8 December 2016 Sabah: “Land below the wind” Sector Update We made a working visit to Sabah’s capital Kota Kinabalu (KK) recently. Key findings: infrastructure development is accelerating, tourist arrivals are seeing sustained growth, oil and gas investments Infrastructure/ continue despite weak prices, and new large-scale integrated property development projects should transform Greater KK in the Property long run. Our top construction/property stock picks for exposure to Sabah’s rapid development are Gabungan AQRS (GAQRS) and WCT. Other non-rated beneficiaries could be Suria Capital and SBC Corp. Overweight (maintain)/ Overweight (maintain) Infrastructure development to improve connectivity One of the key focuses for the development of Sabah under the 11th Malaysia Plan 2016-2020 (11MP) is improving connectivity via infrastructure development. Planned projects include the RM12.8bn Pan Borneo Highway (Sabah section) (PBH) and the new RM311m KK Bus Absolute Performance (%) Rapid Transit (BRT). For the long-term development of the Sabah Development Corridor (SDC), there are plans to build a new KK Airport, 1M 3M 12M GAQRS (2.2) (12.0) 4.1 Light Rail Transit (LRT) system in KK, upgrade Lahad Datu Airport, and WCT Hldgs (2.2) 9.9 20.4 build new railway lines to connect the north and east coasts of Sabah. Suria Cap (2.9) (0.5) (21.3) SBC Corp (5.7) (11.2) 12.1 Pan Borneo Highway – a boon for construction Borneo Highway PDP Sdn Bhd, a Warisan Tarang-UEM Group-MMC Corp joint venture (60:20:20 shareholding), was appointed as the project Relative Performance (%) AQRS WCT Suria SBC Corp delivery partner (PDP) for the PBH Sabah project in April 2016. Three % packages have been awarded and the remaining packages are targeted to 350 be awarded by end-2017 to ensure the project is completed by March 300 2021. Potential beneficiaries are the Suria-GAQRS joint venture (JV) and 250 WCT, which are bidding for the PBH Sabah project. 200 150 Major property development projects planned 100 A major development taking place is the redevelopment of KK Port with an 50 estimated gross development value (GDV) of over RM5bn comprising One Jul-13 Jul-14 Jul-15 Jul-16 Jan-13 Jan-14 Jan-15 Jan-16 Mar-13 Mar-14 Mar-15 Mar-16 Nov-13 Nov-14 Nov-15 Nov-16 Sep-13 Sep-14 Sep-15 Sep-16 May-13 May-14 May-15 May-16 Jesselton (developed by GAQRS-Suria JV), Jesselton Quay (developed Source: Affin Hwang, Bloomberg by SBC-Suria JV), KK Convention City (developed by Mah Sing) and Sabah International Convention Centre. Suria is also planning to acquire 28.9 acres at KK Port for about RM350m to develop an International Cruise Terminal as part of the integrated mixed development project. SP Setia is developing the RM2.2bn Aeropod project in Tanjung Aru currently while the state is developing the RM4bn Tanjung Aru Eco Development. Loong Chee Wei, CFA (603) 2146 7548 Top BUYs: GAQRS, WCT for Sabah exposure; maintain sector views [email protected] We believe the rising tourist arrivals and strong demand from local and foreign buyers for waterfront properties will ensure the success of the KK Port redevelopment project. Construction contract awards for PBH Sabah should benefit the contractors with established track records and precast concrete product manufacturers in Sabah. For these reasons, our top BUYs for exposure to Sabah are GAQRS and WCT. Maintain ratings, TPs. Valuations of companies in our universe with Sabah exposure Stock Bbg Rating Price TP Upside Mkt Cap Core PE (x) Core EPS Gr (%) PBV (x) DY (%) ROE (%) (RM) (RM) (%) (RMbn) CY16E CY17E CY16E CY17E CY16E FY16E FY16E Gabungan AQRS AQRS MK BUY 0.88 1.24 40.9 0.3 19.6 11.6 (600.0) 68.9 0.9 - 5.6 Gamuda GAM MK BUY 4.69 5.74 22.4 11.4 19.7 17.3 (8.7) 13.9 2.9 2.6 9.6 IJM Corp IJM MK BUY 3.28 3.57 8.8 11.8 22.1 20.4 0.4 8.3 3.2 3.0 6.2 WCT Holdings WCTHG MK BUY 1.77 2.13 20.3 2.2 21.1 14.9 (56.2) 41.7 1.8 3.4 3.7 SP Setia SPSB MK HOLD 3.42 3.25 (5.0) 9.8 14.6 14.3 (12.4) 2.6 2.8 4.1 8.6 Note: Share prices as of close on 6 December 2016. Source: Affin Hwang estimates, Bloomberg Affin Hwang Investment Bank Bhd (14389-U) Page 1 of 14 8 December 2016 Infrastructure development to improve connectivity We met up with the Sabah Economic Development and Investment Authority (SEDIA) to get an update on the government’s initiatives under SDC. Under the 11MP, the government will focus on improving connectivity and logistics in Sabah as a critical factor required for the economic development of the state. The under-developed road and railway infrastructure in Sabah creates a bottleneck for economic development. Sabah has the following competitive advantages: Excellent location – accessible by air from 13 global destinations; Natural resources – rich in oil and gas, fertile agriculture land, palm oil and forestry; Cultural heritage – third largest population in Malaysia with 32 ethnic groups spawning diverse cultural backgrounds; and Biodiversity – rich marine life, plant diversity and wildlife habitat. World Heritage Sites in Sabah are Mount Kinabalu, Maliau Basin, Danum Valley and Imbak Canyon. Sipadan island is one of the world’s best diving sites. Under the SDC, these competitive advantages are to be exploited for the development of the tourism, oil and gas (O&G), energy, palm oil, manufacturing and logistics, agriculture and education sectors. Fig 1: Sabah Development Corridor Source: SEDIA Sabah was the sixth-highest GDP contributor to Malaysia in 2015 at 6.6% of the country’s GDP. However, it ranked 13th in terms of GDP per capita at RM19.7k in 2015, below the country’s average of RM37.1k. The state achieved stronger real GDP growth of 6.1% compared to the national average of 5% in 2015 for the first time in the past six years. Affin Hwang Investment Bank Bhd (14389-U) Page 2 of 14 8 December 2016 Fig 2: Percentage share of GDP by state in 2015 Source: Malaysian Department of Statistics Fig 3: GDP per capita by state in 2015 Source: Malaysian Department of Statistics Fig 4: GDP growth rate for Sabah and Malaysia (at 2010 prices) Source: Malaysian Department of Statistics Services sector remained the highest contributor to Sabah’s GDP at 40.8% of the total, followed by the agriculture sector (21.8% of total) and the mining and quarrying sector (25.4% of total) in 2015. Since the SDC was launched in 2008, the state has achieved committed investments of RM157bn and realised investments of RM57bn. We understand that Petronas and other multinational oil companies are the largest investors in the state to develop new deep water oil and gas fields in Sabah. Affin Hwang Investment Bank Bhd (14389-U) Page 3 of 14 8 December 2016 Fig 5: Sabah’s GDP breakdown in 2014 and 2015 Source: Malaysian Department of Statistics Sabah is the top crude palm oil (CPO) producing state in Malaysia with the highest oil extraction rate. Sabah produced 29% of Malaysia’s total CPO production in the first 10 months of 2016. It is also the largest aquaculture and seaweed producer in Malaysia. Tourism is a key driver of the services sector GDP growth in Sabah with tourist arrivals achieving a CAGR of 9% in 2002-2015. The state has the largest crude oil reserves in Malaysia at 45% of the country’s total reserves of 4bn barrels. The state’s crude oil reserves have increased in recent years with the discovery of new deep water reserves off the coast of Sabah. Fig 6: Crude palm oil production by state in January-October 2016 Source: Malaysian Palm Oil Board Affin Hwang Investment Bank Bhd (14389-U) Page 4 of 14 8 December 2016 Fig 6: Tourist arrivals to Sabah (2002-2015) Source: Sabah Tourism Board Fig 7: Malaysia’s oil and gas reserves breakdown Source: SEDIA One of the key focuses for the development of Sabah under the 11th Malaysia Plan 2016-2020 (11MP) is to invest in infrastructure to improve connectivity within the state and international linkages. Some of the planned infrastructure projects include the RM12.8bn PBH Sabah and new RM311m KK BRT. For the long-term development the Sabah Development Corridor (SDC), there are plans to build a new KK Airport, Light Rail Transit (LRT) system in KK, upgrade Lahad Datu Airport, and build new railway lines to connect the north and east coasts of Sabah. WCT is one of the Peninsular Malaysia-based contractors that has been active in undertaking infrastructure and property projects in Sabah. It undertook the RM704m upgrading and expansion works for the Kota Kinabalu International Airport Package 1 – Terminal Building and Landslide Infrastructure & Facilities and the RM109m Kudat Water Supply Scheme – Milau Dam project previously. WCT received a Letter of Intent from the government for the Kota Kinabalu Water Supply Scheme project worth about RM2.8bn previously but the implementation has stalled. Affin Hwang Investment Bank Bhd (14389-U) Page 5 of 14 8 December 2016 Fig 8: Transportation proposal map in Sabah Structure Plan 2033 Source: SEDIA Pan Borneo Highway – a boon for construction The PBH Sabah is a 706-km highway stretching from Sindumin to Kudat in the north and Tawau to the southeast. The highway will also link to Brunei and Sarawak with a total distance of 1,236 km.