infrastructure/ property · 2016/12/07 · fig 8: transportation proposal map in sabah structure...

7 December 2016

Affin Hwang Investment Bank Bhd (14389-U)

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Land below the wind

We had a working visit to Kota Kinabalu (KK) recently. Key findings

are infrastructure development is accelerating, tourist arrivals are

seeing sustained growth, oil and gas investments continue despite

weak prices and new large-scale integrated property development

projects will transform Greater KK in the 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 are Suria Capital and SBC Corp.

Infrastructure development to improve connectivity

One of the key focus for the development of Sabah under the 11th

Malaysia Plan 2016-2020 (11MP) is improving connectivity via

infrastructure development. Some of the planned projects include the

RM12.8bn Pan Borneo Highway (Sabah section) (PBH) and new RM311m

KK Bus Rapid Transit (BRT). For the long-term development of 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, build

new railway lines to connect north and east coasts of Sabah.

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

delivery partner (PDP) for the PBH Sabah project in April 2016. Three

packages have been awarded and the remaining packages are targeted to

be awarded by end-2017 to ensure the project is completed by March

2021. Potential beneficiaries are Suria-GAQRS joint venture (JV) and

WCT, which are bidding for the PBH Sabah project.

Major property development projects planned

A major development taking off is the re-development of KK Port with

estimated gross development value (GDV) of over RM5bn comprising One

Jesselton (developed by GAQRS-Suria JV), Jesselton Quay (developed

by SBC-Suria JV), KK Convention City (developed by Mah Sing) and

Sabah International Convention Centre. Suria is also planning to acquire

28.9-acre land 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.

Top BUYs are GAQRS and WCT for Sabah exposure

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 re-development project. Construction contract awards for the PBH

Sabah will 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.

Valuations of companies in our universe with Sabah exposure

Stock Bbg Rating Price TP Upside Mkt Cap

(RM) (RM) (%) (RMbn) CY16 CY17 CY16 CY17 CY16 FY16 FY16

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

DY (%) ROE (%)Core PE (x) Core EPS Gr (%) PBV (x)

Note: Share prices as of close on 6 December 2016. Source: Affin Hwang estimates, Bloomberg

Sector Update

Infrastructure/ Property Overweight (maintain)/ Overweight (maintain) Absolute Performance (%) 1M 3M 12M GAQRS (2.2) (12.0) 4.1 WCT Hldgs (2.2) 9.9 20.4 Suria Cap (2.9) (0.5) (21.3) SBC Corp (5.7) (11.2) 12.1 Relative Performance (%)

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Source: Affin Hwang, Bloomberg

Loong Chee Wei, CFA (603) 2146 7548

[email protected]

7 December 2016


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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 will 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 is the sixth highest GDP contributor to Malaysia in 2015 at 6.6% of

the country’s GDP. But ranks 13th in terms of GDP per capita at RM19.7k

in 2015, below the country’s average of RM37.1k. The state achieved a

stronger real GDP growth of 6.1% compared to the national average of 5%

in 2015 for the first time over the last six years.

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Fig 2: Percentage share of GDP by state in 2015

Source: Malaysian Department of Statistics

Fig 3: GDP per capita by state in 2015


Fig 4: GDP growth rate for Sabah and Malaysia (at 2010 prices)


Services sector remained the highest contributor to Sabah’s GDP at

40.8% of total, followed by agriculture sector (21.8% of total) and 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.

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Fig 5: Sabah’s GDP breakdown in 2014 and 2015


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 of the coast of Sabah.

Fig 6: Crude palm oil production by state in January-October 2016

Source: Malaysian Palm Oil Board

7 December 2016


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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 focus 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, build

new railway lines to connect north and east coasts of Sabah.

WCT is one of the Peninsular Malaysia-based contractors that have 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.

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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. The highway will improve

the connectivity of major towns and cities in East Malaysia and is expected

to attract more domestic and foreign direct investments in Sabah and

Sarawak to spur faster economic growth in the long run.

The PBH Sabah project has been divided into 35 packages worth RM350-

400m per package. Three packages have been awarded to local Sabah

contractors and the intention is to award all remaining packages to local

contractors. But contractors from Sarawak and Peninsular Malaysia may

be allowed participate through joint ventures if there are insufficient local

players with the expertise to undertake all the remaining packages. We

understand that Suria-GAQRS joint venture (JV) and WCT are interested

to bid for the PBH Sabah project.

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Fig 9: Pan Borneo Highway Sabah alignment

Source: Knight Frank

Gabungan AQRS is a potential beneficiary as it plans to bid for the PBH

Sabah project together with Suria Capital. Meanwhile, it is expanding the

precast concrete plant under its 49%-owned Sedco Precast Sdn Bhd, a

joint venture with state-owned Sabah Development Corp, to supply precast

concrete products for the PBH Sabah project. Since there are local content

requirements for the sourcing of precast products, Sedco Precast will

benefit given it owns one of the largest precast concrete plants in Sabah.

Major property development projects planned

The Sabah property market was hit by the weak sentiment this year due to

the tight lending policy imposed by the banks and affordability issues. The

higher cost of living following the implement of the Goods and Services

Tax (GST) contributed to the property market downturn. The residential

property market was hit by a slowdown in transaction volume since 1H15,

hitting a low of 1,667 units (-36% yoy) in 1H16. Transaction value fell to

RM559m (-33% yoy) in 1H16 after hitting a peak of RM832m in 1H15.

Fig 10: Residential property transaction volume and value in Sabah

Source: NAPIC

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According to Knight Frank, the office market remained robust in KK with

average occupancy rate remaining high at 91.8% and average rental rates

hitting a record high of RM2.71 psf in 2015. However, the surge in net

retail space to 5.65m sq ft (+16% yoy) with the completion of new malls

led to a decline in average occupancy rates to 78% in 2015 from 91% in

2014. The IMAGO shopping mall opened on 28 March 2015, which is set

itself apart by being owned by a single owner compared to other malls that

are partial and fully strata-titled.

There are several major property development projects being undertaken

or has been planned in KK Port and Tanjung Aru, Sabah. The re-

development of KK Port has a GDV of over RM5bn comprising One

Jesselton (RM1.8bn GDV developed by GAQRS-Suria JV), Jesselton

Quay (RM1.8bn GDV developed by SBC-Suria JV), KK Convention City

(RM1.4bn GDV developed by Mah Sing) and Sabah International

Convention Centre.

These Jesselton waterfront integrated mixed development will change the

landscape of KK with iconic buildings with close proximity to the jetty for

island hopping to popular beaches on Gaya island. Suria is also planning

to acquire 28.9-acre land at KK Port for about RM350m to develop an

International Cruise Terminal as part of the integrated mixed development

project complementing nearby Jesselton waterfront development.

Fig 11: Kota Kinabalu Port Aerial View

Source: Suria Capital

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Fig 12: One Jesselton Waterfront


Fig 13: Jesselton Quay


Fig 14: Kota Kinabalu Convention Centre


SBC Corp had a maiden launch comprising 300 units of serviced

apartments in its Jesselton Quay project on 26 October 2016. All the units

were booked in the first two hours of launch at selling prices of RM1,000-

1,200 psf. We gather that most of the buyers were locals. This highlights

the strong inherent demand for waterfront and prime properties in KK.

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SP Setia is developing the Aeropod project in Tanjung Aru with remaining

GDV of RM2.2bn. We gather that it has launched RM500m worth of

properties and has achieved take-up rates of 95% to date. Serviced

apartments were sold at average selling price of RM800 psf with the latest

launch at RM950 psf. The re-development of the train station to Danum

was an integral part of the Aeropod mixed development project.

Fig 15: Aeropod @ Tanjung Aru


Besides SP Setia and Mah Sing, some of the other listed property

developers with projects in Sabah are WCT, Gamuda and IJM Corp. But

the Sabah projects only form a relatively small proportion of these large

developers’ total GDV (less than 6% of total GDV). Hence, the property

developers that are focused in Sabah with a large proportion of their total

GDV in Sabah are GAQRS (57% of total GDV) and SBC Corp (38% of

total GDV).

Fig 16: GDV of Sabah projects for selected developers

Source: Company

7 December 2016


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Fig 17: Sabah projects’ GDV as a percentage of total GDV

Source: Company

Top BUYs are GAQRS and WCT for Sabah exposure We believe the rapid pace of development in Sabah will spur stronger

economic growth in the long run. Although the infrastructure projects are

mostly reserve for local Sabah contractors, we believe there will likely be

capacity constraints faced by them given the large size and scope of

contract packages. Hence, we believe Peninsular Malaysia-based

contractors such as GAQRS and WCT could bid for the packages by

forming joint ventures with local players. We believe the JV between

GAQRS and Suria to bid for the PBH Sabah project has a good chance of

winning a package, given that Suria is a majority state-owned listed

enterprise. Hence, these are our top BUYs for exposure to Sabah.

7 December 2016


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BUY Total return is expected to exceed +10% over a 12-month period

HOLD Total return is expected to be between -5% and +10% over a 12-month period

SSEELLLL Total return is expected to be below -5% over a 12-month period

NOT RATED Affin Hwang Investment Bank Berhad does not provide research coverage or rating for this company. Report is intended as information only and not as a

recommendation

The total expected return is defined as the percentage upside/downside to our target price plus the net dividend yield over the next 12 months.

OVERWEIGHT Industry, as defined by the analyst’s coverage universe, is expected to outperform the KLCI benchmark over the next 12 months

NEUTRAL Industry, as defined by the analyst’s coverage universe, is expected to perform inline with the KLCI benchmark over the next 12 months

UNDERWEIGHT Industry, as defined by the analyst’s coverage universe is expected to under-perform the KLCI benchmark over the next 12 months

This report is intended for information purposes only and has been prepared by Affin Hwang Investment Bank Berhad (14389-U) (formerly known as HwangDBS Investment Bank Berhad) (“the Company”) based on sources believed to be reliable. However, such sources have not been independently verified by the Company, and as such the Company does not give any guarantee, representation or warranty (express or implied) as to the adequacy, accuracy, reliability or completeness of the information and/or opinion provided or rendered in this report. Facts, information, views and/or opinion presented in this report have not been reviewed by, may not reflect information known to, and may present a differing view expressed by other business units within the Company, including investment banking personnel. Reports issued by the Company, are prepared in accordance with the Company’s policies for managing conflicts of interest arising as a result of publication and distribution of investment research reports. Under no circumstances shall the Company, its associates and/or any person related to it be liable in any manner whatsoever for any consequences (including but are not limited to any direct, indirect or consequential losses, loss of profit and damages) arising from the use of or reliance on the information and/or opinion provided or rendered in this report. Any opinions or estimates in this report are that of the Company, as of this date and subject to change without prior notice. Under no circumstances shall this report be construed as an offer to sell or a solicitation of an offer to buy any securities. The Company and/or any of its directors and/or employees may have an interest in the securities mentioned therein. The Company may also make investment decisions or take proprietary positions that are inconsistent with the recommendations or views in this report. Comments and recommendations stated here rely on the individual opinions of the ones providing these comments and recommendations. These opinions may not fit to your financial status, risk and return preferences and hence an independent evaluation is essential. Investors are advised to independently evaluate particular investments and strategies and to seek independent financial, legal and other advice on the information and/or opinion contained in this report before investing or participating in any of the securities or investment strategies or transactions discussed in this report. Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages of any kind relating to such data. The Company’s research, or any portion thereof may not be reprinted, sold or redistributed without the consent of the Company. The Company, is a participant of the Capital Market Development Fund-Bursa Research Scheme, and will receive compensation for the participation. This report is printed and published by: Affin Hwang Investment Bank Berhad (14389-U) A Participating Organisation of Bursa Malaysia Securities Bhd Chulan Tower Branch, 3rd Floor, Chulan Tower, No 3, Jalan Conlay, 50450 Kuala Lumpur. www.affinhwang.com Email : [email protected] Tel : + 603 2143 8668 Fax : + 603 2145 3005

infrastructure/ property · 2016/12/07 · fig 8: transportation proposal map in sabah structure...

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