sarawak Energy the sole owner and operator of the 2,400MW Bakun Hydroelectric Plant (HEP). The purchase allows Sarawak Energy to integrate the operations of Bakun HEP into the Group, optimising water resources management between Bakun and Murum HEPs, resulting in a more efficient allocation of resources, long-term savings and supporting the distribution of a reliable power supply to the state. Baleh, the next big thing. In August 2017, a contract for the main civil works of the 1,285MW Baleh Hydroelectric Plant was signed between Sarawak Energy’s subsidiary SEB Power Sdn Bhd and China Gezhouba Group Company Ltd and Untang Jaya Sdn. Bhd. Joint Venture. The contract includes the design, construction, intake structure, spillway and penstocks for the dam. Located on the Baleh River, about 95km upstream from the confluence with the Rejang River in Kapit, the 188m high Concrete Faced Rockfill Dam, one of Sarawak’s largest infrastructure projects, will generate 1,285MW of renewable energy once completed. Construction is expected to begin in October 2018 and the project is expected to be fully commissioned in 2026. The construction of the Baleh HEP marks China Gezhouba Group Company Ltd’s entry into Malaysia’s construction industry. An established hydropower specialist with more than 40 years of experience, China Gezhouba Group has constructed more than 100 hydropower projects. Untang Jaya Sdn. Bhd. is a Sarawak-registered Class A contractor from the Baleh/Kapit area with extensive background in construction. PMETAL would be one of the beneficiaries if the additional renewable energy is allocated to the company.

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Cahya Mata Sarawak (Not Rated) We met up with Cahya Mata Sarawak’s (CMSB) management led by Suhadi Sulaiman, Chief Executive Officer of the cement division. We were briefed on the group Integrated cement plant located in Mambong, which spans over a 25-hectare site located 28km southeast of Kuching city. It is an integrated facility with a capacity to produce 900,000MT of clinker and 1.0m MT of cement annually. We note that besides the plant in Mambong, CMSB has two other grinding plants in Pending and Bintulu with annual capacity of 1.0m MT and 750,000 MT, respectively. We gather from management that this plant’s clinker production meets approximately 50% of the cement division’s clinker needs with the balance met by imports from Southeast Asia countries mainly from Vietnam last year. However, management noted that it plans to buy more clinkers from Peninsular Malaysia this year, which could reduce their forex exposure. Despite the pick-up in cement demand at c.6-7% last year, capacity utilisation remained below than 50%. The group expects an increasing cement demand trend the on-going Pan Borneo Highway project. CMSB’s 51%-owned PPES Works Sarawak Sdn Bhd, in partnership with Bina Puri Sdn Bhd, is undertaking Work Package Contract (WPC) 06 of the Pan Borneo Highway project. The WPC 06 includes road construction that stretches 64.5km along Sg. Awik Bridge to Bintangor Junction. CMSB has also started supplying to its own Pan Borneo Highway packages and other packages since last year. To recap, CMSB has recently bagged a Coastal Road job worth RM466.7m through its unit PPES Works (Sarawak) with JV partner, China Communication and Construction Company. Their precast & ready-mix plant at Bintulu and ready-mix plant in Sarikei have both been commissioned last year to supply to the Sarawak Pan Borneo Highway, expanding its precast foothold to northern Sarawak area. Based on our channel check, there are only a few precast producers in Sarawak. We understand from management that the entry barrier for the concrete business is generally low with many smallish players in the market. Nonetheless, CMS and Sarawak Concrete Sdn Bhd being the big players with mass production capabilities. Naim Holdings (Not Rated) We met up with Naim Holdings (NAIM)’s representative, Mr. Johnny Wong Soon Ming, Manager-Corporate Planning, where we were briefed with recent updates and development of the company. NAIM is primarily involved in property development and construction activities. It focuses on three principal business areas such as: (i) integrated property development, (ii) construction, civil engineering and infrastructure projects, and (iii) oil and gas (infrastructure projects and oil and gas services via its associates Dayang Enterprise Holdings Bhd). Update on its property segment includes NAIM Permy mall in Miri achieving about 86% occupancy rate. Meanwhile, works for the Fairfield by Marriott upscale business hotel at its Bintulu Paragon Hotel is expected to be completed by 2019. It has remaining landbank of 2,500 acres with GDV of RM1.0b. Unbilled sales as at 9M18 was RM70m with unsold GDV of RM500m. On the construction segment, the group’s current outstanding order-book is RM1.5b, of which RM733m is made up of the SPNB affordable housing projects and the Sarawak Pan Borneo Highway project RM1.2b spanning over Pantu Junction to Batang Skrang section. The group is currently tendering for road infrastructure project in Sarawak namely the second coastal project. KKB Engineering (Not Rated) Next, we met up with KKB Engineering’s senior management led by Mr. William Kho, Group Executive Director to obtain updates on the company’s growth prospects and potential upcoming jobs in the market. KKB has developed a strong base in steel and fabrication works with further expansion and diversification into manufacturing activities such as steel pipes and pipe special manufacturing, LPG cylinders manufacturing and business activity in the Oil & Gas Sector. OceanMight Sdn Bhd is 61%-owned subsidiary of KKB Engineering, a licensed Approved Service Provider by PETRONAS for the construction of major fabrication offshore facilities. It owns a fabrication yard which covers an area of 70 acres, ideally situated along the Sarawak river with close proximity to South China Sea providing competitive advantages over regional fabricators for load out of completed structures to final destinations within the ASEAN region. Its jetty has the capacity to load out 30,000MT of fabricated structure and has a 9m draft during high tides.

In 2018, OceanMight Sdn Bhd bagged 2 contracts from Petronas CariGali Sdn Bhd. First contract, the D28 Phase 1 project for the Provision of Engineering, Procurement, Construction, Installation and Commissioning (EPCIC) of Wellhead Platforms, was awarded in March 2018. Subsequently, the group clinched its second contract, the D18 Phase 2 project in July 2018 for the Provision of Engineering, Procurement, Construction and Commissioning of Wellhead Platforms for a period of about 27 months (15 months; work execution and 12 months; warranty period). The combined total contract for both D28 Phase 1 and D18 Phase 2 projects is c.RM226m. In addition, the group also secured a subcontract from Sapura Fabrication Sdn Bhd (SPSB) for the Provision of Procurement and Construction of Wellhead Deck, piles and conductors which is also part of the SPSB’s engineering, procurement, construction, installation and commissioning for Mudabala Petroleum.

We gather from management, that the company will continue to tender for the infrastructure and steel-related projects under the planned Sarawak State Grid Implementation and water project. The group’s order-book as at September 2018 stood at c.RM900m mainly attributed to the Pan Borneo Highway award namely the WPC09, in which KKB is involved via a joint-venture with WCT Bhd. Since September 2018 till YTD, tender-book is close to c.RM470m.

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Serba Dinamik Holdings (OP , TP: RM 4.80 ) - Bintulu Integrated Energy Service Hub Bintulu Integrated Energy Service Hub (BIEH) is a 30-acre development in Tanjung Kidurong, which will house the MRO and IRM Centre of Excellence in Sarawak. BIEH is targeted to become a central facility that will provide a multitude of MRO, EPCC and relevant scopes of work. The centres will host MRO workshops, blasting, coating and galvanisation areas and plants, fabrication and laydown areas, warehouses and storage facilities, and other facilities such as office buildings, car parks, power substation, a waste-water treatment facility and training centres. The total cost of building the BIEH is RM259m of which RM22m is for land acquisition while land development costs RM237m. YTD, its progress is currently at 30% and targeted to be completed in 2020. BIEH Blasting Workshop BIEH Layout

Source: Serba Dinamik Holdings, Kenanga Research Bintulu Port Holdings (Not Rated) We met up with Bintulu Port Holdings (BIPORT)’s management team at their HQ in Tanjung Kidurong led by Daiana Luna Suip (Group Finance, General Manager) to obtain updates. Currently, BIPORT provides port services at: (i) Bintulu Port, and (ii) Samalaju Port as well as the provision of bulking installation facilities and services for palm oil products. They hold a 30-year concession from 1st Jan 1993 till 31st Dec 2022 with the option to renew for another 30 years while Samalaju Port has a 40- year concession from Jun 2017 and the option to extend another 20 years once the 40-year concession ends. Note that Samalaju Port has a tonnage capacity of 18.0m tonnes for Phase 1. Going forward, the group expects its performance to be impacted by the disruption in LNG supplies and thus the reduction in the number of vessels calling at the port. Although growth is expected from the handling of container and Samalaju cargoes, these are not sufficient to cushion the unforeseen shortfall in the LNG cargo. Press Metal Aluminium Holdings (MP, TP: RM4.00) We visited PMETAL’s Samalaju plant whereby we were briefed on their smelting plant operations. This is the plant that primarily produces aluminium from alumina (raw material) via an electrolysis process. The Samalaju plant has a total smelting capacity of 640k MT/annum. Combined with the Mukah smelting plant capacity of 120K MT, the group annual total smelting capacity is 760k MT. The plant is also able to produce main value-added products such as aluminium billets and wire rods, which management intends to increase in the future as they command better margins. In addition, we gather from management that about 40% of its 500-acres land in Samalaju remains unutilised. We understand that the production process begins by hsl ransporting alumina through their conveyor belt from the Samalaju port to its own silos resulting in logistic cost savings and better product efficiency. Next the alumina will be fed into smelting pots forming liquid aluminium, which then cast into semi- finished forms such as ingots and billets in a cast house. We learn that the electrolysis process requires key inputs such as electricity. Hence, PMETAL is the single biggest user of electricity power in Sarawak as 1,000MW power consumption is required per day. As it is, they are only able to further expand its capacity should they are able to secure power allocation from Sarawak Energy upon the completion of Baleh Dam. OM Sarawak Plant Visit (25% owned by CMSB) We visited OM Materials (Sarawak) Sdn Bhd’s plant in Samalaju, which is 25% owned by CMSB. The plant owns a Ferro Alloy Smelting Plant with a total of 8 main workshops and 16 units of 25.5 MVA furnaces, of which 10 units are allocated to produce Ferrosilicon (FeSi) and 6 units are allocated to produce manganese alloy. Ferrosilicon is used in the production of carbon steels, stainless steels, cast iron and the production of silicon itself. Meanwhile, manganese alloy is used extensively (90% content) in the steel industry whereby it increases the hardness in iron without a reduction in malleability or toughness. The Plant has a design capacity to produce approximately 200- 210k MT of FeSi and 250k-300k MT of manganese alloy per annum. We understand that the Plant has successfully produced a premium grade of SiMn (“low carbon silicomanganese”) thus expanding the product mix offerings and elevating OM Sarawak’s position to one of the few ferroalloy producers capable of supplying in bulk to the stainless-steel industry. During 3Q18, production has exceeded the furnace design capacity for all ferro alloy products. The average daily production output achieved was approximately 64 tonnes of FeSi, 102 tonnes of SiMn and 152 tonnes of HCFeMn per furnace per day. In total 61,179 tonnes of FeSi and 57,097 tonnes of manganese alloy were sold during 3Q18.

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Stock Ratings are defined as follows:

Stock Recommendations

OUTPERFORM : A particular stock’s Expected Total Return is MORE than 10% MARKET PERFORM : A particular stock’s Expected Total Return is WITHIN the range of -5% to 10% UNDERPERFORM : A particular stock’s Expected Total Return is LESS than -5%

Sector Recommendations***

OVERWEIGHT : A particular sector’s Expected Total Return is MORE than 10% NEUTRAL : A particular sector’s Expected Total Return is WITHIN the range of -5% to 10% UNDERWEIGHT : A particular sector’s Expected Total Return is LESS than -5%

***Sector recommendations are defined based on market capitalisation weighted average expected total return for stocks under our coverage.

This document has been prepared for general circulation based on information obtained from sources believed to be reliable but we do not make any representations as to its accuracy or completeness. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may read this document. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees. Kenanga Investment Bank Berhad accepts no liability whatsoever for any direct or consequential loss arising from any use of this document or any solicitations of an offer to buy or sell any securities. Kenanga Investment Bank Berhad and its associates, their directors, and/or employees may have positions in, and may effect transactions in securities mentioned herein from time to time in the open market or otherwise, and may receive brokerage fees or act as principal or agent in dealings with respect to these companies.

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KENANGA INVESTMENT BANK BERHAD (15678-H) Level 12, Kenanga Tower, 237, Jalan Tun Razak, 50400 Kuala Lumpur, Malaysia Chan Ken Yew Telephone: (603) 2172 0880 Website: www.kenanga.com.my E-mail: [email protected] Head of Research

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