Sector report: CONSTRUCTION (Overweight)

* 1Malaysia Development Bhd (1MDB) yesterday signed a co-operation framework agreement with State Grid Corp of China (SGCC), said TheEdgeDaily on Jan 12.

* Both parties are to commence negotiations to undertake projects within the Sarawak Corridor of Renewable Energy (SCORE). The reported further added that total planned investments by the two companies could be as much as US$11bil.

* With a registered capital of 200 billion Yuan, state-owned SGCC is China’s leading transmission and distribution company. Group’s core business is to build and operate power grids. SGCC is also entrusted with the task of providing secure and reliable power supply for most of the regions in China.

* We gather that both 1MDB are SGCC are planning to execute a number of multi-billion ringgit projects within SCORE.

* Latest development may prod renewed interest within the state of Sarawak, and trigger job opportunities for local contractors once the infrastructure projects are rolled-out. This paves the way for a potential collaboration between the Chinese parties and home-grown contractors such as Mata Sarawak Bhd, Hock Seng Lee Bhd (HSL) and Naim Cendera Holdings Bhd.

* That said, we are Neutral on this news for now. While the planned investments by the Chinese party is certainly good news, we are unsure about the actual amount to be allocated for infrastructure spending and how the jobs would be carved out.

* In addition, we remained concerned over the timeline of the planned investments. So far, bulk of the jobs coming out from Sarawak are mainly confined to smaller projects involving basic infrastructure (e.g. roads, bridges, schools).

* In any case, we continue to remain upbeat on the construction sector and maintain our

OVERWEIGHT stance. Our discussions with select contractors points toward an acceleration in domestic flows in 1H 2010.

* We understand that tenders for the RM7bil Klang Valley Light Rail Transit project should be out within the next one to two months. This follows earlier reports that tender bids for the Kelau Dam - part of the Pahang-Selangor raw water transfer project - could be out anytime soon.

* Our top picks for the sector are Gamuda Bhd (Gamuda), IJM Corp Bhd (IJM) and WCT Bhd (WCT). Margins of select contractors are also recovering as prices of building materials begin to normalise along with improved order flow prospects.