InvestIdeas

ECRL – a Hobson’s choice

ECRL will cost RM55bil.

China Communications and Construction Co (CCCC) is in control of the project.

China’s Exim Bank is forking out 85% of the funding for the 688-kilometre railway track and CCCC is the main contractor.

Staff from China constitute about one-fifth of the total 4,000-odd workforce engaged for the project so far. Apart from staff, materials, machinery and other equipment for the project are mostly coming from China.

The Malaysian government is to fork out the remaining 15% of the funding requirement, amounting to about RM8.25bil. In return, Malaysian companies are to get up to 40% of the jobs.

However, the actual amount to be given to Malaysian companies has not been finalised yet, even though some RM13bil of the RM55bil cost of the project has been drawn down.

The ECRL has come under heavy criticism for its cost of RM55bil, which translates to close to RM80mil per km. Other railway projects in Malaysia have so far averaged less than RM50mil per km.

Another RM10.5bil more is to be added on to the loan amount for fortification works along the railway track to prepare the alignment for a double track in the future.

Source: The Star

https://www.thestar.com.my/business/bus ... ns-choice/

HSR, MRT 3 projects may be reviewed

Unlike infrastructure projects such as the East Coast Rail Link (ECRL), MRT 1 and MRT 2 as well as the Pan Borneo Highway, the HSR and MRT 3 projects have not been committed yet.

“This means there’s no drawdown yet on funding, making it easier for them to be put on the back burner,” says an industry source.

The two projects have a total value of RM105bil, with the HSR at RM60bil and MRT 3 to cost about RM45bil to be built.

Of the current ongoing projects, the ECRL is the second-largest infrastructure work which the previous government had committed to after the MRT 1 and MRT 2 at a combined RM70bil.

The Pan Borneo Highway comes at a cost of RM32bil, including the Sarawak and Sabah portions.

A consortium of Gamuda Bhd-MMC Corp Bhd-George Kent (M) Bhd was recently seen as a strong contender to secure the MRT 3’s Circle Line turnkey contract.

Source: The Star

https://www.thestar.com.my/business/bus ... yFL6rWI.99

Cement price war may escalate

PETALING JAYA: The price war in the cement industry could intensify should there not be much of a recovery in demand following the reduction in infrastructure projects, following the 14th General Election (GE14).

According to CIMB Research, this is a potential negative for the earnings outlook of cement companies in the second half of the year.

“This makes it unlikely for any cement company to initiate a price hike to cover rising operating costs.

“For cement players, margins could remain under pressure,” the research house said.

It noted that cement consumption contracted 8% year-on-year in 2017 compared to a [b]6% decline in 2016.[/b]

Following this, the research house also expects demand for steel products in the second half to be negatively affected as well.

“Industrial players’ expectations of a ramp-up in production capacity of steel products required for rail projects could be muted in the second half of 2018.

“In terms of rail demand, output of steel products would mainly be absorbed by the ongoing RM9bil LRT3 and the RM32bil MRT2 Line, which we expect to enter steel-intensive phases over the next one to two years,” it said.

CIMB Research has downgraded the building materials industry to an “underweight” from “neutral.”

It said that earnings risks for cement players would sustain in the second half, more so for Lafarge Malaysia Bhd.

“We maintain a reduce call on Lafarge.

“In line with the downgrade of the construction sector, we cut the building materials industry to an underweight from neutral.

“Key upside risks include a recovery of the scaled-down contracts in 2019,” it noted.

“Our earlier expectations of a recovery in cement demand, driven by cement-intensive phases of large-scale infrastructure projects that were expected to regain momentum after the GE14 no longer hold,” it said.

CIMB Research further explained that although the domestic cement sector has come off its peak capital expenditure cycle for capacity expansion, it did not think the oversupply situation would reverse in the upcoming second half season.

Source: The Star

https://www.thestar.com.my/business/bus ... HY1764C.99

Iron, steel group expects surcharge to raise costs by RM100m a year

KUALA LUMPUR: The Iron and Steel industry expects to pay out more than RM100mil per annum in addional costs for their power consumption from July to December this year, under the revised charges.

The Malaysian Iron and Steel Industry Federation (Misif) said on Wednesday it would be adversely impacted by the government's adjustment to the Imbalance Cost Pass Through (ICPT), which came into effect on July 1.

The Energy Commission (EC) had on June 29 announced the adjustment to the ICPT by cancelling the rebate of 1.52 sen/KWhr and simultaneously imposing a surcharge of 1.35 sen/KWhr.

“The net impact of this adjustment amounted to an increase of 2.87sen/KWhr or a drastic 8%-16% increase for industrial users,” it said.

“Both steelmaking and rolling processes consume more than 650 kWh per metric tonne of electricity. This latest adjustment will translate to more than RM100mil per annum of additional cost to the industry,” it said.

In June, the Pakatan Harapan government had in the biannual review cycle, allowed the continuation of the ICPT mechanism even in the current environment of rising fuel costs.

It will maintain an average base tariff of 39.45 sen/kWh for July to December 2018 and pass through excess costs via a surcharge in line with the ICPT mechanism. A surcharge of 1.35 sen/kWh will apply to non-domestic customers.

Misif complained the iron and steel industry had been affected by cheap imports for the past five years and it was just about to recover.

However, it said the recent surge in natural gas and electricity price in June to December would hamper the recovery effort of the industry and the Malaysian economy at large, especially the last increase of both utilities was just six months ago.

Earlier, Misif had highlighted that over the last four years, the natural gas tariff was increased eight times, from RM16.07 per MMBtu to RM32.69 per MMBtu, up RM16.62 per MMBtu or 103%.

The additional gas cost incurred by the iron and steel industry is estimated to be more than RM107 mil under the new tariff against the applicable rate in May 2014.

Misif said for the industry to stay competitive regionally and globally, government support and assistance was necessary.

The industry contributed 2.9% to Malaysia GDP in 2016 and it has the potential to generate up to 6.5% of GDP growth and could potentially generate up to 225,000 job opportunities in 2020.

Source: The Star

https://www.thestar.com.my/business/bus ... Ajh66ko.99

Building Materials – Malaysia

2H18 Outlook

Following the government’s review and axeing/deferral of some mega infrastructure projects, the domestic recovery in cement and steel demand would be much more gradual than originally anticipated.

Hence, cement ASP should remain depressed even after factoring in modest improvement in 2H18.

Steel ASP should ease gradually, given rising supply and limited incremental upside from the industry consolidation in China.

Maintain MARKET WEIGHT. Top pick – Ann Joo.

Source: UOB

https://research.uobkayhian.com/content ... ab6a577375

Putrajaya approves continuation of LRT3 at a final cost of RM16.63 billion

by Surin Murugiah

KUALA LUMPUR (July 12): The Pakatan Harapan government has approved the continuation of the light rail transit 3 (LRT3) project at a final cost of RM16.63 billion.

In a statement today, Finance Minister Lim Guan Eng said the final total cost of the LRT3 project is reduced by 47% from RM31.65 billion to RM16.63 bilion, saving Malaysians a total of RM15.02 billion.

He said this will include all project costs, including but not limited to Work Package Contracts (WPC), land acquisition, project management, consultancy fees, operational and overhead costs, as well as interest during construction.

Lim said the 37km Light Rail Transit 3 (LRT3) project is a critical project meant to alleviate the issue of traffic congestion along one of the most important and densely populated economic development corridors in the Klang Valley, from Klang to Petaling Jaya.

He said the new LRT line is expected to serve a 2-million population with the capacity to transport 36,700 passenger per hour each way.

Lim added that a thorough renegotiation and rationalisation exercise of the LRT3 project was undertaken with all key stakeholders including Prasarana, MRCB-George Kent (M) Bhd joint venture (MRCB-GK JV) who is the Project Delivery Partner (PDP) and Land Public Transportation Commission (SPAD).

“One critical criteria for the review was that the integrity of the 37km LRT3 line from Johan Setia (Klang) to Bandar Utama (Petaling Jaya) must be maintained.

“In addition, the safety, frequency and quality of service must meet the requirements of the regulators,” he said.

Lim said that in addition, the construction of the LRT3 project will be restructured from a PDP model to a “fixed price contract” with MRCB-GK JV.

He said this will ensure that the price will be fixed and will not be subject to cost overruns.

“The details of this contract will be disclosed at a later stage.

“The savings of more than RM15 billion would not only mean a massive reduction of RM15 billion in debt to be incurred, but also result in additional savings to the tax-payers of up to RM14 billion in interest cost over the period of the loan financing,” he said.

Source: The Edge

http://www.theedgemarkets.com/article/p ... 63-billion

Chinese ‘projects will not go on’: Mahathir blasts Najib’s ‘stupidity’

Renegotiation of deals worth tens of billions of dollars appears to have stalled as Malaysian leader wraps up five-day visit to China

The premier continued to demur on whether he was seeking to cancel or defer the US$20 billion East Coast Rail Link and two pipelines worth over US$2 billion.

While stating that the projects had been cancelled outright, he also said they may be “deferred”.

“If we have to pay compensation, we have to pay. This is the stupidity of the negotiations before. We must find a way to exit these projects … this is our own people’s stupidity.”

Asked if the funds that had been drawn down by the Chinese companies could be recovered, Mahathir replied, “We will recover the money from Najib”.

“He was the one who entered [into these agreements] … What kind of stupidity is this? We agree to pay on time without any condition that work must be done.”

Source: SCMP

https://www.scmp.com/news/china/diploma ... sts-najibs

Lack Of Near-term Catalysts

The sector still lacks catalysts with the de-rating of the construction sector.

Unlike China steel price, local steel price has been fairly flattish since May 18 as domestic demand remained soft.

On a more positive note, the potential restructuring of the water pipe replacement project could benefit selected water pipe players such as Choo Bee.

Maintain MARKET WEIGHT and BUY for Ann Joo.

Source: UOBKH

https://research.uobkayhian.com/content ... d4b04030ac

Pan Borneo Highway to continue but won't cut across Brunei

BANDAR SERI BEGAWAN: Malaysia and Brunei Darussalam have in principle reached an understanding that the Pan Borneo Highway project, connecting Sarawak and Sabah, would not cut into the country.

The agreement was reached following a meeting between Prime Minister Tun Dr Mahathir Mohamad and Sultan Hassanal Bolkiah, which took place at the Istana Nurul Iman in conjunction with the former’s official visit to Brunei Darussalam.

Dr Mahathir said the agreement was based on several related factors, especially cost, as well as immigration issues should the highway cut into Brunei territory.

“The plan has always been to continue building this highway due to its importance to Sabah and Sarawak, but it will not enter Brunei, as initially planned.

“The Sultan of Brunei understands Malaysia’s stand on this, after taking into account the restrictions we face. The Sultan has no issues if the highway was to enter Brunei territory, but he understands our difficulties,” he said.

Dr Mahathir was speaking at a press conference at Istana Qashr Munee on Monday before ending his two-day working visit.

The prime minister said the decision was also made to simplify travel and save time as it would not be necessary to undergo immigration checks.

He said the government is studying alternative routes for the highway project, which is long awaited by the people of both states and can generate development for Sabah and Sarawak.

Asked on whether the government is studying any specific mechanisms to tackle the immigration issues, Dr Mahathir said if the highway cut across Brunei, the country’s immigration laws would still need to be adhered to.

“On that basis, we are looking at alternative routes to prevent such issues,” he said.

Dr Mahathir said the government is also studying the reason behind the delays affecting the Sabah portion of the Pan Borneo Highway.

“We will still go ahead with the project but it will take some time due to our financial situation.

“We are scrutinising the project’s delays in Sabah, as the funds have already been released. We want to know the reason behind the delay,” he said.

Dr Mahathir said the same meeting also led to an understanding being reached on a cooperation with Brunei involving exploration and drilling in two blocks given to the latter during the administration of former prime minister Tun Abdullah Ahmad Badawi.

“This cooperation can have a positive impact on Petronas’ performance,” he said, without specifying the two blocks in question.

This marks Dr Mahathir’s first visit to Brunei since becoming prime minister for the second time.

Source: New Straits Times

https://malaysia.yahoo.com/news/pan-bor ... 24071.html

MRT 2 underground contract terminated

The MOF announced that it will terminate MRT 2’s underground contract, replacing it with an international tender. This is a major negative for Gamuda.

The cost for MRT 2’s above-ground portion will be cut by 23% to RM17.4bn with no cancellation of stations. MMC-Gamuda JV will play a turnkey role.

Termination of MRT 2’s underground scope is a negative surprise. Huge order book impact if Gamuda fails in the soon-to-be-held international tender.

Source: CIMB

https://brokingrfs.cimb.com/so2M-eRIyF4 ... _YZVA2.pdf