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ed-CK / sa- WMT

Dissecting the AMPC dream Transportation spending to anchor ASEAN’s growth

Cross-border projects – Malaysia more dire

DBS Matrix ranks Indonesia highest and Thailand lowest

Key Buys – PTPP, Gamuda, Suncon and Ch. Karnchang Transportation infrastructure to fuel growth. The estimated annual infrastructure needs in ASEAN for 2015-2025 range from US$60-146bn where half is believed to be transport-related. Similar to One Belt, One Road (OBOR), the more advanced ASEAN Master Plan for Connectivity (AMPC) aims to link Southeast Asian countries more seamlessly. Within ASEAN, Thailand’s focus on AMPC projects appears to be more on upgrading of domestic railway works while the regional connectivity projects are hampered by G-to-G and financing issues. In Indonesia we have seen overlap between Jokowi’s Sea Toll Road programme and ASEAN Single Shipping Market (ASSM) and RO-RO network. Malaysia’s progress seems the most advanced with the last leg of double tracking awarded.

Indonesia provides highest cross-border opportunities. Indonesia’s infrastructure needs are the highest at US$235bn over 2013-30 (vs Malaysia US$100bn and Thailand US$105bn). The 2015/16 Global Competitiveness Index survey also ranks Indonesia the poorest at 62/140 vs Malaysia at 25 and Thailand at 44, implying the biggest opportunities also lie there. The AMPC could be the right platform for more G-to-G co-operation and facilitate more cross-border work. Malaysian contractors are most hungry in terms of exploring cross-border opportunities while Thailand appear more risk averse and in Indonesia there is no pressing need to do so.

Earnings momentum. Overall all three countries have shown more cuts in consensus earnings due to the mixture of project delays, margins and dilution from capital raising exercises. Malaysia and Indonesia have shown strong correlation in earnings upgrades and share prices (Suncon, Kimlun and WSKT). Revenue visibility for the larger cap contractors across three countries are at 2-3x historical revenue which should provide an adequate earnings buffer.

Stacking them up. We use five criteria to rank the order of preference for infrastructure exposure to the three ASEAN countries: 1) the GCI Ranking for Infrastructure, 2) earnings risk, 3) valuations, 4) political motivation, and 5) cross border. We like Indonesia, Malaysia and Thailand in this order. Our key BUYs are PTPP, Gamuda, Sunway Construction and Ch. Karnchang.

Analyst Chong Tjen-San, CFA +60 3 26043972 [email protected] Tiesha Putri +6221 30034931 [email protected]

Apichaya KETRUTTANABORVORN +66 2657 7823 [email protected]

ASEAN CONSTRUCTION STOCK UNIVERSE

Prices as of 8 Jul 2016

Source: AllianceDBS, DBS Vickers

DBS Internal Ranking Matrix GCI Earnings V aluat ions Polit ical Cross border A v erage Rank

Risk sMalay sia 3 2 2 1 1 1.800 2

Indonesia 1 1 1 2 3 1.600 1

T hailand 2 3 3 3 2 2.600 3


DBS Group Research . Equity 11 Jul 2016

Asian Insights SparX

Asean Construction

Refer to important disclosures at the end of this report

Price Mkt Cap Target Price Performance (%)

LCL US$m LCL 3 mth 12 mth Rating

Gamuda 4.91 2,966 5.80 (1.2) 4.9 BUY IJM Corp 3.46 3,114 3.30 (4.7) 2.5 HOLD WCT Holdings Bhd 1.47 459 1.55 (15.0) 18.8 HOLD Muhibbah Engineering 2.21 261 3.10 (6.0) 5.2 BUY

Sunway Construction 1.62 524 1.92 (1.2) N.A BUY Kimlun Corp 1.82 137 2.38 (1.6) 37.9 BUY MMC Corporation 2.03 1,546 3.50 (4.3) (14.4) BUY Wijaya Karya 2,880 1,348 2,550 13.4 18.2 HOLD Waskita Karya 2,500 2,583 2,700 27.2 67.8 HOLD Pembangunan Perumahan

3,810 1,405 4,600 1.0 12.4 BUY

Wijaya Karya Beton 935 620 1,000 (3.5) (3.5) HOLD Ch. Karnchang 30.00 1,445 35.00 20.0 14.3 BUY Sino-Thai Engineering & Con. 23.20 1,006 26.00 5.0 3.1 BUY


Asean Construction

The DBS Asian Insights SparX report is a deep dive look into thematic angles impacting the longer term investment thesis for a sector, country or the region. We view this as an ongoing conversation rather than a one off treatise on the topic, and invite feedback from our readers, and in particular welcome follow on questions worthy of closer examination.

Table of Contents AMPC-driven and Other Transport-related Initiatives 3

Transport-based Infrastructure Projects:

Malaysia 11

Indonesia 13

Thailand 16

Global Competitiveness Index – Standings and Opportunities 19

Cross-border Opportunities 22

Funding Gaps 25

Earnings Momentum and Consensus Change 31

Valuation and Regional Sector Comparison 33

Strategy and Stock Picks 38

Company Guides 41

Ch. Karnchang 42

Gamuda 49

IJM 56

Kimlun 64

Muhibbah Engineering 70

PTPP 76

Sino-Thai Engineering 82

Sunway Construction 90

Waskita Karya 98

WCT 105

Wijaya Karya 112

Wijaya Karya Beton 118

Special thanks toSpecial thanks toSpecial thanks toSpecial thanks to……………………

Chong Tjen-San, CFA +60 3 26043972

[email protected]

Tiesha Putri +6221 30034931

[email protected]

Apichaya KETRUTTANABORVORN +66 2657 7823

[email protected]

For their contributions on the respective company notes


Asean Construction

ASEAN CONSTRUCTION – AMPC-DRIVEN AND OTHER TRANSPORT-RELATED INITIATIVES Annual Annual Annual Annual infrastructure needs infrastructure needs infrastructure needs infrastructure needs in ASEAN are huge (201in ASEAN are huge (201in ASEAN are huge (201in ASEAN are huge (2015555----2025)2025)2025)2025)

ADB-ADBIADB-ADBIADB-ADBIADB-ADBI McKins ey Globa lMcKins ey Globa lMcKins ey Globa lMcKins ey Globa l KPMGKPMGKPMGKPMG BhattacharyayBhattacha ryayBhattacha ryayBhattacha ryay Goldman SachsGoldman SachsGoldman SachsGoldman Sachs UNCTADUNCTADUNCTADUNCTAD

(2009)(2009)(2009)(2009) Ins titute (2013)Ins titute (2013)Ins titute (2013)Ins titute (2013) (2014a)(2014a)(2014a)(2014a) e t a l. (2012)e t a l. (2012)e t a l. (2012)e t a l. (2012) (2013)(2013)(2013)(2013) es timatees timatees timatees timate

Estimated annual

investment needs 60 133 146 100 69 110

(Billion of dollars)

Power, transport, Power, transport, Power, transport, Power, Power, transport

Sectors covered telecom- telecom- . .. .. .. . telecom- transport telecom-

munication, WSS munication, WSS munication, WSS munication, WSS

Period covered 2010-2020 2013-2030 mainly 2013-2030 2010-2030 2013-2030 2015-2025

All except Brunei All ASEAN All except Brunei All except Brunei Only Indonesia, All ASEAN

Countries covered Darussalam, Member States Darussalam, Darusssalam, Malaysia, Member States

Singapore Singapore Singapore Philiphines and

Thailand

Source: UNCTAD 2015b

WSS denotes water supply and sanitation

A market A market A market A market full full full full of opportunities.of opportunities.of opportunities.of opportunities. Based on six market research

data, the estimated annual infrastructure funding needs in

ASEAN is massive – ranging from US$60bn to US$146bn over

2015-2025. The highest allocation appears to be skewed

towards transport-related infrastructure projects which will be

a core topic of discussion in this report. According to a report

by UNCTAD, transport-related infrastructure (road, rail, ports

and airports) will contribute half of the US$110bn estimate of

infrastructure needs over 2015-2025.

This finding is shared by Asian Development Bank which

projects that transport and energy-related infrastructure

spending will form 63% of total ASEAN infrastructure

investment needs. The governments of all South-East Asian

countries are cognisant of the pressing needs to bridge the

infrastructure gap which will have knock-on effects on

enhanced trade, investment, tourism and development.

This report will touch on opportunities in the transport-related

infrastructure space domestically and across the region in line

with the ASEAN Master Plan for Connectivity (AMPC). The

focus will be only three ASEAN countries – Malaysia, Indonesia

and Thailand where we have coverage on the infrastructure

based companies. Based on a survey, among the three

countries, the infrastructure needs of Indonesia is the highest

at US$235bn over 2013-2020, followed by Thailand at

US$105bn and Malaysia at US$100bn.

Comparison of Comparison of Comparison of Comparison of infrastructureinfrastructureinfrastructureinfrastructure needsneedsneedsneeds

Populat ionPopulat ionPopulat ionPopulat ion GDPGDPGDPGDP Inf rast ructure needs f rom 2013-2020Inf rast ructure needs f rom 2013-2020Inf rast ructure needs f rom 2013-2020Inf rast ructure needs f rom 2013-2020

Malaysia 29.5m US$305bn US$100bn

Indonesia 244.5m US$879bn US$235bn

Thailand 67.9m US$366bn US$105bn

Source: IMF, World Economic Outlook, other surveys

AMPC AMPC AMPC AMPC –––– regional connectivity and emphasis regional connectivity and emphasis regional connectivity and emphasis regional connectivity and emphasis on on on on ttttransportransportransportransport----

based infrastructurebased infrastructurebased infrastructurebased infrastructure

Infrastructure development forms the backbone of the

economy of ASEAN countries and is crucial in the region’s

economic, social and connectivity development.

Besides improving the level of public transport ridership locally,

the interconnectivity within ASEAN member states is also

crucial through national, subregional and regional

infrastructure development. This will eventually improve

logistics efficiency, support growth of investment, trade and

tourism and could lower the cost of doing business.

Similar to the One Belt, One Road (OBOR) project, the AMPC

which is more mature aims to link Southeast Asian countries

via a system of rail, roads and even ports for RO-RO (roll-on

and roll-off). Of significance from an infrastructure standpoint,

the focus for AMPC has been the Pan-Asia Rail Network and

Asian Highway Network. It remains to be seen how compatible

AMPC and OBOR are, which shares some similarities on

wanting to enhance transport connectivity. China’s recent

involvement in Indonesia’s Jakarta to Bandung High Speed Rail

(HSR) and Malaysia’s Gemas-JB double tracking and Bandar

Malaysia while it is also aggressively pursuing the KL-Singapore

HSR is a positive sign and does suggest the momentum for

China-ASEAN initiatives to ensure AMPC comes to fruition.


Asean Construction

PanPanPanPan----Asia Railway NetworkAsia Railway NetworkAsia Railway NetworkAsia Railway Network

Source: Internet

PanPanPanPan----Asia Railway Network.Asia Railway Network.Asia Railway Network.Asia Railway Network. The convergence of the Singapore-

Kunming Railway or Pan-Asia Railway Network with ASEAN’s

railway connectivity plans is taking shape. If completed, this

will link Kunming, the capital of China’s southwest Yunnan

province, with all the capitals of mainland ASEAN countries.

The Singapore-Kunming Railway or Pan-Asia Railway Network

refers to a network of railways of 6,667km that would connect

China, Singapore and all the countries of mainland Southeast

Asia. In 2007 ASEAN and China proposed building three

routes, the Eastern, Western and a Central Route via Laos. The

proposed network consists of three main routes from

Kunming, China to Bangkok, Thailand: the Eastern Route via

Vietnam and Cambodia; the Central Route via Laos, and the

Western Route via Myanmar. The southern half of the network

from Bangkok to Singapore has long been operational, though

a high-speed line has been proposed. The missing links are

mainly in Cambodia, Myanmar, Thailand and Vietnam.

The biggest missing link is from Laos where work has yet to

start as financing is a main concern, coupled with land issues.

Snapshot of PanSnapshot of PanSnapshot of PanSnapshot of Pan----Asia Railway NetworkAsia Railway NetworkAsia Railway NetworkAsia Railway Network 6,617km rail development

Provide more env ironemental friendly, efficient and economic mode for passengers and freight transport

F lagship project under ASEAN-Mekong Basin Development Cooperation

Prioitised project under MASter Plan on ASEAN Connectiv ity

Two Lines : - Eastern Line : Thailand Cambodia, V ietnam

- Western Line : Thailand, Myanmar

Common line : Singapore, Malaysia, Thailand

Spur line to Lao PDR

Source: Internet, AllianceDBS Research

Broad status of PanBroad status of PanBroad status of PanBroad status of Pan----Asia Railway NetworkAsia Railway NetworkAsia Railway NetworkAsia Railway Network

Missing Link Cambodia

Thailand

Myanmar

V ietnam

Upgrade Cambodia

Malaysia

Thailand

Spurline Laos


MALAYSIAMALAYSIAMALAYSIAMALAYSIA –––– AMPC’s EFFORTS MOSTAMPC’s EFFORTS MOSTAMPC’s EFFORTS MOSTAMPC’s EFFORTS MOST ADVANCEDADVANCEDADVANCEDADVANCED

For Malaysia, it has given its commitment towards China’s Pan-

Asia Railway and its One Belt One Road Project. The electrified

double tracking works is part of this ambitious Pan-Asia

Railway Network. So far all sections have been completed,

apart from the Gemas-Johor Bahru section which was awarded

to a consortium led by China Railways Corporation for RM7bn.

There are parties from China, Japan, South Korea and many

others who are keen to bid for the KL-Singapore HSR project.

Of significance is the China Railway Group Limited (CREC)

which is partnering Iskandar Waterfront. Together with its

partner is has bought a 60% stake in Bandar Malaysia which

will be key station.

Electrified double tracking in Malaysia Electrified double tracking in Malaysia Electrified double tracking in Malaysia Electrified double tracking in Malaysia –––– part of Panpart of Panpart of Panpart of Pan----Asia Asia Asia Asia Railway NetworkRailway NetworkRailway NetworkRailway Network

Sect ionSect ionSect ionSect ion StatusStatusStatusStatus

Rawang - Ipoh (178km) Completed July 2007

Seremban - Gemas (98km) Completed July 2013

Ipoh - Padang Besar (328km) Physical construction completed Nov 2014

Systems works now

Gemas - Johor Bahru (197km) Land acquisition process

Source: AllianceDBS Research


Asean Construction

Electrified double tracking in Malaysia Electrified double tracking in Malaysia Electrified double tracking in Malaysia Electrified double tracking in Malaysia –––– ppppart of Panart of Panart of Panart of Pan----Asia Asia Asia Asia Railway NetworkRailway NetworkRailway NetworkRailway Network


High Speed Rail. High Speed Rail. High Speed Rail. High Speed Rail. MyHSR Corp which is the project delivery vehicle

for the HSR was also quoted in saying that they are still in the

midst of discussions with Singapore on key issues such as

approach to tendering and whether it will be a government

design-and-build contractor model. An MOU is expected to be

signed by mid-2016. The tentative alignment will be based on

two services – a direct service (90 minutes) and another with

transit stops (Bandar Malaysia, Seremban, Melaka, Muar, Batu

Pahat and Nusajaya which will take two hours). We expect this to

be a close race between the Chinese and Japanese.

Probably alignment of HSRProbably alignment of HSRProbably alignment of HSRProbably alignment of HSR

Source: MyHSR, AllianceDBS, DBS Vickers HSR HSR HSR HSR –––– Cutting down travelling timeCutting down travelling timeCutting down travelling timeCutting down travelling time

Source: MyHSR, AllianceDBS, DBS Vickers

INDONESIAINDONESIAINDONESIAINDONESIA –––– EMPHASIS ON PORT CONSTRUCTIONEMPHASIS ON PORT CONSTRUCTIONEMPHASIS ON PORT CONSTRUCTIONEMPHASIS ON PORT CONSTRUCTION

Indonesia’s involvement in the AMPC is largely from the

connectivity of ports to other countries given its status as the

largest archipelagic country in the region.

Among the flagship projects involving Indonesia are:

� Melaka-Pekanbaru interconnection (part of IMT-GT)

� West Kalimantan-Sarawak interconnection (part of BIMP-

EAGA)

� Study on RO-RO network and short-sea shipping

Brunei Action Plan as a blueprint of ASEAN maritime

connectivity. The BAP stresses, among other things, the

importance of maritime transport development to improve

regional connectivity. Four programmes were highlighted in the

BAP in connection with the maritime goal i.e.:

� Realise an ASEAN Single Shipping Market (ASSM) by 2015

� Enhance the capacity of 47 designated ports by 2015

� Establish efficient and reliable shipping routes, including RO-

RO, connections between mainland and archipelagic

Southeast Asia, and strengthen the linkages with global and

domestic routes by 2015

� Establish and enhance the Cruise Corridors by 2015


Asean Construction

Connecting the mainland and archipelagic Southeast Asia

with single shipping and RO-RO network

ASEAN Single Shipping Market (ASSM) ASEAN Single Shipping Market (ASSM) ASEAN Single Shipping Market (ASSM) ASEAN Single Shipping Market (ASSM) is envisaged to facilitate

free-flowing trade among ASEAN member countries through

waterways. There are 47 ports in Southeast Asia which are

designated as gateways into and out of the member countries.

Many of them are located in Indonesia given its status as the

largest archipelagic country in the region.

47 ASEAN gateway ports

No.No.No.No. PortPortPortPort CountryCountryCountryCountry IslandIslandIslandIsland 1 Belawan Indonesia Sumatra 2 Dumai Indonesia Sumatra 3 Palembang Indonesia Sumatra 4 Panjang Indonesia Sumatra 5 Tanjung Priok Indonesia Java 6 Tanjung Emas Indonesia Java 7 Tanjung Perak Indonesia Java 8 Pontianak Indonesia Kalimantan 9 Banjarmasin Indonesia Kalimantan 10 Balikpapan Indonesia Kalimantan 11 Makassar Indonesia Sulawesi 12 Bitung Indonesia Sulawesi 13 Sorong Indonesia Papua 14 Jayapura Indonesia Papua 15 Kyaukphyu Myanmar Mainland ASEAN 16 Yangon Myanmar Mainland ASEAN 17 Thilawa Myanmar Mainland ASEAN 18 Cailan Vietnam Mainland ASEAN 19 Haiphong Vietnam Mainland ASEAN 20 Danang Vietnam Mainland ASEAN 21 Ho Chi Minh Vietnam Mainland ASEAN 22 Phnom Penh Cambodia Mainland ASEAN 23 Sihamoukville Cambodia Mainland ASEAN 24 Bangkok Thailand Mainland ASEAN 25 Laem Chabang Thailand Mainland ASEAN 26 Songkhla Malaysia Mainland ASEAN 27 Penang Malaysia Mainland ASEAN 28 Kemaman Malaysia Mainland ASEAN 29 Kuantan Malaysia Mainland ASEAN 30 Johore Malaysia Mainland ASEAN 31 Port Klang Malaysia Mainland ASEAN 32 Tanjung Pelepas Malaysia Mainland ASEAN 33 Singapore Singapore Mainland ASEAN 34 Kuching Malaysia Borneo 35 Bintulu Malaysia Borneo 36 Kota Kinabalu Malaysia Borneo 37 Sandakan Malaysia Borneo 38 Subic Bay Philippines Luzon 39 Manila Philippines Luzon 40 Batangas Philippines Luzon 41 Iloilo Philippines Visayas 42 Cebu Philippines Visayas 43 Cagayan de Oro Philippines Mindanao 44 Davao Philippines Mindanao 45 General Santos* Philippines Mindanao

46 Zamboanga Philippines Mindanao 47 Muara Brunei Borneo

* Part of ASEAN RO-RO Network’s priority routes

Source: Master Plan on ASEAN Connectivity (2010)

Roll On/Roll Off (RORoll On/Roll Off (RORoll On/Roll Off (RORoll On/Roll Off (RO----RO) Network. RO) Network. RO) Network. RO) Network. RO-RO ship is designed to

carry wheels cargo to avoid the time-consuming loading and

unloading process and costly cargo-handling which are

commonly found in conventional shipping. The launch of ASEAN

RO-RO Network was initially scheduled in 2016-2017 and will

cover three priority routes among four member countries i.e.

Indonesia, the Philippines, Malaysia and Thailand. The routes are:

� General Santos, Philippines – Bitung, Indonesia

� Melaka, Malaysia – Dumai, Indonesia

� Belawan, Indonesia – Phuket, Thailand

Four out of six ports covered by ASEAN RO-RO network are also

designated as gateway ports for ASEAN Single Shipping Market

(ASSM).

Planned RO-RO routes on Malacca Strait and Celebes Sea

Source: ASEAN (2013)

Indonesia and the missing links for AMPC

Southeast Asia comprises over 30,000 islands with Indonesia

being the largest maritime country in the region. One of the key

waterways that have a significant role in global trade flow in the

region is the Strait of Malacca as it connects East Asia to India,

Europe and Middle East. It is worth noting that over half of the

global trade flow passes through this long, narrow waterway,

making it one of the busiest straits in the world.


Asean Construction

Underdeveloped ports and highway networks. Underdeveloped ports and highway networks. Underdeveloped ports and highway networks. Underdeveloped ports and highway networks. Indonesia,

together with Singapore and Malaysia, are in the sweet spot to

benefit from the heavy traffic passing the Strait of Malacca.

Nonetheless, Indonesia’s maritime transportation infrastructure is

the most underdeveloped among the three. According to World

Competitiveness Report (2015), Indonesia’s port quality ranked

82nd, far below Singapore’s (ranked 2

nd) and Malaysia's (ranked

16th). In most cases in Indonesia, while all existing ports are

connected to roads, many of them are heavily congested. That

said, moving the containers or goods from port to hinterland and

to end destination can be extremely time-consuming and costly.

Government’s and crossGovernment’s and crossGovernment’s and crossGovernment’s and cross----border initiatives. border initiatives. border initiatives. border initiatives. The Joko Widodo-led

government has launched a number of initiatives to address this

issue. The Sea Toll Road programme was introduced in 2014 and

has now begun partial operations. The programme involves a

number of hub and smaller port upgrades. The government has

also forged ahead with massive toll road developments,

particularly in Java and Sumatra, to ensure that the containers

and goods can be transported quickly via highway networks once

they are offloaded to the ground.

Furthermore, some of the projects listed in BIMP-EAGA and IMT-

GT sub-regional initiatives shares similarities with those prioritised

by the Indonesian government, such as Manado-Bitung and

Trans Sumatra toll road development which are included in the

country’s 30 priority project lists. Some major ports are currently

being upgraded, which would support the implementation of

ASSM and RO-RO shipping in the future. All of these are not only

targeted to strengthen inter-island connectivity in Indonesia, but

also to improve economic linkage between mainland and

archipelagic Southeast Asia as well as among the archipelagic

countries in the region.

ASEAN ROASEAN ROASEAN ROASEAN RO----RO network RO network RO network RO network aims to connect the missing links among

Indonesia, the Philippines, Malaysia and Thailand. It focuses on

port upgrade works to enable RO-RO ship operation.

Key projects: Bitung, Dumai and Belawan port upgrades.

The IMTIMTIMTIMT----GTGTGTGT initiative seeks to enhance connectivity between key

cities in Sumatra through land transport development. It also

seeks to improve connectivity between cities in Sumatra and

Malay Peninsula, particularly Penang, Melaka and Phuket

through port development.

Key projects: Trans Sumatra toll road (stretching from Banda

Aceh to Palembang), Dumai, Medan and Aceh port

developments.

The other sub-regional initiative, BIMPBIMPBIMPBIMP----EAGAEAGAEAGAEAGA, focuses on

enhancing connectivity between Manado-Bitung in Sulawesi

Island (Indonesia) and Bitung to the Philippines.

Key projects: Manado-Bitung toll road and Manado port

development.

Project intersection – AMPC, Government of Indonesia’s

priority projects and Sea Toll Road programme

ProjectProjectProjectProject AMPC AMPC AMPC AMPC initiativeinitiativeinitiativeinitiative

GoI’s GoI’s GoI’s GoI’s 30303030 priority priority priority priority projectsprojectsprojectsprojects

GoI’s GoI’s GoI’s GoI’s Sea Toll Sea Toll Sea Toll Sea Toll RoadRoadRoadRoad

LinkageLinkageLinkageLinkage

Bitung port RO-RO & ASSM √ √

General Santos

(Philippines) Dumai port RO-RO,

IMT-GT & ASSM

Melaka (Malaysia)

Belawan/Kuala Tanjung port

RO-RO & ASSM

√ √ Phuket (Thailand)

Trans Sumatra toll road

IMT-GT √ n/a

Medan port IMT-GT

Penang (Malaysia)

Aceh port IMT-GT

Phuket (Thailand)

Manado-Bitung toll road

BIMP-EAGA

√ n/a

Manado port BIMP-EAGA

n/a

Palembang port ASSM √ ASEAN

gateway Panjang port ASSM

√ ASEAN gateway

Tanjung Priok port ASSM √

ASEAN gateway

Tanjung Emas port ASSM √

ASEAN gateway

Tanjung Perak port ASSM √

ASEAN gateway

Pontianak port ASSM √

ASEAN gateway

Banjarmasin port ASSM √

ASEAN gateway

Balikpapan port ASSM

ASEAN gateway

Makassar port ASSM √

ASEAN gateway

Sorong port ASSM

√ ASEAN gateway

Jayapura port ASSM √

ASEAN gateway

Source: Various media sources, Master Plan on ASEAN Connectivity

(2010), IMT-GT & BIMP-EAGA Implementation Blueprint 2012-2016


Asean Construction

Indonesia’s maritime axis ambition

Improving connectivity through Sea Toll Road programImproving connectivity through Sea Toll Road programImproving connectivity through Sea Toll Road programImproving connectivity through Sea Toll Road programmemememe. . . .

President Joko Widodo has announced its vision to transform

Indonesia into a maritime axis, which spells out a programme

called Sea Toll Road (nautical highway). Sea Toll Road is aimed to

strengthen inter-island connectivity in Indonesia archipelago by

providing maritime transportation network which runs according

to a predetermined schedule, connecting hub with feeder ports.

The lack of connectivity among islands has brought Indonesia’s

logistics cost to 24.5% of GDP. The launch of Sea Toll Road

programme is expected to lower the costs to 19% of GDP.

24 ports to support sea toll road... 24 ports to support sea toll road... 24 ports to support sea toll road... 24 ports to support sea toll road... There are 24 ports designated

to support Sea Toll Road programme, of which five are deep-sea

ports i.e. Kuala Tanjung, Tanjung Priok, Tanjung Perak, Makassar

and Sorong port. The sea toll road will cover six routes in the

initial phase. Five out of the planned six routes have been up and

running. Three ports were set as a starting point i.e. Tanjung

Perak (Java), Tanjung Priok (Java) and Makassar (Sulawesi).

...with total investment of Rp59tr. ...with total investment of Rp59tr. ...with total investment of Rp59tr. ...with total investment of Rp59tr. The expansion of 24 sea ports

is estimated to require an investment of Rp59tr in 2015-2019, of

which Rp41tr is allocated to develop the five deep-sea ports. The

largest project is the expansion of Kuala Tanjung and Belawan

port in North Sumatra. Both ports are located side by side along

the Strait of Malacca.

24 strategic ports supporting Sea Toll Road

Source: Ministry of Transportation

THAILANDTHAILANDTHAILANDTHAILAND –––– A LOT MORE TO BE DONEA LOT MORE TO BE DONEA LOT MORE TO BE DONEA LOT MORE TO BE DONE

According to ASEAN transport strategic plan 2016-2025, its key action is to complete the missing link section of Singapore-Kunming Rail Link, as follows: (i) Thailand:Thailand:Thailand:Thailand: Aranyaprathet Aranyaprathet Aranyaprathet Aranyaprathet –––– Klongluk (6km) Klongluk (6km) Klongluk (6km) Klongluk (6km)

- Construction is completed - Expected to start operating by 2016

(ii) Cambodia:Cambodia:Cambodia:Cambodia: Poipet Poipet Poipet Poipet –––– Sisophon (48km)Sisophon (48km)Sisophon (48km)Sisophon (48km) - Under construction - The construction is delayed from the original target date in 2013

- Expected to be completed by 2016 (iii) Cambodia: Phnom Penh Cambodia: Phnom Penh Cambodia: Phnom Penh Cambodia: Phnom Penh –––– Loc Ninh (254km)Loc Ninh (254km)Loc Ninh (254km)Loc Ninh (254km)

- Seeking fund for project implementation - Delayed from the original target date in 2015

(iv) Vietnam:Vietnam:Vietnam:Vietnam: Loc Ninh Loc Ninh Loc Ninh Loc Ninh –––– Ho Chi Minh (129km) by 2020Ho Chi Minh (129km) by 2020Ho Chi Minh (129km) by 2020Ho Chi Minh (129km) by 2020 - Seeking fund for project implementation - Expected to be completed by 2020

(v) Vietnam:Vietnam:Vietnam:Vietnam: Mu Gia Mu Gia Mu Gia Mu Gia –––– Tan Ap Tan Ap Tan Ap Tan Ap –––– Vung Ang (119kmVung Ang (119kmVung Ang (119kmVung Ang (119km) - Approved feasibility study on the development - Expected to be completed by 2020

(vi) Lao PDR: Vientiane Lao PDR: Vientiane Lao PDR: Vientiane Lao PDR: Vientiane –––– Thakek Thakek Thakek Thakek –––– Mu Gia (466km) Mu Gia (466km) Mu Gia (466km) Mu Gia (466km) - Approved feasibility study on the development - Expected to be completed by 2020

(vii) Myanmar: Thanbyuzayat Myanmar: Thanbyuzayat Myanmar: Thanbyuzayat Myanmar: Thanbyuzayat –––– Three Pagoda Pass Three Pagoda Pass Three Pagoda Pass Three Pagoda Pass (110km) (110km) (110km) (110km) - Feasibility study was conducted in 2007 - The project has been replaced with the new route from Dawei port to Kanchanaburi

(viii) Thailand: Three Pagoda Pass Thailand: Three Pagoda Pass Thailand: Three Pagoda Pass Thailand: Three Pagoda Pass –––– Name Tok (153km) Name Tok (153km) Name Tok (153km) Name Tok (153km) - Feasibility study was conducted in 2007 - The project has been replaced with the new route from Dawei port to Kanchanaburi

Thailand and upgrading works of rail system to support Singapore-Kunming Railway Link

Currently, the upgrading of the domestic railway network in Thailand, as a part of the Singapore-Kunming Railway Link project, is included in Thailand Transport Infrastructure Development Strategy 2015-2022 (Master Plan), as follows:


Asean Construction

Thailand – upgrading of rail system

Double tra ck ra i lwa yDouble tra ck ra i lwa yDouble tra ck ra i lwa yDouble tra ck ra i lwa y

1s t pha se1s t pha se1s t pha se1s t pha se

Chachoengsao - Klong 19 - Kangkoi 11 0.3 Contractor: STEC

Jira Junction - Khonkaen 22 0.6 Contractor: CK

Prachuapkirikhan - Chumpon

Mapkabao - Nakornratchasrima

Lopburi - Paknampo

Nakornpathom - Nongpraduk - Huahin

Huahin - Prachuapkirikhan

Tota l 1st pha seTota l 1st pha seTota l 1st pha seTota l 1st pha se 33333333 0 .90 .90 .90 .9

2nd pha se2nd pha se2nd pha se2nd pha se

Paknampo - Denchai

Jira Junction - Ubonratchathani

Khonkaen - Nongkhai

Chumpon - Suratthani

Suratthani - Songkla

Hadyai - Padangbesa

Denchai - Chiangmai

To ta l 2nd pha seTota l 2nd pha seTota l 2nd pha seTota l 2nd pha se

Proje c tPro je c tPro je c tPro je c t RouteRouteRouteRouteVa lue Va lue Va lue Va lue

(B tbn)(B tbn)(B tbn)(B tbn)Rema rkRema rkRema rkRema rk

Va lue Va lue Va lue Va lue

(US$bn)(US$bn)(US$bn)(US$bn)

Source: Ministry of Transport, DBS Vickers


Asean Construction

Transport Transport Transport Transport infrastructure important for regional connectivityinfrastructure important for regional connectivityinfrastructure important for regional connectivityinfrastructure important for regional connectivity CompaniesCompaniesCompaniesCompanies

(Cont ractors)(Cont ractors)(Cont ractors)(Cont ractors)

Neak Loeung Bridge Cambodia and V iet Nam Sumitomo Mitsui Construction Construction of the bridge started in

(Japan) 2011 and is expected to be completed

in 2015 at an estimated cost of $130

million.

Second Thai–Lao Savannakhet (Lao PDR) Sumitomo Corporation (Japan) Completed in 2006 at an estimated

Friendship Bridge and Mukdahan (Thailand) cost of $70 million.

Third Thai–Lao Thahhek (Lao PDR) and Italian-Thai Development (Thailand) Completed in 2011 at an estimated

Friendship Bridge Nakhon Phanom (Thailand) cost of $57 million.

Fourth Thai–Lao Thailand and Lao PDR China Railway No.5 Engineering The two companies jointly constructed

Friendship Bridge Group and Krung Thon Engineering the bridge, which was completed in 2013

(Thailand)

The budget of the bridge was

estimated at about $44.8 million.

Lao–Myanmar Luang Namtha (Lao PDR) China Harzone Industry Corporation The bridge links Lao PDR’s National

Friendship Bridge and Xienglap, Thakilek supplied steel trusses for the Road No.17E and Myanmar’s National

(Myanmar) construction of the bridge. Road No. 4, and connects Xiengkok

river port in the Long district in Lao

PDR with Xienglap, Thakilek district

(Myanmar). The bridge was opened in

May 2015.

Kuala Lumpur to Malaysia to Singapore A number of companies have been The project is in the bidding process.

Singapore High-Speed reported to have expressed interest

Rail Link in undertaking the project:

• China Railway Construction

Corporation

• East Japan Railway Company (JR East)

• Alstom (France)

• Siemens AG (Germany)

Thai Railway Thailand

Construction (eventually

part of the SKRL)

Thai–Lao–China rail Thailand, Lao PDR and Giant Consolidated (Malaysia) The rail link is estimated to cost $7.2

freight link Cambodia billion. Construction of the project

will be undertaken with Chinese

supervision. The current construction of this project does not

include the routes within Thai border.

Eventually part of the SKRL • Ch. Karnchang (Thailand)

• Sino-Thai Engineering & Construction (Thailand)

Thailand to V iet Nam Thailand to V iet Nam Giant Consolidated Ltd (Malaysia) Rich Banco Berhad (New Zealand)

Railway (through Lao provided a loan to Giant Consolidated

PDR) Limited (Malaysia) to fund the

construction of rail running across Lao

PDR from the Thai to the V ietnamese

border. However, according to our channel check, there is

so limited information on this project annoucing to the public.

Sources: UNCTAD 2015b, based on industry reports and media.

The first two routes was awarded to the contractors already

while the remaining 9 routes are in the bidding and EIA

approval process.

900 km double railway line

in Thailand

Inf rast ructureInf rast ructureInf rast ructureInf rast ructure Connect ing count riesConnect ing count riesConnect ing count riesConnect ing count ries Remark sRemark sRemark sRemark s

The project is waiting for the EIA approval process and other

documentation process with limited progress.The participating

contractors should be both Thai and Chinese contractors.


Asean Construction

TRANSPORT-BASED INFRASTRUCTURE – MALAYSIA, INDONESIA THAILAND

MALAYSIAMALAYSIAMALAYSIAMALAYSIA

Malaysia Malaysia Malaysia Malaysia –––– TransportationTransportationTransportationTransportation----based infrastructure projectsbased infrastructure projectsbased infrastructure projectsbased infrastructure projects

AmountAmountAmountAmount AmountAmountAmountAmount Potent ial w innersPotent ial w innersPotent ial w innersPotent ial w inners F oreign Part icipat ionF oreign Part icipat ionF oreign Part icipat ionF oreign Part icipat ion

Projec tsProjec tsProjec tsProjec ts (RMbn) (RMbn) (RMbn) (RMbn) (US$bn)(US$bn)(US$bn)(US$bn)

MRT Line 2 and 3 60.0 15 Gamuda, MMC, IJM, Sunway, various Yes, Tunnelling via Swiss Challenge

Penang Integrated Transport 27.0 7 Gamuda. IJM likely to have subcon role Zenith-BUCG awarded undersea tunnel

KL Bullet Train to Singapore 60.0 15 Gamuda, YTL, various Yes, likely to China or J apan

LRT 3 10.0 2 MRCB-George Kent and other local contractors No apart from system and rolling stock

6 new highways 19.0 5 Various No

Pan Borneo Highway 27 7 CMS, Naim, HSL, other West Malaysian players No

Gemas-JB double tracking 8 2 Fajar Baru, Gamuda, IJM, WCT Yes awarded to China Railway Construction

Jalan Tun Razak traffic dispersal 0.9 0 Various No

Total 211.9 52


The priority for Malaysian infrastructure projects over the past

few years have been more transportation-led anchored by the

MRT project. There will be in total three lines where Line 1 will

be completed by July 2017 and Line 2 is already in progress in

terms of the awards. There has been a concerted effort by the

Land Public Transport Commission (SPAD) to achieve a 40%

modal share of public transportation by 2030 from c.25% as

at end-2015.

The Project Delivery Partner (PDP) approach for large scale

government contracts which is basically appointing a

contractor to take on a supervisory role for a project in return

for fees has worked out very well for MRT Line 1. This is as

opposed to the government managing the contract on its own

where contractors may be more susceptible to not perform

optimally. So far, MRT Line 2, LRT 3 and Pan Borneo Highway

have taken this PDP route.

There is some element of foreign participation for these

projects largely either from Chinese-based contractors which

comes with associate funding or G-to-G relationships or from a

technical standpoint where local contractors do not have the

required expertise.

MRT Line 1MRT Line 1MRT Line 1MRT Line 1 which links Sungai Buloh to Kajang is slated for full

completion in July 2017. The cumulative financial progress for

underground is 85% and PDP is 76% with no significant cost

overruns and is on track to meet KPIs.

MRT Line 2.MRT Line 2.MRT Line 2.MRT Line 2. The Sungai Buloh-Serdang-Putrajaya (SSP) or MRT

Line 2 will serve a corridor with a population of around 2m

people, stretching from Sungai Buloh to Putrajaya and will

include Sri Damansara, Kepong, Kampung Batu, Jalan Sultan

Azlan Shah, Jalan Tun Razak, KLCC, Tun Razak Exchange, Kuchai

Lama, Seri Kembangan and Cyberjaya. The proposed length is

52.2km of which 13.5km is underground. A total of 36 stations,

11 of them underground, will be built. At commencement of full

service in 2Q2022, the SSP Line is expected to have a ridership of

529,000 passengers per day.

So far, four out of the ten viaduct packages have been

awarded while the balance six will be awarded over the next

12 months. Only contractors which were involved in MRT Line

1 were allowed to bid for the first three viaduct packages,

V201, V202 and V203. As for tunnelling, MMC-Gamuda has

won the RM15.47bn contract without having to exercise the

Swiss Challenge, implying margins should be intact. The PDP

fees have been set at 6% (similar to Line 1) but with three

additional KPIs which will constitute about 0.5ppt of the 6%.

This will be for safety, quality and response to the public.

LRT 3LRT 3LRT 3LRT 3

As for LRT 3, which links Bandar Utama to Klang, the

appointment of MRCB-George Kent for the PDP role will see

more concrete tenders and awards in 2016. The total length is

37km comprising 26 stations and when completed, will carry

74,000 passengers per day.

The prequalification process saw 22 key construction players

prequalifed for the larger packages. Some of the key contractors

are Gamuda, Bina Puri, Crest Builder, WCT, IJM, Naza

Engineering, Muhibbah Engineering and Sunway Construction.

Also, eight companies have been shortlisted for the tunnelling

portion which spans 2km. We expect awards at the earliest in

4QCY16.

The PDP will receive a fixed fee of 6% paid on a quarterly basis

and will not participate directly in the civil works.

West Coast ExpresswayWest Coast ExpresswayWest Coast ExpresswayWest Coast Expressway

The West Coast Expressway is a 233km tolled expressway which

will link Banting to Taiping. Specifically, it starts at a junction with

Selangor State Road B18 which runs from Banting, Selangor and

ends at the ramp of Changkat Jering toll plaza of the North-

South Expressway at Taiping, Perak. It is planned and designed to

be connected to the existing highways (such as PLUS, SKVE,

NKVE, NNKSB, LATAR, KESAS, etc.). The entire expressway will

have 21 interchanges. According to its website, progress has

reached 19.8% as at April 2016. IJM is the main contractor for


Asean Construction

this project and has been awarded RM2.8bn worth of works out

of the RM5bn contract amount.

WCT was awarded a RM282m contract from IJM for

subcontracting works for Section 3,4,5,8 & 9 for WCE. This

forms part of IJM’s RM2.8bn contract for the WCE. The scope of

works consists of site clearance and earthworks, geotechnical

works, drainage works and box culverts, sub-base, road base and

pavement, traffic signs, road markings and road furniture,

utilities and services, erosion control sediment plan,

environmental protection and enhancement.

We understand tenders from the RM2.2bn open tender portion

for packages 1, 2, 6, 7, 10 and 11 will be called in 2016.

High Speed RailHigh Speed RailHigh Speed RailHigh Speed Rail

Malaysia's and Singapore's land transport regulators (SPAD and

LTA) said they received 98 submissions in response to the

request-for-information exercise for the High Speed Rail (HSR)

project. They include companies from Malaysia, Singapore, the

Asia-Pacific, Europe, the Middle East and North America. Of the

98 submissions, there were 13 from Malaysia and four from

Singapore.

At the recent China High Speed Railway symposium in KL, 14

companies were shortlisted to present their views on the project.

Apparently, the companies are France’s Alstom SA, Germany’s

Siemens AG, Spain's CAF and Talgo SA, Canada’s Bombardier,

China Railway and consortiums from South Korea and Japan.

SPAD is also exploring the use of Transport Oriented

Development (TOD), which is a mixed-use residential and

commercial area aimed at maximising access to public transport

along the HSR line.

SPAD and LTA’s CEOs were also quoted as saying that the

governments of Malaysia and Singapore expect to finalise the

commercial model and procurement approach of the project by

2016. An MOU is expected to be signed by mid-2016.

According to a local daily as reported in early January 2016, both

the Malaysian and Singaporean governments have agreed on the

alignment and have decided on two services – a direct service (90

minutes) and another with transit stops (Bandar Malaysia,

Seremban, Melaka, Muar, Batu Pahat and Nusajaya, which will

take two hours).

Prime Minister Najib has also confirmed China’s interest in the

HSR following the signing of the eight G-to-G MOU. The sale of

1MDB’s power assets to China General Nuclear Power Corp for

RM9.83bn and China Railway Engineering Corp.'s involvement in

Bandar Malaysia could be a precursor to more Chinese

involvement in Malaysia’s mega infrastructure projects like the

HSR.

We expect local contractors which have some of expertise in rail-

related works gathered from the LRT and MRT to have a role. In

particular, we think Gamuda and YTL would be frontrunners to

lead the local contractors.

Penang Transport Master PlanPenang Transport Master PlanPenang Transport Master PlanPenang Transport Master Plan

Gamuda, via SRS Consortium, has been appointed by the Penang

State Government to be the PDP for the roads and public

transport projects in Penang (Penang Transport Master Plan

Strategy 2013-2030). The shareholding structure is as follows:

Gamuda (60%), Ideal Property Development (20%), and Loh Poh

Yen Holdings (20%).

Gamuda is hoping to have two bites of the cherry – being the

PDP, and also turnkey contractor for some key components, but

that is still uncertain at this stage.

The components are an LRT from Komtar to Bayan Lepas, a

monorail from Komtar to Air Itam and Tanjung Bungah, e-buses

across North Channel, bus rapid transits on the mainland and a

20-km Pan Island Link Highway connecting Tanjung Bungah to

Penang International Airport and Tun Dr Lim Chong Eu

Expressway (LCE) with tunnels cutting through the hills.

The first components are supposed to be the LRT (which is 20km

in length) and the Pan Island Link Highway, given their high

economic IRR of 12.2% and 14% respectively. The media also

highlighted the plan to claim two islands in the south of Penang

Island, which will be fully owned by the Penang government. The

land will then be auctioned to finance the project. The estimated

cost for reclaiming two islands of 1,300 acres and 2,100 acres

respectively is RM7-8bn. This works out to be RM47-54psf as

compared to E&O’s reclamation cost at Seri Tanjung Pinang of

RM90-140psf. The previously speculated land to be reclaimed in

Middle Bank is not likely to happen given the strong protests

from environmentalists and civic groups.

The PDP where Gamuda has a 60% stake is in the midst of

extending the signing of the PDP agreement which has since

lapsed. Presentations have been made to the Federal

government, with the feedback being positive so far. There are

two key milestones to achieve, which are:


Asean Construction

1) SPAD submission for the whole public transportation

system for review and approval

2) Department of Environment submission which has so far

been in bits and pieces.

The current guidance is for some approvals to occur in 2H17

and for tenders to happen in mid-2018.

GemasGemasGemasGemas----totototo----Johor Bahru double trackingJohor Bahru double trackingJohor Bahru double trackingJohor Bahru double tracking.

This 197-km stretch represents the last link for the whole

double tracking project in Malaysia. The contract, worth an

estimated RM7bn, was awarded to an entity headed by China

Railway Construction Company. However, local contractors are

eyeing a subcontractor role.

Pan BPan BPan BPan Borneo Highwayorneo Highwayorneo Highwayorneo Highway

In 2013, the Prime Minister stated his commitment towards the

Pan Borneo Highway which was also included in Budget 2016

where a total allocation of RM29bn was made for the total

stretch of 2,239km. The Sarawak portion costing c.RM16bn

has been progressing with the appointment of the PDP role to

Lebuhraya Borneo Utara for the 1,090-km stretch. The

Sarawak portion will be rolled out in two phases and be fully

completed by 2023. So far, the timing of the Sabah portion

costing RM12.8bn remains elusive but the PDP has been

appointed, comprising Warisan Tarang (60%) and a JV

between UEM and MMC holding 20% equity stake each. This

will run from Sindumin to Tawau where the total length is

706km.

The total length of the Sarawak portion is 1,089km, stretching

from Tanjung Datu to Merapok. The scope of the project is

mostly on the upgrading of the current road system from the

present 2-lane single carriageway to a 4-lane dual carriageway

(JKR R5 standard design). At present, only 144km of federal

route 1 is a 4-lane dual carriageway. But there will also be

construction of some additional 30km of roadworks.

So far, three work packages have been awarded and there are

now eight remaining work packages to be awarded this year.

The tenders for this eight closed at the end of May and will be

awarded from June to July onwards. On average, each work

package will be for 60-90km and will be at least RM1bn in

value. The initial portions will be from Jalan Nyabau to Bakun

junctions (43km) and Telok Melano to Sematan (33km). Phase

1 is from Sematan to Miri (746km) and Phase 2 from Kuala

Baram (Jalan Perlis) to Sg Tujuh, Limbang, Lawas area (96km).

This project will involve participation from West Malaysian

contractors where there are allowed to take a maximum of

30% equity stake in a JV company where there must be a

Sarawak partner which will take the balance 70%.

INDONESIA

Over 2,000km toll roads in the pipeline. In the past one year,

toll road development has recorded the best progress among all

government’s infra-related initiatives. The good progress is

largely aided by continuous land acquisition reform and increased

funding channelled through state-owned enterprises via capital

injection i.e. Hutama Karya and Waskita Karya (WSKT).

We identified over 2,000km toll roads in the pipeline and

many of them have kicked off construction. Around 130km

toll road is expected to commence operation this year,

bringing total operational toll roads to 1,080km by the end of

2016. SOEs, among which are Jasa Marga, Hutama Karya and

WSKT, grabbed the most shares in this toll road development.

The number of toll roads being developed has surpassed the

government’s initial target, which is to add 1,000km new toll

roads by 2019. While we acknowledge that private companies

can still initiate toll road developments, we think most of the

toll road projects have moved to execution phase.

Toll road projects not yet awarded to contractors

Toll roadToll roadToll roadToll road LengthLengthLengthLength (km)(km)(km)(km)

InvestmentInvestmentInvestmentInvestment (Rp tr)(Rp tr)(Rp tr)(Rp tr)

Jakarta-Cikampek II South 64.0 13.38 Jakarta-Cikampek Elevated 36.8 14.13 Semanan-Balaraja 31.7 11.31 Kamal-Teluk Naga-Balaraja 48.3 18.00 Serpong-Balaraja 30.0 5.18 Serang-Panimbang 83.9 6.74 Bandung Intra Urban 27.3 6.90 Sukabumi-Ciranjang-Padalarang 62.0 5.03 Cileunyi-Banjar 107.0 15.23 Cisamdawu Section III-VI 32.6 unknown TotalTotalTotalTotal 523.6523.6523.6523.6 95.995.995.995.9

Source: BPJT, various media sources

Reviving the maritiReviving the maritiReviving the maritiReviving the maritime glory through port development. me glory through port development. me glory through port development. me glory through port development.

Currently, there are over 100 commercial ports in Indonesia,

mostly managed by state-owned port operators Pelindo I-IV.

Four ports play the most important role i.e.:

� Belawan port, North Sumatra (1.2m TEUs)

� Tanjung Priok port, Jakarta (6.4m TEUs)

� Tanjung Perak port, East Java (3.2m TEUs)

� Makassar, South Sulawesi


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We also identified a number of ongoing and potential major port

developments, including the mega project Patimban port. Three

ports, namely Kuala Tanjung, Bitung and Sorong port, are

located in the vicinity of special economic zones planned by the

government and designated to be international hubs.

Kuala Tanjung port

Kuala Tanjung port expansion is currently being carried out by

Pelindo I. The port, which is part of the 30 prioritised

infrastructure projects, is envisioned to connect the missing link

between Indonesia’s Sumatra Island and mainland Southeast

Asia. Kuala Tanjung port is located c.27km away from Sei

Mangkei special economic zone. A toll road network (i.e. Trans

Sumatra), is currently being built to improve land transport

linkages in the island. There is also a plan to build a 44km-long

railway to transport goods between Kuala Tanjung port and Sei

Mangkei.

The development of Kuala Tanjung port is scheduled to take

place in 2015-2019 with a total investment of Rp34tr. The first

phase of the construction kicked off in 2015 and is estimated to

cost Rp4tr. PTPP is the major contractor for the project after

clinching Rp900bn worth of construction contract in 2015. Kuala

Tanjung port will also be complemented with a multipurpose

terminal, whose development is undertaken by three SOEs i.e.

Pelindo I, PTPP and WSKT, and industrial estate.

Kuala Tanjung port development in Sumatra

Source: Ministry of Transportation

Bitung port

Bitung port is designed to support domestic as well as

international trades as it connects the missing link between

Indonesia and the Philippines. It is one of three ports included

into the government’s priority infrastructure project list. The

project is also part of AMPC and BIMP-EAGA priority port

project. The existing port is managed by Pelindo IV. The first

phase of Bitung port development has started partially, while the

remaining stages of Phase 1 development will start in 2017. Our

checks suggest that more clarity on this strategic port project will

come in September 2016.

The port project is estimated to cost Rp34tr in 2015-2019. In

addition, a special economic zone (SEZ) will be built in the vicinity

of the port on a 534ha land. To complement the planned SEZ in

Bitung, more infrastructures will also be built in the city,

including a 39km-long toll road that will connect Bitung to

Manado. The concession of the Rp5.1tr toll road was recently

awarded to an SOE consortium consisting of Jasa Marga, WIKA

and PTPP.

Sorong port

Located in West Papua, Sorong port is designated to serve as a

hub in the eastern part of Indonesia. The port is currently being

developed by Pelindo II and scheduled to be operational in 2019.

For the first phase, the port is estimated to require Rp3.5tr

(USD260mn) investment. It is also designated to support the

planned SEZ in Sorong.

Patimban port

Patimban port is initiated to replace the Cilamaya port project,

which was cancelled last year as it is located too closely to an oil

and gas block. The location of Patimban is only 40km away from

Cilamaya and 60-80km away from Cikarang and Karawang

industrial estates.

The multipurpose port, which is estimated to cost USD3bn

(c.Rp40tr), is scheduled to kick off construction in 2017 and

operate partially in 2019. In the first phase, Patimban port will

have a total capacity of 1.8m TEUs with channel depth of 12-14

metre. The container capacity is expected to rise further and

reach 7.5m TEUs by 2037.

The government is currently looking for the funding of the

project. It is reported that Japan has agreed to provide a Special

Term Economic Partnership (STEP) loan amounting to USD2.49tr.

Pelindo II has also expressed interest to take part in this project.


Asean Construction

Urban rail transit and HSR

StatusStatusStatusStatus ProjectProjectProjectProject Contract Contract Contract Contract valuevaluevaluevalue (Rp tr)(Rp tr)(Rp tr)(Rp tr)

Track Track Track Track length length length length (km)(km)(km)(km)

Local contractorsLocal contractorsLocal contractorsLocal contractors Foreign Foreign Foreign Foreign

contractorscontractorscontractorscontractors FundingFundingFundingFunding TimelineTimelineTimelineTimeline

OngoingOngoingOngoingOngoing Jakarta-Bandung HSR 71

WIKA, WTON China Railway Construction

25% of total investment is funded by equity from SOE consortium (WIKA, JSMR, KAI, PTPN VIII),

while the remaining 75% is funded by loan from

China Development Bank

2016-2018

Jakarta MRT’s South-

North corridor (phase 1) 23 16

WIKA, Hutama Karya and JKON

Sumitomo Mitsui Construction,

Shimizu, Obayashi

Funded by USD1.29bn soft loan from JICA

2013-2018

Greater Jakarta LRT

(phase 1) 20 43 ADHI

2015-2018

Palembang LRT 12 23 WSKT

2016-2018

Jakarta LRT (phase 1) 6 6 ADHI*, WIKA*, WSKT*, Jakpro*

2016-2018

PipelinePipelinePipelinePipeline Jakarta-Surabaya railway

revitalisation n/a 750

unknown

Jakarta MRT South-

North corridor (phase 2) n/a 9

2017-2020

Jakarta MRT East-West

corridor n/a 87

unknown

Greater Jakarta LRT

(phase 2) n/a 36

unknown

Bandung LRT (phase 1) 10 20 2017-2018

*potential contractors

Source: companies, various media sources

Government’s priority transportation-based projects

While there are hundreds of ongoing and potential infrastructure

projects, the government has selected 225 strategic projects as

its main focus (President Regulation No.3/2016). Furthermore, 30

projects worth c.Rp851tr were selected (President Instruction No.

1/2016) as the government’s priority over the next two years,

whose progress is directly monitored by a special committee

reporting directly to the President. These high-priority projects

would receive assistance from the special committee since

preparatory stage (including permit issuance and technical

matters) up to commencement of operation. Fourteen out of 30

priority projects are transport-based projects, which are estimated

to require investments of Rp373tr.

Priority transport-based projects listed in President

Instruction No.1/2016

No.No.No.No. CategoryCategoryCategoryCategory ProjectProjectProjectProject Contract Contract Contract Contract valuevaluevaluevalue (Rp tr)(Rp tr)(Rp tr)(Rp tr)

1 Toll road Balikpapan-Samarinda 10.0

2 Toll road Manado-Bitung 5.1

3 Toll road Serang-Panimbang 6.7

4 Toll road Trans Sumatra (8 sections) 80.4

5 Railway Soekarno-Hatta airport 24.0

6 Railway Makassar-Parepare 6.4

7 Railway East Kalimantan 72.0

8 Urban rail transit Jakarta MRT (South-North) 25.0

9 Urban rail transit Palembang LRT 11.5

10 Urban rail transit Greater Jakarta LRT 20.0

11 Port Kuala Tanjung 34.0

12 Port Bitung 34.0

13 Port Cilamaya replacement 40.0

14 Water transportation

Inland waterways (Cikarang-Bekasi-Laut)

3.5

TotalTotalTotalTotal

372.6372.6372.6372.6

Source: Cabinet Secretary, various media sources


Asean Construction

THAILANDTHAILANDTHAILANDTHAILAND Thailand – Transportation based infrastructure projects

Project sProject sProject sProject s Potent ial w innersPotent ial w innersPotent ial w innersPotent ial w inners

Balance of Balance of Balance of Balance of

work s to be work s to be work s to be work s to be

awarded(Btbn)awarded(Btbn)awarded(Btbn)awarded(Btbn)

Balance of Balance of Balance of Balance of

work s to be work s to be work s to be work s to be

awarded(US$awarded(US$awarded(US$awarded(US$

bn)bn)bn)bn)

MRT projects CK, STEC, ITD, UNIQ 274 7.8

Double track railway

CK, STEC, ITD, UNIQ, Ch.Tawee

construction Co Ltd., A.S.

Associated Engineering Co., Ltd. n/a n/a

Motorway Various 126 3.6

Water and irrigation Various n/a n/a

Airport expansion projects Various 49 1.4

TotalTotalTotalTotal 449449449449 12.812.812.812.8

Source: DBS Vickers

According to the Thailand Transport Infrastructure

Development Strategy 2015-2022 (Master Plan), the

government’s investment spending on infrastructure projects

has focused on transportation-based infrastructure.

The government continues to explore ways to accelerate the

process, either streamlining Environmental Impact Assessment

(EIA) approvals or dividing large projects into different phases.

MRT projects

Over the past decade, the priority for infrastructure

development has been led by the MRT projects, given the

government’s efforts to alleviate the critical traffic jam

problems in Bangkok. Currently, there are five MRT routes

operating in Bangkok, with the upcoming purple line

commencing operations in August 2016.

Current MRT lines

Source: Office of Transport and Traffic Policy and Planning (OTP)

Additionally, another three lines of MRT are under

construction:

Under construction MRT lines

Proje c tProje c tProje c tProje c t

Construc tionConstruc tionConstruc tionConstruc tion

Va lue (B tbn )Va lue (B tbn )Va lue (B tbn )Va lue (B tbn ) Contra c torsContra c torsContra c torsContra c tors

Cons truc t ion Cons truc t ion Cons truc t ion Cons truc t ion

commenceme nt commenceme nt commenceme nt commenceme nt

ye a r ye a r ye a r ye a r

Ye a r to Ye a r to Ye a r to Ye a r to

sta rt s ta rt s ta rt s ta rt

ope ra tingope ra tingope ra tingope ra ting

Red l ineRed l ineRed l ineRed l ine

Bangsue-Rangsit 78 STEC/UNIQ JV, ITD 2013 2020

B lue l i neB lue l i neB lue l i neB lue l i ne

Bangsue-Taphra

Hualumpong-Bangkae

Da rk g re e n l ineDa rk g re e n l ineDa rk g re e n l ineDa rk g re e n l ine

Bearing -Samutprakarn 26 CK 2013 2019

Morchit-Kukod 59 ITD, UNIQ, STEC 2015 2020

Tota lTota lTota lTota l 242242242242

80 ITD, CK, UNIQ JV,

STEC2011 2019

Source: CK, STEC, ITD, BEM, DBS Vickers

MRT projects to be opened for bidding by 2016

In 2016, there will be another three MRT projects to be rolled

out for bidding as follows:

(i) MRT orange line which links the Thai Cultural Center to Minburi is expected to be open for bidding in July 2016. This Bt83bn project will be funded by the government via public debt. According to our channel checks, there will be three underground contracts, worth Bt20bn each, on the MRT orange line project. There are only two Thai contractors, CK and ITD, which have the track record for underground works. (ii) MRT pink line (monorail). This Bt27bn project is under the Public-Private partnership (PPP) fast track scheme and is expected to be open for bidding by 4Q16. As the MRT pink line will connect Kaerai and Minburi, this will make it attractive to both existing MRT operators because of the two main reasons: (i) The area along this route is a residential area with a

high population density which means a higher number of passengers and higher project IRR.

(ii) The MRT pink line route will connect the MRT purple line and orange line

(iii) MRT yellow line (monorail) which links Latproa to Samrong is expected to be open for bidding by 4Q16. Like the MRT pink line, this Bt32bn project will be under the PPP fast track scheme. Compared with the MRT pink line, the MRT yellow line project seems to have attracted lower interest from the two current MRT operators.

Potential participants for MRT pink and yellow line

bidding. The PPP scheme tends to require the bidder to be

able to construct, operate and supply the rolling stock.

According to our channel checks and the media, there are

three potential candidates as follows:


Asean Construction

(i) JV between CK, BEM (both subsidiaries of CK) and an undisclosed rolling stock producer

(ii) JV between STEC, BTS and a Chinese rolling stock producer

(iii) JV between ITD and a Japanese rolling stock producer

However, the three candidates prefer to wait for the official Term of References (TORs) before making a final decision on whether they will invest in the MRT pink and yellow lines.

MRT projects; to be open for bidding

Project Descript ionConst ruct ionValue (Btbn)

Const ruct ionValue

(US$bn) ProgressMass Rapid Transit Aut horit y of Thailand : MRTA

Orange line 83 2.4to be opened for bidding in July 2016

Pink line (Monorail) Khae Rai - Min Buri 27 0.8

Yellow line (Monorail) Lat proa - Samrong 32 0.9

Tot al 142 4.1

Thailand Cultural Centre - Min Buri

To be opened for bidding in 2H16

Source: Ministry of Transport, DBS Vickers

Double track railway projects

The public investment on the double track railway projects is another key flagship framework for the Thailand Transport Infrastructure Development Strategy 2015-2022.

This is crucial given the poor performance of Thailand’s current railway network due to the slower speed of the trains. The much slower rate for freight trains is because most of them travel on single track lines. After the completion of the double track railway projects, these single track lines will be upgraded into double or triple track lines, which will enable the trains to travel at 100-120km/hr.

First two projects of double track railway kicked off last

year. The government kicked off the first two double track projects, worth Bt33.2bn, in December last year. These two projects have been awarded to CK and STEC. Currently, the construction progress is still limited, given that they are in the initial phase of the construction. There are no significant cost overruns or potential delays for the projects.

Dual track railway project under construction

Pro je c t RouteConstruc tionVa lue (Btbn) Contra c tors

Klong 19 - Kaeng Koy

11STEC secured Bt9.8bn contract,

Right Tunnelling Co., Ltd. Secured Bt407m contract

Jira Junction - Khonkaen

22JV between CK and Ch. Tawee

construction

Tota l 33

Dual track railway

Source: Ministry of Transport, STEC, CK, DBS Vickers

Another four routes of double track railway. We think that the remaining four routes of double track railway projects in the 1st phase will be open for bidding by 2016. This was because of the clear source of funding for these projects, which will be funded by the government through debt.

Dual track railway projects to be open for bidding

Pro je c t De sc riptionConstruc tionVa lue (Btbn)

Construc tionVa lue

(US$bn) Progre ss

Sta te Ra i lwa y of Tha i la nd : SRT

Prachuab Khiri Khan - Chumpon 17 0.5

Map Kabao - Thanon Chira 29 0.8

Nakhon Pathom - Hua Hin 19 0.5

Lopburi - Paknampo 24 0.7

Tota l 89 2.5

Double-track rail

Cabinet approved

Waiting for the cabinet approval process

Source: Ministry of Transport, STEC, CK, DBS Vickers

Motorway projects

All three routes of motorway projects in the master plan are now in the bidding process. The Bang Pa In – Nakhon Ratchasima and Bang Yai – Karnchanaburi routes are included in the PPP fast track scheme.

The motorway projects were awarded to various contractors, given the simplicity of the civil project.

Dual track railway projects under construction

Motorway routes

Total Const ruct ionValue (Btbn)

Awarded cont ract

(Bt bn) Remark

Pattaya - Map Ta Phut 20 18 CK secured Bt785m contract

Bang Pa In - Nakhon Ratchasima (PPP Fast track)

85 10 ITD secured Bt1.5bn contract

Bang Yai - Karnchanaburi (PPP fast track)

56 7

Total 161 35

Source: Ministry of Transport, CK, DBS Vickers

However, the government still provides the funding of the civil construction for these two projects but will subsequently roll out the bidding for the operation of the concessions.

It is also worth noting that CK is likely to secure the remaining contract for the toll collection system packages of the Pattaya – Map Ta Phut route, worth c.Bt2.5bn. This is because there are only two qualified Thai contractors, including CK and See Sang Karnyotha (1979) Co., Ltd., that have the track record in toll booth construction.

Airport expansion projects

Airport of Thailand PCL (AOT) has kicked off the bidding process for the first two contracts, worth Bt16.4bn for Suvarnabhumi Airport Phase II. We also expect the bidding of another Bt32.6bn contracts from this project to follow.


Asean Construction

AOT has announced the lowest bidders for the first two contracts

as follows;

(i) The lowest bidder for the first package for the ground

and underground floors of the structure is ITD with a

bidding price of Bt12bn(vs Bt13.4bn reference price)

(ii) For the second package for the utility system works is

the JV between Interlink Communication (ILINK TB) and

Samprasit Construction Co., Ltd. with a bidding price of

Bt1.9bn (vs Bt2.3bn reference price)

AOT expects to sign the official contracts with the lowest bidders

in July 2016 (vs August 2016 initially). CK and STEC commented

that the reference price of these two projects do not match with

their GPM target. Thus, they decided not to participate in the

bid.

A number of industry experts think that the developments in the

construction project of Suvarnabhumi Phase II bode well for

infrastructure spending, thus alleviating investor concerns over

potential delays in infrastructure spending. However, the

progress for the other airport expansion projects in the master

plan is still limited.

Progress on Suvarnabhumi Airport phase II project

ProjectProjectProjectProject Descript ionDescript ionDescript ionDescript ion

Const ruct ionConst ruct ionConst ruct ionConst ruct ion

Value (Btbn)Value (Btbn)Value (Btbn)Value (Btbn)

Construct ionConstruct ionConstruct ionConstruct ion

Value Value Value Value

(US$bn)(US$bn)(US$bn)(US$bn) ProgressProgressProgressProgress

Airport s of Thai land Public Company Lim ited : AOTAirport s of Thai land Public Company Lim ited : AOTAirport s of Thai land Public Company Lim ited : AOTAirport s of Thai land Public Company Lim ited : AOT

The ground and

underground floors of

the structure (Package I)

12 0.3 ITD (lowest bidder)

Utility system (Package

II)2 0.1

JV between Interlink

Communication PCL (ILINK TB)

and Samprasit Construction

Co.,Ltd. (lowest bidder)

Expect the remaining contracts

to be opened for bidding by

2017

TotalTotalTotalTotal 49494949 1.41.41.41.4

Extension of building,

terminal and utilities35 1.0

Suvarnabhumi

Airport :

Phase II

Source: AOT, AllianceDBS Research


Asean Construction

GLOBAL COMPETITIVENESS INDEX – STANDINGS AND OPPORTUNITIES?

ASEAN Member States have invested in infrastructure to

varying degrees in terms of spending and development. The

Global Competitiveness Index (GCI) findings for 2015/16 are

based on 140 countries while those for 2014/15 encapsulate

144 countries.

ASEAN ASEAN ASEAN ASEAN –––– country and infrastruccountry and infrastruccountry and infrastruccountry and infrastructure rankingture rankingture rankingture ranking ASEAN CountriesA SEAN CountriesA SEAN CountriesA SEAN Countries Count ry Rank 15/16Count ry Rank 15/16Count ry Rank 15/16Count ry Rank 15/16 Inf ra Rank 15/16Inf ra Rank 15/16Inf ra Rank 15/16Inf ra Rank 15/16 Country Rank 14/15Country Rank 14/15Country Rank 14/15Country Rank 14/15 Inf ra rank 14/15Inf ra rank 14/15Inf ra rank 14/15Inf ra rank 14/15

Singapore 2 2 2 2

Malaysia 18 24 20 25

Thailand 32 44 31 48

Indonesia 37 62 34 56

Myanmar 131 134 134 137

Vietnam 56 76 68 81

Cambodia 90 101 95 107

Philippines 47 90 52 91

Laos 83 98 93 94

Source: GCI, AllianceDBS, DBS Vickers ASEAN ASEAN ASEAN ASEAN rrrranking on anking on anking on anking on iiiinfrastructure nfrastructure nfrastructure nfrastructure –––– Singapore topsSingapore topsSingapore topsSingapore tops, M’sia 2nd, M’sia 2nd, M’sia 2nd, M’sia 2nd

2

24

44

62

76

9098

101

134

2

25

4856

8191 94

107

137

0

20

40

60

80

100

120

140

160

Infra Rank 15/16

Infra Rank 14/15

Source: GCI, AllianceDBS, DBS Vickers

We highlight the infrastructure quality of all ASEAN countries

based on the last two recent GCI findings. In short, we have

concluded that:

i) Unsurprisingly Singapore is ranked the highest in

ASEAN and second in the world

ii) All ASEAN countries showed improvement in the

latest 2015/16 rankings for infrastructure, apart from

Indonesia and Laos.

iii) All ASEAN countries, apart from Singapore, Malaysia

Vietnam and Myanmar, cite the inadequate supply of

infrastructure as the top 5 most problematic reasons

for doing business. For Vietnam and Myanmar, the

likely reason why this issue doesn’t appear is because

relatively other issues cited such as access to

financing, inadequate educated workforce, political

instability, corruption, tax regulation and inefficient

government bureaucracy appear to take precedence.

For the Philippines, this appears as the number two

reason while for Cambodia, Indonesia and Laos, it is

the third reason

iv) Among the three ASEAN countries (Malaysia,

Thailand and Indonesia), the biggest opportunities

likely lie in Indonesia given the poorest ranking in

terms of infrastructure among the three and

concerted effort by the Jokowi-led government to

address this.

v) Malaysian contractors likely stand a higher chance for

Indonesian-based projects given their similar

languages, culture and historical precedence.

MALAYSIAMALAYSIAMALAYSIAMALAYSIA –––– SECOND BEST IN ASEANSECOND BEST IN ASEANSECOND BEST IN ASEANSECOND BEST IN ASEAN

MalaysiaMalaysiaMalaysiaMalaysia’s’s’s’s ininininfrastructure ranking detailfrastructure ranking detailfrastructure ranking detailfrastructure ranking detail

1615

13

16

2120

19

12

19 19

0

5

10

15

20

25

Overall Roads Railway Ports Airport

2015/16

2014/15


Out of three ASEAN countries, Malaysia’s infrastructure is

probably the most mature. This implies while there is a surge in

transport-related infrastructure currently, contractors will need

to venture overseas again eventually.

For the detailed ranking for infrastructure, Malaysia’s overall

infrastructure ranking for 2015/16 fell to 16 vs 20 in 2014/15.

It showed improvement for roads and ports but not for railway

and airports. For railway, Malaysia fell to 13 in 2015/16 (vs 12

in 2014/15) and airport fell to 21 in 2015/16 (vs 19 in

2014/15). Roads and ports showed improvement to 15 and 16

in 2015/16, respectively, vs 19 for both categories in 2014/15.


Asean Construction

MalaysiaMalaysiaMalaysiaMalaysia –––– ttttop 5 op 5 op 5 op 5 problematic reproblematic reproblematic reproblematic reasons for doing businessasons for doing businessasons for doing businessasons for doing business

10.8

10.2

9.2

8.6

7.6

0 2 4 6 8 10 12

Inefficient government bureaucracy

Access to financing

Insufficient capacity to innovate

Corruption

Inadequately educated workforce


THAILANDTHAILANDTHAILANDTHAILAND –––– BT1.7tr PLAN TO DRIVE GROWTHBT1.7tr PLAN TO DRIVE GROWTHBT1.7tr PLAN TO DRIVE GROWTHBT1.7tr PLAN TO DRIVE GROWTH

ThailandThailandThailandThailand’s infrastructure ranking detail’s infrastructure ranking detail’s infrastructure ranking detail’s infrastructure ranking detail

71

51

78

52

38

76

50

74

54

37

0

10

20

30

40

50

60

70

80

90


2015/16 2014/15

Source: GCI, AllianceDBS, DBS Vickers Based on the Global Competitiveness Index,* Thailand’s overall infrastructure ranking for 2015/16 fell to 76 (vs 71 in 2014/15. This shows an urgent need for Thailand to invest in country’s infrastructure in order to become the ASEAN regional hub, given Thailand’s strategic location.

The survey also showed us that the inadequate supply of Thailand’s infrastructure is one of the top 5 most problematic reasons for doing business. Additionally, the government’s aim is to reduce logistics costs, which now account for c.15% of Thai’s GDP, through the upgrade of infrastructure.

Thus, the government has launched the Bt1.7tr spending plan

to upgrade rail, air and water transportation under the

“Thailand Transport Infrastructure Development Strategy

2015-2022” framework.

Thailand Thailand Thailand Thailand –––– top 5 problematic reasons for doing businetop 5 problematic reasons for doing businetop 5 problematic reasons for doing businetop 5 problematic reasons for doing businessssssss

11.7

10.6

9.6

8.7

8.4

0 2 4 6 8 10 12 14

Corruption


Inadequate supply of infrastructure

Policy instability

Access to financing


INDONESIAINDONESIAINDONESIAINDONESIA –––– A WORLD OF OPPORTUNITIESA WORLD OF OPPORTUNITIESA WORLD OF OPPORTUNITIESA WORLD OF OPPORTUNITIES

IndonesiaIndonesiaIndonesiaIndonesia’s’s’s’s infrastructure ranking detailinfrastructure ranking detailinfrastructure ranking detailinfrastructure ranking detail

81 80

43

82

66

72 72

41

77

64

0

10

20

30

40

50

60

70

80

90


2015/16 2014/15


Indonesia is one of the few countries that saw its country

ranking decline. Aside from corruption and bureaucratic red

tape, the underdeveloped infrastructure is also among the

reasons for Indonesia’s weakening competitiveness.

Infrastructure ranking fell to #62 in 2015/2016, which is the

lowest compared to Malaysia (#24) and Thailand (#44).

On the other hand, the relatively low ranking indicates plenty

of opportunities for contractors in the next few years. It is

estimated that Indonesia would need as much as USD235bn to

close the infrastructure gap, which is still higher than the

combined infrastructure needs of Malaysia and Thailand. This

makes Indonesia as one of the largest markets for investors

and contractors.


Asean Construction

Indonesia Indonesia Indonesia Indonesia –––– top 5 problematic reasons for doing businesstop 5 problematic reasons for doing businesstop 5 problematic reasons for doing businesstop 5 problematic reasons for doing business

18.1

12.5

12.3

12.03

8.6

0 2 4 6 8 10 12 14 16 18 20

Government instability/coups

Corruption


Policy instability

Inadequate supply of infrastructure



Asean Construction

CROSS-BORDER OPPORTUNITIES MALAYSIAMALAYSIAMALAYSIAMALAYSIA –––– HIGHEST NEED FOR CROSS BORDER WORKHIGHEST NEED FOR CROSS BORDER WORKHIGHEST NEED FOR CROSS BORDER WORKHIGHEST NEED FOR CROSS BORDER WORK Malaysia contractors overseas (2013Malaysia contractors overseas (2013Malaysia contractors overseas (2013Malaysia contractors overseas (2013----15 selective)15 selective)15 selective)15 selective) Company Company Company Company T y pes of project sT y pes of project sT y pes of project sT y pes of project s Locat ionLocat ionLocat ionLocat ion Cont ract V alue US$mCont ract V alue US$mCont ract V alue US$mCont ract V alue US$mYear CompletedYear CompletedYear CompletedYear Completed

ASEAN Member StatesA SEAN Member StatesA SEAN Member StatesA SEAN Member States

Trans Resources Corp Modernization of airport termina Brunei 98 2014

Bina Puri Building construction Brunei 4 2014

MTD Construction Toll road Indonesia 371 2015

Johawaki Toll road Indonesia 428 2014

UEM Builders Toll road Indonesia 641 2015

Bina Puri Mini Hydropower plant Indonesia 10 2015

Salcon Engineering Others Lao PDR 1 2013

Eastern Soldar Tankage Work Singapore 16 2014

Salcon Engineering Reserv ior Thailand 7 2014

Prinsiptek Building and Residential Thailand 14 2015

Bina Puri Building Thailand 25 2014

Salcon Engineering Water Treatment Vietnam 22 2013

Gamuda Transmission line, mech and electrical V ietnam 146 2013

Ireka Hopsital V ietnam 26 2013

Other dev eloping economiesOther dev eloping economiesOther dev eloping economiesOther dev eloping economies

Malaysian Maritime & Dredging Dredging and bank protection Bangladesh 27 2013

HG Power Transmission Transmission Line Bangladesh 5 2014

HG Power Transmission Transmission Line Bangladesh 23 2015

Scomi Monorail Brazil 621 2014

Scomi Monorail Brazil 652 2015

MTD Highway China 429 2014

Mersing Sewage China 14 2014

Mersing Water China 26 2015

IJM Road and highway India 24 2014

Salcon Engineering Water Treatment India 5 2013

IJM Mahua-Jaipur Section 6 India 6 2015

IJM Mahua-Jaipur Section 9 India 9 2014

UEM Builders Buidling India 13 2014

UEM Builders Road works India 50 2013

Mudajaya Power plant India 588 2013

Ho Hup Road Iraq 20 2015

Ho Hup C Water System Iraq 88 2015

Steelworks Steel Water Tank Kenya 2013

Ranhill Residential Libya 143 2013

WCT Expressway Oman 2015

WCT Road and Building Watar 334 2015

Bina Puri Water System Saudi 8 2013

Salcon Engineering Water Supply Sri Lanka 18 2015

MTD Sewage tunnel UAE 19 2013 Source: CIDB, AllianceDBS, DBS Vickers Malaysia contractor’s overseas exposure Malaysia contractor’s overseas exposure Malaysia contractor’s overseas exposure Malaysia contractor’s overseas exposure –––– nnnnumber and valueumber and valueumber and valueumber and value

1 1 1 3 3 14 6

12

232426

32

41

25

36

59

47

38

6063

5554

2627

7

149

30

0

1000

2000

3000

4000

5000

6000

0

10

20

30

40

50

60

70

Amount (USDm) Total projects

Source: CIDB, AllianceDBS, DBS Vickers

Malaysian contractors are no strangers in terms of overseas

ventures. Based on the statistics from the Construction

Industry Development Board (CIDB), the number of contracts

and amount awarded for overseas jobs slowed significantly

post 2011-12 as contractors were more focused on domestic

jobs such as MRT while there was still a strong pipeline for

property-related projects from the private sector. However, this

slowed significantly since then and 2015 saw no new projects

from overseas. A case in point is IJM where it made a

conscious effort to remain domestic in terms of order flows,

given that its Indian projects faced nagging issues.

DBSVDBSVDBSVDBSV construction universeconstruction universeconstruction universeconstruction universe’s’s’s’s exposure for overseas contractors exposure for overseas contractors exposure for overseas contractors exposure for overseas contractors vsvsvsvs ttttotalotalotalotal

Total Total Total Total

numbernumbernumbernumber

Total project T otal project T otal project T otal project

(USDm)(USDm)(USDm)(USDm)

Completed Completed Completed Completed

project v alue project v alue project v alue project v alue


On-going On-going On-going On-going

project v alue project v alue project v alue project v alue


Gamuda 9 2273 2273 0

IJM 52 2603 2293 224

WCT 15 2016 1292 723

Sunway 12 1493 1493 0

Muhibbah 74 1184 1184 0

Kimlun 0 0 0 0

MMC 4 3458 3458 0

Total 166 13027 11993 947

Total including others 789 31853 24404 6668

% of Total 21 41 49 14 Source: CIDB, AllianceDBS, DBS Vickers DBSV construction DBSV construction DBSV construction DBSV construction universeuniverseuniverseuniverse’s’s’s’s eeeexposure for overseas contractsxposure for overseas contractsxposure for overseas contractsxposure for overseas contracts

0

500

1000

1500

2000

2500

3000

3500

4000

0

10

20

30

40

50

60

70

80

Gamuda IJM WCT Sunway Muhibbah Kimlun MMC

Total project (USDm) Total number

Source: CIDB, AllianceDBS, DBS Vickers Based on the above, contractors under our coverage contributed 21% of the total number of contracts awarded but 41% of the project value from 1996-2015. The key contributors were Gamuda, IJM and MMC. Gamuda’s exposure for overseas projects has been varied but is skewed towards Vietnam, India and the Middle East. IJM has a long standing history in India since the 1990s but given the strong pipeline projects in Malaysia and its peak


Asean Construction

orderbook of RM8.5bn, we think it will be selective in terms of exploring overseas projects for now. 20% of WCT’s current outstanding orderbook comprises Middle East projects (two projects in Qatar). It continues to bid selectively for projects there. Suncon has a successful track record in the Middle East with its Rihan Heights project with JV partner CapitaLand. It has also done several road projects in India for the National Highway Authority of India. We understand that it has been winning at every level for the arbitration process and there is a high probability of some writebacks this year. Muhibbah’s overseas exposure has also been varied but it would benefit from potential flows in Cambodia given that it owns a 21% stake in the airport concession and has some on-the-ground feel of the market there. While contractors are in a sweet spot currently with ample job flows, we think post the rollout of HSR and MRT Line 3 in the next few years, there will be no meaningful large-scale projects to look forward to. Based on our conversation with contractors, there are already making some preparatory ground work to explore potential overseas contracts. For future projects, we do expect joint ventures to be formed to minimise project risk.

Malaysian contractorsMalaysian contractorsMalaysian contractorsMalaysian contractors’’’’ exposure to ASEAN countriesexposure to ASEAN countriesexposure to ASEAN countriesexposure to ASEAN countries

Brunei15%

Cambodia8%

Indonesia30%

Laos0%

Myanmar1%

Philippines7%

Singapore6%

Thailand14%

Vietnam19%


JV projects overseas JV projects overseas JV projects overseas JV projects overseas

Company Company Company Company ProjectProjectProjectProject Amount (USm)Amount (USm)Amount (USm)Amount (USm) CompletedCompletedCompletedCompleted

Gamuda -WCT (70:30)

4 Laning of Panagarh – Palsit Section of NH –

2 West Bengal, India 68 2005

Gamuda-WCT (70:30)

4 Laning of Durgapur Expressway (Dankuni –

Palsit Section on NH-2) West Bengal, India 29 2005

MRCB-Zelleco Construction (50:50) Osmani International Airport, Bangladesh 7.7 2007

Gamuda-WCT (85:15)

Design and build Airfield Paving Tunnel and

Detention Ponds NDIA 663 2008

Gamuda-WCT (51:49) Durkhan Highway 112 2009

IJM-LFE (70:30)Hotel Development Al-Reem Island, Abu Dhabi 108 2008


INDONESIA – IN A SWEET SPOT FOR NOW

Seeking opportunities abroad appears to be Seeking opportunities abroad appears to be Seeking opportunities abroad appears to be Seeking opportunities abroad appears to be lower lower lower lower priopriopriopriority for rity for rity for rity for

now. now. now. now. Indonesia is still in the early phase of an infrastructure

boom. A huge number of projects are still in the designing

phase and have yet to be awarded to contractors.

Opportunities are still abound for local contractors to beef up

their order book, which makes seeking ventures abroad less a

priority at this juncture. On the contrary, this puts Indonesia as

a target market for contractors in a more developed country,

such as Malaysia, Korea, Japan and China.

Contractor’s market share by nationality in Indonesia

Source: BMI Research

WIKA’s small but encouraging start. WIKA’s small but encouraging start. WIKA’s small but encouraging start. WIKA’s small but encouraging start. WIKA appears to be the

most active in seeking opportunities overseas among the listed

state-run contractors. This year, the company expects to win a

building project in Saudi Arabia and two airport expansion

projects in Thailand and East Timor. The contribution of


Asean Construction

overseas project is expected to remain small at below 5% of total revenue and order book for this year. Indonesian contractors’ presence in foreign countries

Contractors Project CustomerContract

value(Rp bn)

Project timeline

WIKA Mall in Kuching Zeacon, Malaysia 168 2014-2015WIKA Office tower Nobel Twin, Myanmar 459 2014-2015WIKA Apartment Gov't of Algeria 350 2014-2015WIKA Oecusse Port Gov't of East Timor 910 2015-2017WIKA Sentubong Bridge Zeacon, Malaysia 110 2015-2017PTPP Tibar Road Gov't of East Timor 264 2013-2015PTPP Liquica Road Gov't of East Timor 127 2012-2014PTPP Office building Gov't of East Timor 185 2012-2014WSKT Suai Airport upgrade Gov't of East Timor 880 2014-2016WSKT Oecusse Road Gov't of East Timor 502 2014-2016 Source: Companies THAILAND – SEEMINGLY MORE RISK AVERSE

Thailand contractors – low overseas exposure. Thailand-based contractors have low exposure to overseas contracts. This is because of concerns over payment. Additionally, the abundant domestic opportunities, especially from the public sector, have eliminated the pressure on the contractors to expand their business overseas for now. CK and ITD; the first two contractors to have overseas exposure CK is the contractor with the largest exposure overseas. Currently, its Xayaburi project makes up 50% of its backlog or Bt48.5bn. The Xayaburi is a hydroelectric dam construction project in Laos. The project owner is Xayaburi power Co., Ltd., a subsidiary of CK.

ITD has 43% of its backlog from overseas projects. Of which, the largest portion (85%) is from the Hongsa Mine project in Laos. However, the major part of the funding of this project is from Thailand, as the major shareholders of Hongsa Power Company Limited are Banpu Power Limited, Ratcburi Electricity Generating Holding PCL, and Lao Holding State Enterprise. Thus, this should alleviate concerns over payment risk.

For the works in India, Mozambique and Bangladesh, ITD appears to have secured the projects through ITD Cementation India PCL (ITCE IN), an India-based construction company engaged in a number of infrastructure works in India.

ITD also owns concessions in (i) Dhaka Elevated Expressway in Bangladesh, worth Bt98bn, and (ii) Railway line and infrastructure of port terminal in Mozambique, worth Bt111bn. Currently, ITD still looking for a partner to invest in these projects. ITD plans to have less than 10% partnership stakes.

Additionally, ITD has the concession to develop the Dawei project, the development of industrial estates and infrastructure project, phase 1 (27 sq km) in Myanmar. This

Bt10bn project has already passed the EIA process and is now waiting for the Myanmar government’s order to start construction.

STEC only ventured overseas last year. Currently, it is working on road construction works in Laos, worth Bt800m, but funding is subsidised by the Thai government. STEC’s management prefers to focus on domestic works as there should be abundant opportunities in the country for many years.

For UNIQ, the company has no interest in venturing overseas as of now.

Thailand’s top four contractors’ exposure overseas (backlog overseas/total backlog)

50%

2% 0%

43%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

CK STEC UNIQ ITD*

Percentage to total backlog

*Excluding its Bt149bn concession in Bangladesh and Mozambique

Source: CK, ITD, DBS Vickers

Thailand – top four contractors’ exposure by country

India, Bt1.1bn

Laos, Bt75bn

Myanmar, 0

Mozambique, Bt3.2bn

Bangalore, Bt0.2bn

Source: CK, STEC, UNIQ, ITD, DBS Vickers


Asean Construction

FUNDING GAPS

Private sector funding and PPP-related initiatives have been low

in this region due to high perceived risks and long duration of

the projects. The support from individual governments,

regional initiatives etc., will help bridge some of the funding

needs. The Asian Development Bank and Japanese Official

Development Assistance (ODA) are already involved in the

AMPC but there is room for involvement from the Asian

Infrastructure Investment Bank (AIIB), Silk Road Fund and

Chinese ODA.

The ASEAN Infrastructure Fund was launched in April 2012

with an estimated total lending commitment of US$300m a

year. This fund comprises equity contributions from individual

member countries and is also co-financed and administered by

the Asian Development Bank.

The AIIB is an international financial institution that aims to

support the building of infrastructure in the Asia-Pacific region.

The capital of the bank is US$100bn, equivalent to 2⁄3 of the

capital of the Asian Development Bank and about half that of

the World Bank.

Based on data compiled by UNCTAD, there is US$10tr in

available funding or resources which can be used for

infrastructure development. This comprises the ASEAN bond

market, ASEAN stock exchanges, ASEAN infrastructure

companies, ASEAN Banks, ASEAN Insurance Companies,

ASEAN Pension Funds.

Available Available Available Available resources regionally for fundingresources regionally for fundingresources regionally for fundingresources regionally for funding

Amount Amount Amount Amount

($ billions)($ billions)($ billions)($ billions)

ASEAN Bond Markets 2015 1,081 Asian Development Bank Bond Monitoring.

Based on second-quarter 2015 bond markets data of Indonesia ($125 billion),

Malaysia ($285 billion), Philippines ($103 billion), Singapore ($241 billion), Thailand

($284 billion) and V iet Nam ($43 billion).

ASEAN Stock 2015 2,002 World Federation of Exchanges.

Exchanges Based on stock exchange market capitalization in August 2015 of Indonesia

($334 billion), Malaysia ($363 billion), Philippines ($243 billion), Singapore ($639

billion), Thailand ($373 billion) and V iet Nam ($50 billion).

ASEAN Infrastructure 2014 1,567 Orbis.

Companies Covers construction, real estate, utilities and telecommunication companies.

(Total assets) Based on 3,319 infrastructure companies with reported financial data; of which

3,030 domestic infrastructure companies with combined total assets of $1.45

trillion and 289 foreign construction companies operating in ASEAN with $117

billion. Information for some companies was based on 2012 data (latest year for

which data are available).

ASEAN Banks 2014 4,619 Orbis.

(Total assets) Based on 477 banks with reported $4,619 billion total assets, with operations

in ASEAN, of which 338 are domestic and 139 foreign owned. Domestic banks

collectively held $4 trillion, and foreign bank subsidiaries owned $619 billion in

total assets. Information for some companies was based on 2012 data (latest

year for which data are available).

ASEAN Insurance 2014 504 Orbis.

Companies Based on data for 278 domestically owned insurance companies and 118 foreignowned

(Total assets) companies operating in ASEAN. Total assets of domestic insurance

companies were $340 billion, and foreign-owned subsidiaries held $164 billion.

Information for some companies was based on 2012 data (latest year for which

data are available).

ASEAN Pension Funds 2014 38 Orbis.

(Total assets) Based on data for 222 pension fund companies with reported financial data, of

which 176 domestic companies held total assets of $31 billion and 36 foreign

ones operating in ASEAN held $7 billion. Information for some companies was

based on 2012 data (latest year for which data are available).

Momorandum:Gross domestic sav ing 2014 820 World Bank.

Exclude data on Myanmar.

Foreign-exchange 2014/2015 750 IMF: Data for Indonesia, Malaysia, Philippines, Singapore and Thailand reported

reserves in August 2015.

World Bank: Data for Brunei Darussalam, Cambodia, Lao PDR, Myanmar and

Viet Nam based on 2014 data and for Myanmar on 2012 data.

Sovereign wealth fund 2014 620 Sovereign Wealth Fund Institute: Based on December 2014 data for Brunei

Investment Agency (Brunei Darussalam), Government Investment Unit

(Indonesia), Khazanah Nasional (Malaysia), GIC Private Limited (Singapore),

Temasek (Singapore) and V ietnam`s State Capital Investment Corporation (V iet

Nam)

Source: UNCTAD 2015b

SourceSourceSourceSourceT y pe of resourcesT y pe of resourcesT y pe of resourcesT y pe of resources YearYearYearYear


Asean Construction

MALAYSIAMALAYSIAMALAYSIAMALAYSIA

For Malaysia, the construction sector in Malaysia has

historically been a localised sector where foreign participation

is only present when the required expertise is needed or it

comes with the associated funding requirements. The MRT

projects have the least risk of cuts in funding or delays as it is

deemed a high priority Economics Transformation Programme

(ETP) project. Financing of the project is off balance sheet and

hence has no impact in terms of the country’s budget deficit.

However, going forward, we expect to see more foreign

participation in the Malaysian construction space. A case in

point is the HSR where 14 companies have been shortlisted to

present their case to SPAD. Among them are companies from

France, Germany, Spain, Canada, China, South Korea and

Japan.

In our view, the sale of 1MDB’s power assets to China General

Nuclear Power Corp for RM9.83bn and China Railway

Engineering Corp’s involvement in Bandar Malaysia could be a

precursor to more Chinese involvement in Malaysia’s mega

infrastructure projects like the HSR. We think this is a ‘win-win’

situation in Malaysia as the government’s current finances and

budget deficit will render it unlikely to be able to fund another

large-scale project besides the MRT. Even with higher foreign

participation, local contractors will continue to benefit but will

have to settle for a subcontractor role.

Moreover, we understand that regionally, China’s involvement

in infrastructure projects in ASEAN comes with the most

competitive funding structure.

Malaysia Malaysia Malaysia Malaysia –––– ggggovernment’s financesovernment’s financesovernment’s financesovernment’s finances

46

47

48

49

50

51

52

53

54

55

56

0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

800.0

2010 2011 2012 2013 2014 2015 2016e

% to GDPRM bnOutstanding govt debt (lhs)

Debt to GDP ratio (rhs)

Additional room space for debt

before hitting 55% to GDP limit

Source: BNM, AllianceDBS Research

INDONESIAINDONESIAINDONESIAINDONESIA

Infrastructure investment needs and funding source

State budget

Rp1,979tr(41%)

SOERp1,066tr(22%)

PrivateRp1,751tr(37%)

Source: National Development Planning Agency

State budgetState budgetState budgetState budget

As part of the efforts to narrow the country’s infrastructure

deficit, the government for the first time raised the

infrastructure budget to 15% of the total state expenditure, a

significant increase from the average of 8% in 2005-2014. The

infrastructure budget was further raised in the 2016 state

budget from Rp290tr to Rp313tr (+8% y-o-y), with its share of

total expenditure being maintained at 15%.

State’s infrastructure budget trend

26

54 60 79 76

86

114

146 156

178

290 313

0%

5%

10%

15%

20%

-

50

100

150

200

250

300

350

State's infrastructure budget (Rp tr) as % of state exp.

Source: CEIC, Ministry of Finance

Despite the higher budget, government cannot rely on the state

budget as the main source of funding as it is obliged by law to

maintain fiscal deficit below 3% of GDP every year. Revenue

shortfall is one of the key risks faced by the government as it

would force the government to scrap or delay the execution of

state-funded projects. A case in point is the government’s plan

to cut the budget of the Ministry of Public Works and Housing

in the range of 5% this year due to the widening fiscal deficit.


Asean Construction

Infrastructure budget

Rp trRp trRp trRp tr %%%%

Ministerial spendingMinisterial spendingMinisterial spendingMinisterial spending 166166166166 189189189189 8888 14%14%14%14%

Public Works & Housing 102 97 (5) -5%

Transportation 46 43 (3) -6%

Non-ministerial spendingNon-ministerial spendingNon-ministerial spendingNon-ministerial spending 5555 5555

Transfer to region & village fundTransfer to region & village fundTransfer to region & village fundTransfer to region & village fund 83838383 83838383

Capital expenditureCapital expenditureCapital expenditureCapital expenditure 48 61

Capital injection to SOE** 38 52 14 37%

Social infrastructureSocial infrastructureSocial infrastructureSocial infrastructure 7777 7777

Infrastructure supportInfrastructure supportInfrastructure supportInfrastructure support 4444 4444

TotalTotalTotalTotal 313313313313 350350350350 24242424 12%12%12%12%

2016 state 2016 state 2016 state 2016 state

budget budget budget budget

(APBN)(APBN)(APBN)(APBN)

2016 2016 2016 2016

revised revised revised revised

state state state state

budget budget budget budget

draftdraftdraftdraft

(R-APBNP)*(R-APBNP)*(R-APBNP)*(R-APBNP)*

Potential changesPotential changesPotential changesPotential changes

*Indicative numbers; **Changes include a total Rp2tr cut in Pelindo III

and Hutama Karya and a budget increase of Rp16tr for BLU LMAN (land

acquisition) but not including Rp13.5tr budget increase for PLN.

Source: Ministry of Finance, AllianceDBS, DBS Vickers

Capital injection and capital market. Capital injection and capital market. Capital injection and capital market. Capital injection and capital market. Through capital injection,

the government aims to increase the role of SOEs in executing

infrastructure development plans. In the 2016 revised state

budget, as much as Rp64tr budget is allocated to SOEs,

mostly to fund infrastructure development in the country. In

some cases where the SOE entitled for capital injection is

publicly traded, a rights issue scheme will be applied to allow

private investors to retain their stakes in the company. With

enlarged equity base post capital injection or rights issue, the

SOEs will have more capacity to leverage up and can take up

more infrastructure projects in the future. Furthermore, the

capital injection budget is not constrained by the statutory

fiscal deficit limit of 3% of GDP.

Government’s capital injection budget

2.0 1.5 3.0 - -

41.4

29.7

57.3

2.0 7.2 4.6

2.0 3.0

23.5

10.7

10.7

-

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

2010 2011 2012 2013 2014 2015 2016 2016*

Infra-related capital injection (Rp tr) Non-infra related capital injection (Rp tr) *Draft of 2016 revised state budget (R-APBNP)


Capital injection to selected infra-related SOEs (in Rp bn)

CompanyCompanyCompanyCompany

Initial Initial Initial Initial proposalproposalproposalproposal

(2016 state (2016 state (2016 state (2016 state budget)budget)budget)budget)

Proposed by Proposed by Proposed by Proposed by gov’t in gov’t in gov’t in gov’t in

revised state revised state revised state revised state budget draftbudget draftbudget draftbudget draft

Approved by Approved by Approved by Approved by parliamentparliamentparliamentparliament

WIKA 4,000 4,000 4,000

PTPP 2,250 2,250 2,250

JSMR 1,250 1,250 1,250

PLN* 10,000 23,560 23,560

Hutama Karya 3,000 3,000 2,000

Angkasa Pura II 2,000 2,000 2,000

Industri KA 1,000 1,000 1,000

Pelindo III 1,000 1,000 -

Amarta Karya 32 32 32

*The budget increase of Rp13.56tr is non-cash capital injection

Source: Ministry of Finance

Infra-related SOEs’ rights issue (in Rp bn)

CompanyCompanyCompanyCompany YearYearYearYear Gov’t capital Gov’t capital Gov’t capital Gov’t capital injectioninjectioninjectioninjection

Rights issue Rights issue Rights issue Rights issue proceedsproceedsproceedsproceeds

WSKT 1H15 3,500 5,300

ADHI 2H15 1,400 2,700

WIKA* 2H16 4,000 6,150

PTPP* 2H16 2,250 4,410

JSMR* 2H16 1,250 1,785


PublicPublicPublicPublic----Private Partnership Private Partnership Private Partnership Private Partnership –––– getting the deal throughgetting the deal throughgetting the deal throughgetting the deal through. Three out

of five hub ports, which are designed to support government’s

sea toll road programme and the ASEAN Single Shipping Market

(ASSM) are also listed in Bappenas’ 2015 Public-Private

Partnership (PPP) book. The participation of the private sector is

of importance due to the high investment requirement and

limited room for government financing.

Government’s support mechanisms for PPP projects

Source: Ministry of Finance


Asean Construction

Major ports offered for private financing

ProjectProjectProjectProject InvestmentInvestmentInvestmentInvestment

(USD m)(USD m)(USD m)(USD m)

RemarksRemarksRemarksRemarks

Kuala TanjungKuala TanjungKuala TanjungKuala Tanjung (Pelindo I)

2,000.00

� Phase 1 50ha container field � Phase 2 583ha container field � Phase 3 350ha container field BitungBitungBitungBitung (Pelindo IV) 500.00

Makassar New Makassar New Makassar New Makassar New PorPorPorPort t t t (Pelindo IV)

421.55

� Phase 1 46ha container terminal (reclaimed)

� Phase 2 30ha container terminal (reclaimed)

� Phase 3 30ha container terminal and 5.8ha RO-RO terminal (reclaimed)

Source: BAPPENAS’ 2015 PPP Book

The Asia infrastructure race The Asia infrastructure race The Asia infrastructure race The Asia infrastructure race –––– compecompecompecompetition heats up; more tition heats up; more tition heats up; more tition heats up; more

fund made available by Japan recently.fund made available by Japan recently.fund made available by Japan recently.fund made available by Japan recently. The large

infrastructure gap in Asia and the public fund limitation to

plug this gap have attracted Japan and China, the two

biggest powers in the region, to play a more active role in

project financing. Both countries have turned into Asian

countries for investment opportunities in an attempt to find a

new growth engine.

In Sep 2015, three Indonesian state-owned banks secured a

loan commitment worth USD3bn from the China

Development Bank (CDB) to finance infrastructure

development in Indonesia. CDB has also signed a

commitment deal with the Indonesian government to provide

up to USD20bn to support 16 infrastructure projects in

Indonesia. More loan deals have been made in the past

months, including CDB loan for the Jakarta-Bandung high-

speed railway project amounting to USD4.1bn. Based on our

checks, the financial close is currently reaching the final stage.

Furthermore, Japan has decided to loosen the lending rules

for overseas infrastructure projects this year. We note that the

initiative was taken after Japan lost the Jakarta-Bandung high-

speed railway contract to China last year. Chinese bids were

selected over those of Japan which asked for financial

guarantee from the Indonesian government.

The new policy now allows Japan to invest in riskier

infrastructure projects through a special account. The move is

part of the government’s plan called Quality Infrastructure

Initiative, which has set out a target of USD110bn new

investment in Asia infrastructure development in 2016-2020

through Japan-backed development banks i.e. JBIC, ADB and

JICA. The change is aimed at enabling Japan to bid more

competitively for large-scale infrastructure projects across

Asia.

We also note that ADB recently decided to boost its lending

commitment to fund Indonesia’s infrastructure build from

USD740m p.a. in 2010-2014 to USD2bn p.a. or a total of

USD10bn over the next five years.

JBIC’s funding commitment to ASEAN member countries

Source: FT Confidential Research, JBIC

Underleveraged nonUnderleveraged nonUnderleveraged nonUnderleveraged non----bank infrastructure financing companies. bank infrastructure financing companies. bank infrastructure financing companies. bank infrastructure financing companies.

The role of non-bank financial institutions specialising in

infrastructure financing has recently becoming more evident

in Indonesia. Currently, there are two institutions backed by

the Indonesian government, PT Sarana Multi Infrastruktur

(SMI) and PT Indonesia Infrastructure Finance (IIF). Having the

Government of Indonesia and multilateral development banks

(i.e. IFC, ADB) as shareholders, SMI and IIF have better access

to long-term funding, which is suitable for infrastructure

financing.

Both institutions have a relatively underleveraged balance

sheet and plan to ramp up its portfolio starting this year.

SMI’s recent involvement in bridging the financing needs for

toll roads’ land acquisition has marked its initial significant

role in speeding up infrastructure development. This year, the

company has proposed to receive Rp4.16tr capital injection

from the government.


Asean Construction

THAILANDTHAILANDTHAILANDTHAILAND

Thailand's infrastructure investment plan by source of fund for fiscal year 2015-2022

SOEs SOEs SOEs SOEs borrowing/on borrowing/on borrowing/on borrowing/on lending, 45%lending, 45%lending, 45%lending, 45%

Government Government Government Government Budget, 20%Budget, 20%Budget, 20%Budget, 20%

PublicPublicPublicPublic----Private Private Private Private Partnership, Partnership, Partnership, Partnership,

20%20%20%20%

SOEs revenue, 10%

Infrastructure Fund, 5%

Source: Public Debt Management Office (PDMO), AllianceDBS Research

Expect government spending to become less significant.

Government financing has a number of constrains. In Thailand,

the public debt/GDP borrowing ceiling is at 60%, compared to

the current level at 44%.

Although the current funding of infrastructure projects is

highly dependent on public funding, we believe that

government financing will become less significant.

Currently, there are five infrastructure projects in the pipeline

that will be funded by government borrowings as follows: Infrastructure projects that will be funded by the government

ProjectProjectProjectProject Des criptionDes criptionDes criptionDes cription

Cons tructionCons tructionCons tructionCons truction

Va lue (Btbn)Va lue (Btbn)Va lue (Btbn)Va lue (Btbn) Progres sProgres sProgres sProgres s

Mas s Rapid Trans it Authority of Tha iland : MRTAMas s Rapid Trans it Authority of Tha iland : MRTAMas s Rapid Trans it Authority of Tha iland : MRTAMas s Rapid Trans it Authority of Tha iland : MRTA

Orange line83

to be opened for bidding in

June 2016

State Ra ilway of Tha iland : SRTState Ra ilway of Tha iland : SRTState Ra ilway of Tha iland : SRTState Ra ilway of Tha iland : SRT

Prachuab Khiri Khan - Chumpon 17

Map Kabao - Thanon Chira 29

Nakhon Pathom - Hua Hin 19

Lopburi - Paknampo 24


Double-track

rail

Thailand Cultural Centre - Min

Buri

Cabinet approved

Waiting for the cabinet

approval process

Source: PDMO, AllianceDBS Research

Thus, we see a high potential for these five projects to be

open for bidding this year, given their clear source of funding.

Infrastructure loans from Japanese government for

funding the Thai-Japanese railway cooperation. The

Japanese government has played an important role in the Thai

government’s public funding through Japanese funds. For

example, in 2015, the Japanese government funded Bt11bn

for the MRT red line; Bang Sue – Rungsit route, which is now

under construction by Unique Engineering and Construction

(UNIQ TB), through Japan International Cooperation Agency

(JICA). However, for projects that are funded by the Japanese

government, they are required to have the involvement of a

Japanese entity, e.g. a Japanese rolling stock producer, in the

project.

Going forward, financial help from the Japanese government

is expected to continue. On 27 May 2015, the Thai and

Japanese governments signed a memorandum of cooperation

(MOC) to invest in a high-speed train project (Bangkok-

Chiang Mai), worth Bt546bn. This project is still in the

feasibility study phase, given its huge investment amount with

low IRR.

Apparently, the Japanese government is also interested in

investing in a 575km East-West corridor rail project in

Thailand, consisting of the Karnchanaburi – Laem Chabung*

route and the Bangkok – Aranyaprathet route, which is still in

the feasibility study phase. This route will link Bangkok with

eastern and western provinces, which means that this rail

project would play a crucial role in logistics services for

ASEAN.

Cancellation on Thai-China railway cooperation. The Chinese government also offers infrastructure loans to the Thai government. The Chinese government is interested in a high speed train project connecting southern China through landlocked Laos to Thailand’s industrial eastern coast. However, given the lack of a final deal, General Prayuth Chan-ocha, Thailand’s prime minister, has announced the cancellation of this cooperation between Thai and China. This is because of the inability to agree on the investment-sharing and loan structure.

Public-Private partnership (PPP) scheme to become more

crucial. Private financing needs to play a bigger role in order

to keep the public debt ratio below the 60% threshold.

Currently, the government has put five projects, worth

Bt334bn, under the PPP scheme since November 2015.

The five projects are (i) MRT pink line, (ii) MRT yellow line, (iii)

MRT blue line extension, (iv) Motorway project: Bang Pa In**

– Nakhon Ratchasima, and (v) Motorway project: Bangyai –

Kanchanaburi.**

Additionally, there would be a proposal made to include the

two high-speed rail projects, the Bangkok-Rayong, worth

Bt153m, and Bangkok Huahin routes, Bt95m, into the Public-

private partnership scheme in July 2016.

** PPP contract cover only the right to manage the motorway and

share of toll fee while the government funds civil construction costs

But PPP still fraught with issues. According to our channel

checks, contractors prefer to wait for the full Term of

References (TORs) of the PPP project before deciding on

whether they will participate in the bid.

We expect the bidding process for the MRT pink and yellow

line projects to finally take place within 2016. We think that

the PPP terms for these two projects should form the master

reference PPP term of other subsequent projects. Additionally,


Asean Construction

if the bidding for these two projects is successful, this could

lower the private sector’s concerns over the return on

investment through PPP projects.

Infrastructure fund; government’s new source of

funding. “Thailand Future Fund (TFF)” may be launched this

year after obtaining cabinet approval in 2015. This Bt100bn

infrastructure fund is to be raised by the private sector and

targets the overseas market. Note that this infrastructure fund

is allowed to invest in greenfield projects.


Asean Construction

EARNINGS MOMENTUM AND CONSENSUS CHANGE

Overall, we have seen more cut in earnings as opposed to

upgrades across all countries. The steepest cuts in earnings

have come from Indonesia, largely due to the slower-than-

expected rollout of government contracts. For Malaysia, it has

been from specific capital raising issues as well as the poorer

performance of other divisions given the more diversified

nature of contractors. For Thailand, the cuts have been more

on company specific issues.

Of the three countries, we found that there is the highest

correlation between earnings changes and share prices for

Malaysia and Indonesia (but for upgrades only) while in

Thailand it appears to matter the least.

MALAYSIAMALAYSIAMALAYSIAMALAYSIA –––– POSITIVE CORRELATION FOR UPGRADESPOSITIVE CORRELATION FOR UPGRADESPOSITIVE CORRELATION FOR UPGRADESPOSITIVE CORRELATION FOR UPGRADES

Consensus earnings for FY16F and FY17F are on average down

by 10% and 4%, respectively, over the past one year. On

average, our universe of construction stocks is up by 11% for

the corresponding period. We think this implies some

optimism has been priced in for 2016.

We have also seen the strongest share price performance for

Sunway Construction and Kimlun which also has the best

earnings delivery, coupled with upgrades in consensus earnings.

The correlation coefficient and R-Squared between Sunway

Construction’s change in consensus earnings and share price for

the past one year has been 0.87 and 76%, while for Kimlun it

was 0.92 and 85% respectively. Hence, we are now seeing a

higher correlation between share prices and consensus earnings

change but only in terms of earnings upgrades. We think this will

be more crucial once the majority of key projects are rolled out

this year, implying that execution is the next important milestone

to monitor.

For Gamuda, the cuts in earnings for FY16-17F have largely been

from the dilution of the warrants issue; given that the company

had long forewarned that FY16F (Y/E July) net profit was

expected to be lower y-o-y. Similarly, the cuts for WCT for FY16-

FY17F have also factored in the dilution from the warrants but

this is also coupled with its poor earnings delivery so far from

lacklustre property sales while its higher-margin infrastructure

projects have yet to contribute.

Note that our forecast earnings are generally in line with

consensus, apart from IJM. We think there could be more

downgrades for IJM given its recent weak 4QFY16 (Y/E March)

results.

Summary of EPS revisions and DBSV vs consensus for 1Summary of EPS revisions and DBSV vs consensus for 1Summary of EPS revisions and DBSV vs consensus for 1Summary of EPS revisions and DBSV vs consensus for 1----yearyearyearyear

GAMGAMGAMGAM IJMIJMIJMIJM WCTHGWCTHGWCTHGWCTHG SCGBSCGBSCGBSCGB MUHIMUHIMUHIMUHI KICBKICBKICBKICB

-25.9% - -34.3% 18.5% -13.4% 25.9%

-20.6% -29.5% -24.6% 38.0% -9.6% 19.5%

-9.8% -27.1%

98.1% - 107.8% 101.6% 95.0% 102.2%

94.1% 82.0% 94.0% 89.9% 102.6% 105.2%

89.9% 77.1% 92.7% 97.4% 103.0% 114.0%

FY16 EPS Revision

FY17 EPS Revision

DBSV vs. consensus (FY16)

DBSV vs. consensus (FY17)

FY18 EPS Revision

DBSV vs. consensus (FY18) Source: Bloomberg Finance LP. AllianceDBS, DBS Vickers.

INDONESIAINDONESIAINDONESIAINDONESIA –––– POSITIVE CORRELATION FOR UPGRADESPOSITIVE CORRELATION FOR UPGRADESPOSITIVE CORRELATION FOR UPGRADESPOSITIVE CORRELATION FOR UPGRADES

Positive earnings momentum was only noted for WSKT, which

saw its consensus EPS forecast being upgraded significantly by

38% in the past 12 months. Consensus FY16F net profit is

now on par with management’s guidance of Rp1.5tr.

There was only a mild change in PTPP’s EPS forecast.

Meanwhile, WIKA, ADHI and WTON’s EPS saw a series of

downgrades in the past months mainly due to choppy project

execution.

Our FY16 earnings forecasts for WSKT and PTPP are in line

with consensus. Our FY17 earnings forecast for WSKT is 14%

below consensus as we have assumed some start-up losses to

be generated by WSKT’s two toll roads. We believe there is

downside risk to consensus’ FY17F net profit forecast as it has

yet to factor in potential start-up losses from WSKT’s toll roads

operations. As for WIKA, we are more cautious on this year’s

earnings outlook as we believe that it largely hinges on the

capital injection plan and the progress of Jakarta-Bandung HSR

construction work. We think there could be significant upside

for WTON’s EPS if the Jakarta-Bandung HSR makes even slight

progress as consensus has yet to incorporate the potential

earnings contribution from the HSR project into FY16F EPS.

Summary of EPS forecast revisions in the past 12 months

WSKTWSKTWSKTWSKT WIKAWIKAWIKAWIKA PTPPPTPPPTPPPTPP ADHIADHIADHIADHI WTONWTONWTONWTON FY16F EPS 37.9% -17.0% -0.2% -23.3% -35.1% FY17F EPS 36.7% -17.1% -3.2% -25.2% -16.9% FY18F EPS -7.1% -3.5% 1.6% -18.6% -16.9%

Source: Bloomberg Finance L.P, AllianceDBS, DBS Vickers


Asean Construction

DBSV vs. consensus’ earnings forecast

WSKTWSKTWSKTWSKT WIKAWIKAWIKAWIKA PTPPPTPPPTPPPTPP WTONWTONWTONWTON FY16F EPS 1.02 0.93 0.96 1.18 FY17F EPS 0.86 0.98 0.97 0.99


Summary of CORREL and RSQ between consensus earnings

change and share price in the past 12 months

CORRELCORRELCORRELCORREL RSQRSQRSQRSQ WSKT 0.92 0.85 WIKA 0.49 0.24 PTPP -0.18 0.03 ADHI -0.81 0.66 WTON 0.42 0.18


It is worth noting that while we have seen a stronger correlation

between share price and consensus earnings change in the past

12 months, particularly for WSKT, earnings revision is not the

only key driver of the share price as reflected in the low degree

of correlation (please refer to the table above). We believe that

order book replenishment and announcement of potential large-

size win are the other key factors driving share price

performance. A case in point is ADHI (not rated) whose share

price rallied after being appointed as the contractor of the

Greater Jakarta LRT – whose construction contract up to the time

of writing has yet to be awarded or contribute earnings to the

company.

THAILANDTHAILANDTHAILANDTHAILAND –––– DRIVEN MORE BY NEWSFLOWDRIVEN MORE BY NEWSFLOWDRIVEN MORE BY NEWSFLOWDRIVEN MORE BY NEWSFLOW

CKCKCKCK’s consensus earnings for FY16F were revised up by 4%

while consensus lowered FY17F by 23% over the past one

year. The main reason for the upward revision in FY16F

earnings is the company’s announcement on the additional

work for its Xayaburi project. Surprisingly, the correlation

between CK’s share price and its FY16F and FY17F consensus

earnings is low with a correlation coefficient of 0.13 and 0.19

respectively.

Our earnings forecasts for CK are significantly higher than

consensus, given that consensus appears to have ignored the

equity income contribution from BEM, its subsidiary. Stripping

out the contribution from BEM, our FY16F earnings would be

15% higher than consensus.

STECSTECSTECSTEC’s consensus earnings for FY16F and FY17F were lowered

by 21% and 29%, respectively, over the past one year. The

main reason for the earnings cut is the loss-making new

parliament building project. However, STEC’s stock price rose

2% in the corresponding period. Additionally, like CK, we

found only a weak positive relationship between STEC’s share

prices and its FY16F and FY17F consensus earnings, with a

correlation coefficient of 0.29 and 0.31 respectively.

Our earnings forecasts for STEC are lower than the consensus,

given that we have imputed lower revenue. However, we

believe that there could be downward revision in earnings,

given the lower-than-expected revenue recognition this year

from its dual track railway and the new parliament project.

High correlHigh correlHigh correlHigh correlation between share price and newsflow, rather ation between share price and newsflow, rather ation between share price and newsflow, rather ation between share price and newsflow, rather

than earnings. than earnings. than earnings. than earnings. The low correlation between stock prices and

consensus earnings affirmed our belief that the sector is driven

more by newsflow. For example, in March 2016, there was a

lack of newsflow in the sector and rumours on the cabinet

reshuffle. Thus, we saw a significant drop in share price for

both CK and STEC in the same period. Summary of EPS revisions and DBSV vs consensus for 1-year

CKCKCKCK STECSTECSTECSTEC

FY16 EPS Revision 17% -23%

FY17 EPS Revision -6% -27%

DBSV vs consensus (FY16) 77% -11%

DBSV vs consensus (FY17) 41% -8%

Source: Bloomberg Finance LP., AllianceDBS Research


Asean Construction

VALUATION AND REGIONAL SECTOR COMPARISON

Sector Sector Sector Sector ccccomparisonomparisonomparisonomparison

Market CapMarket CapMarket CapMarket Cap Rec.Rec.Rec.Rec. T PTPTPTP

Market Market Market Market

cap/order cap/order cap/order cap/order

book (x)book (x)book (x)book (x)

(USDm)(USDm)(USDm)(USDm) (Local currency )(Local currency )(Local currency )(Local currency ) CY15CY15CY15CY15 CY16CY16CY16CY16 CY17CY17CY17CY17 CY15CY15CY15CY15 CY16CY16CY16CY16 CY17CY17CY17CY17 CY15CY15CY15CY15 CY16CY16CY16CY16 CY17CY17CY17CY17 CY15CY15CY15CY15 CY16CY16CY16CY16 CY17CY17CY17CY17

Malay siaMalay siaMalay siaMalay sia

Gamuda 2,819.1 BUY 5.80 18.7 20.8 19.0 1.9 1.9 1.8 1.9 1.9 1.9 10.7 9.6 9.8 -1% 1.4

IJM 3,053.4 HOLD 3.30 17.5 19.1 19.8 1.4 1.4 1.3 2.4 2.1 2.1 8.4 7.2 6.7 -6% 1.5

WCT 473.5 HOLD 1.55 11.6 16.6 15.6 0.7 0.9 0.9 2.2 2.2 2.2 9.0 5.8 5.9 -14% 0.4

Muhibbah Eng 251.5 BUY 3.10 12.0 10.6 9.7 1.2 1.1 1.1 1.8 1.9 2.1 11.7 11.2 11.6 11% 0.5

Kimlun 129.3 BUY 2.38 10.0 9.8 8.5 1.2 1.0 1.0 2.1 2.0 2.3 14.8 13.4 13.8 9% 0.3

SunCon 525.0 BUY 1.92 16.1 14.3 13.9 4.5 3.8 3.8 2.5 2.6 2.7 33.2 28.7 25.0 7% 0.4

Simple A v erageSimple A v erageSimple A v erageSimple A v erage 14.314.314.314.3 15.215.215.215.2 14.414.414.414.4 1.81.81.81.8 1.71.71.71.7 1.71.71.71.7 2.12.12.12.1 2.12.12.12.1 2.22.22.22.2 14.614.614.614.6 12.712.712.712.7 12.112.112.112.1 1%1%1%1% 0.80.80.80.8

IndonesiaIndonesiaIndonesiaIndonesia

Waskita Karya 2,496.6 HOLD 2700.00 32.1 22.4 21.7 13.2 8.8 6.7 0.6 0.9 0.9 17.0 14.7 13.5 21.6% 0.8

PTPP 1,313.0 BUY 4600.00 24.2 20.2 15.9 4.1 3.5 3.0 0.8 1.0 1.3 22.0 18.7 20.2 23.5% 0.4

Wijaya Karya 1,081.5 HOLD 2550.00 23.6 20.9 15.2 3.4 3.0 2.6 0.9 0.9 1.0 15.1 15.1 18.1 24.7% 0.4

Wijaya Karya Beton 584.4 HOLD 1000.00 45.9 22.9 16.6 3.6 3.2 2.8 1.2 0.7 1.3 8.0 14.8 17.8 66.0% 3.6

Simple av erageSimple av erageSimple av erageSimple av erage 31.431.431.431.4 21.621.621.621.6 17.417.417.417.4 6.16.16.16.1 4.64.64.64.6 3.73.73.73.7 0.90.90.90.9 0.80.80.80.8 1.11.11.11.1 15.615.615.615.6 15.815.815.815.8 17.417.417.417.4 34%34%34%34% 1.31.31.31.3

T hailandThailandThailandThailand

Ch. Karnchang 1208 BUY 35 19.2 17.0 22.3 2.1 1.9 1.8 1.6 1.3 1.6 11.1 11.5 8.1 -7% 0.6

Sino-Thai Engineering 981 BUY 26 23.0 32.1 26.6 3.8 3.6 3.6 1.5 1.9 1.5 17.3 11.5 13.1 -7% 0.6

Simple av erageSimple av erageSimple av erageSimple av erage 21.121.121.121.1 24.524.524.524.5 24.424.424.424.4 2.92.92.92.9 2.72.72.72.7 2.72.72.72.7 1.61.61.61.6 1.61.61.61.6 1.61.61.61.6 14.214.214.214.2 11.511.511.511.5 10.610.610.610.6 -7%-7%-7%-7% 0.60.60.60.6

Diluted PE (x )Diluted PE (x )Diluted PE (x )Diluted PE (x ) P/NTA (x)P/NTA (x)P/NTA (x)P/NTA (x) Net Div Y ield (%)Net Div Y ield (%)Net Div Y ield (%)Net Div Y ield (%) ROE (%)ROE (%)ROE (%)ROE (%)

CY15-CY15-CY15-CY15-

CY17 EPS CY17 EPS CY17 EPS CY17 EPS

CAGRCAGRCAGRCAGR

Source: DBS Vickers, AllianceDBS, Bloomberg

RegRegRegRegional ional ional ional comparison comparison comparison comparison –––– PE CY16 (x)PE CY16 (x)PE CY16 (x)PE CY16 (x)

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

Source: AllianceDBS, DBS Vickers, Bloomberg

Regional Regional Regional Regional ccccomparison omparison omparison omparison –––– P/NTA CY16 (x)P/NTA CY16 (x)P/NTA CY16 (x)P/NTA CY16 (x)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0


Regional Regional Regional Regional comparison comparison comparison comparison –––– ROE CY16 (%)ROE CY16 (%)ROE CY16 (%)ROE CY16 (%)

0

5

10

15

20

25

30

35


RegionalRegionalRegionalRegional ccccomparison omparison omparison omparison –––– 2222----year EPS CAGR (%)year EPS CAGR (%)year EPS CAGR (%)year EPS CAGR (%)

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%



Asean Construction

Regional sector Regional sector Regional sector Regional sector ccccomparisonomparisonomparisonomparison

From a valuation stand point, Malaysia appears to be cheapest

at 15x CY16 EPS followed by Indonesia at 22x and Thailand at

25x. However, stripping out the smaller cap names in Malaysia,

the larger cap names like Gamuda and IJM trade at 19-21x

CY16 EPS.

While Indonesia’s valuations amay ppear expensive at 22x

CY16F EPS, this falls to 17x in CY17F and is also backed by

superior ROEs of 16-17% and stronger 2-year EPS CAGR of

34%. At these levels, it is also at 0.5SD above mean.

Additionally, it is the market which offers the most potential in

terms of contract flows given the country’s relatively

underdeveloped infrastructure.

MALAYSIAMALAYSIAMALAYSIAMALAYSIA –––– POTENTIAL POTENTIAL POTENTIAL POTENTIAL TO TRADE HIGHERTO TRADE HIGHERTO TRADE HIGHERTO TRADE HIGHER

DBSV KL Construction DBSV KL Construction DBSV KL Construction DBSV KL Construction –––– PE trading rangesPE trading rangesPE trading rangesPE trading ranges

-2SD

-1SD

Mean

+1SD

+2SD

10.0

12.0

14.0

16.0

18.0

20.0

22.0

24.0

2-Jan-09

2-Jul-09

2-Jan-10

2-Jul-10

2-Jan-11

2-Jul-11

2-Jan-12

2-Jul-12

2-Jan-13

2-Jul-13

2-Jan-14

2-Jul-14

2-Jan-15

2-Jul-15

2-Jan-16

PE (x)


DBSV KL Construction DBSV KL Construction DBSV KL Construction DBSV KL Construction –––– P/BV trading rangesP/BV trading rangesP/BV trading rangesP/BV trading ranges

-2SD

-1SD

Mean

+1SD

+2SD

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2-Jan-09

2-Jul-09

2-Jan-10

2-Jul-10

2-Jan-11

2-Jul-11

2-Jan-12

2-Jul-12

2-Jan-13

2-Jul-13

2-Jan-14

2-Jul-14

2-Jan-15

2-Jul-15

2-Jan-16

PBV (x)


Our construction universe is now trading at 1-year forward PE

of 15x and P/BV of 1.7x. This is roughly at mean to +1SD

levels.

The sector also commanded premium valuations during periods

of more aggressive contract flows and pump-priming such as

the 9MP and 10MP. During the onset of the 10MP in 2011,

the sector traded at a high of >+2SD above mean or 23x PE

and 3.3x P/NTA. But it subsequently de-rated to -1SD in late

2011 due to an overall soft equity market. Similarly, from

January 2007 to September 2008, when the 9MP projects

were rolled out, the sector traded at up to 24x PE and 2.2x

P/NTA.

Moving to the start of the 11MP, we believe there is a

probability that the sector will command higher valuations

given that it is at just at mean to +1SD valuations. But we think

this need to be also balanced by Malaysia’s less-than-

favourable fiscal position given the still low oil and CPO prices.

In 2015, we already saw the appointment of PDP roles for key

projects like MRT Line 2, LRT 3, Penang Transport Master Plan

and KL 118, and a slew of projects for RAPID and TRX. We

think the timely rollout and award of these projects and

stronger earnings delivery will see further valuation expansion.

Revenue Revenue Revenue Revenue vvvvisibility isibility isibility isibility

Malaysia Malaysia Malaysia Malaysia –––– rrrrevenue visibility (evenue visibility (evenue visibility (evenue visibility (oooorderbook/historical constructiorderbook/historical constructiorderbook/historical constructiorderbook/historical constructionnnn revenuerevenuerevenuerevenue (x) (x) (x) (x) ))))

1.9 1.9 1.9

2.62.7

2.9

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

KICB MUHI WCTHG SCGB IJM GAM Source: AllianceDBS, DBS Vickers

Based on the chart above, the large-cap contractors of

Gamuda and IJM have the best revenue visibility at 2.9x and

2.7x respectively. This is followed closely by Sunway

Construction at 2.6x. In our view, all three companies have

also the least earnings risk given their strong execution track

record and higher-margin orders that comprise infrastructure-

related and design-and-build projects.


Asean Construction

Gamuda’s RM8.3bn comprises predominantly the tunnelling

works for MRT Line 2 worth RM7.7bn. We expect pretax

margins to be at least 12-13% similar to MRT Line on a cost

per km basis, MRT Line 2’s total contract value of RM15.47bn

is 30% higher than MRT Line 1. We understand Gamuda has

factored in a generous yearly increase in steel cost over a five-

year period.

IJM’s RM8.5bn orderbook comprises largely two key projects

which are the recently won V203 package for MRT Line 2

worth RM1.47bn and the RM2.8bn WCE contract. This

package, V203, is 79% higher on a RMbn/km basis as

compared to IJM’s MRT Line 1 V5 package. We understand

this is because the element of structural works is higher.

Sunway Construction’s orderbook now stands at RM5bn

which is at its peak. The largest projects are Putrajaya Parcel F

and MRT Line 2, V201 package which forms 53% of this. We

think pretax margins for these two key projects will also be at

least 7-8%. For the Putrajaya Parcel F, SCG has already locked

in 50% of the steel requirements at an average price of

roughly RM1,800 to RM2,000/tonne. This is a design and build

project where it was also a criterion to be VDC-enabled,

implying there is room to achieve higher margins. For MRT Line

2, V201 package, pricing is 30% higher on a per km basis as

compared to its V4 package for MRT Line 1, while all raw

material requirements are borne by the government. Works

are anticipated to start in June/July.

INDONESIAINDONESIAINDONESIAINDONESIA –––– A MORE IDEAL ENTRY POINTA MORE IDEAL ENTRY POINTA MORE IDEAL ENTRY POINTA MORE IDEAL ENTRY POINT

Our construction universe now trades at +0.5SD above the

average PE since 2012 (the year when infrastructure theme

started to play out in Indonesia). Valuations have corrected to

a more reasonable level now, in our view, trading at 21x

forward PE vs. the peak of 29x in Feb 2015. We see room for

the sector to trade higher as the Joko Widodo-led government

accelerates project execution.

Construction sector’s 12-month forward PE

5

10

15

20

25

30

35

Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16

+2sd

+1sd

-1sd

-2sd

Avg.


Construction companies’ PE valuation range since 2012 (x)

5

15

25

35

45

55

65

75

WSKT PTPP WIKA WTON


Source: Companies, AllianceDBS, DBS Vickers

Revenue visibility (x)

24.0 20.1 17.2 4.2

40.6 43.8

35.0

2.4

1.7

2.2 2.0

0.6

-

0.5

1.0

1.5

2.0

2.5

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

WSKT* PTPP WIKA WTON

Rp tn

FY16F Revenue 5M16 outstanding order book 4M16 outs. order book to FY16F revenue (LHS)

*based on 4M16 order book

Source: Companies, AllianceDBS, DBS Vickers


Asean Construction

Share price performance

8%

-1%

49%

25%

11%

5%

6%

8%

53%

47%

-10%

-2%

-20% -10% 0% 10% 20% 30% 40% 50% 60%

WIKA

PTPP

WSKT

ADHI

WTON

JCI

y-o-y YTD


THAILANDTHAILANDTHAILANDTHAILAND –––– AT HIGHER END OF RANGEAT HIGHER END OF RANGEAT HIGHER END OF RANGEAT HIGHER END OF RANGE

DBSV TH Construction – PE trading ranges

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

11 12 13 14 15 16

(x)

-2 sd

-1 sd

Mean

+1 sd

+2 sd


DBSV TH Construction – P/BV trading range

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

11 12 13 14 15 16

(x)

-2 sd

-1 sd

Mean

+1 sd

+2 sd


Our infrastructure-related construction universe is now trading

at a 1-year forward PE of 24x and P/BV of 2.7x. This is

equivalent to +1SD levels.

Given the volatile nature of CK earnings, we prefer to use P/BV

for our analysis. The construction stocks normally command

premium valuations in the period of high positive newsflow.

For example, the sector traded at +2SD level when the cabinet

announced the Bt2trn infrastructure spending bill in 2013.

However, it subsequently de-rated to the -0.5SD level when

the bill was ruled unconstitutional by the charter court in

2014.

Given the upcoming supercycle of infrastructure spending in

Thailand, we believe that the sector will be able to trade at

+2SD level again. However, it needs to be supported by the

strong positive newsflow in the sector like the contract awards

of MRT orange, pink and yellow line projects as well as

another four routes of dual track railway.

Additionally, the potential jump in earnings for Thai

contractors next year, driven by the strong growth in revenue

recognition from projects awarded this year, should lead to the

further re-rating of the sector.


Asean Construction

Thailand – revenue visibility (orderbook/historical construction revenue)

2.82.9

2.3

1.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

CK STEC UNIQ ITD

Source: CK, STEC, UNIQ, ITD, AllianceDBS Research

Based on the chart above STEC has the best earnings visibility

at 2.9x, followed closely by CK at 2.8x. We believe that these

two companies have lower earnings volatility, compared to the

other two major contractors, thanks to their strong expertise

and track record in project execution.

CK’s orderbook stands at Bt97bn, anchored mainly by the

Xayaburi dam and Sirat expressway projects (both are projects

of its subsidiaries) and the double track railway – the Jira

Junction-Khon Kaen section. We believe that CK could

maintain its gross profit margin (GPM) within its target range

of 8-10%, given the mixture of projects and its hedging policy

in construction materials.

STEC’s orderbook of Bt53bn comprises mainly 12 small

power plant projects, new parliament building and double

track railway, i.e. Chachoengsao – Klong 19 –Kaengkoi. We

expect STEC to maintain its GPM within its target range of 8-

9%, given the contributions from the power plant project,

which offers higher profitability, and its net cash position,

which allows STEC to enjoy better trading and hedging terms

for its construction materials.


Asean Construction

STRATEGY AND STOCK PICKS

Ranking based on Ranking based on Ranking based on Ranking based on fivefivefivefive key criteriakey criteriakey criteriakey criteria

GCI Rank ingGCI Rank ingGCI Rank ingGCI Rank ing Earnings Risk sEarnings Risk sEarnings Risk sEarnings Risk s V aluat ions V aluat ions V aluat ions V aluat ions Polit ical mot iv at ion Polit ical mot iv at ion Polit ical mot iv at ion Polit ical mot iv at ion Cross borderCross borderCross borderCross border Simple av erageSimple av erageSimple av erageSimple av erage

IndonesiaIndonesiaIndonesiaIndonesia 1 1 1 2 3 1.6

Malay siaMalay siaMalay siaMalay sia 3 2 2 1 1 1.8

ThailandThailandThailandThailand 2 3 3 3 2 2.6


Strategy and stock picksStrategy and stock picksStrategy and stock picksStrategy and stock picks

We use five criteria to rank the order of preference for

infrastructure exposure to the three ASEAN countries.

1) The Global Competitiveness Index Ranking for

Infrastructure

2) Earnings risk

3) Valuations

4) Political motivation to pump prime and political stability

5) Readiness for cross-border opportunities

Overall, we rank Indonesia as the number one market for

infrastructure exposure, followed by Malaysia and then

Thailand.

The details of our methodology for ranking are as follows:

1) The Global Competitiveness Index Ranking for 1) The Global Competitiveness Index Ranking for 1) The Global Competitiveness Index Ranking for 1) The Global Competitiveness Index Ranking for

Infrastructure Infrastructure Infrastructure Infrastructure

For 1, we deem a lower GCI score more attractive as it

indicates that there will be more job flows in the years to

come.

Hence, we rank Indonesia 1, Thailand 2 and Malaysia 3.

2) Earnings risk 2) Earnings risk 2) Earnings risk 2) Earnings risk

For 2, we take into account revenue visibility (average for

our universe by country) which is also balanced by the

execution track record and the ability to pass on higher raw

material costs. We also take into account consensus

earnings change and potential for upgrades.

All countries exhibit similar revenue visibility of between 2x

and 3x for the larger contractors. Indonesian contractors

have the highest ability to pass on the higher cost of raw

materials given that multi-year government contracts have

this clause. For Malaysia, only the MRT aboveground works

have this clause, where fluctuations in steel bar prices are

borne by the government. For public sector projects in Thailand, the contractor needs to absorb gains/losses for the

first 4% before the government can be held responsible for

the cost variation.

For all markets, we do not see any meaningful upgrades at

least for 2016.

Hence, we rank Indonesia 1, Malaysia 2 and Thailand 3.

3) Valuations 3) Valuations 3) Valuations 3) Valuations

For 3, we look at the valuation in each country relative to

the historical trading range as well as the absolute valuation

relative to the other countries. We also take into account

the 2-year EPS CAGR and ROEs.

The Malaysian contractors trade at the cheapest valuations

of 15x CY16 EPS while Indonesia and Thailand players at

22-23x. However, this is also due to the presence of our

smaller cap coverage for the Malaysian contractors. The

larger contractors like IJM and Gamuda trade at 19-21x

CY16 EPS. In terms of earnings growth (2-year EPS CAGR

for CY15-CY17), the most muted growth stems from

Thailand with an average of -3%, followed by Malaysia at

+3%, while the best is from Indonesia with an average

growth of +33%. ROE-wise, Indonesia is the best with an

average ROE of 17% for CY17, followed by Malaysia‘s 12%

and Thailand’s 11%.

Hence, we rank Indonesia 1, Malaysia 2 and Thailand 3.

4)4)4)4) Political motivation to pump prime and political stabilityPolitical motivation to pump prime and political stabilityPolitical motivation to pump prime and political stabilityPolitical motivation to pump prime and political stability

For 4, we assess if there is any political motivation to pump

prime the economy via additional project flows, taking into

account elections or other events as a barometer. We also

factor in the political stability of the country.


Asean Construction

For Malaysia, the ruling government needs to call for

elections by August 2018 while for Thailand it is in 2017

and Indonesia by 2019. As for political stability, for Thailand

and Indonesia, this shows up as a top 5 reason as most

problematic for doing business in the country but not for

Malaysia. This is according to the GCI survey. We also factor

in the fact that Thailand is under military rule.

Hence, we rank Malaysia 1, Indonesia 2 and Thailand 3.

5) Readiness for 5) Readiness for 5) Readiness for 5) Readiness for crosscrosscrosscross----border opportunitiesborder opportunitiesborder opportunitiesborder opportunities

For 5, we try to determine if contractors in each country are

deemed more ready to take on cross-border opportunities.

Based on the section on Cross-border Opportunities, we

rank Malaysia 1, Thailand 2 and Indonesia 3.

Malaysia Stock PicksMalaysia Stock PicksMalaysia Stock PicksMalaysia Stock Picks

We have BUY ratings on Gamuda, Sunway Construction,

Muhibbah and Kimlun

Gamuda (BUY, TP RM5.80) – Best Best Best Best ttttransportation proxyransportation proxyransportation proxyransportation proxy

Gamuda is our top large cap pick in the sector, as it is the best

proxy to a slew of upcoming transportation-related projects.

Its strong reputation for MRT Line 1 and PDP appointment for

Penang Transport Master Plan (PTMP) provide it with leverage

for other large-multiplier projects such as LRT 3, Gemas-JB

double tracking, Pan Borneo Highway and High Speed Rail.

Suncon – (BUY, TP RM1.92) – Malaysia’s leading pure Malaysia’s leading pure Malaysia’s leading pure Malaysia’s leading pure

construction plconstruction plconstruction plconstruction playerayerayerayer

Sunway Construction Group (SCG) is the largest listed pure

play construction player in Malaysia. Given its strong track

record with MRT, LRT and BRT jobs previously, we are of the

view that SCG is on a strong footing to bag several key

infrastructure packages such as LRT3 and BRT as well as other

major highway projects like SUKE, DUKE and Pan-Borneo

Highway. SCG has also established itself as the only

construction specialist to be involved in all three Rapid Line

infra projects (MRT, LRT and BRT). This makes the group one

of the strongest contenders to win the pipeline of 11MP

projects.

Muhibbah (BUY, TP RM3.10) – Scarcity premiumScarcity premiumScarcity premiumScarcity premium

Muhibbah is an ideal proxy to the 11th Malaysian Plan given

its expertise in three core areas: i) civil engineering; ii) marine-

based construction, and iii) offshore and onshore fabrication

works, where its Petronas licence offers an advantage. Other

contractors do not have this combination to vie in the

competitive civil engineering space. Its Cambodian airport

concession is a strong cash cow. Siam Reap and Phnom Penh

airports have doubled their capacity to 12m passengers.

Passenger arrivals grew 13% to 6.5m passengers in FY15.

Kimlun (BUY, TP RM2.38) – SmallSmallSmallSmall----cap MRT proxycap MRT proxycap MRT proxycap MRT proxy

Within our construction universe, Kimlun stands out as the

most direct small cap proxy to MRT projects. In spite of the 3-

year EPS CAGR of 30% and decent yields of c.2-2.3% with

stronger order replenishment ahead, Kimlun is currently

trading at a bargain valuation.

Indonesia Stock PicksIndonesia Stock PicksIndonesia Stock PicksIndonesia Stock Picks

PTPP (BUY, TP Rp4500). Given its experience and expertise

in sea port construction, the ASEAN maritime connectivity

initiative, government’s sea toll road programme and

China’s Maritime Silk Road initiative may put PTPPPTPPPTPPPTPP in

something of a sweet spot. We like the company for its

good execution track record and niche in port construction.

PTPP now trades at 20.8x FY16F EPS, a 16%/6% discount

to WIKA/WSKT. We see the potential for PTPP to re-rate

upwards as new contract wins pick up or if the

government’s capital injection plan goes through.

Meanwhile, the parliament’s recent approval of the

Rp2.25tr capital injection would support earnings growth

from 2017 onwards.

WSKT (HOLD, TP Rp2700). WSKT WSKT WSKT WSKT is the best proxy to toll

road build-out. While we like WSKT due to its relatively

assured contract wins coming from Palembang LRT and its

high-margin in-house toll road projects, its share price has

gained 43% since we upgraded our call to BUY back in Feb

2016. We now see limited upside potential for its share

price as we believe the positives have largely been priced in,

while cash flow generation has continued to deteriorate on

the back of rising revenue contribution from turnkey and in-

house toll road projects. Therefore, we downgraded WSKT

to a HOLD.

WIKA (HOLD, TP Rp2550). We have a HOLD call on WIKAWIKAWIKAWIKA.

The approval of the capital injection plan would be a

positive catalyst for WIKA’s share price in the near term.

Nonetheless, its earnings outlook also largely hinges on its


Asean Construction

signature Jakarta-Bandung HSR project which has been

progressing slower than expected, pending the issuance of

the construction permit and financial close with China

Development Bank.

WTON (HOLD, TP Rp1000). WTONWTONWTONWTON will likely be the

biggest beneficiary of the Jakarta-Bandung high-speed

railway, in our view. The project would boost WTON’s

earnings visibility in the next two years. The company

expects to clinch Rp6tr–9tr new order book from HSR,

which is equivalent to 1.4x-2.2x our FY16F revenue.

Nonetheless, we maintain our HOLD call on the stock for

now as we do not see much upside for earnings and

valuation. We would turn more positive on the stock if there

is significant progress for the Jakarta-Bandung HSR project.

Thailand Stock Picks

CK (BUY, TP Bt35.0) – A well-diversified contractor play

Ch. Karnchang PCL (CK) is our top pick in the sector, as it is

the prime beneficiary of the upcoming supercycle of public

transport-related infrastructure projects. This is on the back

of (i) CK’s strong reputation in MRT construction, especially

for underground works, which should allow CK to secure at

least one underground construction contract from the

upcoming MRT orange line project, and (ii) its transport

related subsidiary, BEM,* could supply transportation-

related construction works to CK in the long run.

*The current operator of MRT blue line and purple line and

expressway in Bangkok

STEC (BUY, TP Bt26.0) – Thailand’s largest pure

construction play

Sino-Thai Engineering & Construction PCL (STEC) is

Thailand’s largest pure construction play. Thus, STEC stands

a good chance of benefiting from the government’s

infrastructure spending in the upcoming cycle. Given its

strong track record in constructing, good relationship with

the public sector and its net cash position, we are convinced

that STEC has low earnings volatility, compared to the other

contractors. STEC has also established itself as the power

plant construction specialist. This could boost STEC’s GPM

as power plant projects normally offer higher profitability.


Asean Construction

Appendix: Company GuidesAppendix: Company GuidesAppendix: Company GuidesAppendix: Company Guides

ASIAN INSIGHTS VICKERS SECURITIES

ed: CK / sa:TP

BUYBUYBUYBUYLast Traded Price: Last Traded Price: Last Traded Price: Last Traded Price: Bt24.50 (SETSETSETSET : : : : 1,385.86) Price Target :Price Target :Price Target :Price Target : Bt35.00 (43% upside) (Prev Bt33.00) Potential Catalyst: Potential Catalyst: Potential Catalyst: Potential Catalyst: Sharp surge of 2016 revenue

Where we differ:Where we differ:Where we differ:Where we differ: We are in line with consensus Analyst Apichaya KETRUTTANABORVORN +66 2657 7823 [email protected]

What’s New • To realise Bt14bn from Bt19bn additional work for

Xayaburi project in FY16

• Reversal of previously booked finance costs on

additional work portion of Xayaburi project last

year, which will be reduced FY16F finance cost by

Bt1bn; The finance cost will then be capitalized

• Maintain BUY with a higher TP of Bt35, based on

SOP valuation

Price Relative

Forecasts and Valuation FY FY FY FY DecDecDecDec ((((BtBtBtBt m) m) m) m) 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF Revenue 32,951 34,912 51,611 40,478 EBITDA 3,776 3,178 5,767 6,302 Pre-tax Profit 2,700 2,719 3,589 2,517 Net Profit 2,296 2,193 3,014 2,211 Net Pft (Pre Ex.) 992 182 3,014 2,211 Net Pft Gth (Pre-ex) (%) nm (81.7) 1,559.2 (26.6) EPS (Bt) 1.36 1.29 1.78 1.31 EPS Pre Ex. (Bt) 0.59 0.11 1.78 1.31 EPS Gth Pre Ex (%) nm (82) 1,559 (27) Diluted EPS (Bt) 1.39 1.33 1.82 1.34 Net DPS (Bt) 0.35 0.40 0.53 0.39 BV Per Share (Bt) 11.3 12.1 13.7 14.5 PE (X) 18.1 18.9 13.8 18.8 PE Pre Ex. (X) 41.8 228.5 13.8 18.8 P/Cash Flow (X) 38.2 nm nm 6.2 EV/EBITDA (X) 20.8 28.6 18.8 16.7 Net Div Yield (%) 1.4 1.6 2.2 1.6 P/Book Value (X) 2.2 2.0 1.8 1.7 Net Debt/Equity (X) 1.9 2.3 2.8 2.5 ROAE (%) 12.9 11.1 13.8 9.3

Earnings Rev (%):Earnings Rev (%):Earnings Rev (%):Earnings Rev (%): 65 (8) Consensus EPS Consensus EPS Consensus EPS Consensus EPS (BtBtBtBt):::: 0.81 0.94 Other Broker Recs:Other Broker Recs:Other Broker Recs:Other Broker Recs: B: 16 S: 2 H: 1 Corporate Governance CG Rating Anti-corruption Progress Indicator

Level 3:Established (3B: Established by Internal Commitment and Policy)

Source of all data: Company, DBS Vickers, Bloomberg Finance L.P

To create new records this year Maintain BUY with Maintain BUY with Maintain BUY with Maintain BUY with SOPSOPSOPSOP----based based based based TP TP TP TP of of of of Bt35.00. Bt35.00. Bt35.00. Bt35.00. We like CK for

its rich expertise in construction, high potential to secure more

infrastructure contracts, ability to benefit from the group

amalgamation programme and attractive valuation of only

13.8x FY16F PE. Thus, it is our top pick in the contractor space.

To rTo rTo rTo realiseealiseealiseealise Bt14bn additional revenues and reduction of Bt1bn Bt14bn additional revenues and reduction of Bt1bn Bt14bn additional revenues and reduction of Bt1bn Bt14bn additional revenues and reduction of Bt1bn

interest expense from Xayaburi project in 2016. interest expense from Xayaburi project in 2016. interest expense from Xayaburi project in 2016. interest expense from Xayaburi project in 2016. CK expects to

sign the official contract award of Bt19bn additional work for

the Xayaburi project, worth Bt76.6bn initially, in 2Q16 with

the project owner Xayaburi Power Co., Ltd. This Bt19bn

additional work is for environmental purposes, as requested by

the Laos government.

According to management, CK expects to realise the Bt14bn

revenue from the additional work for this project in FY16. It

also expects a decrease of Bt1bn interest expense in FY16, due

to the reversal of finance cost relating to the construction cost

of additional work portion of the Xayaburi project. Note that

CK Power PCL, CK's 30.25%-owned subsidiary, is the major

shareholder of Xayaburi Power Co., Ltd, with a 30% stake.

Beneficiary of BECLBeneficiary of BECLBeneficiary of BECLBeneficiary of BECL----BMCL amalgamation. BMCL amalgamation. BMCL amalgamation. BMCL amalgamation.

After the completion of the merger of BECL and BMCL on 28

December 2015, CK ended up with a 29.05% stake in BEM,

the merged entity. This should benefit CK, which could derive

potentially higher equity income via the new company, driven

by the lower cost of debt and strong outlook for BMCL post-

amalgamation. Moreover, a hike in equity income from BEM

from 1Q16 onwards will help boost CK’s earnings prospects.

Valuation:

We value CK at Bt35.00, based on SOP method, comprising

Bt13 for the construction business and Bt22 for its investment.

Key Risks to Our View:

i) Delay in bidding process from the government, ii) political

instability, and iii) slower-than-expected economic recovery.

At A Glance Issued Capital (m shrs) 1,694

Mkt. Cap (Btm/US$m) 41,500 / 1,164

Major Shareholders (%)

Mahasiri Siam Co Ltd. 20.1

Ch Karnchang Holding 10.4

C K Office Tower Co Ltd 5.5

Free Float (%) 61.2

3m Avg. Daily Val (US$m) 9.4

ICB IndustryICB IndustryICB IndustryICB Industry : Industrials / Construction & Materials

DBS Group Research . Equity 23 May 2016

Thailand Company Guide

Ch. Karnchang Version 3 | Bloomberg: CK TB | Reuters: CK.BK Refer to important disclosures at the end of this report

83

133

183

233

283

333

383

5.9

10.9

15.9

20.9

25.9

30.9

May-12 May-13 May-14 May-15 May-16

Relative IndexBt

Ch. Karnchang (LHS) Relative SET INDEX (RHS)


Company Guide

Ch. Karnchang

WHAT’S NEW

To secure Bt19bn additioTo secure Bt19bn additioTo secure Bt19bn additioTo secure Bt19bn additional works from Xayaburi projectnal works from Xayaburi projectnal works from Xayaburi projectnal works from Xayaburi project* in * in * in * in

2Q16; 2Q16; 2Q16; 2Q16; of which Bt14bn will be recognisof which Bt14bn will be recognisof which Bt14bn will be recognisof which Bt14bn will be recogniseeeedddd in FY16F. in FY16F. in FY16F. in FY16F. CK expects

to sign the official contract of Bt19bn additional work for the

Xayaburi project with Xayaburi Power Co., Ltd, in 2Q16. A

Bt14bn work portion of this project will be recognise this year,

given that CK has already completed this work portion. Note

that CK has already booked Bt2bn of this additional work

portion in 1Q16. The gross profit margin (GPM) from this

additional work should be in line with the company’s target

GPM of 8-10%.

Currently, CK is in talks with its auditor on whether it can book

the whole Bt12bn revenue in 2Q16 or gradually book this

revenue portion throughout FY16F. This will be a major catalyst

for CK’s FY16F earnings, as this leads to a 48% increase in CK’s

total revenue this year.

*The Bt76bn dam and hydro power plant project in Laos

To provide To provide To provide To provide additional loan to Xayaburi Power Co.,additional loan to Xayaburi Power Co.,additional loan to Xayaburi Power Co.,additional loan to Xayaburi Power Co., LtdLtdLtdLtd.**.**.**.** CK announced that it will provide an additional loan of Bt2bn to Xayaburi power Co., Ltd. It already has an existing outstanding loan of Bt11.5bn. The additional loan will be used to fund the additional construction work portion of the Xayaburi Hydroelectric Power Project (to be paid to the contractor***).

We believe that this will not have an adverse impact on CK’s D/E ratio as CK will get the cash inflow from construction revenue back from Xayaburi Power Co., Ltd in a larger proportion than CK’s financial support for the project.

(See additional information on the additional loan on page 3)

** The operator of the Xayaburi Hydroelectric Power Project. Currently, CK indirectly holds a 9% stake in Xayaburi Power Co., Ltd. through CK Power PCL, in which CK has a 30% stake *** CK is the main contractor of the Xayaburi Hydroelectric Power Project

To reverse Bt1bn finance cost in FY16F. To reverse Bt1bn finance cost in FY16F. To reverse Bt1bn finance cost in FY16F. To reverse Bt1bn finance cost in FY16F. According to management, CK’s auditor has allowed the company to gradually reverse CK’s finance costs relating to the construction of the additional work portion for the Xayaburi project which CK has recognised as expenses last year. CK expects the benefit from this reversal transaction to be c.Bt1bn this year. Note that CK has already reversed the previously booked finance cost in 1Q16, which reduced 1Q16 finance cost by c.Bt250m.

In our view, this will improve CK’s FY16F earnings significantly but the benefits in terms of cash flow should be limited.

Expect 2Q16F to be an extraordinary strong quarter. Expect 2Q16F to be an extraordinary strong quarter. Expect 2Q16F to be an extraordinary strong quarter. Expect 2Q16F to be an extraordinary strong quarter. We expect

an extraordinary increase in 2Q16F earnings to be driven by:

(i) The potential surge in revenue recognition of Bt12bn arising

from the additional work portion of the Xayaburi project

(ii) The dividend income from TTW PCL of Bt232m. However,

CK will not book the dividend income from Bangkok

Expressway and Metro (BEM), given that CK uses the equity

method for BEM

(iii) A reversal of c.Bt250m interest cost in 2Q16

Strong backlog and highStrong backlog and highStrong backlog and highStrong backlog and high----potential contracts to drive growth.potential contracts to drive growth.potential contracts to drive growth.potential contracts to drive growth.

CK’s backlog stood at Bt76bn at end-1Q16, which can support

revenues for the next two years. CK also has another Bt44bn

worth of high-potential projects, including (i) the Bt19bn

additional works from the Xayaburi power plant project in

Laos, which CK has already working on it, (ii) the M&E system

and O&M service***** contract for the blue line extension

worth Bt25bn. These would bring CK’s backlog to a record

high Bt130bn.

Additionally, management said that it is starting to see signs of

decreasing steel prices in May 2016. This means a brighter

outlook for CK’s potential backlog, in terms of margins

***** Operations Service and Maintenance (O&M);

Mechanical and Electrical (M&E)

Maintain BUY with a higher TP of Bt35. Maintain BUY with a higher TP of Bt35. Maintain BUY with a higher TP of Bt35. Maintain BUY with a higher TP of Bt35.

We like CK for its experienced management team and expertise

in construction. Given its solid backlog, potential to secure more

infrastructure contracts and ability to benefit from the group

amalgamation programme, CK is our top pick in the contractor

space. After imputing the additional revenue of Bt14bn and a

reduction of Bt1bn in finance costs, we maintain our BUY rating

on CK with a higher SOP-based TP of Bt35. . . .

We value CK’s construction business at Bt13, pegged to 25x

FY17F PE, which is the sector weighted average PE – we used

FY17F EPS as we believe that FY16 earnings would be

somewhat extraordinary. We value its investments at Bt22, with a 20% discount to their market value.

Although the surge in FY16F earnings is an extraordinary

development, we believe that this would act as a positive short-

term catalyst to drive up the share price.

CK: Sum-of-parts valuation

Source of all data: Company, DBS Vickers

Unit : BtmUnit : BtmUnit : BtmUnit : Btm

FY17F Net profit 2,211

Associate income (1,326)

Net profit of core business 885

Assigned PE at 25x 25

Value of CK's const ruct ion businessValue of CK's const ruct ion businessValue of CK's const ruct ion businessValue of CK's const ruct ion business 22,13322,13322,13322,133

Bangkok Expressway and Metro PCL (29.05% stake) 27,530

TTW PCL (19.40% stake) 7,977

CK Power PCL (30.25% stake) 732

36,23936,23936,23936,239

Total 58,372

No. of shares (m) 1,653

Sum-of-part s per share (Bt ) Sum-of-part s per share (Bt ) Sum-of-part s per share (Bt ) Sum-of-part s per share (Bt ) 35.035.035.035.0

Value of CKValue of CKValue of CKValue of CK''''s investment s s investment s s investment s s investment s ((((with with with with 20202020% % % % discount to their discount to their discount to their discount to their

market va luemarket va luemarket va luemarket va lue ))))


Company Guide

Ch. Karnchang

CRITICAL DATA POINTS TO WATCH

Earnings Drivers:

Strong exposure to Laos.Strong exposure to Laos.Strong exposure to Laos.Strong exposure to Laos. CK is constructing a run-off river

hydropower dam or Xayaburi project, worth Bt76bn in Laos,

excluding the additional work portion. The project accounts for

38% of the company’s total backlog. Moreover, CK will be

awarded the Bt19bn additional works (environmental related)

for the Xayaburi project by 2Q16.

In addition, there are 13,000-MW hydro power plant and dam

projects to bid for in Laos. We believe that this should present

a huge opportunity to CK, given its strong track record in Laos.

Bt19bn additional works from Xayaburi project; a key earnings Bt19bn additional works from Xayaburi project; a key earnings Bt19bn additional works from Xayaburi project; a key earnings Bt19bn additional works from Xayaburi project; a key earnings

driver in FY16F. driver in FY16F. driver in FY16F. driver in FY16F. The Xayaburi Power Co., Ltd, project owner of

the Xayaburi project, will have to invest an additional Bt19bn for

environmental purposes, as requested by the Laos government.

This Bt19bn additional works will be awarded to CK, which CK

expects to be awarded the official contract in 2Q16.

The areas for the additional works include (i) navigation lock, (ii)

design change for sediment management, (iii) dam safety, and

(iv) fish-passing facilities. Management has guided that the GPM

of the additional works should be at the same level with the

original work scope range of 8-10%. The method of funding for

this additional investment of Xayaburi Power Co., Ltd. is to get

the financial support through loans from its shareholders.

However, the Laos government will subsidise this additional

investment in the form of tax privileges, lower revenue sharing,

concession period extension, etc. Management has also guided

that this additional work will have a mild effect on the IRR of the

Xayaburi project. The IRR of this project is expected to be c.13%

(vs. 12-15% target range previously).

High potential to secure at least one contract from the MRT High potential to secure at least one contract from the MRT High potential to secure at least one contract from the MRT High potential to secure at least one contract from the MRT

Orange line.Orange line.Orange line.Orange line. At least three mass transit lines will be opened for

bidding this year. These include Orange, Pink, and Yellow lines.

The MRT Orange line will comprise three underground

contracts, one aboveground works contract, one depo &

parking building contract and one rail system contract. These

projects are worth Bt91bn in total. As there are three

underground work contracts, there are only two Thai

contractors including CK and ITD, which have a track record

for underground works, have a good chance of winning at

least one such contract.

Declining finance costs.Declining finance costs.Declining finance costs.Declining finance costs. CK has refinanced its debt (with

c.4.85% cost of debt) with Bt5.5bn worth of debentures that

carry 2.19% to 3.36% interest rates. Thus, CK‘s current

average cost of funds drops to 4.15%.

Details on CK’s loan to Xayaburi Power Company Limited

Loan amountLoan amountLoan amountLoan amount Bt13.5bn (including the additional loan of Bt2bn)

Interest rate during Interest rate during Interest rate during Interest rate during constructionconstructionconstructionconstruction

Not more than the MLR plus 0.25 percent per annum

Interest rate after the Interest rate after the Interest rate after the Interest rate after the project's Commercial project's Commercial project's Commercial project's Commercial Operation Date (COD), by Operation Date (COD), by Operation Date (COD), by Operation Date (COD), by 2019201920192019

Not more than the MLR

Estimated total interest Estimated total interest Estimated total interest Estimated total interest until 2031until 2031until 2031until 2031

Bt10bn

Projects to bid for in 2016

Client breakdown by sector

Normal earnings vs extra gain(mainly from realizing gains from investments)

Source: Company, DBS Vickers

ProjectProjectProjectProject Descript ionDescript ionDescript ionDescript ion

V alue V alue V alue V alue

(Btbn)(Btbn)(Btbn)(Btbn) ProgressProgressProgressProgress

Mass Rapid T ransit A uthorit y of Thailand : MRTAMass Rapid T ransit A uthorit y of Thailand : MRTAMass Rapid T ransit A uthorit y of Thailand : MRTAMass Rapid T ransit A uthorit y of Thailand : MRTA

Orange line Thailand Cultural Centre - Min Buri 91

Pink line (Monorail) Khae Rai - Minburi 27

Yellow line (Monorail) Lat proa - Samrong 32

Purple Line (Southern Extension) Tao Poon - Ratboorana 72

Awaiting for EIA

process & under

feasibility approval

Department of Highway : DOHDepartment of Highway : DOHDepartment of Highway : DOHDepartment of Highway : DOH

Pattaya - Map Ta Phut 14

Awaiting for the

E-Auction process

of Toll Collection

Bang Pa In - Nakhon Ratchasima 85

State Railway of Thailand : SRTState Railway of Thailand : SRTState Railway of Thailand : SRTState Railway of Thailand : SRT





A irports of T hailand Public Company Limit ed : AOTA irports of T hailand Public Company Limit ed : AOTA irports of T hailand Public Company Limit ed : AOTA irports of T hailand Public Company Limit ed : AOT

Suvarnabhumi Airport : Phase IIExtension of building, terminal and

utilities49 TOR announced

TotalTotalTotalTotal 514514514514

Bangyai - Karnchanaburi

Under the E-

auction bidding

process

Motorway

Waiting for the

cabinet approval

Cabinet approved

Double-track rail

56

Cabinet approved

74% 79% 84%

69% 67%

25%21% 16%

31% 33%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2012A 2013A 2014A 2015A 1Q16A

Public CK group

-2,000

-1,000

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2011A 2012A 2013A 2014A 2015A 1Q16A

Btm

Normalized earnings Extra gains


Company Guide

Ch. Karnchang

Balance Sheet:

CK’s debt-to-equity ratio as at FY15 was 2.3x. We expect this

ratio to rise to 2.8x in FY16, given its potentially high backlog

growth in FY16.

Currently, c.57% of its debt is for financing the company’s

investments while the remaining 43% is for its working capital.

Share Price Drivers:

Acceleration of public infrastructure projects.Acceleration of public infrastructure projects.Acceleration of public infrastructure projects.Acceleration of public infrastructure projects. Thailand’s

construction sector has been supported by positive news flows

on infrastructure investments. The government’s concrete

actions for its eight-year (2015-2022) infrastructure plan, which

kicked off in 4Q15, could be a share price catalyst for CK.

Key Risks:

Political instability Political instability Political instability Political instability

• Political instability could cause further delays in the

government's infrastructure spending programme.

Further delays in mega infrastructure projectsFurther delays in mega infrastructure projectsFurther delays in mega infrastructure projectsFurther delays in mega infrastructure projects

• This would cap new contract wins..

High earnings volatilityHigh earnings volatilityHigh earnings volatilityHigh earnings volatility

• The extra ordinary earnings of CK, mainly from gains

on its investment, have played a major role to bottom

line in the past years. Realizing gains from investment

is probably the norm or life saver of CK after all.

High exposure to Lao projectHigh exposure to Lao projectHigh exposure to Lao projectHigh exposure to Lao project

• CK has done the additional work portion on Xayaburi

project before getting the contract awarded by

Xayaburi Power Co., Ltd. We view this as significant

risk for CK especially in case of the project owner is

unable to pay for the completed works.

Company Background

CH. Karnchang PCL (CK) is one of Thailand's leading general

contractors and basic infrastructure developers. It is involved in

the construction of large-scale infrastructure, building

construction, and general civil works, and invests in

government concession projects in order to expand operations

and generate long-term recurring income.

CK’s major project backlog as of 31 March 2016

ProjectProjectProjectProject

Contract Contract Contract Contract Value Value Value Value (Btbn)(Btbn)(Btbn)(Btbn)

ProgressProgressProgressProgress

MRT Purple LineMRT Purple LineMRT Purple LineMRT Purple Line

- Elevated structure, contract 1 14.8 99.9%

- Supply and Installation of M&E system 20.0 58.0%

MRT Blue LineMRT Blue LineMRT Blue LineMRT Blue Line - Underground Civil (Sanam Chai - Tha Phra), contract 2 10.0 92.5%

- Trackwork, Contract 5 4.7 71.4%

MRT Green LineMRT Green LineMRT Green LineMRT Green Line

- Elevated Structure and Depot, Contract 1 13.2 82.0%

- Tracework, Contract 2 2.2 69.0%

Xayaburi : A runXayaburi : A runXayaburi : A runXayaburi : A run----offoffoffoff----river Hydro projectriver Hydro projectriver Hydro projectriver Hydro project 76.6 76.6 76.6 76.6 62.0%62.0%62.0%62.0%

Si Rat (Sector B+) ExpresswaySi Rat (Sector B+) ExpresswaySi Rat (Sector B+) ExpresswaySi Rat (Sector B+) Expressway 22.5 22.5 22.5 22.5 84.0%84.0%84.0%84.0%

SRT Double Track Railroad : Chira Junction SRT Double Track Railroad : Chira Junction SRT Double Track Railroad : Chira Junction SRT Double Track Railroad : Chira Junction ---- Khon Kaen Section*Khon Kaen Section*Khon Kaen Section*Khon Kaen Section* 21.9 21.9 21.9 21.9 1.7%1.7%1.7%1.7%

* Joint-venture project between CK and Ch.Tawee Construction

Leverage & Asset Turnover (x)

Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.3

0.4

0.4

0.5

0.5

0.6

0.6

0.00

0.50

1.00

1.50

2.00

2.50

2013A 2014A 2015A 2016F 2017F

Gross Debt to Equity (LHS) Asset Turnover (RHS)

0.0

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

3,500.0

4,000.0

2013A 2014A 2015A 2016F 2017F

Capital Expenditure (-)

Btm

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

2013A 2014A 2015A 2016F 2017F

Avg: 31.1x

+1sd: 49x

+2sd: 66.9x

-1sd: 13.3x

-4.1

5.9

15.9

25.9

35.9

45.9

55.9

65.9

75.9

85.9

May-12 May-13 May-14 May-15

(x)

Avg: 2.28x

+1sd: 2.94x

+2sd: 3.59x

-1sd: 1.63x

-2sd: 0.98x0.8

1.3

1.8

2.3

2.8

3.3

3.8

4.3

4.8


(x)


Company Guide

Ch. Karnchang

Key Assumptions

FY FY FY FY DecDecDecDec 2013201320132013AAAA 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF

Beginning backlog 109,087 95,300 95,530 83,551 91,725

New projects signed (Btm) 19,001 33,181 22,933 45,785 40,000

Realized (Btm) 32,788 32,951 34,912 37,611 40,478

Ending backlog (Btm) 95,300 95,530 83,551 91,725 91,247

Income Statement (Btm)


Revenue 32,788 32,951 34,912 51,611 40,478

Cost of Goods Sold (29,233) (29,827) (31,986) (47,298) (36,912)

Gross ProfitGross ProfitGross ProfitGross Profit 3,5553,5553,5553,555 3,1243,1243,1243,124 2,9262,9262,9262,926 4,3134,3134,3134,313 3,5663,5663,5663,566 Other Opng (Exp)/Inc (609) (362) (710) (878) (253)

Operating ProfitOperating ProfitOperating ProfitOperating Profit 2,9452,9452,9452,945 2,7622,7622,7622,762 2,2162,2162,2162,216 3,4353,4353,4353,435 3,3133,3133,3133,313 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0

Associates & JV Inc (489) 26.8 (19.4) 1,054 1,326

Net Interest (Exp)/Inc (958) (1,393) (1,488) (900) (2,121)

Exceptional Gain/(Loss) 7,746 1,304 2,011 0.0 0.0

PrePrePrePre----tax Profittax Profittax Profittax Profit 9,2459,2459,2459,245 2,7002,7002,7002,700 2,7192,7192,7192,719 3,5893,5893,5893,589 2,5172,5172,5172,517 Tax (1,533) (342) (459) (507) (238)

Minority Interest (38.1) (60.8) (67.8) (67.8) (67.8)

Preference Dividend 0.0 0.0 0.0 0.0 0.0

Net ProfitNet ProfitNet ProfitNet Profit 7,6747,6747,6747,674 2,2962,2962,2962,296 2,1932,1932,1932,193 3,0143,0143,0143,014 2,2112,2112,2112,211 Net Profit before Except. (72.4) 992 182 3,014 2,211

EBITDA 3,154 3,776 3,178 5,767 6,302

Growth Revenue Gth (%) 56.9 0.5 6.0 47.8 (21.6)

EBITDA Gth (%) 68.9 19.7 (15.8) 81.5 9.3

Opg Profit Gth (%) 156.3 (6.2) (19.8) 55.0 (3.6)

Net Profit Gth (Pre-ex) (%) nm nm (81.7) 1,559.2 (26.6)

Margins & Ratio Gross Margins (%) 10.8 9.5 8.4 8.4 8.8

Opg Profit Margin (%) 9.0 8.4 6.3 6.7 8.2

Net Profit Margin (%) 23.4 7.0 6.3 5.8 5.5

ROAE (%) 62.0 12.9 11.1 13.8 9.3

ROA (%) 12.5 3.0 2.5 2.8 1.8

ROCE (%) 6.0 4.6 2.9 3.7 3.4

Div Payout Ratio (%) 8.7 25.8 30.9 30.0 30.0

Net Interest Cover (x) 3.1 2.0 1.5 3.8 1.6



Company Guide

Ch. Karnchang

Quarterly / Interim Income Statement (Btm)

FY FY FY FY DecDecDecDec 1Q1Q1Q1Q2015201520152015 2Q2Q2Q2Q2015201520152015 3Q3Q3Q3Q2015201520152015 4Q4Q4Q4Q2015201520152015 1Q1Q1Q1Q2016201620162016

Revenue 8,544 8,511 8,752 9,105 9,003


Gross ProfitGross ProfitGross ProfitGross Profit 708708708708 731731731731 738738738738 749749749749 799799799799 Other Oper. (Exp)/Inc (91.4) (68.8) 4.71 (555) (394)

Operating ProfitOperating ProfitOperating ProfitOperating Profit 617617617617 662662662662 743743743743 194194194194 405405405405 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0

Associates & JV Inc 3.17 9.77 (27.2) (5.2) 149

Net Interest (Exp)/Inc (360) (372) (395) (361) (230)

Exceptional Gain/(Loss) 315 1,657 38.9 0.0 53.5

PrePrePrePre----tax Profittax Profittax Profittax Profit 575575575575 1,9571,9571,9571,957 359359359359 (173)(173)(173)(173) 377377377377 Tax (120) (281) (60.1) 1.93 (52.5)


Net ProfitNet ProfitNet ProfitNet Profit 437437437437 1,6491,6491,6491,649 284284284284 (178)(178)(178)(178) 305305305305 Net profit bef Except. 188 230 252 (178) 259

EBITDA 871 921 980 441 787

Growth Revenue Gth (%) 14.0 (0.4) 2.8 4.0 (1.1)

EBITDA Gth (%) 1.7 5.7 6.5 (55.0) 78.4

Opg Profit Gth (%) 24.1 7.4 12.1 (73.9) 109.0

Net Profit Gth (Pre-ex) (%) (6.0) 22.2 9.5 nm nm

Margins Gross Margins (%) 8.3 8.6 8.4 8.2 8.9

Opg Profit Margins (%) 7.2 7.8 8.5 2.1 4.5

Net Profit Margins (%) 5.1 19.4 3.2 (2.0) 3.4

Balance Sheet (Btm)


Net Fixed Assets 7,518 6,962 7,330 8,211 9,047

Invts in Associates & JVs 19,177 21,205 25,267 26,320 27,646

Other LT Assets 4,204 8,726 15,429 15,429 15,429

Cash & ST Invts 3,913 5,265 4,667 1,125 3,485

Inventory 2,496 8,562 12,787 18,979 16,537

Debtors 4,288 5,337 6,174 8,754 10,778

Other Current Assets 30,438 24,815 21,413 44,664 35,029

Total AssetsTotal AssetsTotal AssetsTotal Assets 72,03472,03472,03472,034 80,87280,87280,87280,872 93,06693,06693,06693,066 123,482123,482123,482123,482 117,952117,952117,952117,952

ST Debt 13,353 12,844 15,291 22,605 19,729

Creditor 6,846 5,904 6,602 9,799 7,506

Other Current Liab 9,352 10,856 8,663 19,074 15,406

LT Debt 22,886 29,027 38,247 45,000 47,000

Other LT Liabilities 2,757 2,770 3,408 3,408 3,408

Shareholder’s Equity 16,551 19,125 20,457 23,199 24,506

Minority Interests 290 346 398 398 398

Total Cap. & Liab.Total Cap. & Liab.Total Cap. & Liab.Total Cap. & Liab. 72,03472,03472,03472,034 80,87280,87280,87280,872 93,06693,06693,06693,066 123,482123,482123,482123,482 117,952117,952117,952117,952

Non-Cash Wkg. Capital 21,025 21,953 25,109 43,524 39,433

Net Cash/(Debt) (32,326) (36,606) (48,871) (66,480) (63,244)

Debtors Turn (avg days) 53.5 53.3 60.2 52.8 88.1

Creditors Turn (avg days) 77.1 79.7 72.0 63.8 89.0

Inventory Turn (avg days) 23.7 67.7 121.8 122.6 175.6

Asset Turnover (x) 0.5 0.4 0.4 0.5 0.3

Current Ratio (x) 1.4 1.5 1.5 1.4 1.5

Quick Ratio (x) 1.3 1.2 1.1 1.1 1.2

Net Debt/Equity (X) 1.9 1.9 2.3 2.8 2.5

Net Debt/Equity ex MI (X) 2.0 1.9 2.4 2.9 2.6

Capex to Debt (%) 9.7 1.0 2.5 3.2 3.7

Z-Score (X) 1.3 1.3 1.3 1.3 1.4



Company Guide

Ch. Karnchang

Cash Flow Statement (Btm)


Pre-Tax Profit 9,245 2,700 2,719 3,589 2,517

Dep. & Amort. 697 988 981 1,279 1,664

Tax Paid (1,908) (772) (759) (692) (667)

Assoc. & JV Inc/(loss) 489 (26.8) 19.4 (1,054) (1,326)

Chg in Wkg.Cap. (13,143) (929) (12,175) (18,010) 4,091

Other Operating CF 374 (1,375) (1,711) 185 429

Net Operating CFNet Operating CFNet Operating CFNet Operating CF (11,992)(11,992)(11,992)(11,992) 1,0851,0851,0851,085 (10,925)(10,925)(10,925)(10,925) (14,703)(14,703)(14,703)(14,703) 6,7086,7086,7086,708 Capital Exp.(net) (3,514) (432) (1,349) (2,160) (2,500)

Other Invts.(net) 7,121 1,218 2,011 0.0 0.0

Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0

Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0

Other Investing CF 0.0 0.0 0.0 0.0 0.0

Net Investing CFNet Investing CFNet Investing CFNet Investing CF 3,6063,6063,6063,606 786786786786 662662662662 (2,160)(2,160)(2,160)(2,160) (2,500)(2,500)(2,500)(2,500) Div Paid (578) (666) (593) (678) (904)

Chg in Gross Debt 8,285 5,631 11,667 14,067 (876)

Capital Issues 0.0 41.3 0.0 0.0 0.0

Other Financing CF 1,591 (1,662) 122 (67.8) (67.8)

Net Financing CFNet Financing CFNet Financing CFNet Financing CF 9,2979,2979,2979,297 3,3453,3453,3453,345 11,19711,19711,19711,197 13,32113,32113,32113,321 (1,848)(1,848)(1,848)(1,848)

Currency Adjustments 233 35.6 0.0 0.0 0.0

Chg in Cash 1,144 5,252 934 (3,542) 2,360

Opg CFPS (Bt) 0.70 1.19 0.74 1.95 1.54

Free CFPS (Bt) (9.4) 0.39 (7.2) (10.0) 2.48


Target Price & Ratings History

Source: DBS Vickers

ScoreScoreScoreScore Range Number of LogoRange Number of LogoRange Number of LogoRange Number of Logo DescriptionDescriptionDescriptionDescription

90-100 Excellent

80-89 Very Good

70-79 Good

60-69 Satisfactory

50-59 Pass

<50 No logo given N/A

S.No.S.No.S.No.S.No. DateDateDateDateClosing Closing Closing Closing

PricePricePricePrice

Target Target Target Target

PricePricePricePriceRat ing Rat ing Rat ing Rat ing

1: 18 Aug 15 24.70 33.00 BUY

2: 21 Aug 15 26.25 33.00 BUY

3: 16 Nov 15 27.75 33.00 BUY

4: 25 Nov 15 28.00 33.00 BUY

5: 29 Feb 16 22.60 33.00 BUY

6: 09 Mar 16 24.60 33.00 BUY

7: 29 Mar 16 25.25 33.00 BUY

8: 17 May 16 24.70 33.00 BUY

Note Note Note Note : Share price and Target price are adjusted for corporate actions.

1

23

4

5

6

7

8

21.47

22.47

23.47

24.47

25.47

26.47

27.47

28.47

29.47

May-15 Sep-15 Jan-16

BtBtBtBt


ed:CK / sa:BC

BUYBUYBUYBUYLast Traded Price: Last Traded Price: Last Traded Price: Last Traded Price: RM4.81 (KLCIKLCIKLCIKLCI : : : : 1,642.2) Price Target :Price Target :Price Target :Price Target : RM5.80 (21% upside) (Prev RM5.80) PPPPotential Catalyst: otential Catalyst: otential Catalyst: otential Catalyst: Other 11MP wins, sale of Splash

Where we differ:Where we differ:Where we differ:Where we differ: Our preference is Gamuda for our large-cap pick Analyst Chong Tjen-San,CFA +60 3 26043972 [email protected]

What’s New • In-line 3QFY16 results, growth to resume in FY17F

• Expect strong 4Q for property, led by Singapore

• Next imminent award is Pan Borneo Highway

• Reiterate BUY, TP RM5.80

Price Relative

Forecasts and Valuation FY FY FY FY JulJulJulJul ((((RMRMRMRM m) m) m) m) 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF

Revenue 2,400 1,862 4,071 5,122 EBITDA 590 558 664 718 Pre-tax Profit 858 824 921 963 Net Profit 682 616 694 727 Net Pft (Pre Ex.) 682 616 694 727 Net Pft Gth (Pre-ex) (%) (5.2) (9.7) 12.7 4.8 EPS (sen) 28.4 21.9 24.7 25.9 EPS Pre Ex. (sen) 28.4 21.9 24.7 25.9 EPS Gth Pre Ex (%) (8) (23) 13 5 Diluted EPS (sen) 28.4 21.9 24.7 25.9 Net DPS (sen) 8.88 8.88 8.88 8.88 BV Per Share (sen) 263 240 258 276 PE (X) 17.0 21.9 19.5 18.6 PE Pre Ex. (X) 17.0 21.9 19.5 18.6 P/Cash Flow (X) 19.2 61.7 46.8 42.6 EV/EBITDA (X) 24.8 29.8 25.1 23.1 Net Div Yield (%) 1.8 1.8 1.8 1.8 P/Book Value (X) 1.8 2.0 1.9 1.7 Net Debt/Equity (X) 0.4 0.4 0.4 0.3 ROAE (%) 11.6 9.4 9.9 9.7

Earnings Rev (%):Earnings Rev (%):Earnings Rev (%):Earnings Rev (%): 0 0 0 Consensus EPS Consensus EPS Consensus EPS Consensus EPS (sensensensen):::: 25.5 29.7 32.3 Other Broker Recs:Other Broker Recs:Other Broker Recs:Other Broker Recs: B: 15 S: 2 H: 6

Source of all data: Company, AllianceDBS Research, Bloomberg Finance L.P

Best transport infra proxy Best proxy to transportation infrastructureBest proxy to transportation infrastructureBest proxy to transportation infrastructureBest proxy to transportation infrastructure

Gamuda is our top large cap pick in the sector, as it is the best

proxy to a slew of upcoming transportation-related projects. Its

strong reputation for MRT Line 1 and PDP appointment for

Penang Transport Master Plan (PTMP) provide it with leverage

for other large-multiplier projects such as LRT 3, Gemas-JB

double tracking, Pan Borneo Highway and High Speed Rail.

LLLLaaaarrrrggggeeee mmmmuuuullllttttiiii----yyyyeeeeaaaarrrr pppprrrroooojjjjeeeeccccttttssss eeeennnnssssuuuurrrreeee ssssttttrrrroooonnnngggg eeeeaaaarrrrnnnniiiinnnnggggssss vvvviiiissssiiiibbbbiiiilllliiiittttyyyy

Gamuda’s outstanding orderbook now stands at RM8.2bn

which does not include the PDP fees for MRT Line 2

aboveground works. The final contract value for the whole

project will only be known once all the packages are awarded

which will likely be about RM30bn. Earnings will shrink in

FY16F due to the timing of recognition for MRT Line 2, but this

has been priced in by the market. Construction works for MRT

Line 2 are scheduled to start in mid-2016, which suggests

earnings recognition only in FY17F. Gamuda is also vying for

other large scale projects such as Pan Borneo Highway (with JV

partner Naim), LRT 3 and Gemas-JB double tracking.

Swapping oneSwapping oneSwapping oneSwapping one----off dividend for longoff dividend for longoff dividend for longoff dividend for long----term growthterm growthterm growthterm growth

There are expectations for the Splash deal to be concluded in

2016 at close to the book value of RM2.8bn. We do not

expect special dividends as the proceeds will likely be used for

the Penang Transport Master Plan project; this will be positive

as Gamuda could secure long-term construction earnings and

a firm footing in Penang’s property market.

Valuation:

We maintain our BUY rating and SOP-derived TP of RM5.80.

We have accounted for the dilution of warrants and

corresponding increase in cash raised from full conversion

while also assuming some marginal wins outside of MRT 2.


High raw material price.High raw material price.High raw material price.High raw material price. The tunnelling portion of MRT Line 2

is its largest project and is susceptible to fluctuations of raw

material prices, particularly for steel. Nonetheless, we think this

is partly mitigated by the higher contract value on a per km

basis.At A Glance Issued Capital (m shrs) 2,416

Mkt. Cap (RMm/US$m) 11,621 / 2,866


EPF 9.8

KWAP 6.8

Free Float (%) 78.8



DBS Group Research . Equity 30 Jun 2016

Malaysia Company Guide

Gamuda Version 5 | Bloomberg: GAM MK | Reuters: GAMU.KL Refer to important disclosures at the end of this report

42

92

142

192

242

3.0

3.5

4.0

4.5

5.0

5.5

Jun-12 Jun-13 Jun-14 Jun-15 Jun-16

Relative IndexRM

Gamuda (LHS) Relative VIX Index (RHS)


Company Guide

Gamuda

WHAT’S NEW

In-line results, expect stronger property sales in 4Q

No surprises.No surprises.No surprises.No surprises. It posted a 3QFY16 net profit of RM153m (-5% y-o-y, -5% q-o-q), bringing 9MFY16 net profit to RM474m (-10% y-o-y) – in line with our and consensus estimates. 3QFY16 construction pretax profit dropped by 10% q-o-q and 33% y-o-y to RM42m, as MRT Line 1 civil works are at its tail- end with just remaining orders of RM0.5bn. The 9MFY16 construction margin was 7.1% vs 8.6% in 9MFY15. KV MRT Line 1 is on track for full completion in July 2017, with cumulative progress at 85% (87% underground and 82% elevated) with no significant cost overruns.

Slower quarter for property but expect a surge for 4QFY16Slower quarter for property but expect a surge for 4QFY16Slower quarter for property but expect a surge for 4QFY16Slower quarter for property but expect a surge for 4QFY16.... 3QFY16 property presales came in at RM190m (-32% y-o-y) bringing 9MY16 to RM575m (-29% y-o-y). Contrary to earlier expectations of cutting FY16F property presales of RM1.33bn by about 20-30%, Gamuda actually raised the forecast slightly to RM1.4bn. This is because of the strong showing for its Gem Residences in Singapore (Gamuda has a 50% stake). This project was launched end-May 2016 at an average price of S$1,450 psf and so far take up rates has reached 55% with the smaller units being mostly sold. Hence, Gamuda expects RM500m in total presales in 4QFY16 from this project.

9MFY16 pretax profit for its property division fell 23% y-o-y to RM175m but margins remained relatively stable at 23%. Unbilled sales now stand at RM1.0bn, giving earnings visibility of less than two years.

Progress of MRT Line 2 awardsProgress of MRT Line 2 awardsProgress of MRT Line 2 awardsProgress of MRT Line 2 awards. . . . So far, 18 work packages for MRT line 2 worth RM23bn have been awarded including the tunnelling package of RM15.47bn. Assuming a total project value of RM30bn, this implies that 76% of the total project has been awarded. So far, four viaduct packages have been awarded and the remaining six will be awarded by 2QCY17.

Next imminent award likely Pan Borneo HighwayNext imminent award likely Pan Borneo HighwayNext imminent award likely Pan Borneo HighwayNext imminent award likely Pan Borneo Highway. . . . Similar to the last quarter, Gamuda reiterated that it is still eyeing other local jobs such as Pan Borneo Highway, LRT 3 and Southern double tracking. The most imminent award will likely be Pan Borneo Highway which should be in the next two to three months.

Quarterly / Interim Income Statement (RMm)

FY FY FY FY JulJulJulJul 3Q3Q3Q3Q2015201520152015 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016 % chg yoy % chg yoy % chg yoy % chg yoy % chg qoq% chg qoq% chg qoq% chg qoq

Revenue 554 527 467 (15.6) (11.4)

Cost of Goods Sold (429) (454) (377) (12.0) (16.8)

Gross ProfitGross ProfitGross ProfitGross Profit 125125125125 73.973.973.973.9 89.989.989.989.9 (27.9)(27.9)(27.9)(27.9) 21.621.621.621.6

Other Oper. (Exp)/Inc 22.6 35.6 16.8 (25.7) (52.8)

Operating ProfitOperating ProfitOperating ProfitOperating Profit 147147147147 110110110110 107107107107 (27.6)(27.6)(27.6)(27.6) (2.6)(2.6)(2.6)(2.6)

Other Non Opg (Exp)/Inc 0.0 0.0 0.0 nm nm

Associates & JV Inc 86.2 112 109 26.3 (2.7)

Net Interest (Exp)/Inc (24.5) (29.2) (29.7) (21.4) (1.7)

Exceptional Gain/(Loss) 0.0 0.0 0.0 nm nm

PrePrePrePre----tax Profittax Profittax Profittax Profit 209209209209 192192192192 186186186186 (11.1)(11.1)(11.1)(11.1) (3.3)(3.3)(3.3)(3.3)

Tax (31.8) (22.2) (20.7) (35.0) (6.8)

Minority Interest (16.8) (9.9) (12.5) (25.9) 25.7

Net ProfitNet ProfitNet ProfitNet Profit 160160160160 160160160160 153153153153 (4.8)(4.8)(4.8)(4.8) (4.6)(4.6)(4.6)(4.6)

Net profit bef Except. 160 160 153 (4.8) (4.6)

EBITDA 233 221 215 (7.7) (2.7)

Margins (%)

Gross Margins 22.5 14.0 19.2

Opg Profit Margins 26.6 20.8 22.8

Net Profit Margins 29.0 30.4 32.7

Source of all data: Company, AllianceDBS Research


Company Guide

Gamuda


Earnings Drivers:

On track for next earnings upcycle.On track for next earnings upcycle.On track for next earnings upcycle.On track for next earnings upcycle. We think the market has

priced in the expected earnings decline in FY16F. The decline is

because MRT Line 1 is largely completed and MRT Line 2 will

only contribute in FY17F.

MRT Line 2 to contribute in FY17.MRT Line 2 to contribute in FY17.MRT Line 2 to contribute in FY17.MRT Line 2 to contribute in FY17. There is low risk of the

project being delayed or shelved because it is deemed a high-

multiplier and top priority ETP project. The PDP fee remains at

6%, similar to MRT Line 1. The only difference is MRT Co. has

introduced three additional KPIs (safety, quality and public

response) which will constitute half a percentage point out of

the 6%. The MMC-Gamuda JV has returned as the tunnelling

contractor with a total contract value of RM15.47bn or

RM7.7bn per contractor. A few viaduct packages for the

aboveground works have been awarded and all should be

awarded within the next one year.

Sale of Splash.Sale of Splash.Sale of Splash.Sale of Splash. The sale of Splash remains the biggest overhang

for Gamuda. It remains optimistic about concluding the deal by

end-2016 with pricing likely at a book value of about RM2.8bn.

Given that it is actively pursuing the Penang Integrated

Transport System project which requires higher upfront capex,

there may not be special dividends from the sale.

Awaiting approvals for Penang Transport Master Plan (Awaiting approvals for Penang Transport Master Plan (Awaiting approvals for Penang Transport Master Plan (Awaiting approvals for Penang Transport Master Plan (PTMP).PTMP).PTMP).PTMP).

Gamuda has received a Letter of Award (LOA) – via SRS

Consortium – from the Penang State Government to be the PDP

for the Roads and Public Transport Projects in Penang (Penang

Transport Master Plan Strategy 2013-2030). The key hurdle for

this project is obtaining the federal government’s approval for

land reclamation and for the LRT. Gamuda is hoping to have

two bites of the cherry – PDP, and also as turnkey contractor for

some key components – but these are uncertain at this stage.

The two main components of the project are LRT from George

Town to Bayan Lepas and the Pan Island Link highway. The

railway scheme has been submitted to SPAD while the

environmental and social impact assessment studies are

ongoing. In our view, this project will only take off post the next

general elections.

Property sales driven by overseas projects.Property sales driven by overseas projects.Property sales driven by overseas projects.Property sales driven by overseas projects. Gamuda has raised

its property presales for FY16F slightly to RM1.4bn largely for

the strong showing of its Gem Residences project in Singapore.

Its FY17F property sales target is RM1.8bn with two key

launches Gamuda Gardens and Kundang Estates.

Construction margins

Property launches Malaysia

Construction profit contribution

Property profit contribution

New order wins

Source: Company, AllianceDBS Research

8.7

7.68.2

9.5

11.1

0.0

1.6

3.2

4.8

6.4

8.0

9.6

11.2

2014A 2015A 2016F 2017F 2018F

1,700

950 900 850 850

0

347

694

1,040

1,387

1,734

2014A 2015A 2016F 2017F 2018F

32

24.7 24.1

2728.2

0.0

6.5

13.0

19.6

26.1

32.6

2014A 2015A 2016F 2017F 2018F

26.1

29.5 28.9 29.1 29.6

0.0

6.0

11.9

17.9

23.9

29.8

2014A 2015A 2016F 2017F 2018F

7,735

0

2,000

0

1,562

3,125

4,687

6,250

7,812

2016F 2017F 2018F


Company Guide

Gamuda

Balance Sheet:

Manageable net gearing.Manageable net gearing.Manageable net gearing.Manageable net gearing. Net gearing remained manageable at

0.49x as at 30 April 2016, but has inched up from 0.43x as at

31 July 2015 largely due to land banking over the past two

years. More recent land bank purchases include its maiden

project in Toa Payoh, Singapore for S$345.9m (Gamuda has a

50% share), a small parcel of freehold land in Melbourne for

AUD40m, an 18-acre land in Kota Kinabalu for RM100m, and a

257-acre parcel located just 2km from Kota Kemuning for

RM392m.

Further land banking could raise gearing.Further land banking could raise gearing.Further land banking could raise gearing.Further land banking could raise gearing. Gamuda is still

seeking to land bank further in choice locations despite the

softening property market. But it will be more selective now

given its aggressive land banking over the past year or so.


Proxy to transportationProxy to transportationProxy to transportationProxy to transportation----related related related related projects. projects. projects. projects. Besides having a strong

reputation, it also has ample capacity and the technical know-

how to bid for large upcoming transport-related projects such

as MRT Line 2, LRT 3, PTMP, and High Speed Rail. Thus far,

execution for MRT Line 1 has been smooth. Gamuda has also

expressed interest in bidding for LRT 3 civil works, Pan Borneo

Highway and also the Gemas-JB double tracking. It is making a

concerted effort to beef up its orderbook and to diversify its

project risk.

Resolution for Splash.Resolution for Splash.Resolution for Splash.Resolution for Splash. A successful resolution for Splash would

remove the overhang on the stock. Investors could welcome

potential earnings prospects from the Penang Integrated

Transport project at the expense of a one-off special dividend.

Key Risks:

Macroeconomic factors. Macroeconomic factors. Macroeconomic factors. Macroeconomic factors. Generally, an economic slowdown

could adversely affect the group because this could defer or

halt some projects, especially infrastructure projects. This could

result in slower order book replenishment.

Slowdown in property market. Slowdown in property market. Slowdown in property market. Slowdown in property market. The various tightening policies

for the Malaysian property sector could reduce the demand for

property (i.e. residential and commercial) in the near future.

Company Background

Gamuda's core businesses focus on three segments which are

engineering & construction, infrastructure concessions, and

property development.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.1

0.2

0.2

0.3

0.3

0.4

0.4

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

2014A 2015A 2016F 2017F 2018F


0.0

20.0

40.0

60.0

80.0

100.0

120.0

2014A 2015A 2016F 2017F 2018F


RMm

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

2014A 2015A 2016F 2017F 2018F

Avg: 17.4x

+1sd: 20.1x

+2sd: 22.8x

-1sd: 14.6x

-2sd: 11.9x

10.7

12.7

14.7

16.7

18.7

20.7

22.7

24.7


(x)

Avg: 1.96x

+1sd: 2.11x

+2sd: 2.27x

-1sd: 1.8x

-2sd: 1.64x

1.3

1.5

1.7

1.9

2.1

2.3

2.5


(x)


Company Guide

Gamuda

Key Assumptions

FY FY FY FY JulJulJulJul 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF

Construction margins 8.70 7.60 8.15 9.54 11.1 Property launches Malaysia

1,700 950 900 850 850 Construction profit contribution

32.0 24.7 24.1 27.0 28.2 Property profit contribution

26.1 29.5 28.9 29.1 29.6

New order wins 7,735 0.0 2,000

Segmental Breakdown


Revenues (RMm) Construction 1,180 1,158 333 2,365 3,297

Property development 895 842 685 660 600

Infrastructure 154 401 409 417 425

Others 0.0 0.0 435 630 800

TotalTotalTotalTotal 2,2302,2302,2302,230 2,4002,4002,4002,400 1,8621,8621,8621,862 4,0714,0714,0714,071 5,1225,1225,1225,122

Pretax profit (RMm) Construction 294 242 233 291 319

Property development 239 289 192 196 196

Infrastructure 385 450 455 473 477

Others 0.0 0.0 87.0 117 138

Int Expense (66.4) (124) (143) (155) (168)

TotalTotalTotalTotal 852852852852 858858858858 824824824824 921921921921 963963963963

Income Statement (RMm)


Revenue 2,230 2,400 1,862 4,071 5,122


Gross ProfitGross ProfitGross ProfitGross Profit 488488488488 580580580580 519519519519 720720720720 816816816816 Other Opng (Exp)/Inc (28.2) (10.4) 17.5 (81.6) (127)

Operating ProfitOperating ProfitOperating ProfitOperating Profit 460460460460 570570570570 536536536536 639639639639 689689689689

Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0

Associates & JV Inc 430 375 379 382 386

Net Interest (Exp)/Inc (38.0) (86.6) (91.0) (99.8) (112)

Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0

PrePrePrePre----tax Profittax Profittax Profittax Profit 852852852852 858858858858 824824824824 921921921921 963963963963 Tax (117) (133) (165) (184) (193)



Net ProfitNet ProfitNet ProfitNet Profit 719719719719 682682682682 616616616616 694694694694 727727727727 Net Profit before Except. 719 682 616 694 727

EBITDA 481 590 558 664 718

Growth

Revenue Gth (%) (42.6) 7.6 (22.4) 118.7 25.8

EBITDA Gth (%) 42.7 22.7 (5.5) 19.1 8.2

Opg Profit Gth (%) 47.4 23.9 (5.9) 19.1 7.9

Net Profit Gth (Pre-ex) (%) 33.0 (5.2) (9.7) 12.7 4.8




ROAE (%) 13.9 11.6 9.4 9.9 9.7

ROA (%) 7.7 5.8 4.4 4.6 4.5

ROCE (%) 4.8 4.6 3.6 3.9 4.0

Div Payout Ratio (%) 28.7 31.3 40.5 35.9 34.3




Company Guide

Gamuda


FY FY FY FY JulJulJulJul 3Q3Q3Q3Q2015201520152015 4Q4Q4Q4Q2015201520152015 1Q1Q1Q1Q2016201620162016 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016

Revenue 554 623 513 527 467

Cost of Goods Sold (429) (531) (428) (454) (377)

Gross ProfitGross ProfitGross ProfitGross Profit 125125125125 91.891.891.891.8 84.984.984.984.9 73.973.973.973.9 89.989.989.989.9 Other Oper. (Exp)/Inc 22.6 43.0 24.2 35.6 16.8


Associates & JV Inc 86.2 99.3 114 112 109



PrePrePrePre----tax Profittax Profittax Profittax Profit 209209209209 191191191191 193193193193 192192192192 186186186186 Tax (31.8) (35.5) (19.7) (22.2) (20.7)


Net ProfitNet ProfitNet ProfitNet Profit 160160160160 154154154154 161161161161 160160160160 153153153153 Net profit bef Except. 160 154 161 160 153

EBITDA 233 234 223 221 215

Growth Revenue Gth (%) (15.2) 12.5 (17.7) 2.9 (11.4)

EBITDA Gth (%) (9.7) 0.3 (4.9) (0.6) (2.7)

Opg Profit Gth (%) (13.3) (8.5) (19.0) 0.4 (2.6)

Net Profit Gth (Pre-ex) (%) (11.9) (4.2) 4.9 (0.7) (4.6)



Net Profit Margins (%) 29.0 24.7 31.4 30.4 32.7

Balance Sheet (RMm)


Net Fixed Assets 285 312 391 465 535


Other LT Assets 3,125 5,163 5,163 5,163 5,163

Cash & ST Invts 920 1,438 1,801 2,237 2,702

Inventory 295 186 213 245 282

Debtors 1,716 1,377 1,583 1,821 2,094



ST Debt 792 777 1,177 1,577 1,977

Creditor 881 1,355 1,558 1,792 2,061

Other Current Liab 126 327 327 327 327

LT Debt 1,739 3,358 3,358 3,358 3,358

Other LT Liabilities 653 815 815 815 815





Net Cash/(Debt) (1,611) (2,698) (2,735) (2,698) (2,634)




Asset Turnover (x) 0.2 0.2 0.1 0.3 0.3

Current Ratio (x) 3.2 2.1 1.9 1.8 1.7

Quick Ratio (x) 1.5 1.1 1.1 1.1 1.1

Net Debt/Equity (X) 0.3 0.4 0.4 0.4 0.3


Capex to Debt (%) 0.7 0.6 2.2 2.0 1.9

Z-Score (X) 2.7 1.9 1.9 2.0 1.9



Company Guide

Gamuda

Cash Flow Statement (RMm)


Pre-Tax Profit 852 858 824 921 963

Dep. & Amort. 20.9 20.2 21.6 25.7 29.6

Tax Paid (72.9) (882) (165) (184) (193)

Assoc. & JV Inc/(loss) (430) (375) (379) (382) (386)

Chg in Wkg.Cap. (712) 164 (31.1) (35.8) (41.1)

Other Operating CF (83.7) 818 (51.9) (55.6) (55.6)

Net Operating CFNet Operating CFNet Operating CFNet Operating CF (426)(426)(426)(426) 604604604604 219219219219 289289289289 317317317317 Capital Exp.(net) (16.6) (24.3) (100.0) (100.0) (100.0)

Other Invts.(net) 0.0 0.0 0.0 0.0 0.0

Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0

Div from Assoc & JV 123 83.5 0.0 0.0 0.0

Other Investing CF 88.1 (1,473) 51.9 55.6 55.6

Net Investing CFNet Investing CFNet Investing CFNet Investing CF 195195195195 (1,413)(1,413)(1,413)(1,413) (48.1)(48.1)(48.1)(48.1) (44.4)(44.4)(44.4)(44.4) (44.4)(44.4)(44.4)(44.4) Div Paid (277) (285) (208) (208) (208)

Chg in Gross Debt 354 1,561 400 400 400

Capital Issues 142 219 0.0 0.0 0.0

Other Financing CF (374) (167) 0.0 0.0 0.0

Net Financing CFNet Financing CFNet Financing CFNet Financing CF (155)(155)(155)(155) 1,3281,3281,3281,328 192192192192 192192192192 192192192192

Currency Adjustments 0.0 0.0 0.0 0.0 0.0

Chg in Cash (386) 518 363 437 464

Opg CFPS (sen) 12.3 18.3 8.91 11.6 12.7

Free CFPS (sen) (19.0) 24.1 4.24 6.72 7.72








1: 30 Jun 15 4.67 6.00 BUY

2: 17 Aug 15 4.15 6.00 BUY

3: 15 Dec 15 4.38 5.60 BUY

4: 17 Dec 15 4.40 5.60 BUY

5: 02 Mar 16 4.66 5.60 BUY

6: 25 Mar 16 4.93 5.80 BUY

7: 01 Apr 16 4.85 5.80 BUY

8: 04 Apr 16 4.88 5.80 BUY

9: 04 May 16 4.75 5.80 BUY

10: 17 May 16 4.72 5.80 BUY

11: 03 Jun 16 4.86 5.80 BUY

12: 24 Jun 16 4.82 5.80 BUY


1

2 3

45

6

7

8

9

10

11

12

3.65

3.85

4.05

4.25

4.45

4.65

4.85

5.05

Jun-15 Oct-15 Feb-16

RMRMRMRM

ASIAN INSIGHTS VICKERS SECURITIES ed:CK / sa: WMT

HOLDHOLDHOLDHOLD Last Traded Price: Last Traded Price: Last Traded Price: Last Traded Price: RM3.44 (KLCIKLCIKLCIKLCI : : : : 1,631.09) Price Target :Price Target :Price Target :Price Target : RM3.30 (-4% downside) Potential Catalyst: Potential Catalyst: Potential Catalyst: Potential Catalyst: Higher margin new wins, stronger property sales

Where we differ:Where we differ:Where we differ:Where we differ: We prefer Gamuda given its positioning as the most

complete transportation infrastructure proxy Analyst Chong Tjen-San +60 3 26043972 [email protected]

What’s New • 4QFY16 below, special dividend of 3 sen declared

• Bright spots were infrastructure & manufacturing

• Cutting FY17-18F earnings by 10-11%

• HOLD, TP RM3.30 based on SOP

Price Relative

Forecasts and Valuation FY FY FY FY MarMarMarMar ((((RMRMRMRM m) m) m) m) 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF

Revenue 5,448 5,128 7,197 7,404 EBITDA 1,470 1,166 1,299 1,408 Pre-tax Profit 1,019 1,156 893 952 Net Profit 481 794 609 639 Net Pft (Pre Ex.) 481 492 609 639 Net Pft Gth (Pre-ex) (%) (42.0) 2.2 23.8 5.0 EPS (sen) 13.4 22.1 17.0 17.8 EPS Pre Ex. (sen) 13.4 13.7 17.0 17.8 EPS Gth Pre Ex (%) (42) 2 24 5 Diluted EPS (sen) 13.4 22.1 17.0 17.8 Net DPS (sen) 11.1 7.40 7.40 7.40 BV Per Share (sen) 235 252 261 272 PE (X) 25.6 15.5 20.3 19.3 PE Pre Ex. (X) 25.6 25.1 20.3 19.3 P/Cash Flow (X) 22.4 16.3 14.4 13.6 EV/EBITDA (X) 12.0 14.8 13.7 12.9 Net Div Yield (%) 3.2 2.2 2.2 2.2 P/Book Value (X) 1.5 1.4 1.3 1.3 Net Debt/Equity (X) 0.4 0.4 0.4 0.4 ROAE (%) 6.3 9.1 6.6 6.7 Earnings Rev (%):Earnings Rev (%):Earnings Rev (%):Earnings Rev (%): (11) (10) Consensus EPS Consensus EPS Consensus EPS Consensus EPS (sensensensen):::: 17.9 20.3 23.9 Other Broker Recs:Other Broker Recs:Other Broker Recs:Other Broker Recs: B: 17 S: 1 H: 5


Execution of peak orderbook is key Eroding Eroding Eroding Eroding defensive proxy to the sector.defensive proxy to the sector.defensive proxy to the sector.defensive proxy to the sector. IJM’s appeal as a construction proxy has always been its strong execution track record. This, coupled with its now record orderbook, makes it a defensive proxy to the sector. Nonetheless, this defensive positioning may be somewhat eroded over the near term as it now owns 24.4% of the Scomi Group post the conversion of the bonds. Peak orderbook but will continue to grow marginally.Peak orderbook but will continue to grow marginally.Peak orderbook but will continue to grow marginally.Peak orderbook but will continue to grow marginally. Its peak quality orderbook of RM8.5bn incorporates the MRT Line 2, V203 package and can provide solid earnings visibility over the next 2-3 years; but this also limits the group’s ability to take on other large-scale projects. Given that it can be selective now with its peak orderbook, we expect incremental wins from here to be margin-enhancing. The company’s diversified and defensive nature also makes it a less attractive bet to potentially capitalise on more contract flows with the rollout of the 11MP. We estimate every RM1bn increase in new contract wins (vs our base case) would only raise FY17F EPS by <2% Headwinds ahead forHeadwinds ahead forHeadwinds ahead forHeadwinds ahead for property.property.property.property. IJM Land’s FY16 pretax profit fell 68% to RM159m. It still has unbilled sales of RM1.7bn, which implies decent visibility over the next 1-2 years. FY16 property sales came in at RM1.45bn (vs RM1.7bn in FY15), implying 4QFY16 property sales of RM450m (+28% q-o-q). There is no sales guidance for FY17 but it hopes to beat FY16 with the introduction of various schemes.

Valuation:

Our valuation for IJM is based on sum-of-the-parts valuation

given its diversified business portfolio. We value the

construction business based on a combination of DCF and PE

valuation methodologies, while its property and concession

businesses are valued based on DCF. Key Risks to Our View:

StrongerStrongerStrongerStronger----thanthanthanthan----expected wins. expected wins. expected wins. expected wins. We believe IJM will be more selective when bidding for projects, given its peak orderbook. But IJM remains a reputable contractor with a strong execution track record and balance sheet, and may still be present in other projects such as DASH, SUKE and Pan Borneo.


Mkt. Cap (RMm/US$m) 12,344 / 3,017


EPF 11.8

KWAP 5.0

Free Float (%) 70



DBS Group Research . Equity

27 May 2016


IJM Corp Version 3 | Bloomberg: IJM MK | Reuters: IJMS.KL Refer to important disclosures at the end of this report

75

95

115

135

155

175

195

215

2.0

2.5

3.0

3.5

4.0


Relative IndexRM

IJM Corp (LHS) Relative KLCI INDEX (RHS)


Company Guide

IJM Corp

WHAT’S NEW

Below expectations, bright spots were manufacturing

and Kuantan Port

• Below expectations.Below expectations.Below expectations.Below expectations. IJM’s 4QFY16 headline net profit of

RM44m brought FY16 net profit to RM793m. Stripping out

the one-off exceptional gains of RM302m due to the

disposal and fair value gains on re-measurement of the

remaining equity interests in Jaipur Mahua Tollway and

Swarna Tollway, Its FY16 core net profit of RM492m was

below our expectations. This was due to poorer-than-

expected earnings for construction, property and

plantations. Its infrastructure division performed well

anchored by a strong showing for Kuantan Port. A second

interim dividend of 4 sen was declared and also a 3-sen

special dividend.

• Construction.Construction.Construction.Construction. 4QFY16 construction pretax profit of

RM53m was higher than 3QFY16’s RM35m but was down

25% y-o-y. On a full-year basis, construction pretax profit

for FY16 was down 8% y-o-y to RM171m while margins

were also lower at 10.4% vs 15.1% in FY15. This was due

to the finalisation of accounts for certain projects in FY15.

Its total outstanding orderbook now stands at RM8.5bn (5x

FY16 construction revenue). Of this, 72% comprises road

and other infra-related jobs and the balance 28% building

works. We understand it has bid for certain packages for

DASH and SUKE, and will also bid for certain of the

balance packages for WCE (1,2,6, 7, 10 and 11).

• Property.Property.Property.Property. IJM Land recorded a 4QFY16 pretax profit of just

RM4m (3QFY16 of RM21m and 2QFY16 of RM84m),

bringing FY16 pretax profit to RM159m (-68% y-o-y).

Pretax margins for FY16 fell to 12% from 22% in FY15. It

still has unbilled sales of RM1.7bn, which implies decent

visibility over next 1-2 years. 4QFY16 property sales were

RM450m, bringing FY16 sales to RM1.45bn (vs RM1.7bn

for FY15). There is no sales guidance for FY17F but it

should be better than FY16. It is targeting to launch

RM1.5bn properties for this financial year. We understand

that its township developments such as Seremban 2,

Austin Duta and Rimbayu continue to do well. It is also

exploring various new schemes to boost property sales.

• Manufacturing.Manufacturing.Manufacturing.Manufacturing. Its manufacturing division showed decent

performance for FY16 with revenue rising 6% y-o-y to

RM983m while pretax profit was marginally lower by 1%

to RM124m. Its piles division has a 7½ month orderbook

visibility which is at its peak and it has started to deliver

large diameter piles for the Kuantan Port expansion.

• Infrastructure.Infrastructure.Infrastructure.Infrastructure. Its infrastructure division recorded a pretax

profit of RM555m for FY16 (vs RM42m in FY15) due to

one-off gain from its Indian highways of RM302m. In

particular, Kuantan Port did extremely well with FY16

pretax profit of RM251m (vs RM141m in FY15) due to

higher throughput of 38m FWT. However, we understand

this is not sustainable and will normalise at 25m FWT.

• Cutting earnings.Cutting earnings.Cutting earnings.Cutting earnings. We cut our FY17-FY18F earnings by 10-

11% to largely factor in slightly lower property sales while

also cutting out pretax margins to 16% (from 22%) which

we understand is a more sustainable level.


Company Guide

IJM Corp


FY FY FY FY MarMarMarMar 4Q4Q4Q4Q2015201520152015 3Q3Q3Q3Q2016201620162016 4Q4Q4Q4Q2016201620162016 % chg yoy % chg yoy % chg yoy % chg yoy % chg qoq% chg qoq% chg qoq% chg qoq

Revenue 1,443 1,440 1,167 (19.1) (19.0)

Cost of Goods Sold (1,005) (1,071) (874) (13.0) (18.4)

Gross ProfitGross ProfitGross ProfitGross Profit 438438438438 369369369369 293293293293 (33.1)(33.1)(33.1)(33.1) (20.6)(20.6)(20.6)(20.6)

Other Oper. (Exp)/Inc (118) (87.7) (169) 43.1 92.6

Operating ProfitOperating ProfitOperating ProfitOperating Profit 320320320320 281281281281 124124124124 (61.2)(61.2)(61.2)(61.2) (55.8)(55.8)(55.8)(55.8)


Associates & JV Inc (22.2) (1.1) 24.6 nm nm

Net Interest (Exp)/Inc (53.1) (40.9) (13.9) 73.8 65.9

Exceptional Gain/(Loss) 0.0 133 0.0 nm nm

PrePrePrePre----tax Profittax Profittax Profittax Profit 245245245245 373373373373 135135135135 (44.9)(44.9)(44.9)(44.9) (63.8)(63.8)(63.8)(63.8)

Tax (93.4) (78.3) (92.9) (0.6) 18.7

Minority Interest (52.9) (38.1) 2.29 (104.3) (106.0)

Net ProfitNet ProfitNet ProfitNet Profit 98.398.398.398.3 256256256256 44.244.244.244.2 (55.0)(55.0)(55.0)(55.0) (82.7)(82.7)(82.7)(82.7)

Net profit bef Except. 98.3 123 44.2 (55.0) (64.0)

EBITDA 298 280 149 (50.0) (46.9)

Margins (%)






Company Guide

IJM Corp


Earnings Drivers:

Construction division never been stronger. Construction division never been stronger. Construction division never been stronger. Construction division never been stronger. IJM’s construction

division has never been stronger. Its current orderbook of

c.RM8.5bn has surpassed its peak of RM6.7bn in 2007 with the

recent MRT V203 win worth RM1.47bn. More importantly, the

quality of its orderbook is solid now with all local jobs and

anchored by the RM2.8bn West Coast Expressway project and

more recently MRT Line 2, V203 package worth RM1.47bn. This

compares to 2007 when half of its orderbook were legacy

overseas projects and raw material costs were also high.

More selective now. More selective now. More selective now. More selective now. We expect IJM to be more selective when

bidding for new projects given its peak orderbook. The

company is still eyeing various projects from the 11MP such as

more specialist works for DASH and SUKE, parts of Pan Borneo

Highway. Tenders for the remaining packages for WCE

(Packages 1, 2, 6, 7, 10 and 11) will commence from early 2016

onwards. It will also try to free capacity by accelerating progress

of works in order to capitalise on more flows and the benign

raw material environment. We also think it may get a decent

portion of works for the Penang Integrated Transport project as

and when it kicks off.

No more minority leakages for IJM Land. The privatisation

of IJM Land was completed in early April 2015. There was some

dilution from the exercise given the new share issuance of

279m shares would offset the minority interest savings. Over

the longer term, the privatisation will likely be accretive to IJM’s

SOP value given it still owns well-located township landbank in

the choice property states of Malaysia.

Manufacturing division to also benefit from surge in project Manufacturing division to also benefit from surge in project Manufacturing division to also benefit from surge in project Manufacturing division to also benefit from surge in project

flows. flows. flows. flows. IJM’s presence in the infrastructure space in Malaysia is

two-fold – construction, and manufacturing via Industrial

Concrete Products. With a 50% market share in the spun piles

market, we expect the latter to also benefit from projects such

as WCE and Kuantan Port.

Scomi overhangScomi overhangScomi overhangScomi overhang. IJM has raised its stake in Scomi via converting

the nominal value of RM110m of convertible redeemable

secured bonds. This brings its stake to 24.4% (RM0.365/Scomi

share) compared to its initial 7.7% stake (RM0.33/share) in late

2012. In our view, the conversion of the bonds to equity does

not represent IJM’s optimism in Scomi but one of lack of choice.

We understand IJM is taking a longer term on its oil and gas

exposure but for now it will have to equity account for its

24.4% stake.


Property profit contribution

Manufacturing profit contribution

Plantations profit contribution

New order wins


168185

171

226210

0

33

65

98

130

163

196

2014A 2015A 2016A 2017F 2018F

749

495

159217 223

0

153

305

458

611

764

2014A 2015A 2016A 2017F 2018F

146

126 124

143

164

0

33

67

100

134

167

2014A 2015A 2016A 2017F 2018F

109

89

50

171

212

0

43

86

128

171

214

2014A 2015A 2016A 2017F 2018F

238

2,914

950

1,500

2,500

0

589

1,177

1,766

2,355

2,943

2014A 2015A 2016A 2017F 2018F


Company Guide

IJM Corp

Balance Sheet:

Strong balance sheet. Strong balance sheet. Strong balance sheet. Strong balance sheet. IJM’s net gearing as at 31 March 2016

stood at 0.46x, with net debt of RM4.1bn. While this seems

high, about 81% of the outstanding debt is ring-fenced against

cash flows from its concession assets.

Special dividends? Special dividends? Special dividends? Special dividends? IJM has declared a special dividend of 3 sen

for FY16, bringing its total dividends to 10 sen. It also paid a

special dividend of 10 sen in 4QFY14 when it sold its stake in

Trichy highway, Kuantan Port and Kemaman Port.

Bonus issue. Bonus issue. Bonus issue. Bonus issue. IJM has completed a one-for-one bonus issue of up

to 1,793m shares which was capitalised from its share premium

account. This was completed in 3QCY15.

Share Price Drivers:Share Price Drivers:Share Price Drivers:Share Price Drivers:

Less leveraged bet to surge in project flows. Less leveraged bet to surge in project flows. Less leveraged bet to surge in project flows. Less leveraged bet to surge in project flows. Although IJM is a

conglomerate, its share price exhibits more correlation to news

of new contract wins. But IJM’s peak orderbook and more

diversified earnings base makes it a less leveraged proxy to the

expected surge in contract flows. It stands a good chance of

clinching works for other infra-related works such as LRT 3 but

that is not sufficient to change our view on the stock. We

estimate every RM1bn increase in new contract wins (vs our

base case) would only raise FY16F EPS by <2%.

Also a proxy to IJM Land. With the privatisation of IJM Land,

investors wanting exposure to its property arm will have to be

invested in IJM. Given the lack of listed large cap township

developers, IJM may also appeal when interest returns to the

property market.

Company Background

IJM is a conglomerate involved in construction, property

development, plantations, industrial products, toll concessions

and ports.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.2

0.2

0.2

0.3

0.3

0.3

0.3

0.3

0.4

0.4

0.4

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

2014A 2015A 2016A 2017F 2018F


0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

800.0

2014A 2015A 2016A 2017F 2018F


RMm

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2014A 2015A 2016A 2017F 2018F

Avg: 19.4x

+1sd: 24.1x

+2sd: 28.8x

-1sd: 14.7x

-2sd: 10x8.9

13.9

18.9

23.9

28.9


(x)

Avg: 1.55x

+1sd: 1.67x

+2sd: 1.8x

-1sd: 1.43x

-2sd: 1.3x

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9

2.0


(x)


Company Guide

IJM Corp

Key Assumptions

FY FY FY FY MarMarMarMar 2014201420142014AAAA 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF


168 185 171 226 210 Property profit contribution

749 495 159 217 223 Manufacturing profit contribution

146 126 124 143 164 Plantations profit contribution

109 89.4 50.4 171 212

New order wins 238 2,914 950 1,500 2,500

Segmental Breakdown


Revenues (RMm) Construction 1,802 950 1,414 2,823 2,644

Property 2,076 2,116 1,185 1,355 1,395

Manufacturing & quarry 884 922 980 1,078 1,186

Plantation 647 668 558 851 980

Others 598 792 992 1,091 1,200


PBT (RMm) Construction 168 185 171 226 210

Property 749 495 159 217 223

Manufacturing & quarry 146 126 124 143 164

Plantation 109 89.4 50.4 171 212

Others 244 125 651 136 143

TotalTotalTotalTotal 1,4161,4161,4161,416 1,0191,0191,0191,019 1,1561,1561,1561,156 893893893893 952952952952

PBT Margins (%) Construction 9.3 19.5 12.1 8.0 7.9

Property 36.1 23.4 13.4 16.0 16.0

Manufacturing & quarry 16.5 13.6 12.7 13.2 13.8

Plantation 16.9 13.4 9.0 20.1 21.6

Others 40.8 15.8 65.7 12.5 11.9

TotalTotalTotalTotal 23.623.623.623.6 18.718.718.718.7 22.522.522.522.5 12.412.412.412.4 12.912.912.912.9



Revenue 6,006 5,448 5,128 7,197 7,404


Gross ProfitGross ProfitGross ProfitGross Profit 1,6601,6601,6601,660 1,6811,6811,6811,681 1,4341,4341,4341,434 1,8121,8121,8121,812 1,9171,9171,9171,917

Other Opng (Exp)/Inc 128 (389) (434) (689) (715)

Operating ProfitOperating ProfitOperating ProfitOperating Profit 1,7881,7881,7881,788 1,2921,2921,2921,292 999999999999 1,1231,1231,1231,123 1,2021,2021,2021,202 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0

Associates & JV Inc (140) (30.3) 23.6 24.8 26.0


Exceptional Gain/(Loss) 0.0 0.0 302 0.0 0.0

PrePrePrePre----tax Profittax Profittax Profittax Profit 1,4161,4161,4161,416 1,0191,0191,0191,019 1,1561,1561,1561,156 893893893893 952952952952 Tax (341) (306) (274) (223) (238)

Minority Interest (246) (232) (88.0) (60.7) (75.0)



EBITDA 1,942 1,470 1,166 1,299 1,408

Growth Revenue Gth (%) 28.8 (9.3) (5.9) 40.3 2.9

EBITDA Gth (%) 64.7 (24.3) (20.7) 11.4 8.3

Opg Profit Gth (%) 75.4 (27.7) (22.7) 12.3 7.1

Net Profit Gth (Pre-ex) (%) 97.1 (42.0) 2.2 23.8 5.0




ROAE (%) 13.4 6.3 9.1 6.6 6.7

ROA (%) 4.9 2.5 4.0 3.0 3.0

ROCE (%) 9.3 5.4 4.4 4.7 4.9

Div Payout Ratio (%) 80.0 82.7 33.4 43.6 41.5




Company Guide

IJM Corp


FY FY FY FY MarMarMarMar 4Q4Q4Q4Q2015201520152015 1Q1Q1Q1Q2016201620162016 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016 4Q4Q4Q4Q2016201620162016

Revenue 1,443 1,182 1,339 1,440 1,167

Cost of Goods Sold (1,005) (811) (938) (1,071) (874)

Gross ProfitGross ProfitGross ProfitGross Profit 438438438438 371371371371 401401401401 369369369369 293293293293 Other Oper. (Exp)/Inc (118) (60.3) (117) (87.7) (169)


Associates & JV Inc (22.2) 0.62 (0.5) (1.1) 24.6


Exceptional Gain/(Loss) 0.0 169 0.0 133 0.0


Minority Interest (52.9) (33.7) (18.4) (38.1) 2.29

Net ProfitNet ProfitNet ProfitNet Profit 98.398.398.398.3 337337337337 156156156156 256256256256 44.244.244.244.2 Net profit bef Except. 98.3 168 156 123 44.2

EBITDA 298 311 283 280 149

Growth Revenue Gth (%) 7.7 (18.1) 13.3 7.5 (19.0)

EBITDA Gth (%) (11.9) 4.6 (9.1) (1.0) (46.9)

Opg Profit Gth (%) (3.1) (2.9) (8.8) (0.8) (55.8)

Net Profit Gth (Pre-ex) (%) (28.7) 71.1 (7.0) (21.5) (64.0)




Balance Sheet (RMm)


Net Fixed Assets 1,590 1,727 1,813 2,255 2,668


Other LT Assets 5,952 5,552 5,252 5,384 5,516

Cash & ST Invts 2,257 2,034 2,087 1,821 1,583

Inventory 593 784 1,092 1,311 1,573

Debtors 2,319 2,428 2,256 2,708 3,249



ST Debt 2,333 1,989 1,477 1,477 1,477

Creditor 2,095 2,020 2,258 2,710 3,252

Other Current Liab 127 291 35.0 35.0 35.0

LT Debt 3,274 4,158 4,334 4,484 4,634



Minority Interests 2,211 1,146 1,208 1,269 1,344



Net Cash/(Debt) (3,350) (4,114) (3,725) (4,140) (4,528)




Asset Turnover (x) 0.4 0.3 0.3 0.4 0.3

Current Ratio (x) 2.1 2.6 3.0 2.8 2.6

Quick Ratio (x) 1.0 1.0 1.2 1.1 1.0

Net Debt/Equity (X) 0.4 0.4 0.4 0.4 0.4


Capex to Debt (%) N/A 8.8 N/A 12.6 12.3

Z-Score (X) 2.0 1.8 1.8 1.8 1.7



Company Guide

IJM Corp



Pre-Tax Profit 1,416 1,019 1,156 893 952

Dep. & Amort. 154 178 166 176 205

Tax Paid (341) (306) (274) (223) (238)

Assoc. & JV Inc/(loss) 140 30.3 (23.6) (24.8) (26.0)

Chg in Wkg.Cap. (485) (376) 102 (218) (262)

Other Operating CF (569) 4.87 (368) 255 276

Net Operating CFNet Operating CFNet Operating CFNet Operating CF 316316316316 550550550550 758758758758 858858858858 908908908908 Capital Exp.(net) 530 (542) 458 (750) (750)

Other Invts.(net) (647) (236) (563) 0.0 0.0

Invts in Assoc. & JV (325) (149) 43.7 0.0 0.0

Div from Assoc & JV 16.5 11.2 8.76 0.0 0.0

Other Investing CF 89.8 99.4 (128) 0.0 0.0

Net Investing CFNet Investing CFNet Investing CFNet Investing CF (336)(336)(336)(336) (816)(816)(816)(816) (180)(180)(180)(180) (750)(750)(750)(750) (750)(750)(750)(750) Div Paid (234) (430) (328) (269) (269)

Chg in Gross Debt 1.39 625 (418) (105) (126)

Capital Issues 179 298 49.4 0.0 0.0

Other Financing CF 314 (417) (20.9) 0.0 0.0

Net Financing CFNet Financing CFNet Financing CFNet Financing CF 261261261261 76.576.576.576.5 (718)(718)(718)(718) (374)(374)(374)(374) (395)(395)(395)(395)


Chg in Cash 242 (189) (139) (266) (237)

Opg CFPS (sen) 22.3 25.8 18.3 30.0 32.6

Free CFPS (sen) 23.6 0.23 33.9 3.01 4.40








1: 27 May 15 3.51 3.88 HOLD

2: 10 Aug 15 3.28 3.88 HOLD

3: 26 Aug 15 3.05 3.13 HOLD

4: 25 Nov 15 3.35 3.30 HOLD

5: 26 Feb 16 3.40 3.30 HOLD

6: 13 May 16 3.55 3.30 HOLD


1

2

3

4

5

6

2.85

2.95

3.05

3.15

3.25

3.35

3.45

3.55

3.65

3.75

May-15 Sep-15 Jan-16 May-16

RMRMRMRM

ASIAN INSIGHTS VICKERS SECURITIES ed: TH / sa: BC

BUYLast Traded Price: RM1.79 (KLCI : 1,639.98) Price Target : RM2.38 (33% upside) (Prev RM2.38)

Potential Catalyst: Higher proportion if infra-related projects Where we differ: We are more optimistic premised on better orderbook replenishment and execution

Analyst Chong Tjen-San, CFA +60 3 26043972 [email protected]

Price Relative

Forecasts and Valuation FY Dec (RMm) 2015A 2016F 2017F 2018F Revenue 1,054 1,105 1,130 1,068 EBITDA 124 116 130 139 Pre-tax Profit 86.4 85.7 98.9 107 Net Profit 63.8 65.2 75.2 81.2 Net Pft (Pre Ex.) 70.7 65.2 75.2 81.2 Net Pft Gth (Pre-ex) (%) 56.8 (7.9) 15.4 7.9 EPS (sen) 21.2 21.7 25.0 27.0 EPS Pre Ex. (sen) 23.5 21.7 25.0 27.0 EPS Gth Pre Ex (%) 57 (8) 15 8 Diluted EPS (sen) 17.7 18.1 20.8 22.5 Net DPS (sen) 3.80 3.47 4.00 4.32 BV Per Share (sen) 153 171 192 215 PE (X) 8.4 8.3 7.2 6.6 PE Pre Ex. (X) 7.6 8.3 7.2 6.6 P/Cash Flow (X) 17.2 20.9 6.1 4.5 EV/EBITDA (X) 4.9 5.3 4.3 3.5 Net Div Yield (%) 2.1 1.9 2.2 2.4 P/Book Value (X) 1.2 1.0 0.9 0.8 Net Debt/Equity (X) 0.1 0.2 0.0 CASH ROAE (%) 14.8 13.4 13.8 13.3 Earnings Rev (%): 0 0 0 Consensus EPS (sen): 20.4 22.7 21.0 Other Broker Recs: B: 6 S: 0 H: 1


Gunning for more infra projects Cheapest infra stock to buy. Within our construction universe, Kimlun stands out as the most direct small cap proxy to MRT projects. Despite the strong earnings delivery and decent yields of c.1.9-2.4% with stronger order replenishment ahead, Kimlun is currently trading at a bargain valuation of 8.3x FY16F EPS.

Pan Borneo Highway contract award. We estimate its construction orderbook stands at RM1.48bn, inclusive of YTD wins of c.RM972m and the recent Pan Borneo Highway (PBH) contract. Its total orderbook including manufacturing is RM1.8bn. Of the RM1.48bn construction orderbook, we estimate about one-third is infra-related. We believe its exposure to the property market in Johor will be partially offset by more infra-related contract wins. Moreover, clinching the PBH contract worth RM1.46bn further validates its ability to potentially win more infra-related jobs. The contract was awarded for the development and upgrading work of the Serian to Pantu Junction roundabout, slated to complete by year 2020. Together with its JV partner Zecon Bhd, Kimlun will hold a 30% stake, implying its share is worth RM438m.

Most direct proxy to MRT. Kimlun has won a RM199m Segmental Box Girder (SBG) for MRT Line 2. We remain confident that it will clinch the Tunnel Lining Segment (TLS) works for MRT Line 2 whose contract value would be higher than those for MRT Line 1 of RM49m, as the tunnel is longer. MRT Line 1 is 51km long, of which 9.5km will be underground, while MRT Line 2 is 52.2km in length, of which 10.2km will be underground.

Valuation:

We maintain our target price of RM2.38, based on 11x FY16F PE. This is a tad below +1SD of its historical mean of 11.5x and 15% discount to the sector average. We think this is justified given its impeccable earnings delivery and its positioning as a direct MRT proxy.


Low-margin wins. The biggest risk is its perceived overreliance on projects in Johor. We think this is mitigated by its stringent bidding process where it only accepts projects from strong clients while also judging the saleability of the project.

At A Glance

Issued Capital (m shrs) 301 Mkt. Cap (RMm/US$m) 538 / 136 Major Shareholders (%) Phin Sdn Bhd 29.1 Tin Pang 6.3

Free Float (%) 64.6 3m Avg. Daily Val (US$m) 0.23 ICB Industry : Industrials / Construction & Materials



Kimlun Corp Version 5 | Bloomberg: KICB MK | Reuters: KICB.KL Refer to important disclosures at the end of this report

69

89

109

129

149

169

189

209

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4


Relative IndexRM

Kimlun Corp (LHS) Relative KLCI INDEX (RHS)


Company Guide

Kimlun Corp


Earnings Drivers:

Construction segment remains a key earnings driver. Kimlun’s construction arm made up 80-92% of revenue in FY07-FY15. It was the largest earnings contributor in FY11, peaking at 85% of the group’s gross profit. Group GP margins, however, hit a low of 9.5% in FY14 as margins had been declining over the years due to a larger share of Johor high-rise residential projects in the orderbook. Note that these projects have higher M&E portion, on which Kimlun only earns minimal margins.

More selective on jobs. Kimlun will be more selective on jobs in order to be less reliant on high-rise developments in Johor, which is currently seeing a surplus. The group is raising its exposure to the non-residential projects and will be bidding aggressively for more infrastructure projects. Given that it has a strong niche in TLS and SBG works in MRT projects, the group has won the SBG works for MRT2 and should win its portion of the TLS soon. Previously, for MRT1, it had secured c.50% market share based on overall contracts of RM272m (RM223: SBG and RM49m: TLS).

Manufacturing generates higher margins. Kimlun operates two manufacturing plants – in Ulu Choh in Johor, and a newer plant in Senawang, Seremban. It manufactures concrete products such as segmental box girders and other reinforced precast concrete products for the infrastructure and building sectors in Malaysia and Singapore. FY15 manufacturing segment margins recorded strong margins of 26%, buoyed by larger sales orders for jacking pipes and better TLS margins.

Property launches on the back burner. Kimlun launched a small property project in Pontian (GDV RM50m) comprising 131 units. Sales at its maiden property project called the Hyve in Cyberjaya (SOHO and offices; GDV RM235m) have achieved 82% take-up rate with RM6.7m worth of unbilled sales. The softening property market has prompted the group to defer the launch of its residential projects in Iskandar Medini (GDV RM447m) comprising 865 SOHO and retail units. It has also expanded its land bank with the recent purchase being Kota Tinggi Land (currently registered as agriculture land). This was purchased at just RM5psf before land conversion and spans some 141 acres.

Construction revenue

Concrete products revenue


Concrete products margins

Property margins


925857

905855

715

0

134

267

401

534

668

801

2014A 2015A 2016F 2017F 2018F

193 192 196

271

333

0

68

136

204

272

2014A 2015A 2016F 2017F 2018F

5.97

8.438 8 8

0.00

1.72

3.44

5.16

6.87

8.59

2014A 2015A 2016F 2017F 2018F

16.4

26.1

20 20 20

0.0

5.3

10.5

15.8

21.1

26.4

2014A 2015A 2016F 2017F 2018F

28.4

14

1110 10

0.0

5.7

11.5

17.2

22.9

28.6

2014A 2015A 2016F 2017F 2018F


Company Guide

Kimlun Corp

Balance Sheet:

As at 31 March 2016, the company had RM76m net debt, translating into 0.2x net gearing. There is minimal capex requirement going forward, with the completion of the Senawang plant. We estimate annual capex requirement at RM25m over the next few years. The company completed a one-for-four rights issue in March 2014.


MRT Line 2. Kimlun has already won a RM199m contract for SBG for MRT Line 2. It is expected to clinch its fair share of TLS where the contract value could be higher than that for MRT Line 1 as the rail is longer. MRT Line 1 is 51km long, of which 9.5km is underground, while MRT Line 2 is 52.2km in length, of which 10.2km will be underground. Kimlun has an outstanding order book of c.RM1.8bn (RM1.48bn construction, RM0.34bn manufacturing).

Capitalising on other infra-related projects. Its ability to win the PBH contract validates its potential to clinch more infra projects going forward. It has submitted the tender bid for Central Spine Road, both as a main and sub-contractor thus far. Apart from that, it is also tendering for DASH and SUKE highways for eight work packages in total. Kimlun is also raising its exposure to bid for non-residential projects, potentially venturing into the affordable residential jobs segment to ride on government initiatives to construct 1m units of affordable houses in the next five years.

Key Risks:

Rising material prices. A surge in raw material prices like cement and steel would potentially lead to margin erosion.

Delays in the award of contract. Any delay of government projects under the 11MP would possibly have an adverse impact on the group’s earnings performance.

Softening property market. A softening property market in Johor would slow down contract awards.

Company Background

Kimlun is primarily involved in construction and the manufacture of concrete products. Its construction division is mainly involved in building jobs for property developments in Johor, while its concrete products are mainly used in the construction of MRT lines.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.9

1.0

1.1

1.2

1.3

1.4

0.00

0.10

0.20

0.30

0.40

0.50

2014A 2015A 2016F 2017F 2018F


0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

2014A 2015A 2016F 2017F 2018F


RMm

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

2014A 2015A 2016F 2017F 2018F

Avg: 8.7x

+1sd: 11.4x

+2sd: 14x

‐1sd: 6x

‐2sd: 3.4x3.0

5.0

7.0

9.0

11.0

13.0

15.0

17.0

Jun-12 Jun-13 Jun-14 Jun-15

(x)

Avg: 1.31x

+1sd: 1.66x

+2sd: 2.02x

‐1sd: 0.96x

‐2sd: 0.6x0.5

1.0

1.5

2.0

2.5


(x)


Company Guide

Kimlun Corp

Key Assumptions

FY Dec 2014A 2015A 2016F 2017F 2018F

Construction revenue 925 857 905 855 715 Concrete products revenue 193 192 196 271 333 Construction margins 5.97 8.43 8.00 8.00 8.00 Concrete products margins 16.4 26.1 20.0 20.0 20.0 Property margins 28.4 14.0 11.0 10.0 10.0

Segmental Breakdown

FY Dec 2014A 2015A 2016F 2017F 2018F

Revenues (RMm)

Construction 925 857 905 855 715 Concrete products 193 192 196 271 333 Property 101 4.67 4.00 4.00 20.0 Investment 0.27 0.25 0.0 0.0 0.0 Total 1,220 1,054 1,105 1,130 1,068 Operating profit (RMm)

Construction 55.2 72.2 72.4 68.4 57.2 Concrete products 31.6 50.1 39.3 54.1 66.6 Property 28.7 0.65 0.44 0.40 2.00 Investment 0.27 0.25 0.0 0.0 0.0 Total 116 123 112 123 126 Operating profit Margins

Construction 6.0 8.4 8.0 8.0 8.0 Concrete products 16.4 26.1 20.0 20.0 20.0 Property 28.4 14.0 11.0 10.0 10.0 Investment 100.0 100.0 N/A N/A N/A Total 9.5 11.7 10.1 10.9 11.8


FY Dec 2014A 2015A 2016F 2017F 2018F

Revenue 1,220 1,054 1,105 1,130 1,068 Cost of Goods Sold (1,104) (931) (993) (1,007) (942) Gross Profit 115 123 112 123 126 Other Opng (Exp)/Inc (37.6) (20.1) (20.9) (21.7) (22.5) Operating Profit 77.8 103 91.3 101 103 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 0.0 0.0 3.78 7.56 13.9 Net Interest (Exp)/Inc (12.6) (9.5) (9.3) (9.9) (10.4) Exceptional Gain/(Loss) (10.8) (6.9) 0.0 0.0 0.0 Pre-tax Profit 54.4 86.4 85.7 98.9 107 Tax (16.1) (22.7) (20.6) (23.7) (25.6) Minority Interest (4.1) 0.0 0.0 0.0 0.0 Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 34.3 63.8 65.2 75.2 81.2 Net Profit before Except. 45.1 70.7 65.2 75.2 81.2 EBITDA 102 124 116 130 139 Growth

Revenue Gth (%) 28.8 (13.6) 4.9 2.2 (5.5) EBITDA Gth (%) 49.3 20.7 (6.0) 12.2 6.7 Opg Profit Gth (%) 56.7 32.1 (11.2) 10.9 2.1 Net Profit Gth (Pre-ex) (%) 26.3 56.8 (7.9) 15.4 7.9 Margins & Ratio

Gross Margins (%) 9.5 11.7 10.1 10.9 11.8 Opg Profit Margin (%) 6.4 9.8 8.3 9.0 9.7 Net Profit Margin (%) 2.8 6.1 5.9 6.7 7.6 ROAE (%) 9.8 14.8 13.4 13.8 13.3 ROA (%) 3.9 6.8 6.7 7.5 7.5 ROCE (%) 5.8 10.1 8.5 9.0 8.8 Div Payout Ratio (%) 26.3 17.9 16.0 16.0 16.0 Net Interest Cover (x) 6.2 10.9 9.8 10.3 9.9


ASIAN INSIGHTS VICKERS SECURITIES Page 5

Company Guide

Kimlun Corp


FY Dec 1Q2015 2Q2015 3Q2015 4Q2015 1Q2016

Revenue 322 258 241 232 235 Cost of Goods Sold (292) (231) (210) (197) (199) Gross Profit 30.2 27.5 30.8 34.5 35.9 Other Oper. (Exp)/Inc (8.5) (4.4) (1.7) (5.5) (11.0) Operating Profit 21.7 23.1 29.1 29.0 24.9 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (2.5) (2.3) (2.5) (2.3) (2.2) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 19.3 20.8 26.6 26.7 22.7 Tax (5.1) (5.2) (7.0) (5.3) (5.6) Minority Interest 0.0 0.0 0.0 0.0 0.0 Net Profit 14.1 15.6 19.6 21.4 17.1 Net profit bef Except. 14.1 15.6 19.6 21.4 17.1 EBITDA 27.7 28.2 39.9 39.0 29.8

Growth

Revenue Gth (%) 14.9 (19.8) (6.7) (3.8) 1.2 EBITDA Gth (%) 18.9 1.9 41.5 (2.1) (23.7) Opg Profit Gth (%) 27.9 6.1 26.1 (0.3) (14.1) Net Profit Gth (Pre-ex) (%) 54.2 10.5 25.8 9.2 (20.1) Margins

Gross Margins (%) 9.4 10.6 12.8 14.9 15.3 Opg Profit Margins (%) 6.7 8.9 12.1 12.5 10.6 Net Profit Margins (%) 4.4 6.0 8.1 9.2 7.3

Balance Sheet (RMm)

FY Dec 2014A 2015A 2016F 2017F 2018F

Net Fixed Assets 161 152 156 159 162 Invts in Associates & JVs 0.0 10.1 10.1 10.1 10.1 Other LT Assets 6.36 2.95 2.95 2.95 2.95 Cash & ST Invts 86.1 96.8 97.1 158 249 Inventory 21.1 21.5 21.8 22.1 20.7 Debtors 596 585 575 588 556 Other Current Assets 44.2 105 105 105 105 Total Assets 915 973 968 1,045 1,106

ST Debt 111 102 105 111 117 Creditor 325 342 272 276 258 Other Current Liab 6.75 7.05 7.05 7.05 7.05 LT Debt 67.8 62.7 69.8 73.8 77.8 Other LT Liabilities 0.0 0.0 0.0 0.0 0.0 Shareholder’s Equity 400 460 514 578 646 Minority Interests 4.19 0.0 0.0 0.0 0.0 Total Cap. & Liab. 915 973 968 1,045 1,106

Non-Cash Wkg. Capital 330 362 423 432 416 Net Cash/(Debt) (93.0) (67.7) (77.4) (26.8) 54.2 Debtors Turn (avg days) 175.8 204.6 191.6 188.0 195.5 Creditors Turn (avg days) 108.3 133.8 115.3 101.5 105.9 Inventory Turn (avg days) 6.4 8.5 8.1 8.1 8.5 Asset Turnover (x) 1.4 1.1 1.1 1.1 1.0 Current Ratio (x) 1.7 1.8 2.1 2.2 2.4 Quick Ratio (x) 1.5 1.5 1.8 1.9 2.1 Net Debt/Equity (X) 0.2 0.1 0.2 0.0 CASH Net Debt/Equity ex MI (X) 0.2 0.1 0.2 0.0 CASH Capex to Debt (%) 16.1 7.1 14.3 13.6 12.9 Z-Score (X) 2.9 2.8 3.1 3.1 3.1


ASIAN INSIGHTS VICKERS SECURITIES Page 6

Company Guide

Kimlun Corp


FY Dec 2014A 2015A 2016F 2017F 2018F

Pre-Tax Profit 65.2 93.4 85.7 98.9 107 Dep. & Amort. 24.7 20.9 21.2 21.7 22.1 Tax Paid (16.1) (22.7) (20.6) (23.7) (25.6) Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. (12.2) 27.8 (60.7) (9.3) 15.8 Other Operating CF 21.1 (88.0) 0.0 0.0 0.0 Net Operating CF 82.7 31.4 25.7 87.6 119 Capital Exp.(net) (28.9) (11.7) (25.0) (25.0) (25.0) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF 10.7 0.03 0.0 0.0 0.0 Net Investing CF (18.1) (11.7) (25.0) (25.0) (25.0) Div Paid (9.0) (11.4) (10.4) (12.0) (13.0) Chg in Gross Debt (56.1) (14.6) 10.0 10.0 10.0 Capital Issues 30.1 0.0 0.0 0.0 0.0 Other Financing CF 24.4 17.1 0.0 0.0 0.0 Net Financing CF (10.6) (8.9) (0.4) (2.0) (3.0) Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash 54.0 10.8 0.28 60.6 91.1 Opg CFPS (sen) 31.6 1.17 28.7 32.2 34.3 Free CFPS (sen) 17.9 6.53 0.23 20.8 31.3




S.No. DateClosing

PriceTarget Price

Rat ing

1: 20 Jul 15 1.39 2.05 BUY

2: 28 Aug 15 1.16 2.05 BUY

3: 25 Sep 15 1.22 2.05 BUY

4: 27 Nov 15 1.33 2.05 BUY

5: 15 Dec 15 1.40 2.05 BUY

6: 29 Feb 16 1.53 2.26 BUY

7: 02 Mar 16 1.59 2.26 BUY

8: 14 Mar 16 1.71 2.38 BUY

9: 30 Mar 16 1.83 2.38 BUY

10: 04 Apr 16 1.82 2.38 BUY

11: 04 May 16 1.79 2.38 BUY12: 31 May 16 1.77 2.38 BUY13: 03 Jun 16 1.78 2.38 BUY

Note : Share price and Target price are adjusted for corporate actions.

1

2

3

45

6

7

8 9

10

11

12

13

1.00

1.20

1.40

1.60

1.80

2.00

Jun-15 Oct-15 Feb-16 Jun-16

RM


ed: TH / sa: BC

BUYBUYBUYBUYLast Traded Price: Last Traded Price: Last Traded Price: Last Traded Price: RM2.20 (KLCIKLCIKLCIKLCI : : : : 1,639.98) Price Target :Price Target :Price Target :Price Target : RM3.10 (41% upside)

Potential Catalyst: Potential Catalyst: Potential Catalyst: Potential Catalyst: Chunkier higher-margin wins

Where we differWhere we differWhere we differWhere we differ:::: Our earnings are below consensus as we have

factored in the potential private placement

Analyst Chong Tjen-San, CFA +60 3 26043972 [email protected]

Price Relative

Forecasts and Valuation FY FY FY FY DecDecDecDec ((((RMRMRMRMmmmm) ) ) ) 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF

Revenue 1,605 1,754 1,781 1,707 EBITDA 251 225 251 267 Pre-tax Profit 165 149 177 195 Net Profit 86.0 99.8 117 128 Net Pft (Pre Ex.) 86.0 99.8 117 128 Net Pft Gth (Pre-ex) (%) 5.4 16.1 17.1 9.7 EPS (sen) 18.2 20.7 22.6 24.7 EPS Pre Ex. (sen) 18.2 20.7 22.6 24.7 EPS Gth Pre Ex (%) 5 13 9 10 Diluted EPS (sen) 18.2 20.7 22.6 24.7 Net DPS (sen) 3.98 4.13 4.51 4.95 BV Per Share (sen) 175 199 204 224 PE (X) 12.1 10.6 9.8 8.9 PE Pre Ex. (X) 12.1 10.6 9.8 8.9 P/Cash Flow (X) 33.7 13.7 9.4 7.1 EV/EBITDA (X) 7.9 9.0 8.3 7.6 Net Div Yield (%) 1.8 1.9 2.1 2.2 P/Book Value (X) 1.3 1.1 1.1 1.0 Net Debt/Equity (X) 0.6 0.5 0.4 0.3 ROAE (%) 11.7 11.2 11.6 11.6

Earnings Rev (%):Earnings Rev (%):Earnings Rev (%):Earnings Rev (%): 0 0 0 Consensus EPS Consensus EPS Consensus EPS Consensus EPS (sen):::: 22.0 25.3 29.5

Other Broker Recs:Other Broker Recs:Other Broker Recs:Other Broker Recs: B: 6 S: 0 H: 0


Scarcity premium infra proxy Scarcity premiumScarcity premiumScarcity premiumScarcity premium. Muhibbah is an ideal proxy to the 11th

Malaysian Plan given its expertise in three core areas: i) civil

engineering; ii) marine-based construction, and iii) offshore

and onshore fabrication works, where its Petronas licence

offers an advantage. Other contractors do not have this

combination to vie in the competitive civil engineering space.

Cash cow: Cambodia airport concession.Cash cow: Cambodia airport concession.Cash cow: Cambodia airport concession.Cash cow: Cambodia airport concession. Siam Reap and

Phnom Penh airports have doubled their capacity to 12m

passengers. Passenger arrivals grew 13% to 6.5m in FY15. We

estimate its 21% stake in the Cambodia airport concession is

worth RM677m (DCF, WACC 10%, RM/USD 4.15, and

average passenger traffic growth of 5% p.a. until 2040),

which is already 63% of the stock’s market capitalisation.

Revenues are also in USD which is a boost to its earnings given

the weak MYR.

Good start for 2016Good start for 2016Good start for 2016Good start for 2016. Contract flows so far for 2016 have been

promising. For its infrastructure division, it has won two

contracts, a RM137m building contract from PETRONAS

Carigali, in which it has a 70% stake, implying a contract value

of RM96m and a smallish contract for the Phnom Penh airport

expansion. For its shipyard division, it clinched a RM92m

contact win from the Ministry of Transport to undertake the

design and construction of a multi-purpose vessel for the

Malaysia Marine Department. Its total outstanding orderbook

is now RM2.1bn, of which RM1.4bn comes from

infrastructure.

Valuation:

Muhibbah is a BUY with a SOP-derived TP of RM3.10. We

value the stock based on SOP as we think this better reflects its

diversified business while also capturing its cash-generating

Cambodian concession.


Delays in project flows and sudden spikes in raw material costs

could dampen its earnings outlook.

At A Glance Issued Capital (m shrs) 472

Mkt. Cap (RMm/US$m) 1,039 / 263


Mac Ngan Boon 22.1

Lembaga Tabung Haji 9.6

Free Float (%) 60.7





Muhibbah Engineering Version 5 | Bloomberg: MUHI MK | Reuters: MUHI.KL Refer to important disclosures at the end of this report

57

107

157

207

257

0.7

1.2

1.7

2.2

2.7

3.2

3.7


Relative IndexRM

Muhibbah Engineering (LHS) Relative KLCI INDEX (RHS)


Page 2

Company Guide

Muhibbah Engineering


Earnings Drivers:

Stronger earnings growth ahead.Stronger earnings growth ahead.Stronger earnings growth ahead.Stronger earnings growth ahead. We expect Muhibbah to deliver

stronger earnings growth in FY16. With its Petronas licence and

marine-based expertise, Muhibbah is poised to clinch more RAPID

contracts in 2016. Within our construction universe, Muhibbah

stands out as an excellent proxy to the 11MP projects. Given that

we are at the start of an upswing for construction awards, we

expect new job wins to kick in significantly in 2H16. Overall

orderbook stood at RM2.1bn (as at May 2016). We believe this will

grow further on the back of its strong execution track record while

also anchored by its ability to replenish its orderbook.

Infrastructure division most promising.Infrastructure division most promising.Infrastructure division most promising.Infrastructure division most promising. Muhibbah believes the

infrastructure sector is on a multi-year upcycle with potentially

RM153bn worth of projects up for grabs (RM100bn RAPID,

RM50bn Infrastructure Construction and RM3bn Marine/Ports).

Muhibbah will be bidding for major projects such as RAPID, MRT

Line 2 and WCE, and is quietly confident of clinching other marine-

based projects. So far, 2016 has gotten off to a decent start with

two wins – one from Petronas Carigali and the other for Phnom

Penh airport expansion.

Cambodia airports to double capacity.Cambodia airports to double capacity.Cambodia airports to double capacity.Cambodia airports to double capacity. Effective July, the Siam Reap

and Phnom Penh airports will double their existing capacity to 12m

passengers. The US$85m capex has been financed by only one year

of operating cashflow, which suggests the airports are cash cows.

Passenger arrivals reached 6.5m in 2015 (+13 % y-o-y), led by the

recovery in Chinese tourists. We estimate its 21% stake is worth

RM677m (DCF, WACC 10%, RM/USD 4.15, and average passenger

growth of 5% p.a. until 2040).

Favco capitalising on other revenue streams.Favco capitalising on other revenue streams.Favco capitalising on other revenue streams.Favco capitalising on other revenue streams. Total outstanding

orderbook now stands at RM604m (as at May 2016) which is

sufficient for earnings visibility until early 2017. Out of this amount,

84% is still from offshore cranes (vs peak of 95%). The slowdown

in offshore crane demand is expected to be partly compensated by

an increase in demand for tower cranes. Locally, Favelle Favco has

won a RM30m contract from UEM-Samsung to build KL 118. Note

that Favelle Favco's cranes have been used to build 12 out of the

14 tallest buildings in the world. We understand there may be M&A

opportunities given its strong balance sheet with net cash of

RM270m as at 31 December 2015.

Construction revenue contribution

Cranes revenue contribution

Shipyard revenue contribution

New orders for construction

New orders for cranes


1,082

1,330

1,2031,161

1,025

0

192

384

576

768

959

1,151

1,343

2014A 2015A 2016F 2017F 2018F

798 792

358

443 460

0

163

326

488

651

814

2014A 2015A 2016F 2017F 2018F

223

51

193178

223

0

45

91

136

182

227

2014A 2015A 2016F 2017F 2018F

539

1,267

772850

1000

0

256

512

768

1,024

1,280

2014A 2015A 2016F 2017F 2018F

435

139

250

400

450

0

91

182

273

364

455

2014A 2015A 2016F 2017F 2018F


Company Guide


Balance Sheet:

Needs bigger balance sheet. Needs bigger balance sheet. Needs bigger balance sheet. Needs bigger balance sheet. Muhibbah’s shareholder’s funds as at

31 March 2016 stood at RM1.1bn (including minority interest). The

proposed private placement of up to 10% of new shares will help

Muhibbah strengthen its capital base. This will help bring net

gearing down to c.0.5x from 0.6x as at December 2015, while its

cash-generating Cambodia airport concession should provide

adequate cash flow. Based on the minimum and maximum

scenario, this is expected to raise up to RM109-112m. The majority

of the proceeds amounting to RM75m will be used to pare down

borrowings while the balance will be for working capital purposes.


Complete proxy to Malaysia infrastructure. Complete proxy to Malaysia infrastructure. Complete proxy to Malaysia infrastructure. Complete proxy to Malaysia infrastructure. Muhibbah is a complete

proxy to the Malaysian infrastructure space because of its

experience in bread-and-butter civil engineering works, as well as

niche marine infrastructure, and onshore and offshore fabrication

works. Hence, we expect it to clinch works from RAPID, MRT Line

2, LRT 3, highway and port projects.

Premium for recurring base.Premium for recurring base.Premium for recurring base.Premium for recurring base. In our view, the market continues to

discount the strong cash flow of its concession business, particularly

the Cambodian airport concession. Contractors which have a

higher degree of relatively assured income such as IJM and

Gamuda, which own sizeable toll portfolios, should command

premium valuations.

CapitaliCapitaliCapitaliCapitalising on Petronas Fabrication Licensing on Petronas Fabrication Licensing on Petronas Fabrication Licensing on Petronas Fabrication Licencccce.e.e.e. Muhibbah was

awarded the much sought-after Petronas licence to take on

offshore facility construction and major onshore fabrication works.

This suggests better opportunities to bag more Petronas-related

jobs (downstream works). It has a 57-acre fabrication yard with a

total capacity of 25,000 MT per year, making it the third largest

among Petronas-licensed fabricators.

Completed landmark projects. Completed landmark projects. Completed landmark projects. Completed landmark projects. Muhibbah has an impressive track

record, having completed a list of landmark projects locally and

abroad. Of significance is the LNG Regasification project for

Petronas Gas in Melaka and South Klang Valley Expressway.

Key Risks:

Delays in project flows and sudden spikes in raw material costs

could dampen its earnings outlook.

Company Background

Muhibbah is primarily involved in construction, fabrication of cranes

and shipbuilding. These three core divisions cater largely for the

O&G sector. It also holds a 21% associate stake in two concessions,

namely the Cambodian airports and Federal road maintenance in

Malaysia.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.4

0.4

0.4

0.5

0.5

0.5

0.5

0.5

0.6

0.6

0.6

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

2014A 2015A 2016F 2017F 2018F


0.0

10.0

20.0

30.0

40.0

50.0

60.0

2014A 2015A 2016F 2017F 2018F


RMm

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2014A 2015A 2016F 2017F 2018F

Avg: 11x

+1sd: 15.1x

+2sd: 19.2x

-1sd: 6.9x

-2sd: 2.8x2.5

4.5

6.5

8.5

10.5

12.5

14.5

16.5

18.5

20.5


(x)

Avg: 1.56x

+1sd: 2.06x

+2sd: 2.57x

-1sd: 1.05x

-2sd: 0.54x0.4

0.9

1.4

1.9

2.4

2.9


(x)


Company Guide


Key Assumptions

FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF

Construction revenue contribution

1,082 1,330 1,203 1,161 1,025

Cranes revenue contribution 798 792 358 443 460

Shipyard revenue contribution 223 50.5 193 178 223

New orders for construction 539 1,267 772 850 1,000

New orders for cranes 435 139 250 400 450

Segmental Breakdown


Revenues (RMm) Construction 1,082 1,330 1,203 1,161 1,025

Cranes 798 792 358 443 460

Ships 223 50.5 193 178 223

Inter-segment (369) (568) 0.0 0.0 0.0




Revenue 1,734 1,605 1,754 1,781 1,707


Gross ProfitGross ProfitGross ProfitGross Profit 254254254254 262262262262 231231231231 258258258258 266266266266 Other Opng (Exp)/Inc (131) (138) (135) (146) (147)

Operating ProfitOperating ProfitOperating ProfitOperating Profit 123123123123 124124124124 96.396.396.396.3 113113113113 120120120120 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0

Associates & JV Inc 49.2 62.2 65.3 73.1 79.7






Net ProfitNet ProfitNet ProfitNet Profit 81.681.681.681.6 86.086.086.086.0 99.899.899.899.8 117117117117 128128128128 Net Profit before Except. 81.6 86.0 99.8 117 128

EBITDA 228 251 225 251 267

Growth Revenue Gth (%) (10.5) (7.4) 9.3 1.6 (4.2)

EBITDA Gth (%) 10.9 10.1 (10.3) 11.6 6.1

Opg Profit Gth (%) 17.2 0.5 (22.1) 17.1 6.3

Net Profit Gth (Pre-ex) (%) (5.6) 5.4 16.1 17.1 9.7




ROAE (%) 13.5 11.7 11.2 11.6 11.6

ROA (%) 2.8 2.5 2.8 3.4 3.6

ROCE (%) 2.8 2.8 3.5 4.2 4.6

Div Payout Ratio (%) 23.4 21.8 20.0 20.0 20.0




Company Guide




Revenue 363 410 394 432 482

Other Oper. (Exp)/Inc (337) (378) (354) (403) (464)

Operating ProfitOperating ProfitOperating ProfitOperating Profit 26.326.326.326.3 32.232.232.232.2 39.539.539.539.5 29.029.029.029.0 18.118.118.118.1 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0




PrePrePrePre----tax Profittax Profittax Profittax Profit 39.639.639.639.6 37.437.437.437.4 50.550.550.550.5 41.041.041.041.0 34.034.034.034.0 Tax (7.6) (11.2) (11.1) (1.5) (8.1)


Net ProfitNet ProfitNet ProfitNet Profit 23.323.323.323.3 19.319.319.319.3 23.023.023.023.0 20.120.120.120.1 23.823.823.823.8 Net profit bef Except. 23.3 19.3 23.0 20.1 23.8

EBITDA 59.7 56.4 65.9 62.9 36.5

Growth Revenue Gth (%) (20.4) 13.0 (4.1) 9.7 11.6

EBITDA Gth (%) (12.3) (5.6) 16.8 (4.6) (42.0)

Opg Profit Gth (%) (19.3) 22.5 22.8 (26.6) (37.5)

Net Profit Gth (Pre-ex) (%) 15.3 (17.3) 19.4 (12.8) 18.3

Margins Opg Profit Margins (%) 7.2 7.8 10.0 6.7 3.8


Balance Sheet (RMm)


Net Fixed Assets 725 785 819 798 776

Invts in Associates & JVs 236 257 318 386 461

Other LT Assets 31.0 52.8 52.8 52.8 52.8

Cash & ST Invts 601 578 522 583 681

Inventory 226 301 250 250 257

Debtors 1,334 1,601 1,441 1,464 1,403

Other Current Assets 12.5 18.1 18.1 18.1 18.1


ST Debt 1,168 1,221 1,146 1,146 1,146

Creditor 966 1,136 876 876 829

Other Current Liab 38.8 33.6 33.6 33.6 33.6

LT Debt 69.3 48.9 48.9 48.9 48.9

Other LT Liabilities 61.9 64.2 64.2 64.2 64.2

Shareholder’s Equity 644 826 960 1,056 1,161



Non-Cash Wkg. Capital 567 751 800 823 815

Net Cash/(Debt) (636) (692) (673) (612) (514)




Asset Turnover (x) 0.6 0.5 0.5 0.5 0.5

Current Ratio (x) 1.0 1.0 1.1 1.1 1.2

Quick Ratio (x) 0.9 0.9 1.0 1.0 1.0

Net Debt/Equity (X) 0.7 0.6 0.5 0.4 0.3


Capex to Debt (%) 4.6 4.3 3.3 3.3 3.3

Z-Score (X) 1.2 1.1 1.2 1.3 1.4



Company Guide




Pre-Tax Profit 144 165 149 177 195

Dep. & Amort. 55.8 65.2 63.7 65.5 67.3

Tax Paid (24.8) (27.8) (20.9) (26.0) (28.9)

Assoc. & JV Inc/(loss) (49.2) (62.2) (65.3) (73.1) (79.7)

Chg in Wkg.Cap. (258) (174) (48.8) (22.5) 7.35

Other Operating CF 59.9 64.1 0.0 0.0 0.0

Net Operating CFNet Operating CFNet Operating CFNet Operating CF (72.9)(72.9)(72.9)(72.9) 30.830.830.830.8 77.777.777.777.7 121121121121 161161161161 Capital Exp.(net) (56.6) (54.1) (40.0) (40.0) (40.0)

Other Invts.(net) 0.0 0.0 0.0 0.0 0.0

Invts in Assoc. & JV (45.6) 0.0 0.0 0.0 0.0

Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0


Net Investing CFNet Investing CFNet Investing CFNet Investing CF (35.6)(35.6)(35.6)(35.6) 6.566.566.566.56 (40.0)(40.0)(40.0)(40.0) (40.0)(40.0)(40.0)(40.0) (40.0)(40.0)(40.0)(40.0) Div Paid (18.9) (19.1) (18.7) (20.0) (23.4)

Chg in Gross Debt 362 32.9 (75.0) 0.0 0.0

Capital Issues (13.7) 19.6 0.0 0.0 0.0

Other Financing CF (46.4) (93.5) 0.0 0.0 0.0

Net Financing CFNet Financing CFNet Financing CFNet Financing CF 283283283283 (60.2)(60.2)(60.2)(60.2) (93.7)(93.7)(93.7)(93.7) (20.0)(20.0)(20.0)(20.0) (23.4)(23.4)(23.4)(23.4)


Chg in Cash 175 (22.8) (56.1) 61.2 97.9

Opg CFPS (sen) 39.3 43.4 26.2 27.7 29.7

Free CFPS (sen) (27.5) (5.0) 7.80 15.7 23.4








1: 21 Jul 15 2.28 3.40 BUY

2: 01 Sep 15 1.79 2.90 BUY

3: 04 Sep 15 1.93 2.90 BUY

4: 30 Nov 15 2.23 2.90 BUY

5: 15 Dec 15 2.22 2.90 BUY

6: 14 Jan 16 2.36 2.90 BUY

7: 01 Mar 16 2.25 2.90 BUY

8: 04 Apr 16 2.37 2.90 BUY

9: 04 May 16 2.28 2.90 BUY

10: 12 May 16 2.27 3.10 BUY

11: 01 Jun 16 2.14 3.10 BUY

12: 03 Jun 16 2.25 3.10 BUY


1

23

4 5

6

7

8

9

10

11

12

1.53

1.73

1.93

2.13

2.33

2.53


RMRMRMRM

ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa: MA

BUYLast Traded Price: Rp3,940 (JCI : 4,980.11) Price Target : Rp4,600 (17% upside)

Potential Catalyst: Award of large-sized, multi-year contracts Where we differ: Broadly in line with consensus

Analyst Chong Tjen-San +60 3 26043972 [email protected] Tiesha Putri +6221 30034931 [email protected]

Price Relative

Forecasts and Valuation FY Dec (Rpbn) 2015A 2016F 2017F 2018F Revenue 14,217 20,089 24,005 27,787 EBITDA 1,677 2,202 2,728 3,208 Pre-tax Profit 1,288 1,634 2,060 2,455 Net Profit 740 889 1,129 1,353 Net Pft (Pre Ex.) 740 889 1,129 1,353 Net Pft Gth (Pre-ex) (%) 38.8 20.0 27.1 19.8 EPS (Rp) 153 183 233 279 EPS Pre Ex. (Rp) 153 183 233 279 EPS Gth Pre Ex (%) 39 20 27 20 Diluted EPS (Rp) 153 183 233 279 Net DPS (Rp) 30.6 36.7 46.6 55.9 BV Per Share (Rp) 905 1,058 1,254 1,487 PE (X) 25.8 21.5 16.9 14.1 PE Pre Ex. (X) 25.8 21.5 16.9 14.1 P/Cash Flow (X) 38.0 87.9 39.2 23.3 EV/EBITDA (X) 12.0 10.1 8.5 7.6 Net Div Yield (%) 0.8 0.9 1.2 1.4 P/Book Value (X) 4.4 3.7 3.1 2.6 Net Debt/Equity (X) 0.1 0.4 0.5 0.5 ROAE (%) 22.0 18.7 20.2 20.4 Earnings Rev (%): 0 0 0 Consensus EPS (Rp): 192 242 304 Other Broker Recs: B: 21 S: 0 H: 1

Source of all data: Company, AllianceDBS Research, DBS Vickers, Bloomberg Finance L.P

Gaining ground Maintain BUY; top pick in construction sector. We like PTPP for its good execution track record and niche in port construction. New contract wins have started to catch up in June. We expect a stronger order book replenishment and earnings growth in the coming quarters as SOEs and government ramp up capex. Meanwhile, the parliament’s recent approval of the Rp2.25tr capital injection would support earnings growth from 2017 onwards. The capital spending of Pelindo I to IV would be important to monitor, as it may provide upside potential to PTPP’s FY16 contract wins guidance of Rp31tr. New contracts make up 35% of management’s full-year target. PTPP won Rp3.6tr worth of new contracts in the first half of June, bringing its new contract wins to Rp10.8tr. The company expects new contracts to reach Rp12tr-13tr by the end of June, representing 40% of full-year target. PTPP is also the lowest bidder for Balikpapan-Samarinda and Manado-Bitung toll road’s construction work worth Rp4tr. This win is relatively assured as PTPP also owns minority stakes (15%) in the toll road concession. A ‘safer’ business model. Although the trend of contractors investing in infrastructure assets has become evident of late, PTPP sticks to its initial strategy, which is to be very selective in bidding for equity participation with the focus being on ports and power plants. While pursuing such a strategy saves PTPP from balance sheet risk and start-up losses, this also makes PTPP more dependent on the capex budget of the government and SOEs. On the positive side, the company’s large backlog of Rp44tr (2.2x our FY16F revenue) and sound track record in project delivery should provide a strong footing for PTPP in meeting our earnings growth forecast of 21% y-o-y in FY16.

Valuation:

We peg our TP to 25x FY16 EPS (+0.7SD of historical PE mean since 2012).


Prolonged slowdown in property sector. PTPP has both direct and indirect exposure to the property sector. A prolonged slowdown in the economy and demand for property can negatively impact earnings and cash flows.

At A Glance

Issued Capital (m shrs) 4,842 Mkt. Cap (Rpbn/US$m) 19,079 / 1,453 Major Shareholders (%) Republic of Indonesia (%) 51.0

Free Float (%) 49.03m Avg. Daily Val (US$m) 1.8 ICB Industry : Industrials / Construction & Materials


Indonesia Company Guide

PT PP (Persero) Version 3 | Bloomberg: PTPP IJ | Reuters: PTPP.JK Refer to important disclosures at the end of this report

81

181

281

381

481

581

504.0

1,004.0

1,504.0

2,004.0

2,504.0

3,004.0

3,504.0

4,004.0

4,504.0


Relative IndexRp

Pembangunan Perumahan (LHS) Relative JCI INDEX (RHS)


Company Guide

PT PP (Persero)


Earnings Drivers:

Redirecting focus to government-related infrastructure projects. Approximately 25% of PTPP’s Rp41tr backlog came from private property developers. The project execution may be slower amid the still subdued property market, therefore affecting the company’s contract burn rate and earnings negatively. Management expects a larger contribution of government’s infrastructure projects this year with a mix of 77%:23% between government-related and private projects vs. 63%:37% booked in FY15. As government-related infrastructure projects typically command a higher margin compared to private developers’ property projects, this opens up the possibility of margin expansion in the future.

Beneficiary of Indonesia port build-out. PTPP has over the years developed a niche in port construction in Indonesia. According to Bapennas, Indonesia would need as much as Rp59tr to develop and expand 24 ports from 2015-2019. Among the largest projects are the multi-year expansions of Kuala Tanjung port (Rp18.4tr) and Tanjung Perak port (Rp8.6tr). Both ports were initially built by PTPP, hence increasing the company's competitive edge to secure the work contracts once the projects are tendered out. This year, Pelindo I-IV, the state-run port operators that will carry out a significant part of the government’s port development plan, have allocated a capex of Rp14tr for port expansion.

Capital injection overhang lifted; planned rights issue should support earnings outlook from 2017 onwards. The parliament recently approved the capital injection budget to a number of SOEs, including PTPP which amounts to Rp2.25tr. The capital injection would be executed through a rights issue (likely in 4Q16), hence allowing minority investors to maintain its ownership in the company. The rights issue proceeds will be used to fund PTPP’s equity investment in infrastructure projects, among which are Kuala Tanjung Multi Purpose Terminal, Balikpapan-Samarinda toll road, Manado-Bitung toll road, Pandaan-Malang toll road and a 2x200MW power plant in Sumatra.

New Contract Win (Rp bn)

Carry over contract (Rp bn)

Blended gross margin (%)

Source: Company, AllianceDBS Research, DBS Vickers

20,240

27,07429,876

33,901

38,667

0

5,579

11,158

16,737

22,316

27,895

33,474

39,053

2014A 2015A 2016F 2017F 2018F

22,278

29,867

39,140

48,927

58,823

0

12,000

24,000

36,000

48,000

60,000

2014A 2015A 2016F 2017F 2018F

13.914.7

12.713.2 13.4

0.0

3.0

6.0

9.0

12.0

15.0

2014A 2015A 2016F 2017F 2018F

44% 51% 46%

19% 11% 32%

37% 39% 23%

FY15A 1Q16A FY16 target

SOE Government Private

849 1,650

4,170

6,000

7,200

10,800

3% 5%

13%

19% 23%

35%

-

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

-

2,000

4,000

6,000

8,000

10,000

12,000

1M16 2M16 3M16 4M16 5M16 up to

2nd week of

June

PTPP's new contracts (Rp bn) as % of FY16 target


Company Guide

PT PP (Persero)

Balance Sheet:

Strong balance sheet enables company to take up more projects. As at the end of Mar 2016, PTPP was in a net debt position of Rp2.8tr, translating into a net gearing of 0.5x. PTPP’s FY16 capex budget is also relatively low compared to peers at Rp2.8tr (of which Rp1.3tr will be allocated to its property arm), therefore the company still has ample room for new borrowings.


Award of a large-sized, multi-year infrastructure contract. The awards of large-sized, multi-year contracts will further improve PTPP’s revenue and earnings visibility, and ultimately lead to the re-rating of its share price.

Passing of tax amnesty bill. The tax amnesty plan should bring in extra revenue for the government and help to fund its infrastructure development plan.

Key Risks:

Slowdown in property sector. PTPP’s exposure to the property sector has increased notably with net profit contribution from the property arm at 26% in FY15. As at the end of Feb 2016, 25% of PTPP’s outstanding order book (c.Rp10tr) came from private developers. A prolonged slowdown in the property market may pose risks to PTPP’s earnings and cash flows.

Earnings dilution due to rights issue. PTPP is entitled to obtain a Rp2.25tr capital injection from the government this year. This will be done through a rights issue where the company may raise up to Rp4.4tr from the government and minority shareholders, with the amount representing 24% of its market capitalisation.

Company Background

PT PP is Indonesia's leading construction company whose portfolio ranges from building engineering to infrastructure construction. It has established a solid reputation in the construction of high-rise buildings and ports.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.8

0.8

0.8

0.9

0.9

0.9

0.9

0.9

1.0

1.0

1.0

0.00

0.20

0.40

0.60

0.80

1.00

1.20

2014A 2015A 2016F 2017F 2018F


0.0

500.0

1,000.0

1,500.0

2,000.0

2,500.0

2014A 2015A 2016F 2017F 2018F


Rpm

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2014A 2015A 2016F 2017F 2018F

Avg: 16.1x

+1sd: 21.3x

+2sd: 26.5x

‐1sd: 10.9x

‐2sd: 5.7x5.1

10.1

15.1

20.1

25.1


(x)

Avg: 4.17x

+1sd: 5.61x

+2sd: 7.05x

‐1sd: 2.73x

‐2sd: 1.28x1.1

2.1

3.1

4.1

5.1

6.1

7.1

8.1


(x)

Rpbn


Company Guide

PT PP (Persero)

Key Assumptions

FY Dec 2014A 2015A 2016F 2017F 2018F

New Contract Win (Rp bn) 20,240 27,074 29,876 33,901 38,667 Carry over contract (Rp 22,278 29,867 39,140 48,927 58,823 Blended gross margin (%) 13.9 14.7 12.7 13.2 13.4

Segmental Breakdown

FY Dec 2014A 2015A 2016F 2017F 2018F

Revenues (Rpbn)

Construction 10,662 11,611 16,252 18,205 20,238 Real Estate and Property 645 1,573 1,925 2,258 2,845 EPC 1,091 928 1,802 3,426 4,581 Others 29.3 106 111 117 122 Total 12,427 14,217 20,089 24,005 27,787 Gross Profit (Rpbn) Construction 1,414 1,244 1,788 2,003 2,226 Real Estate and Property 267 680 551 695 875 EPC 143 206 216 463 619 Others (91.8) (46.2) 0.0 0.0 0.0 Total 1,732 2,085 2,555 3,160 3,720 Gross Profit Margins (%) Construction 13.3 10.7 11.0 11.0 11.0 Real Estate and Property 41.3 43.3 28.6 30.8 30.8 EPC 13.1 22.2 12.0 13.5 13.5 Others (313.1) (43.7) 0.0 0.0 0.0 Total 13.9 14.7 12.7 13.2 13.4

Income Statement (Rpbn)

FY Dec 2014A 2015A 2016F 2017F 2018F

Revenue 12,427 14,217 20,089 24,005 27,787 Cost of Goods Sold (10,878) (12,210) (17,535) (20,845) (24,067) Gross Profit 1,550 2,007 2,555 3,160 3,720 Other Opng (Exp)/Inc (281) (410) (465) (566) (668) Operating Profit 1,268 1,597 2,089 2,593 3,052 Other Non Opg (Exp)/Inc (94.2) (50.5) 0.0 0.0 0.0 Associates & JV Inc 72.4 67.0 70.3 73.8 77.5 Net Interest (Exp)/Inc (326) (326) (526) (608) (674) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 921 1,288 1,634 2,060 2,455 Tax (387) (442) (618) (765) (894) Minority Interest (0.1) (105) (127) (166) (209) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 533 740 889 1,129 1,353 Net Profit before Except. 533 740 889 1,129 1,353 EBITDA 1,326 1,677 2,202 2,728 3,208 Growth

Revenue Gth (%) 6.6 14.4 41.3 19.5 15.8 EBITDA Gth (%) 22.1 26.5 31.3 23.9 17.6 Opg Profit Gth (%) 18.2 25.9 30.8 24.1 17.7 Net Profit Gth (Pre-ex) (%) 26.8 38.8 20.0 27.1 19.8 Margins & Ratio




Company Guide

PT PP (Persero)

Quarterly / Interim Income Statement (Rpbn)

FY Dec 1Q2015 2Q2015 3Q2015 4Q2015 1Q2016

Revenue 1,982 3,240 3,553 5,443 2,588 Cost of Goods Sold (1,704) (2,834) (3,058) (4,614) (2,228) Gross Profit 278 405 495 829 360 Other Oper. (Exp)/Inc (86.0) (99.4) (101) (123) (105) Operating Profit 192 306 394 705 255 Other Non Opg (Exp)/Inc (17.2) (37.5) (28.1) 32.3 (19.4) Associates & JV Inc 3.20 6.80 11.8 45.2 5.80 Net Interest (Exp)/Inc (15.7) (54.2) (30.0) (226) (21.4) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 162 221 348 557 220 Tax (68.4) (104) (108) (161) (90.4) Minority Interest (0.1) (50.0) (22.1) (33.1) (31.7) Net Profit 93.5 67.2 217 362 98.2 Net profit bef Except. 93.5 67.2 217 362 98.2 EBITDA 178 275 378 783 242

Growth

Revenue Gth (%) (57.1) 63.5 9.7 53.2 (52.5) EBITDA Gth (%) (68.7) 54.8 37.3 107.2 (69.1) Opg Profit Gth (%) (65.6) 59.5 28.9 79.0 (63.8) Net Profit Gth (Pre-ex) (%) (61.4) (28.1) 223.2 66.7 (72.9) Margins


Balance Sheet (Rpbn)

FY Dec 2014A 2015A 2016F 2017F 2018F

Net Fixed Assets 710 2,989 4,886 5,951 7,185 Invts in Associates & JVs 147 272 272 272 272 Other LT Assets 245 437 437 437 437 Cash & ST Invts 2,611 3,302 2,372 1,981 1,683 Inventory 2,675 2,747 3,819 4,539 5,241 Debtors 7,244 8,829 12,109 14,469 16,748 Other Current Assets 947 553 553 553 553 Total Assets 14,579 19,129 24,447 28,202 32,119

ST Debt 1,577 1,765 1,765 1,765 1,765 Creditor 7,022 7,888 11,328 13,467 15,548 Other Current Liab 1,263 1,462 1,462 1,462 1,462 LT Debt 1,455 1,913 2,923 3,423 3,923 Other LT Liabilities 928 982 982 982 982 Shareholder’s Equity 2,334 4,382 5,122 6,074 7,201 Minority Interests 1.00 737 864 1,030 1,238 Total Cap. & Liab. 14,579 19,129 24,447 28,202 32,119

Non-Cash Wkg. Capital 2,583 2,779 3,690 4,632 5,532 Net Cash/(Debt) (421) (376) (2,316) (3,207) (4,005) Debtors Turn (avg days) 200.2 206.3 190.2 202.1 205.0 Creditors Turn (avg days) 224.7 224.3 201.3 218.5 221.5 Inventory Turn (avg days) 75.1 81.6 68.8 73.6 74.6 Asset Turnover (x) 0.9 0.8 0.9 0.9 0.9 Current Ratio (x) 1.4 1.4 1.3 1.3 1.3 Quick Ratio (x) 1.0 1.1 1.0 1.0 1.0 Net Debt/Equity (X) 0.2 0.1 0.4 0.5 0.5 Net Debt/Equity ex MI (X) 0.2 0.1 0.5 0.5 0.6 Capex to Debt (%) 5.3 4.2 42.9 23.1 24.4 Z-Score (X) NA NA NA NA NA



Company Guide

PT PP (Persero)

Cash Flow Statement (Rpbn)

FY Dec 2014A 2015A 2016F 2017F 2018F

Pre-Tax Profit 921 1,288 1,634 2,060 2,455 Dep. & Amort. 57.1 79.6 113 135 156 Tax Paid (387) (442) (618) (765) (894) Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. (719) (196) (911) (943) (900) Other Operating CF 410 (226) 0.0 0.0 0.0 Net Operating CF 282 503 217 487 817 Capital Exp.(net) (160) (156) (2,009) (1,200) (1,389) Other Invts.(net) (192) (77.3) 0.0 0.0 0.0 Invts in Assoc. & JV (78.2) (196) 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF (95.1) (233) 0.0 0.0 0.0 Net Investing CF (525) (662) (2,009) (1,200) (1,389) Div Paid (126) (106) (148) (178) (226) Chg in Gross Debt 369 457 1,010 500 500 Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF 0.0 354 0.0 0.0 0.0 Net Financing CF 243 704 862 322 274 Currency Adjustments 11.3 71.1 0.0 0.0 0.0 Chg in Cash 11.3 616 (930) (391) (298) Opg CFPS (Rp) 207 144 233 295 355 Free CFPS (Rp) 25.3 71.7 (370) (147) (118)




S.No. Date Closing PriceTarget Price

Rating

1: 04 Dec 15 3710 4650 BUY

2: 28 Dec 15 3810 4650 BUY

3: 01 Feb 16 3825 4650 BUY

4: 29 Apr 16 3665 4600 BUY

5: 04 May 16 3630 4600 BUY

6: 30 May 16 3690 4600 BUY

7: 01 Jun 16 3680 4600 BUY


1

2

34

5

6

7

2940

3140

3340

3540

3740

3940

4140

4340


Rp


ed:CK / sa:TP

BUYBUYBUYBUYLast Traded Price: Last Traded Price: Last Traded Price: Last Traded Price: Bt22.70 (SETSETSETSET : : : : 1,430.80) Price Target :Price Target :Price Target :Price Target : Bt26.00 (15% upside) (Prev Bt22.00)

Potential Catalyst: Potential Catalyst: Potential Catalyst: Potential Catalyst: The upcoming bidding of public projects

Where we Where we Where we Where we differ:differ:differ:differ: We are less bearish than consensus Analyst Apichaya KETRUTTANABORVORN +66 2657 7823 [email protected]

What’s New • Remain bullish on the mega infrastructure bidding

this year

• Limited upside risk from the power plant projects

• Unexcited 2Q16F earnings

• Maintain BUY, with a higher TP of Bt26

Price Relative

Forecasts and Valuation FY FY FY FY DecDecDecDec ((((BtBtBtBt m) m) m) m) 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF

Revenue 21,652 18,331 18,737 22,317 EBITDA 2,127 1,854 1,728 2,054 Pre-tax Profit 1,919 1,866 1,363 1,645 Net Profit 1,521 1,527 1,094 1,320 Net Pft (Pre Ex.) 1,521 1,079 1,094 1,320 Net Pft Gth (Pre-ex) (%) 1.4 (29.0) 1.4 20.7 EPS (Bt) 1.00 1.00 0.72 0.87 EPS Pre Ex. (Bt) 1.00 0.71 0.72 0.87 EPS Gth Pre Ex (%) 1 (29) 1 21 Diluted EPS (Bt) 1.00 1.00 0.72 0.87 Net DPS (Bt) 0.50 0.35 0.36 0.43 BV Per Share (Bt) 5.48 6.09 6.36 6.86 PE (X) 22.8 22.7 31.7 26.2 PE Pre Ex. (X) 22.8 32.1 31.7 26.2 P/Cash Flow (X) nm nm 25.8 15.2 EV/EBITDA (X) 13.8 17.7 17.8 14.5 Net Div Yield (%) 2.2 1.6 1.6 1.9 P/Book Value (X) 4.1 3.7 3.6 3.3 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 19.1 17.3 11.5 13.1

Earnings Rev (%):Earnings Rev (%):Earnings Rev (%):Earnings Rev (%): (5) (10) Consensus EPS Consensus EPS Consensus EPS Consensus EPS (BtBtBtBt):::: 0.82 0.96 Other Broker Recs:Other Broker Recs:Other Broker Recs:Other Broker Recs: B: 18 S: 0 H: 2

Corporate Governance CG Rating

Anti-corruption Progress Indicator n/a

Source of all data: Company, DBS Vickers, Bloomberg Finance L.P

Here comes the sun Reiterate BUY, Bt26.0 TP (PE valuation).Reiterate BUY, Bt26.0 TP (PE valuation).Reiterate BUY, Bt26.0 TP (PE valuation).Reiterate BUY, Bt26.0 TP (PE valuation). As one of Thailand’s

four largest construction contractors as well as having a net

cash position, STEC stands a good chance of benefiting from

the government’s infrastructure spending over the next few

years. Our TP is pegged to 29x FY17 PE (+1SD of mean). STEC

was trading at 33x PE in 2013 when the government

announced Bt2tn worth of infrastructure projects.

A prime beneficiary of rising construction activities in Thailand. A prime beneficiary of rising construction activities in Thailand. A prime beneficiary of rising construction activities in Thailand. A prime beneficiary of rising construction activities in Thailand.

After securing the dual-track railway project for the Klong 19 –

Kaeng Koy route worth Bt9.83bn in December 2015, we

maintain our bullish view that STEC stands a good chance to

win additional work worth at least Bt30bn. We have assigned

a high potential to the following projects to be opened for

bidding this year: (i) Double-track rail; Prachuab Khiri Khan –

Chumpon and Map Kabao – Thanon Chira routes, worth

Bt49bn in total, (ii) MRT orange line, worth Bt83bn, (iii) MRT

pink line, worth Bt27bn, and (iv) MRT yellow line, worth

Bt32bn. Note that STEC’s new project wins target for FY16F is

Bt30-40bn (vs our forecast of Bt30bn).

Earnings to surge in FY17. Earnings to surge in FY17. Earnings to surge in FY17. Earnings to surge in FY17. Given the delay in infrastructure

bidding in 1H16 and limited progress on STEC’s dual-track

railway project due to the initial stage of project, FY16F

earnings should be flat y-o-y. However, we expect FY17F

earnings to surge 20% y-o-y, given the high revenue

recognition from its dual-track railway project and the

estimated Bt30bn contracts signed in FY16.

Valuation:

We maintain our BUY rating with a higher TP of Bt26, pegged

to 29x FY17F PE


Further delays in government spending on mega infrastructure

projects, cost overrun and higher steel/construction materials

price.


Mkt. Cap (Btm/US$m) 34,620 / 983


Chanweerakul's Family 21.7

Thai NVDR 10.6

UBS AG Singapore Branch 5.1

Free Float (%) 72.4




Thailand Company Guide

Sino-Thai Engineering & Con. Version 3 | Bloomberg: STEC TB | Reuters: STEC.BK Refer to important disclosures at the end of this report

76

96

116

136

156

176

196

216

236

8.3

13.3

18.3

23.3

28.3


Relative IndexBt

Sino-Thai Engineering & Con. (LHS) Relative SET INDEX (RHS)


Company Guide

Sino-Thai Engineering & Con.

WHAT’S NEW

FY16F soft earnings outlook. Given the lack of new

contracts signed in 1H16 due to the delay of the

infrastructure bidding and the low revenue recognition from

its dual-track railway project, the Klong 19 – Kaeng Koy

route, due to the initial phase of the project, we expect FY16F

earnings to remain flat at Bt1.1bn. Thus, we revise down our

FY16F earnings by 5% to reflect the “lower-than-expected”

revenue recognition in FY16F. Note that, as of end-1Q16,

STEC’s current backlog stood at Bt52.9bn.

Failure to clinch power plant projects. In 1Q16, STEC

expected to secure power plant construction contracts in

2Q16, which should improve its backlog quality since power

plant projects offer higher gross profit margin (GPM) than

that of infrastructure projects. However, STEC failed to secure

the 1,300MW Bangpakong power plant and 1,300 MW

South Bangkok power plant, whose winning bidders were

announced recently. Additionally, the bidding process for the

other potential power plant project of STEC, the 800MW

Krabi power plant, is still pending due to environmental

issues.

Thus, we lower our FY17F GPM assumption from 9.5% to

8.9%.

Growing confidence in infrastructure bidding. We remain

convinced that the contractor sector outlook remains strong,

thanks to the government’s acceleration of mega

infrastructure auctions. This is in line with the view of

management that anticipates a number of auctions from the

government to proceed in 2H16. We have assigned a high

potential to the following projects to be opened for bidding

this year: (i) Double-track rail; Prachuab Khiri Khan – Chumpon

and Map Kabao – Thanon Chira routes, worth Bt49bn in total,

(ii) MRT orange line, worth Bt83bn, (iii) MRT pink line, worth

Bt27bn, and (iv) MRT yellow line, worth Bt32bn.

Potential backlog from MRT pink linePotential backlog from MRT pink linePotential backlog from MRT pink linePotential backlog from MRT pink line. STEC’s orderbook still has

potential upside from the MRT pink line project worth Bt19bn or

36% of its current backlog; we believe that STEC will be a partner

for BTS Group Holdings PCL (BTS TB Equity) in bidding for the

contract. However, both STEC and BTS have agreed to review the

official contract of the project first before making a final decision if

they will participate in the bidding.

The probability is low for STEC to be a co-investor with BTS in this

project, given that STEC has no experience in operating a mass

transit system and its management has shown little interest in

investing in the MRT pink line project. Note that we have not

factored in the MRT pink line project in our forecast yet.

Brighter outlook for steel prices. Steel prices decreased 20%

from its peak in April 2016. Additionally, we expect steel prices to

go down further in 3Q16, given the increasing steel supply from

China. This alleviates our concern that the profitability of STEC’s

potential projects might fall.

STEC: 2Q16F result preview

FY Dec (Btm)FY Dec (Btm)FY Dec (Btm)FY Dec (Btm) 1Q151Q151Q151Q15 1Q161Q161Q161Q16 2Q16F2Q16F2Q16F2Q16F ChgChgChgChg

yyyy----oooo----yyyy

Chg Chg Chg Chg

qqqq----oooo----qqqq

Sales 4,186 4,472 4,537 8% 1%

COGS (inc dep'n) -3,735 -4,079 -4,139 11% 1%

Gross profitGross profitGross profitGross profit 451451451451 393393393393 398398398398 -12% 1%

Selling and admin -135 -109 -110 na 1%

Operating profitOperating profitOperating profitOperating profit 316316316316 284284284284 288288288288 -9% 1%

Asso &

other income 62 30 40 -35% 34%

Net interest 24 10 10 -58% -1%

Pretax profitPretax profitPretax profitPretax profit 402402402402 324324324324 338338338338 -16% 4%

Income tax -80 -54 -58 -29% 7%

Minority interest -1 -2 -5 285% 144%

Net profitNet profitNet profitNet profit 320320320320 268268268268 276276276276 -14% 3%

EPS (Bt) 0.21 0.18 0.25 20% 44%

Margin Analysis (%)Margin Analysis (%)Margin Analysis (%)Margin Analysis (%)

Gross margin 10.8% 8.8% 8.8%

Op margin 7.6% 6.4% 6.4%

Net margin 7.6% 6.0% 6.1%

SGA/Sales (%) 3.2% 2.4% 2.4% Source: Company, DBS Vickers


Company Guide


Projects to be up for bidding in FY16


ProjectProjectProjectProject Des criptionDes criptionDes criptionDes cription

Cons tructionCons tructionCons tructionCons truction

Va lue (Btbn)Va lue (Btbn)Va lue (Btbn)Va lue (Btbn) Progres sProgres sProgres sProgres s

Mas s Rapid T rans it Authority of Tha iland : MRTAMas s Rapid T rans it Authority of Tha iland : MRTAMas s Rapid T rans it Authority of Tha iland : MRTAMas s Rapid T rans it Authority of Tha iland : MRTA

Orange line83

to be opened for bidding in June 2016

Pink line (Monorail) Khae Rai - Min Buri 27

Yellow line (Monorail) Lat proa - Samrong 32


State Ra i lway of Tha i land : SRTState Ra i lway of Tha i land : SRTState Ra i lway of Tha i land : SRTState Ra i lway of Tha i land : SRT






Department of Highway : DOHDepartment of Highway : DOHDepartment of Highway : DOHDepartment of Highway : DOH

Pattaya - Map Ta Phut 20

Bang Pa In - Nakhon Ratchasima 85

Bang Yai - Karnchanaburi 56


Airports of Tha i land Public Company L imited : AOTAirports of Tha i land Public Company L imited : AOTAirports of Tha i land Public Company L imited : AOTAirports of Tha i land Public Company L imited : AOT



Extension of building, terminal and utilities 49

The bid for Bt16.4bn contracts were submitted; the

lowest bidder for package I, worth Bt12bn, is Italian-

Thai Development PCL (ITD); The qualified particant

for package II are Nawarat Patanakarn PCL (NWR)

and Samprasit Construction Co., Ltd.

Double-track rail

Thailand Cultural Centre - Min Buri

To be opened for bidding in 2H16

Cabinet approved

Waiting for the cabinet approval process

In bidding process

Suvarnabhumi Airport :

Phase II

Motorway


Company Guide



Earnings Drivers:

A prime beneficiary of rising infrastructure spending. A prime beneficiary of rising infrastructure spending. A prime beneficiary of rising infrastructure spending. A prime beneficiary of rising infrastructure spending. We

reiterate our view that public investments will accelerate and

become the lone pillar of growth for the Thai economy this

year. This is on the back of the slowing growth rate of private

consumption and investments, given the fall in borrowing and

low wage growth. The government is therefore speeding up the

investment in infrastructure projects to provide a key engine for

Thai economic growth this year. This should be positive for

STEC, as it is one of the top four construction contractors in

Thailand. STEC is in a net cash position which allows the

company to readily participate in the bidding of new

infrastructure projects from the government. Note that STEC

also owns two precast concrete factories and has vast expertise

in executing infrastructure works, thus reinforcing its strong

position in the infrastructure upcycle this time around.

Backlog breakdown.Backlog breakdown.Backlog breakdown.Backlog breakdown. Based on our estimated backlog

amounting to Bt52.9bn as at 31 Mar 2016, its backlog could be

equivalent to more than two years’ worth of revenue. Thus,

STEC should still be resilient enough to cope with any further

delay in the country’s infrastructure spending.

Power plant project to maintain STEC’s GPM.Power plant project to maintain STEC’s GPM.Power plant project to maintain STEC’s GPM.Power plant project to maintain STEC’s GPM. Currently, STEC

has two power plant projects in its backlog, comprising 12 small

power plants and offsite works for power plant projects. Note

that the average GPM of power plant projects is much higher,

compared to about 6-7% for government infrastructure

projects. This should help STEC achieve its target GPM of 8-9%

Downside risk from new parliament projectDownside risk from new parliament projectDownside risk from new parliament projectDownside risk from new parliament project. Construction

progress for the Bt11.5bn new parliament project has only

reached 20% because of delays in the land expropriation

process. As a result, STEC expects to extend the completion

period to 2019 (vs November 2016 currently). We believe that it

is reasonable to expect the project to be completed in 2019,

based on a progress rate of 20% per year (base-case scenario).

STEC has booked a Bt579m loss provision from this project in

2Q15, which the company believes to be large enough to cover

the total potential losses from this project. However, we believe

that further provisions might be needed.

Expect more projects to be secured in 2016Expect more projects to be secured in 2016Expect more projects to be secured in 2016Expect more projects to be secured in 2016. Based on STEC’s

history, its success ratio in winning projects is between 20%

and 25%. Assuming that the company submits bids for projects

worth Bt150bn in 2016 and achieves a 20% success ratio, the

value of projects to be awarded should be about Bt30bn, up

sharply from Bt17.5bn in 2014 and Bt21bn in 2015

Profitability

Revenue vs Backlog

Backlog breakdown by type of work

Backlog breakdown by client


9.3%

8.3% 8.4%

9.5%10.2%

9.4% 9.1%

4.8%

6.1%5.5%

7.3%7.8%

7.3%

6.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2010A 2011A 2012A 2013A 2014A 2015A 1Q16

Gross margin Net margin

14,815

19,74822,242 21,552

13,825

4,472

48,935

38,381

51,08847,821

56,07352,887

0

10,000

20,000

30,000

40,000

50,000

60,000

2011A 2012A 2013A 2014A 2015A 1Q16

Btm

Revenue Ending backlog


Company Guide


Balance Sheet:

STEC has the strongest balance sheet in the sector currently,

with a net cash position of Bt0.45/sh at end-1Q16.


BBBBenefitenefitenefitenefiting hugelying hugelying hugelying hugely from mega infrastructure projects to be open from mega infrastructure projects to be open from mega infrastructure projects to be open from mega infrastructure projects to be open

for bidding in 2016. for bidding in 2016. for bidding in 2016. for bidding in 2016. The concrete actions on the bidding

process of the dual-track railway, motorway and Suvarnbhumi

phase II projects fuel expectations for more projects to kick off

this year. We assigned the high potential for the projects to be

open for bidding in FY16 which are (i) double-track rail;

Prachuab Khiri Khan – Chumpon and Map Kabao – Thanon

Chira routes, worth Bt49bn, (ii) MRT orange line, worth Bt83bn,

(iii) MRT pink line, worth Bt27bn, and (iv) MRT yellow line,

worth Bt32bn.

Based on STEC’s history, its success ratio in winning projects is

between 20% and 25%. Assuming that the company submits

bids for projects worth Bt150bn in 2016 and achieves a 20%

success ratio, the value of projects to be awarded should be

about Bt30bn, up sharply from Bt17.5bn in 2014 and Bt21bn in

2015.

Key Risks:

Further delays in mega infrastructure projects. Further delays in mega infrastructure projects. Further delays in mega infrastructure projects. Further delays in mega infrastructure projects. This will cap

new contract wins.

Construction delay. Construction delay. Construction delay. Construction delay. This could result in cost overruns which

could subsequently crimp profit margins.

Increase building material costIncrease building material costIncrease building material costIncrease building material cost. . . . This could lead to lower profit

margins.

Company Background

Sino-Thai Engineering and Construction Public Company Ltd. is

a construction company providing both civil and mechanical

works. Its services include infrastructure, buildings, energy and

power generation plants, industrial and environment.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.7

0.8

0.8

0.9

0.9

1.0

1.0

0.00

0.02

0.04

0.06

0.08

0.10

0.12

0.14

2013A 2014A 2015A 2016F 2017F


0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

800.0

900.0

1,000.0

2013A 2014A 2015A 2016F 2017F


Btm

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2013A 2014A 2015A 2016F 2017F

Avg: 22.5x

+1sd: 29.5x

+2sd: 36.5x

-1sd: 15.5x

-2sd: 8.6x7.6

12.6

17.6

22.6

27.6

32.6

37.6


(x)

Avg: 3.5x

+1sd: 4.16x

+2sd: 4.82x

-1sd: 2.84x

-2sd: 2.17x

1.6

2.1

2.6

3.1

3.6

4.1

4.6

5.1

5.6

6.1


(x)


Company Guide


Key Assumptions


Beginning backlog 39,152 51,088 47,821 50,603 61,966

New projects signed 34,178 18,285 21,020 30,000 30,000

Realized for the year 22,242 21,552 18,238 18,637 22,217

Ending backlog 51,088 47,821 50,603 61,966 69,749

Income Statement (Btm)


Revenue 22,294 21,652 18,331 18,737 22,317



Operating ProfitOperating ProfitOperating ProfitOperating Profit 1,6361,6361,6361,636 1,6881,6881,6881,688 1,3421,3421,3421,342 1,1991,1991,1991,199 1,4811,4811,4811,481 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0

Associates & JV Inc (21.5) 11.1 17.4 18.3 19.2

Net Interest (Exp)/Inc 281 220 58.8 145 145

Exceptional Gain/(Loss) 294 0.0 448 0.0 0.0

PrePrePrePre----tax Profittax Profittax Profittax Profit 2,1902,1902,1902,190 1,9191,9191,9191,919 1,8661,8661,8661,866 1,3631,3631,3631,363 1,6451,6451,6451,645 Tax (449) (389) (321) (269) (325)

Minority Interest (7.3) (9.5) (18.2) 0.0 0.0


Net ProfitNet ProfitNet ProfitNet Profit 1,7331,7331,7331,733 1,5211,5211,5211,521 1,5271,5271,5271,527 1,0941,0941,0941,094 1,3201,3201,3201,320 Net Profit before Except. 1,500 1,521 1,079 1,094 1,320

EBITDA 1,983 2,127 1,854 1,728 2,054

Growth Revenue Gth (%) 12.2 (2.9) (15.3) 2.2 19.1

EBITDA Gth (%) 22.5 7.3 (12.8) (6.8) 18.9

Opg Profit Gth (%) 34.3 3.2 (20.5) (10.7) 23.5

Net Profit Gth (Pre-ex) (%) 36.9 1.4 (29.0) 1.4 20.7




ROAE (%) 25.6 19.1 17.3 11.5 13.1

ROA (%) 7.7 6.1 6.4 4.6 4.9

ROCE (%) 18.7 16.5 12.3 9.9 11.5

Div Payout Ratio (%) 44.0 50.2 35.3 50.0 50.0

Net Interest Cover (x) NM NM NM NM NM



Company Guide


uarterly / Interim Income Statement (Btm)


Revenue 4,221 4,993 4,690 4,427 4,486


Gross ProfitGross ProfitGross ProfitGross Profit 486486486486 473473473473 454454454454 319319319319 407407407407 Other Oper. (Exp)/Inc (109) (99.1) (144) (36.7) (100)



Net Interest (Exp)/Inc 23.7 15.9 14.4 4.76 10.1

Exceptional Gain/(Loss) 0.0 0.0 0.0 448 0.0

PrePrePrePre----tax Profittax Profittax Profittax Profit 402402402402 390390390390 332332332332 743743743743 324324324324 Tax (80.5) (62.3) (60.1) (119) (53.8)


Net ProfitNet ProfitNet ProfitNet Profit 320320320320 326326326326 270270270270 611611611611 268268268268 Net profit bef Except. 320 326 270 163 268

EBITDA 512 451 452 368 454

Growth Revenue Gth (%) (30.0) 18.3 (6.1) (5.6) 1.3

EBITDA Gth (%) (8.1) (12.0) 0.1 (18.6) 23.4

Opg Profit Gth (%) (15.1) (0.7) (16.8) (9.2) 8.7

Net Profit Gth (Pre-ex) (%) (13.8) 1.8 (17.1) (39.7) 64.6




Balance Sheet (Btm)


Net Fixed Assets 2,650 3,166 3,197 3,498 3,598


Other LT Assets 2,363 3,128 3,733 3,733 3,733

Cash & ST Invts 8,663 5,565 2,065 4,084 5,157

Inventory 1,118 1,187 2,300 2,371 2,824

Debtors 2,917 2,748 3,079 3,454 3,900



ST Debt 69.5 70.4 71.3 71.3 71.3

Creditor 2,966 3,727 4,023 4,148 4,940


LT Debt 0.0 0.0 0.0 0.0 0.0





Non-Cash Wkg. Capital (5,418) (2,860) 930 (989) (1,389)

Net Cash/(Debt) 8,594 5,495 1,993 4,013 5,086




Asset Turnover (x) 1.0 0.9 0.8 0.8 0.8

Current Ratio (x) 1.2 1.2 1.2 1.2 1.2

Quick Ratio (x) 1.1 1.1 1.0 1.0 1.0

Net Debt/Equity (X) CASH CASH CASH CASH CASH

Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH

Capex to Debt (%) 1,233.5 1,341.0 736.4 1,139.1 917.9

Z-Score (X) 2.7 2.7 3.1 2.9 2.8



Company Guide


Cash Flow Statement (Btm)


Pre-Tax Profit 2,190 1,919 1,866 1,363 1,645

Dep. & Amort. 368 427 494 510 554

Tax Paid (412) (359) (315) (250) (306)

Assoc. & JV Inc/(loss) 21.5 (11.1) (17.4) (18.3) (19.2)

Chg in Wkg.Cap. 666 (2,558) (1,619) (264) 400

Other Operating CF (104) (822) (618) (0.7) 0.25

Net Operating CFNet Operating CFNet Operating CFNet Operating CF 2,7302,7302,7302,730 (1,404)(1,404)(1,404)(1,404) (208)(208)(208)(208) 1,3401,3401,3401,340 2,2742,2742,2742,274 Capital Exp.(net) (857) (944) (525) (812) (654)

Other Invts.(net) 0.0 0.0 0.0 0.0 0.0

Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0

Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0


Net Investing CFNet Investing CFNet Investing CFNet Investing CF (857)(857)(857)(857) (944)(944)(944)(944) (525)(525)(525)(525) (812)(812)(812)(812) (654)(654)(654)(654) Div Paid (593) (763) (763) (539) (547)

Chg in Gross Debt (108) 0.87 0.87 0.0 0.0

Capital Issues 339 0.0 0.0 0.0 0.0

Other Financing CF (37.5) 11.8 24.3 0.0 0.0

Net Financing CFNet Financing CFNet Financing CFNet Financing CF (399)(399)(399)(399) (750)(750)(750)(750) (737)(737)(737)(737) (539)(539)(539)(539) (547)(547)(547)(547)


Chg in Cash 1,473 (3,098) (1,470) (10.7) 1,073

Opg CFPS (Bt) 1.35 0.76 0.92 1.05 1.23

Free CFPS (Bt) 1.23 (1.5) (0.5) 0.35 1.06



Source: DBS Vickers

ScoreScoreScoreScore Range Number of LogoRange Number of LogoRange Number of LogoRange Number of Logo DescriptionDescriptionDescriptionDescription

90-100 Excellent

80-89 Very Good

70-79 Good

60-69 Satisfactory

50-59 Pass

<50 No logo given N/A





1: 11 Aug 15 22.20 22.00 HOLD

2: 16 Sep 15 25.25 30.00 BUY

3: 02 Nov 15 25.00 30.00 BUY

4: 12 Nov 15 24.90 30.00 BUY

5: 20 Nov 15 25.00 30.00 BUY

6: 25 Jan 16 22.30 30.00 BUY

7: 19 Feb 16 19.60 22.00 BUY

8: 29 Mar 16 21.60 22.00 BUY

9: 16 May 16 21.80 22.00 BUY


1

2

3

4

5

6

7

8

9

16.62

18.62

20.62

22.62

24.62

26.62


BtBtBtBt


ed: CK / sa:BC

BUYBUYBUYBUYLast Traded Price: Last Traded Price: Last Traded Price: Last Traded Price: RM1.65 (KLCIKLCIKLCIKLCI : : : : 1,648.98) Price TargetPrice TargetPrice TargetPrice Target:::: RM1.92 (17% upside) Potential Catalyst: Potential Catalyst: Potential Catalyst: Potential Catalyst: Good proxy to 11MP infra projects, higly profitable precast segment. Where we differ:Where we differ:Where we differ:Where we differ: While our earnings forecasts are broadly in-line, we are more bullish in terms of TP. We believe SCG will rerate with stronger earnings deliverance and contract wins.

Analyst Chong Tjen-San +60 3 26043972 [email protected]

What’s New • Executing on peak orderbook of RM5bn

• Strong YTD wins and looking to exceed RM2.5bn

forecast, ample capacity for new orders.

• Potential writebacks may lift earnings

Price Relative

Forecasts and Valuation FY FY FY FY DecDecDecDec ((((RMRMRMRM m) m) m) m) 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF

Revenue 1,881 1,917 1,989 2,150 EBITDA 162 178 221 243 Pre-tax Profit 141 141 178 201 Net Profit 114 127 143 161 Net Pft (Pre Ex.) 125 127 143 161 Net Pft Gth (Pre-ex) (%) 86.5 1.9 12.1 12.9 EPS (sen) 8.83 9.84 11.0 12.4 EPS Pre Ex. (sen) 9.65 9.84 11.0 12.4 EPS Gth Pre Ex (%) 87 2 12 13 Diluted EPS (sen) 8.83 9.84 11.0 12.4 Net DPS (sen) 0.0 4.00 4.08 4.60 BV Per Share (sen) 24.4 34.9 41.8 49.7 PE (X) 18.7 16.8 15.0 13.3 PE Pre Ex. (X) 17.1 16.8 15.0 13.3 P/Cash Flow (X) 11.6 9.0 12.3 10.6 EV/EBITDA (X) 12.6 10.1 7.8 6.6 Net Div Yield (%) 0.0 2.4 2.5 2.8 P/Book Value (X) 6.8 4.7 3.9 3.3 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 24.6 33.2 28.7 27.2

Earnings Rev (%):Earnings Rev (%):Earnings Rev (%):Earnings Rev (%): 0 0 0 Consensus EPS Consensus EPS Consensus EPS Consensus EPS (sensensensen):::: 10.0 10.7 11.9 Other Broker Recs:Other Broker Recs:Other Broker Recs:Other Broker Recs: B: 8 S: 0 H: 3


Strong and dependable Malaysia’s leading pure construction player.Malaysia’s leading pure construction player.Malaysia’s leading pure construction player.Malaysia’s leading pure construction player. Sunway Construction Group (SCG) is the largest listed pure play construction player in Malaysia. Given its strong track record with MRT, LRT and BRT jobs previously, we are of the view that SCG is on a strong footing to bag several key infrastructure packages such as LRT3 and BRT as well as other major highway projects like SUKE, DUKE and Pan-Borneo Highway. SCG has also established itself as the only construction specialist to be involved in all three Rapid Line infra projects (MRT, LRT and BRT). This makes the group one of the strongest contenders to win the pipeline of 11MP projects.

Riding on Singapore’s public housing development. Riding on Singapore’s public housing development. Riding on Singapore’s public housing development. Riding on Singapore’s public housing development. Its precast division is a strong proxy to the growing demand for HDB residences in Singapore where the government is targeting to build an additional 88,000 units of public housing in FY16-FY19. With premium EBIT margins recorded over the past few years, the business is ROE-enhancing and also synergistic to its construction business. The completion of its 3rd precast plant in Iskandar should give it ample capacity to cater for more orders while also compensating for the eventual return of the Tampines plant.

Still bidding for more jobs and looking to exceed RM2.5bn Still bidding for more jobs and looking to exceed RM2.5bn Still bidding for more jobs and looking to exceed RM2.5bn Still bidding for more jobs and looking to exceed RM2.5bn forecast. forecast. forecast. forecast. Not one to rest on its laurels, SCG will be bidding for LRT 3 (already prequalified), DASH and SUKE, Pan Borneo Highway and the internal projects from the property arm of its holding company. Its total tenderbook now stands at RM18bn. Assuming SCG were to win one package for LRT, one for either DASH and SUKE and also Pan Borneo Highway, it is likely to beat its 2013 new order wins of RM2.9bn, inclusive of precast.

Valuation: BUY, TP set at RM 1.92. BUY, TP set at RM 1.92. BUY, TP set at RM 1.92. BUY, TP set at RM 1.92. Our TP is based on sum-of-parts (SOP) valuation to reflect the growing contribution from its high-margin precast business. While our SOP value is RM2.77bn or RM2.14/share, we have ascribed a 10% discount to arrive at our target price of RM1.92.

Key Risks to Our View: The timely execution of its peak orderbook of RM5bn is crucial to minimise any earnings cuts. With its strong execution track record and experience, we believe the group is able to execute the projects in a timely manner. At A Glance Issued Capital (m shrs) 1,293

Mkt. Cap (RMm/US$m) 2,133 / 531


Sunway Berhad 55.6

Tan Sri Jeffrey Cheah & Family 7.6

Free Float (%) 37.9





Sunway Construction Group Version 1 | Bloomberg: SCGB MK | Reuters: SCOG.KL Refer to important disclosures at the end of this report

83

103

123

143

163

183

203

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

Jul-15 Oct-15 Jan-16 Apr-16

Relative IndexRM

Sunway Construction Group (LHS) Relative KLCI INDEX (RHS)


Company Guide

Sunway Construction Group

WHAT’S NEW

Looking to exceed expectations

We hosted SCG on a one and a half day non-deal roadshow

(NDR) in Hong Kong which attracted a strong response.

Below are some of the key takeaways:

Executing on peak orderbook.Executing on peak orderbook.Executing on peak orderbook.Executing on peak orderbook. SCG's orderbook now stands

at RM5bn which is at its peak. This will give it two and a half

years’ earnings visibility. The largest projects are Putrajaya

Parcel F and MRT Line 2, V201 package which forms 53% of

this. More importantly, we think pretax margins for these two

key projects will also be at least 7-8%. Recall that 2015

pretax margin was low at 3.6% due to MRT Line 1 and KLCC

project (NEC and Package 2 and 2A) where certain losses and

provisions were fully provided for. For its KLCC project, the

project ran into unfavourable soil conditions and was also

impacted by a stop work order due to the client changing the

tower footprint. We understand 1Q16 construction margins

will show significant improvement on a y-o-y basis.

For the Putrajaya Parcel F, SCG has already locked in 50% of

the steel requirements at an average price of roughly

RM1,800 to RM2,000/tonne. This is a design and build

project where it was also a criteria to be VDC-enabled,

implying there is room to achieve higher margins. Also as a

mitigating factor, SCG is looking to import more steel billets

from China to be used at the local steel manufacturer's plant.

For MRT Line 2, V201 package, pricing is 30% higher on a

per km basis as compared to its V4 package for MRT Line 1,

while all raw material requirements are borne by the

government. Works are anticipated to start in June/July.

Total Outstanding Orderbook (RMm)

Still bidding for more jobs and looking to exceed RM2.5bn Still bidding for more jobs and looking to exceed RM2.5bn Still bidding for more jobs and looking to exceed RM2.5bn Still bidding for more jobs and looking to exceed RM2.5bn

forecast.forecast.forecast.forecast. Not one to rest on its laurels, SCG will be bidding

for LRT 3 (already prequalified), DASH and SUKE, Pan Borneo

Highway and the internal projects from the property arm of

its holding company. Its total tenderbook now stands at

RM18bn. Assuming SCG were to win one package for LRT 3,

one for either DASH and SUKE and also Pan Borneo Highway,

it is likely to beat its 2013 new order wins of RM2.9bn,

inclusive of precast.

SCG has prior experience for the LRT Package B (Kelana Jaya

extension) which was completed in 2015 while the nature of

DASH and SUKE which is largely elevated work will give it an

edge over its competitors. We also like SCG's chances for Pan

Borneo Highway given it has submitted four tenders out of

eight, with all tenders closing by end of May. Additionally, its

partner, KTS Group has strong local connections in terms of

the supply chain procurement of raw materials, coupled with

the fact that it also owns a quarry.

Strong YTD winsStrong YTD winsStrong YTD winsStrong YTD wins. So far, YTD wins including precast amount

to RM2.0bn. We have modelled in RM2.5bn worth of new

orders for FY16F, inclusive of precast. We estimate for every

RM250m worth of new orders will raise our FY16F net profit

by 1.4%.

Ample capacity to take on new orders.Ample capacity to take on new orders.Ample capacity to take on new orders.Ample capacity to take on new orders. In spite of its peak

orderbook of RM5bn, SCG believes it will take on more jobs

with the existing machinery and 800 foreign workers it has

directly under its payroll. Moreover, its larger projects such as

MRT Line 2 and Putrajaya Parcel F stretches for another 4-5

years. SCG has one of the largest machinery arrays that

include 27 boring rigs, 18 tower cranes, 11 crawler cranes

and 23 hydraulic excavators. Also, in the past it has done

work for MRT, LRT and BRT concurrently. In the more

extreme circumstance, SCG can also outsource more work to

release capacity.

Total YTD wins and potential new wins

Contract s umContract s umContract s umContract s um

Outs tanding Outs tanding Outs tanding Outs tanding

order bookorder bookorder bookorder book

Infras tructureInfras tructureInfras tructureInfras tructure

MRT Package V4 (Sec 17 to Semantan) 1,173 43

MRT Package V201 (Sungai Buloh- Persiaran Dagang) 1,213 1,213

JohorJohorJohorJohor

Coastal Highway Southern Link 170 66

BuildingBuildingBuildingBuilding

Putrajaya Parcel F 1,610 1,450

KLCC (NEC + Package 2 & 2a 646 414

Others 92 33

Interna lInterna lInterna lInterna l

Sunway Velocity 2 Mall + Link Bridge 370 92

Sunway Velocity Hotel + Office 93 69

Sunway Velocity Medical Centre 200 159

Sunway Geo Retail Shops & Flexi Suites 153 59

Sunway Medical Centre 3 (Sub & Superstructures) 167 96

Sunway Medical Centre 4 (2 towers) 380 380

Sunway Iskandar - Citrine Swc Apt 213 106

Sunway Geo Retail Shops & Flexi Suites Phase 2 244 207

Sunway Lenang Phase 1A 96 30

Sunway Iskandar- Emerald Residences 175 133

Others 124 51

Singapore

Precast 844 416

Grand Tota lGrand Tota lGrand Tota lGrand Tota l 7,9617,9617,9617,961 5,0165,0165,0165,016

ProjectsProjectsProjectsProjects Contract Sum (RMm)Contract Sum (RMm)Contract Sum (RMm)Contract Sum (RMm)

Civil, Infrastructure & Building

MRT Package V201 ( Sungai Buloh- Persiaran Dagang) 1213

Velocity Link Bridge 20

MRT Spurline (piling) 12

Casa Kiara 3 (piling) 19

SMC4 & 5 380

Sunway Velocity Medical Centre 200

Sunway Velocity Hotel + Office 93

Precast 53

Grand total of YTD wins 1995

Potential new wins

LRT3 600

DASH or SUKE 600

Pan Borneo (30% of RM1.5bn) 450

Precast 250

Grand total of potential new wins 1900


Company Guide


Total Yearly New Order wins

Potential writebacks?Potential writebacks?Potential writebacks?Potential writebacks? There could be one-off writebacks from

certain projects but the timing remains uncertain. Of

significance are its toll road projects in India with up to

RM40m of potential writebacks and VOs for MRT Line 1. For

MRT Line 1 V4 package, the PDP has only certified RM770m

out of the RM1.173bn total contract value. This implies that

there is ample budget to pay at least part of this balance

RM440m. We understand part of this difference includes

largely changing terrain conditions and prolongation costs.

The Indian toll road writebacks could be by this year as we

understand the courts have ruled in the favour of SCG at

every jurisdiction level. This is part of the ongoing arbitration

process with the National Highway Authority of India.

Precast.Precast.Precast.Precast. SCG is guiding for S$100m (c.RM300m) worth of

new orders for FY16F which will continue to be buoyed by

the housing market (80% in HDB) in Singapore. YTD wins

amount to RM58m. It is confident of remaining as the top 3

precast supplier for HDB in Singapore.

We understand 50% of the steel requirements for the HDB

construction can be passed on to the main contractor. Pretax

margins will normalise to between 20% and 25% in FY16F vs

39% in FY14 and 31% in FY15. The higher margins in FY14-

FY15 were due to the finalisation of accounts which typically

is a 1-2 year process. When the accounts are certified, the

additional revenue will flow straight to its bottomline.

Strong balance sheetStrong balance sheetStrong balance sheetStrong balance sheet. SCG is in a net cash position of

RM332m as at end-2015 which will give it the flexibility to

raise its dividend payout from the current 35% policy and

also give it the opportunity to take on PFI and bullet payment-

type projects or even explore overseas projects. This is a rarity

among the listed contractors where most are in a net debt

position. SCG has done works in the Middle East, Trinidad

and Tobago and India before.

1900

2900

800

2600

0

500

1000

1500

2000

2500

3000

3500

FY12 FY13 FY14 FY15

RMmRMmRMmRMmRMmRMmRMmRMmRMmRMmRMmRMmRMmRMmRMmRMm


Company Guide



Earnings Drivers:

Sweet spot ahead. Sweet spot ahead. Sweet spot ahead. Sweet spot ahead. We think SCG’s construction segment is

entering a ‘sweet spot’ on the back of the expected upturn in

Malaysia’s construction industry. Given its notable brand name

and strong execution track record, we believe the group is one

of the strongest contenders to bag several key projects under

the Eleventh Malaysia Plan (11MP). We are of the view that SCG

is on a strong footing to bag several key infrastructure packages

such as LRT3 and BRT as well as other major highway projects

like SUKE, DUKE and Pan-Borneo Highway.

Stronger infrastructure orderbook.Stronger infrastructure orderbook.Stronger infrastructure orderbook.Stronger infrastructure orderbook. With MRT2 viaduct package

(V201) being the major infra win in 2016 so far, we estimate

its construction orderbook now stands at RM5.0bn. We think

SCG has gotten off to a strong start with construction YTD

wins of RM1.9bn. This means that SCG will only need to clinch

another c.RM300m worth of contracts to meet our FY16F new

wins assumptions for construction, as we have assumed a total

of RM2.2bn new orders for this division.

Highly profitable precast segment. Highly profitable precast segment. Highly profitable precast segment. Highly profitable precast segment. SCG’s precast segment

should be sturdy in contributing a larger share of earnings to

the group. SCG’s precast division made up 13-16% of revenue

in FY12-FY15. It was the largest earnings contributor in FY15,

accounting for 57% of the group’s overall EBIT. The group

believes the normalised margin lies in the 20-25% range. This is

supported by sustainable orders from the Singapore market.

Assuming that it will retain the 3rd precast plant this year, its

total annual production capacity in 2016 is estimated to rise to

251,000 m³. The continuous expansion of its plants enables the

group to have ample capacity to cater for more orders from the

Singapore market, as the group plans to return the Tampines

plant by year 2017.

Potential next win Potential next win Potential next win Potential next win –––– Pan Borneo Highway. Pan Borneo Highway. Pan Borneo Highway. Pan Borneo Highway. SCG has partnered

with a local private company in Sarawak, KTS Holdings Sdn Bhd.

For this project, it is understood that the share of the JV must

be 70:30 with local Sarawak contractor holding the majority

stake. It is estimated that total cost for the Pan Borneo Highway

Sarawak project amounted to RM16.1bn, with each package

worth around RM1-1.5bn. Hence, we expect SCG to win at

least another RM450m, based on 30% share of the RM1.5bn

package.

New order wins

Construction revenue

Precast revenue

Construction EBIT margins

Precast EBIT margins


2,900

800

2,6002,500

2,300

0

400

800

1,200

1,600

2,000

2,400

2,800

2013A 2014A 2015A 2016F 2017F

1,9552,032

1,664 1,6891,830

0

400

800

1,200

1,600

2,000

2013A 2014A 2015A 2016F 2017F

252

301

253

300320

0

65

130

196

261

326

2013A 2014A 2015A 2016F 2017F

3.56

6.97.39

0.00

0.93

1.87

2.80

3.73

4.67

5.60

6.53

7.47

2015A 2016F 2017F

30.5

21 21

0.0

6.2

12.3

18.5

24.6

30.8

2015A 2016F 2017F


Company Guide


Balance Sheet:

Strong balance sheet and cash generation ability.Strong balance sheet and cash generation ability.Strong balance sheet and cash generation ability.Strong balance sheet and cash generation ability. As at 31 Dec

2015, the company has a net cash position of RM332m, with

no long-term borrowings and minimal working capital

requirements going forward. We estimate the group will retain

its strong balance sheet with next cash position of RM417m and

RM527m for FY16-FY17F. Meanwhile, its ROAE is expected to

hover around the 27-29%.


Executing on peak orderbook.Executing on peak orderbook.Executing on peak orderbook.Executing on peak orderbook. Suncon's orderbook now stands

at RM5bn which is at its peak. This will give it two and a half

years’ visibility. The largest projects are Putrajaya Parcel F and

MRT Line 2, V201 package which forms 53% of this. More

importantly, we think pretax margins for these two key projects

will also be at least 7-8%. Recall that 2015 pretax margin was

low at 3.6% due to MRT Line 1 and KLCC project (NEC and

Package 2 and 2A) where certain losses and provisions were

fully provided for.

Dividend payout policy of at least 35%. Dividend payout policy of at least 35%. Dividend payout policy of at least 35%. Dividend payout policy of at least 35%. SCG is committed to

distribute minimum 35% of its core profit to shareholders,

which is rare among construction players. This could be

attributable to its sizeable operations with a large asset base

that requires little capex spending going forward. We have

imputed a 37% dividend payout ratio, based on our strong net

cash forecasts. This translates into decent yields of c.3%

Key Risks:

Delays in construction. Delays in construction. Delays in construction. Delays in construction. There may be project cost overruns due

to several factors such as design and engineering issues and

soil conditions.

Fluctuations Fluctuations Fluctuations Fluctuations ofofofof prices of raw materials. prices of raw materials. prices of raw materials. prices of raw materials. The construction

business typically requires a wide range of raw materials

including steel bars, ready mixed concrete, diesel, electrical

cables and fittings, which are all subject to price fluctuations.

Company Background

An established player with >30 years of heritage, Sunway

Construction Group (SCG) is one of Malaysia’s largest

construction companies. It adopts an integrated business

model that covers various phases of construction activities,

from project design to completion.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


1.2

1.3

1.3

1.4

1.4

0.00

0.10

0.20

0.30

0.40

0.50

2014A 2015A 2016F 2017F


0.0

10.0

20.0

30.0

40.0

50.0

60.0

2013A 2014A 2015A 2016F 2017F


RMm

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

2014A 2015A 2016F 2017F

Avg: 12.3x

+1sd: 13.5x

+2sd: 14.6x

-1sd: 11.1x

-2sd: 9.9x

8.6

9.6

10.6

11.6

12.6

13.6

14.6

15.6


(x)

Avg: 3.94x

+1sd: 4.21x

+2sd: 4.48x

-1sd: 3.66x

-2sd: 3.39x

2.9

3.4

3.9

4.4

4.9


(x)


Company Guide


Key Assumptions


New order wins 2,900 800 2,600 2,500 2,300

Construction revenue 1,955 2,032 1,664 1,689 1,830

Precast revenue 253 300 320

Construction EBIT margins 3.56 6.90 7.39

Segmental Breakdown



Precast Concrete 252 301 253 300 320

Consolidated Adjustments (368) (452) 0.0 0.0 0.0


EBIT (RMm) Construction 59.2 117 135

Precast Concrete 77.1 62.9 67.2

TotalTotalTotalTotal 42.442.442.442.4 120120120120 136136136136 180180180180 203203203203

EBIT Margins (%) Construction N/A N/A 3.6 6.9 7.4

Precast Concrete N/A N/A 30.5 21.0 21.0




Revenue 1,840 1,881 1,917 1,989 2,150



Operating ProfitOperating ProfitOperating ProfitOperating Profit 42.442.442.442.4 120120120120 136136136136 180180180180 203203203203 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0

Associates & JV Inc 45.4 30.4 (0.1) 0.0 0.0

Net Interest (Exp)/Inc 2.07 0.72 4.54 (1.4) (1.4)

Exceptional Gain/(Loss) 27.6 (10.6) 0.0 0.0 0.0


Minority Interest 0.85 0.05 (0.6) 0.0 0.0


Net ProfitNet ProfitNet ProfitNet Profit 94.594.594.594.5 114114114114 127127127127 143143143143 161161161161 Net Profit before Except. 66.9 125 127 143 161

EBITDA 85.2 162 178 221 243

Growth Revenue Gth (%) N/A 2.2 1.9 3.7 8.1

EBITDA Gth (%) nm 90.0 10.1 24.0 9.8

Opg Profit Gth (%) nm 183.7 13.4 31.7 12.8

Net Profit Gth (Pre-ex) (%) nm 86.5 1.9 12.1 12.9




ROAE (%) N/A 24.6 33.2 28.7 27.2

ROA (%) N/A 8.5 9.2 9.0 9.3

ROCE (%) N/A 21.8 25.3 22.1 21.7

Div Payout Ratio (%) 0.0 0.0 40.7 37.0 37.0

Net Interest Cover (x) NM NM NM 130.7 143.3


RM2.3bn new wins in 2017 (RM2bn construction RM300m precast)

Precast margins to normalise towards 20% range


Company Guide



FY FY FY FY DecDecDecDec 1Q1Q1Q1Q2015201520152015 2Q2Q2Q2Q2015201520152015 3Q3Q3Q3Q2015201520152015 4Q4Q4Q4Q2015201520152015

Revenue 496 500 450 470

Cost of Goods Sold 0.0 0.0 0.0 0.0

Gross ProfitGross ProfitGross ProfitGross Profit 496496496496 500500500500 450450450450 470470470470 Other Oper. (Exp)/Inc (457) (459) (422) (443)

Operating ProfitOperating ProfitOperating ProfitOperating Profit 39.239.239.239.2 41.341.341.341.3 28.228.228.228.2 27.627.627.627.6 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0

Associates & JV Inc 0.0 0.0 0.0 0.0

Net Interest (Exp)/Inc 0.44 0.37 1.90 1.84

Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0

PrePrePrePre----tax Profittax Profittax Profittax Profit 39.639.639.639.6 41.741.741.741.7 30.130.130.130.1 29.429.429.429.4 Tax (5.2) (3.8) (5.0) 0.97

Minority Interest 0.0 0.0 0.46 (1.0)

Net ProfitNet ProfitNet ProfitNet Profit 34.434.434.434.4 37.837.837.837.8 25.725.725.725.7 29.429.429.429.4 Net profit bef Except. 34.4 37.8 25.7 29.4

EBITDA 39.2 41.3 28.2 27.6

Growth Revenue Gth (%) N/A 0.8 (10.0) 4.4

EBITDA Gth (%) nm 5.4 (31.6) (2.4)

Opg Profit Gth (%) nm 5.4 (31.6) (2.4)

Net Profit Gth (Pre-ex) (%) nm 10.0 (32.1) 14.4

Margins Gross Margins (%) 100.0 100.0 100.0 100.0

Opg Profit Margins (%) 7.9 8.3 6.3 5.9

Net Profit Margins (%) 6.9 7.6 5.7 6.2

Balance Sheet (RMm)


Net Fixed Assets 206 179 163 156 151

Invts in Associates & JVs 22.1 24.2 0.0 0.0 0.0

Other LT Assets 5.77 10.8 17.4 17.4 17.4

Cash & ST Invts 157 222 468 555 662

Inventory 25.5 20.2 17.3 19.8 21.4

Debtors 1,020 790 835 872 943

Other Current Assets 4.95 8.52 14.4 14.4 14.4


ST Debt 75.1 135 137 138 139

Creditor 731 791 913 942 1,014


LT Debt 15.4 0.07 0.0 0.0 0.0

Other LT Liabilities 1.57 4.29 4.10 4.10 4.10

Shareholder’s Equity 614 315 451 541 642

Minority Interests (4.5) (5.2) 0.63 0.63 0.63


Non-Cash Wkg. Capital 311 14.1 (56.1) (45.1) (44.9)

Net Cash/(Debt) 66.1 86.4 332 417 523

Debtors Turn (avg days) N/A 175.7 154.7 156.6 154.0

Creditors Turn (avg days) N/A 192.4 211.3 227.6 219.5

Inventory Turn (avg days) N/A 5.8 4.6 4.6 4.6

Asset Turnover (x) NM 1.4 1.4 1.3 1.2

Current Ratio (x) 1.5 1.1 1.3 1.3 1.4

Quick Ratio (x) 1.4 1.1 1.2 1.3 1.4

Net Debt/Equity (X) CASH CASH CASH CASH CASH

Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH

Capex to Debt (%) 54.6 33.8 18.8 25.4 25.2

Z-Score (X) NA NA NA NA NA


Strong balance sheet and net cash position

Mainly due to higher margins contributed by precast segment


Page 8

Company Guide




Pre-Tax Profit 89.8 151 141 178 201

Dep. & Amort. 42.8 41.6 41.9 41.5 40.1

Tax Paid (23.7) (26.5) (13.0) (35.6) (40.2)

Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0

Chg in Wkg.Cap. (66.8) 297 79.9 (11.0) (0.2)

Other Operating CF 41.0 (279) (13.6) 0.0 0.0

Net Operating CFNet Operating CFNet Operating CFNet Operating CF 83.183.183.183.1 184184184184 236236236236 173173173173 201201201201 Capital Exp.(net) (49.4) (45.7) (25.7) (35.0) (35.0)

Other Invts.(net) 0.0 0.0 0.0 0.0 0.0

Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0

Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0

Other Investing CF (19.7) 395 (38.8) 0.0 0.0

Net Investing CFNet Investing CFNet Investing CFNet Investing CF (69.2)(69.2)(69.2)(69.2) 349349349349 (64.5)(64.5)(64.5)(64.5) (35.0)(35.0)(35.0)(35.0) (35.0)(35.0)(35.0)(35.0) Div Paid (19.5) (429) (70.0) (52.7) (59.5)

Chg in Gross Debt 29.2 46.5 1.64 1.00 1.00

Capital Issues 0.0 0.0 0.0 0.0 0.0

Other Financing CF (21.9) (85.5) 65.7 0.0 0.0

Net Financing CFNet Financing CFNet Financing CFNet Financing CF (12.2)(12.2)(12.2)(12.2) (468)(468)(468)(468) (2.6)(2.6)(2.6)(2.6) (51.7)(51.7)(51.7)(51.7) (58.5)(58.5)(58.5)(58.5)


Chg in Cash 1.76 65.5 169 86.3 107

Opg CFPS (sen) 11.6 (8.7) 12.1 14.2 15.5

Free CFPS (sen) 2.61 10.7 16.3 10.7 12.8








1: 28 Mar 16 1.67 1.92 BUY

2: 29 Mar 16 1.67 1.92 BUY


1

2

0.96

1.06

1.16

1.26

1.36

1.46

1.56

1.66

1.76

Jul-15 Nov-15 Mar-16

RMRMRMRM

Capex capped at RM40m going forward.

ASIAN INSIGHTS VICKERS SECURITIES ed: JS / sa:MA

HOLD (Downgrade from BUY)

Last Traded Price: Rp2,540 (JCI : 4,980.11) Price Target : Rp2,700 (6% upside)

Potential Catalyst: Toll road divestment plan materialises Where we differ: Broadly in line with consensus Analyst Chong Tjen-San +60 3 26043972 [email protected] Tiesha Putri +6221 30034931 [email protected]

What’s New Downgrade to HOLD; recent rally leaves limited upside

potential

Toll road divestment plan will be a key catalyst

Price Relative

Forecasts and Valuation FY Dec (Rp m) 2015A 2016F 2017F 2018F Revenue 14,153 23,995 29,040 30,487 EBITDA 1,715 2,437 3,029 3,312 Pre-tax Profit 1,398 2,020 2,167 2,259 Net Profit 1,048 1,499 1,548 1,623 Net Pft (Pre Ex.) 955 1,499 1,548 1,623 Net Pft Gth (Pre-ex) (%) 90.4 57.0 3.3 4.8 EPS (Rp) 78.2 112 116 121 EPS Pre Ex. (Rp) 71.3 112 116 121 EPS Gth Pre Ex (%) 37 57 3 5 Diluted EPS (Rp) 78.2 112 116 121 Net DPS (Rp) 15.6 22.4 23.1 24.2 BV Per Share (Rp) 713 809 902 1,000 PE (X) 32.5 22.7 22.0 21.0 PE Pre Ex. (X) 35.6 22.7 22.0 21.0 P/Cash Flow (X) 37.1 1099.9 70.7 24.4 EV/EBITDA (X) 21.4 17.5 14.3 13.0 Net Div Yield (%) 0.6 0.9 0.9 1.0 P/Book Value (X) 3.6 3.1 2.8 2.5 Net Debt/Equity (X) 0.3 0.8 0.7 0.6 ROAE (%) 17.0 14.7 13.5 12.7 Earnings Rev (%): 0 9 0 Consensus EPS (Rp): 104 130 174 Other Broker Recs: B: 19 S: 1 H: 5


Downgrade to Hold on limited upside Downgrade to HOLD; recent rally leaves limited upside potential. We downgraded Waskita Karya (WSKT) to HOLD as there is limited upside potential to the share price after a very strong rally in the past few months. The share price has notched up return of 50% year-to-date (YTD), outperforming the sector and the broader market, driven by consensus’ earnings upgrade (+37% in the past six months). Currently, consensus’ FY16 earnings forecast is on par with management’s guidance of Rp1.5tr (implying 43% y-o-y earnings growth in FY16). We think the current share price has priced in the positives. Toll road divestment plan would be key catalyst to watch. With 15 toll roads in the portfolio to be delivered in 2016-2018, we flag the risk of an overstretched balance sheet in the future. The company is planning for another capital injection exercise from the government in 2017. It is also considering divesting some toll roads to strategic investors. Given the high funding needs, we will closely monitor the progress of these plans. 4M16 new contracts made up 17% of management’s full-year target. WSKT has signed Rp6.7tr worth of new contracts in the first four months of this year, representing an 81% increase y-o-y. Note that the company has changed its disclosure policy to only release new contract achievements on a quarterly basis going forward. While its order book replenishment has not been the strongest among peers YTD, WSKT has plenty of contracts that are strongly slated to be awarded to it this year, coming from its in-house toll roads and Palembang LRT (making up 67% of target for new contracts for FY16).

Valuation:

We valued WSKT’s construction business at 22x FY16F PE. As for the toll roads, we valued the three toll roads that will be operational in 2017 using the DCF method. Our sum-of-the-parts TP of Rp2,700 implies 24x FY16F PE.


Delay in project execution. Delay in project execution could lead to lower earnings and trigger negative sentiment towards Indonesia's construction sector.

At A Glance

Issued Capital (m shrs) 13,573 Mkt. Cap (Rpbn/US$m) 34,476 / 2,626 Major Shareholders (%) Republic of Indonesia 68.0




Waskita Karya Version 4 | Bloomberg: WSKT IJ | Reuters: WSKT.JK Refer to important disclosures at the end of this report

89

189

289

389

489

589

689

333.4

833.4

1,333.4

1,833.4

2,333.4

2,833.4

Dec-12 Jan-14 Jan-15 Jan-16

Relative IndexRp

Waskita Karya (LHS) Relative JCI INDEX (RHS)


Company Guide

Waskita Karya

WHAT’S NEW

Downgrade to HOLD; recent rally leaves limited upside

potential

Consensus’ earnings forecast is now on par with management guidance. WSKT’s strong earnings momentum was one of the key reasons supporting our BUY rating back in February. We nonetheless noted that there has been a series of significant earnings upgrades with consensus’ FY16F EPS raised by 37% to Rp1.5tr, on par with management’s guidance. While we are confident that WSKT’s excellent project execution would continue to translate to strong top line growth going forward (which we believe is also the general consensus view), we do not see much upside on margins that could trigger further earnings upgrades. Indeed, the exceptionally high gross margins of WSKT’s precast segment (28.0% in 1Q16) leaves us concerned whether it is sustainable. As a comparison, WTON was only able to book 12.4% gross margin in the same quarter despite its utilisation rate reaching 79%.

We also flag a similar risk in WSKT’s construction segment, where gross margins hit a record-high in 1Q16 (16.3% vs. typical low-teens gross margin for state-run contractors). Nonetheless, we think the high margins will last longer in construction segment along with rising revenue contribution from WSKT’s in-house toll road construction. We note that while the accounting standard allows WSKT to book profits from its self-owned toll road construction work, the profit generated by precast segment will likely be eliminated upon consolidation of its financial statements.

We are maintaining our net profit forecast for FY16. However, we highlight that our FY17 net profit forecast is now 14% below consensus as we have assumed Rp431bn start-up losses to be generated by WSKT’s two toll roads, Pejagan-Pemalang and Kanci-Pejagan, next year. We expect FY17F net profit to only grow by 5% y-o-y in FY17F although EBITDA should continue to record robust growth of 24% y-o-y. We believe there is downside risk to consensus’ FY17F net profit forecast as it has yet to factor in potential start-up losses from WSKT’s toll roads operations.

Flagging balance sheet risk, but potential capital injection in 2017 and toll road divestment plan would allay these concerns. With 15 toll road concessions in the portfolio, WSKT is set to gear up its balance sheet in the next two years. The company is a majority shareholder of 8 toll road concessions, which is estimated to require an investment of Rp51tr, funded by a combination of 70% in debt and 30% equity. WSKT also owns minority stakes in seven other toll road concessions. While this strategy should continue to boost net profit growth of WSKT’s construction segment in

the next 2-3 years, we believe it would not be accompanied by strong operating cash flow generation. We acknowledge that despite expecting strong earnings growth in FY16, the company expects operating cash flow to deteriorate to –Rp3.8tr vs. +Rp918bn in FY15.

WSKT is planning to propose another capital injection exercise to the government in 2017. The company is also considering divesting some of its toll roads to strategic investors after the construction completes. Both of these plans, if they materialise, would ease balance sheet concern and act as a key catalyst for the share price, in our view.

Consensus EPS Trend vs. Share Price

Source: Bloomberg Finance L.P, AllianceDBS Research, DBS Vickers

Construction and Precast Segment Gross Margin Trend


1,000

1,200

1,400

1,600

1,800

2,000

2,200

2,400

2,600

2,800

900

1,000

1,100

1,200

1,300

1,400

1,500

1,600

Rp bn

WSKT net profit FY16F Price (RHS)

Company guidance (Rp1.5tr)

0%

5%

10%

15%

20%

25%

30%

1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16

Construction gross margin Precast gross margin


Company Guide

Waskita Karya


Earnings Drivers:

Re-routing its business plan. The toll road acquisition spree last year marked a change in WSKT’s business model. The company is now aiming to become one of the leading toll road operators in Indonesia by 2018. The company is the majority stakeholder for seven toll road concessions in Java and one in Sumatra whose total investment value is Rp51tr. It also owns minority stakes in seven other toll road concessions.

We estimate that the construction works for WSKT’s 15 toll road concessions could be worth over Rp55tr. Approximately Rp15tr has been awarded and included in WSKT’s order book. Management expects to book contracts worth another Rp15tr from its self-owned toll roads for the remainder of this year.

Capital intensive toll road business would require further capital raising. The cyclical nature of the construction business and intensifying competition among contractors are the main reasons for WSKT’s expansion into toll road operations. While this expansion should secure a recurring income stream in the long term, this also exposes WSKT to financial and traffic risks – particularly during the initial years of toll road operations. Given the high capital requirement and long gestation period of the business, the toll road acquisition spree last year has raised concerns on WSKT’s ability to fund its expansion plan.

Assuming a capital structure of 70% debt and 30% equity for the 15 toll roads, WSKT needs to invest Rp14.6tr to fund its equity stakes. The company will have to increase its gearing given that the Rp5.3tr rights issue proceeds received last year can only cover 36% of the equity investment requirement. The company plans to propose Rp3.1tr capital injection from the government in 2017. One more alternative funding that the company is considering is to partially divest its toll roads once the construction completes. We believe toll road divestment will be a key catalyst for WSKT in the future. The recent development on this plan is the gradual divestment of its 25% stake in Kanci-Pejagan toll road to Adhi Karya (ADHI) in exchange for construction services given by ADHI to the toll road’s existing stakeholders.

New Contract Wins (Rp bn)

Carry Over Contract (Rp bn)

Construction Gross Margin (%)

Precast Gross Margin (%)

Toll Road Equity Investment's Funding Structure (Rp tr)


22,625

32,000

40,000

31,150 31,150

0

5,771

11,543

17,314

23,086

28,857

34,629

2014A 2015A 2016F 2017F 2018F

10,516

19,915

36,898

54,09857,786

0

11,788

23,577

35,365

47,153

2014A 2015A 2016F 2017F 2018F

10.1

1312.4 12.5 12.6

0.0

2.6

5.3

7.9

10.6

13.2

2014A 2015A 2016F 2017F 2018F

(5,000)

(4,000)

(3,000)

(2,000)

(1,000)

0

1,000

2,000

2012A 2013A 2014A 2015A 2016F (Company guidance)

5.3

5.0

4.3

2015 rights issue Bonds Waskita precast 2017 rights issue


Company Guide

Waskita Karya

Balance Sheet:

Further fund raising needed. As at the end of 1Q16, WSKT had a net debt of Rp5.6tr, translating to net gearing of 0.59x. We expect its debt to rise as the company extends its business model to include the capital-intensive toll road operating business and expansion of its precast business. Management has budgeted Rp6tr capex this year, most of which is for toll road expansion. To fund this, WSKT plans to issue bonds amounting to Rp3-5tr and divest Waskita Beton Precast through IPO this year with targeted proceeds of Rp4tr.


Award of large-sized infrastructure contracts. The award of large-sized, multi-year projects will improve WSKT’s revenue and earnings visibility, and ultimately lead to an upward re-rating of its share price.

Incremental value from toll roads. To better capture the toll road operating business, we incorporate the NPV of WSKT’s toll roads that will be operational in 2017 into our TP, i.e. Pejagan-Pemalang, Depok-Antasari and Kanci-Pejagan. We assume that each toll road will achieve WSKT’s expected traffic volume by year 3. For traffic volume, we assumed a CAGR of 12-20% in the first 10 years, 5-7% in the following 10 years and 2% up to year 40 when the concessions end. Based on our DCF calculation (WACC 9.6%), these toll roads add Rp2.7tr incremental value to WSKT or a Rp200 increase to our TP. Note that our project IRR assumptions of 13-14% are lower than management’s guidance of 17% and we have yet to include the remaining 12 toll roads into our TP calculation.

Key Risks:

Persistently weak operating cash flow. We have yet to see positive operating cash flows at WSKT despite strong contract wins last year. Its venture into the toll road operating business could also deteriorate WSKT’s operating cash flow during the early years of operations. As such, its balance sheet could remain stretched, forcing it to make another rights or bond issue in the future.

Unsustainable precast margins. We are cautious on the sustainability of its precast margins. The company expects to be able to sustain the segment's gross margin at 15%. However, we think this will be challenging given that Wika Beton, the market leader in precast business, only expects to sustain its gross margin at 13%. We believe this can only be achieved through continuous product innovation.

Company Background

PT Waskita Karya Tbk (WSKT) is a state-owned contractor engaged in a wide variety of construction activities including toll roads, bridges, ports and buildings. It is the most leveraged proxy to the Indonesian construction sector, deriving c. 80% of its revenues from construction and >50% of its projects from the Government of Indonesia.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.6

0.7

0.7

0.8

0.8

0.9

0.9

1.0

1.0

0.00

0.20

0.40

0.60

0.80

1.00

1.20

2014A 2015A 2016F 2017F 2018F


0.0

1,000.0

2,000.0

3,000.0

4,000.0

5,000.0

6,000.0

7,000.0

2014A 2015A 2016F 2017F 2018F


Rpm

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

2014A 2015A 2016F 2017F 2018F

Avg: 15.5x

+1sd: 19.3x

+2sd: 23.2x

‐1sd: 11.7x

‐2sd: 7.8x6.7

8.7

10.7

12.7

14.7

16.7

18.7

20.7

22.7

24.7


(x)

Avg: 2.91x

+1sd: 3.74x

+2sd: 4.57x

‐1sd: 2.09x

‐2sd: 1.26x1.1

1.6

2.1

2.6

3.1

3.6

4.1

4.6

5.1

5.6

6.1


(x)

Rpbn


Company Guide

Waskita Karya

Key Assumptions

FY Dec 2014A 2015A 2016F 2017F 2018F

New Contract Wins (Rp 22,625 32,000 40,000 31,150 31,150 Carry Over Contract (Rp 10,516 19,915 36,898 54,098 57,786 Construction Gross 10.1 13.0 12.4 12.5 12.6 Precast Gross Margin (%) 18.2 15.9 14.0 14.0 14.0

Segmental Breakdown

FY Dec 2014A 2015A 2016F 2017F 2018F

Revenues (Rpbn)

Construction 9,484 12,052 20,374 24,450 25,143 Building rentals/Property 0.30 0.60 0.60 0.60 0.60 Precast 803 2,069 3,620 4,344 4,996 Energy 0.0 0.0 0.0 0.0 0.0 Others 0.0 31.8 0.0 246 348 Total 10,287 14,153 23,995 29,040 30,487 Gross Profit (Rpbn)

Construction 963 1,561 2,526 3,056 3,168 Building rentals/Property 0.30 0.60 0.60 0.60 0.60 Precast 146 328 507 608 699 Energy 0.0 0.0 0.0 0.0 0.0 Others 0.0 0.0 0.0 246 348 Total 1,109 1,889 3,034 3,911 4,216 Gross Profit Margins (%) Construction 10.1 13.0 12.4 12.5 12.6 Building rentals/Property 99.7 100.0 100.0 100.0 100.0 Precast 18.2 15.9 14.0 14.0 14.0 Energy N/A N/A N/A N/A N/A Others N/A 0.0 N/A 100.0 100.0 Total 10.8 13.4 12.6 13.5 13.8


FY Dec 2014A 2015A 2016F 2017F 2018F

Revenue 10,287 14,153 23,995 29,040 30,487 Cost of Goods Sold (9,178) (12,232) (20,961) (25,129) (26,271) Gross Profit 1,109 1,921 3,034 3,911 4,216 Other Opng (Exp)/Inc (431) (518) (888) (1,345) (1,450) Operating Profit 678 1,403 2,146 2,566 2,766 Other Non Opg (Exp)/Inc 20.5 159 0.0 0.0 0.0 Associates & JV Inc 197 10.1 194 241 275 Net Interest (Exp)/Inc (140) (267) (321) (641) (783) Exceptional Gain/(Loss) 0.0 92.8 0.0 0.0 0.0 Pre-tax Profit 756 1,398 2,020 2,167 2,259 Tax (254) (350) (520) (618) (636) Minority Interest 0.30 0.10 0.40 0.40 0.40 Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 502 1,048 1,499 1,548 1,623 Net Profit before Except. 502 955 1,499 1,548 1,623 EBITDA 934 1,715 2,437 3,029 3,312 Growth

Revenue Gth (%) 6.2 37.6 69.5 21.0 5.0 EBITDA Gth (%) 27.3 83.7 42.1 24.3 9.3 Opg Profit Gth (%) 18.9 106.9 52.9 19.6 7.8 Net Profit Gth (Pre-ex) (%) 36.3 90.4 57.0 3.3 4.8 Margins & Ratio




Company Guide

Waskita Karya


FY Dec 1Q2015 2Q2015 3Q2015 4Q2015 1Q2016

Revenue 1,403 2,582 3,438 6,731 3,072 Cost of Goods Sold (1,246) (2,258) (3,024) (5,704) (2,552) Gross Profit 157 324 414 1,027 520 Other Oper. (Exp)/Inc (50.0) (90.6) (112) (245) 58.2 Operating Profit 107 233 301 782 578 Other Non Opg (Exp)/Inc (18.0) 1.40 (4.3) 159 (151) Associates & JV Inc 11.1 37.2 14.4 (52.6) (35.2) Net Interest (Exp)/Inc (50.2) (67.6) (27.6) (122) (132) Exceptional Gain/(Loss) 0.0 0.0 22.8 70.0 0.0 Pre-tax Profit 50.1 204 307 837 260 Tax (38.2) (44.7) (77.7) (190) (136) Minority Interest 0.0 0.10 (0.1) 0.20 3.20 Net Profit 11.9 160 229 647 127 Net profit bef Except. 11.9 160 206 578 127 EBITDA 100 272 311 889 392

Growth

Revenue Gth (%) (72.0) 84.0 33.2 95.8 (54.4) EBITDA Gth (%) (81.3) 171.1 14.5 185.5 (55.9) Opg Profit Gth (%) (76.2) 117.5 29.1 159.7 (26.1) Net Profit Gth (Pre-ex) (%) (96.8) 1,238.9 29.0 180.4 (78.0) Margins



FY Dec 2014A 2015A 2016F 2017F 2018F

Net Fixed Assets 622 1,923 7,703 8,247 8,648 Invts in Associates & JVs 735 1,572 1,572 1,572 1,572 Other LT Assets 1,080 8,739 8,739 8,739 8,739 Cash & ST Invts 1,700 5,522 968 885 1,297 Inventory 327 388 617 736 769 Debtors 6,842 10,093 14,356 17,374 18,240 Other Current Assets 1,237 2,073 2,493 2,991 3,228 Total Assets 12,542 30,309 36,447 40,544 42,491

ST Debt 1,917 3,483 3,483 3,483 3,483 Creditor 5,272 8,773 12,121 14,470 15,104 Other Current Liab 539 1,409 1,409 1,409 1,409 LT Debt 1,246 4,547 6,047 6,547 6,547 Other LT Liabilities 803 2,394 2,394 2,394 2,394 Shareholder’s Equity 2,759 9,547 10,837 12,085 13,398 Minority Interests 5.90 157 157 156 156 Total Cap. & Liab. 12,542 30,309 36,447 40,544 42,491

Non-Cash Wkg. Capital 2,594 2,371 3,935 5,223 5,723 Net Cash/(Debt) (1,463) (2,508) (8,562) (9,144) (8,733) Debtors Turn (avg days) 220.2 218.4 185.9 199.4 213.2 Creditors Turn (avg days) 186.9 212.0 182.7 194.8 207.6 Inventory Turn (avg days) 12.1 10.8 8.8 9.9 10.6 Asset Turnover (x) 1.0 0.7 0.7 0.8 0.7 Current Ratio (x) 1.3 1.3 1.1 1.1 1.2 Quick Ratio (x) 1.1 1.1 0.9 0.9 1.0 Net Debt/Equity (X) 0.5 0.3 0.8 0.7 0.6 Net Debt/Equity ex MI (X) 0.5 0.3 0.8 0.8 0.7 Capex to Debt (%) 10.4 11.7 61.7 7.6 6.7 Z-Score (X) NA NA NA NA NA



Company Guide

Waskita Karya


FY Dec 2014A 2015A 2016F 2017F 2018F Pre-Tax Profit 756 1,398 2,019 2,166 2,258 Dep. & Amort. 38.0 143 96.0 221 270 Tax Paid (254) (350) (520) (618) (636) Assoc. & JV Inc/(loss) 0.0 1.00 0.0 0.0 0.0 Chg in Wkg.Cap. (417) 148 (1,564) (1,288) (500) Other Operating CF (211) (421) 0.0 0.0 0.0 Net Operating CF (88.7) 918 30.9 481 1,392 Capital Exp.(net) (329) (938) (5,876) (764) (671) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV (755) (498) 0.0 0.0 0.0 Div from Assoc & JV 1.10 0.0 0.0 0.0 0.0 Other Investing CF 0.0 (170) 0.0 0.0 0.0 Net Investing CF (1,083) (1,607) (5,876) (764) (671) Div Paid (110) (100) (210) (300) (310) Chg in Gross Debt 1,782 (729) 1,500 500 0.0 Capital Issues 59.2 5,348 0.0 0.0 0.0 Other Financing CF (3.1) 0.0 0.0 0.0 0.0 Net Financing CF 1,728 4,519 1,291 200 (310) Currency Adjustments (1.2) 5.90 0.0 0.0 0.0 Chg in Cash 556 3,836 (4,555) (82.7) 411 Opg CFPS (Rp) 34.0 57.5 119 132 141 Free CFPS (Rp) (43.2) (1.5) (436) (21.1) 53.8





Rating

1: 10 Aug 15 1820 1305 FULLY VALUED

2: 11 Nov 15 1680 1700 HOLD

3: 01 Feb 16 1730 2150 BUY

4: 02 May 16 2370 2700 BUY

5: 04 May 16 2550 2700 BUY

6: 11 May 16 2440 2700 BUY

7: 30 May 16 2590 2700 BUY

8: 01 Jun 16 2510 2700 BUY


12

3

456 7

8

1444

1644

1844

2044

2244

2444

2644


Rp


ed:CK / sa:BC

HOLDHOLDHOLDHOLDLast Traded Price: Last Traded Price: Last Traded Price: Last Traded Price: RM1.69 (KLCIKLCIKLCIKLCI : : : : 1,630.96) Price Target :Price Target :Price Target :Price Target : RM1.55 (-8% downside) Potential Catalyst: Potential Catalyst: Potential Catalyst: Potential Catalyst: Higher margin contract wins and property sales

Where we differ:Where we differ:Where we differ:Where we differ: We believe the holding company discount will widen

post listing of REIT and construction Analyst Chong Tjen-San +60 3 26043972 [email protected]

What’s New • 1Q16 profit hit by unrealised forex loss, marginal

improvement for construction and property

• Listing of REIT & construction likely to be delayed

• Exploring other options to degear balance sheet

• Maintain HOLD, TP unchanged at RM1.55

Price Relative

Forecasts and Valuation FY FY FY FY DecDecDecDec ((((RMRMRMRM m) m) m) m) 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF

Revenue 1,668 2,369 2,591 2,523 EBITDA 234 280 333 378 Pre-tax Profit 272 202 213 223 Net Profit 219 155 165 175 Net Pft (Pre Ex.) 161 155 165 175 Net Pft Gth (Pre-ex) (%) 33.7 (3.7) 6.6 5.5 EPS (sen) 18.3 9.39 10.0 10.6 EPS Pre Ex. (sen) 13.4 9.39 10.0 10.6 EPS Gth Pre Ex (%) 34 (30) 7 5 Diluted EPS (sen) 16.8 9.39 10.0 10.6 Net DPS (sen) 3.38 3.38 3.38 3.38 BV Per Share (sen) 218 165 173 181 PE (X) 9.3 18.0 16.9 16.0 PE Pre Ex. (X) 12.6 18.0 16.9 16.0 P/Cash Flow (X) nm 8.1 9.8 7.8 EV/EBITDA (X) 17.1 17.6 15.5 14.1 Net Div Yield (%) 2.0 2.0 2.0 2.0 P/Book Value (X) 0.8 1.0 1.0 0.9 Net Debt/Equity (X) 0.7 0.8 0.8 0.8 ROAE (%) 9.0 5.8 5.9 6.0

Earnings Rev (%):Earnings Rev (%):Earnings Rev (%):Earnings Rev (%): 0 1 N/A Consensus EPS Consensus EPS Consensus EPS Consensus EPS (sensensensen):::: 11.3 13.3 14.9 Other Broker Recs:Other Broker Recs:Other Broker Recs:Other Broker Recs: B: 11 S: 1 H: 6


Widening holding company discount Degearing exercise unlikely to exciteDegearing exercise unlikely to exciteDegearing exercise unlikely to exciteDegearing exercise unlikely to excite

WCT is still looking to list its construction arm and REIT to help degear its balance sheet but the timing remains fluid. In the meantime, WCT is looking to dispose of some other assets (land and office). As at 31 March 2016, WCT was in a net debt position of RM2.7bn (including JV) or net gearing of 1.0x. While the listing exercise is much needed to address its cash flow issues with its ongoing mall expansion, we are concerned that the remaining core business left in WCT is its deteriorating property development business. Unless the listing entails a hefty special dividend or a meaningful restricted offer for shares, we see no reason to be bullish on the exercise.

Construction division on stronger footingConstruction division on stronger footingConstruction division on stronger footingConstruction division on stronger footing Its outstanding orderbook is now RM4.4bn, given the strong 2015 wins of RM3.1bn. We are encouraged that 74% of its orderbook now constitutes engineering and infrastructure works, which give it more flexibility for margin enhancement. However, note that RM755m of this orderbook relates to TRX infra work which does not generate any cash flow as profits will be used to acquire a plot of land in TRX. WCT is guiding for RM2bn worth of new orders this year.

Lacklustre property sales to offset constructionLacklustre property sales to offset constructionLacklustre property sales to offset constructionLacklustre property sales to offset construction WCT recorded property sales of RM373m for 2015 (vs RM460m in 2014). It has set a sales target of RM600m for FY16F and the main launch for this year will be the residential portion of its OUG project known as Paradigm Garden City. While the indicative pricing of RM800-850psf is lower than its Azure Residences at RM1000psf, we are concerned that take-up rates will be lacklustre with the still poor sentiment on the sector.

Valuation:

We have a HOLD rating for WCT with an SOP-based TP of

RM1.55. We value its construction business using PE, while its

property development and property investment units are

valued based on DCF and market value respectively.


With a stronger construction orderbook and pipeline ahead,

we think the key risk is the continued deterioration of its

property franchise and widening holding company discount

from the listing of its construction unit and REIT. At A Glance Issued Capital (m shrs) 1,248

Mkt. Cap (RMm/US$m) 2,109 / 514


WCT Capital 19.8

EPF 7.3

Free Float (%) 44





WCT Holdings Bhd Version 3 | Bloomberg: WCTHG MK | Reuters: WCTE.KL Refer to important disclosures at the end of this report

51

71

91

111

131

151

171

191

211

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2.6

2.8


Relative IndexRM

WCT Holdings Bhd (LHS) Relative KLCI INDEX (RHS)


Company Guide

WCT Holdings Bhd

WHAT’S NEW

A slow start but it could get better

Dragged by forex lossDragged by forex lossDragged by forex lossDragged by forex loss.... Its 1Q16 headline net profit of RM9m

(-73% y-o-y and -87% q-o-q) included an unrealised foreign

exchange loss of RM23m in relation to its Qatar project.

Stripping this out, net profit would have been RM32m –

broadly in line with our expectations.

Construction back in the blackConstruction back in the blackConstruction back in the blackConstruction back in the black. 1Q16 construction EBIT

registered a small profit of RM3.7m vs a loss of RM19m in

4Q15. Stripping out the effects of forex, we estimate that

1Q16 construction EBIT was RM27m vs RM11m in 4Q15

while 1Q margins improved to 3.7% vs 1.4% in 4Q15. There

should be gradual improvements in margins in the

subsequent quarters as the higher margin local civil

engineering works filter through.

PPPProperty salesroperty salesroperty salesroperty sales still slowstill slowstill slowstill slow.... 1Q16 property EBIT was higher at

RM17m vs RM11m in 4Q15 (vs RM25m in 3Q15) on the back

of a 66% increase in revenue to RM93m. Unbilled sales as at

31 March 2016 stood at RM551m while its sales target for

FY16F is RM600m. 1Q property sales amounted to RM68m

while the official launch of its Paradigm Garden City in OUG,

whose first phase is known as R2, has not occurred. However,

based on the bookings received for its soft launch where

WCT collected a deposit of RM10k, this could translate into

sales of RM137m.

Exploring other avenues to reduce net gearingExploring other avenues to reduce net gearingExploring other avenues to reduce net gearingExploring other avenues to reduce net gearing. . . . We

understand the timing of the listing of its REIT and

construction businesses may take longer than expected. Its

net debt as at 31 March 2016 (inclusive of JV) was RM2.7bn

(net gearing of 1.0x). WCT is contemplating the disposal of

some assets and land which could raise up to RM600m.

Together with the JV with UEM Sunrise for the Rawang

development, the total amount raised could hit RM800m

which would bring its net gearing down to 0.7x. Nonetheless,

capex requirements over the next few years will be high with

the expansion of its mall business.

.


FY FY FY FY DecDecDecDec 1Q1Q1Q1Q2015201520152015 4Q4Q4Q4Q2015201520152015 1Q1Q1Q1Q2016201620162016 % chg yoy % chg yoy % chg yoy % chg yoy % chg qoq% chg qoq% chg qoq% chg qoq

Revenue 352 522 485 37.9 (7.1)

Cost of Goods Sold (297) (481) (419) 41.1 (12.9)

Gross ProfitGross ProfitGross ProfitGross Profit 54.954.954.954.9 41.641.641.641.6 66.466.466.466.4 20.820.820.820.8 59.459.459.459.4

Other Oper. (Exp)/Inc 4.33 (33.4) (36.9) (951.9) 10.3

Operating ProfitOperating ProfitOperating ProfitOperating Profit 59.359.359.359.3 8.178.178.178.17 29.529.529.529.5 (50.3)(50.3)(50.3)(50.3) 260.6260.6260.6260.6


Associates & JV Inc 3.49 73.0 9.15 162.4 (87.5)

Net Interest (Exp)/Inc (20.0) 2.90 (13.4) 32.9 nm

Exceptional Gain/(Loss) 0.0 0.0 23.0 nm nm

PrePrePrePre----tax Profittax Profittax Profittax Profit 42.842.842.842.8 84.184.184.184.1 48.248.248.248.2 (41.1)(41.1)(41.1)(41.1) (70.0)(70.0)(70.0)(70.0)

Tax (9.5) (15.4) (15.1) 59.5 (2.0)

Minority Interest (0.1) 0.22 (1.3) 1,478.0 (688.2)

Net ProfitNet ProfitNet ProfitNet Profit 33.233.233.233.2 68.968.968.968.9 8.838.838.838.83 (73.4)(73.4)(73.4)(73.4) (87.2)(87.2)(87.2)(87.2)

Net profit bef Except. 33.2 68.9 31.8 (3.61) (53.6)

EBITDA 62.8 81.2 38.6 (38.4) (52.4)

Margins (%)






Company Guide

WCT Holdings Bhd


Earnings Drivers:

Stronger construction franchise. Stronger construction franchise. Stronger construction franchise. Stronger construction franchise. WCT’s construction division has

now an outstanding orderbook of RM4.2bn, given the strong

2015 wins of RM3.1bn. We are encouraged that 74% of its

orderbook now constitutes engineering and infrastructure

works, which give more flexibility in margin accretion. However,

note that RM755m of this orderbook relates to TRX infra work

which does not generate any cash flow as profits will be used to

acquire a plot of land in TRX.

It is guiding for RM2bn worth of new orders this year where

projects in the pipeline could be from additional RAPID, TRX and

Kwasa Damansara Land works, MRT 2, LRT 3, and Pan Borneo

Highway. The revival of its KK Water Supply scheme project will

be an added boost to its orderbook, while it will also continue

to focus on projects in Qatar. We understand WCT has

tendered for a prison project worth RM1bn there.

Softer property sales to offset better construction earnings.Softer property sales to offset better construction earnings.Softer property sales to offset better construction earnings.Softer property sales to offset better construction earnings.

WCT recorded property sales of RM373m in 2015 (vs RM460m

in 2014). It has set a sales target of RM600m for FY16F and the

main launch for this year will be the residential portion of its

OUG project known as Paradigm Garden City. While the

indicative pricing of RM800-850psf is lower than its Azure

Residences at RM1000psf, we are concerned that the take-up

rates will be lacklustre with the still poor sentiment on the

sector. The first phase of Paradigm Garden City is known as R2

(419 units with a GDV of RM418m). Average built-ups are

between 941 and 1,619 sq ft. The next phase is slated for end-

2016 and will have bigger built-ups of 1,000-2,900 sq ft and

comprise 940 units.

Two assets slated for REIT.Two assets slated for REIT.Two assets slated for REIT.Two assets slated for REIT. WCT’s REIT will comprise two assets

initially, i.e. Paradigm Mall in Kelana Jaya and AEON BBT Mall in

Klang. The combined asset size is c.RM1.2bn. The two malls

generate positive EBITDA of RM40-45m and RM30m

respectively. Although Gateway@KLIA2 has received the

extension of its concession period to 25 years (which lowers the

yearly amortisation), we think that it will be difficult to inject

this asset into the REIT given its concession structure and WCT

also only owns 70% of the concession.

Post the completion of the renewal of tenancies for Paradigm

Mall, WCT has managed to achieve a 10% increase in base

rental rates to RM7.50 psf. This is on the back of occupancy

rates of 94%. At a later stage, other assets such as Paradigm

Johor Bahru (1.25m sq ft) and Paradigm Mall OUG (1.5m sq ft)

may be injected. Paradigm Johor Bahru is slated to open

towards the later part of 2016. So far, it has managed to clinch

50% tenancy of the total NLA of 1.25m sq ft and has targeted

an average rental rate of RM7.50 psf.

Construction new orders


Construction profit

Property development profit

Property investment profit


994

3,100

1,7001,500 1,500

0

447

895

1,342

1,789

2,236

2,684

3,131

2014A 2015A 2016F 2017F 2018F

4.85

5.975.53

5.86

0.00

1.22

2.45

3.67

4.90

6.12

2014A 2015A 2016F 2017F 2018F

94

140

95

108 110

0

28

57

85

114

142

2014A 2015A 2016F 2017F 2018F

73.569

81.286.1

97.4

0.0

19.7

39.4

59.0

78.7

98.4

2014A 2015A 2016F 2017F 2018F

3532.5

43.8

48.2

53.7

0.0

10.8

21.7

32.5

43.4

54.2

2014A 2015A 2016F 2017F 2018F


Company Guide

WCT Holdings Bhd

Balance Sheet:

Balance sheet to be degeared.Balance sheet to be degeared.Balance sheet to be degeared.Balance sheet to be degeared. WCT is a net debt position of

RM2.7bn (net gearing of 1.0x) as at 31 March 2016, inclusive of

debt at JV level (Paradigm Mall and Gateway@KLIA2). The

listing of its REIT and construction division is still ongoing but

the timing remains fluid. This was expected to bring net gearing

levels to a more manageable 0.4x. In the meantime, WCT is

looking to dispose of some other assets which could raise up to

RM600m. Together with the sale of Rawang Land to UEM

Sunrise, this could bring its net gearing level to 0.7x. But capex

requirements over the next few years will still be higher with the

construction of Paradigm Garden City in OUG.


Stronger contract flows. WCT is guiding for RM2bn worth of

new wins in 2016. If it is able to surprise on the upside with

higher-margin contracts, this could act as a rerating catalyst.

Resurgence in property sales in 2016.Resurgence in property sales in 2016.Resurgence in property sales in 2016.Resurgence in property sales in 2016. WCT has set a sales

target of RM600m for FY16F. This is highly dependent on the

success of Paradigm Garden City. In our view, this target is

challenging and we expect property sales to be lacklustre given

the still poor consumer sentiment, and it could see more

downside risks.

Special dividends?Special dividends?Special dividends?Special dividends? Investors hoping for a bumper special

dividend from the successful arbitration for the Dubai race

course project will be disappointed. The timeline for completion

is expected to be long (two years) while WCT's capex

requirements over the next few years are high given the

expansion of its retail malls. The arbitral tribunal under the

Dubai International Arbitration Centre (DIAC) has ruled in

favour of the group in a dispute with the Meydan Group. The

total amount to be paid is AED1.1bn (c.RM1.2bn) for work

done, repayment of performance bond, loss of profit, damages

and interest, arbitration fees and legal costs. The carrying value

of performance security deposits and receivables under dispute

in WCT’s books was c.AED318m (RM330m). Hence, this will

translate into a net gain of RM860m or RM0.47/share.

Key Risks:

Execution risks.Execution risks.Execution risks.Execution risks. WCT has been beefing up its orderbook with

more civil engineering jobs, which is positive. What is pertinent

now is the ability to execute these orders now and deliver

better-margin construction earnings. We think this is crucial for

a sustained rerating of the stock.

COMPANY BACKGROUND

WCT is primarily involved in construction, property

development and property investment. Its construction division

is involved in a wide array of civil infrastructure and building

works. The property division has developments in the Klang

Valley, Iskandar Malaysia and Sabah. WCT also owns three

malls and a hotel as part of its property investment assets.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.2

0.2

0.2

0.3

0.3

0.3

0.3

0.3

0.4

0.4

0.4

0.00

0.20

0.40

0.60

0.80

1.00

2014A 2015A 2016F 2017F 2018F


0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

450.0

2014A 2015A 2016F 2017F 2018F


RMm

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

2014A 2015A 2016F 2017F 2018F

Avg: 15.2x

+1sd: 18.5x

+2sd: 21.8x

-1sd: 11.8x

-2sd: 8.5x

6.9

8.9

10.9

12.9

14.9

16.9

18.9

20.9

22.9


(x)

Avg: 1.09x

+1sd: 1.39x

+2sd: 1.69x

-1sd: 0.79x

-2sd: 0.49x0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8


(x)


Company Guide

WCT Holdings Bhd

Key Assumptions


Construction new orders 994 3,100 1,700 1,500 1,500

Construction margins 4.85 5.97 5.53 5.80 6.00

Construction profit 93.9 140 95.2 108 110

Property development profit 73.5 69.0 81.2 86.1 97.4

Property investment profit 35.0 32.5 43.8 48.2 53.7

Segmental Breakdown



Property Development 399 336 509 577 529

Property Investment 59.9 61.1 140 148 157

Inter-segment (732) (846) 0.0 0.0 0.0


Pretax profit (RMm) Construction 93.9 140 95.2 108 110

Property Development 73.5 69.0 81.2 86.1 97.4

Property Investment 35.0 32.5 43.8 48.2 53.7

Others (51.3) 30.4 (18.2) (29.4) (37.9)

TotalTotalTotalTotal 151151151151 272272272272 202202202202 213213213213 223223223223

Pretax Margins (%) Construction 4.9 6.6 5.5 5.8 6.0

Property Development 18.4 20.5 16.0 14.9 18.4

Property Investment 58.4 53.2 31.3 32.7 34.1




Revenue 1,662 1,668 2,369 2,591 2,523








Minority Interest (2.1) 2.49 3.74 5.61 7.01



EBITDA 184 234 280 333 378

Growth Revenue Gth (%) (0.6) 0.3 42.1 9.4 (2.6)

EBITDA Gth (%) (34.9) 27.0 19.6 18.9 13.6

Opg Profit Gth (%) (38.0) 32.2 1.7 9.2 6.6

Net Profit Gth (Pre-ex) (%) (39.0) 33.7 (3.7) 6.6 5.5




ROAE (%) 5.9 9.0 5.8 5.9 6.0

ROA (%) 2.2 3.4 2.2 2.2 2.2

ROCE (%) 2.6 3.0 2.7 2.8 2.8

Div Payout Ratio (%) 31.0 18.5 35.9 33.7 32.0




Company Guide

WCT Holdings Bhd



Revenue 352 422 372 522 485

Cost of Goods Sold (297) (377) (313) (481) (419)

Gross ProfitGross ProfitGross ProfitGross Profit 54.954.954.954.9 45.845.845.845.8 58.458.458.458.4 41.641.641.641.6 66.466.466.466.4 Other Oper. (Exp)/Inc 4.33 7.77 61.8 (33.4) (36.9)

Operating ProfitOperating ProfitOperating ProfitOperating Profit 59.359.359.359.3 53.553.553.553.5 120120120120 8.178.178.178.17 29.529.529.529.5 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0


Net Interest (Exp)/Inc (20.0) (19.4) (21.3) 2.90 (13.4)


PrePrePrePre----tax Profittax Profittax Profittax Profit 42.842.842.842.8 43.843.843.843.8 101101101101 84.184.184.184.1 25.225.225.225.2 Tax (9.5) (14.9) (15.3) (15.4) (15.1)

Minority Interest (0.1) 2.11 0.25 0.22 (1.3)

Net ProfitNet ProfitNet ProfitNet Profit 33.233.233.233.2 31.131.131.131.1 85.985.985.985.9 68.968.968.968.9 8.838.838.838.83 Net profit bef Except. 33.2 31.1 85.9 68.9 8.83

EBITDA 62.8 63.2 122 81.2 38.6

Growth Revenue Gth (%) 9.1 20.1 (12.0) 40.4 (7.1)

EBITDA Gth (%) 62.4 0.7 93.4 (33.6) (52.4)

Opg Profit Gth (%) 64.0 (9.7) 124.5 (93.2) 260.6

Net Profit Gth (Pre-ex) (%) 63.7 (6.5) 176.6 (19.8) (87.2)




Balance Sheet (RMm)


Net Fixed Assets 1,232 1,434 1,766 2,068 2,339


Other LT Assets 1,723 1,966 1,966 1,966 1,966

Cash & ST Invts 952 665 643 552 525

Inventory 506 695 760 780 774

Debtors 1,022 1,156 1,328 1,431 1,400

Other Current Assets 240 183 183 183 183


ST Debt 584 520 520 520 520

Creditor 1,025 936 1,256 1,357 1,326


LT Debt 1,846 2,073 2,223 2,373 2,523



Minority Interests 52.8 36.8 33.1 27.5 20.5


Non-Cash Wkg. Capital 729 1,088 1,005 1,028 1,021

Net Cash/(Debt) (1,479) (1,928) (2,100) (2,341) (2,519)




Asset Turnover (x) 0.3 0.3 0.3 0.3 0.3

Current Ratio (x) 1.7 1.8 1.6 1.6 1.6

Quick Ratio (x) 1.2 1.2 1.1 1.1 1.0

Net Debt/Equity (X) 0.6 0.7 0.8 0.8 0.8


Capex to Debt (%) 0.1 1.1 14.6 14.0 13.3

Z-Score (X) 1.1 1.1 1.2 1.2 1.2



Company Guide

WCT Holdings Bhd



Pre-Tax Profit 161 272 202 213 223

Dep. & Amort. 27.4 26.7 69.0 102 133

Tax Paid (58.8) (60.4) (50.5) (53.3) (55.8)

Assoc. & JV Inc/(loss) (15.4) (30.2) (33.2) (36.6) (40.2)

Chg in Wkg.Cap. (503) (531) 82.9 (22.5) 6.87

Other Operating CF (30.5) (231) 74.9 81.9 89.1

Net Operating CFNet Operating CFNet Operating CFNet Operating CF (419)(419)(419)(419) (554)(554)(554)(554) 345345345345 285285285285 356356356356 Capital Exp.(net) (2.8) (29.7) (402) (404) (404)

Other Invts.(net) 0.0 0.0 0.0 0.0 0.0

Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0

Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0

Other Investing CF (96.1) (106) 0.0 0.0 0.0

Net Investing CFNet Investing CFNet Investing CFNet Investing CF (98.8)(98.8)(98.8)(98.8) (136)(136)(136)(136) (402)(402)(402)(402) (404)(404)(404)(404) (404)(404)(404)(404) Div Paid (48.8) (22.6) (40.5) (40.5) (40.5)

Chg in Gross Debt 498 142 150 150 150

Capital Issues 0.0 0.0 0.0 0.0 0.0

Other Financing CF (66.7) (57.8) (74.9) (81.9) (89.1)

Net Financing CFNet Financing CFNet Financing CFNet Financing CF 383383383383 61.661.661.661.6 34.634.634.634.6 27.627.627.627.6 20.320.320.320.3

Currency Adjustments 46.7 202 0.0 0.0 0.0

Chg in Cash (88.3) (427) (22.2) (90.9) (27.5)

Opg CFPS (sen) 6.99 (1.9) 15.9 18.6 21.1

Free CFPS (sen) (35.1) (48.6) (3.4) (7.2) (2.9)








1: 26 May 15 1.70 1.83 HOLD

2: 22 Jul 15 1.39 1.44 HOLD

3: 21 Aug 15 1.18 1.29 HOLD

4: 20 Oct 15 1.39 1.30 HOLD

5: 13 Nov 15 1.34 1.30 HOLD

6: 25 Nov 15 1.53 1.48 HOLD

7: 16 Jan 16 1.62 1.48 HOLD

8: 26 Feb 16 1.58 1.55 HOLD


1

2

3

4

5

67

8

1.07

1.17

1.27

1.37

1.47

1.57

1.67

1.77

May-15 Sep-15 Jan-16 May-16

RMRMRMRM

ASIAN INSIGHTS VICKERS SECURITIES ed: JS / sa: MA

HOLDHOLDHOLDHOLD Last Traded Price: Last Traded Price: Last Traded Price: Last Traded Price: Rp2,960 (JCIJCIJCIJCI : : : : 4,980.11) Price Target :Price Target :Price Target :Price Target : Rp2,550 (14% downside)

Potential CPotential CPotential CPotential Catalyst: atalyst: atalyst: atalyst: Resumption of HSR construction

Where we differWhere we differWhere we differWhere we differ:::: Broadly in line with consensus Analyst Chong Tjen-San +60 3 26043972 [email protected] Tiesha Putri +6221 30034931 [email protected]

Price Relative

Forecasts and Valuation FY FY FY FY DecDecDecDec ((((RpRpRpRpbnbnbnbn) ) ) ) 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF

Revenue 13,620 17,175 24,827 31,611 EBITDA 1,681 1,976 3,043 3,954 Pre-tax Profit 1,098 1,341 1,878 2,415 Net Profit 625 707 971 1,274 Net Pft (Pre Ex.) 625 707 971 1,274 Net Pft Gth (Pre-ex) (%) 2.8 13.1 37.5 31.2 EPS (Rp) 102 115 158 207 EPS Pre Ex. (Rp) 102 115 158 207 EPS Gth Pre Ex (%) 3 13 37 31 Diluted EPS (Rp) 102 115 158 207 Net DPS (Rp) 20.9 20.6 23.3 32.0 BV Per Share (Rp) 711 806 941 1,116 PE (X) 29.1 25.8 18.7 14.3 PE Pre Ex. (X) 29.1 25.8 18.7 14.3 P/Cash Flow (X) 76.3 49.1 39.9 33.8 EV/EBITDA (X) 12.0 12.0 8.6 7.3 Net Div Yield (%) 0.7 0.7 0.8 1.1 P/Book Value (X) 4.2 3.7 3.1 2.7 Net Debt/Equity (X) 0.2 0.7 0.9 1.1 ROAE (%) 15.1 15.1 18.1 20.2 Earnings Rev (%):Earnings Rev (%):Earnings Rev (%):Earnings Rev (%): 0 0 0 Consensus EPS Consensus EPS Consensus EPS Consensus EPS (Rp):::: 125 164 209

Other Broker Recs:Other Broker Recs:Other Broker Recs:Other Broker Recs: B: 14 S: 0 H: 11


Awaiting progress on high-speed rail Maintain HOLD. Maintain HOLD. Maintain HOLD. Maintain HOLD. We maintain our HOLD call on WIKA as we

believe its earnings outlook largely hinges on the progress of

its signature Jakarta-Bandung high-speed railway project. The

share price had a strong rally in the past few weeks as

investors had anticipated the approval of capital injection plan.

Recall that the company is planning to use the equity raising

proceeds to fund WIKA’s Rp8tr equity investment portion in 10

infrastructure projects. While this event should remove the

funding overhang on WIKA, we would like to see better

progress on the HSR project before turning more positive on

the stock.

The fast train is inching alongThe fast train is inching alongThe fast train is inching alongThe fast train is inching along. . . . Following the ground breaking

ceremony in Jan 2016, the construction for the project has yet

to resume, pending financial close with China Development

Bank (CDB) and issuance of the construction permit for the

remaining 137 km-long track. Recall that Ministry of

Transportation has only issued construction permit for 5 km-

long track to date.

Strong new contract growth but still way off targetStrong new contract growth but still way off targetStrong new contract growth but still way off targetStrong new contract growth but still way off target. . . . Up to

second week of June, the company has won Rp10.25tr worth

of new contracts (+37.5% y-o-y), making up 19% of

management’s FY16 target. Note that WIKA has set an

ambitious target to double its new contract wins to Rp52.8tr.

Jakarta-Bandung high speed railway (HSR) is expected to

contribute the most at c. 32% of FY16 target. We also note

that WIKA expects a surge in EPC jobs this year from only

Rp1tr new contracts in FY15 to Rp8.4tr in FY16 as it is

confident of winning some fuel storage and power plant

projects. Valuation:

Following the earnings revision, we cut our TP to Rp2,550 (vs.

Rp2,850 previously). We peg our TP to 22x FY16F EPS (mean

forward PE since 2012).


Delay in project rolloutDelay in project rolloutDelay in project rolloutDelay in project rollout. Delay in project rollout, especially the

mega high-speed railway project, should lead to lower-than-

expected revenue and earnings. At A Glance Issued Capital (m shrs) 6,149

Mkt. Cap (Rpbn/US$m) 18,202 / 1,386


Republic of Indonesia (%) 65.2 Free Float (%) 33.8 3m Avg. Daily Val (US$m) 2.5


DBS Group Research . Equity

30 Jun 2016


Wijaya Karya Version 3 | Bloomberg: WIKA IJ | Reuters: WIKA.JK Refer to important disclosures at the end of this report

82

132

182

232

282

900.0

1,400.0

1,900.0

2,400.0

2,900.0

3,400.0

3,900.0


Relative IndexRp

Wijaya Karya (LHS) Relative JCI INDEX (RHS)


Company Guide

Wijaya Karya


Earnings Drivers:

Capital injection overhang liftedCapital injection overhang liftedCapital injection overhang liftedCapital injection overhang lifted. . . . Through plenary meeting, the

parliament recently approved WIKA’s proposal to obtain Rp4tr

government capital injection in 2016. The company will seek to

obtain additional Rp2.1tr cash from minority shareholders

through a rights issue in Nov 2016. Recall that WIKA plans to

use the equity raising proceeds to fund its equity investment in

10 infra projects worth Rp142tr, where its equity portion

amounts to Rp8tr. The management initially guided that if

capital injection is passed and the rights issue takes place in Sep

2016, FY16 net profit guidance might be raised by 9% to

Rp820bn.

All eyes on HSR. All eyes on HSR. All eyes on HSR. All eyes on HSR. The mega project Jakarta-Bandung HSR is now

running behind schedule after breaking ground in Jan 2016.

The construction work is halted pending the completion of the

detailed engineering design, issuance of construction permit for

the remaining 137 km-long track and financial closure with

CDB. Prior to this delay, WIKA expects to recognise 18% of the

targeted Rp19.23tr order book as revenue in FY16. Nonetheless

as the construction timeline is now stretched out to July 2016 at

the earliest, we see downside risk to management’s guidance.

Transit Oriented Development (TOD) plans remains a work in Transit Oriented Development (TOD) plans remains a work in Transit Oriented Development (TOD) plans remains a work in Transit Oriented Development (TOD) plans remains a work in

progress. progress. progress. progress. Following the appointment of the three world-class

property and urban development consultants (Aedas, Atkins

and Surbana Jurong) back in Jan 2016, more details on the TOD

plan is scheduled to be revealed this year. This should bring

more clarity on how the consortium plans to compensate HSR’s

low IRR (estimated FIRR is in the range of 6.5%-10.8%). The

HSR consortium plans to team up with private developers given

the high capital requirement to develop new townships.

Nonetheless, we believe WIKA Realty, WIKA’s property arm,

would play an important role in the development.

The TOD will be built in the vicinity of HSR’s four stations i.e.

Halim Perdanakusuma (East Jakarta), Karawang (West Java),

Walini (West Java) and Tegalluar (Bandung, West Java). Walini

would become the largest township project with a total area of

2,900ha, followed by Tegalluar (450ha). The consortium also

plans to develop the 250ha land in Karawang into a commercial

area. As for Halim, the project scale is relatively small with the

plan to build hotels and low-rise apartments on the 25ha land.

In total, the ToD would be built on 3,625ha land over the next

few years. At the end of Jan 2016, management claimed to

have secured commitment-to-sell from land owners for 45% of

HSR’s land requirement.

New Contract Win (Rp bn)

Total Order Book (Rp bn)

Blended Gross Margin (%)

Management's Guidance for FY16

WIKA's Funding Structure for HSR Equity Investment


17,632

25,222

45,313

37,698 36,965

0

6,538

13,076

19,614

26,152

32,690

39,228

45,766

2014A 2015A 2016F 2017F 2018F

23,784 23,301

31,362 32,531

40,216

0

8,204

16,408

24,612

32,817

2014A 2015A 2016F 2017F 2018F

11.412.1 11.8 11.9 12

0.0

2.5

5.0

7.4

9.9

12.4

2014A 2015A 2016F 2017F 2018F

New New New New

contractscontractscontractscontracts CapexCapexCapexCapex Net profitNet profitNet profitNet profit

Net profit Net profit Net profit Net profit

growthgrowthgrowthgrowth

(Rp bn)(Rp bn)(Rp bn)(Rp bn) (Rp bn)(Rp bn)(Rp bn)(Rp bn) (Rp bn)(Rp bn)(Rp bn)(Rp bn) (y-o-y)(y-o-y)(y-o-y)(y-o-y)

Government injects

Rp4tr capital; WIKA

holds rights issue in Seprights issue in Seprights issue in Seprights issue in Sep6,980 820 31%

WIKA holds private private private private

placementplacementplacementplacement in Nov

without the

government’s

participation 4,500 750 20%

52,802

ScenarioScenarioScenarioScenario

Revenue ex-Revenue ex-Revenue ex-Revenue ex-

JOJOJOJO

(Rp bn)(Rp bn)(Rp bn)(Rp bn)

19,386

Rights issueRp1.28tr

DebtRp1.75tr

Earnings from HSR

constructionRp1tr

Total WIKA'sequity investment

in PT KCICRp4tr


Company Guide

Wijaya Karya

Balance Sheet:

Room to increase debt still exists.Room to increase debt still exists.Room to increase debt still exists.Room to increase debt still exists. WIKA had Rp3.7tr debt at the

end of 1Q16 with a relatively low net gearing level at 0.39x,

while gearing ratio was at 0.67x.

Listing of WIKA Gedung. Listing of WIKA Gedung. Listing of WIKA Gedung. Listing of WIKA Gedung. The company is currently in the

process of spinning off its building construction business and

merging it into WIKA Gedung, one of WIKA’s subsidiaries.

Following the spinoff, WIKA plans to divest a 30% stake in

WIKA Gedung through IPO likely next year. The IPO is expected

to raise Rp1tr.


Progress on HSR project. Progress on HSR project. Progress on HSR project. Progress on HSR project. Further clarity on HSR project would be

a positive catalyst for WIKA. Among the key events to watch

are: i) completion of detailed engineering design, ii) issuance of

construction permit, and iii) financial closure. All of which

should pave way for WIKA to achieve its order book and

earnings target.

Faster rollFaster rollFaster rollFaster roll----out of government’s infrastructure projects. out of government’s infrastructure projects. out of government’s infrastructure projects. out of government’s infrastructure projects. If the

government manages to eliminate red tape and speed up the

execution of infrastructure development plan, WIKA’s share

price may re-rate upward.

Key Risks:

Delay in infrastructure project execution.Delay in infrastructure project execution.Delay in infrastructure project execution.Delay in infrastructure project execution. Delay in project

execution could lead to lower order book and earnings. Such

newsflow could also create negative sentiment towards

Indonesia's construction sector and lead to valuation de-rating.

Lower free cash flow generation in the medium term. Lower free cash flow generation in the medium term. Lower free cash flow generation in the medium term. Lower free cash flow generation in the medium term. Aside

from being the contractor, WIKA typically owns some stakes in

the assets being built. This exposes WIKA to the risk of

deteriorating cash flow generation, as such a business model

requires high capital investments and normally generates

negative cash flows in the early years of operations.

Earnings dilution due to rights issue. Earnings dilution due to rights issue. Earnings dilution due to rights issue. Earnings dilution due to rights issue. The company plans to

hold a rights issue to raise additional capital of Rp6.1tr this

year. The targeted proceeds represent 34% of its current

market capitalisation.

Company Background

Wijaya Karya is a construction company with interests in EPC,

civil, building works, precast and realty.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.7

0.8

0.8

0.9

0.9

1.0

1.0

0.00

0.20

0.40

0.60

0.80

1.00

1.20

2014A 2015A 2016F 2017F 2018F


0.0

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

3,500.0

4,000.0

2014A 2015A 2016F 2017F 2018F


Rpm

0.0%

5.0%

10.0%

15.0%

20.0%

2014A 2015A 2016F 2017F 2018F

Avg: 21x

+1sd: 26.5x

+2sd: 31.9x

-1sd: 15.6x

-2sd: 10.2x9.1

14.1

19.1

24.1

29.1

34.1

39.1


(x)

Avg: 4.18x

+1sd: 5x

+2sd: 5.82x

-1sd: 3.35x

-2sd: 2.53x2.2

2.7

3.2

3.7

4.2

4.7

5.2

5.7

6.2

6.7

7.2


(x)


Company Guide

Wijaya Karya

Key Assumptions


New Contract Win (Rp bn) 17,632 25,222 45,313 37,698 36,965

Total Order Book (Rp bn) 23,784 23,302 31,362 32,531 40,216

Blended Gross Margin (%) 11.4 12.1 11.8 11.9 12.0 Segmental Breakdown

FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF Revenues (Rpbn)

Construction 4,731 5,984 8,866 13,231 17,365

EPC 3,179 3,370 3,001 4,130 5,282

Industrial (Precast) 3,271 2,830 4,166 5,856 6,886

Property 1,283 1,436 1,142 1,611 2,077


Gross Profit (Rpbn) Construction 371 593 913 1,433 1,912

EPC 273 424 360 496 634

Industrial (Precast) 544 400 574 778 914

Property 237 238 183 258 332


Gross Profit Margins (%) Construction 7.8 9.9 10.3 10.8 11.0

EPC 8.6 12.6 12.0 12.0 12.0

Industrial (Precast) 16.6 14.1 13.8 13.3 13.3

Property 18.4 16.6 16.0 16.0 16.0



FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF Revenue 12,463 13,620 17,175 24,827 31,611



Operating ProfitOperating ProfitOperating ProfitOperating Profit 1,0321,0321,0321,032 1,2261,2261,2261,226 1,4851,4851,4851,485 2,2072,2072,2072,207 2,8582,8582,8582,858 Other Non Opg (Exp)/Inc (131) (38.6) (46.3) (55.6) (66.7)

Associates & JV Inc 363 283 287 377 492



PrePrePrePre----tax Profittax Profittax Profittax Profit 1,1391,1391,1391,139 1,0981,0981,0981,098 1,3411,3411,3411,341 1,8781,8781,8781,878 2,4152,4152,4152,415 Tax (395) (395) (490) (709) (921)

Minority Interest (136) (78.0) (144) (198) (220)


Net ProfitNet ProfitNet ProfitNet Profit 608608608608 625625625625 707707707707 971971971971 1,2741,2741,2741,274

Net Profit before Except. 608 625 707 971 1,274

EBITDA 1,393 1,681 1,976 3,043 3,954

Growth

Revenue Gth (%) 4.9 9.3 26.1 44.6 27.3

EBITDA Gth (%) 21.1 20.7 17.6 54.0 30.0

Opg Profit Gth (%) 8.0 18.8 21.2 48.6 29.5

Net Profit Gth (Pre-ex) (%) 6.7 2.8 13.1 37.5 31.2

Margins & Ratio

Gross Margins (%) 11.4 12.1 11.8 11.9 12.0



ROAE (%) 18.0 15.1 15.1 18.1 20.2

ROA (%) 4.3 3.5 3.2 3.6 3.9

ROCE (%) 9.1 7.9 7.6 8.8 9.5

Div Payout Ratio (%) 28.1 20.6 17.9 14.7 15.4



We assumed Rp17tr new contracts from Jakarta-Bandung HSR.

Expect HSR’s construction profit to contribute 11% to WIKA’s FY16F operating profit.


Company Guide

Wijaya Karya


FY FY FY FY DecDecDecDec 1Q1Q1Q1Q2015201520152015 2Q2Q2Q2Q2015201520152015 3Q3Q3Q3Q2015201520152015 4Q4Q4Q4Q2015201520152015 1Q1Q1Q1Q2016201620162016 Revenue 2,005 2,773 3,313 5,529 2,727


Gross ProfitGross ProfitGross ProfitGross Profit 185185185185 312312312312 483483483483 676676676676 292292292292 Other Oper. (Exp)/Inc (82.3) (102) (104) (141) (87.0)

Operating ProfitOperating ProfitOperating ProfitOperating Profit 103103103103 209209209209 379379379379 535535535535 205205205205 Other Non Opg (Exp)/Inc 17.5 (17.3) (7.1) (31.6) (0.7)

Associates & JV Inc 47.6 50.3 73.1 112 28.4

Net Interest (Exp)/Inc (53.0) (10.2) (150) (159) (60.4)


PrePrePrePre----tax Profittax Profittax Profittax Profit 115115115115 232232232232 295295295295 457457457457 172172172172 Tax (48.0) (78.9) (93.6) (175) (77.9)


Net ProfitNet ProfitNet ProfitNet Profit 61.561.561.561.5 139139139139 190190190190 235235235235 71.771.771.771.7 Net profit bef Except. 61.5 139 190 235 71.7

EBITDA 168 242 445 615 232

Growth

Revenue Gth (%) (48.0) 38.3 19.5 66.9 (50.7)

EBITDA Gth (%) (64.9) 44.6 83.5 38.3 (62.2)

Opg Profit Gth (%) (72.6) 104.3 80.9 41.2 (61.7)

Net Profit Gth (Pre-ex) (%) (70.3) 125.9 36.7 23.4 (69.4)





FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF Net Fixed Assets 2,676 3,184 6,534 8,519 10,848


Other LT Assets 1,855 1,960 1,960 1,960 1,960

Cash & ST Invts 2,301 2,560 1,705 1,518 859

Inventory 817 1,031 1,224 1,755 2,231

Debtors 4,416 6,278 7,764 10,543 13,424



ST Debt

1,691 1,796 1,796 1,796 1,796

Creditor 3,903 4,323 5,478 7,852 9,985


LT Debt 1,275 1,646 4,146 6,146 8,146



Minority Interests 989 1,063 1,207 1,405 1,625


Non-Cash Wkg. Capital 395 1,198 1,642 2,493 3,629

Net Cash/(Debt) (665) (882) (4,237) (6,424) (9,082)




Asset Turnover (x) 0.9 0.8 0.8 0.9 1.0

Current Ratio (x) 1.1 1.2 1.1 1.2 1.2

Quick Ratio (x) 0.8 0.8 0.8 0.8 0.8

Net Debt/Equity (X) 0.1 0.2 0.7 0.9 1.1


Capex to Debt (%) 34.9 20.4 60.6 31.5 30.2

Z-Score (X) NA NA NA NA NA



Company Guide

Wijaya Karya


FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF Pre-Tax Profit 1,139 1,098 1,341 1,878 2,415

Dep. & Amort. 129 211 251 515 671

Tax Paid (370) (479) (490) (709) (921)

Assoc. & JV Inc/(loss) (363) (283) (287) (377) (492)

Chg in Wkg.Cap. (665) (811) (444) (851) (1,136)

Other Operating CF (49.2) 503 0.0 0.0 0.0

Net Operating CFNet Operating CFNet Operating CFNet Operating CF (178)(178)(178)(178) 238238238238 371371371371 456456456456 538538538538 Capital Exp.(net) (1,036) (701) (3,600) (2,500) (3,000)

Other Invts.(net) (316) (12.0) 0.0 0.0 0.0

Invts in Assoc. & JV (48.6) 282 0.0 0.0 0.0

Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0

Other Investing CF 132 106 0.0 0.0 0.0

Net Investing CFNet Investing CFNet Investing CFNet Investing CF (1,268)(1,268)(1,268)(1,268) (325)(325)(325)(325) (3,600)(3,600)(3,600)(3,600) (2,500)(2,500)(2,500)(2,500) (3,000)(3,000)(3,000)(3,000) Div Paid (171) (129) (127) (143) (197)

Chg in Gross Debt 638 479 2,500 2,000 2,000

Capital Issues 448 0.0 0.0 0.0 0.0

Other Financing CF 1,446 (4.0) 0.0 0.0 0.0

Net Financing CFNet Financing CFNet Financing CFNet Financing CF 2,3602,3602,3602,360 346346346346 2,3742,3742,3742,374 1,8571,8571,8571,857 1,8041,8041,8041,804


Chg in Cash 914 259 (856) (187) (659)

Opg CFPS (Rp) 79.2 171 133 213 272

Free CFPS (Rp) (197) (75.2) (525) (332) (400)




S.No.S.No.S.No.S.No. DateDateDateDate Closing PriceClosing PriceClosing PriceClosing PriceTarget Target Target Target

PricePricePricePriceRating Rating Rating Rating

1: 10 Aug 15 2650 3000 HOLD

2: 25 Nov 15 2875 2850 HOLD

3: 01 Dec 15 2865 2850 HOLD

4: 01 Feb 16 2745 2850 HOLD

5: 02 May 16 2580 2550 HOLD

6: 04 May 16 2560 2550 HOLD

7: 01 Jun 16 2450 2550 HOLD

8: 23 Jun 16 2860 2550 HOLD


1

23

4

5

6

7

8

2099

2299

2499

2699

2899

3099

3299


RpRpRpRp

ASIAN INSIGHTS VICKERS SECURITIES ed: JS / sa: MA

HOLD Last Traded Price: Rp975 (JCI : 4,980.11) Price Target : Rp1,000 (3% upside) Potential Catalyst: Resumption of HSR construction Where we differ: We have factored in potential earnings from HSR Analyst Chong Tjen-San +60 3 26043972 [email protected] Tiesha Putri +6221 30034931 [email protected]

Price Relative

Forecasts and Valuation FY Dec (Rpbn) 2015A 2016F 2017F 2018F Revenue 2,653 4,166 5,856 6,886 EBITDA 322 557 758 898 Pre-tax Profit 206 463 640 712 Net Profit 174 348 479 533 Net Pft (Pre Ex.) 174 348 479 533 Net Pft Gth (Pre-ex) (%) (47.1) 100.3 37.6 11.3 EPS (Rp) 20.0 40.0 55.0 61.2 EPS Pre Ex. (Rp) 20.0 40.0 55.0 61.2 EPS Gth Pre Ex (%) (47) 100 38 11 Diluted EPS (Rp) 20.0 40.0 55.0 61.2 Net DPS (Rp) 11.3 5.99 12.0 16.5 BV Per Share (Rp) 253 287 330 375 PE (X) 48.9 24.4 17.7 15.9 PE Pre Ex. (X) 48.9 24.4 17.7 15.9 P/Cash Flow (X) 18.5 15.1 15.4 13.2 EV/EBITDA (X) 25.7 15.0 11.6 10.0 Net Div Yield (%) 1.2 0.6 1.2 1.7 P/Book Value (X) 3.9 3.4 3.0 2.6 Net Debt/Equity (X) CASH CASH 0.1 0.1 ROAE (%) 8.0 14.8 17.8 17.4 Earnings Rev (%): 0 0 0 Consensus EPS (Rp): 33.8 44.8 55.5 Other Broker Recs: B: 6 S: 0 H: 5


Waiting for the train Preferred HSR play, but maintain Hold on lofty valuation and slow progress of HSR. With a market share of 40%, Wijaya Karya Beton (WTON) remains an important proxy to Indonesia’s infrastructure story. We have seen significant improvements in the government’s project execution and are confident that this would help WTON’s earnings to recover this year. Nonetheless, we see limited upside for WTON’s share price from the current level unless there is notable progress on Jakarta-Bandung high-speed railway (HSR) project. Currently, construction has halted pending the issuance of construction permit and financial closure. Banking on Jakarta-Bandung HSR and WIKA’s internal projects. The HSR consortium is working to finalise the detailed engineering design of the project which is expected to bring more clarity on the total precast requirements and order size for WTON. Management’s latest estimate suggests that the project would bring in new contracts worth Rp6tr-Rp9tr in 2016-2019 which is equal to 1.4-2.2x our forecast revenue for FY16. We understand that most state-run contractors have lately been expanding their precast manufacturing capacity to support their internal projects, resulting in some loss for WTON. This was reflected in last year’s decline in revenue and earnings. WIKA’s multi-year projects (such as HSR and LRT) would support earnings recovery this year. 5M16 new contracts in line. For the five months to may 2016, WTON has secured Rp1.55tr worth of new contracts, making up 36% of management’s full-year guidance of Rp4.3tr. Note that the guidance does not take into account potential orders from the Jakarta-Bandung HSR. Valuation:

We maintain our TP at Rp1,000, based on 25x FY16F EPS (at -0.7SD of its 2-year forward PE mean). Key Risks to Our View:

Delay in government’s infrastructure project rollout, particularly for the Jakarta-Bandung HSR, would result in lower-than-expected order book and earnings for WTON. At A Glance Issued Capital (m shrs) 8,715 Mkt. Cap (Rpbn/US$m) 8,498 / 647 Major Shareholders (%) PT Wijaya Karya (Persero) Tbk 60.0KKMS 8.8Treasury Stock 4.3




Wijaya Karya Beton Version 3 | Bloomberg: WTON IJ | Reuters: WTON.JK Refer to important disclosures at the end of this report

89

109

129

149

169

189

209

229

531.0

731.0

931.0

1,131.0

1,331.0

1,531.0

Apr-14 Oct-14 Apr-15 Oct-15 Apr-16

Relative IndexRp

Wijaya Karya Beton (LHS) Relative JCI INDEX (RHS)


Company Guide

Wijaya Karya Beton


Earnings Drivers:

Clear beneficiary of Jakarta-Bandung high-speed railway. WTON recently agreed to support its parent company, Wijaya Karya, to supply precast to the Jakarta-Bandung HSR project. The company estimates that the project requires 3.5m tonnes of precast concrete in 2016-2018 or roughly 1.17m tonnes p.a., on par with WTON’s annual capacity from West Java factory, with the contract value ranging from Rp6tr to Rp9tr. The company plans to set up several temporary production facilities near HSR’s construction site to cater to this large order. In addition, the HSR consortium also plans to build a Transit Oriented Development (TOD) in the vicinity of HSR’s four stations while WIKA has expressed interest to bid for Bandung LRT construction work, which would benefit WTON. We expect HSR project to contribute 13% and 41% to our FY16F and FY17F net profit respectively. Better revenue visibility with 5M16 order backlog reaching 0.6x of our FY16 revenue forecast. WTON expects to win Rp4.3tr worth of new contracts in FY16, a 23% increase from FY15. The company also has Rp1.7tr order backlog from FY15. Including the contracts brought forward, WTON’s order book would be Rp2.4tr at the end of May 2016 or 0.6x of our FY16 forecasted revenue. As WTON’s precast orders are typically delivered and recognised as revenue within 3-6 months, we are confident that this large backlog will enable WTON’s earnings to recover this year. First-mover advantage in ex Java market. WTON has continued to expand its coverage to markets outside Java where competitors are fewer. In these areas, the company often serves as the only large-scale precast producer, allowing it to maintain higher pricing and margins compared to those in Java. Based on our channel checks, WTON’s state-run competitors will still be focusing on expanding in the Java market in the near future. Therefore, we are confident that WTON’s position outside Java markets will remain firm. The rollout of toll roads and port projects outside Java should benefit WTON as it will be able to meet the precast requirements. In FY15, net margin of ex Java market was 200bps higher than Java’s.

Gross profit margin (%)

Production capacity ('000 tons)

Sales volume ('000 tons)

Utilization rate (%)


14.9

12.4

13.813.3 13.3

0.0

2.1

4.3

6.4

8.6

10.7

12.9

15.0

2014A 2015A 2016F 2017F 2018F

2,2002,300

2,500

3,000

3,300

0

673

1,346

2,020

2,693

3,366

2014A 2015A 2016F 2017F 2018F

1,464 1,413

1,868

2,532

2,863

0

584

1,168

1,752

2,336

2,920

2014A 2015A 2016F 2017F 2018F

66.561.4

74.7

84.4 86.7

0.0

17.5

35.0

52.6

70.1

87.6

2014A 2015A 2016F 2017F 2018F


Company Guide

Wijaya Karya Beton

Balance Sheet:

Robust balance sheet to fund expansion plan. We expect WTON to maintain its net cash position over the next two years. To fund the increasing working capital needs, the company plans to sell its treasury stocks to the public this year. The planned expansion over the next two years will boost capacity to 3m tons 2.3m in 2015 but should be adequately funded by internally generated funds. Assuming the treasury stocks are sold at Rp920/share, the proceeds raised would be Rp347bn.


Award of large-sized, multi-year contracts. Among the potential contracts are Jakarta-Bandung HSR, Greater Jakarta LRT and Giant Sea Wall. Resumption of Jakarta-Bandung HSR construction. Construction on the Jakarta-Bandung HSR project is currently halted after breaking ground in Jan 2016, as the consortium needs to finalise the detailed engineering design and secure the construction permit from the government before resuming construction activities. The resumption would be a re-rating catalyst for WTON’s earnings and share price.

Key Risks:

Delay in government’s infrastructure project rollout, particularly for the Jakarta-Bandung high-speed railway, would result in lower-than-expected order book and profit for WTON. Delays in infrastructure project execution will cause WTON’s revenue to fall short of expectations, and also lower WTON’s profitability given its high operating leverage. Increasing competition in the Java market. Major SOE contractors are looking to increase their precast production capacities, particularly in the Java market. Intensifying competition may weaken WTON’s pricing power in Java and erode its margins. In FY15, Java contributed to 55% and 46% of WTON’s consolidated revenue and earnings respectively. The bulk of WTON’s cost of goods sold (COGS) is in USD. Steel and cement make up 30% and 20% of WTON’s COGS respectively. Additionally, some overhead costs for its production facilities are also in USD, which exposes WTON’s profitability to currency fluctuations. Nevertheless, the company has mitigated this risk by signing umbrella contracts for its key raw materials, enabling it to lock in prices for three months.

Company Background

WTON is the dominant market leader in precast concrete with c.40% market share.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.6

0.7

0.7

0.8

0.8

0.9

0.9

1.0

1.0

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

2014A 2015A 2016F 2017F 2018F


0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

800.0

900.0

1,000.0

2014A 2015A 2016F 2017F 2018F


Rpm

0.0%

5.0%

10.0%

15.0%

20.0%

2014A 2015A 2016F 2017F 2018F

Avg: 27.8x

+1sd: 40.4x

+2sd: 53x

‐1sd: 15.2x

‐2sd: 2.6x2.3

12.3

22.3

32.3

42.3

52.3

62.3


(x)

Avg: 4.36x

+1sd: 5.22x

+2sd: 6.07x

‐1sd: 3.51x

‐2sd: 2.66x2.3

2.8

3.3

3.8

4.3

4.8

5.3

5.8

6.3


(x)

Rpbn


Company Guide

Wijaya Karya Beton

Key Assumptions

FY Dec 2014A 2015A 2016F 2017F 2018F Gross profit margin (%) 14.9 12.4 13.8 13.3 13.3 Production capacity ('000 2,200 2,300 2,500 3,000 3,300 Sales volume ('000 tons) 1,464 1,413 1,868 2,532 2,863 Utilization rate (%) 66.5 61.4 74.7 84.4 86.7

Segmental Breakdown

FY Dec 2014A 2015A 2016F 2017F 2018F Revenues (Rpbn) Concrete 3,228 2,591 4,101 5,781 6,798 Service 49.7 61.7 65.0 75.1 88.4 Total 3,277 2,653 4,166 5,856 6,886 Gross Profit (Rpbn)

Concrete 396 231 462 641 752 Service 12.7 7.40 7.80 9.00 10.6 Total 409 238 470 650 764 Gross Profit Margins (%) Concrete 12.3 8.9 11.3 11.1 11.1 Service 25.5 12.0 12.0 12.0 12.0 Total 12.5 9.0 11.3 11.1 11.1


FY Dec 2014A 2015A 2016F 2017F 2018F Revenue 3,277 2,653 4,166 5,856 6,886 Cost of Goods Sold (2,790) (2,324) (3,592) (5,077) (5,972) Gross Profit 487 329 574 778 914 Other Opng (Exp)/Inc (76.9) (90.2) (104) (129) (152) Operating Profit 410 238 470 650 763 Other Non Opg (Exp)/Inc (3.4) (6.4) 0.0 0.0 0.0 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc 6.00 (25.9) (8.4) (10.7) (51.4) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 413 206 463 640 712 Tax (89.1) (34.3) (115) (160) (178) Minority Interest 6.10 2.10 2.10 0.0 0.0 Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 329 174 348 479 533 Net Profit before Except. 329 174 348 479 533 EBITDA 492 322 557 758 898 Growth Revenue Gth (%) 24.0 (19.1) 57.1 40.6 17.6 EBITDA Gth (%) 25.1 (34.5) 73.0 36.1 18.5 Opg Profit Gth (%) 22.0 (41.9) 97.1 38.2 17.4 Net Profit Gth (Pre-ex) (%) 35.3 (47.1) 100.3 37.6 11.3 Margins & Ratio Gross Margins (%) 14.9 12.4 13.8 13.3 13.3 Opg Profit Margin (%) 12.5 9.0 11.3 11.1 11.1 Net Profit Margin (%) 10.0 6.6 8.4 8.2 7.7 ROAE (%) 23.4 8.0 14.8 17.8 17.4 ROA (%) 9.8 4.2 7.1 8.0 7.5 ROCE (%) 15.5 6.9 11.5 13.9 14.5 Div Payout Ratio (%) 30.0 56.7 15.0 21.8 26.9 Net Interest Cover (x) NM 9.2 56.0 60.7 14.8


Expecting Jakarta-Bandung HSR project to contribute 15% to FY16F revenue.


Company Guide

Wijaya Karya Beton


FY Dec 1Q2015 2Q2015 3Q2015 4Q2015 1Q2016 Revenue 428 464 658 1,104 733 Cost of Goods Sold (394) (383) (583) (964) (642) Gross Profit 34.1 80.5 74.3 140 91.0 Other Oper. (Exp)/Inc (17.9) (21.8) (20.7) (29.7) (17.8) Operating Profit 16.2 58.7 53.6 110 73.2 Other Non Opg (Exp)/Inc (2.0) (3.3) 0.20 (1.4) 0.60 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc 2.90 (9.0) (10.5) (9.4) (4.2) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 17.1 46.4 43.3 99.2 69.7 Tax (2.1) (10.0) (9.6) (12.6) (16.3) Minority Interest 2.00 0.10 0.50 (0.5) (3.1) Net Profit 17.0 36.5 34.2 86.1 50.2 Net profit bef Except. 17.0 36.5 34.2 86.1 50.2 EBITDA 14.2 55.4 53.8 109 73.8 Growth Revenue Gth (%) (55.2) 8.5 41.8 67.9 (33.6) EBITDA Gth (%) (88.9) 291.2 (2.9) 101.9 (32.0) Opg Profit Gth (%) (87.1) 262.6 (8.7) 105.2 (33.5) Net Profit Gth (Pre-ex) (%) (83.8) 114.7 (6.3) 151.7 (41.7) Margins Gross Margins (%) 8.0 17.4 11.3 12.7 12.4 Opg Profit Margins (%) 3.8 12.7 8.2 10.0 10.0 Net Profit Margins (%) 4.0 7.9 5.2 7.8 6.9


FY Dec 2014A 2015A 2016F 2017F 2018F Net Fixed Assets 1,671 1,998 2,494 3,298 3,856 Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 Other LT Assets 4.10 3.70 3.70 3.70 3.70 Cash & ST Invts 1,039 824 853 489 294 Inventory 458 623 848 1,201 1,411 Debtors 476 570 821 1,154 1,357 Other Current Assets 155 439 378 496 573 Total Assets 3,802 4,456 5,397 6,641 7,495 ST Debt 565 212 312 412 412 Creditor 420 558 767 1,087 1,277 Other Current Liab 525 1,025 1,361 1,811 2,085 LT Debt 1.20 320 320 320 320 Other LT Liabilities 88.5 79.2 79.2 79.2 79.2 Shareholder’s Equity 2,143 2,205 2,501 2,876 3,266 Minority Interests 59.5 58.2 56.1 56.1 56.1 Total Cap. & Liab. 3,802 4,456 5,397 6,641 7,495 Non-Cash Wkg. Capital 144 49.3 (81.4) (46.8) (20.2) Net Cash/(Debt) 472 292 222 (243) (437) Debtors Turn (avg days) 50.0 72.0 60.9 61.6 66.6 Creditors Turn (avg days) 50.3 79.9 68.9 68.1 73.9 Inventory Turn (avg days) 87.9 88.2 76.5 75.2 81.7 Asset Turnover (x) 1.0 0.6 0.8 1.0 1.0 Current Ratio (x) 1.4 1.4 1.2 1.0 1.0 Quick Ratio (x) 1.0 0.8 0.7 0.5 0.4 Net Debt/Equity (X) CASH CASH CASH 0.1 0.1 Net Debt/Equity ex MI (X) CASH CASH CASH 0.1 0.1 Capex to Debt (%) 139.6 88.8 92.2 124.7 94.6 Z-Score (X) 4.8 3.5 3.2 2.9 2.8


EBIT margin improved y-o-y on better utilisation rate.


Company Guide

Wijaya Karya Beton


FY Dec 2014A 2015A 2016F 2017F 2018F Pre-Tax Profit 412 206 462 639 711 Dep. & Amort. 84.8 89.9 86.0 108 135 Tax Paid (125) (34.3) (115) (160) (178) Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. (283) 94.4 131 (34.6) (26.6) Other Operating CF 103 102 0.0 0.0 0.0 Net Operating CF 192 458 563 552 641 Capital Exp.(net) (790) (472) (582) (912) (692) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF 0.0 0.0 0.0 0.0 0.0 Net Investing CF (790) (472) (582) (912) (692) Div Paid (20.0) (98.6) (52.2) (105) (144) Chg in Gross Debt 13.0 (103) 100 100 0.0 Capital Issues 1,193 0.0 0.0 0.0 0.0 Other Financing CF 37.4 0.80 0.0 0.0 0.0 Net Financing CF 1,224 (201) 47.8 (4.5) (144) Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash 625 (215) 28.6 (365) (194) Opg CFPS (Rp) 54.4 41.8 49.6 67.3 76.6 Free CFPS (Rp) (68.6) (1.6) (2.2) (41.3) (5.8)





Rating

1: 10 Aug 15 1060 1200 BUY

2: 25 Nov 15 915 1000 HOLD

3: 01 Dec 15 910 1000 HOLD

4: 01 Feb 16 990 1000 HOLD

5: 03 Mar 16 945 1000 HOLD

6: 28 Apr 16 975 1000 HOLD

7: 04 May 16 935 1000 HOLD

8: 01 Jun 16 915 1000 HOLD


1

23

4

5

6

7

8

741

791

841

891

941

991

1041

1091

1141

1191


Rp


Asean Construction

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