PUBLIC INVESTMENT BANK PublicInvest Research Sector Update Thursday, June 22, 2017 KDN PP17686/03/2013(032117) Construction Overweight FBM KL Construction INDEX Infrastructure Spending Still A Key Primer (m) Volume (m) KLcon Index 350 400 Infrastructure spending to continue. With a record-high c.RM58bn worth of 300 350 infrastructure jobs already dished out in 2016, we believe infrastructure 300 250 spending is still not showing any signs of slowing down, with more high profile 250 200 jobs planned. Among the key infrastructure jobs that we expect to be awarded 200 150 in the near term include East Coast Rail Link (c.RM55bn), LRT3 (c.RM10bn), 150 100 Kuala Lumpur-Singapore High Speed Rail (c.RM70bn) and MRT3 (c.RM50bn). 100 50 50 Other infrastructure jobs include BRT lines (c.RM2.0bn), Gemas-JB Double 0 0 Tracking (c.RM9bn) and Pan Borneo Sabah (c.RM13bn). Jun-16 Aug-16 Sep-16 Nov-16 Dec-16 Feb-17 Mar-17 May-17 Jun-17 Construction as economic stimulus. We believe that construction will remain SECTOR PERFORMANCE a key contributor to the local economy. As a percentage of GDP, construction continues to trend higher, with c.4.9% of GDP in 2016 from c.3.0% of GDP in 1M 3M 6M 2006-2007. It appears higher than other emerging countries (averaging 3.6% of Absolute Returns -1.5 +5.1 +17.6 GDP between 1992 and 2013) but within the range of developed countries in Relative Returns -1.9 +3.9 +8.6 Asia and Oceania (4.6% of GDP). China’s construction spending is the highest at 8.6% of GDP. As such, we expect the current trajectory of construction spending to continue, supported especially by transportation-related jobs. Maintain OVERWEIGHT stance. We expect construction stocks to continue to RECOMMENDATION TABLE be bolstered by the positive jobs flows, especially from the huge infrastructure projects planned. This year started with the remaining MRT2 contracts Current Target Upside awarded, and the award of the RM1bn Bukit Bintang City Centre (BBCC) retail Call (RM) (RM) (%) mall to IJM Corporation (IJM). Prasarana also dished out two smallish LRT3 contracts to Mudajaya (RM58m) and WCT Holdings (RM186m). We expect Gamuda 5.40 6.20 +15 O other civil work packages for LRT3 to be rolled out soon as the tenders are IJM 3.46 3.40 -2 N WCT 2.04 2.00 -5 N already closed back in March. Revenue visibility remains good, with most Jaks 1.51 1.50 -1 N construction players under our coverage having outstanding order books that TRC 0.71 0.82 +15 O could last them c.2-5 years, with scope for jobs replenishment remaining HSL 1.63 1.86 +14 O healthy. The FBM KL Construction Index is now trading at a rolling 1-year forward PE of c.16x, which above the mean of 15x. The index has moved up significantly from its 5-year low in 2012 where it tested -1SD (standard deviation) below mean and within the peak reached in 2016. Selected construction players such as big cap players Gamuda and IJM could continue to be the prime beneficiaries, especially from infrastructure projects. Meanwhile, other small- mid cap players will enjoy the spillover by participating as sub-contractors for the mega projects. That said, earnings of Gamuda and IJM could be pressured by weakness from respective property segments, but news flows are expected to hog the limelight and sustain the premium valuations. The sector enjoyed premium valuations as evident during the Ninth Malaysia Plan (9MP) and Tenth Malaysia Plan (10MP) periods. To recap, the construction sector traded as high as c.25x PE or above +2SD in 2007/08. Tan Siang Hing T 603 2268 3016 F 603 2268 3014 E [email protected] 1 Important disclaimer is provided at the end of this report.| PUBLIC INVESTMENT BANK Page 1 of 11 PUBLIC INVESTMENT BANK Development Spending Under Eleventh Malaysia Plan (11MP) Development spending at RM45bn in Under 11MP, the total development expenditure allocated is RM260bn, with c.RM45bn 2016, and projected another RM46bn in already spent in 2016. In 2017, the government’s gross development expenditure 2017 spending is projected to grow 2.2% YoY to RM46bn. With the allocation under 11MP still unchanged, the average spending for 2017 to 2020 is c.RM53.8bn. Hence, we still believe that that the jobs flows will continue to be robust, underpinned by major jobs such as MRT, LRT, Pan Borneo, East Coast Railway Link and the Kuala Lumpur- Singapore High Speed Rail. Figure 1: Development Expenditure Allocation 10 MP 11 MP Allocation: RM230bn Allocation: RM260bn Spent:RM223.6bn 60 53.8 50 46.4 46.9 45.0 42.2 40.5 39.5 40 30 20 10 0 2011 2012 2013 2014 2015 2016 2017-2020 Source: MOF Construction spending as a percentage of GDP has been trending higher and stood at Construction spending as % of GDP 4.9% in 2016. It appears higher than the average of other emerging countries (averaging 3.6% of GDP between 1992 and 2013 based on the studies by MGI) but within the range of developed countries in Asia and Oceania (4.6% of GDP). China’s construction spending is the highest at 8.6% of GDP. As such, we expect the current trajectory of construction spending to continue, supported especially by transportation- related jobs. Figure 2: Construction Spending GDP 6.0 Construction GDP(RHS, bn) 70 Construction Sector as % to GDP(LHS) 5.0 60 50 4.0 40 3.0 30 2.0 20 1.0 10 0.0 0 2010 2011 2012 2013 2014 2015 2016 Source: CEIC 2 Important disclaimer is provided at the end of this report.| PUBLIC INVESTMENT BANK Page 2 of 11 PUBLIC INVESTMENT BANK Figure 3: Infrastructure Spending as % of GDP Source: MGI Infrastructure spending taking the lead Total construction jobs awarded in 2016 almost matched the record-high chalked in 2014, with infrastructure jobs picking up the slack in the property sector. We believe Infrastructure spending picking up the that infrastructure spending will continue to drive the sector, with more mega projects slack from property sector in the pipeline. Infrastructure-related projects doubled to RM88bn in 2016 whilst residential and non-residential fell 26% and 23% YoY respectively due to softer property market. As evident in the Government’s recent budgets, the priority will be on infrastructure spending especially transportation projects such as MRT, LRT, HSR, etc. To recap, the single largest infrastructure undertaking, the MRT project in the Klang Valley, is targeted to complete its line 1 by July 2017, which we believe is a strong testament to local contractors’ execution abilities and the successful approach using the Project Delivery Partner (PDP) model. More projects are currently adopting the same approach, amongst which are MRT Line 2, LRT 3 and Pan Borneo Highway. Figure 4: Total Awarded Jobs (CIDB) 200,000 178,819.7 176,263.4 140,733.0 150,000 127,615.8 131,038.5 99,461.6 93,294.2 85,837.1 91,008.5 100,000 74,913.7 mn MYR 50,000 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: CIDB 3 Important disclaimer is provided at the end of this report.| PUBLIC INVESTMENT BANK Page 3 of 11 PUBLIC INVESTMENT BANK Figure 5: Jobs Awarded Contracts by Type 83,108 63,108 43,108 mn MYR 23,108 3,108 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Residential Infrastructure Non-Residential Social Amenities Source: CIDB Major Infrastructure Projects in 2017 1)MRT 2 With recent awards to Gadang, TRC Synergy and Acre Works, all the 10 viaduct (“V”) packages for MRT 2 have effectively been dished out. According to sources, works are progressing well and targeted to be fully completed by 2022. The line will serve a corridor with a population base of c.2m people stretching from Sungai Buloh to Putrajaya and will include Sri Damansara, Kepong, Batu, Jalan Sultan Azlan Shah, Jalan Tun Razak, KLCC, Tun Razak Exchange, Kuchai Lama, Seri Kembangan and Cyberjaya. The proposed alignment is 52.2km of which 13.5km is underground. A total of 37 stations, 11 of them underground, will be built. The consortium of MMC-Gamuda won the RM15.5bn contract with the PDP fees set at 6% (similar to Line 1) but with three additional KPIs which will constitute about 0.5% of the 6%. We understand these are for safety, quality and response to the public. Figure 6: Timeline of MRT2 Source: Prasarana 2)LRT 3 To recap, the Project Delivery Partner (PDP) for the LRT 3 was awarded to the joint venture of George Kent and Malaysian Resources Corporation Berhad (MRCB), with an estimated RM9n construction cost. The 37km line connecting Bandar Utama in Petaling Jaya to Johan Setia in Klang will consist of 26 stations (25 elevated and 1 underground), 5 integrated stations and 10 park and ride facilities. Prasarana Malaysia has begun dishing out the LRT 3 jobs, albeit smallish, with the contracts awarded in April to Mudajaya Group (RM58m contract sum) to manufacture, supply and deliver precast pier caps and WCT Holdings (RM186m) for the construction and completion of the Johan Setia Depot (Phase 1). We understand that tender briefings for the major civil construction packages were closed recently and anticipate that the results should be out soon. 4 Important disclaimer is provided at the end of this report.| PUBLIC INVESTMENT BANK Page 4 of 11 PUBLIC INVESTMENT BANK Figure 7: Timeline of LRT3 Source: Prasarana 3) Pan Borneo Sabah Pan Borneo Highway Sabah, which has an estimated construction cost of c.RM13bn, is a Federal Government project to upgrade road connectivity in Sabah.