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Economic Transformation Programme - Full house on Open Day (OSK Research)

Full House on Open Day

The ETP Open Day certainly attracted much attention as the presentation halls and breakout sessions were packed. We believe the biggest excitement was with regard to the Greater KL NKEA, which promises more immediate and tangible projects. While some uncertainties remain, the ETP is certainly the best Economic Reform blueprint the Government has come up with in recent years and we believe it has more than a fighting chance of success.

Meanwhile, its overall impact on the market would be rather muted, with the key beneficiaries still being infrastructure related players such as Gamuda, MMC and MRCB.

Full House. We believe the attendance at the Economic Transformation Programme (ETP) Open Day exceeded the Performance Management and Delivery Unit’s (Pemandu)’s expectations as the presentation hall was overflowing and so were the Breakout sessions, where the National Key Economic Areas (NKEAs) were explained in detail. This indicates the strong interest Malaysians from all walks of life have in the ETP and on how it may change their future.

Greater KL booth the main draw. While all 12 NKEA booths had their fair share of visitors, we believe the one on Greater KL attracted the most interest as it had:

(1) a scale model of KL and all the new proposed property developments;
(2) more tangible projects such as the KL MRT and River of Life Entry Point Projects (EPPs), with high-level financial figures available; and
(3) its projects were the most likely to kick off first. Most of the other booths, however, displayed only 1 or 2 high impact proposed projects that are ready to start immediately.
Better than anything before. We believe the ETP is the best economic reform plan that the Government has come up with in recent years. In fact, Pemandu highlighted that it was the first of its kind in the world. Definitely the details provided in terms of tangible projects give it more than a fighting chance of succeeding.

There are still uncertainties, though. Nonetheless, the 12 NKEAs are much broader in scope than the 6 National Key Result Areas (NKRAs) in the Government Transformation Programme (GTP), also undertaken by Pemandu.

The GTP also had a lot more tangible KPIs and on the ground projects that the Government itself could kick start. The ETP’s targets, on the other hand, are more high level in terms of job creation and Gross National Income (GNI), and the Government will have to depend largely on the Private Sector to kick start the EPPs as 92% of the investment is to come from the Private Sector. As such, we believe that cutting down on Government bureaucracy will have to be a critical factor in ETP’s success.

 Otherwise, uncertainties with regard to EPPs kick-starting might derail the process. Infrastructure players still the Beneficiaries. With most of the excitement coming from the
Greater KL NKEA, we still see positive sentiment on infrastructure players such as Gamuda (TRADING BUY, FV: RM4.00) and MMC Corp (TRADING BUY, FV: RM2.59) for the MRT and MRCB (TRADING BUY, FV: RM1.80) which may be involved in land development around KL.

Do note that all these stocks have minimal or no upside to our fair values and are very much Trading Ideas riding on the positive sentiment from economic reform. While there might be other examples of beneficiaries such as Dialog (BUY, FV: RM1.47) from its deepwater terminal and HELP International (NEUTRAL, FV: RM4.30) from its PPP schools, we see these projects as having a greater amount of uncertainty as compared to the KL MRT and the property plays in KL. We note the rumour of a casino in Sabah but believe there are still many hurdles faced by this proposal for now.

WHAT WE SAW
Full House. The attendance at the Performance Management and Delivery Unit’s (Pemandu) Open Day on the Economic Transformation Programme (ETP) exceeded their own expectations as the hall was overflowing and some attendees had to watch the speeches on the screens outside. The Breakout sessions, during which each of the 12 National Key Economic Areas (NKEAs) were described in more details, were also packed, which indicates the keen interest that Malaysians from all walks of life have i n the ETP. In this report, we summarise briefly the ETP but given that it has largely been covered in the media, we will instead highlight the key points from the ETP Open Day as well as our current view on it.

The ETP in brief. To summarise the key points:

  • Is a programme with key action items, projects and targets rather than a high level plan with strategiesand ambitions
  • Expected to involve USD444bn in investment through 2020
  • Will lift Malaysia’s Gross National Income past USD15,000 per capita, making Malaysia a High IncomeNation
  • Involves 131 Entry Point Projects (EPPs) and 60 business opportunities
  • Will generate 3.3 million jobs
  • 92% of the investment is to come from the Private Sector, with the Government only contributing some8%
  • Focus is on Domestic Direct Investment, with some 73% of investment to come from domestic sources
  • Out of the 131 EPPs, 7 have been identified as having obtained firm commitment from parties keen tostart Among the high priority EPPs are the KL Mass Rapid Transit (MRT) system, investment by E&E firms inthe upstream semiconductor industry in Penang and the development of a “Malaysia Truly Asia’’ tourist center in KL
  • Other than the 7 priority projects, key EPPs include the LNG regasification plant in Melaka, the high speed rail link with Singapore, covered walkways connecting shopping centres in KL, the listing of more GLCs and the reduction of Government stakes in existing GLCs.
More details on the EPPs. While the presentations on the Open Day was nothing new, having already been presented at our 15 Sept Singapore event with Pemandu as well as an analyst briefing, the booths did provide more details on the 131 EPPs. Each NKEA had its own booth with elaboration (in both Bahasa Malaysia and English) on the background of the NKEA, the rationale for its inclusion as an NKEA, the challenges faced as well as the way forward, in addition to the EPPs within the NKEA.

Greater KL booth the main attraction. While all the booths had their share of visitors, the booth that attracted the most interest was the one on Greater KL. This was due to the fact that there were more financial details on the ETPs highlighted in this booth, which indicate that at least some preliminary costing has been carried out as well as the fact that most of the EPPs here are more tangible. Examples of the EPPs in KL include the KL MRT, the pedestrian walkways to promote a greener KL and tourism, as well as the River of Life project. Maps of the KL MRT, which have been eagerly awaited, were provided as well as the overall development plan for Greater KL, which were presented in a scale model

highlighting the following developments:
  • Kampung Baru development
  • Pudu Jail
  • KL Financial Centre
  • Malaysia Truly Asia Centre
  • River of Life nodes
  • 1Malaysia Sungai Besi
  • Global Healthcare Metropolis in part of the Universiti Malaya campus
WHAT WE THINK
The Good. The ETP certainly appears revolutionary in terms of its level of details and Pemandu indicates that it is actually the first of its kind in the world. Certainly nothing close to this has ever occurred in Malaysia in recentyears and we are comforted by the fact that the Government seems to have a clear plan of where it wants Malaysia to go. If any of the Government’s recent plans has a chance of success, we think the ETP does.

The Uncertain. On the flip side, the ETP seems to be much more broad-based than the Government Transformation Programme (GTP) and the details revealed thus far at the Open Day do not seem to be of the same level as that of the GTP. Also, with its much heavier dependence on the Private Sector, it appears that there is less that the Government could do to ensure that the EPPs proceed as scheduled. Finally, even for the sections that are dependent on the Government, the KPIs seem more vague and harder to track compared to the GTP.

The examples. We take 2 examples to illustrate our point.
  • In the first one, we look at the GTP and the National Key Result Area (NKRA) on crime reduction. In this NKRA, it could be highlighted that the KPI was a reduction in the crime and street crime indexes.

    Projects include ranking all the police stations, identifying the hot spots, redeploying personnel to the hot spots and rewarding police stations that have reduced crime in their areas. All very hands on and practicable action, but if we compare this with the NKEAs, the target is for a certain amount of GNI to be generated via a certain number of EPPs and Business Opportunities.

    The private sector will have to be enticed into carrying out the EPP (with the promise of profit) and the Government basically sets out the roadmap and acts as an enabler without offering any direct carrot or stick to ensure that there is progress.

  • As the other example, we look at the River of Life EPP. In this EPP, 10 nodes along the Klang River are to be beautified and redeveloped. For this, it is indicated that some RM3.6bn will have to be spent in sewage treatment, squatter relocation, drainage and flow management and managing river cleanliness.

    However, some have pointed out that the proposed cost seems a bit high. Also, it was not revealed which authority would spearhead the rehabilitation project and whether any private companies would be involved in the redevelopment and whether the costs of the river rehabilitation would be funded by the riverside property development.

    If these details are available in the final copy of the ETP book, than it would indeed be a very potent tool in the development of Malaysia. Nonetheless, in any case, the fact that the Government is embarking on the ETP with identifiedprojects and is willing to engage the private sector to act as an enabler is a very positive step in the right direction.
The Beneficiaries. Out of the 12 NKEA booths, we believe the one on Greater KL provided the highest level of details as well as short term excitement. As such, we continue to see the beneficiaries being those involved in infrastructure development, including Gamuda (TRADING BUY, FV: RM4.00) and MMC Corp (TRADING BUY, FV: RM2.59) for the MRT and MRCB (TRADING BUY, FV: RM1.80), which may be involved in land development around KL. Do note that all these stocks have minimal or no upside to our fair values, and are very much Trading Ideas riding on positive sentiment from economic reform.

While there might be other beneficiaries such as Dialog (BUY, FV: RM1.47) owing to its deepwater terminal, and HELP International (NEUTRAL, FV: RM4.30) from its PPP schools, we see a greater degree of uncertainty over these projects compared to the KL MRT and the property plays in KL. We note the rumour of a casino in Sabah but believe there are still many hurdles faced by this proposal for now.
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