Study Visit Note 21 March 2019 East Malaysia 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 Kota Kinabalu, 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, Sarawak Energy, CMS, NAIM, KKB, BIPORT, SERBA, PMETAL, and OM Sarawak. On the Pan Borneo Sabah 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 Kuala Lumpur 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, PP7004/02/2013(031762) 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 Putrajaya 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) .