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Construction Sector (AmResearch) - Expanding the role of PPP projects

OVERWEIGHT

• The Federal Government unveiled the 10th Malaysia Plan (10MP) yesterday. Not surprisingly, total development allocation was RM230bil – or a marginal 4% growth compared to the RM220bil allocated under the 9MP (including Private Finance Initiative or PFI projects).

• Broadly, the upcoming 10MP period sets the tone for a moderation in infrastructure project roll-outs – given the Federal Government’s target to reduce its fiscal deficit from an estimated 5.3% in 2010 (2009: 7%) to 3% in 2015. To be sure, the share of physical infrastructure is expected to drop from 78% under the 9MP to 60% under the 10MP.

• A fairly sizeable portion of infrastructure spending would likely be partly-funded by the private sector - where 52 “high-impact” projects worth a combined RM63bil (27% of development allocation under the 10MP) have been earmarked under the public-private partnership (PPP) concept. This would include: (1) Seven highway projects worth RM19bil (This would include the West Coast Expressway, Guthrie-Damansara Expressway, Sungai Juru Expressway and Paroi-Senawang-KLIA expressway); (2) Two coal-fired power plants (~RM7bil); and (3) Development of Malaysian Rubber Board’s 3,300-acre land in Sungai Buloh (RM10bil)

• An RM20bil facilitation fund would also be provided to ease the funding needs of the private sector. Such projects may include Land Reclamation works in West Port (Port Klang), Malaysia Truly Asia Centre (KL) and Senai High Technology Park (Iskandar Malaysia).

• But the exact mechanism and funding of the PPP projects remain uncertain at this juncture. We believe the PPP concept is not something new – and is actually another form of privatised/semi-privatised projects similar to the PFI structure. In any case, actual execution of RM20bil worth of PFI jobs announced during the 9MP have been far and few.

• Conceptually, we believe the proposed Klang Valley MRT system makes sense – as it would help integrate the existing monorail/LRT lines – and be in line with the Federal Government’s aims to increase the usage of public transportation in Malaysia. But - we are unsure about the status of this massive project jointly-proposed by Gamuda Bhd (Gamuda) and MMC Corp Bhd (MMC) – given its estimated RM30bil tag and associated funding concerns. Nor was there any clarity on a timeline of the RM7bil Klang Valley LRT extension works during the unveiling of the 10MP.

• We do not think the 10MP would excite the market – given a lack of fresh project catalysts apart from the MRT proposal. Likewise, select cornerstone jobs that have been announced are also not something new (e.g. Gemas-Johor Bahru double-tracking project). Of the few noteworthy new projects that have been proposed - e.g. Gombak Integrated transport terminal, expansion of Penang Port – contract value is not likely to be sizeable (i.e. less than RM500mil).

• However, we expect a further re-acceleration of contract flows in Sarawak. The inclusion of two massive aluminium smelters in SCORE worth RM18bil should help prod a faster roll-out of basic infrastructure required to support the region’s deep potential. Our top Sarawak picks are Naim Holdings Bhd (BUY, FV=RM4.60/share) and Hock Seng Lee Bhd (BUY, FV=RM2.00/share).

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