Regional Thematic UNDER CONSTRUCTION UNDER CONSTRUCTION Sector Update Regional 25 July 2016 Construction & Engineering | Construction Overweight Construction Stocks Covered: 10 As Many As Stars In The Sky Ratings (Buy/Neutral/Sell): 6 / 7 / 0 Last 12m Earnings Revision Trend: Negative Although four ASEAN countries – Indonesia, Malaysia, Singapore and Top Picks Target Price Thailand – are facing the threat of an economic slowdown, each is relying Adhi Karya Persero (ADHI IJ) – BUY IDR 3,400 on different engines to stimulate their economies. All four countries (based Gadang Holdings (GADG MK) – BUY MYR 3.10 on our survey in each capital city) still report progress in terms of Sino-Thai Engineering & Construction THB29.00 construction activities from both the private and public sectors. Our RHB (STEC TB) - BUY construction analysts maintain their positive view on the sector with Top Sunway Construction (SCGB MK) - BUY MYR 1.86 Picks as follows: 1. Indonesia: Adhi Karya Persero; 2. Malaysia: Sunway Construction and Gadang Holdings; 3. Thailand: Sino-Thai Engineering & Construction. Crane count in four ASEAN countries No. of crane No. of project Different engines in different countries. In order to boost their economies and 140 60 prevent a slowdown, Singapore and Malaysia are focusing on export growth and 120 50 domestic consumption respectively, while Thailand and Indonesia are relying on 100 investments in public infrastructure projects. In spite of the different stimulus 40 80 instruments, construction activities remain abundant within a 3km radius around 30 the centre of each capital city – we counted many cranes working actively in our 60 20 surveyed area. Kuala Lumpur ranks the top among the four, with 131 cranes. 40 Bangkok came in second with 112 cranes. Jakarta and Singapore are almost 20 10 equal, with about 66 and 52 cranes respectively. 0 0 Indonesia Malaysia Singapore Thailand What can be learnt from the crane survey? No. of crane No. of project Indonesia: Jakarta, with many infrastructure projects under construction, is set Source: RHB to develop new projects. This is especially in terms of new skyscrapers aligned with mass rapid transit (MRT) routes. In the meantime, Indonesia’s residential property sector has been facing slow demand growth since FY15, which has led Table Of Contents to delays of developers’ new project launches. Still, office and apartment projects Why counting cranes? 2 under construction remain on track and are a dominant presence in Jakarta’s Indonesia 3 central business district (CBD). Malaysia 8 Malaysia: The busiest construction activities in this country will not end soon, as Singapore 18 the Government has assured new infrastructure projects will be implemented as planned. However, there is a likely trend for developers to slow down their Thailand 28 launches for residential and non-residential projects due to the weak property Adhi Karya Persero (ADHI IJ) 37 market. Our analyst believes infrastructure spending by the Government will boost new construction projects awarded to contractors in FY16-17. Gadang Holdings (GADG MK) 40 Sino-Thai Engineering & Construction (STEC TB) 43 Singapore: As the most developed and most congested country among the four (with a construction cycle that is getting ahead of the others), Singapore is Sunway Construction (SCGB MK) 46 focusing on quality rather than quantity. There is a growing number of new mixed-use projects plus energy-efficient buildings. These are supported by planned construction of more transportation alternatives for a better access to the CBD area. Analysts Dony Gunawan Thailand: Bangkok’s CBD is dominated by SET-listed companies’ condominium +6221 2970 7063 projects for the mid- to high-end market. There are obvious trends in the CBD, including: [email protected] i. Facility expansion of long-term growth businesses such as hospitals and a university campus; Ng Sem Guan, CFA ii. The game of mixed-use projects played by Thai landlords; +603 9207 7678 iii. Initial signs that the hotel sector will expand to a new location in the CBD. [email protected] Jarick Seet +65 6232 3891 [email protected] P/E (x) P/B (x) Yield (%) Company Name Price Target Dec-17F Dec-17F Dec-17F Rating Adhi Karya Persero IDR2,720 IDR3,400 11.2 1.5 3.4 BUY Chatree Srismaicharoen Gadang Holdings MYR2.48 MYR3.10 6.7 1.0 2.9 BUY +66 2862 9743 Sino-Thai Engineering & ConstructionTHB25.00 PCL THB29.00 23.9 3.4 1.7 BUY [email protected] Sunw ay Construction Group MYR1.65 MYR1.86 13.3 3.3 2.6 BUY Source: Company data, RHB See important disclosures at the end of this report 1 Powered by the EFA Platform Construction Regional Sector Update 25 July 2016 Why Counting Cranes? According to RHB’s estimate, the four ASEAN countries in our survey – Indonesia, Malaysia, Singapore, and Thailand – have the potential to see their GDPs increase gradually in FY16-17. Although all four economies have faced economic challenges due to internal and external threats, their governments are focusing on different engines to boost GDP growth to a higher level. Indonesia and Thailand remain focused on public investments in infrastructure projects, while Singapore and Malaysia are relying on the export sector and domestic consumption respectively. It is interesting to note, however, that the growth of construction activities in Indonesia, Malaysia and Thailand is estimated to be far above their respective GDP growth. Meanwhile, the construction sector in Singapore is significant to some degree. Figure 1: RHB’s estimates on construction growth and as a percentage of GDP Indonesia Malaysia Singapore Thailand FY16F FY17F FY16F FY17F FY16F FY17F FY16F FY17F GDP Growth (%) 5.1 5.3 3.9 4.0 1.8 2.0 3.2 3.5 Construction % of GDP 10.5 10.5 4.5 4.5 13.2 13.3 8.7 9.0 Growth (%) 8.2 8.5 6.0 5.3 4.6 1.1 13.5 17.3 Public construction % of GDP NA NA NA NA 8.8 8.6 4.7 5.1 Growth (%) NA NA NA NA 8.4 9.1 18.6 23.6 Private construction % of GDP NA NA NA NA 4.4 4.7 4.0 3.8 Growth (%) NA NA NA NA -3.0 -3.6 7.5 10.1 Source: RHB Crane counting is the method we have adopted to measure the construction activities in each country, in terms of quality and quantity. In addition to collating the number of cranes counted in each CBD area (within a 3km radius of the centre of the capital city), we also detail out the current situation and circumstances as well as the future construction activity trends in each country. Below is a summary of the results of our crane counting surveys. We counted a total of 361 cranes and 176 projects under construction for all four countries. Figure 2: Summary of cranes and projects in the four ASEAN countries surveyed Total No. of cranes No. of projects Residential No. of cranes No. of projects Malaysia 131 48 Malaysia 33 20 Thailand 112 55 Thailand 43 33 Indonesia 66 19 Indonesia 9 3 Singapore 52 54 Singapore 25 25 Office No. of cranes No. of projects Hotel No. of cranes No. of projects Malaysia 21 3 Malaysia 18 4 Thailand 17 8 Thailand 6 2 Indonesia 30 10 Indonesia - - Singapore 16 10 Singapore 7 12 Mixed-use No. of cranes No. of projects Other No. of cranes No. of projects Malaysia 34 11 Malaysia 25 10 Thailand 29 4 Thailand 17 8 Indonesia 21 4 Indonesia 6 2 Singapore - - Singapore 4 7 Source: RHB We will detail our findings from the crane survey in alphabetical order of the countries, ie Indonesia first, followed by Malaysia, Singapore, and Thailand. The analysts behind each survey are listed below: Indonesia Dony Gunawan [email protected] Malaysia Ng Sem Guan [email protected] Singapore Jarick Seet [email protected] Thailand Chatree Srismaicharoen [email protected] See important disclosures at the end of this report 2 Construction Regional Sector Update 25 July 2016 Indonesia Built when Soekarno was Indonesia’s president, the Semanggi flyover is widely known as an iconic structure of Jakarta. Located in the heart of the city, the clove-shaped flyover connects its most crowded areas – including the Sudirman Central Business District (SCBD), Thamrin, Senayan and Kuningan – within a 3km radius. These areas also cover the city’s two major roads, Sudirman Road and Gatot Subroto Road, which are the centre of Jakarta’s activity, with a large number of office buildings, apartments and shopping centres located along them. Figure 3: The 3km radius, with Semanggi as the centre Figure 4: Another view of the 3km radius of our survey, with Semanggi as the centre Source: RHB Source: RHB Figure 5: Semanggi flyover in 1992 Figure 6: Semanggi flyover in 2015 Source: Tempo Source: Jakartadulukala Indonesia’s property sector has been facing slower demand growth since early 2015. This resulted in a decrease in supply in 2016, as developers opted to delay the construction of their projects. Our ground checks reveal that 50% of the construction projects around the Semanggi flyover are still concentrated towards Sudirman Road. We think that this is in line with the Government’s recent infrastructure development, including its MRT plan. See important disclosures at the end of this report 3 Construction Regional Sector Update 25 July 2016 Figure 7: Commercial property supply growth in the Figure 8: Pipeline of apartments and office projects in Jabodetabek area Jakarta % YoY No of Buildings 40 60 Title: Title: 54 Source: Source: 35 50 46 30 Please fill in the values above to have them entered in your report Please fill in the values above to have them entered in your report 25 40 35 20 23.2 30 26 15 19 10 20 15 6.2 13 5 3.6 10 0 3.1 -5 0 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 2016 2017 2018 2019 Offices Retails Apartments Hotels Apartment Office Source: Bank of Indonesia Source: Colliers International Indonesia During our ground checks, we counted 19 different projects and 66 cranes within the 3km radius of Semanggi.