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Unmasking Asia Thematic Research APRIL 2016
ASEAN Infrastructure: THE NEW OLD THING
SEE PAGE 125 FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS Co. Reg No: 198700034E MICA (P) : 099/03/2012
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Unmasking Asia Thematic Research Series Stress Test Series, September 2015 Regional: I So Wanna Be Resilient Hong Kong/China: The Devil’s in the Details… India: Asia’s Sanctuary Indonesia: Finding a Foothold Malaysia: Weathering Through The Philippines: Stress Cuts Profit But FCF Stays Positive Singapore: The Growth Conundrum Thailand: Barely Resilient Vietnam: Timely Deleveraging Hong Kong/China Energy: Project Blue Sky, December 2015 Hong Kong/China Electric Vehicles: The Green Race, January 2016 ASEAN Infrastructure: The New Old Thing, April 2016
REGIONAL INFRASTRUCTURE
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Executive Summary
Is ASEAN Infrastructure The New Old Thing?
This report tackles the theme in two ways. From a strategy perspective, we assess the needs and the sources of funding. We also look at each country from a sector perspective to identify gaps, whether they will be filled and, if not, what needs to happen for shortfalls to be met. This provides the basis for identifying opportunities and investment recommendations. Our focus is on Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam.
Our principal findings are:
Since the start of the year, the poor global cyclical environment has meant greater fiscal impetus on infrastructure spend. Even Singapore is set to accelerate development expenditure to 6% of GDP by 2020.
Structurally, looking at asset turnover globally suggests few reasons to expect global growth to accelerate. And, given aggregate leverage, there are few reasons to expect balance sheet expansion by developed markets as well as China.
But while ASEAN infrastructure needs are well known, funding remains the key question. We looked at savings rates against demographic and urbanization trends and find there are reasons to expect rising domestic savings rates in coming years. It also helps that ASEAN balance sheets are under-leveraged with capacity to expand. While foreign capital is needed, domestic funding is set to be a big factor.
Two of the countries have external funding needs. In Indonesia, government development budgets are up 33% CAGR since 2014, and spending in the first two months is running at over 40% YoY. Even so, interest rates and the currency have been well behaved this year. Power is interesting in that our team reckons IRRs have not changed in recent years, even as they have dropped around the region. The team also sees opportunities in transport.
In Vietnam, the government acknowledges that the state budget and other forms of development assistance may meet at most half of budgetary needs over the next 10 years. That implies that Public Private Partnerships are a necessity and not an option, offering new opportunities.
In Thailand, there is sufficient domestic liquidity to fund spending as the emphasis shifts to transport. This new focus reflects concerns over the threat of high logistics costs to competitiveness. If projects can be successfully executed, logistics costs could drop 2%-points to 12%, significant for the manufacturing sector.
The Philippines has under-invested in recent years and has actually seen deteriorating logistics performance in contrast to the rest of the region. Infrastructure spending is set to be a key focus of the incoming government following the May elections, with transport again the emphasis.
In Malaysia and Singapore, it’s about improving the quality of infrastructure rather than increasing the infrastructure capital stock per se.
The biggest theme in Malaysia is the build-out of the rail system over the next 5-10 years to improve and enhance local and regional connectivity given the launch of the ASEAN Economic Community last December.
Singapore continues to invest in extending its lead as a regional hub, both in LNG and in information and communication. Development expenditure in the budget is set to accelerate.
Around the region, while we are seeing improving governance overall, much remains to be done. The practicalities of land acquisition remain a key risk throughout much of the region, particularly for executing transport projects.
The team’s best stock ideas are on page 2.
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ASEAN Infrastructure Best Ideas Price Mkt Cap 3mth avg T/O PE (x) EPS growth (%) PB (x) DY (%) RoE (%) EV/EBITDA (x)
Name Ticker Sector Analyst (lcl crcy) (USDm) (USDm) Rating 15 16F 15 16F 15 16F 15 16F 15 16F 15A 16F
Indonesia
Adhi Karya ADHI IJ Construction Pandu Anugrah 2,670 719 5 Buy 12.1 13.9 23 -13 1.1 1.7 1.3 1.0 14 13 5 7
Bumi Serpong Damai BSDE IJ Real Estate Aurellia Setiabudi 1,835 2,671 4 Buy 13.7 13.5 -36 2 1.8 1.6 0.8 0.7 15 13 1 1
Jasa Marga JSMR IJ Construction Pandu Anugrah 5,375 2,764 3 Hold 24.9 20.8 3 20 3.5 3.2 1.3 1.4 15 16 13 12
Pembangunan Perumahan PTPP IJ Construction Pandu Anugrah 3,750 1,373 2 Buy 26.8 20.2 27 33 6.2 5.0 0.9 1.1 26 28 10 8
Summarecon SMRA IJ Real Estate Aurellia Setiabudi 1,590 1,735 3 Buy 27.6 20.5 -40 35 3.8 3.3 1.3 1.5 15 17 2 2
Waskita Karya WSKT IJ Construction Pandu Anugrah 2,090 2,145 5 Buy 22.0 22.3 81 -2 2.4 2.7 0.5 0.7 17 13 14 14
Malaysia
Gamuda GAM MK Construction Li Shin Chai 5.0 3,029 5 Buy 17.1 18.0 -7 -5 1.8 1.9 2.4 2.4 12 10 23 20
IJM IJM MK Construction Li Shin Chai 3.6 3,310 5 Hold 22.1 22.7 -14 -3 1.4 1.5 2.1 2.1 7 7 12 15
Sunway Construction SCGB MK Construction Li Shin Chai 1.6 534 1 Buy 16.5 13.5 12 22 4.7 3.8 2.5 2.6 33 31 9 7
Philippines
DMCI Holdings DMC PM Industrials Rommel Rodrigo 12.8 3,661 2 Hold 15.5 13.7 0 13 2.8 2.6 3.9 4.4 19 20 11 9
Metro Pacific Inv’t MPI PM Financials Rommel Rodrigo 5.8 3,515 5 Buy 18.7 19.3 2 -3 1.5 1.4 0.6 0.6 8 7 20 19
Singapore
Mapletree Ind Trust MINT SP REITs Joshua Tan 1.6 2,122 3 Buy na na na na 1.2 1.2 6.5 6.9 8 8 18 18
SingTel ST SP Telcos Gregory Yap 3.7 43,812 62 Buy 15.7 15.5 4 1 2.4 2.3 4.7 4.8 16 15 10 8
Thailand
Advanced Info Service ADVANC TB Telcos Maria Lapiz 153 12,913 77 Buy 11.6 15.0 9 -22 9.4 11.2 8.5 6.6 82 68 7 9
Airports of Thailand AOT TB Transport Sittichai D. 376 15,248 40 Buy 33.5 26.4 32 27 4.9 4.3 1.4 1.5 15 17 16 18
CH. Karnchang CK TB Construction Maria Lapiz 25.3 1,214 11 Buy 33.5 29.5 29 13 2.1 2.0 1.2 1.4 7 7 22 21
Vietnam
Cotec Construction CTD VN Construction Trung Thai Quang 178,000 374 0.4 Buy 12.1 9.8 100 23 2.6 2.2 2.8 3.1 22 24 5 6
Kinh Bac City Dev’t KBC VN Real Estate Trung THAI Quang 12,700 268 1 Buy 16.9 12.7 -17 33 0.9 0.8 0.0 0.0 6 7 20 15
Share price as at Apr 7, 2016 closing. Source: Maybank Kim Eng
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Table of Contents
ASEAN Infrastructure Best Ideas ......................... p2
Global: That Wonderful Elusive Sustainable Balance Sheet Growth ....................................... p5
Indonesia: Stepping on the Gas ...................... p20
Malaysia: Going Down a Different Road ....... p36
The Philippines: If You Have the Will, You’ll Have the Way .......................................... p50
Singapore: While We Were Sleeping… ........... p68
Thailand: Round 2! ............................................. p90
Vietnam: Still Below Potential ......................... p106
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Five Takeaways
1. ASEAN infrastructure remains an area where we see sustained growth.
2. Indonesia (power and transport), Vietnam (PPP projects throughout), the Philippines and Thailand (both transport) are areas of opportunity. Malaysia and Singapore will focus on quality rather than quantity.
3. Regulations and transparency need to continue to improve, particularly as transport infrastructure needs clear land acquisition processes to be put in place.
4. Logistics performance has been improving. The Philippines has lagged in recent years while Indonesia has seen the greatest improvement.
5. In ASEAN, we think the demographic and urbanization trends suggest rising domestic savings rates in the coming years. It also helps that ASEAN balance sheets are under-leveraged. While foreign capital is needed, domestic funding is set to be a big factor.
REGIONAL INFRASTRUCTURE Sadiq Currimbhoy [email protected] (65) 6231 5836 Willie Chan [email protected] (852) 2268 0631
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REGIONAL INFRASTRUCTURE That Wonderful Elusive Sustainable Balance Sheet Growth In our outlook report for this year, 6-for-16 (Jan 23), infrastructure build in ASEAN was a consistent theme. From a strategy perspective too, with some indicators in the region consistent with recessionary readings, we felt there was greater impetus and necessity for governments to implement projects.
Since then, the global environment has remained lacklustre and the urge for government-led infrastructure spending has arguably increased. And there has been some response. In the Indonesia chapter, Head of Research Isnaputra Iskandar and team report faster government action and realized spending up nearly 50% YoY. Even Singapore has gotten into the act. Our team highlights that the government indicated public development expenditure could top SGD30b, or 6% of GDP, by 2020.
This report takes this analysis a step further by looking at Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam and examining each of the sub-sectors within infrastructure, assessing if they will be implemented and highlighting the investment opportunity. For each country, 5 takeaways are offered in addition to sector analysis.
In this strategy chapter, we focus on whether the ASEAN balance sheet can sustainably grow to fund and build the needed infrastructure. We focus on three things:
1. The Asean infrastructure opportunity; 2. The proposition in a global context; and, 3. The funding ability of the region.
ONE: UNDERSTANDING THE NEEDS
We know large parts of ASEAN are under-built. The ADB in its 2015 ASEAN Investment Report on Infrastructure and Connectivity estimates that the region needs USD110b per year until 2025 in infrastructure spend. The ADB report goes
into some detail highlighting the rising foreign direct investment and intra-regional investment in key projects across the region.
This report focuses on just the ASEAN-6 where our country teams reckon we could see government spending of USD84b this year. Of this, Indonesia provides the bulk at USD23b. After this is Vietnam at USD20b. Government efforts amount to USD14b in Singapore and USD9b in Malaysia. Thailand is set to be small this year (USD3b) but ramping up to an average of USD9b a year to 2020. The Philippines has disappointed in recent years by spending significantly less than target. But the election provides an opportunity for new impetus.
Infrastructure Capital Stock
From a macro perspective, to see where we are currently in the region, we used IMF data on capital stock.
Fig 1: Public + PPP capital stock per capita
Source: IMF – Investment and Capital Stock Dataset, Maybank Kim Eng
The capital stock data is put together using national accounts and is measured in constant 2005 dollars. The IMF accumulates the annual investment spending by any one country, applying estimated depreciation rates. The data is broken up into three components: one, public sector (which we assume is
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infrastructure); two, public-private partnerships (PPP, which is likely infrastructure given much is invested in power projects); and three, private sector (which we assume is not infrastructure but may be factories, etc). For our analysis, we assumed that infrastructure capital stock was the combination of both public and PPP. Removing PPP and looking only at public sector does not change the analysis much.
For this report, we used two different metrics: one is capital stock per capita and capital stock as a percent of GDP. The latter we found more intuitive while the former helps to also understand the degree of the problem.
Unsurprisingly, the bulk of Asia and ASEAN is underbuilt. Singapore has amongst the highest per capita capital stock. China’s infrastructure stock on this basis is not overly extended, though Malaysia has one of the highest levels in the region. On this metric, both have some way to catch up to Singapore.
Within Asean, there are very low readings for Indonesia, the Philippines and predictably, the ’Frontier markets’ of Vietnam, Cambodia and Laos. India, too, exhibits a very low infrastructure capital stock per capita.
Fig 2: Public + PPP capital stock as % of GDP
Source: IMF – Investment and Capital Stock Dataset, Maybank Kim Eng
On an infrastructure capital stock to GDP basis, the picture is somewhat different. More developed countries have lower infrastructure capital stock to GDP – essentially the built infrastructure has already resulted in much stronger income growth to support it or is of better quality. More developing countries such as Malaysia and China (although we shall later disucss, we have some concerns that this number may be overstated) have much higher levels, suggesting that some of the build has already occurred.
The bulk of the ASEAN nations, however, continue to show very low levels of capital stock. In this report, each team goes into their individual needs. Power is clearly the focus in Indonesia and Vietnam. Interestingly, many discuss transport.
Quality Versus Quantity
The issue of “quality” deserves a close look as less quantity but more quality may be able to support higher economic activity.
Fig 3: Quality of overall infrastructure & public capital stock+PPP as % of GDP
Source: IMF – Investment and Capital Stock Dataset, World Economic Forum, Maybank Kim Eng
Using Quality of Infrastructure data from the World Economic Forum, we plotted quality with infrastructure capital stock as a percent of GDP. The data is part of the Global Competitiveness Report. Not surprisingly, the developed world and
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Asia’s city states have the highest quality of infrastructure. And, while they have a high infrastructure capital stock per capita (Figure 1), they also have a relatively lower level of infrastructure as a share of GDP (Figure 2 and 3).
Unfortunately, we do not have history to see how infrastructure capital stock evolves over time from both a “quantity” and “quality” perspective. Only the quantity metric is available. But this is instructive.
The Big Curl?
While not shown here, infrastructure capital stock in Singapore exceeded 108% of GDP in 1990 and based on the latest 2013 data, it’s below 70%. We do not know the quality then, but there has always been the approach of “build it and they will come.” This continues today and Singapore still has a very proactive economic infrastructure plan to be a regional hub. It is home to 50% of Southeast Asia’s data centres and is expanding capacity.
From an aggregate perspective, this suggests that there is a “Big Curl” – initially, capital stock to GDP surges dramatically even as quality perhaps only slowly improves. Eventually, there is less need for physical infrastructure build, but a need to improve and optimize.
On this logic, China and Malaysia are in this “curl-phase”. This comes out in the Malaysian chapter put together by Suhaimi Ilias, Wong Chew Hann, Tan Chi Wei and Chai Li Shin. They discuss the emphasis on improving the efficiency and quality of infrastructure.
China’s response has been natural: with less physical build-out ahead, One Belt, One Road has the potential to allow companies that were previously building in China to build elsewhere. And, the rest of ASEAN, and India too, have significant scope to increase both quantity metric (which tends to exceed GDP) and quality.
Why Quality Matters – checking the data
Naturally, such ’quality‘ measures may not be accurate. So, we plotted quality against the private sector capital stock to GDP. The logic was that better quality infrastructure will attract more private investment.
In Asia, which is still dominated by low-margin manufacturing, a small change in logistics costs can mean much higher potential returns. And higher returns attract private sector capital. The chart below shows this to be the case.
Fig 4: Quality of overall infrastructure & private capital stock as % of GDP
Source: IMF – Investment and Capital Stock Dataset, World Economic Forum, Maybank Kim Eng
We were a bit surprised by the low readings in China given the expansion of many private sector companies. One possibility is companies that are classified as government should really be considered private sector. Even so, aggregating both suggests that while the capital stock has increased, there is still more to do. The difficulty for China is leverage, as we shall see later.
Importance of Institutional Systems
The ability to bridge such quantity and quality gaps is also a function of the strength of a country’s institutions. That is, are the socio, political and legal systems and structures in place so that the “right” projects are identified and executed?
For example, one concern over the preceding analysis is that some capital stock data may be overstated due to leakage and slippage. As the capital stock data uses GDP components, if project values are over-stated due to corruption and other losses then the value of the capital stock will also be too high.
In our previous work (Big Ideas: The Charts Of ASEAN, Chart 32, Corruption Percentiles), we used data from Transparency International. We converted the rankings data into percentiles: the higher the percentile, the higher the rank
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and so the stronger the institutional system. In ASEAN, the highest score is Singapore.
Our cross-check is again to use private sector capital stock: the higher the ranking, the more the private sector would want to come into the country and build capital stock. The chart below shows this is largely the case.
Fig 5: Corruption percentiles & private capital stock as % of GDP
Source: IMF – Investment and Capital Stock Dataset, Transparency International, Maybank Kim Eng
By using rankings and percentiles, we are looking for improvements in score by countries relative to other countries over time. Our underlying thinking is that institutional improvements are keys to attracting capital in a competitive global environment. And, as such, we want to see consistent improvements from both an absolute, and relative to the rest of the world, perspective.
The biggest improvements in recent years have been in Indonesia and the Philippines. India, too, has shown encouraging improvement. The readings for Cambodia, Myanmar and Laos remain very low.
Fig 6: Corruption Percentiles
Source: Transparency International, Maybank Kim Eng
As a case in point, throughout the country chapters, there is a great emphasis on transport infrastructure, including road and rail. Thailand and the Philippines stress the needs in this space. In Thailand’s case, 93% of the Expedited Project List is in rail and roads. Like other countries, the key is to be able to secure land access and each team in this report discusses the latest developments.
In Indonesia, the Philippines and Vietnam, land acquisition is a central issue and progress is discussed in the country chapters. In the Philippines, underinvestment in recent years has created significant bottlenecks. Michael Bengson and Luz Lorenzo reckon that when the new president is elected in May, infrastructure will almost certainly be a top priority. There, a new law was passed last month (the “Right-of-Way Act”) and implementation will be the key.
Why Technology Matters
Our bias is that technology is the enemy of corruption. We think the success of individuals using social media to expose misbehaving leaders and companies and corrupt practices is set to continue. Other similar use of information (such as Wikileaks and as we write, the Panama Papers) to reveal leakages, wrongdoings
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and malfeasance serves to put pressure on decision makers to behave in a way that minimizes losses for society.
In Asia, the rapid digitization (Big Ideas: The Charts Of ASEAN, Chart 16, Getting Ready for the e-consumer) could serve to accelerate this trend. Indeed, in each of the country sections, what is clear is that communication capex and penetration rates are high and are set to continue to increase as more and more countries move to 4G. In short, the price of information is falling at a rapid pace in the region.
Inter-connectedness and Trade Infrastructure
And that information is more easily shared and traded as ASEAN is increasingly inter-connected (see also the Undersea pipe chart in the Singapore chapter). But while communication infrastructure is being built out, physical logistics infrastructure is lagging.
There are some estimates of logistics costs as a percent of GDP and in Thailand, this exceeds 14%. In the US, it is 8.3% as reported by the Council of Supply Chain Management Professionals. Given that Thailand on the previous metrics has both more and better quality infrastructure than many other ASEAN countries, we estimate logistics costs in other countries could be nearer 20%.
The following chart shows the Logistics Performance Index (LPI). The LPI includes 6 different metrics including customs, infrastructure, international shipments, logistics quality and competence, tracking and tracing and timeliness.
The y-axis shows the latest reading as of 2014. The x-axis shows the increase in points since 2010. So, one would want to be in the top right hand corner, improving logistics performance that is at a high level. Cambodia and Indonesia show the greatest improvements in LPI over that 4-year period. In Indonesia’s case, the improvements were driven by customs performance and logistics quality. Even so, were the total LPI improvement from 2010 to 2014 be replicated, it would still lag Thailand and Malaysia (which are very close to each other and similar to China). So, further investment needs to occur. India and the Philippines have been, on this metric, going backwards.
Fig 7: Logistics Performance Index and change since 2010
Source: World Bank, Maybank Kim Eng
The Intra-regional trade perspective
With the launch of the ASEAN Economic Community earlier this year, there is much expectation of a surge in intra-regional trade. While intra-regional trade is not much more than 20% of total trade, in the EU and for NAFTA, this exceeds 40%.
Looking at the LPI, the bulk of European countries have the highest readings. Within NAFTA, Canada and the US have very high readings but Mexico is similar to many ASEAN countries. So, logistics matters, but it is possible to have high intra-regional trade even if not all the countries have the strongest infrastructure. In Mexico’s case, this may be because the key manufacturing areas are close enough to transportation networks to benefit trading partners. It still takes many years for businesses to identify, maximize and get comfortable with cross-border risk.
ASEAN’s case may not be dissimilar. As manufacturing is still a key driver of growth, and many are low-margin businesses, any logistics improvements can increase margins and profits significantly.
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However, we reckon intra-regional trade will move much faster than the pace seen in NAFTA, where it took almost 10 years for merchandise trade to double. We base this on three reasons:
1. The adoption of technology and communication infrastructure through many countries lowers significantly the cost of market research, testing out new products, access to consumers and businesses. This is particularly important in an environment where product cycles are becoming shorter.
2. The demographic patterns on young consumers mean a growing consumer base.
3. The mediocre outlook for the global economy pushing governments to invest more into infrastructure build-out. This is the subject of the next section.
TWO: SUSTAINABLY EXPANDING BALANCE SHEETS IS THE SCARCE COMMODITY
Who can Expand Their Balance Sheet and Where?
A great deal continues to be written about the lack of global growth. Rather than use macro data, we wanted to use company data. And we reckon one reason for the weak global growth environment is the following figure. The chart shows asset turnover for the key countries globally – defined here as just sales divided by average total assets. The universe is the listed non-financial companies in the relevant benchmarks. These are aggregated by adding all the sales and dividing by total average assets. Effectively, we are measuring how much sales the balance sheet generates as if all the non-financials were one company.
Fig 8: Asset turnover in the US, Europe, Japan & Asia
Source: Factset, Maybank Kim Eng
Since the Global Financial Crisis in 2008, the balance sheet in the key countries has been generating fewer sales. We could posit any number of reasons, but one of these is that Quantitative Easing (or QE) helped keep weak companies from going bust. Another is that the QE meant a rush of capital to Emerging Markets which resulted in excess capacity being built. The bottom line is that lower asset turns has meant downward pressures on returns on capital.
The Asia deterioration, across the board and so including the ASEAN countries, has been dramatic.
What does this mean for returns on capital relative to the cost of capital?
As asset turns have fallen, we compared returns on invested capital (RoIC) for the non-financials against long term bond yields in each of the developed regions. The logic is that a large gap between the returns and cost of capital will be able to drive self-sustaining growth. Our RoIC calculation is a simplification using the ROE decomposition framework: it’s simply net profit divided by invested capital.
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The US
The US-listed sector provides a relatively comforting picture. Despite lower asset turnover, record operating margins have meant the RoIC in the US has held up well compared to bond yields. In the chart below, the yellow line is RoIC while the grey line is the US 10-year bond yield. This gap has allowed US growth to continue to grow. With a wider gap, companies would be expected to continue to invest for growth.
Fig 9: US RoIC, 10-year government bond & US$ real effective FX rate
Source: Factset, Bloomberg, Maybank Kim Eng
The positives are balanced by some potential negatives. First, despite very low interest rates, thanks to low asset turnover, returns have not exploded to the upside. Indeed, companies have focused on cost cuts. Operating margins are at record highs and this may not be sustainable, particularly as the more cyclical and globally related sectors of the economy suffer. Second, credit spreads have widened for High Yield and some Investment Grade debt and these could impact growth and therefore, returns. Finally, the red line shows the US$ real effective exchange rate (right hand reverse scale). This has risen sharply in recent years and back to levels prior to the GFC. The US$ strength has yet to feed into the RoIC of US companies in aggregate but is worrisome enough for Fed Chair Janet Yellen to sound very dovish. Nevertheless, the US is a relative bright spot.
Japan
In contrast, and perhaps unsurprisingly, Japan’s return on invested capital looks much more linked to the exchange rate (red line on reverse scale below) than domestic bond yields. Demographic and domestic debt issues are so large that Japanese returns do appear to be a function of the exchange rate and the self-sustaining nature of returns is therefore questionable.
Fig 10: Japan RoIC, 10-year government bond & real effective FX rate
Source: Factset, Bloomberg, Maybank Kim Eng
Europe
Europe is also interesting as the demographic picture changes with aging populations. Lower bond yields have not meant higher RoICs in Europe. Asset turns have been declining as elsewhere but the economy has been poor and for this universe of companies, part of the reason for improvement has been the exporters.
The red line again shows the Euro REER, on the right hand reverse scale. The annual nature of the analysis means there are unfortunately too few data points but the weakening Euro has likely been improving returns of listed companies. The European Central Bank (ECB), seeing weak inflation data and a soft economy, has been increasingly aggressive.
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Fig 11: Europe RoIC, 10-year government bond & real effective FX rate
Source: Factset, Bloomberg, Maybank Kim Eng
One implication of more aggressive policy by the ECB and the Bank of Japan is the risk of currency wars given how returns in Japan and Europe have moved in recent years. Interestingly, negative interest rates in neither Japan nor Europe have done much to weaken their own exchange rates further. And that could impact returns of exporters and could prevent self-sustaining growth. All this before we get to the margin pressures on banks when there are negative interest rates.
And the Liabilities Side is a Problem Too
We also need to consider the liabilities side of the balance sheet. Here, the macro data, by including household and government debt, shows developed economies are potentially too stretched.
The table below shows this. For every country, aggregate non-financial debt to GDP is higher than before the GFC. Germany stands out as the least leveraged economy. Furthermore, in Germany, the UK and US, the private sector has deleveraged. But this has been more than balanced by a surge in government debt as fiscal deficits rose sharply. In other countries, both the private and public sector debt to GDP rose, and sometimes as nominal GDP remains very weak in some countries.
Fig 12: Debt to GDP distribution in Europe, US & Japan
2007 2014
Total Private Sector Debt
to GDP %)
Total Government Debt to GDP
(%)
Total Debt
to GDP (%)
Total Private Sector Debt
to GDP (%)
Total Government Debt to GDP
(%)
Total Debt
to GDP (%)
Europe Germany 117 64 181 109 75 184 France 151 64 215 181 96 277 Belgium 167 87 254
209 107 316
Spain 206 36 242 185 99 284 Italy 113 100 213 121 132 253 Netherlands 221 43 264 241 68 309 UK 184 44 228
161 88 249
US 228 56 283 211 97 308 Japan 175 167 342 188 230 418
Source: BIS, Eurostat, World Bank, Maybank Kim Eng
The stretched balance sheets could limit the ability of the developed world to drive sustainable growth. While debt to GDP may continue to rise, the Japan experience suggests that it is not a guarantee that growth will accelerate. Rather, it may push more countries to reign in fiscal deficits1, putting more pressure on monetary policy makers. But interest rates are already negative in Europe and Japan, and yet to indicate any success. In short, the policy credibility problem for central banks may persist for some time.
The China Factor
We have found using the ROE decompositions useful in understanding Chinese returns. In previous work, we have highlighted the decline in asset turns and therefore in returns on invested capital.
The chart below compares RoIC for the listed Chinese non-financials universe. While interest rates have trended down, the returns on capital have fallen at a much faster pace. Indeed, the gap is amongst the lowest. The excess capacity is such that there are not enough returns to get companies to invest and expand their balance sheets again.
1 In this context, “People’s QE” is understandable: if companies don’t invest, then governments need to invest in social and other infrastructure projects and this needs to also be monetized by the Central Bank.
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Fig 13: China RoIC, 10-year government bond & real effective FX rate
Source: Factset, Bloomberg, Maybank Kim Eng
Insofar as these returns reflect the environment in China, it is difficult to expect too much from Chinese growth in coming years. We also plotted the RMB REER. While we are hesitant again to say that the currency has been driving returns down, it is interesting that the strong RMB could be impacting returns negatively too. Instead, China is more likely to want to export its excess capacity to the rest of the world adding to global disinflationary pressure.
The problem for China, frequently discussed by us and others, is also leverage: the post GFC credit boom added roughly 100%-points of debt to GDP, resulting in an aggregate leverage ratio of 250%. So, while China has some infrastructure quality improvements to do, a debt-fuelled boom may mean good money is being thrown at bad and this raises much greater longer term concerns (see The Cycle, Bank Cost of Capital and the Importance of AUDJPY, March 10, 2016).
The bottom line is the evolution and sustainability of returns in the developed world and China gives little confidence that growth is set to recover sharply. And there is therefore a greater probability of a low global interest rate environment. The negative is that currencies may stay volatile and this means that domestic savings will need to fund some of ASEAN’s infrastructure build. This is the subject of the next section.
THREE: FUNDING SUSTAINABLE GROWTH
The persistent question is how infrastructure spend will be funded. That is, can the liability side of the domestic balance sheet expand to match the asset side?
We approach this via looking at two separate sources:
1. The potential for domestic leverage in ASEAN; and, 2. The outlook for domestic savings
The State of Leverage in ASEAN
Unlike the developed world, and indeed China, ASEAN is under-leveraged. The table below shows the breakdown of aggregate debt to GDP for Asia by household, non-financial corporate and government debt. The bulk of ASEAN is underleveraged and can expand their balance sheet. The levels in Indonesia, the Philippines, Thailand and nearby India are very low and there is significant scope to expand leverage.
Fig 14: Debt to GDP distribution in Asia, as of September 2015
Total
Household Total
Non-Financial Corp Total Govt
Total
China * 39 166 44 249 Hong Kong 67 218 5 290 Indonesia 17 24 27 68 India 10 50 68 128 Korea 87 106 42 235 Malaysia 70 68 55 193 Philippines 10 29 53 92 Singapore 61 86 104 251 Thailand 71 52 31 154
Source: BIS, Philippines Central Bank and Department of Finance, Maybank Kim Eng, China’s * denotes private sector observations of much higher non-banking sector lending.
Can we see credit booms?
Indeed, if interest rates globally are to stay low for a prolonged period of time, and disinflationary pressure persists, then interest rates in markets such as India, Indonesia and Vietnam may ultimately be too high. Domestically, infrastructure spending that reduces bottlenecks and allows inflation to be more manageable could mean that interest rates can fall and do so substantially and sustainably. That has the potential to translate into a domestic credit boom.
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Fig 15: Current account, fiscal account, interest rate, inflation & capital adequacy
Current account
(% of GDP) Fiscal account
(% of GDP) Interest rate
(%) Inflation YoY (%)
Capital Adequacy (%)
2015E 2016E 2015E 2016E 10-yr Govt bond Latest 2015E
Hong Kong 3.1 2.3 1.9 0.8 1.2 3.1 14.0 Australia -4.6 -4.2 -1.9 -2.5 2.5 1.7 10.4 Taiwan 14.6 13.8 -0.2 -1.4 0.8 2.4 9.0 Korea 7.7 7.5 0.0 0.1 1.8 1.0 11.6 Malaysia 3.0 2.0 -3.2 -3.2 3.8 4.2 12.7 China 2.7 2.7 -3.5 -3.0 2.9 2.3 11.3 Thailand 8.9 5.3 -3.0 -2.5 1.7 -0.5 13.9 Vietnam 0.7 0.3 -5.4 -5.0 6.9 1.7 13.3 Indonesia -2.1 -2.3 -2.4 -2.5 7.7 4.5 19.2 India -1.1 -1.0 -3.5 -3.9 7.5 5.2 5.5 Philippines 2.9 3.6 -0.9 -1.9 4.3 0.9 13.9 Singapore 19.7 20.0 -0.1 0.3 1.8 -0.8 13.8
Source: Bloomberg, World Bank, Maybank Kim Eng Estimates
The table above also shows that the need for external savings has dropped sharply. Current account deficits are now surpluses in many countries helping to create net domestic savings and no reliance on foreign capital2. Even in Indonesia, where there is a current account deficit, import growth in US$ terms as of February 2016 has been falling – down 17% y-o-y (3 month moving average) overall and down 42% y-o-y (3MMA, again) in for non-oil imports so the correction could be faster than expectations.
Indeed, the team region wide is starting to see more domestic funding of many infrastructure projects. For example, in Thailand, our Head of Research Maria Lapiz reports excess liquidity of THB2.4t (or USD68b).
But foreign and private capital will be needed. In Vietnam, Head of Research Lien Le Hong makes the point that the government admits that the state budget and other forms of development assistance may meet only half of the budgetary needs over the next 10 years. Private Public Partnerships are therefore “a MUST, and not an option.”
2 Government deficit or G-T) + (Current Account surplus or X-M) = (Excess Domestic Saving or S-I)
The Outlook for Savings Rates
But while domestic credit plays a role, there is also the potential of higher savings rates.
For ASEAN as a whole, the Prime Savers Ratio, that is the percentage of the population aged 40-60, is set to rise for a further 15 years. This age group contains those with higher earnings but also who save as retirement approaches. Fig 16: Demographics trends in ASEAN
Source: UN Population Database, Maybank Kim Eng
Drivers of Savings
We also wanted to understand the drivers of savings. An IMF paper on World Saving by Francesco Grigoli, Alexander Herman and Klaus Schmidt-Hebbel tries to test the drivers of savings using data across countries over time. Their model tests a number of variables including real interest rates, the level of incomes, growth rate, terms or trade, the flow of private sector credit among others.
We found two variables they used particularly interesting: one, old-age dependency ratio (or the % of the population aged 65 and above) and the other,
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urbanization rate. These are slower moving in nature and also are areas where we see material changes in ASEAN. The population is young with very low old-age dependency ratio and the region is also seeing rising urbanization.
First: Savings and old age dependency
In the regression result from the IMF paper, which uses a global database, the authors find a negative sign: that is, higher old age dependency means lower savings rates. This is intuitive but we wondered if it really applied to ASEAN given the young population.
Fig 17: Gross saving as % of GDP & old age dependency ratio
Source: World Bank -World Development Indicators, Maybank Kim Eng
So, given fewer observations, we did a simple scatter diagram to see what the link looked like in ASEAN. This is shown in Figure 17, but we excluded Singapore as we use the same sample for the next analysis on urbanization and the city-nation has 100% urbanization and the Philippines where repatriation means much higher levels of gross savings.
On this simplified basis, there does not seem to be a very strong link between gross savings and old age dependency ratio. So it is possible there are other factors at play given the young population. The best fit we tried was a polynomial where savings rates seem to rise with old age dependency but then fall thereafter. The key level appears to be around 10%.
Second: Savings and Urbanization
In the IMF results, there is also a negative empirical relationship between savings and urbanization. The theoretical relationship, in contrast, is ambiguous. This surprised us and we plotted it above for ASEAN, again excluding Singapore and the Philippines. Again, we are looking if there is a simple relationship and are not really econometrically modelling savings behaviour in the region.
Fig 18: Gross saving as % of GDP & urban population % of total
Source: World Bank - World Development Indicators, Maybank Kim Eng
The relationship seems to be positive but again, the best fit is polynomial and there is a rollover at high levels of urbanization. So, it could that at the early stages of urbanization, households save more as earnings are higher than rural incomes and there is a need to save in order to secure a property. Plus, there is also the need to send money back to rural areas, save for education, etc. Over time, as urbanization levels rise, there is less need to do this and the costs of living in the city rise.
The chart shows that it’s at around the 60% urbanization level where savings rate peak out. While each country is different, and the caveat is that there are many forces at play, the bulk of ASEAN is very much below these levels.
What is also interesting is the range of savings rates in the region (so the scale of the y-axis) and how much it moves. Even though all the countries are put
y = -0.6413x2 + 12.416x - 28.495R² = 0.1863
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together, it’s still the case that increases in percentage points in Savings rates are common for any one country!
This leads us to the table below which shows current incomes and savings rates against old age dependency and urban population as a % of total. For the more developed nations, including China and North Asia, the rise in old age dependency ratios could be large factors driving future savings, and indeed, how strong future growth can be.
Fig 19: GDP, old age dependency ratio, gross saving (% of GDP) & urbanization (%)
GDP
(USDb) Old age dependency
ratio (%) Gross savings
(% of GDP) Urban population
(% of total)
2015 2013 2020F 2013 2013
Australia 1,241 22 25 25 89 Cambodia 18 6.1 7.6 11 20 China 11,385 12 17 50 53 Hong Kong 308 19 27 26 100 India 2,183 8.3 9.8 32 32 Indonesia 873 7.6 8.6 31 52 Japan 4,116 40 48 22 92 Korea 1,393 17 22 34 82 Malaysia 314 7.9 10.0 30 73 Philippines 299 7.0 8.0 45 45 Singapore 294 14 21 47 100 Thailand 374 14 18 27 48 Vietnam 199 9.3 12 30 32 United Kingdom 2,865 26 29 12 82 United States 17,968 21 26 18 81
Source: World Bank - World Development Indicators, IMF World Economic Outlook, Maybank Kim Eng
In ASEAN though, we think the demographic and urbanization trends suggest that there is a case to expect rising domestic savings rates in coming years. A 2%-point increase in Savings Rates for the ASEAN countries below means USD47.4b in additional savings. In the context of the ADB’s USD110b a year target for all of ASEAN, this is a significant proportion of funding needs.
In sum, there is a reasonable chance that both the credit and savings part of the ASEAN balance sheet can sustainably fund the asset growth part.
Financial Infrastructure, Risk Perception and a look at IRRs
Naturally, in some countries, financial market deepening, the development of liquid bond markets and the insurance sector among other factors will also be key drivers and this will take some time.
A Little IRR Analysis
Ultimately, it’s about whether risk perceptions are declining over time.
We wanted to understand how the required IRRs of similar projects were changing over time. We chose 2010 compared to today and asked teams in 4 key countries to fill out the table below. The idea is that a declining IRR trend for similar projects would be consistent with falling risk perceptions. The table was filled out by Isna in Indonesia, Maria in Thailand, Chi Wei in Malaysia and Michael in The Philippines.
The results are spread over the next two pages and hopefully will help our readers get used to reading tables that connect across 2 landscape pages!
The bottom line is that IRRs have fallen in Malaysia, the Philippines and Thailand, but have actually stayed very high in Indonesia. If we continue to see the improvements in transparency (Figure 6) and logistics (Figure 7), and even a little clarity on land acquisition, the relative gap between Indonesia and elsewhere is arguably too high. Indeed, we think that infrastructure in Indonesia is set to attract both regional and global capital in the coming years.
The Rest of the Report
The rest of the report contains outlooks from each of our country teams in Indonesia, Malaysia, The Philippines, Singapore, Thailand and Vietnam.
Each team looked at the individual sectors within infrastructure to assess current and future plans and assess its viability and the ability to execute. They then offered their highest conviction stock opportunities. A summary of the stock lists for equity investors is on page 2.
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Fig 20: IRRs Around the Region Indonesia Malaysia Thailand Philippines 1. What were the
IRRs of greenfield projects in 2010?
Around 11-15% in USD. Project IRRs were around 10%. 10-16%. Around 14% WACC.
2. What sort of projects do that reflect (ie, coal fired, etc)?
Coal fired power plants, but we suspect this also applied to other types of power plants.
Both coal and gas plants. Natural gas, coal fired, and co-generation plants.
Coal-fired power plants, diesel power plants and hydro power plants.
3. What risks are considered reflected in this calculation (eg, sometimes, the deals would only be done in USD and with guarantees), etc?
PLN was and has been the off-taker.
The selling price was in USD.
IPP did not carry fuel-price risk.
The tenor of the contract is different from one power plant to another: 30 years for mine-mouth coal power plants, 25 years for non-mine-mouth ones and 20 years for gas-fired power plants.
Given the IRR, private sector interested in the projects normally worked together with foreign financial institution. The latter helping to lower the cost of fund.
The government didn’t provide blanket guarantee for IPP projects, and this stance remains until now. In the past, for the 10,000MW project the government provided full guarantee. However, this only applied to the 10,000MW project and not to IPP ones.
PPAs are structured in ringgit and have fixed tenures (25 years for coal, 21 years for gas).
Power projects are usually financed by ringgit bonds (usually >10 year tenures, and Malaysia has a deep bond market), issued upon PPA signing just prior construction.
IPPs do NOT bear fuel price risk.
One IPP had to take on a little demand risk, but IPPs in general, bore no demand risk, and capacity payments are paid upon fulfillment of availability targets.
The offtakers Tenaga (Peninsular Msia) and Sabah Electricity (Sabah, 80% owned by Tenaga), have no history of defaults.
IPPs have highly insulated power purchase agreements under Thailand's single-buyer industry structure. EGAT shoulders essentially all of the grid's demand risk with payments to IPPs consisting of two components including Availability payment and Energy payment. Availability payment are designed to compensate IPPs for their fixed investment costs including debt service obligations , fixed operating costs as well as Fx risk. AP is the main revenue stream that will generate return for power plant. The energy payment is for compensated IPP variable cost of production (fuel consumption and other variable opex). This payment structure means that IPPs' returns over a project lifecycle are dependent on the plant being available and largely independent of the plant's actual dispatch level. So, the key risk for Thailand's IPP is the plant outage.
These are long-term Power Supply Agreements between a privately owned generator and a distributor (either an electric cooperative or a privately owned distribution utility) approved by the regulator. The rates are in Philippine Pesos and the PSAs provide for full pass-through of fuel cost. Project financing is available and all Peso-denominated. Note there are many electric cooperatives and private distribution utilities in the Philippines. Some have very good credit standings such as Meralco, Visayan Electric and Davao Light and Power. Some do not, particularly among the electric cooperatives.
4. Are there any other relevant points (execution risk? Project refinanced upon completion?)
Land acquisition was a very big issue then (the law was passed only in 2012). The timing was very uncertain to complete the land acquisition and the pricing could skyrocket from initial estimates.
Low execution risk, construction tends to be completed when financing is secured. IPPs have been around in Malaysia since early-1990's. Regulatory framework is mature, and industry players and financiers are all very familiar with the segment.
Nope. Low execution risk, construction tends to be completed because financing is secured before the project is rolled out. The regulatory framework is quite mature, so we see no other risk rather than plant outage.
The risks have changed with the restructuring of the power sector beginning in 2001. In the 1990s, it used to be that IPPs entered into Build-Operate-Transfer projects with the state-owned National Power Corp, which is a stronger credit than a company. Also, the returns were even higher in the early 1990s as there was a power crisis and the government at the time wanted to address the issue as soon as possible by attracting private sector capital.
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Fig 20 – cont’d: IRRs Around the Region Indonesia Malaysia Thailand Philippines 5. What are the
IRRs of greenfield projects now?
Around 11-15% in USD for coal- and gas-fired power plants, and 15% for geothermal ones, which carry higher risk.
6-8% project IRR. A private sector guides that 6-7% for new gas IPP but we see this as being theoretical because really the gas supply in Thailand is running out. LNG, especially after the price collapse could be a good substitute but as of now the government has just approved the proposal to allow a 3rd party to do LNG terminal and importation because state-owned PTT is not keen as return is not attractive.
Around 12.6% WACC.
6. Are these comparable to the ones we are using for 2010?
IRR for coal and gas power plants are relatively unchanged. The case is different for geothermal ones as the government has already increased the IRR in order to attract investments.
Yes, still applies to coal and gas plants. Regulatory framework hasn't changed.
Not comparable. Yes, this applies to the same type of projects.
7. What risks are considered (so has there been any change?)
The structure remains the same i.e. IPPs sell their electricity to PLN in USD during tenor of their contracts and they don’t carry fuel-price risk.
The main difference is the pass of land acquisition bill, which - despite slow implementation - should provide stronger legal basis than before.
Another development is that the government has simplified the process, one of them being no approval from Minister of Energy and Mineral Resources is required if PLN has to buy electricity at the highest price of the range.
Another point to note is that with declining energy subsidy (energy subsidy has declined 60% since President Jokowi took power), will this translate into lower – or at least fixed – IRR going forward?
Risk parametres are largely unchanged, but the perception of the level of risk borne by Malaysia IPPs hasbeen lowered. Five more years of unblemished track record at the off-takers, and financing is generally not difficult to secure. There is also a little bit of public pressure. Hence regulator is demanding lower IRRs from operators.
Rising competition for the bidding will pressure the new project IRR. In particular we notice influx of interest from Japanese producers who have very competitive funding costs. However, with power demand weak and local community aversion against new coal fired power plant the roll out of 2015 PDP could be delayed.
Same risk structure. What has changed is the availability of financing from local banks has increased significantly due to the high level of liquidity in the Philippine financial system.
8. Any other relevant points?
The private sector has voiced its concern that after adjusting for cost of fund, their net return is only ~2%. They look pessimistic that they can compete with foreign players from Japan and China, etc which have lower cost of fund.
Some local banks are reluctant to fund power projects for the following reasons: 1) they question PLN’s payment sustainability amid lack of guarantee from the government, 2) they already have high exposure to PLN through other channels, and 3) as the projects are done in USD, funding should be is USD as well, but local banks can’t compete in USD funding with foreign banks.
There is a general concern by industry players that project IRRs might have gotten too low (cost of capital is usually in the 6-8% range). Players are clamouring for higher project IRRs.
Some concerns also on recent direct awards (open tender previously), particularly to a previous state-owned entity.
Thailand is running out of gas, so they will have to import LNG and that will push the gas pool price up. While the more expensive LNG cost would drive up gas generation cost, IPPs' earnings would not be affected by the higher LNG prices given the pass-through clauses in PPAs with EGAT. However, there is the question of how much subsidization should EGAT bear.
It used to be that the PSAs were negotiated bilaterally. However, the Department of Energy issued a circular in 2015 mandating electric cooperatives and distribution utilities to undergo a “Competitive Selection Process” for their requirements.
Source: Maybank Kim Eng Research. Isnaputra Iskandar (Indonesia), Tan Chi Wei (Malaysia), Maria Lapiz (Thailand) and Michael Bengson (The Philippines)
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1. Infrastructure rollout in full throttle
2. Government has flagged strong commitment
3. Projects are not heavily reliant on government funding
4. Land acquisition: has the risk really receded?
5. Top picks: PTPP, WSKT, BSDE
INDONESIA INFRASTRUCTURE Isnaputra Iskandar, CFA [email protected] (62) 21 8066 8680 Pandu Anugrah [email protected] (62) 21 8066 8688 Aurellia Setiabudi [email protected] (62) 21 8066 8691 Anthony Lukmawijaya [email protected] (62) 21 8066 8690
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INDONESIA INFRASTRUCTURE Stepping on the Gas Indonesia urgently needs infrastructure to support economic growth and competitiveness. It made good progress in the past two years, when its ranking in the Global Competitiveness Report by the World Economic Forum climbed by 16 places. In the latest report, it is down slightly, from 34 to 37 among 140 countries. Infrastructure - where its ranking slipped to 62 from 56 - is still one of its main problems.
Rankings aside, progress has been made in legislation in the last 3-4 years, starting with a land-acquisition bill in 2012. This was followed by a higher budget for infrastructure and kick-off of the MRT project in Jakarta.
1. Infrastructure rollout in full throttle
The government has set targets for all types of infrastructure development, from power to water supply, until 2020, with no priority given to any. This is understandable, as the lag can be seen almost everywhere: 1) domestic toll roads grew by just a 5% CAGR in the past five years, half that of national car sales; 2) an electrification ratio of 84% is one of the lowest in ASEAN; 3) port dwelling time is five days on average, the worst in ASEAN; and 4) domestic cement per capita of 240kg is much less than Malaysia’s 600kg, suggesting under-construction.
Of all the segments, we think power will provide the best opportunities for investors. This is because: 1) power generation is open to private investors; 2) electricity prices are set in USD, reducing currency-mismatch risks; and 3) Indonesia has abundant sources of energy, especially low-CV coal. The next attraction, we think, will be toll roads, with their main draw being periodic tariff adjustments. We also think that property companies will gain from infrastructure development.
2. Government has flagged strong commitment
Since President Jokowi took over at the end of 2014, the budget for infrastructure has increased by a 33% CAGR, to IDR314t in 2016. On the flip side, energy subsidies have been cut by a 45% CAGR to IDR102.1t. The higher budget suggests that over 2% of GDP will be spent on infrastructure development, one of the biggest ever. In order to accelerate spending, the government has resorted to budget pre-funding and faster tendering. Realised spending until beginning of February was up 40-50% YoY.
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3. Projects are not heavily reliant on government funding
Government funding is important, but that is mainly for land acquisitions and basic infrastructure such as bridges and water dams. For bigger projects such as power plants, high-speed railways and toll roads, the government has limited funding capacity. For such projects, it normally engages SOEs and/or private companies, mostly through public private partnerships (PPP). Our rough estimates suggest that funding by SOEs and private companies will account for more than 50% of total project values.
The government will still not provide blanket guarantees for projects run by SOEs and/or private companies. It will continue to support them through other mechanisms, such as accelerating land acquisitions process and faster permit issuance. We welcome this as it reflects fiscal prudence. Anecdotal evidence also suggests that an absence of government guarantees is not a big deterrent to investors.
4. Land acquisition: has the risk really receded?
There have been notable improvements in land-acquisition regulations. A law was passed in 2012 which provides legal support for completing land acquisitions within specific periods. The government also allows private parties to acquire land on their own if they believe that they can do it more quickly than the government.
Passage of the law is one thing, implementation another. There is no universal interpretation of the law, which leads to disputes and contentions. Quick action by the government to address this is required, as delays may dent confidence in the law. The Batang power project is the most high-profile case of a stalemate caused by conflicting interpretations of the law. Still, we think that foreign investors remain interested.
5. Top picks: PTPP, WSKT, BSDE
In our view, the main beneficiaries of infrastructure development would be toll-road and construction companies. JSMR should be able to clinch toll-road construction contracts. Construction companies, ADHI, PTPP, WIKA and WSKT, could benefit from almost all types of development, ranging from power plants to ports and toll roads. Our top picks are those with strong order books: WSKT and PTPP.
Property developers should also profit from any infrastructure boom. We prefer those with mass-market exposure such as BSDE, CTRA and SMRA and a strong presence in major cities. BSDE is our top pick for its ample land bank and strong balance sheet. Another beneficiary could be GIAA, from passenger-traffic growth, fleet expansion and the development of new airports across the country. We don’t think that the latter has been fully appreciated by the market.
Infrastructure development could even change other corporates’ operations and cost base. This is already being played out in the power sector, where major coal producers, ADRO, ITMG, PTBA and UNTR, have jumped onto the power-development bandwagon, mostly for business diversification. We forecast their earnings in 4-5 years will be less volatile than now.
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Focus Charts
35,000MW power programme for completion in 2020 Government’s infrastructure targets for 2019
Source: PLN Source: Bappenas
Typical sources of projects for SOE contractors Better clarity on land acquisition under the new land bill
Source: Ministry of Finance, Ministry of Public Works & Maybank KE Source: Jasa Marga
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Indonesia Infrastructure Facts & Forecasts Sector State in 2010 Current State 2020 Targets
Expenditure 2015 2016 Forecast (2016-2020)
Power (capacity in MW)
Coal: 12,031
Oil: 2,724
Gas: 3,363
Nuclear: 0
Hydro: 3,840
Combined cycle: 7,806
Other Renewables: 1,108
Total: 30,872
Peak load (MW): 18,756
Electricity sales (TWh): 146
Electrification ratio (%): 66
Coal: 25,627
Oil: 2,923
Gas: 3,795
Nuclear: 0
Hydro: 3,911
Combined cycle: 9,584
Other Renewables:1,399
Total: 47,239
Peak load (MW): 36,787
Electricity sales (TWh): 219
Electrification ratio (%): 84
Coal: 46,155
Oil: 2,991
Gas: 7,349
Nuclear: 0
Hydro: 6,261
Combined cycle: 19,269
Other Renewables:1,799
Total: 83,824
Peak load (MW): 50,531
(by 2019)
Electricity sales (TWh): N/A
Electrification ratio (%): 96.9
(by 2024)
No official data available. Estimated 2015 total spending of IDR27t on 3,782MW of new power capacity.
Estimated capex of IDR30t for 4,212MW new power capacity.
Total funding for 2016-20 will be IDR1,127t: 1) power plants (IDR814t); and 2) transmission and electrical power sub-stations (IDR313t).
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Sector MKE View: Achievable Challenges Reasons & Response Opportunities
Power (capacity in MW)
2016 PLN's 2015-2024 business plan calls for 4,212MW of new power capacity in 2016: 2,885MW for PLN & 1,327MW for IPPs. Should be achievable as funding has been resolved by PLN. 2020 Government ambitiously eyeing 35GW new power capacity by 2020. PLN to build 30% and IPPs, 70%. Most new plants (56%) will be coal-fired. Rest will use gas, oil and renewable energy. We think the 35GW programme may be delayed by land-acquisition hiccups. However, since 70% will be added by IPPs, execution should be better than PLN. We estimate a maximum 70% of the target will be completed by 2020.
Land acquisitions still the biggest obstacle. Government responsible for acquiring land, which doesn’t help, given its typically slow execution.
Delays caused by land acquisitions, securing fuels and funding. Government passed land-acquisition bill in 2012, but implementation has been patchy due to conflicting interpretations of the law, among others. In the most high-profile case which the government eventually won, the law was challenged by the local community. This delayed the construction of the Batang power plant, the largest in South-East Asia. In order to accelerate land acquisitions, the government allows the private sector to acquire land if it believes it can do it faster. While positive, we don’t think it will fully eliminate problems.
Despite hiccups, we don’t see declining interest from foreign investors. Batang is a good example. Other big power projects such as 2,000MW Tanjung Jati B awarded to UNTR and Java 7 projects suggest still-strong interest.
Indonesia’s electrification ratio is lower than neighbours’. It also has abundant energy resources. Government has to iron out land-acquisition problems in order to build confidence. Construction of Batang power plant, foreign-funded, is a landmark case for FDIs. Opportunities on funding side too, as most, if not all, projects will be financed by foreign financial institutions, given their more competitive costs of funds.
Coal companies (ADRO, ITMG, PTBA and UNTR) to benefit not only from their investments in power sector but also from selling coal to the power plants. Construction companies (ADHI, PTPP, WIKA and WSKT) should be other beneficiaries. Among construction companies, WIKA has highest exposure to the power sector. This doesn’t mean other construction companies (ADHI, PTPP and WSKT) cannot replicate its success in the sector.
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Indonesia Infrastructure Facts & Forecasts Sector State in 2010 Current State 2020 Targets
Expenditure 2015 2016 Forecasts (2016-2020)
Transport Air 59.3m air travellers
560 commercial planes 230 airports in 2010
82.5m air travellers in 2015 782 commercial planes as of Mar 2016 237 airports as at end-2015
Within transportation we think land transport will offer better opportunities than air and sea. This is because the government is working on regulations of land transport, such as legalizing presence of application-based transportation operators, which will change dynamics of the industry. We believe this will have impact to listed companies such as Blue Bird and Express Taxi. 252 airports by 2019 299 airports in 15-20 years’ time
Garuda Indonesia alone spent IDR1.3t on aircraft pre-deliveries. Using its domestic market share of 40%, this implies industry down payments of IDR3.3t for new planes. IDR7t for airport development by Angkasa Pura I&II
Estimated industry new-plane down payments of IDR5.7t IDR11t capex by Angkasa Pura II alone for airport development
N/A
Land - Roads National public roads Paved roads: 277,755km Dirt roads: 209,559km (source: Bappenas)
National public-road estimates (2% CAGR for 2005-2010) Paved roads: 303,000km Dirt roads: 230,000km
2,650km of new multi-lane roads
Full funding by Ministry of Public Works with estimated IDR25-50t for road development.
Full funding by Ministry of Public Works with estimated IDR25-50t for road development.
Estimated expenditure of IDR125t
Land - Toll roads 728km 936km 400-500km of new toll roads by 2020 Completion of 2,000km Trans Sumatra by 2025
Estimated capex of IDR10t, mainly by Jasa Marga and Waskita Karya
Estimated capex of IDR20t by Jasa Marga, Citra Marga Nusaphala Persada and Waskita Karya. Additional IDR3-5t may be spent by Hutama Karya on Trans Sumatra south section.
Substantial projects in the pipeline involving more than IDR100t for completion of Trans Java, Trans Sumatra, Balikpapan - Samarinda (Kalimantan), Greater Jakarta and Bitung - Manado in North Sulawesi.
Part of the funding requirement may be shifted to 2020-2025 if land acquisitions are delayed.
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Sector MKE View: Achievable Challenges Reasons & Response Opportunities
Transport Air
2016 Government targets 87.5m air travellers for 2016. YTD arrivals suggest a shortfall. At least 50 planes will be delivered to Garuda Indonesia and Lion Air in 2016. Kertajati airport, run by regional government, under construction. Should be completed by 2017. Two other new airports could be completed this year, in East Java and Banten.
2020 If annual passenger traffic grows 5%, till 2020, passengers could reach 105m. We estimate Garuda & Lion Air will take delivery of at least 295 new planes by 2020 as Lion Air alone plans to operate 780 by 2028. At least 15 new airports will be completed by 2020.
Delays in new airports the biggest risk. Current airport capacity, especially in big cities, is close to 100%. Airport expansion may not be accompanied by new runways, which will be problematic. Runway development typically stalled by problems in land acquisition.
Lack of airport development in Indonesia may impede growth. Ministry of Public Transportation plans to build 15 new airports over 2015-2019, revitalise 100 airports and increasing runway capacity for 15. Low fuel prices have given airline companies the financial ability to add new planes and open new routes. Airports with low economic feasibility would be developed by Ministry of Public Transportation. Angkasa Pura will develop larger and/or international airports. Would require financing.
Local airline fleet expansion and airport development to catch up with air travel. Garuda Indonesia could benefit from growing demand for air travel as it is the largest full-service legacy carrier. Cardig Aero Services provides aviation support services, food solutions and facility management. New airport construction and capacity expansion could indirectly benefit all listed SOE construction companies such as Waskita Karya, Wijaya Karya, Adhi Karya and Pembangunan Perumahan.
Land - Roads Development of regional border roads in Kalimantan-Malaysia and border roads within Kalimantan. Road development outside Java Island. Trans Papua with total length of 827km
Quality of roads may not meet international standards, requiring high maintenance costs
Government awarding higher budgets and speeding up execution
Better access and potentially lower logistics costs may result in faster distribution of goods.
For Trans Papua, better road network would create opportunities for investment in agribusiness and mining.
Beneficiaries: all listed SOE contractors of ADHI, WIKA, WSKT, and PTPP
Land - Toll roads Construction of remaining concessions of Trans Java: 697km with investment value of IDR45t. Full connectivity of Trans Java with total 1,000km. Partial completion of Trans Sumatra. More toll roads in Greater Jakarta.
Execution, particularly in areas with high population densities
Progress in stalled toll roads, after a spate of M&As in 2015 by companies with stronger funding capability. Enforcement of regulations on land acquisition.
Property development alongside new toll roads. Toll-road completion typically results in new property development and improved logistics costs.
Listed property companies in Greater Jakarta: Bumi Serpong Dama, Alam Sutra and Summarecon Agung
Listed property company in Trans Java: Surya Semesta Internusa
Beneficiaries: all listed SOE contractors of ADHI, WIKA, WSKT, and PTPP
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Indonesia Infrastructure Facts & Forecasts Sector State in 2010 Current State 2020 Targets
Expenditure 2015 2016 Forecasts (2016-2020)
Land - Rail (km)
National railway and commuter lines (Cawang – Soeakarno Hatta & regional rail)
6,714km (4,678km in operation)
6,714km - no change from 2010 (4,718km in operation)
To add 3,400km by 2019-2020. Estimated IDR10-20t required from annual budget
Estimated IDR10-20t required from annual budget
More than 1,000km targeted across the country with estimated investment of IDR106t. To be developed by Ministry of Public Transportation Part of the funding requirement may be shifted to 2020-2025 on potential delays in land acquisition.
Light Rail Transit (LRT) – Inner city of Jakarta
- Nascent stage. Awaiting revisions of Presidential Decree on participation of Regional State-Owned Enterprises.
180km for inner Jakarta with 1st phase to be completed in 2018.
- - Estimated spending of IDR10-20t on 1st phase for Asian Games
LRT Greater Jakarta Construction of 1st phase 73km for Greater Jakarta - Initial spending of IDR1-2t for first-stage LRT.
Investment of IDR34t for entire project
LRT Palembang - Nascent stage of construction 25km for Palembang, South Sumatra
- IDR700b-1.5t IDR7.2t
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Sector MKE View: Achievable Challenges Reasons & Response Opportunities
Land - Rail (km) National railway and commuter line (Cawang – Soeakarno Hatta & regional rail)
Greater Jakarta commuter line, from city to airport, costing IDR3,800b As intra-city railway will be mainly funded by Ministry of Public Transportation, budget may be limited. Additional funding may come from soft loans from France, Japan & Germany.
Funding highly dependent on annual budgets allocated to Ministry of Public Transportation. Land acquisitions may not be difficult for low-density population areas, but development of commuter lines might face resistance from land owners.
Enforcing land-acquisition laws would hasten execution.
Train-carriage procurement. Historically, carriages are from Japan or SOE producer, PT Industri Kereta Api. Beneficiaries: all listed SOE contractors of ADHI, WIKA, WSKT, and PTPP
Light Rail Transit (LRT) – Inner city of Jakarta
Potential completion of Presidential Decree revisions. Existing regulations only allow for the appointment of SOE companies without the involvement of regional governments while the project falls under the regional government of Jakarta. Regional government would want to take full charge of project. Potentially half the length target of 50km
Funding shortfall most obvious, as capex requirement is substantial. Regional SOEs may need government’s capital injections, dedicated regional budgets or third-party loans.
Development of intra-city transport would alleviate traffic congestion. Regional governments to give top capex priority to this, through regional SOEs.
Regional SOE, Jakarta Propertindo, is the LRT Jakarta developer. Will likely invite SOE contractors to build it. Potential development of convenience stores at terminals.
LRT Greater Jakarta SOE contractor, Adhi Karya, appointed as sole contractor. Set to be completed in 2018-2019 with funding of IDR34t. For 2016, 1st stage will be development of pillars with 10-25% completion. We foresee completion by 2020. Further development possible, to connect with Tangerang, Banten province.
Potential hurdle in land acquisitions, although requirements are small. Although facility will be built elevated, terminal development may be delayed by hurdles in land acquisition.
Government has taken bigger role in acquiring land to connect the commuter line with the interchange of higher-speed rail.
Funding pretty much secured from bank loans and ADHI’s recent rights issue. Ministry of Public Transportation to repay all construction expenses beginning 2017. ADHI to benefit, given direct appointment by the President as main contractor.
LRT Palembang Assuming completion of 20-30% pa, project should be 100% finished by 2018. This would translate to IDR1.4-2.2t spending per year. Feasibility is high, as infrastructure would be built mainly above ground, with minimal land-acquisition needs.
Potential delays in construction, hindered by land acquisition.
Aims to finish project before Asian Games in 2018.
LRT development to reignite economic growth for Palembang. Potential opportunities in businesses that support city development, such as F&B and property. Waskita Karya is main contractor.
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Indonesia Infrastructure Facts & Forecasts Sector State in 2010 Current State 2020 Targets
Expenditure 2015 2016 Forecasts (2016-2020)
High speed railway Jakarta – Bandung
- Needs several permits 150km to be completed in 2019 - Expenditure hinges on progress of permit issuance. Construction may reach less than 5%, translating to small capex of IDR500b-1t
Estimated investment of IDR60t, of which IDR30t is for construction .
Sea (incl ports) - Expansion of ports and construction of new ones in three parts of eastern Indonesia
24 ports to be given priority Capex for SOE seaport operators: IDR14t
Based on capex plans of SOE port operators, 2016 capex should reach IDR14.5t
Government aims to spend IDR40t on new ports in 2016-2020.
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Sector MKE View: Achievable Challenges Reasons & Response Opportunities
High speed railway Potentially low project delivery in 2016, as full permits have not been secured. High chance of delays, from the need to acquire land in several sections. 2019 target could be delayed to 2020.
Land acquisitions and timely issuance of permits. Financial closure for China soft loans might hinge on completion of all legal procedures. WIKA will likely become the main contractor, given its indirect minority ownership.
Administrative procedures, particularly permits from relevant ministries.
Property development in vicinity. Listed company Summarecon has 400ha of land bank. WIKA will be sole contractor.
Sea (incl ports) Largest new port of Kalibaru in Jakarta set for completion in 2016. Consortium of SOE companies constructing Kuala Tanjung Port in North Sumatra. This will operate as a bulk terminal. Investment may top IDR17t. Four new ports altogether: Kuala Tanjung (North Sumatra), Bitung (North Sulawesi), Sorong (Papua) & Kalibaru.
Economically unfeasible, small seaports to be built by Ministry of Public Transportation. As funding is mainly from the government, allocations may be limited. SOEs to take charge of larger port development. Would impinge on their capital positions. Mega seaports to function as alternatives to international ones such as Subang Seaport. Their development is stalled by bureaucratic red tape.
Most major seaports will be developed by the SOE port operator, Pelindo. Government has given top priority to development and refurbishment of seaports to cut logistics costs through "sea toll road" concept.
Development of alternative international ports in Subang, West Java. To support industrial area of Cikarang, where most exporting automotive plants are located. New Subang Port is under feasibility study. Will likely be chosen to replace Cilamaya Port worth IDR35t, which was cancelled given its overlapping location with oil & gas projects. Beneficiaries: all listed SOE contractors of ADHI, WIKA, WSKT, and PTPP
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Indonesia Infrastructure Facts & Forecasts Sector State in 2010 Current State 2020 Targets
Expenditure 2015 2016 Forecasts (2016-2020)
Communication Telecom Mobile SIMs: 242.7m (100.8%)
Pre-paid: 98.1% Post-paid: 1.9% 2G: 201.5m 3G: 41.2m 4G: -
343.2m (134.2%) Pre-paid: 98.5% Post-paid: 1.5% 2G: 190.8m 3G: 147.9m 4G: 4.4m
370.3m (138%) Pre-paid: 98.0% Post-paid: 2% 2G: 86m 3G: 240.9m 4G: 43.5m
Big 3 spent c.IDR38t, mainly on 3G modernisation and early 4G deployment. TLKM spent IDR26t, EXCL IDR5t, ISAT IDR7t.
Total capex of IDR45t, mainly for 4G LTE deployment. TLKM expected to spend IDR32t, EXCL and ISAT IDR6-7t each.
Total capex of IDR190t. IDR130t by TLKM.
Internet/ digitalisation
Mobile data users: 33.3m or 13.70% of mobile subs.
140.1m or 40.8% of mobile subs.
261.3m or 70.6% of mobile subs. Around IDR1t, for funding early- stage construction of Palapa Ring II, an under-sea fibre-optic network. Mainly for West (2k km) and Central (2.7k km) Indonesia.
Completion of Palapa Ring II for West, Central and East (6.3k km) Indonesia. Will involve another IDR7.5t. Palapa Ring II to operate by 2019.
Water
Access to potable water (% of population): 44.2% Sanitation (% of population): 55.5%
Access to potable water (% of population): 68.9% Sanitation (% of population): 62.4%
Access to potable water (% of population): 100.0% Sanitation (% of population): 100.0%
Access to potable water (% of population): Capex pa is about IDR55t Sanitation (% of population): Capex pa is about IDR54t
Access to potable water (% of population): Capex pa is about IDR55t Sanitation (% of population): Capex pa is about IDR54t
Access to potable water (% of population): IDR278t: public sector 78%, private sector 22% Sanitation (% of population): IDR274t: public sector 73%, private sector 27%
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Sector MKE View: Achievable Challenges Reasons & Response Opportunities
Communication Telecom Development of backbone.
Also spectrum auctions of 2,100Mhz and 2,300Mhz to provide additional capacity. High smartphone penetration with strong demand for digital content and higher usage of 4G LTE`.
Lower network quality outside Java. High interconnection fees.
Government plans to revise regulations on interconnection fees. Lower fees would encourage telcos other than TLKM to expand networks outside Java. Government plans to auction 3G spectrum in near term.
Digital content such as social apps and video streaming. Indonesia’s demographics supportive of high data consumption. Rising e-commerce to benefit telco operators. Start-up digital companies. Transportation apps gaining popularity, given lack of public infrastructure in big cities such as Jakarta and Bandung.
Internet/ digitalization
Water
Access to potable water (% of population): 2016: 70% 2020: maximum 80% Sanitation (% of population): 2016: 63-64% 2020: maximum 75%
Main obstacle is funding as 70-80% will come from state and regional governments. Given low commodity prices, not sure if the government has enough funds to support projects.
Over-ambitious annual targets of 6-8% increases of population for access to drinkable water and 8-9% for sanitation. In past 5 years, only increased 1.1 % and 1.4% p.a., respectively. In the past the government had increased access to drinkable water and sanitation at around 1-2% p.a., which is slow due to as we mentioned earlier lack funding. This is because main problem is funding, as 70-80% is from state and regional government budgets.
If the sector is fully open to private investments, local banks (BBCA. BBNI, BBRI and BMRI) could have funding opportunities.
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Indonesia Infrastructure Facts & Forecasts Sector State in 2010 Current State 2020 Targets
Expenditure 2015 2016 Forecasts (2016-2020)
Housing Housing ownership in urban areas at 67.90% Housing ownership in rural areas at 87.31% Housing backlog at 13,600,000 units House ownership at 78% Number of households at 34,670,000 Slum-housing ownership at 13% House purchases using mortgages at 18% Of the government’s 1m housing units per-year programme, 400,000 units achieved 50% population lives in urban areas.
Housing ownership in urban areas at 69.08% Housing ownership in rural areas at 88.26% Housing backlog at 13,339,526 units House ownership at 82.63% Number of households at 39,170,000 Slum-housing ownership at 10% House purchases using mortgages at 26% Of the government’s 1m housing units per-year programme, 660,474 achieved 56% population lives in urban areas
No targets for housing ownership in both urban & rural. Housing backlog at 6,000,000 units (existing demand + additional annual demand – supplied houses) House ownership: N/A Number of households at 43,670,000 (gov’t target) Slum-housing ownership: 2016 target is 9%. House purchases using mortgages: No target Of the government’s 1m housing units per-year programme, 1m pa By 2025, government expects 65% of the population to live in urban areas.
Government allocated IDR7.7t to subsidised housing. We estimate private sector will supply IDR30t.
Government allocated IDR7.6t. We estimate private sector contributed IDR34t.
Government to allocate IDR38t. We estimate private sector will contribute IDR170t. Expect urbanisation to continue, further altering household composition in urban and rural areas.
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Sector MKE View: Achievable Challenges Reasons & Response Opportunities
Housing
Houses built in 2016 should exceed 2015 levels, in line with economic recovery. With that, government should be able to build 1m housing units a year by 2020.
High mortgage rates and low banking penetration.
Mortgage rates are being lowered and loan-tenure ratios relaxed. Bigger budgets for subsidised housing. Targeting lending to primary home owners rather than investors. Lower property taxes.
Long-term property-market growth from burgeoning young population. Private developers to benefit from volume rather than ASP growth, as developers had already enjoyed significant ASP growth in the past 5 years which was higher than income growth. As such, we think the upside for further ASP growth is limited. More interest in mass-market supply, a segment supported by the government. We prefer developers with exposure to this: Bumi Serpong Damai, Ciputra Development and Summarecon Agung. These also have a strong presence in major cities.
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1. The rail thing: biggest area of business opportunities
2. Eyes on government debt
3. Improve and enhance network connectivity
4. Tapping into China’s excess capital and capacity
5. Top picks: Gamuda & Sunway Construction Group
MALAYSIA INFRASTRUCTURE Wong Chew Hann [email protected] (603) 2297 8686 Suhaimi ILIAS [email protected] (603) 2297 8682 Tan Chi Wei [email protected] (603) 2297 8690 Chai Li Shin [email protected] (603) 2297 8684
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MALAYSIA INFRASTRUCTURE Going Down a Different Road Malaysia already has a developed and advanced ecosystem of physical social and economic infrastructure, covering roads, bridges and highways, airports and seaports, power, water, and information & communication technology (ICT), as well as healthcare, education and housing.
Nonetheless, two of the six thrusts of the 11th Malaysia Plan (11MP, 2016-2010) are related to infrastructure i.e. “strengthening infrastructure to support economic expansion” and “improving the wellbeing for all”.
Strengthening infrastructure to support economic expansion is not just about pump-priming to boost growth amid the challenging external and domestic environment. It is about efficiency and quality of the infrastructure, as well as getting the biggest bang for the buck from the investment, not just in terms of multiplier effect during the construction phase but more importantly generating productivity-driven growth and creating business opportunities. Consequently, the targeted outcomes include: building an integrated transport system; improving the coverage, quality and affordability of digital infrastructure; and expanding logistics to enhance trade facilitation.
Improving the social infrastructure and narrowing the urban-rural infrastructure gap underpins the effort to improve the population’s wellbeing. Among the infrastructure-related projects and targets are the Pan-Borneo Highway; rural high-speed broadband; 99% of population served by clean and treated water; construction of 3,000km of surfaced rural roads; building 653,000 affordable and low-cost houses; and universal access to quality healthcare.
Underscoring the commitment to infrastructure, the Development Expenditure allocation for 11MP is up 13% to MYR260b after the drop in actual spending to MYR216b in 10MP (2011-2015) vs MYR222b in 9MP (2006-2010). Further, development spending on physical projects was spared the axe in the revised budgets 2015 and 2016, which were curtained due to the fall in crude oil price. As a result, operating spending will be cut instead.
1. The rail thing: biggest area of business opportunities
Railway is a notable area of under-development / under-investment in Malaysia. Therefore it is the biggest investment theme and area of business opportunity within the infrastructure space in the next 5-10 years. At least around MYR115b or 10% of 2015 GDP is earmarked for railway projects up to 2020-2025. The key railway infrastructure projects include:
• MYR76b Klang Valley Mass Rapid Transit i.e. KVMRT1 (MYR23b), KVMRT2 (MYR30b) and KVMRT3 (MYR23b)
• MYR3.5b Klang Valley Light Railway Transit Phase 2 (KVLRT2 i.e. Kelana Jaya Line extended to Putra Heights; Ampang Line extended to Puchong)
• MYR10b Klang Valley Light Railway Transit Phase 3 (KVLRT3 i.e. Bandar Utama-Shah Alam-Klang)
• MYR8b Gemas-Johor Bahru Double Track
• MYR0.5b KL Monorail Extension (Brickfields-Old Klang Road)
• MYR8b Freight Relief Line (Seremban - Port Klang - Serendah)
• MYR8b Express Rail Link (ERL) extension to Malacca
• KL-Singapore High Speed Rail
• Upgrade in Klang Valley Commuter Rail
• KTMB Subang-Klang Freight Line
• East Coast Railway e.g. MYR0.2b to upgrade East Coast rail lines (Gemas-Mentakab, Jerantut-Sg Yu, Gua Musang-Tumpat); Kuantan-Mentakab double-track
• Sarawak Railway Line (320km between Similajau in Bintulu and Tanjung Manis in Mukah)
• Johor Bahru & Penang LRT
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2. Eyes on government debt
Rail infrastructure accounts for over one-third of Malaysia’s infrastructure investment in 2016-2020, pointing to high public sector financing requirement. The government’s debt-to-GDP ratio is already very close to the 55% self-imposed limit (end-2015: 54.5%), which it has committed to observe as an integral part of its fiscal consolidation together with the budget deficit reduction to achieve a near-balanced budget by 2020. This limits the room for on-balance sheet financing by the government.
As a result, the attention is on off-balance sheet funding through government-guaranteed debt (GG) issued by government-owned infrastructure-related special purpose vehicles like Danainfra Nasional Berhad and Prasarana Nasional Berhad. Over the past four years, GG debt has been relatively stable at around 15-15.5% of GDP after rising from the recent low of 9.0% in 2008. In managing GG debt, the government favours the "user pay” model for Public Private Partnership (PPP)/Private Finance Initiative (PFI) projects (e.g. tolled highway projects), with the possibility of soft loans secured by foreign - especially Chinese - contractors (e.g. railway projects) and the potential for financing from the Asian Infrastructure Investment Bank.
3. Improve and enhance network connectivity
The focus on rail infrastructure is to improve and enhance urban public transport connectivity and network given the target to ramp up urban public transport modal share to 40% for Greater KL and to 20% for other cities by 2020 following the marginal increase to 17.1% in 2015 from 16.9% in 2010. It is also to de-congest roads and highways by making railway the logistical mode of choice for freight transport as well as to connect and develop industrial areas and ports.
There is also the need for better external connectivity, in view of the launch of the ASEAN Economic Community in Dec 2015, Malaysia’s signing of the Trans- Pacific Partnership Agreement (TPPA), and the trade and business opportunities from China’s One Belt, One Road initiatives. Key enabling investments include KL-Singapore High Speed Rail and ports with industrial and commercial developments, e.g. Kuantan Port & Malaysia-China Kuantan Industrial Park; Melaka Gateway.
4. Tapping into China’s excess capital & capacity Malaysia can benefit from lower capital and construction costs by tapping into China’s surplus capital and excess capacity situation as Chinese companies search for business and investment opportunities overseas. This is further supported by the positive announcements by Chinese Premier Li Keqiang during his visit to Malaysia at end-2015, which in essence endorse and support more China investments into Malaysia, underscoring the cordial and constructive diplomatic ties between the two countries.
Malaysia is seeing rising FDI from China. Chinese companies are increasingly visible in Malaysia’s construction and property sectors, and are invested in manufacturing (e.g. solar photovoltaic, metals), energy (e.g. China General Nuclear Power’s acquisition of Edra Global Energy; Shendong Hengyuan Petrochemical’s acquisition of 51% stake in Shell Refining), education (e.g. Xiamen University Malaysia – first overseas branch campus of a Chinese state-owned university) and ICT (e.g. Huawei’s Global ICT Training Centre in Cyberjaya and Regional Data Hosting Centre in Nusajaya). China’s railway construction and engineering companies are the frontrunners in upcoming railway projects like the Gemas-JB double track and the KL-Singapore High Speed Rail.
5. Top picks: Gamuda, Sunway Construction Group
We prefer construction players with niche expertise and a strong track record in infrastructure projects. They would be the key beneficiaries of the slew of infrastructure job awards in 2016. Our Top BUY pick remains Gamuda as we expect successful rollout of the Penang Transport Master Plan project as a major positive. It could also clinch additional jobs from the mega rail projects including KVLRT 3 and Gemas-JB double track rail. Sunway Construction Group is our preferred mid-cap pick given its favourable pure construction exposure and as it is poised to benefit from the infrastructure mania that could lead its orderbook to a record high in 2016.
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Focus Charts
Malaysia Plan: government development expenditure (MYRb) Government debt (% of GDP)
Source: Malaysia Plans, Ministry of Finance Source: CEIC
Gov’t development expenditure vs operating expenditure (% chg) Rising China FDI into Malaysia (USDb) reflecting China’s surplus capital & excess capacity
Source: Bank Negara Malaysia, Ministry of Finance Source: CEIC
230 230
260
222 216
0
50
100
150
200
250
300
9MP (2006-2010) 10MP (2011-2015) 11MP (2016-2020)
Allocation Actual Spending
42.1% 40.6% 40.1% 39.8%50.8% 51.1% 51.5% 53.3% 53.0% 52.7% 54.5%
10.2% 9.9% 9.4% 9.0%
11.8% 12.2% 13.2% 15.2% 15.4% 15.5% 15.4%52.3% 50.5% 49.5% 48.8%
62.7% 63.2% 64.7%68.4% 68.4% 68.2% 69.9%
0%
10%
20%
30%
40%
50%
60%
70%
80%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Govt Debt Govt-Guaranteed Debt (Contingent Liability)
(15)
(10)
(5)
0
5
10
15
20
25
30
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
E
Operating Expenditure Gross Development Expenditure
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
1.1
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
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2014
2015
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Malaysia Infrastructure Facts & Forecasts Sector State in 2010 Current state 2020 targets Expenditure
2015 2016 Forecasts (2016-2020) Power
Coal, oil, fossil fuels, hydro, renewable energy
Peninsula Malaysia: 21,817MW capacity, 45% reserve margin Sabah: 1,111MW, 42% reserve margin Sarawak: 1,347MW, 23% reserve margin 53 MW of installed capacity in renewable energy (2009)
Peninsula Malaysia: 20,657MW capacity, 22% reserve margin (new capacity insufficient to offset old power plants taken offline) Sabah: 1,423MW, 45% reserve margin (localised loads) Sarawak: 5,778MW, >100% reserve margin (commissioning of Bakun and Murum, 2 large-scale hydro plants) 243 MW of installed capacity in renewable energy (2014) i.e. 66% solar photovoltaic, 23% biomass, 6% mini hydro, 5% biogas
Peninsula Malaysia: 24,145MW capacity, 23% reserve margin Sabah: 2,137MW, 60% reserve margin Sarawak: c.10,000MW (the new hydro dams will only proceed upon demand) 2,080 MW of installed capacity in renewable energy i.e. 38% biomass; 24% mini hydro, 17% solid waste, 12% biogas, 9% solar photovoltaic
Peninsula Malaysia + Sabah: MYR11.5b (all private sector) Sarawak: MYR700m (state)
Peninsula Malaysia + Sabah: MYR10b (all private sector) Sarawak: MYR700m (state)
Around MYR50b for Peninsula Malaysia + Sabah Over MYR10b for Sarawak if the two new hydro dams proceed
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Sector MKE view: Achievable Challenges Reasons & Response Opportunities
Power
Coal, oil, fossil fuels, hydro, renewable energy
No risk for 2016. Construction of power plants is a multi-year event, and will be completed once started. Up to 2020, Peninsula Malaysia and Sabah projects should proceed. Sarawak is after wholesale customers, and thus rollout depends on the commodity cycle.
Some controversies towards direct awards. Structural issues such as localised distribution of loads in East Malaysia making it uneconomical for operators.
New capacity is to maintain reserve margin, and grid integrity. The regulator is already quite holistic with capacity planning. Has been moving towards open tenders until recent years.
Structuring and financing of capex requirements.
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Malaysia Infrastructure Facts & Forecasts Sector State in 2010 Current state 2020 targets Expenditure
2015 2016 Forecasts (2016-2020) Transport Air (incl. ports) Passengers handled 61.3m in
2010 Passengers handled 85.1m in 2015. KLIA2 started operations in 2014.
Upgrading airport infrastructure in Langkawi, Kedah, Kelantan and Mukah and air navigation system in KLIA to cater for increasing passengers. Expanding air freight capacity via new regional cargo hub at the old LCCT and upgrading cargo handling systems at KLIA and Kota Kinabalu International Airport.
MYR0.05b MYR0.042b About MYR0.25b
Aircraft financing Total fleet size was roughly 200
Total fleet size of 239 Moving target, but the country normally acquires 12-15 new aircraft per year.
MYR0.5b MYR1.1b Between MYR4b-7b depending on size of aircraft acquired
Land - Roads 137,200 km of roads in 2010, 43.7 km per 100 sq km land area. Rural road coverage was 45,905km in 2009.
230,300km of roads in 2015, 69.6km per 100 sq km land area.
No official targets. The major road projects in the Greater KL planned include Duke Highway phase 2 and East Klang Valley Expressway (EKVE), Damansara-Shah Alam Elevated Expressway (DASH), Sungai Besi-Ulu Kelang Elevated Expressway (SUKE), DUKE Highway Phase 3, Jalan Tun Razak traffic dispersal. Intercity road projects include Pan Borneo HIghway Sarawak, West Coast Expressway, Central Spine Road, Kota-Bahru-Kuala Krai Highway, and East Coast Highway. 3,000km rural roads to be built.
MYR1.6b MYR6b MYR50b
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Sector MKE view: Achievable Challenges Reasons & Response Opportunities
Transport
Air (incl. ports) Largely achievable. Expenditure relates mainly to system upgrades, not major expansion. Current expenditure forecasts relate mainly to minor upgrades, and would materially change if proposals for a third terminal at KLIA take off.
Execution issues, with cost overruns and numerous construction delays at KLIA2. National carrier MAS is undergoing its latest round of restructuring. Relationship between AirAsia and Malaysia Airports is far from ideal.
Passengers handled have been growing as KLIA positions itself as a low-cost carrier hub.
Capex financing. Malaysia Airports is also focusing on developing its commercial revenues.
Aircraft financing Achievable, this is the normal rate for Malaysian-based airlines. Our visibility is for the next two years, and we think the momentum is pretty strong.
Rates have to be competitive; aircraft financing is in USD and competes globally for financing.
Part of replacement cycle and also to cater to organic growth that normally tracks GDP. AirAsia and Malindo also have a huge order pipeline that they have committed to and have to take in these aircraft.
Airlines like to hedge USD exposure to MYR if the forward rates are attractive.
Land - Roads Achievable. Construction of the Pan Borneo Highway Sarawak, DASH, SUKE, WCE, EKVE and DUKE extension is starting or have started. Aside from the on-going highway projects, more urban roads to alleviate congestion and rural-urban roads to boost rural area growth would be proposed.
Financing for construction of non-tollable highways is dependent on the government. As for the tollable roads, financial sustainability depends on traffic volumes achieved.
Tollable road projects would be funded privately via PPP/PFI form under BOT concessions. However, the non-tollable roads such as Pan Borneo Highway and Central Spine Road would have to be financed by the government via bonds.
New roads especially rural-urban roads would spur economic development in rural areas including industrial, commercial and property developments.
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Malaysia Infrastructure Facts & Forecasts Sector State in 2010 Current state 2020 targets Expenditure
2015 2016 Forecasts (2016-2020) Transport – cont’d Land - rail 1,665 km of rail lines.
Annual ridership of urban rail in Greater Klang Valley was 171m. Public transport modal share for urban areas was 16.9%.
2,250km of rail lines. Annual ridership of urban rail in Greater Klang Valley was 226m. Public transport modal share for urban areas was 17.1%. In the Greater KV, construction of KVMRT 1 and KVLRT 2 is completing soon. As for intercity rail, the Ipoh- Padang Besar double track rail and Padang Besar-Gemas double track rail have been completed.
Target to achieve public transport modal share for Greater KL to 40% and other capital cities to 20% by 2020. In Greater KL, KVMRT 2, KVLRT 3 will start construction soon. As for the other cities, there are Kota Kinabalu BRT and Penang LRT. As for inter-city rail, the works on the Gemas-JB double track rail could start soon. In terms of inter-region rail, the KL-SG high speed rail is now under planning stage and is targeted to be completed in 2020. Other potential rail projects that could be revived include the East Coast Railway.
MYR7.5b MYR8.5b MYR90b
Sea (incl. ports) 10 federal container ports: 24m TEU capacity
10 federal container ports: 31m TEU capacity
No masterplan for ports in Malaysia. However, there are talks for a third port in Port Klang and a deep-sea port in Melaka. Total capacity could approach c.40m TEUs
About MYR1b About MYR1b About MYR5b
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Sector MKE view: Achievable Challenges Reasons & Response Opportunities
Transport – cont’d
Land - Rail KVMRT 1 has been progressing smoothly. Major civil work packages for KVMRT 2 have been awarded, and construction should begin soon. Tender results for KVLRT 3 and Gemas-JB double track rail should be announced by 4Q 2016, with construction potentially beginning in 2017. The KL-SG high speed rail depends on progress of government-to-government negotiations.
Government financial conditions, given the current environment of low crude oil prices and fiscal consolidation targets to achieve a near-balanced budget by 2020.
Implementation depends largely on availability of financing. Public infrastructure projects that are not profitable are mainly financed by government guaranteed corporate bonds. Gemas-JB double track rail and KL-SG high speed rail could be financed by soft loans secured by foreign contractors. Aside from financing, other issues that could lead to implementation delay include land acquisition, construction difficulties, poor construction project management and a shortage of foreign workers. Malaysia has demonstrated strong execution and construction capabilities via the Project Delivery Partner under KVMRT 1 that is close to full completion soon.
Public transportation operators are also focusing on developing property and retail opportunities in an attempt to improve their financial standing. Increasing demand for rail infrastructure would also be beneficial to related local suppliers and services providers.
Sea (incl. ports) On track. Private sector initiative. Third port at Port Klang is likely to proceed and could be awarded to a concessionaire.
Structural issues such as suitable location (with natural breakwater and deep depth) and building of new infrastructure at the new location.
Port Klang (handles >50% of the country's throughput) will face capacity constraint by 2025, hence, the construction of a third port should start by 2020.
Structuring and financing of capex requirements.
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Malaysia Infrastructure Facts & Forecasts Sector State in 2010 Current state 2020 targets Expenditure
2015 2016 Forecasts (2016-2020) Communication
Telecom 120% mobile penetration. 3G penetration 27% Fixed broadband penetration 56%
150% mobile penetration. 60% smartphone penetration. 3G penetration 85%. 4G penetration 50%. Fixed broadband penetration 75%.
Fixed broadband penetration 95%
MYR6.5b MYR7.2b About MYR32b
Internet / digitalization
0.5m sq ft of data centre space
about 1.5m sq ft of data centre space
5m sq ft of data centre space MYR0.3b MYR0.3b About MYR2b
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Sector MKE view: Achievable Challenges Reasons & Response Opportunities
Communication
Telecom Largely achievable. Mobile players have in fact accelerated 4G rollout. Fixed- line players are also actively expanding coverage.
Potentially punitive spectrum fees affecting capex plans of operators.
Regulator has generally been holistic and business friendly, and pro-investment. But recent incident regarding spectrum fees has affected its reputation.
The industry is already very entrenched, and penetration rates are high. Capex largely revolves around technology upgrades (eg 3G to 4G, fibre broadband to homes).
Internet / Digitalisation
Achievable. Expansion plans generally revolve around satisfying potential demand, thus projects are seldom disrupted once construction begins. However, 5m sq ft data centre space by 2020 is perceived by operators to be a highly ambitious target, and is thus not likely to be met.
Bandwidth is still a slight concern as both the domestic fibre footprint and Malaysia's international connectivity are not yet optimal.
The data centre industry is one of the entry point projects under the government's Economic Transformation Plan for income and job creation.
Data centres are not particularly costly in the overall scheme of things. A data-centre themed REIT has yet to take off in Malaysia.
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Malaysia Infrastructure Facts & Forecasts Sector State in 2010 Current state 2020 targets Expenditure
2015 2016 Forecasts (2016-2020) Water 94.2% clean water coverage in
2010. Non-revenue water at 36.3% in 2010. (Note: Non-revenue water is the difference between the volume of water put into a water distribution system and the volume that is billed to customers) Water treatment production capacity 16,779 m litres per day (MLD) Three states have migrated to the new licensing regime (sale and leaseback from the federal government) from a concession regime previously.
95.1% clean water coverage in 2014. Non-revenue water at 36.6% in 2013. Water treatment production capacity was at 18,421 MLD Six states have migrated to the new licensing regime.
Target 99% clean water coverage. Reduce non-revenue water to 25%. Remaining five states are expected to migrate to the new licensing regime.
MYR0.5b MYR1.5b MYR7.5b
Housing Urbanisation; affordable & low-cost housing
71% urban population in 2010. 111,000 affordable & low-cost houses built between 2005 and 2010.
74.3% urban population in 2015. 102,200 affordable & low-cost houses built between 2011 and 2015.
Urban population to reach 77% by 2020. 653,000 affordable & low-cost houses to be built in 2016-2020.
MYR2.29b MYR2.588b MYR12.5b
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Sector MKE view: achievable Challenges Reasons & response Opportunities
Water Langat 2 water treatment plant construction is in progress. Pipe replacement in Selangor would pick up to reduce NRW post full-migration into new licensing regime. Increasing migration to the new licensing regime would protect long term financial sustainability and ensure improvement of the water industry.
Financing from federal government. Migration to new licensing regime transfers ownership of water assets to the federal government. This should see increased investment in water infrastructure to improve services, with a new water tariff-setting mechanism potentially being introduced.
Apart from new water treatment capacity, capex would be mainly in pipe replacement to reduce non-revenue water.
Housing Urbanisation; affordable & low-cost housing
Affordable housing target is achievable as the government is partnering property developers to launch affordable housing projects. Development costs are thus borne by property developers.
Tightening of housing loan approvals could slow down take-up of affordable housing projects.
Partnering property developers shifts the burden of financing away from the government. End demand is however an increasing problem as banks tighten up on credit approval criteria.
Increasing demand for mortgages for affordable housing to offset slowdown in the property market.
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1. Significant investment needed in transport infrastructure projects
2. Land acquisition remains the issue; political will is needed
3. Multiplier effects if inadequacies in transport infrastructure are addressed
4. Regulatory risks evident in some PPP projects like water
5. Metro Pacific Investments (MPI PM, BUY, TP PHP7.00) best play
PHILIPPINES INFRASTRUCTURE Michael Bengson [email protected] (632) 849-8840 Luz Lorenzo [email protected] (632) 849-8836
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PHILIPPINES INFRASTRUCTURE If You Have The Will, You’ll Have The Way Transport infrastructure is the one key area that is severely lacking investment in the Philippines. There are 14 transport Public Private Partnership (PPP) projects costing an estimated PHP636b (~USD13b) that have yet to be awarded. A law was passed in 2000 to expedite the right-of-way for national government infrastructure projects. Yet land acquisition and right-of-way remain the key stumbling blocks for transport-infrastructure projects. While the government can expropriate land and property by applying eminent domain, this is in practice an extremely slow process as negotiations can drag on with one or more land owners. In some instances, we understand the proponents of these projects make part of the land acquisitions themselves to break the deadlock.
One example was the MCX, also called the Daang-Hari- SLEX link road project, which encountered right-of-way issues and thus was delayed. MCX is a USD54m 4km, 4-lane expressway, which cuts through the New Bilibid prison reservation connecting the city of Bacoor, Cavite to the South Luzon Expressway. The project was awarded in Dec 2011 but it was not completed until 2015. This is not ideal!
We note that a new law was passed in March 2016 (RA No. 10752 or “The Right-of-Way Act” intended to improve the process of land acquisition. We believe this is a good step. However, much depends on the implementation.
In the light of growth issues among the more developed markets, the Philippines could truly lead GDP growth and is one of the few countries which can afford an expansionary fiscal budget. If spending on infrastructure were boosted, we believe the country’s GDP growth would be as high as 7-8% from a baseline of 5-6% growth. This is partly a function of political will. Every new government issues its own economic blueprint, known as the Philippine Development Plan (PDP). The 2011-2016 PDP set ambitious targets by aiming to expand GDP by an average of 7-8% for the period with significant contributions from a sustained increase in public infrastructure spending as a ratio to GDP. The target public infrastructure ratio was 4.0% (PHP668b) for 2015 and 5.1% for 2016. However, public infrastructure spending growth reached only ~2.4% (~PHP400b) in 2015 while GDP growth averaged 6.4% in 2011-2015.
When the new president elected in May formulates the 2017-2022 PDP, infrastructure will almost certainly be a top priority. For the past five administrations, infrastructure has been the focus but each government faced various constraints. The key issue going forward will be the speed of implementation. Current low interest rates, ample liquidity and low leverage should support faster implementation.
PPP projects have partially compensated for persistent government underspending. Due to past successes, these have expanded beyond power generation. In the current list of PPP projects, an estimated PHP303b have been awarded and PHP1,308b are in the pipeline. The projects in the pipeline will be left for the next government to execute, with over 90% addressing the transport deficit. Again, political will in passing legislation and streamlining processes is important in moving these projects forward.
PPP projects (2011-2016)
PHPb
AWARDED 303.3 PPP projects for implementation
Transport 251.2
Water 24.4
Others 27.6
PIPELINE 1,308.5 Projects under procurement 556.6 Transport 486.1
Water 18.7
Others 51.8
Projects for roll-out 66.1 Transport 66.1
For approval of relevant government bodies 641.4 Transport 619.9
Others 21.4
Projects with ongoing studies 44.6 Transport 44.6
Sources: PPP Center, Maybank ATRKE
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1. Transport and water distribution mainly public
Transport: Horrendous traffic jams and airport /seaport congestion are testament to the severe deficiencies in transport infrastructure. This is still largely the purview of the government although in Luzon island major toll roads are PPP projects. Over 90% of the PHP1,308b PPP projects in the pipeline address the transport infrastructure deficit.
Water: The privatization of water distribution services in Metro Manila was a key success story, particularly for the East Zone. We note that Manila Water, the operator of the East Zone, was able to reduce non-revenue water (leakages and / or pilferages) from ~60% in 1997 to ~11% presently. Also, there were no issues with the regulatory framework back then. So it was all the more unexpected when regulatory issues erupted in 2013. The issue is whether or not corporate income tax is a “recoverable” expense and has been brought before the Philippine Supreme Court. There were concerns this would affect investor perception of other PPP projects in other sectors but this did not happen.
In the rest of the country, water distribution is still largely the responsibility of the government. The main issue is developing new sustainable water sources to replace the prevalent practice of tapping ground water that leads to subsidence and also in many cases may not be potable because of extensive developments above ground.
2. Multiplier effects if glaring inadequacies in transport infrastructure are addressed
Prolonged travel and delivery time is keeping costs of living and businesses elevated. This was highlighted in 2014 when congestion in the main Manila seaport increased delivery periods by months. Today, there are daily reminders, especially for Metro Manila motorists and commuters, of the delays caused by the lack of mass transport systems and alternate roads. The decrepit state of airports is an obstacle to growing the tourism industry. Boosting investment is appropriate as the multiplier effects on lowering the costs of living and for businesses will be substantial, as well as accelerating development of other industries, notably tourism. It can also lead to decongestion of Metro Manila and spur development in provincial areas.
3. Private sector leads in power, telecoms and housing
Power: Private investment in the power generation sector ramped up significantly following the restructuring of the industry in 2001. The restructuring process has worked out quite well and there is confidence in the regulatory framework. Also, we note there are more players and a significant pipeline of power generation projects. There is better access to Peso-denominated financing, partly due to the high level of liquidity in the Philippine financial system. As a result, the typical WACC of a coal-fired power generation project has declined from ~14% in 2010 to ~12.6% presently. The returns for those who participated in the privatization of state-owned plants were significantly higher in some cases.
Similarly, the Renewable Energy Act of 2008 was successful, resulting in rapid buildout of wind, solar and other renewable energy capacity, and an existing pipeline of greenfield renewable energy projects.
However, the restructuring of the sector may have worked too well as we estimate the risk of an oversupply of baseload power plants in the Luzon grid by 2019. A possible opportunity relates to the construction of an LNG regasification facility needed upon depletion of the Malampaya natural-gas field by 2024. Attractiveness of the project depends on whether the government offers the right incentives and policy support.
Telecoms: Private investment, first introduced in the 1990s, has grown since and has resulted in high mobile penetration (114% in FY15). However, we note broadband penetration and download speeds remain relatively low. There are presently only two players in the telco sector, the result of consolidation. Being an archipelago, the cost of backhaul in the Philippines is expensive. Also, unlike other countries, there is no National Broadband Network. As a result, telcos have to build all the infrastructure themselves.
However, there is a niche opportunity in wireless broadband, particularly LTE 4G on the 700 MHz frequency. Also, more private investment is required to expand broadband service coverage and increase download rates. Another possible growth area is financial technology (fin-tech). Globe Telecom and Smart Communication have invested in the Automatic Fare Collection System, which involves the use of a stored-value card and micro cashless payment system. The card can be used to buy load for prepaid mobile services.
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Housing: public expenditure on housing has been estimated at less than 1% of government spending. A highly fragmented private sector-led industry has been unable to cope with the quantity and quality of housing units required resulting in a big gap in meeting housing needs. This is evident in the prevalence of slums in urban areas, especially in Metro Manila. In rural areas, there are fewer slum areas but houses are not built of durable materials so are more vulnerable to natural and man-made disasters.
4. Regulatory risks evident in some PPP projects
The Metro Manila water distribution system served as a model PPP undertaking but in late 2013 the regulator reinterpreted key provisions of the concession agreements. This led to international arbitration that is still ongoing. Implementation of straightforward provisions in toll-road concessions has been delayed, apparently for political reasons. Due to delays in government deliverables, a hospital renovation PPP project was returned to the government.
5. MPI best infra play
Metro Pacific Investments Corp (MPI PM, BUY, TP PHP7.00) is the most direct infrastructure play. It derives earnings from toll roads (North Luzon Expressway, Manila-Cavite Expressway, Subic-Clark-Tarlac Expressway), electricity distribution (Manila Electric Co), water distribution (Maynilad Water Services Inc), rail mass transit (LRT1) and hospitals. Regulatory risk on its PPP projects has taken several forms. One is the ongoing second round of arbitration of Maynilad with the water regulator on whether income taxes should be included in the tariff. Another is delays of two to three rounds of scheduled toll rate hikes for NLEX and CAVITEX. Despite these setbacks, MPI continues to bid for PPP projects but makes proposals using conservative assumptions to factor in regulatory risks.
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Focus Charts
Government infrastructure spending / GDP (%) Vehicle sales and YoY growth
Sources: National Economic Development Authority, Department of Budget and
Management, Maybank ATRKE Sources: Chamber of Automotive Manufacturers of the Philippines Inc, Association of Vehicle
Importers and Distributors Inc, Maybank ATRKE``
Toll roads Growth in number of users / subscribers of major ICT services
Source: Metro Pacific Investments Corp Sources: Philippine ICT Statistics Portal, International Telecommunication Union (ITU)
2.2 2.3 2.2 2.4 2.22.5
3.54.0
5.1
-
1.0
2.0
3.0
4.0
5.0
6.0
2012 2013 2014 11M15 2016
(%)
ACTUAL TARGET
-50.0
-40.0
-30.0
-20.0
-10.0
0.0
10.0
20.0
30.0
40.0
0
50000
100000
150000
200000
250000
300000
350000
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
(%)Uni
ts
Vehicle sales YoY Growth
-5.0%
0.0%
5.0%
10.0%
0
50,000
100,000
150,000
200,000
250,000
2010 2011 2012 2013 2014 2015
No.
of
Vehi
cle
Entr
ies NLEX average daily traffic
Vehicle entries
Growth Rate
-5.0%
0.0%
5.0%
10.0%
15.0%
0
1,000
2,000
3,000
4,000
5,000
2010 2011 2012 2013 2014 2015
KM in
tho
usan
ds NLEX vehicle-kilometers travelled
Kilometers travelled
Growth Rate0
5
10
15
20
25
30
35
40
-
20.00
40.00
60.00
80.00
100.00
120.00
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
(%)
Use
rs /
Sub
scri
bers
, in
Mill
ions
Fixed (wired)-broadband subscriptionsMobile-cellular telephone subscriptionsFixed-telephone subscriptionsPercentage of Individuals using the Internet (%)
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Philippines Infrastructure Facts & Forecasts Sector State in 2010 Current State 2020 Targets
Expenditure 2015 2016 Forecasts
Energy
Coal, oil, fossil fuels, thermal
The Luzon grid accounted for ~74% of total power consumption in the Philippines. In FY10, Philippines’ power consumption was 67,743 GWh and peak demand was 10,375 MW. Total installed capacity was 16,359 MW. GWh consumption breakdown by grid: Luzon: 74.3% Visayas: 13.3% Mindanao: 12.4% GWH generation breakdown down by plant type: Coal: 34.4% Nat-gas: 28.8% Geothermal: 14.7% Hydro: 11.5% Oil-based: 10.5% Other RE: 0.1%
FY14 GWh consumption grew by a CAGR of 3.3% from FY10. With regard to plant mix, we note that coal rose to ~43% of generation from 34.4% in FY10. In FY14, the country’s power consumption was 77,261 GWh and peak demand was 11,822 MW. Total installed capacity was 17,944 MW. GWh consumption breakdown by grid: Luzon: 74.4% Visayas: 13.3% Mindanao: 12.3% GWH generation breakdown down by plant type: Coal: 42.8% Nat-gas: 24.2% Geothermal: 13.3% Hydro: 11.8% Oil-based: 7.4% Other RE: 0.5%
The Department of Energy (DOE) is projecting electricity demand to grow by a CAGR of 4-5% up to 2030. This is for the guidance of private power generation companies in planning capacity build-out. The DOE has talked about setting a mandated capacity mix by plant type with a minimum of 30% for nat-gas, which is much higher than the existing contribution. However, it is uncertain whether the implementation will be strictly enforced. Coal accounted for 43% of the country’s FY14 GWh production and 32% of installed capacity. This will grow further given the existing pipeline of committed and indicative projects, which comprise mostly coal-fired power plants. However, there is a growing concern among stakeholders that this may be too much, particularly in light of the UN Climate Conference in Paris in Dec’15.
Capex for power plants, particularly the 97 MW Avion and 414 MW San Garbriel nat-gas power facilities. Also, construction of SMC Global Power’s coal-fired power projects in Limay Bataan (300 MW) and Malita, Davao de Sur (300 MW) started.
Capex for the San Buenaventura coal-fired power station in Mauban. Quezon (460 MW) and other coal-fired power projects may ramp up beginning in 2016. First Gen Corp may decide whether or not to invest in an LNG regasification terminal in 2016. Note there are ~2,700 MW of nat-gas power plants, which source the fuel from the Malampaya offshore field. However, the field may be depleted by 2024 so there is a need to develop an alternative source such as LNG. However, the infrastructure must be built first. Note there must be enough lead time for the regasification facility to be completed before the Malampaya field is depleted in 2024.
Capex for coal-fired power projects may cost as much as USD2.5m/MW if the plant equipment is sourced from Japanese suppliers. The planned LNG regasification terminal may cost as much as USD1b. This would be a completely private-sector-led project.
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Sector MKE View: Achievable Challenges Reasons & Response Opportunities
Energy Coal, oil, fossil fuels, thermal
With regard to the demand-supply situation we note there is a comfortable reserve margin in the Luzon grid and we believe there is the risk of an oversupply of baseload power capacity by 2019. There is ~5,000 MW of baseload capacity, which will come on line in Luzon by 2019. This is based on the list of “committed projects” from the Department of Energy and certain projects “announced”, which have a good chance of happening, although unfunded at this point.
The most pressing need is to develop an alternative to the Malampaya field, which may be depleted by 2024. Note this one field supplies all the nat-gas requirements of the country. One alternative is LNG. However, the infrastructure must be built for this to be an option and it will have to be developed predominantly by the private sector. The key for this project is a government policy supporting nat-gas / LNG such as the setting of a mandated capacity mix.
There are new players in the sector who are growing their power-generation business and adding to supply. However, as some of the projects have not started construction yet, an oversupply situation may be averted if these projects are “phased-in”. Also, there is always the risk of delay with regard to power projects in the Philippines due to any one of the following reasons : 1) slow development of the transmission infrastructure; 2) inability to secure permits and / or an Environmental Compliance Certificate; and 3) unable to secure long-term offtake contract with a distribution utility.
The development of an LNG regasification terminal is an opportunity if the right incentives and policy are put in place to support the project.
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Philippines Infrastructure Facts & Forecasts Sector State in 2010 Current State 2020 Targets
Expenditure 2015 2016 Forecasts
Nuclear
Hydro
Hydro plants, including impoundment dams and run-of-river type hydro had a total installed capacity of 3,400 MW in 2010.
The Department of Energy continues to push for the development of run-of-river hydro power projects through the incentives provided in the Renewable Energy Act such as the feed-in tariff.
The DOE has an aspirational target of growing installed capacity of renewable energy by ~9,000 MW by 2030 from ~5,000 MW in 2010. Most of this will come from hydro power at ~5,000 MW.
Relatively small. Relatively small. Run-of-river hydro projects are typically less than 100 MW and the cost to develop is as much as USD4-5m/MW.
Other Renewables
Geothermal power plants had a total installed capacity of 1,966 MW in 2010.
Geothermal power projects are eligible for tax incentives as provided by the Renewable Energy Act.
The DOE has an aspirational target of growing geothermal power capacity by ~1,500 MW by 2030.
Greenfield geothermal power projects are typically small at less than 100 MW and cost as much as USD5m/MW to develop.
Solar
There was a rush of building of solar power capacity as the capacity quota for feed-in tariff was increased to 550 MW. This includes the 50 MW quota in the first allocation and an additional 500 MW in the second allocation.
A total of 550 MW of solar power capacity is eligible for feed-in tariff (PHP9.68/KWh for the first allocation and PHP8.69/KWh for the second allocation).
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Sector MKE View: Achievable Challenges Reasons & Response Opportunities
Nuclear Hydro
Run-of-river hydro has significant potential in the Philippines but these projects may be located in remote areas with little infrastructure. They are eligible for feed-in tariff (up to fixed quota) and tax incentives.
Other Renewables
Geothermal has significant potential in the Philippines as the country is located within the Pacific Rim of Fire, an area with significant tectonic / volcanic activity. However, the economic feasibility of such projects is a bit challenged now that energy prices (coal and oil) are at low levels. Note that geothermal projects are not eligible for feed-in tariff.
Solar
Solar power development is an attractive opportunity in the Philippines given the elevated feed-in tariff and declining price of solar panels. However, we understand the feed-in tariff quotas for the first and second allocations are nearly taken up.
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Philippines Infrastructure Facts & Forecasts Sector State in 2010 Current State 2020 Targets
Expenditure 2015 2016 Forecasts
Transport
Air (incl ports)
Annual international and domestic passenger traffic 48.08m Annual international and domestic cargo traffic 1,111m kg Ninoy Aquino International Airport domestic and international flights 200,100
95.94m as of 2014 1,232m kg as of 2014 236.440 as of 2014
As published in the official 2011-2016 Philippine Development Plan and updated in 2013, the end-target is 74.32m. End-of-plan target is 1,677m kg End-of-plan target is 274.88 thousand
According to national government budget data, total infrastructure and other capital outlays in 11M15 was PHP368b, +23% YoY. Still, this is only about 2.4% of GDP, well below the official 4% target for 2015. Had the target been met, total national government infrastructure and other capital outlays would have reached PHP531b.
The government is targeting 5.1% of GDP in total infrastructure and other capital outlays in 2016 or PHP760b. However, the likelihood of underspending remains, although perhaps less so in an election year. For transport PPP projects, there are two ongoing construction projects for a toll road and an airport. The total project cost of the Mactan-Cebu International Airport passenger terminal building is PHP18b.
Conservatively, if GDP grows on average by 5% over the next six years of the new administration and assuming inflation of 2%, as well as the share of infra spending remaining at 5% of GDP, public-sector infra spending could reach PHP1,036b in 2021. Currently, there are 14 transport PPP projects where costs have been estimated at a total of PHP636b that have not yet been awarded.
Land - Roads Total length of arterial roads with roughness index of 3.0 (km) 1,400 in 2011 Proportion of paved roads (out of the total 31,242 km) 80.9% Proportion of permanent bridges along national arterial roads, 96.3%
3,654 kilometres of arterial roads as of 2014 92.7% paved roads as of 2014 99.4% permanent bridges as of 2014
As published in the official 2011-2016 Philippine Development Plan and updated in 2013, the end-target is 6,600 kilometres End-of-plan target is 100% End-of-plan target is 100%
San Miguel Corporation, a major PPP proponent, estimates 2015 spending on three ongoing toll road projects at PHP30.2b or about 8% of the government’s total infra spending.
The NAIA expressway with estimated cost of PHP24b is almost complete. Other PPP transport projects that have been awarded but are in pre-construction activities total seven and have combined total project cost of PHP231b.
Land - Rail
Annual ridership of passengers 219.27m Ratio of revenue to operation and maintenance cost (farebox ratio) 1.05
243.58m as of 2014 1.11 as of 2015
As published in the official 2011-2016 Philippine Development Plan and updated in 2013, the end-target is 270.10m End-of-plan target is 1.15
Sea (incl ports) Cargo throughput 168.24m MT
Number of water transport passengers 52m
217.11m MT as of 2014 54m as of 2014
As published in the official 2011-2016 Philippine Development Plan and updated in 2013, the end-target is 228.37m MT End-of-plan target is 75m
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Sector MKE View: Achievable Challenges Reasons & Response Opportunities
Transport Air (incl ports)
While the official target for public-sector infrastructure spending is 5.1% of GDP, we believe what is achievable is 2.5-3.5%, which translates to an estimated PHP360-500b. For transport PPP projects, we assume no new ones will be awarded as the current administration is about to end its term while the new administration is likely to have to settle down first after taking office in Jul-16. For the transport PPP projects that have been awarded, we estimate 5% of project cost will be spent this year for those in pre-construction activities or PHP12b. For those with ongoing construction, about PHP30b.
The most obvious shortfalls in transport infrastructure are: (1) The lack of quality mass transit that
has led to a surge in new vehicle sales and increased sharply the travel time within Metro Manila and other urban centres.
(2) Delay in building new roads to improve connectivity among various locations.
(3) Inability to keep pace with the increase in passenger and cargo traffic at airports and seaports so that passenger arrivals and departures are not delayed, as is the withdrawal of goods.
(4) Safety on air and sea vessels as a result of lack of equipment and/or inadequate observance of safety regulations.
Underspending on the part of the government is due to more care in disbursement of funds following an adverse ruling from the Supreme Court in 2014, weak coordination among government agencies, land acquisition issues and red tape, among others. Since 1986, different governments have manifested varying degrees of political will that have helped to accelerate or slow down infrastructure development. Because of the forthcoming May presidential elections, there is uncertainty on what the pace will be in the next six years. However, we believe that because there has been such a glaring deficit in transport infrastructure, it will be among the top priorities of the new government.
The greatest opportunities come from the PPP transport projects. As these carry much regulatory risk, companies guard against these by making conservative bid assumptions as a buffer against delay in deliverables by the government. As major transport infrastructure projects such as those offered in the PPP programme will eventually increase land values in the vicinity, most bidders go into a consortium or are conglomerates that will benefit from several aspects of the project.
Land – Roads
Land acquisition / Right-of-Way A new law was passed in March 2016 (RA No. 10752 or “The Right-of-Way Act” intended to improve the process of land acquisition.
Land - Rail
Land acquisition / Right-of-Way A new law was passed in March 2016 (RA No. 10752 or “The Right-of-Way Act” intended to improve the process of land acquisition.
Sea (incl ports)
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Philippines Infrastructure Facts & Forecasts Sector State in 2010 Current State 2020 Targets
Expenditure 2015 2016 Forecasts
Communication
Telecoms/mobile There are two major players in the mobile and wireline telecommunications market: PLDT and Globe Telecom. San Miguel Corp bought a stake in Liberty Telecom in 2009 in partnership with Qatar Telecom. ~102% mobile (SIM) penetration using FY11 numbers. Smartphone penetration was ~15% for Globe Telecom in 2011.
Still two major players in the telecommunications sector: PLDT and Globe Telecom. San Miguel Corp (SMC) increased its stake in Liberty Telecom after acquiring the stake of Qatar Telecom. SMC group plans to launch a wireless broadband service offering before the end of 2016 and is open to other possible partners after JV talks with Telstra broke down recently. Mobile (SIM) penetration was ~114% in FY15. Smartphone penetration was ~40% for both Globe Telecom and PLDT in FY15.
Increase CMTS coverage as a percentage of total municipalities from 94.7% in 2009 to 100% in 2016.
2015: Combined capex of PLDT and Globe Telecom was PHP75.33b The bulk of the spending was related to expansion and upgrade of network for wireless data.
2016: Combined capex of PLDT and Globe Telecom forecast at PHP81.3b. Both companies continue to upgrade their network with regard to data capacity.
We understand SMC will launch a wireless broadband service offering before the end of the year. The investment may cost up to USD1b, which was the figure under discussion with Telstra previously.
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Sector MKE View: Achievable Challenges Reasons & Response Opportunities
Communication Telecoms/ Mobile SMC may launch a wireless
broadband service offering before the end of the year.
LTE 4G wireless infrastructure is lacking. Wireless data traffic is increasing significantly for both Globe Telecom and PLDT. This is partly driven by the rising penetration rate of smartphones. GLO and TEL launched Fiber to the Home (FTTH) broadband services late last year. But this service is only available in selected areas in Metro Manila. For the incumbents there is a lack of available spectrum in the 700 MHz band, which could be used for LTE 4G broadband services (90 MHz of the 700 MHz frequency band is held by SMC group companies).
A renewed push by SMC in the wireless broad band space may spur competition and investment, thereby increasing Internet download speed, which is currently one of the slowest in the region. Having said that, the industry is already quite competitive despite having only two players. There are also a number of challenges for any new entrant in the Philippines: 1) no tower sharing; 2) low ARPU; and 3) high interconnectivity costs. Regarding capex, the Philippines being an archipelago means the cost of back haul is significantly more expensive than in other countries. Also, increasing coverage can be delayed to some extent by the many permits needed to construct a cell site.
Wireless broadband service using LTE 4G on the 700 MHz frequency is a niche opportunity in an otherwise slow growing sector. Another area of possible growth is “Fin-tech”. Note that Globe Telecom and Smart Communication invested in the Automatic Fare Collection System (AFCS) PPP. The new payment system, which was rolled out, involves the use of a stored value card (Beep) and micro cashless payment system, which can also be used for purchases in certain retail establishments. The card can be used to buy load for prepaid mobile services. However, the revenue potential is still unclear.
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Philippines Infrastructure Facts & Forecasts Sector State in 2010 Current State 2020 Targets
Expenditure 2015 2016 Forecasts
Internet/ digitalization/ big data
Download speed of ~1 mbps in 2011 based on Akamai
Household download speed of 3.64 mbps in May 2015 (ranking 176 out of 202 countries) based on Ookla.
Improve cost efficient broadband service delivery, network infrastructure expansion and upgrades through increased competition based on Philippine Digital Strategy 2011-16. • Lowering of Herfindahl-
Hirschman Index, which is a measure of market concentration.
• Average price for basic broadband Internet falls by 5% annually.
• Investment in infrastructure expansion and development increase by 10% annually.
Universal broadband Internet service: • For businesses: all CBDs to
have broadband coverage with average download speeds of 20 mbps for customers by 2016.
• For households, broadband with average download speed of at least 2 mbps to be available to 80% of customers throughout the country.
Universal basic broadband Internet by 2016 to all barangays through publicly shared access. Universal broadband Internet access for public schools by 2016. Increase the percentage of households with broadband connection from 13.8% in 2008 to 25.8% in 2016.
The government is evaluating setting up a Universal Access and Service Fund, which can be used for the development of broadband infrastructure, particularly in underserved communities. The plan involves allocation of ~PHP2b in spectrum users’ fees collected by the NTC for the UASF. The spectrum users’ fees are currently remitted to the National Treasury.
The Department of Science and Technology plans a free Wi-Fi Internet service. Once fully deployed, the project will serve 105,000 concurrent users with 256 kbps each with data volume based on a Fair Usage Policy. The budget for the project is ~PHP1.41b.
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Sector MKE View: Achievable Challenges Reasons & Response Opportunities
Internet/ digitalization/ big data
N/A
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Philippines Infrastructure Facts & Forecasts Sector State in 2010 Current State 2020 Targets
Expenditure 2015 2016 Forecasts
Housing Provision of socialized housing units, 10% of population.
Total housing need, which is housing backlog and housing for new households, was 3.7m units.
Updates are available only at the end of the plan period.
The 2016 target of the National Housing Authority and Socialized Housing Finance Corporation is to provide 578,756 socialized housing units. Total housing need in 2016 is estimated at 5.8m units. Official target is to provide 1.47m housing units for the entire plan period.
A 2009 estimate puts government spending on housing at less than 1% of total national government expenditures. If this proportion still holds, 2015 public sector housing spend would have been less than PHP20b, perhaps flattish YoY.
The private sector is the main provider of housing needs but it has not been able to close the gap, hence the continuing large housing backlog. The six listed companies in our property universe are among the largest in the country but operate in a heavily fragmented industry. Between 2010 and 2015 their residential project costs almost tripled to around PHP100b.
With a budget of PHP3,001b in 2016 total national government expenditures, 1% or PHP30b would be the upper limit to housing spend. We estimate the companies in our property universe will increase spending by about 9% to PHP106b.
With fiscal space, it is possible government spending on housing will increase its share of expenditures. The companies in our property universe are currently working on reducing their receivables and inventory levels. We expect an acceleration in residential capex as interest rates are expected to remain subdued while household incomes are expected to rise with declining unemployment.
Water Metro Manila East Zone: Non-revenue water: 11% Billed volume: 409.8m mcm
Metro Manila West Zone: Non-revenue water: 51% Billed volume: 373.8m mcm
The two Metro Manila water concessionaires depend on a single source of raw water: Angat dam
Metro Manila East Zone: Non-revenue water: 13% Billed volume: 476.7m mcm
Metro Manila West Zone: Non-revenue water: 34.3% Billed volume: 498.3m mcm
Marginal improvements in concessionaires’ KPI over the 2013-18 rate rebasing period.
FY15 capex of PHP12.2b for the two concessionaires
FY16 forecast capex for Manila Water and Maynilad of PHP23.9b.
PHP200b capex in the East Zone from 2013-2037 PHP239b capex in the West Zone from 2013-2037
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Sector MKE View: Achievable Challenges Reasons & Response Opportunities
Housing The government has fallen below its spending target for several years and may do so again but perhaps to a smaller extent as it is an election year. The companies in our property universe have been opportunistic in launching residential projects as they are bringing down inventory and receivable levels. We think they are likely to achieve our modest targets.
Underspending on the part of the government is due to more care in disbursement of funds following an adverse ruling from the Supreme Court in 2014, weak coordination among government agencies, land acquisition issues and red tape, among others. Since 1986, different governments have manifested varying degrees of political will that have helped to accelerate or slow down infrastructure development. Because of the forthcoming May presidential election, there is uncertainty on what the pace will be in the next six years.
The obvious shortfalls are in socialized housing as is evident from the presence of slums in urban areas, especially in Metro Manila. In rural areas, there are fewer slum areas but housing units are not built of durable materials so are more prone to destruction in natural disasters. Many housing units, both in urban and rural areas, are situated in disaster-prone locations because of inadequate planning or zoning.
The greatest opportunities are in providing decent mid-income housing as this portion of the populating is expected to broaden as the economy grows. This is still inadequately served, especially in provincial areas. Affordability is improving in a low-interest rate environment amid rising incomes.
Water Programmed capex can now be implemented as the new rates for 2013-18 have been implemented in 2015. Capex post-2018 subject to the outcome of the next five-year rate rebasing. Having said that, we do not expect any significant change from the existing plan.
24/7 water supply is lacking outside Metro Manila. Also, there is underinvestment in the development of new water sources and the upgrade / expansion of the distribution networks outside Metro Manila.
Investment spending in the East and West Zones was delayed because of regulatory issues with regard to water rates. This needs to be resolved before new investments can be made in the two concession areas. The MWSS approved implementation of the new rates for 2013-18 rate rebasing period mid last year.
The greatest opportunity is in the development of bulk water supply projects, particularly outside Metro Manila. Also, there is the opportunity in the upgrade and expansion of the water distribution infrastructure outside Metro Manila.
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1. NIRC provides recurring-income support for higher public spending.
2. Investing to enhance productivity and promote sustainable growth.
3. Jump in development expenditure to benefit social infrastructure.
4. Rail, LNG, airports & infocomm are needle-moving projects.
5. Stock picks: SingTel & MINT.
SINGAPORE INFRASTRUCTURE Gregory Yap & Singapore Research Team [email protected] (65) 6231 5848
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SINGAPORE INFRASTRUCTURE While We Were Sleeping… Singapore underinvested in its infrastructure from early 2000. Development spending was SGD12b in 2010, before spiking to SGD19-20b in FY15/FY16 or 5% of GDP. This is about to change. Deputy Prime Minister Tharman Shanmugaratnam indicated that public development expenditure could top SGD30b (6% of GDP) by the end of this decade.
Every Singaporean is drilled that the country is not endowed with natural resources; they are also vaguely aware that there are no cheap suburbs to retire to. It is no state secret that after 50 years of prudent spending and market pricing of public goods and services, a large pool of reserves has accumulated. Somewhat publicised but not fully appreciated is that Singapore’s foreign reserves compensate for its lack of natural resources. Investment income from these foreign reserves now supplements the government’s budgets through Net Investment Return Contribution (NIRC).
The Constitution was amended in 2008 to embrace the NIRC Framework. From FY09, this allows the government to spend up to 50% of expected long-term real returns from the net assets of GIC and MAS. Temasek joined the framework in FY16. In the FY16 budget, NIRC income is SGD14.7b, up from SGD9.9b in FY15, against operating revenue of SGD68.44b. Under the previous Net Investment Income Contribution (NIIC) Framework in 2000-2008, the contribution was below SGD4b.
NIRC Supplements Government Revenue
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1. Creating ecosystems for enhancing productivity and promoting sustainable growth
Three ways in which Singapore’s infrastructure are different from the rest of ASEAN are:
i. Singapore’s spending is moving beyond providing amenities and basic social/economic infrastructure. These are done with. Singapore already has established extensive infrastructure networks. Power plants and distribution grids, water plants, roads and housing are well designed and maintained, now among the best in the developed world. This is consistent with findings in our earlier section, which suggest that Singapore fares well both in the quality and quantity of its infrastructure. Still, the government plans to raise its development budget from SGD12b (3.7% of GDP) in 2010 to SGD30bn in 2020 (6%). It has a record of investing judiciously to cultivate ecosystems and create new streams of income or through raising factor productivity. For example, the oil industry is now 5% of GDP and Singapore has become the undisputed oil hub in Asia. Behind this success is its “plug and play” infrastructure and complete supply-chain integration.
Fig 21: Total development expenditure as % of GDP
Source: Accountant-General’s Dept, SingStats
ii. Proactive economic infrastructure development. Singapore’s spending on social infrastructure may be patchy but not economic infrastructure development. While the region’s development initiatives are aimed at resolving crippling bottlenecks, Singapore builds infrastructure proactively to attract/retain foreign investments. Its reclamation and extensive development of Jurong Island raked in billions of investments from leading global oil and chemical companies. Work on Changi Airport’s Terminal 5 and Terminal 1 expansion commenced even before Terminal 4 is completed. Singapore has also been working on water independence decades before its 2061 water agreement with Malaysia expires.
iii. Funding. Public finance is in good shape, more so with the adoption of NIRC. Private-public partnerships (PPPs) play a role by marking services to market and enhancing efficiency. Extraneous risks aside, clarity on the framework should minimise execution missteps for PPPs. Accordingly, cost of capital is also low and IRRs should be lower than the region.
2. Rebalancing priorities
A rebalance of infrastructure priorities may shift more investments to social-oriented projects. Previously, Singapore’s economic agenda overwhelms its social programme. The 2010-2013 flash floods, long queues for public housing, spiralling prices of HDB flats and congestions at public hospitals were evidence of the underspending. A groundswell of disenchantment during the 2011 general elections was a timely reminder that the social fabric needed strengthening. Congestions in public transportation, long waiting times for public housing and snaking queues at hospitals had an economic cost. They compelled the government to slow down its intake of foreigners and foreign labour.
Along with transport, healthcare is of priority. New hospitals, generous subsidies for the pioneer generation & lower-income families and mandatory healthcare insurance to reduce large-bill outlays are new initiatives. Its 2013 plan targeted one new public hospital a year on average up until 2020, representing a 40% increase in public-hospital beds. From 2010-2015,
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healthcare development expenditure has increased almost 3-fold to SGD1.6b.
Changing demographics, annual smog problems from the region and global warming are additional hot spots. Addressing these would require raising spending on transportation, public housing, connectivity, elder-friendly facilities, flood alleviation, food centres and community centres etc. But it by no means suggests that economic infrastructure will take a back seat.
Fig 22: Economic and social development expenditure
Source: Accountant-General’s Dept
3. Projects that move the needle
i. Rail. Rail’s reliability should stay at the top of the new agenda. Stage 3 of the 42km SGD20.7b Downtown Line, when completed in 2017, should take some pressure off existing tracks. Traffic may also be diverted to a new SGD18b 30km Thomson Line as it opens in stages from 2019. Solutions for bus transport are faster and easier to implement. By transiting to an operator model, the government has more latitude to add operating assets and increase service frequency and accessibility.
ii. Airport. Although Changi Airport’s Terminal 4 will only be completed in 2017, work has started on the SGD1.7b expansion of Terminal 1 and a new Terminal 5. Passenger capacity will increase to 135m by mid-2020.
A third runway has also been planned. Changi Airport is currently highly profitable with revenue of SGD2.1 b and net profit of SGD780m.
iii. LNG. Developing an LNG hub is of economic and strategic interest. It is a matter of timing, in our opinion. About 95% of the feedstock used to generate energy is currently gas piped from Malaysia and Indonesia. Long-term “take or pay” fuel contracts will expire only in early 2020. As current legislation forbids power producers from entering into new contracts to import piped gas, demand for LNG ought to accelerate towards early 2020. Singapore is Asia’s oil and gas trading and pricing hub. Adding LNG broadens its offerings but a second LNG terminal is crucial for this. The recent softness in commodity prices has been a setback but the clock is ticking and the investment looks imminent. The success of LNG and LNG trading could add meaningfully to GDP.
iv. Infocomm. Singapore is already ranked the second most network-ready country in the world, by the World Economic Forum. It hosts 50% of South-East Asia’s data centres. To cement its position, it is forging ahead with a Smart City platform that will tout an ultra-high-speed digital super-highway and super connectivity. Already served by 15 submarine cable systems with a total capacity of 114 Tbps, the new trustworthy ICT platform should extend its lead. Its aim is to create 80,000 new jobs, increase today’s 4% contribution to GDP by two-fold and infocomm export revenue by 3x.
4. Pricing, operating model and cost of capital
Singapore prices its public goods at full cost recovery, with an eye on long-term financial sustainability. Where possible, they are pegged to market prices. For example, its water tariffs consider the cost of its entire water system such as water collection, reservoir management, the treatment, reclamation & desalination of water and their associated costs. Today, Singaporeans are familiar with the concept of paying market prices for public goods.
The government has experimented with various models of executing infrastructure development. It has corporatised ports, divested energy generation assets and instituted PPP for water desalination. Changi Airport and PSA are highly profitable. Power producers are broadening and increasing their investments in Singapore. The models of bus and railway
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operations are being calibrated. But statutory boards mainly use direct contracting because the results have been satisfactory.
As the prices of goods and services reflect market prices, there is a higher probability of adequate returns of capital for infrastructure projects (ROIC > WACC). And with PPPs mostly working successfully, we see no problems in attracting further capital inflows. In recent government open tenders for bus routes, more than 10 bids were thrown in by various countries. Foreign bus operators were willing to bid lower than the Singaporean incumbents. This implies general recognition of low execution risks and accompanying expectations of low returns for operating in Singapore.
Fig 23: PPP Projects in Singapore
No. PPP Project Public Sector Agency/Private Sector Partner Project Description
1 Singapore Sports Hub Singapore Sports Council/ Singapore Sports Hub Consortium
35-ha site development to replace National Stadium for 25 years. Opened in Jun 2014.
2 ITE College West Institute of Technical Education/ Gammon Capital
To design, build, maintain and operate ITE College West for 27 years. Opened in Jul 2010.
3 SingSpring Desalination Plant
Public Utilities Board/ SingSpring Pte Ltd
Supply 30m gallons of water per day for 20 years. Opened in Sep 2005.
4 Tuaspring Desalination Plant
Public Utilities Board/ Tuaspring Pte Ltd
Supply 70m gallons of water per day for 25 years. Opened in Sep 2013.
5 Keppel Seghers Ulu Pandan NEWater Plant
Public Utilities Board/ Keppel Seghers NEWater Development Co Pte Ltd
Supply 32m gallons of NEWater per day for 20 years. Opened in Mar 2007.
6 Sembcorp NEWater Plant
Public Utilities Board/ Sembcorp NEWater Pte Ltd
Supply 50m gallons of NEWater per day for 25 years. Opened in May 2010.
7 Incineration Plant National Environment Agency/ Keppel Seghers Engineering Singapore Ptd Ltd
Design, build, own and operate new incineration plant next to Tuas South Incineration Plant, which can incinerate 800 tonnes of refuse per day for 25 years. Opened in Jan 2009.
8 TradeXchange Singapore Customs/ CrimsonLogic Pte Ltd
Create one-stop integrated logistics information port. Develop, operate and maintain software for 10 years from 2007-2017.
Source: Centre for Liveable Cities Singapore, MND
5. Equity selection: usual suspects
Unfortunately, the dichotomy between the real economy and equity markets almost ensures that stock selections are uninspiring. Well-executed infrastructure development directly and indirectly promotes economic production and precipitates foreign investments. This creates a positive business climate and promotes lending. Given its genesis as a development bank, DBS (SELL, TP SGD12.68), an active infrastructure financier around the region, stands to be a key beneficiary. However, we are concerned about the intermediate term asset quality cycle and rates it a SELL.
Direct proxies for the airport are SATS (HOLD, TP SGD3.82) and SIA Engineering (HOLD, TP SGD3.61). In the infocomm space, Singtel (BUY, TP SGD4.40) should be the biggest beneficiary as it owns about 17% of the data centres in Singapore. Keppel DC Reit (Unrated) is another potential beneficiary.
For construction companies, the slack from residential property demand may be taken up by spending to improve social amenities. This is a fragmented industry, comprising small and medium-sized contractors. Opportunistic players with access to capital may surface to consolidate capabilities and scale to bid for and undertake bigger projects.
Stretching the investment theme further, higher foreign investments should entice more better-paid expatriates, giving impetus to rental demand for residential property. New business formation should be positive for landlords. We favour AREIT (HOLD, TP SGD2.23) and MINT (BUY, TP SGD1.71).
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Focus Charts
Gas Demand-Supply Balance (metric tonnes per annum)
Rail Growth Not Keeping Pace With Population Growth (no. of persons, kilometres)
Source: BG Group, Wood Mackenzie, Poten & Partners Source: LTA, SingStats
Submarine Cable Map Total Housing Stock (no. of units)
Source: TeleGeography Source: HDB, URA, Maybank KE
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Singapore Infrastructure Facts & Forecasts Sector State in 2010 Current State 2020 Targets
Expenditure 2015 2016 Forecasts
Energy
Coal, oil, Fossil Fuels, Thermal
In 2005, natural gas was 74.7% of fuel mix. Petroleum products 23.1%. In 2001, natural gas was just 26%.
Natural gas is 95.5% of fuel mix. Petroleum products down to 0.7%. Consumption of electricity is 46.4t WH/year: households 7t, industries 7t, commerce 17t. Of licensed generation capacity of 12,889MW, gas is 95.5%. 9,718 MW is from combined cycle cogen/tri-gen plants.
Most natural gas is piped from Malaysia and Indonesia. LNG to play bigger role as it can be imported easily. LNG provides fuel diversification and security. To promote LNG usage, power producers no longer allowed to import piped gas for energy generation from 2006. Ban will be reviewed when LNG imports reach 3Mtps or in 2018, whichever earlier. To store and export LNG, work on a first LNG terminal costing SGD1.7b on a 40 ha plot on Jurong Island commenced in 2013. Given its strategic importance, government has been increasing capacity ahead of demand. Currently, 3 tanks, a secondary jetty, regasification facilities have LNG throughput capacity of 6 Mtpa. Aim is 11 Mtpa by 2018. Maximum capacity is 16 Mtpa. Second terminal could be in the works, in Eastern Singapore to support new industrial sites and power plants in that area. Government hopes to develop Singapore into an LNG hub.
Not much visibility. Due to falling energy prices, much-talked-about second LNG terminal has been slow to get off ground.
Energy projects are typically undertaken by or in partnership with private sector. Government undertakes preparatory work such as land reclamation. LNG Terminal 2 might be an exception, like Terminal 1. Feasibility studies for Terminal 1 started in 2005. But during the global financial crisis in 2009, the terminal became economically unviable. Government took over its development and ownership out of strategic interests. It might now just do the same with second terminal.
-SGD500m for development of second terminal
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Sector MKE View: Achievable Challenges Reasons & Response Opportunities
Energy
Coal, oil, Fossil Fuels, Thermal
Singapore’s electricity market in oversupply since 2013. Likely to remain so for couple of years. Not positive for power generators but good for power consumers.
Lack of feedstock diversification and locked-in long-term contracts. Singapore’s heavy reliance on piped natural gas from Indonesia and Malaysia is untenable from security standpoint. Government keen to develop LNG and stop companies from importing piped gas.
Generators have locked in long-term piped gas/LNG supplies. Current contracts are based on “take or pay”. Domestic demand for LNG not expected to take off until these contracts end. Several contracts will expire over next six years. In the long run, more secure LNG supply & liberalisation should create a more stable and transparent market. May help Singapore become LNG hub. Singapore wants to develop an electricity futures market. Aims to open electricity market to full competition by 2018. Also wants to provide a clearer roadmap on electricity demand in next 10-15 years to aid planning of capacity.
LNG a key business opportunity. Will diversify feedstock for energy generation. Enhances Singapore as oil trading and commodity hub. LNG industry already attracting strong attention. Although much of Singapore’s gas requirements are locked in by long-term agreements, 9 bidders have applied for the coveted LNG aggregator/buyer licence. Singapore's demand for Gas demand is expected to be 1.1-2.9m tpa by 2020, 2.9-5.2m tpa by 2022 and 6.9-9m tpa by 2025. An LNG hub here could spark supporting industries for LNG tracking, PPG terminal, cold energy utilisation & LNG bunkering services. Second SGD500m LNG terminal put on backburner due to low crude prices. For international traders, additional products provide opportunities for portfolio optimisation. Risks are Indonesia and Malaysia have been in this space longer. Japan and China have similar ambitions.
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Singapore Infrastructure Facts & Forecasts Sector State in 2010 Current State 2020 Targets
Expenditure 2015 2016 Forecasts
Energy – cont’d
Nuclear
Study started on whether nuclear-based electricity can be added to energy mix.
But concluded that nuclear risks exceeded benefits.
Still SGD63m set aside for Nuclear Safety Research & Education Program.
Hydro
Other Renewables
Solar
Installed capacity of solar PV systems doubled in 2014 YoY, driven by additional 13.7 MWac of capacity spread over 248 new installations. There are 636 solar installations with grid connected capacity of 25.5MWac. 93% installed by non-residential users.
Aims to raise adoption of solar power to 350MWp by 2020 or 5% of peak electricity demand.
Solar the most viable renewable energy. Being in the tropics, Singapore’s annual solar irradiance is 1,150 kWh/M2/year. SGD580m blueprint to grow clean energy.
Transport Government spent SGD10.3b on all transport development projects.
Development budget lowered to SGD8.8b from SGD10.3b after completion of some airport work last year.
Air (incl ports)
Changi Airport had four terminals with combined passenger handling capacity of 73m pa. Budget terminal with passenger handling capacity of 7m closed in 2012. Changi Airport handled 42m passengers in 2010.
Following closure of budget terminal, remaining three terminals can handle 66m passengers a year. Terminal 4 under construction at the previous budget terminal. Terminal 1 being expanded, dubbed Project Jewel. Airport handled 55m passengers in 2015.
Terminal 4 can handle 16m passengers pa. Opening in 2017. Completion of Project Jewel in 2018 will add over 50k sqm of retail space to Terminal 1 and raise its annual passenger handling capacity by 3m to 24m. Terminal 5 will add 50m passenger handling capacity by mid-2020s. Airport will introduce third runway for commercial use by early 2020s. Passenger handling capacity will double to 135m by mid-2020s.
Changi Airport Development Fund introduced with a budget of SGD3b.
Changi Airport Development Fund raised by SGD1b.
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Sector MKE View: Achievable Challenges Reasons & Response Opportunities
Energy – cont’d
Nuclear
Hydro
Other Renewables
Solar
Continuous review of policy framework to encourage solar installations.
Land scarcity limits most installations on rooftops. Needs to manage intermittency of solar power.
Government studying feasibility of harnessing solar energy at its reservoirs and land-based facilities Needs to ensure sufficient back-up power to manage intermittency.
Of alternative sources of energy, solar appears most credible. Solar capacity expected to increase from 43.8MW in 2015 to 350MW by 2020. Should contribute up to 20% of energy by 2050, from less than 1%. Government studying possible enhancement of solar capacity to 600MW by 2020 instead of 350MW.’
Transport
Air (incl ports)
Execution risks typically minimal. T4 should open as scheduled in 2017.
No shortfall, especially with T4.
Development of T5, even before T4 is completed, to stay ahead of the curve. Part of government efforts to ensure that Changi Airport keeps its top global ranking since tourism has big spinoffs for the economy. Government also wants to ensure that Singapore benefits from airspace liberalisation in ASEAN. Government-owned Changi Airport is highly profitable with FY3/15 revenue of SGD2,150m, net profit of SGD782m and ROEs of 13.2%.
Planned airport expansion will support long-term growth of aviation companies. Direct proxies for airport expansion are SATS and SIA Engineering. SATS a dominant ground handler and provider of inflight meals. SIA Engineering provides aircraft maintenance, repair and overhaul services with lion’s share of maintenance business. While positive, we believe long-term outlook has been priced in. CapitaLand could benefit from Project Jewel. So could CMT, as CapitaLand is its asset sponsor.
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Singapore Infrastructure Facts & Forecasts Sector State in 2010 Current State 2020 Targets Expenditure
2015 2016 Forecasts (2016-2020) Transport – cont’d Land - Roads 3,377km of roads. In 2010,
8,300 ha or 12% of land was used for land transport infrastructure. Started construction of Marina Coastal Expressway, a 420m undersea tunnel scheduled for completion in 2013.
3,496km of roads. Construction work started on 21.5km North-South Expressway. Will include express bus lanes and cycling routes. Continuing upgrade of roads and commuter facilities.
Aims to use only 9,700 ha or 13% of land for land transport infrastructure by 2030. Completion of integrated transport hubs. One in Bukit Panjang (2017) and one in Yishun (2019). Contract to build Next Generation Electronic Road Pricing (ERP 2) system recently awarded to an NCS-led consortium. Due in 2020. The new satellite-based system exemplifies Singapore’s use of technology to manage urban congestion.
2016 budget of SGD260m for North- South Expressway.
North-South Expressway expected to cost SGD8b.
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Sector MKE View: Achievable Challenges Reasons & Response Opportunities
Transport – cont’d Land - Roads Low execution risks for roads.
To transit to a Government Contracting Model (GCM) when licences for current operators expire this year. Of the 12 bus packages under the new regime, three will be awarded via tendering and nine retained by incumbents. Government wants to own all bus assets. Transition details for the nine packages retained by incumbents remain under negotiation. Singapore’s taxi market is under threat from new entrants, Uber and Grab.
No shortage of planned road expansion. For buses, government will transit to GCM where bus companies operate fleets on designated routes and government owns bus assets. Should solve many problems over time as quality of transport services should no longer be compromised by operators’ profitability considerations. Government also prepared to pump in capital to expand bus fleets to ease capacity constraints and ply routes deemed unprofitable. Government allows app-based new taxi players to supplement traditional cabbies. It may draft new regulations for new entrants to address public concerns over safety and service standards.
Roads are generally fine. Congestions tolerable partly due to Electronic Road Pricing and quota system for cars. But new roads have to be judiciously planned as opportunity costs of land are high. Bus and rail services among the public’s biggest bugbears. Service reliability/timeliness and overcrowding are key frustrations. Government and transport operators under pressure to raise capacity. Shortage of taxis during peak hours. Prohibitive costs of private car ownership have led to strong demand for taxi services. New taxi entrants such as Uber and Grab introduced private car hiring in recent years to satisfy demand.
First two bus packages awarded to two foreign bus operators under competitive tendering. 10-11 bidders participated in each tender. Contracts awarded to UK-based Tower Transit and Go Ahead Group with annual values of SGD126m and SGD100m respectively. While it is difficult to estimate project IRRs due to a lack of disclosures, we believe these bids should be profitable. Equity market eagerly awaiting transition to new business model. As listed bus operators have been losing money, a migration should boost bottom lines. Market also looking for windfalls from the sale of operating assets to the government. We are less sanguine. Government’s FY16 budget contains planned expenditure of only SGD225m for the purchase of bus assets vs the two bus operators’ assets of SGD1b. Overall, we are less bullish on benefits to the operators in the transition process. The strong run-up in stock prices of ComfortDelGro and SMRT since early 2014 also suggests positives have been priced in. While incumbent taxi operators are under structural threat, competitive landscape remains benign for the time being, thanks to strong underlying commuter demand.
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Singapore Infrastructure Facts & Forecasts Sector State in 2010 Current State 2020 Targets Expenditure
2015 2016 Forecasts (2016-2020) Transport – cont’d Land - Rail
Total rail length of 159 km with Phase 2 of Circle Line turning operational. First announced Kuala Lumpur (KL)-Singapore High Speed Rail (HSR).
Total rail length increased to 200km in 2015 with opening of Downtown Line Stages 1 and 2. Government adding train cars and upgrading network to raise capacity. To finalise commercial model and procurement approach for KL-Singapore HSR by 2016.
By 2030, rail should reach almost 360km. East West Line extension to Tuas West to be ready in 2016. Downtown Line Stage 3 to be opened in 2017. Thomson-East Coast Line to open in phases from 2019. Jurong Region Line and Cross Island Line will open in 2025 and 2030 respectively. KL-Singapore HSR completion in 2022.
Key rail expenditure in 2015: Tuas West extension (SGD0.57b), Downtown Line (SGD1.6b), Thomson East Coast Line (SGD1.65b).
Key rail budget for 2016: Tuas West extension (SGD0.25b), Downtown Line (SGD1.1b), Thomson East Coast Line (SGD2.8b).
Of the SGD65.5b budget for rail projects under development, SGD38.7b has yet to be spent.
Sea (incl ports) Handled 27.68 TEUs.
Handled 30.6m TEUs. 57 berths at Tanjong Pagar, Keppel, Brani and Pasir Panjang, with capacity of 35m TEUs
SGD3.5b for Phases 3-4 of Pasir Panjang Terminal, will add 15 berths and 6,000m quay length. Cranes can arch across 24 rows of containers. Handling capacity to reach 50m TEUs. Plans for mega port in Tuas to consolidate all terminals.
Budget 2016 provides SGD600m for reclamation of Tuas Terminal Phase 1
SGD3.5b
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Sector MKE View: Achievable Challenges Reasons & Response Opportunities
Transport – cont’d Land - Rail
Tuas West extension due to be completed this year. Downtown Line Stage 3 on track for completion in 2017.
While rail congestion has improved with the ramp-up in capacity in recent years, system reliability remains poor. Still no progress in transition to a more sustainable business model.
Rail overcrowding and service unreliability have been incurring public’s wrath. Current licensing regime requires rail operators to own or buy over rail assets at some point but operators have little incentive to incur capex to improve capacity. As rail companies are for-profit organisations, maintenance has also been neglected. Recognising this, government has introduced a new rail financing framework. It will take charge of capacity expansion, and plan, design & build train systems. Operators will provide maintenance. Government and rail operators have been working on migrating from old licences to a new and sustainable model in recent years. Progress slow.
120km of the 360km of rail lines to be built by 2030 yet to be awarded. We expect operating contracts to be free of legacy contractual issues. This project presents growth opportunities for rail operators, though we cannot rule out competition from foreign operators. Transition remains a work in progress. Announcement of details could catalyse stocks. As the largest rail network operator, SMRT should benefit the most.
Sea (incl ports)
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Singapore Infrastructure Facts & Forecasts Sector State in 2010 Current State 2020 Targets Expenditure
2015 2016 Forecasts (2016-2020) Communication Telecoms/mobile 3 infrastructure-based players
<10 retail service providers Market penetration: 143.6% (mobile including 4G), 101.8% (wired residential household broadband as of Mar 2011 following changes in methodology) Optical fibre broadband plans only launched in 2H10. Data became available only in mid-2011
3 infrastructure-based players 17 retail service providers Optical-fibre Next Generation Nationwide Broadband Network (NGNBN) championed, sponsored and funded by government. Up to SGD1b in financial incentives to telcos to cooperate in necessary infrastructure and promote fibre optics. NGNBN will increase carrying capacity and transport speeds for data in Singapore tremendously. Market penetration: 148.4% (mobile including 4G), 102.8% (wired residential household broadband), 63.3% (total residential + corporate optical fibre broadband)
Regulator dangling one more facility-based operator licence and discounted-price spectrum to new entrant through an auction. Interest from two broadband companies operating in Singapore: MyRepublic and Consistel. MR reportedly raising USD250m and Consistel, up to USD1b. NGNBN to be enhanced through a Heterogeneous Network that allows devices to use best network needed for tasks at hand and seamless switching between networks. Masterplan recommends building a nationwide sensor network to gather data on public safety, monitoring the environment and building systems and managing traffic through the deployment of Aggregation Gateway Boxes.
2015: Combined capex of three telcos at SGD2.4b
2016: Combined capex of three telcos forecast at SGD3.1b
Two contenders for fourth network reportedly seeking SGD250m-1b in funding. IDA has projected capex of SGD400-700m for fourth network.
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Sector MKE View: Achievable Challenges Reasons & Response Opportunities
Communication Telecoms/ Mobile Government expected to
auction spectrums this year in 2 rounds: one for incumbents and one for new entrants.
Singapore a premium telecom market. 148% mobile penetration, one of the highest in the region. 3 operators serving a small market. But consumers are still paying above-region access costs for voice, SMS and data. Also tied to contracts as long as 2 years. More competition needed.
If bidders emerge for the fourth licence/spectrum, they will be the first new challenger since 1998.
As cost of access falls for consumers, more could be enticed to consume content. There should be explosion of demand for video content. Would expect more investments in video content creation by ecosystem players, such as StarHub’s recent investment in MM2, a movie producer, distributor and investor.
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Singapore Infrastructure Facts & Forecasts Sector State in 2010 Current State 2020 Targets Expenditure
2015 2016 Forecasts (2016-2020) Communication – cont’d Internet/digitalization/big data
Number of data centres/players: 40/28 Data usage: 5.33 petabytes (2Q12) HH wired broadband subscriber growth: 102.9%(1Q13)
Number of data centres/players: 47/28 Data usage: 10.68 petabytes HH wired broadband subscriber growth: 102.8% Strategic initiative to develop a “digital harbour”. Robust communications infrastructure, national sensor network and complementary infrastructure such as data centres promote a vibrant cloud computing ecosystem. Reinforces Singapore’s position as regional telecommunications hub with the fastest broadband speeds and largest Internet exchanges. In the 1990s, there were 3 major data centres: Equinix (US), Global Switch (UK) and Singtel (SG). Now 47 centres, owned and operated by 28 players, with 249 MegaWatts of IT power supply. 9 more centres under construction, with most to be completed in 2016. This will boost IT power capacity by 47% to 364 MW. Biggest players are Singtel (17% market share by number of data centres), followed by Equinix, Fujitsu, Keppel and Tata with 6% each.
Singapore’s data centres host an estimated 50% of the region’s capacity. A widely-held view is Singapore has reached a gateway status on par with HK, allowing it to be a bridge between China and the world. More international companies using Singapore to serve customers in China. Chinese companies also using Singapore to serve customers in Europe or North America.
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Sector MKE View: Achievable Challenges Reasons & Response Opportunities
Communication – cont’d Internet/digitalisation/big data
9 new data centres under construction that will raise capacity IT power supply by 47%. Industry utililsation only estimated to be 70% but oversupply may actually be forming in the market.
Although booming, many data centres are likely to be inefficient in use of energy and space. Infocomm Development Authority (IDA) launched Green Data Centre Roadmap to improve data-centre energy consumption and efficiency. A set of standards needed for operating data centres in a tropical climate. Part of the masterplan recommends feasibility studies of building data centres underground.
Property consultancy, Cushman & Wakefield, not alarmed by dip in occupancy. Sustained demand from growing tech/network content companies such as Facebook, Netflix, Uber. Major banks and insurers also outsourcing to data centres to comply with MAS requirements. C&W expects occupancy to be back to 70% by 2018, and a return to a landlords’ market with positive rental reversions once supply is fully taken up.
Structure Research expects Singapore’s data colocation market to grow from USD963.2m in 2014 to USD1.265b in 2016, +15%. Also sees opportunities in upgrading of data centres. Data centres could create jobs and provide economic multipliers. Although not big direct hirers, they enable the digital economy and support a complex and high-value supply chain of products and services.
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Singapore Infrastructure Facts & Forecasts Sector State in 2010 Current State 2020 Targets Expenditure
2015 2016 Forecasts (2016-2020) Housing, urbanisation and environment Housing and urbanisation
Singapore had 1.17m housing units in 2010: public 898.5k, ECs 10.4k, private 258.2k. Low private-home vacancy rate of 5.0%. 10,000 ha or 14% of land used for housing. In 2010, strong population growth, underbuilding in prior years and low mortgage rates bumped up private and public housing prices. To reign in prices, government introduced eight rounds of cooling measures from late 2009.
We estimate 1.33m units as of end-2015: public 985.9k, ECs 18.3k, private 327.4k. Ramp-up in home building and slow demand in recent years swelled stock in the private market. In each of past two years, private developers and HDB completed almost 50,000 homes a year. Home prices were 8% lower than their peak in 3Q13.
Aggressive home building is expected to continue. We expect housing stock to increase by 41.5k units: public 22.1k, ECs 4.4k, private 15.0k a year for next three years. Should result in surplus, fulfilling government’s aim of building ahead of demand. Official target: 13,000 ha or 17% of land used for housing in 2030.
Environment Global warming has raised temperatures and created freak weather patterns. Floods or droughts, scorching heat and smog from forest fires from Indonesia could create pollution and health problems.
Singapore’s preferred solution is to talk to the Indonesian government and distribute masks. Has not started reviewing infrastructure to tackle smog.
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Sector MKE View: Achievable Challenges Reasons & Response Opportunities
Housing, urbanisation and environment Housing and urbanisation
Private developers and HDB likely to add 51,800 housing units this year. Pace of construction may be slowed to let demand catch up.
No shortfalls. Housing market has tipped into oversupply.
With spiralling home prices under control, market is increasingly concerned about impending oversupply.
As evident from the dip in social expenditure/GDP, the government may have underspent. Finance Minister hinted that government spending could jump. We see a surge in spending on flood alleviation, drainage, sewage, new food centres & neighbourhood improvements. Such work typically undertaken by small construction companies. In anticipation of oversupply, property stocks have been sold down. Now at 30-50% discounts to RNAV. We see home prices bottoming in 2017 and recommend positioning ahead of the turn. As population ages & to keep the city vibrant, government may have to spend on upgrading, improving & refreshing housing estates. As industry is fragmented and companies are not well served by banks, it is possible to nurture a few such companies as market consolidators.
Environment Smog from forest fires may be aggravated by dry weather and global warming. Infrastructure can be improved to alleviate the distress. For example, better connectivity between buildings and public amenities. Schools may need more enclosed facilities. We see more government expenditure in the future.
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Singapore Infrastructure Facts & Forecasts Sector State in 2010 Current State 2020 Targets Expenditure
2015 2016 Forecasts (2016-2020) Housing, urbanisation and environment – cont’d Healthcare Hospital beds in 2010: public
8,881, private 1,402 Hospital beds in 2014: public 9,602 (+8.1%), private 1,628 (+16.1%) Hospital admissions per bed in 2010: public 38.7, private 67.2 Hospital admissions per bed in 2014: public 39.8 (+2.8%), private 72.1 (+7.2%)
New initiatives in 2013 included more public-hospital beds, better subsidies for elderly & lower-income groups and mandatory healthcare insurance to reduce large hospital bill outlays. 80% of primary healthcare services provided by private practitioners and 20% by government polyclinics. Opposite is true for more costly hospitalisation care. Citizens aged 65 and above have doubled from 220k in 2000 to 440k. Expected to balloon to 900k by 2030. 20-72% of population above 65 years old found to be admitted to hospitals at least once a year vs 4-15% for <65 years old.
Overcome bed shortages in public hospitals, which are running at >85% occupancy. Increase affordability and accessibility for lower-income groups and elderly via targeted government subsidies. Reduce outlays for large hospital bills by introducing mandatory life insurance coverage.
Development expenditure of SGD1.4b, 3x more than 2010’s SGD0.5b.
FY16 development expenditure of SGD1.6b, +14% YoY. FY16 public healthcare expenditure to increase by SGD1.8b or 19.0% YoY, the highest increment.
Aims to add one new hospital a year on average, up until 2020, +40%. Beyond 2020, plans for four more new hospitals.
Water Reservoirs accounted for 5% of land use in 2010. Sales of potable water 476.1 cu m: domestic 59%, non-domestic 40%. 516m cubic metres treated (2008) New water:16% Industrial water: 4% Largest NEWater plant in Changi built in 2010, capacity 50mgd.
Sources of water: water catchment, imports, desalination, reclaimed water. Sales of potable water 506.3 cu m: domestic 58%, non-domestic 42%. 571m cu m treated water Unaccounted-for water: 5% New water :18% Industrial water: 4% Treated water has capacity to meet 30% and desalinated water, 25% of Singapore’s water needs.
Reservoirs still to make up 5% of land use by 2030. Water needs to be met by treated or desalinated water.
Treated water to meet 40% of demand by 2020 and 50% by 2060.
Long-term target: desalination to meet 25%.
Building 3rd desalination plant in Tuas for SGD217m for 49.6 cu m/year.
SingSpring’s capacity is 41.5 cu m/year and Tuaspring, 96.7 cu m/year
Fifth treatment plant completing in 2016 with capacity of 83.2m cu m/year. JV between Beijing Water and United Engineers. Concession for 2016-48. First year’s rate is SGD0.276.
Development spending of SGD1,363m
Development expenditure of SGD1,245m
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Sector MKE View: Achievable Challenges Reasons & Response Opportunities
Housing, urbanisation and environment – cont’d Healthcare
Water Development on track.
Water is not only needed for human survival but also by many industries. Non-households consume 42% of Singapore’s water. While water self-sufficiency is no longer an issue, cost of water production has to be managed to maintain Singapore’s cost competitiveness. Singapore’s selling price to industries is already among highest in the region. Cost of water production tied to energy costs. As technology improves, so should production costs.
Water key for national security. Singapore intends to be fully self-sufficient by 2061. Agreement with Malaysia on water imports runs out in 2061. This currently provides c.60% of Singapore’s water needs. Government should continue to develop treatment or desalination plants and look out for technology changes to minimise production costs.
Balancing security with cost of water production. As open tenders are transparent, winning bidders are either cost-efficient, prepared to accept lower returns or possess breakthrough technologies.
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1. Transport this time: rail, motorways, ports
2. But naturally problematic. Expect delays in completion
3. Power & telco exciting
4. Strong PPP platform needed for road projects
5. Stock picks: ADVANC, AOT & CK
THAILAND INFRASTRUCTURE Institutional Research Team & Tim Leelahaphan [email protected] [email protected] (66) 2658 6300
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THAILAND INFRASTRUCTURE Round 2! Over 1990-2015, a total of USD52b infrastructure projects were rolled out in Thailand: 43% in power and 42% in telecoms, according to the World Bank. The private sector executed 77% of these projects under various forms of private-public participation (PPP). BOO and BTO were the most common. Some were successful in generating positive IRRs; others were not. For example, the early IPPs, which were essentially government divested assets, generated IRRs of 16-17%. Private-sector projects yielded 12-15%. Among telcos, ADVANC and DTAC generated 11.8% and 9.3%, respectively, on 2G BTO concessions. TRUE - formerly TelecomAsia, the BTO concessionaire for Bangkok’s fixed-line network - produced a negative 3.89% over 2001-2012. The lessons learned seem to be: 1) single contracts work better; 2) counter-party state agencies matter; and 3) multiple concessions in allied businesses have low chances of generating positive returns.
The last build-out has put Thailand in the middle of the pack in ASEAN, at 30th
position in the World Bank’s Infrastructure Index, out of 160 countries. More would need to be done to take the country to the next level. Unfortunately, execution has been slow. Thailand’s seven governments since 2006 had each vetted this long list of infrastructure plans that was due for rollout a decade ago. We dub this the Megaproject List (MPL). The MPL has hardly changed its shape and form, though its capex has varied between THB2.5t and THB3.6t or USD70-103b. The current military government has earmarked THB1.6-1.9t or USD45-54b for projects to be expedited through 2016-2020, 53% under PPP. Funding by the private sector is not an issue, given THB2.4t of excess liquidity and 51.9% leverage for the non-financial sector. All the government needs to do is to pave the way for the private sector to proceed, in our view. To that end, the 1992/2013 PPP Act has been amended, mainly to facilitate negotiations.
Our top infrastructure picks are ADVANC (4G telephony), AOT (tourism/ people connectivity) & CK (civil work, mass transit and utilities).
Thailand is ranked in the middle …of ASEAN WB Infra Index
Source: World Bank
Thailand’s ICT Ranking Ambitions
Source: National Broadcasting & Telecommunications Commission
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1. Transport this time: rail, motorways, ports
Thailand’s seven governments since 2006 had each vetted this long list of infrastructure plans that was due for rollout a decade ago. We dub this the Megaproject List (MPL). Earmarked for expedited implementation are 20 projects with a combined value of THB1.61.9t or USD45-54b, 53% under PPP schemes. We call this the Expedited Project List (EPL). The value is a range because of recent uncertainties over the structure of the TH-CN high-speed train. The Thai government may end up implementing this project; if so, the time take could be shorter, potentially lowering the budget. Because there is already a THB95.4b budget earmarked for land appropriation/expropriation we take this as a positive indicator that the projects are likely to go ahead.
The energy and telco focus during the 1990-2015 rollout put Thailand on a sound economic footing. Resulting from that, 83% of Thai households are now electrified, with phone penetration hitting 108% by 2010. In addition, with the private sector undertaking most of the projects, multiplier effects were faster. We think power reliability allowed power-sensitive industries such as petrochemicals to flourish. This resulted in a multiplication of industries that, inter alia, turned Thailand into ASEAN’s auto-manufacturing hub.
It could be different this time around. By our estimates, 63% of the EPL are rail projects - including the high-profile TH-CH and TH-JP high-speed trains - and 30% roads, mainly motorways. As these types of projects have long lead times, returns are generally difficult to estimate. Thus, a successful execution with private sector participation needs a strong PPP platform whereby risk/reward is well-shared. There is already a THB95.4b land appropriation allocated for these projects so that is a positive indicator that it is likely to go ahead.
Fig 24: Thailand’s infrastructure rollout 1990-2015 Implemented 2016-2020 EPL
Sector USD m % share USD m % share Airports 455 1% 1,465 3%
Power 22,988 43% na na
Natural gas* 1,350 3% 616 1%
Railroads ** 2,772 5% 32,898 63%
Roads 2,247 4% 15,811 30%
Seaports 199 0% 111 0%
Telecom 22,138 42% 426* 1%
Water & Sewerage 831 2% 568 1%
* LNG Terminal 2 commercial in 2017, 5m-tonne capacity
** Railroads include 5 mass transit projects, USD11.258b & original TH-CN hi-speed train plan
Source: MKE-ISR
The current rollout involves 2,647km of roads for completion within five years. Accounting for 20% of today’s road network, this is liable to cause traffic disruptions and hence, delay completion.
Yet, this is not the same as foot-dragging. The emphasis on transport underscores the government’s concerns about the threat of high logistics costs to Thailand’s economic competitiveness, particularly as manufacturing accounts for 84% of its GDP. About 96% of the sector’s output is moved by land. If transport projects are executed successfully, we estimate that logistics costs could drop by 2ppts to 12.1% of GDP by 2020, saving Thai industries THB260b per year.
2. Delays in completion are common for transport
As the amended PPP Act should iron out kinks in the negotiation process, we believe rollout can begin this year. Terms of reference should start coming out by mid-2Q16. However, we see several physical limitations to construction work, including materials, manpower, seasonal weather and the availability of good-sized civil contractors. This implies potential delays in project completion, which have to be factored into risk/return-sharing agreements; otherwise, there could be serious glitches and uncompensated cost overruns. Thailand’s history of transport infrastructure rollout is littered with contractors’ court cases – the most prominent being the
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Suvarnabhumi International Airport and Airport Link - and compensation claims, some stuck with the court for over a decade.
3. Power & telco remain exciting, but are outside EPL
Our comprehensive list of infrastructure projects includes power and telco projects that have fallen more into the private sector’s domain, thanks to PPP’s record of smooth rollout. Power should top the agenda in the medium term due to the need to replace old gas-fired plants with other fuel types. Coal is the second fuel of choice as it is cheap and readily available. Of late, however, new coal-fired power projects such as the 800MW plant on the southern island of Krabi met with strong resistance from the local community over environmental pollution. This will take time to sort out.
LNG is more expensive and PTT is the natural developer of its terminals, though it is reluctant because of unattractive returns (WACC equals IRR). Alternative energy is an option and we have a whole array: solar, wind, biomass and municipal/industrial waste. Solar is by far the most popular and we have both industrial and community projects. Capacity is set to treble by 2036 from 1,420MW in 2015. This is the best growth prospect in ASEAN. There remain substantial investment opportunities in alternative energy because Thailand has limited other fuels. Imported hydropower from Laos and Myanmar could fill the gap but this has to be paced due to delivery risks. Runoff on the Mekong River has been fluctuating wildly due to damming in China.
Telco is another area awaiting major investments. Mobile operators’ 4G build-out is expected to cost THB140b. The bulk will be spent in 2016. After that, there will be a host of developments from cables to data centres and apps, to advance the country’s aim of scaling up the ICT Development Index from 74th to 60th by 2017.
4. Strong PPP platform is key
In the past, PPP was deployed predominantly in the power and telco sectors. It worked well because EGAT, as the main partner in power, is a very strong, well-run state enterprise. Telco had a clear addressable market and concession owners left operators alone most of the time. PPP remains viable for power and telco projects, in our view.
From the EPL, we count THB990b worth of projects for rollout under PPP. The government is amending the 1992/2013 PPP Act to accelerate the negotiation process. Acting under urgency, we are a bit concerned that it will fail to calibrate the sharing of risks/rewards properly, which could generate problems down the road. However, the odds appear stacked in the private sector’s favour. Material prices are likely to remain low. Funding is likely to remain cheap, given a sluggish economy and excess liquidity of THB2.4t in the system. Based on our estimates, liquidity should remain ample even at the peak of loan drawdowns in 2020, the year of completion for myriad projects.
5. There are now will, funds & stocks to play
The 2016-2020 infrastructure rollout in Thailand should benefit from the longevity of this current military government and high PPP participation. The latter should ensure follow-through and fiscal discipline. In our universe, we see 35 stocks that could benefit. Our top picks are ADVANC (4G telephony), AOT (tourism/people connectivity) & CK (civil work, mass-transit concessions, power & water). We pick these companies for their high cash-flow generation (AOT, ADVANC) and its diversified businesses and strong execution (CK). Although CK looks leveraged at 21.6x net debt/EBITDA, this has to be qualified. It has quasi-utilities in its portfolio with long-term purchase contracts, especially in power and water.
Fig 25: Financial snapshot of our top infrastructure picks
WACC EVA Spread Net debt/EBITDA
Current 5-Y Avg Current 5-Y Avg Current 5-Y Avg
ADVANC 8.7% 11.4% 28.3% 31.1% 0.8 0.1
AOT 9.3% 10.8% 4.1% -4.4% -0.7 0.7
CK 5.3% 8.9% -3.8% -8.4% 21.6 35.7
Source: MKE-ISR
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Focus Charts
Power generation by fuel type (PDP 2015 plan) Airport of Thailand’s passenger capacity
Anticipated savings in logistics costs Ample domestic liquidity to finance projects over the next five years
* Assume 2.3% growth on excess liquidity based on 6Yr CAGR
** Gov't Borrow factors in budget
0
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2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Import Hydro Coal/Lignite RenewableGas Nuclear Others
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67 59 5958 54 50 47 48 48 47 51
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Suvarnabhumi Don MuangPhuket Chiang MaiHat Yai Chiang Rai
5Y CAGR (2015-2020): 11.4%
+104%
Million pax
7.5% 7.5% 7.6% 7.4% 7.3% 7.3% 7.2% 7.1% 7.0% 6.8% 6.6%
6.3% 5.9% 5.5% 5.5% 5.5% 5.5% 5.4% 5.2% 5.0% 4.8% 4.4%
1.4%1.3% 1.3% 1.3% 1.3% 1.3% 1.3% 1.2% 1.2% 1.1%
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2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E
Transportation Inventory holding Logistic administration
15.2% 14.7% 14.4%14.2% 14.1% 14.1% 13.9%13.5% 13.2% 12.7% 12.1%
-2%
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(THBb) (THBb)
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Thailand Infrastructure Facts & Forecasts Sector State in 2010 Current State 2020 Targets Expenditure
2015 2016 Forecasts (2016-2020) Power
Power development plan (PDP 2015) Total generation (GWh)
Total: 164,829
Gas: 72%
Coal: 18%
Renewables: 2%
Hydro & imports: 4%
Total: 192,189
Gas: 67%
Coal: 18%
Renewables: 5%
Hydro & imports: 8%
Total: 260,764 (year 2025)
Gas: 51%
Coal: 23%
Renewables: 18%
Hydro & imports: 8%
Total: New capacity over 2015-2036 = 57,459MW
Gas: +22,847 (THB800b, USD1m/MW)
Coal: +7,390 (THB181b, USD0.7m/MW)
Renewables: +12,105 (details below)
Hydro & imports: +13,117(mostly imports, so low capex)
Renewable plan (AEDP) (capacity in MW)
3,788 (2013)
Solar: 823
Wind: 223
Hydro:109
MSW: 47
Biogas: 265
Biomass: 2,321
7,963
Solar: 1,420
Wind: 234
Hydro:3,079
MSW: 132
Biogas: 373
Biomass: 2,727
19,684 (year 2036)
Solar: 6,000
Wind: 3,002
Hydro:3,282
MSW: 550
Biogas: 1,280
Biomass: 5,570
Total: +12,105 (c. THB750b, USD1.8m/MW)
Solar: +4,580(THB502b, USD3m/MW)
Wind: +2,768 (THB126b, USD1.3m/MW)
Hydro:+204(THB4b, USD0.6m/MW)
MSW: +418(THB15b, USD1m/MW)
Biogas: +907(THB32b, USD1m/MW)
Biomass: +2,843 (THB74b, USD0.75m/MW)
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Sector MKE View: Achievable Challenges Reasons & Response Opportunities
Power Power development plan (PDP 2015)
Implementing agency, EGAT, has financial capacity. Can execute 30% of new capacity 38% of new capacity will be for IPPs/SPPs 19% hydro-power imports mainly from Laos with some from Myanmar
Lack of decisiveness on fuel type a handicap Thailand’s gas reserves can last only 5-7 years. Coal is its next option but there is public resistance to coal-based plants in new locations LNG the next option but country cannot rely on PTT alone for terminal investments as returns are not promising. Grid capacity is main constraint for renewables
More public hearings on clean-coal technology Use LNG in gas power plants but government has to subsidise so that WACC exceeds IRR Government now allows third-party operators to operate LNG terminals Private sector more interested in renewables as capacity is small and investments bite-sized Less urgency for __ as current reserve margins are already high at 17% vs desired 15%. Low need for new capacity. 35-40% increases needed over next 10 years.
Private companies with WACC below 7.9% (PTT) can technically build LNG terminal. Government is supportive. A 5m-tonne terminal can support over 3,000MW power capacity, based on our estimates Existing LNG terminals are in Laem Chabang. Due for expansion (see Port Development section)
Renewables Will happen but some areas might face delays
Regulatory constraints as some projects, especially those classified as community solar projects, are undertaken by JVs. Projects have to go through another series of approval Grid constraints as some locations do not have adequate grids
EGAT, the monopoly operator of the power grid, now in charge of developing a smart grid for managing and smoothening out the load system and increasing the mix from renewables.
Contracts for smart grid more than likely to go to foreign companies as local EPCs do not have competency Private-sector interest in renewables is already high. Solar is crowded. Low-speed wind turbines are more suitable for Thailand’s slow wind velocity of 4.5km/hour. Listed renewable stocks are GUNKUL (also an EPC), DEMCO (also an EPC), EGCO, SPCG, EA, TSE, SUPER, CHOW, SOLAR, BCP, IFEC and RATCH.
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Thailand Infrastructure Facts & Forecasts Sector State in 2010 Current State 2020 Targets Expenditure
2015 2016 Forecasts (2016-2020) Transport Air Suvarnabhumi Phase 2:
Approved by Cabinet; two out of seven contracts already out for bidding; construction starts in Jun 2016 Don Muang Phase 3: Pending Cabinet approval DM Phase 2 just finished U-tapao airport : Allows 12 flights per day Major expansion for commercialisation pending approval from Cabinet and waiting for EIA
Suvarnabhumi Phase : Commercial operation by 2020 to raise capacity to 60m pax from 45m Don Muang Phase 3: AOT will build new Terminal 3. Will connect airport’s rail to the new Red Line mass transit under PPP; COD likely in 2019/2020 Completion expected in 2021. Capacity +12m pax, +310 flights/day U-tapao airport: Plans to construct bays and aviation bridges to accommodate more than 62,000 flights a year and 5m pax by 2020. A 15-year development plan
Suvarnabhumi Phase 2: THB52b: AOT (SOE) to invest Don Muang Phase 3: THB27.4b: AOT (SOE) to invest U-tapao airport : THB620m for current expansion (small) Tentative budget for repair and maintenance depot is THB15b No data for major terminal expansion
Land – Roads Interprovincial motorway to hook up with motorway to BKK and IE: 126km of motorway now link Eastern Seaboard, an industrial zone, to Bangkok
Interprovincial motorway to hook up with motorway to BKK and IE: Starts this year
Interprovincial motorway to hook up with motorway to BKK and IE: Another 354km linking 3 routes; within the East, north/north-eastern and West COD in 2019-20
Interprovincial motorway to hook up with motorway to BKK and IE: THB161b
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Sector MKE View: Achievable Challenges Reasons & Response Opportunities
Transport Air Suvarnabhumi Phase 2:
Highly likely to meet 2020 target. Don Muang: Phase 3Expect delays in approval U-tapao airport: t Small expansion should be completed this year Major expansion could take longer
Suvarnabhumi Phase 2: Potential construction delays Bigger airport might invite more noise-compensation claims; negotiations should be pro-active. Changes in government may delay projects. Don Muang: Terminal specifications not yet clear; neither is the budget U-tapao airport: Speed of government approval and limited sources of funds. As U-tapao is a navy base, there are several hurdles to clear before commercialisation of parts of it can happen
Suvarnabhumi Phase 2: Suvarnabhumi running at 120% capacity. With its tourism goals, government is very amenable to hasten airport expansion Rising LCC penetration may limit room to absorb ‘extra” traffic of Suvarnabhumi. Don Muang: Discussions intensifying Trying to raise efficiency of existing terminals; also trying to optimise traffic and ease constraints U-tapao airport: Navy insists on taking complete control of the airport, though it will seek assistance from AOT
Suvarnabhumi Phase 2: Expect Phase 3 to start right away as traffic is likely to ramp up quickly Ancillary services have to increase with capacity and aircraft. ASEAN’s air liberalisation set for 2016/17. Thailand aims to stake claim to ASEAN tourism hub In 2020, Suvarnabhumi’s passenger capacity could surpass HKIA’s at estimated 74m pax Don Muang: Rising LCC penetration in Thailand. LCCs raising capacity and aircraft by 12% and 10% annually Optimising traffic and reducing constraints U-tapao airport: Well-placed to cater to eastern tourism flows, helping ease constraints in Bangkok airports. Current users of the airport are AAV, China Southern Airlines and Bangkok Airways but at low frequencies Eastern region receives 13-15% of tourism flows and growing U-tapao could facilitate executive movements from Eastern Seaboard to Trat Special Economic Zone that borders Cambodia
Land – Roads Interprovincial motorway to be ultimately hooked up with BKK and IE: Put under PPP fast-tracking. Expect tenders out by 2H16
Interprovincial motorway to be ultimately hooked up with BKK and IE: Availability of contractors for north/north-eastern and west links because these traverse long distances and available contractors are small
Interprovincial motorway to be ultimately hooked up with BKK and IE: Negotiations with private sector under PPP need to be fine-tuned. Government may have to assume a bit more risk to make the project attractive
Interprovincial motorway to be ultimately hooked up with BKK and IE: THB161b funding for PPP fast track with negotiations in nine months Traffic gridlock starting to form in industrial zone in Chonburi/Rayong, especially towards the port Motorway can shorten travel between north-east, central and west and resort destinations Land transport is the most common mode of logistics at 96% of total or 185,883mt km. Also expensive at THB1.72/t km vs THB0.93 for trains.
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Thailand Infrastructure Facts & Forecasts Sector State in 2010 Current State 2020 Targets Expenditure
2015 2016 Forecasts (2016-2020) Rail Bangkok Mass Transit Three routes now operational One line will open this year,
Purple Line, an extension Two lines already approved Two pending approval: Red & Orange
To complete all five mass-transit lines with 136km by 2022
Total cost 131b THB245b funding for PPP, excluding newly completed Purple Line Two lines approved this year. THB106b will be under PPP fast track. Land-appropriation budget of THB12b from fiscal budget
Inter-city dual-tracking railway
Single-track rail, 1m gauge Now seeking PPP partners to start work on five routes
Expect implementation in 2016 THB145b, funding by PPP and fiscal budget
Hi-speed train to tourist destinations (Huahin & Rayong)
Private sector has expressed interest: CP Group and BTS Group
2020/2021 THB250b from private sector
TH-CN Hi-Speed Train (BKK/Nong Khai)
JV talks with Chinese partner failed. Thai government will pursue project on its own. Route has been shortened to 250km from 873km and budget reduced
Expect implementation in 2016 and COD in 2019
Fiscal budget reduced from THB530b to THB200b
TH-JP railway (Bangkok-Phitsanulok-Chiang Mai)
Needs approval from Cabinet and EIA
Expect implementation in 2016 THB449b
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Sector MKE View: Achievable Challenges Reasons & Response Opportunities
Rail Bangkok Mass Transit Expect delays by 3-5 years
Handover of sites typically slow Physical limitations, causing traffic congestions and gridlock Civil contractors have financial access but labour may be in shortage. Potentially problematic concession terms
Government just approved 2 new lines: Pink and Yellow. Expect terms of reference by 2H16. It has also allocated land-appropriation budget PPP can provide access to private-sector capital
Completed Purple Line could raise trips by another 147K/day from 260 in 2015 as distance doubles to 47km. Extension can benefit operator of Purple Line 1, listed BEM Plc Cut commuters’ travel time and transportation costs by est. 15%. Reduce car ownership Push urbanisation and economic production to outer ring of Bangkok in the northwest direction. New residential sites could open up and drive land values by as much as 25%, going by previous routes. Positive for branded residential developers with “limited” land banks such as LPN Development. Commercial complexes could also expand as new neighbourhoods are formed
Inter-city dual-track railway
Delays of no less than five years Finding PPP partners will be difficult because the economics is difficult to assess
No information available
Reduce traffic gridlock and lower logistics costs from 14.1% of GDP to 12.1% by 2020, saving THB260b per year.
Hi-speed train to tourist destinations (Huahin & Rayong)
Achievable if private sector’s interest is real
Negotiating benefits No information available Connecting resorts with Bangkok should stimulate tourism. 3% of foreigners now visit Huahin province and 13-15%, the east. All use bus transport.
TH-CN Hi-Speed train (BKK/Nong Khai)
Long delays Government will roll out project; physical resources limited No land-appropriation budget
Government intent on rolling out this project with fiscal budget; this will crowd out other government-funded projects
Project duplicates the dual-track SRT while travellers are increasingly serviced by LCCs
TH-JP railway (Bangkok-Phitsanulok-Chiang Mai)
Achievable but may also be delayed as undertaking is huge and greenfield
Design, environmental impact and cost-sharing still being discussed
Continued talks Significant opportunity as this is a new route that ends in Myanmar’s deep seaport in Dawei that opens up to the Indian Ocean. Dawei Development Area is a major initiative to create a huge industrial complex in Myanmar. Will be managed by an SPV owned by governments of Thailand, Myanmar and Japan. Listed Thai companies developing Phase 1 are ITD and ROJNA
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Thailand Infrastructure Facts & Forecasts Sector State in 2010 Current State 2020 Targets Expenditure
2015 2016 Forecasts (2016-2020) Ports Port development Two main projects approved
by Cabinet: port Terminal A and container terminal (Phase I)
Start in 2016 THB4b
Water Water system In 2011, not 2010, Thailand
reeled under worst floods in 50 years. Central plains inundated for 175 days
Intensifying drought risks will further disrupt agricultural output and manufacturing in the lower north and central regions, including Bangkok
To avoid repetition of devastating floods and intense drought as in 2006 Regulate water supply to ensure all users receive predictable supply
THB70.5b spent on ad-hoc solutions
THB900b on “urgent” water-management projects
Internet and telecommunication Internet Broadband penetration 14%
300,000m submarine cables connecting islands
Penetration rose to 31% in 2015
Increase broadband capacity to 2,000-3,000gbps from 500gbps with 53% penetration Drafting digital-economy policy Increase Internet users from 16m to 40m Provide wifi access to 30,000 rural households by 2017 Install additional submarine fibre-optic links Add data centres to Thailand’s current 14, 13 in Bangkok
Mostly private-sector initiatives under licensing scheme Expenditure from private sector not available National broadband project to connect 30K households will cost THB15b. To be rolled out by state-owned TOT and CAT No data available for submarine cables Very thin data on data centres planned by private sector. WHA announced plans to build 10 and ILINK, 2
Telecom Mobile penetration 108% Penetration rose to 140% in 2015. 4G auction completed, in which TRUE won 25MHz and ADVANC, 15MHZ. 4th winner, JAS, defaulted on payment. Need to re-auction 10MHz on 24 Jun 2016
Increase 4G penetration from below 10% Another spectrum auction in 2018 for 850MHz, 1800MHz and 2600MHz
THB148b, based on announced capex of ADVANC, DTAC and TRUE
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Sector MKE View: Achievable Challenges Reasons & Response Opportunities
Port Port development Able to implement on time Community resistance has been resolved Increased public relations to promote
understanding Laem Chabang Port is a major jumping-off point for auto, machinery parts, petroleum and petrochemical exports. In 2015, the port handled 6.6m TEUs Higher handling capacity calls for parallel expansion of ancillary facilities and terminal operators by private sector. Listed terminal operators for Eastern Seaboard are JWD and NYT
Water Water system Likely to take a long time to
start. Urgent budget has been instituted since 2012.
No fewer than 10 agencies have their say on management Unclear sources of funding: annual budgets, debt or PPP
EIA and HIA approval. Difficulties in financing, given high budget requirements
None. Government resorts to quick fixing of problems Private sector’s interest is limited to construction of dams
Engage private sector in water supply using the BTO model used by listed EASTW and TTW Secure water for industrial and agricultural proposes. Prevent and minimise flood/drought damages which normally produce financial losses of THB100b a year.
Internet and telecommunication Internet Submarine fibre-optic project
by private companies likely to start Digital economy may take some time
Delays in implementation due to unclear policy
Clearer policy; improvements in security of e-payment system
Increasing 4G penetration will promote use of Internet and Internet transactions Opportunities in e-commerce. e-commerce now valued at THB2.1t, 15% of nominal GDP Digital advertising expected to rise 25% to THB10b this year mainly via Facebook and Youtube
Telecom Adding subscribers will be challenging.
Fierce competition among operators Clearer policy from regulators; improvements in security of e-payment system
Need for data centres. Listed ILINK, LOXINFO, BJC and WHA (plan for 10 centres) are looking to expand Demand for smart warehouses to support e-commerce More applications and solutions
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Thailand Infrastructure Facts & Forecasts Sector State in 2010 Current State 2020 Targets Expenditure
2015 2016 Forecasts (2016-2020) Housing and urbanisation Housing Number of households at
21.7m Population at 63.9m People per household at 2.95 Housing inventory at 125,000 units
Number of households 24.7m Population 65.7m People per household 2.66 Housing inventory 160,000 units Property stimulus targeting low-income earners
Number of households to grow by 2.5% per year Population to grow by 1% per year Low-cost housing scheme to help low-income earners Target of 40,000 units this year with up to THB1m loan/unit facility Bring mortgage rejection rates below 20% from 25%
THB10b housing loans to low-income earners for homes not exceeding THB3m
THB70b: THB30b loans for developers of projects with units not exceeding THB1.5m each THB40b of 30-year housing loans for low-income earners seeking first homes at prices not exceeding THB1.5m
Urbanisation 2.38 persons/household in Bangkok Metropolis Condos = 54% of housing sold Average size of one-bedroom condos= 45sqm
2.13 persons/household in Bangkok Metropolis Condos = 60% of housing sold Average size of one-bedroom condos = 30sqm
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Sector MKE View: Achievable Challenges Reasons & Response Opportunities
Housing and urbanisation Housing Property market should grow
by 10% in 2016
High mortgage rates and low banking penetration Stringent bank lending
Lower interest rates Ease in credit quality
Banks should benefit Developers which focus on low-price housing
Urbanization Smaller households; more vertical living; smaller condos 2.0 persons/household in Bangkok Metropolis Condos = 62% of housing sold Average size of one-bedroom condo = 28sqm
Lack of public transportation Government to build more mass transit and rail
Services and development should target smaller households Services for ageing population, considering fast nuclearisation of the Thai household. Hospital operator VIBHA plans to build care centre for the aged
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1. Irrefutable need to speed more on infrastructure, urgently!
2. Public Private Partnership now a MUST, not a choice
3. Transport particularly under strain, so is power
4. Land acquisition & red tape are stumbling blocks
5. Top picks: KBC & CTD
VIETNAM INFRASTRUCTURE Lien Le [email protected] (84) 8 44 555 888 ext 8181
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VIETNAM INFRASTRUCTURE Still Below Potential Vietnam stood out in recent years for its stabilised macros and faster growth. Its long-term growth potential is even more convincing, as it prepares to add to and upgrade its infrastructure, which has lagged its socio-economic development. Challenges are, in our view, accessing new sources of funds, refining planning processes, responding to rapid urbanisation and developing stronger institutions to encourage private financing. The government has taken measures to improve the investment environment and incentivise foreign and private investors through more transparent and attractive public-private partnerships or PPPs. Although progress remains slow, we are hopeful that things will speed up under a new cabinet, which will be formed in 2Q16.
Transport, power, water and energy have better growth potential. For the time being, water supply and treatment not open to private participation. Much of it is still being regulated by municipal authorities. Investment opportunities in water mostly lie in loans provided to listed companies like CII VN and REE VN, which have water projects in southern Vietnam, or via owning their shares. Vietnam is still in need of more oil and gas as it has to import over two thirds of its refined oil and lacks gas for industrial and individual uses. But investments in oil and gas fields are likely to slow down in the foreseeable future, amid weak crude prices.
Most improved competitiveness index…
Source: World Economic Forum, the lower the score the better
…but still behind ASEAN-5 as infrastructure ranks only higher than the Philippines
Source: World Economic Forum, the lower the score the better
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Thailand Malaysia Indonesia Philippines Vietnam
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Thailand Malaysia Indonesia Philippines Vietnam2010-11 2011-12 2012-13 2013-14 2014-15 2015-16
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1. Irrefutable need to spend more, urgently!
Vietnam posted one of the highest and most stable growth rates in the region in recent years, notwithstanding runaway credit growth, inflation and non-performing loans in the banking system. Its GDP growth ranged from 5.35% to 8.48%, averaging 6.8% between 2001 and 2015, one of the highest in the world. FDI has also climbed, to a record high recently.
Urbanisation growth, at 3% each year, has added 1m to its urban centers, presenting planning and financing challenges. Vietnam’s infrastructure is woefully inadequate, to meet this rapid urbanisation and rising demand from FDI companies.
So far, Vietnam has relied heavily on its state budgets for development. However total investments increased at 12.1% on average during 2005-2015, at a lower pace of 18.4% by total fiscal spending - composed of investment and recurring expenditure. Investment over total fiscal spending dropped to only 18% in FY15, before returning to 21% in the 2016 fiscal year as Vietnam still faces a serious lack of infrastructure in transport, energy, power, water and telecom.
Fig 25: Insufficient investment spending on infrastructure
Source: MoF, *2013-15: estimated by MoF, not finalised at National Assembly meetings yet
2. Public Private Partnership now a MUST, not a choice
Estimates vary but general consensus points to USD200-300b of funds required for infrastructure development in 2016-2020 and at least similar quantums for 2020-2025. This is more than double the annual investments in the last decade.
Challenges have surfaced to force Vietnam to reconsider funding for its infrastructure investments:
• Its fiscal deficit has widened to over 5% again in the last five years, as spending increased faster than revenues. Vietnam has turned to higher public debt to fund these deficits. Although public debt is still below the 65% ceiling allowed by the National Assembly, its rapid increase – the bulk in general obligation bonds backed by tax payments rather than revenue bonds backed by infrastructure revenue streams - has heightened the country’s credit risk and borrowing costs.
Fig 26: Public debt has been rising to fund fiscal deficits
Source: SBV, MoF, IMF, WB
• Vietnam’s allocation of Official Development Assistance funds have dwindled. ODA is a cheaper source of funds which used to account for 30% of its infrastructure financing. Vietnam’s upgrade to “middle-
0%
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Fiscal spending - Investment growth (LHS)Fiscal spending - Current expenditure growth (LHS)Investment/total fiscal spending (RHS)
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income” status from low-income in 2013 hastened the decline. Its ODA entitlement will be completely removed by 2018. This adds to its urgency to find new sources of long-term financing.
The government admits that the state budget and other forms of development assistance may meet only 40-50% of its infrastructure budgetary needs in the next 10 years. The shortfall may, in part, be met by private investors, including foreign ones.
This implies that Public Private Partnership or PPPs are now a MUST, not an option. Past infrastructure projects had already adopted early forms of build-operate-transfer, build-transfer, build-transfer-operate, build-own-operate, build-lease-transfer, build-transfer-lease and operate-manage. What has been lacking are reforms in consumer pricing, enterprise restructuring and regulations to establish the credit-worthiness of infrastructure enterprises.
Decree 78 was issued in 2010, to allow for and facilitate 38 pilot infrastructure projects under PPPs. This was followed by Decree 15, which provides for more PPPs in infrastructure projects from 10 Apr 2015. Decree 15 aims to plug shortfalls in previous regulations. It allows for more investment types and widens the scope of projects to include telecom and technology. To supplement, a Public Investment Law, the first in Vietnam, was passed on 18 Jun 2014 to take effect on 1 Jan 2015. More recently, a revised Budget Law was also passed, effective from FY2017. These are attempts to improve the efficiency and transparency of planning and executing public/public-private investments and thereby, ease fiscal constraints.
Even then, various non-state infrastructure companies cite consumer pricing as a hurdle, rendering the returns of PPPs unappealing. As consumer-pricing reforms are likely to take longer, requiring the readiness of the masses to accept higher toll fees for better roads etc, the onus is on the state to provide clear and predictable rules for cost computation. These include timelines for and assistance with land clearance, pricing mechanisms and budget support. The new cabinet may have no choice but to accommodate the demands of private investors in its bid to sustain economic growth, retain FDIs and attract new ones rather than risk Vietnam losing out to Myanmar, Bangladesh, Pakistan etc.
3. Transport is particularly under strain; so is power
Of the USD200-300b of infrastructure spending needed in 2016-20, transport could take up 40%, 2.5x higher than in 2011-2015. Vietnamese still rely heavily on roads, predominantly local roads, and not so much on urban roads or highways. The country’s railway system is outdated, with no major improvements since 1970s. Inland waterways are popular, thanks to over 40,000 km of natural waterways, which have somewhat limited the development of large deep-sea ports. Air transport has only been used more in recent years, with the allowance of private low-cost airlines. Most local and national airports are fully utilised. Due to huge capital requirements, transport is more open to PPPs, mostly through BOT and BT. However, costly and time-consuming land clearance, bureaucracy and unattractive toll fees have been holding back private bidding for projects. With the Ministry of Transportation being the most efficient ministry in restructuring state-owned transport companies in the past three years, we expect transport to continue to lead the transformation in infrastructure PPP.
After transportation, power is the next sector where liberalisation has picked up in the last three years. PPPs have been rather popular in this sector, more so for small hydro-power plants due to lower rates of investment and simplified selling-price negotiations in power purchase agreements. However, due to more severe El Nino effects and the improper construction of dams which precipitated light earthquakes near the Song Tranh 2 power plant, power plants in the pipeline have been granted to investors with a larger capital base and proven technical capability & track records. Electricity demand in Vietnam has been growing by double digits in the last 10 years, averaging 11.2%. Supply is constrained by: 1) financial difficulties at state-owned enterprises such as Vinacomin and the Song Da Group; 2) a lack of gas supply due to delays in the Block B Omon pipeline; and 3) time-consuming, complex power-purchase-agreement negotiations and finalisation. To meet its shortfall, Vietnam has been importing from China. Its shortage could worsen in the next 2-3 years and more incentives would have to be dangled to accelerate investments in new plants.
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4. Land acquisition & red tape are stumbling blocks
Lengthy land clearance has long been the main stumbling block for most infrastructure projects in Vietnam. The acquisition, compensation and clearance of land for infrastructure projects are the responsibility of municipal governments, under the 2013 revised Land Law and Decree 37/2014. Implementation and progress, however, depend much on interpretation of the law by city/provincial authorities, as well as their capability. That said, investors and contractors have secured stronger legal backing over the years for the timely handover of land to implement their projects. Delays that affect the returns of their projects could result in monetary or other forms of compensation by the city/provincial authorities eg toll-fee concessions or longer fee-collection periods. But their negotiation and finalisation can be lengthy.
Three developments are expected to be game-changers. Firstly, fiscal constraints have reduced the ability of the local authorities to pay penalties for their late handover of land. In late 2014, the Hochiminh City People’s Council was notified that it had to pay up to USD100,000/day for delays in handing over land for the Ben Thanh – Suoi Tien metro project. Over in Hanoi, the Hanoi City People’s Council was sued for USD10m by Japanese contractors for late land handover for the Nhat Tan bridge project. Secondly, Decree 15/2015 on PPPs specifies the categories and criteria for bidding process of all infrastructure projects. This would leave out incapable “pre-assigned” contractors/investors as it had been popularly the case before. Local authorities would also need to improve and upgrade themselves to work with more sophisticated, highly demanding capable contractors/investors. Last but not least, there are stronger calls for ongoing reforms at ministerial and municipal levels and among state-owned enterprises to hold responsible individuals liable for poor performances regardless of rank and seniority. This may create an environment in which all stakeholders work towards cutting bureaucracy and shortening the procedures for land clearance.
5. Top picks
For exposure to infrastructure, we recommend: KBC VN (industrial-park developer), CTD VN (civil contractor) and HPG VN (steel maker).
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Focus Charts
State budget may meet 50-60% of infrastructure needs only Aims to reach ASEAN-4 standards for ease of doing business by 2016
Source: MoF, MoIP, World Bank, MKE Source: World Bank
Steady pick-up in FDI disbursements Most urgent shortages are in power sector
Source: GSO, MoIP Source: various, MKE, on-going construction is not sufficient to meet demand
-
20.0
40.0
60.0
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
E
2016
F
2017
F
2018
F
2019
F
2020
F
Infrastructure development,USDb - by State funding
Infrastructure development,USDb - Total requirements byMoIPInfrastructure development,USDb - MKE forecasts
to be filled up by private investors
Starting a businessDealing with
construction permits
Getting electricity
Registering property
Getting credit
Protecting minorityinvestors
Paying taxes
Trading across borders
Enforcing contracts
Resolving insolvency
Vietnam Asean - 4, average
2,500 2,540 2,500 2,700
2,850 3,050
3,500
0
1,000
2,000
3,000
4,000
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16
USDm
0
50
100
150
200
250
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
E
2016
E
2017
E
2018
E
2019
E
2020
E
Generation(b kwh)Actual demand incl. wastage during transmission(b kwh)
UNMASKING ASIA 112
Vietnam Infrastructure Facts & Forecasts Sector State in 2010 Current State 2020 Targets
Expenditure 2015 2016 Forecasts (2016-2020)
Power Total designed capacity: 20,000MW Total production: 90b kwh/year Power generation by type: hydro (46%), thermal-coal (15%), thermal-gas (34%), others (5%) (DO/FO & diesel) Direct investments or via subsidiaries of state-owned corporations: EVN, PVN, Song Da Group
Total designed capacity: 35,000MW Total production in 2015: 159b kwh/year, +11.23% YoY Average growth in 2011-15: 10.37%/year Power generation by type: hydro (42%), thermal-coal (34%), thermal-gas (19%), others (5%) (DO/FO & diesel) EVN, PVN & Song Da still the major investors. More private investors in Phu My, Hiep Phuoc, Mong Duong 2, Vinh Tan 1 thermal power plants and other small hydro-power projects (5% of capacity)
Total designed capacity: 60,000MW Total production needed: 265-278b kwh/year Total production needed: 352-379b kwh by 2025 or 80,000 MW; 506-559b kwh by 2030 or 140,000MW Power generation by type: hydro (34%), thermal-coal (43%), thermal-gas (13%), others (9%) (DO/FO & diesel & renewables) Foreign and/or private investors other than EVN, PVN and Song Da are expected to account for 30-40% of total production capacity
Not disclosed. For 5,000MW capacity added in 2015, average construction period was 3 years for thermal-power and 5-7 years for large hydro-power plants. MKE estimates for 2015: USD2-3b of USD5b has been disbursed so far.
For every 5,000 MW addition each year, USD5-6b is required. Disbursements in 1H16 likely will slow down, in anticipation of new Cabinet in 2Q. Investments likely to resume only from 2H16 VII master plan just signed on 18 Mar 2016, confirming which projects are approved, aka to be implemented during 2016-30
Adjusted VII master plan provides for USD7.9b/year in 2016-20. MKE estimates USD5-6b pa Adjusted VII master plan provides for USD10.8b/year in 2020-30. MKE estimates USD5-6b pa Our assumptions are more conservative due to: 1) caution over reliability of hydro power; 2) pollution caused by coal-fired plants; 3) uncertainties over timeline for new gas supply from Block B Omon; and 4) concerns over ability to ensure security of nuclear power
Coal, oil, Fossil Fuels, Thermal
DO/FO & diesel-fired power plants accounted for only 5% of total capacity Coal-fired plants consumed 9.4m tonnes or 21% of total produced Investors mostly state-owned EVN, PVN
DO/FO & diesel-fired plants are insignificant (<5%) Existing gas-fired plants consumed 9b cu m in FY15 or 90% of total production Investors still state-owned EVN, PVN. Sector has started to appeal to private investors who participate more through JVs with EVN or PVN in Hiep Phuoc, Phu My, Vinh Tan 1, Mong Duong 2
Dry gas supply may grow 40% by 2020 once Block B Omon is completed. Ground-breaking in early Apr 2016. Output mostly for power plants in the pipeline in the south. 80m tonnes of coal needed for 25,800MW coal-fired plants in 2020 pa, double current production. More imports may be unavoidable. Mixed group of investors. More foreigners in the pipeline, mostly in JVs with EVN/PVN/Lilama: Van Phong by Sumitomo and Hanoinco; Vung Ang 2 by One Energy & Lilama. Standalone foreign investors: Nam Dinh 1 by Tai Kwang; Dung Quat by SembCorp; Long Phu 2 by Tata Power.
Coal-fired plants’ capex not disclosed, est. USD1.5-2b Gas-fired plants’ capex not disclosed. Should be insignificant as there is no gas supply yet, from the delayed Block B 20Omon project
Coal-fired plants’ capex not disclosed, est. same as in FY15 or USD1.5-2b Gas-fired plants’ capex not disclosed likely to be negligible due to delays in Block B Omon
Gas-related capex unlikely significant due to Block B Omon’s delays
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Sector MKE View: Achievable Challenges Reasons & Response Opportunities
Power Vietnam historically falls short in construction of power plants due to bureaucratic red tape and lack of gas for gas plants and environmental- pollution concerns for coal plants. Total spending this year estimated at USD2-3b, FY15F levels. 2016-2017 electricity shortage could be acute. No choice but to accelerate investments, especially by private investors.
Master plan for new plants spells out type of plants, capacity and investors. New investors normally have to "buy" the project(s) or team up with existing approved investors. Approved plants may take years to finalise power purchase agreements with EVN. Compounded by time-consuming land clearance. Maximum 12% IRR for power projects in power purchase agreements signed with EVN. May not be attractive in local currency. Many companies have suffered from sizeable FX losses for borrowings in foreign currencies.
Substantially clearer guidance on power purchase agreements between power plants and EVN. 5% of electricity now sold in open market vs fixed volume and prices under purchase agreements with EVN. Listed companies such as NT2, PPC, VSH said to be more efficient, selling 10-20% of electricity generated in open market. Adjusted master power plan VII (to 2030) has more realistic adjustments/assumptions for growth and type of power generation. Government may liberalise generation and distribution, reduce monopoly in distribution of electricity and lower wastage during transmission, estimated at 10-11%.
Investors positive on double-digit growth in demand for electricity. All approved power plants until 2030 have identified investors. FDIs in manufacturing – at two-thirds of total FDIs - could be further improved once access to electricity improves.
Coal, oil, Fossil Fuels, Thermal
Gas-related investments have to continue as capex requirements are huge for LNG imports for gas-fired plants, especially in the south. Actual disbursements for Block B Omon may be slow in 2016 but may need to be accelerated from next year as gas feedstock is needed for major plants in the south
Coal-fired plants want to import coal themselves while government prefers state-owned Vinacomin to import then re-sell to these plants. Vinacomin and its subsidiaries are main producers and previously main exporters of coal
Shortage of electricity implies urgent need for new gas supply. 2/3 of refined oil still imported. Urgent need to construct new oil refineries Most gas-fired power plants are bankable. Obstacle is supply of materials: who will import the coal, where will gas come from for new projects?
Thermal power will likely grow the fastest, as electricity demand is expected to surge while hydro power seems to have so many constraints. After the signing of master plan VII on 18 Mar 2016, expect clearer guidance from the government
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Vietnam Infrastructure Facts & Forecasts Sector State in 2010 Current State 2020 Targets Expenditure
2015 2016 Forecasts (2016-2020) Nuclear Experimental, not yet commercialised
Hydro 46% of total electricity supply. Investors mostly state (EVN, Song Da), private investors. Mostly small hydro-power plants of 20-30MW
42% of total installed capacity. Recently added large hydro power plants: Son La 2,400MW, largest in SEA. Investor is EVN Ongoing construction of Lai Chau 1,200MW. Investment is USD1.8-2.0b, also by EVN Investors mostly state (EVN, Song Da), private investors. Mostly small hydro power plants of 20-30MW
To increase to 20.2K MW by 2020 from 16.3k MW in 2015. Less favoured due to weather conditions, soil impact and lack of financial resources for large plants EVN invested in about 50%, remainder by independent power producers (IPPs)
Not disclosed, estimated at USD0.5-1b
Not disclosed, estimated the same as in FY15 or USD0.5-1.0b
Not disclosed, estimated at USD0.5-1b
Other Renewables Minor Wind-power: private investors
Minor 3% by 2020 4% by 2025 and 8% by 2030
n/a n/a n/a
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Sector MKE View: Achievable Challenges Reasons & Response Opportunities
Nuclear 1st nuclear power plants approved but feasibility study is on hold because of safety and security considerations
Safety & security concerns after Fukushima incident
Status unclear Government seems keen on nuclear energy given environmental issues for coal-fired plants & lack of gas supply for gas-fired plants.
Hydro Likely can add 4,000MW or 25% capacity in 2016-20 as hydro is technically more feasible. Vietnam has been ahead in constructing the largest hydro power plants in SEA. Investment rate is mostly comparable with coal-fired plants: USD1.2-1.5m/MW
As with other types of power plants, negotiations for power purchase agreements are lengthy, especially for above 30MW plants. Deters investors and bankers
Clearer guidance on PPA. Faster liberalisation of power sector
About 50% of new capacity in the pipeline will be built by private investors, mostly unlisted. Opportunities more on financing side for bankers.
Other Renewables Few wind power plants
High investment rate. But Cong Ly wind power plant with 99.2 MW capacity costs USD250m or USD2.5m/MW, 2x more than hydro or thermal power plants. Power purchase agreement with EVN also said to be not attractive enough
Not clear Not clear
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Vietnam Infrastructure Facts & Forecasts Sector State in 2010 Current State 2020 Targets Expenditure
2015 2016 Forecasts (2016-2020) Transport
Air (incl ports) Fewer than 45m passengers/year
69.4m/year 91m/ year or +32% from current levels
Aircraft purchases: VND21,208b or USD0.95b for 7 units by Vietnam Airlines, listed in 2014. Jetstar is 66.9% owned by Vietnam Airlines. Exact number for Vietjet Air not available.
No details Vietnam Airlines reportedly buying 35 planes for VND100,000b or USD4.4b Vietjet Air signed a USD9.1b contract with Airbus in Feb 2014 to buy 62 units, with rights to buy 30 and lease 8. In Nov 2015, it signed another contract worth USD3.6b for 30 Airbus plans: A321 neo & A321 ceo Long Thanh new international airport costs USD16b till 2025
Land - Roads Inadequate due to lack of efficient investments Investors: not applicable
Limited highways Ongoing metro lines: 2 first lines in Hanoi (Nhổn – Hanoi station, Cát Linh – Hà Đông, USD2.2b investments), first line in Hochiminh (Bến Thành – Suối TIên, USD2.5b) Investors in Hochiminh: JV between Sumitomo and Cienco 6, listed in Dec 2015. Investors in Hanoi: Official Development Assistance from Chinese government
3 metro lines in Hanoi and Hochiminh scheduled for completion in 2019-20 More state investments, funded by Official Development Assistance
Not available Not available Metro: USD4.7b for 3 ongoing metro lines in Hanoi & Hochiminh 2020-30: at least USD8.3b for lines 2 and 5 in Hochiminh. No estimates for remaining 4 lines in Hanoi, but should be at least USD5-6b Investors: Official Development Assistance, Public-Private Partnership
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Sector MKE View: Achievable Challenges Reasons & Response Opportunities
Transport Air (incl ports) IPOs of airports & airliners
IPO of Vietjet Air in 2Q16 is expected to raise USD800m Capacity improvements should be intensive for large city/provincial airports. Funding secured for new international Long Thanh Airport Phase 1. Construction likely to commence in 2018 after land clearance.
Lack of transparency and still-poor customer service by airlines and airport operators. Long Thanh Airport could face strong competition from airports in Singapore, Bangkok, Kuala Lumpur and Hong Kong
Aviation infrastructure highly under-developed Although lagging, Vietnam is arguably the best located in SEA since Hochiminh is closest to most Asian cities Huge demand for low-cost airlines domestically and regionally. Vietjet Air has started to fly longer haul, to Singapore, Thailand, Taiwan etc.
Airliners' fleet expansion, new airports, airport upgrading/expansion
Land - Roads Started 2 metro lines in Hanoi out of 6 planned. 1 metro line in Hochiminh out of 6 planned. Scheduled for completion in 2019-20
Hochiminh’s first metro line is on time for 2020 but Hanoi’s is likely to be delayed by slow and costly land clearance. Cat Linh – Ha Dong line’s investment has jumped to nearly USD900m from previous forecast of USD552m. This may not be the end. Hochiminh’s first Ben Thanh – Suoi Tien line may also cost 2.5x more, at USD2.5b, up from USD1.1b estimated in 2007
The 2 biggest cities with high population densities have under-developed their public transport for years. Metro appears to be the most efficient for most passengers. Despite close scrutiny by city authorities and the media to ensure progress, Hanoi’s project progress has been slow
Although open to PPPs, more likely to be undertaken by the state, which will rely more on commercial loans
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Vietnam Infrastructure Facts & Forecasts Sector State in 2010 Current State 2020 Targets Expenditure
2015 2016 Forecasts (2016-2020) Transport – cont’d
Land - Rail No statistics available. Railway system mostly outdated. Not a popular mode of transport. Rail use limited to small amount of cargoes, as most goods are still moved by trucks
Old railway system. Limited capacity and speed improvements. High-speed trains only compatible with a completely new rail system. Congress did not approve replacement of north-south railway with USD56b++ investment or more than 25% of GDP. Instead, approved shorter Hanoi – Vinh, Hochiminh – Nha Trang routes, each estimated to cost USD10b. Under feasibility study. To be proposed to the National Assembly for approval before 2020 In Nov-Dec 2015, 24 subsidiaries of Vietnam Railway Corporation were privatised. Operational improvements after IPOs. No major capex. Capex funded by parent holdings or through PPPs
Hochiminh – Nha Trang & Hanoi – Vinh high-speed railways are under feasibility study. Each about USD10b. To be proposed for National Assembly approval before 2020
N/A N/A New railways (Hochiminh – Nha Trang & Hanoi – Vinh) are still under feasibility study. USD2.3b under BOT & Official Development Assistance for upgrade of Hanoi – Hochiminh railway, aka north-south railway
Sea (incl ports) 259m tonnes/year Investors: more local, private
427m tonnes/year Investors: more local, private. Earlier foreign investors in logistics, transport & ports hit by 2008 financial crisis
640m tonnes/year, mostly through 2 new deep-sea ports: in Haiphong, North and Cai Mep – Thi Vai, South Attracting more foreign investors due to large investments required for deep-sea ports
NA NA USD3-4b for the 2 new deep seaports
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Sector MKE View: Achievable Challenges Reasons & Response Opportunities
Transport – cont’d Land - Rail Still under feasibility study Funding of USD10b each needed for Hanoi –
Vinh and Hochiminh – Nha Trang new railways. Modern technology needed for these high-speed trains
Still under feasibility study Not clear
Sea (incl ports) Most new capacity came from upgrades & expansion.
Development of new deep-sea ports delayed by large funding requirements and lower-than-expected throughput due to slowdown in global trade.
Major projects may be resumed in 2016-17 as existing ports are fully deployed. Little left other than going further deep-sea.
Improvements by provinces/cities to connect ports with industrial parks & residentials.
Huge investments for deep-sea ports, each costing millions of USD Connectivity between ports and main roads
To meet rising demand from higher trade following FTAs in the years to come Accelerate land clearance for investments and improve connectivity with main roads
Funding port development
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Vietnam Infrastructure Facts & Forecasts Sector State in 2010 Current State 2020 Targets Expenditure
2015 2016 Forecasts (2016-2020) Communication
Telecom Fixed telephone coverage: 16% of population Mobile phone subscriptions: 125% of population Investors mostly state-owned companies for infrastructure/backbone development
Fixed telephone coverage declined to 6% due to transition Mobile phone subscriptions: 147% Investors mostly state-owned companies for infrastructure/backbone development
Fixed telephone coverage: 20-25% Nationwide telecom revenue: USD15-17b or 6-7% GDP No clear guidance on opening of sector to more investors, although government did agree to sell its 50.2% stake in FPT Telecom in 2015. This signalled greater willingness to reduce regulation/control
Total IT spending in 2015F: VND110,000b IT spending split between government & private sector. No official statistics but government said to have spent more as private sector is not willing to spend much on IT Investors in telecom infrastructure still mostly state-owned telcos such as Viettel, Mobifone, Vinaphone
Total IT spending in 2016F: VND121,000b Investors in telecom infrastructure still mostly state-owned telcos such as Viettel, Mobifone, Vinaphone. From 2016, all telcos are required to contribute 1.5% of revenue to public telco fund
5% CAGR Unclear but likely more investments by private sector eg FPT VN via FPT Telecom
Internet/ digitalization
Fixed broadband coverage: 4% Internet penetration: 31%
Fixed broadband coverage: 6% Internet penetration: 48% (2014 data)
Fixed broadband coverage: 15-20% Mobile broadband coverage: 35-40% Internet penetration: 55-60%
N.A. N.A. N.A.
Water Still very much regulated by municipal authorities. Statistics very scarce and inconsistent Investors mostly assigned city-owned water companies
Less but still much regulated by municipal authorities. Huge water wastage, officially 25% but unofficially 40%. Difference is mostly due to absence of central database. Data collected & compiled by individual companies Investors mostly assigned city-owned water companies, which then turn to partnerships with private investors. They retain controlling interest of half to two thirds of stakes
Operating structures as per 2015.
N.A. N.A. USD3.3b for water supply & treatment in cities only. Money from Ministry of Construction, Ministry of Resources & Environment and Finnish government, a long-time donor to water projects in Vietnam
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Sector MKE View: Achievable Challenges Reasons & Response Opportunities
Communication
Telecom 2016 could still be a slow year for telecom infrastructure spending. Ministry of Information and Communications spending increased only 5.5% in 2015, 10% below plan. 5% CAGR in total spending over 2016-20
Fixed lines may be in permanent decline Still much regulated IPO of Mobifone, 2nd largest and 2nd most profitable telco, scheduled for 2H16. No details yet
Not clear Indirect opportunities via listed company FPT VN, which owns 45% of FPT Telecom. FPT wants to purchase a 50.2% stake in FPT telecom when the state divests. Divestment approved in 2H15. Awaiting more information on Mobifone IPO (2015 revenues USD1.4b, earnings USD330m)
Internet/ digitalisation
4G is next big thing this year 10% CAGR in total spending over 2016-20
Broadband Internet fixed-line subscriptions may fall behind government target, if not budgeted properly and invested on time 4G launched in Hochiminh, Vung Tau and Phu Quoc in Jan 2016. 3G not popular due to perceived slow speeds. Wifi more frequently used as widely free in cities
Vietnam aims to modernise IT infrastructure with tax incentives as it considers this a "high tech" sector. However, as with telecom, Internet infrastructure spending seems behind its potential as the spending is by state-owned enterprises, Mobifone, Vinaphone, Viettel
Broadband Internet fixed lines, digital services
Water City/province-owned companies are granted projects. They then sell stakes to investors for funding but normally retain 51% to 2/3 of the shares.
Water has to be sold to provincial water companies for final distribution Poor water supply/distribution, mostly by state-owned enterprises, leads to abnormally high wastage Very low transparency
Liberalisation still slow Water is still subsidised, even though subsidies have stopped for petroleum and power
Mostly funding opportunities for projects. Direct investment opportunities still limited.
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Vietnam Infrastructure Facts & Forecasts Sector State in 2010 Current State 2020 Targets Expenditure
2015 2016 Forecasts (2016-2020) Housing Housing numbers scarce Housing numbers still scarce n/a n/a n/a n/a Urbanisation 17.5 sqm of residential floor
per head Investors mostly private-sector listed developers
21.5 sqm of residential floor per head Investors mostly private-sector listed developers
25 sqm of residential floor per head Investors mostly private-sector listed developers Likely achievable due to more stable interest rates
VND1,000,000b in gross construction output
10% growth 10% CAGR
UNMASKING ASIA 123
Sector MKE View: Achievable Challenges Reasons & Response Opportunities
Housing Urbanisation Social housing driven by private
sector, with tax incentives from government. Previously by state-owned developers with bad reputations for housing quality. Guidance is often provided for social/affordable housing to promote accommodation for mass market eg minimum 20% area has to set aside for social housing for plots that are bigger than 10 ha
Social housing, while aggressively led by private sector, might still be "undersupplied" in next 5-10 years, if government does not encourage more supply
Access to land and a confusing land-title registry system are major impediments to increasing social-housing stock
Affordable social housing with higher quality, led by private developers, should be where the greatest opportunities lie. Backed by mass demand and affordability
UNMASKING ASIA 124
REGIONAL
Sadiq CURRIMBHOY Regional Head, Research & Economics (65) 6231 5836 [email protected]
WONG Chew Hann, CA Regional Head of Institutional Research (603) 2297 8686 [email protected]
ONG Seng Yeow Regional Head of Retail Research (65) 6231 5839 [email protected]
TAN Sin Mui Director of Research (65) 6231 5849 [email protected]
ECONOMICS
Suhaimi ILIAS Chief Economist Singapore | Malaysia (603) 2297 8682 [email protected]
Luz LORENZO Philippines (63) 2 849 8836 [email protected]
Tim LEELAHAPHAN Thailand (66) 2658 6300 ext 1420 [email protected]
JUNIMAN Chief Economist, BII Indonesia (62) 21 29228888 ext 29682 [email protected]
STRATEGY
Sadiq CURRIMBHOY Global Strategist (65) 6231 5836 [email protected]
Willie CHAN Hong Kong / Regional (852) 2268 0631 [email protected]
MALAYSIA
WONG Chew Hann, CA Head of Research (603) 2297 8686 [email protected] • Strategy
Desmond CH’NG, ACA (603) 2297 8680 [email protected] • Banking & Finance
LIAW Thong Jung (603) 2297 8688 [email protected] • Oil & Gas Services- Regional
ONG Chee Ting, CA (603) 2297 8678 [email protected] • Plantations – Regional
Mohshin AZIZ (603) 2297 8692 [email protected] • Aviation - Regional • Petrochem
YIN Shao Yang, CPA (603) 2297 8916 [email protected] • Gaming – Regional • Media
TAN Chi Wei, CFA (603) 2297 8690 [email protected] • Power • Telcos
WONG Wei Sum, CFA (603) 2297 8679 [email protected] • Property
LEE Yen Ling (603) 2297 8691 [email protected] • Building Materials • Glove • Ports • Shipping
CHAI Li Shin, CFA (603) 2297 8684 [email protected] • Plantation • Construction & Infrastructure
Ivan YAP (603) 2297 8612 [email protected] • Automotive • Semiconductor • Technology
Kevin WONG (603) 2082 6824 [email protected] • REITs • Consumer Discretionary
LIEW Wei Han (603) 2297 8676 [email protected] • Consumer Staples
LEE Cheng Hooi Regional Chartist (603) 2297 8694 [email protected]
Tee Sze Chiah Head of Retail Research (603) 2297 6858 [email protected]
Cheah Chong Ling (603) 2297 8767 [email protected]
HONG KONG / CHINA
Howard WONG Head of Research (852) 2268 0648 [email protected] • Oil & Gas - Regional
Benjamin HO (852) 2268 0632 [email protected] • Consumer & Auto Jacqueline KO, CFA (852) 2268 0633 [email protected] • Consumer Staples & Durables
Ka Leong LO, CFA (852) 2268 0630 [email protected] • Consumer Discretionary & Auto
Mitchell KIM (852) 2268 0634 [email protected] • Internet & Telcos
Ning MA (852) 2268 0672 [email protected] • Insurance
Stefan CHANG, CFA (852) 2268 0675 [email protected] • Technology
Warren LAU (852) 2268 0644 [email protected] • Technology – Regional
INDIA
Jigar SHAH Head of Research (91) 22 6623 2632 [email protected] • Oil & Gas • Automobile • Cement
Anubhav GUPTA (91) 22 6623 2605 [email protected] • Metal & Mining • Capital Goods • Property
Vishal MODI (91) 22 6623 2607 [email protected] • Banking & Financials
Abhijeet KUNDU (91) 22 6623 2628 [email protected] • Consumer
Neerav DALAL (91) 22 6623 2606 [email protected] • Software Technology • Telcos
SINGAPORE
Gregory YAP (65) 6231 5848 [email protected] • SMID Caps • Technology & Manufacturing • Telcos
YEAK Chee Keong, CFA (65) 6231 5842 [email protected] • Offshore & Marine
Derrick HENG, CFA (65) 6231 5843 [email protected] • Transport • Property • REITs (Office)
Joshua TAN (65) 6231 5850 [email protected] • REITs (Retail, Industrial)
John CHEONG, CFA (65) 6231 5845 [email protected] • Small & Mid Caps • Healthcare
Ng Li Hiang (65) 6231 5840 [email protected] • Banks
INDONESIA
Isnaputra ISKANDAR Head of Research (62) 21 8066 8680 [email protected] • Strategy • Metals & Mining • Cement
Rahmi MARINA (62) 21 8066 8689 [email protected] • Banking & Finance
Aurellia SETIABUDI (62) 21 8066 8691 [email protected] • Property
Pandu ANUGRAH (62) 21 8066 8688 [email protected] • Infra • Construction • Transport• Telcos
Janni ASMAN (62) 21 8066 8687 [email protected] • Cigarette • Healthcare • Retail
Adhi TASMIN (62) 21 8066 8694 [email protected] • Plantations
Anthony LUKMAWIJAYA (62) 21 8066 8690 [email protected] • Aviation
PHILIPPINES
Luz LORENZO Head of Research (63) 2 849 8836 [email protected] • Strategy • Utilities • Conglomerates • Telcos
Lovell SARREAL (63) 2 849 8841 [email protected] • Consumer • Media • Cement
Rommel RODRIGO (63) 2 849 8839 [email protected] • Conglomerates • Property • Gaming • Ports/ Logistics
Katherine TAN (63) 2 849 8843 [email protected] • Banks • Construction
Michael BENGSON (63) 2 849 8840 [email protected] • Conglomerates
Jaclyn JIMENEZ (63) 2 849 8842 [email protected] • Consumer
Arabelle MAGHIRANG (63) 2 849 8838 [email protected] • Banks
THAILAND
Maria LAPIZ Head of Institutional Research Dir (66) 2257 0250 | (66) 2658 6300 ext 1399 [email protected] • Consumer • Materials • Ind. Estates
Sittichai DUANGRATTANACHAYA (66) 2658 6300 ext 1393 [email protected] • Services Sector • Transport
Yupapan POLPORNPRASERT (66) 2658 6300 ext 1394 [email protected] • Oil & Gas
Tanawat RUENBANTERNG (66) 2658 6300 ext 1395 [email protected] • Banks & Diversified Financials
Sukit UDOMSIRIKUL Head of Retail Research (66) 2658 6300 ext 5090 [email protected]
Mayuree CHOWVIKRAN (66) 2658 6300 ext 1440 [email protected] • Strategy
Padon VANNARAT (66) 2658 6300 ext 1450 [email protected] • Strategy
Surachai PRAMUALCHAROENKIT (66) 2658 6300 ext 1470 [email protected] • Auto • Conmat • Contractor • Steel
Suttatip PEERASUB (66) 2658 6300 ext 1430 [email protected] • Media • Commerce
Sutthichai KUMWORACHAI (66) 2658 6300 ext 1400 [email protected] • Energy • Petrochem
Termporn TANTIVIVAT (66) 2658 6300 ext 1520 [email protected] • Property
Jaroonpan WATTANAWONG (66) 2658 6300 ext 1404 [email protected] • Transportation • Small cap
VIETNAM
LE Hong Lien, ACCA Head of Institutional Research (84) 8 44 555 888 x 8181 [email protected] • Strategy • Consumer • Diversified • Utilities
THAI Quang Trung, CFA, Deputy Manager, Institutional Research (84) 8 44 555 888 x 8180 [email protected] • Real Estate • Construction • Materials
Le Nguyen Nhat Chuyen (84) 8 44 555 888 x 8082 [email protected] • Oil & Gas
NGUYEN Thi Ngan Tuyen, Head of Retail Research (84) 8 44 555 888 x 8081 [email protected] • Food & Beverage • Oil&Gas • Banking
TRINH Thi Ngoc Diep (84) 4 44 555 888 x 8208 [email protected] • Technology • Utilities • Construction
PHAM Nhat Bich (84) 8 44 555 888 x 8083 [email protected] • Consumer • Manufacturing • Fishery
NGUYEN Thi Sony Tra Mi (84) 8 44 555 888 x 8084 [email protected] • Port operation • Pharmaceutical • Food & Beverage
TRUONG Quang Binh (84) 4 44 555 888 x 8087 [email protected] • Rubber plantation • Tyres and Tubes • Oil&Gas
Regional Offices
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APPENDIX I: TERMS FOR PROVISION OF REPORT, DISCLAIMERS AND DISCLOSURES DISCLAIMERS
This research report is prepared for general circulation and for information purposes only and under no circumstances should it be considered or intended as an offer to sell or a solicitation of an offer to buy the securities referred to herein. Investors should note that values of such securities, if any, may fluctuate and that each security’s price or value may rise or fall. Opinions or recommendations contained herein are in form of technical ratings and fundamental ratings. Technical ratings may differ from fundamental ratings as technical valuations apply different methodologies and are purely based on price and volume-related information extracted from the relevant jurisdiction’s stock exchange in the equity analysis. Accordingly, investors’ returns may be less than the original sum invested. Past performance is not necessarily a guide to future performance. This report is not intended to provide personal investment advice and does not take into account the specific investment objectives, the financial situation and the particular needs of persons who may receive or read this report. Investors should therefore seek financial, legal and other advice regarding the appropriateness of investing in any securities or the investment strategies discussed or recommended in this report. The information contained herein has been obtained from sources believed to be reliable but such sources have not been independently verified by Maybank Investment Bank Berhad, its subsidiary and affiliates (collectively, “MKE”) and consequently no representation is made as to the accuracy or completeness of this report by MKE and it should not be relied upon as such. Accordingly, MKE and its officers, directors, associates, connected parties and/or employees (collectively, “Representatives”) shall not be liable for any direct, indirect or consequential losses or damages that may arise from the use or reliance of this report. Any information, opinions or recommendations contained herein are subject to change at any time, without prior notice. This report may contain forward looking statements which are often but not always identified by the use of words such as “anticipate”, “believe”, “estimate”, “intend”, “plan”, “expect”, “forecast”, “predict” and “project” and statements that an event or result “may”, “will”, “can”, “should”, “could” or “might” occur or be achieved and other similar expressions. Such forward looking statements are based on assumptions made and information currently available to us and are subject to certain risks and uncertainties that could cause the actual results to differ materially from those expressed in any forward looking statements. Readers are cautioned not to place undue relevance on these forward-looking statements. MKE expressly disclaims any obligation to update or revise any such forward looking statements to reflect new information, events or circumstances after the date of this publication or to reflect the occurrence of unanticipated events. MKE and its officers, directors and employees, including persons involved in the preparation or issuance of this report, may, to the extent permitted by law, from time to time participate or invest in financing transactions with the issuer(s) of the securities mentioned in this report, perform services for or solicit business from such issuers, and/or have a position or holding, or other material interest, or effect transactions, in such securities or options thereon, or other investments related thereto. In addition, it may make markets in the securities mentioned in the material presented in this report. MKE may, to the extent permitted by law, act upon or use the information presented herein, or the research or analysis on which they are based, before the material is published. One or more directors, officers and/or employees
of MKE may be a director of the issuers of the securities mentioned in this report. This report is prepared for the use of MKE’s clients and may not be reproduced, altered in any way, transmitted to, copied or distributed to any other party in whole or in part in any form or manner without the prior express written consent of MKE and MKE and its Representatives accepts no liability whatsoever for the actions of third parties in this respect. This report is not directed to or intended for distribution to or use by any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. This report is for distribution only under such circumstances as may be permitted by applicable law. The securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. Without prejudice to the foregoing, the reader is to note that additional disclaimers, warnings or qualifications may apply based on geographical location of the person or entity receiving this report.
Malaysia
Opinions or recommendations contained herein are in the form of technical ratings and fundamental ratings. Technical ratings may differ from fundamental ratings as technical valuations apply different methodologies and are purely based on price and volume-related information extracted from Bursa Malaysia Securities Berhad in the equity analysis.
Singapore
This report has been produced as of the date hereof and the information herein may be subject to change. Maybank Kim Eng Research Pte. Ltd. (“Maybank KERPL”) in Singapore has no obligation to update such information for any recipient. For distribution in Singapore, recipients of this report are to contact Maybank KERPL in Singapore in respect of any matters arising from, or in connection with, this report. If the recipient of this report is not an accredited investor, expert investor or institutional investor (as defined under Section 4A of the Singapore Securities and Futures Act), Maybank KERPL shall be legally liable for the contents of this report, with such liability being limited to the extent (if any) as permitted by law.
Thailand
The disclosure of the survey result of the Thai Institute of Directors Association (“IOD”) regarding corporate governance is made pursuant to the policy of the Office of the Securities and Exchange Commission. The survey of the IOD is based on the information of a company listed on the Stock Exchange of Thailand and the market for Alternative Investment disclosed to the public and able to be accessed by a general public investor. The result, therefore, is from the perspective of a third party. It is not an evaluation of operation and is not based on inside information. The survey result is as of the date appearing in the Corporate Governance Report of Thai Listed Companies. As a result, the survey may be changed after that date. Maybank Kim Eng Securities (Thailand) Public Company Limited (“MBKET”) does not confirm nor certify the accuracy of such survey result.
Except as specifically permitted, no part of this presentation may be reproduced or distributed in any manner without the prior written permission of MBKET. MBKET accepts no liability whatsoever for the actions of third parties in this respect.
US
This research report prepared by MKE is distributed in the United States (“US”) to Major US Institutional Investors (as defined in Rule 15a-6 under the Securities Exchange Act of 1934, as amended) only by Maybank Kim Eng Securities USA Inc (“Maybank KESUSA”), a broker-dealer registered in the US (registered under Section 15 of the Securities Exchange Act of 1934, as amended). All responsibility for the distribution of this report by Maybank KESUSA in the US shall be borne by Maybank KESUSA. All resulting transactions by a US person or entity should be effected through a registered broker-dealer in the US. This report is not directed at you if MKE is prohibited or restricted by any legislation or regulation in any jurisdiction from making it available to you. You should satisfy yourself before reading it that Maybank KESUSA is permitted to provide research material concerning investments to you under relevant legislation and regulations.
UK This document is being distributed by Maybank Kim Eng Securities (London) Ltd (“Maybank KESL”) which is authorized and regulated, by the Financial Services Authority and is for Informational Purposes only. This document is not intended for distribution to anyone defined as a Retail Client under the Financial Services and Markets Act 2000 within the UK. Any inclusion of a third party link is for the recipients convenience only, and that the firm does not take any responsibility for its comments or accuracy, and that access to such links is at the individuals own risk. Nothing in this report should be considered as constituting legal, accounting or tax advice, and that for accurate guidance recipients should consult with their own independent tax advisers. DISCLOSURES Legal Entities Disclosures Malaysia: This report is issued and distributed in Malaysia by Maybank Investment Bank Berhad (15938-H) which is a Participating Organization of Bursa Malaysia Berhad and a holder of Capital Markets and Services License issued by the Securities Commission in Malaysia. Singapore: This material is issued and distributed in Singapore by Maybank KERPL (Co. Reg No 197201256N) which is regulated by the Monetary Authority of Singapore. Indonesia: PT Kim Eng Securities (“PTKES”) (Reg. No. KEP-251/PM/1992) is a member of the Indonesia Stock Exchange and is regulated by the BAPEPAM LK. Thailand: MBKET (Reg. No.0107545000314) is a member of the Stock Exchange of Thailand and is regulated by the Ministry of Finance and the Securities and Exchange Commission. Philippines: Maybank ATRKES (Reg. No.01-2004-00019) is a member of the Philippines Stock Exchange and is regulated by the Securities and Exchange Commission. Vietnam: Maybank Kim Eng Securities JSC (License Number: 71/UBCK-GP) is licensed under the State Securities Commission of Vietnam.Hong Kong: KESHK (Central Entity No AAD284) is regulated by the Securities and Futures Commission. India: Kim Eng Securities India Private Limited (“KESI”) is a participant of the National Stock Exchange of India Limited (Reg No: INF/INB 231452435) and the Bombay Stock Exchange (Reg. No. INF/INB 011452431) and is regulated by Securities and Exchange Board of India. KESI is also registered with SEBI as Category 1 Merchant Banker (Reg. No. INM 000011708) US: Maybank KESUSA is a member of/ and is authorized and regulated by the FINRA – Broker ID 27861. UK: Maybank KESL (Reg No 2377538) is authorized and regulated by the Financial Services Authority.
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Disclosure of Interest
Malaysia: MKE and its Representatives may from time to time have positions or be materially interested in the securities referred to herein and may further act as market maker or may have assumed an underwriting commitment or deal with such securities and may also perform or seek to perform investment banking services, advisory and other services for or relating to those companies. Singapore: As of 9 April 2016, Maybank KERPL and the covering analyst do not have any interest in any companies recommended in this research report. Thailand: MBKET may have a business relationship with or may possibly be an issuer of derivative warrants on the securities /companies mentioned in the research report. Therefore, Investors should exercise their own judgment before making any investment decisions. MBKET, its associates, directors, connected parties and/or employees may from time to time have interests and/or underwriting commitments in the securities mentioned in this report. Hong Kong: KESHK may have financial interests in relation to an issuer or a new listing applicant referred to as defined by the requirements under Paragraph 16.5(a) of the Hong Kong Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission. As of 9 April 2016, KESHK and the authoring analyst do not have any interest in any companies recommended in this research report. MKE may have, within the last three years, served as manager or co-manager of a public offering of securities for, or currently may make a primary market in issues of, any or all of the entities mentimay be providing, or have provided within the previous 12 months, significant advice or investment services in relation to the investment concerned or a related investment and may receive compensation for the services provided from the companies covered in this report.
OTHERS Analyst Certification of Independence
The views expressed in this research report accurately reflect the analyst’s personal views about any and all of the subject securities or issuers; and no part of the redirectly or indirectly, related to the specific recommendations or views expressed in the report. Reminder
Structured securities are complex instruments, typically involve a high degree of risk and are intended for sale only to sophisticated investors who are capable of understanding and assuming the risks involved. The market value of any structured security may be affected by changes in economic, financial and political factors (including, but not limited to, spot and forward interest and exchange rates), time to maturity, market conditions and volatility and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a structured product should conduct its own analysis of professional advisers as to the risks involved in making such a purchase. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior consent of MKE.
Ong Seng Yeow | Executive Director, Maybank Kim Eng Research
Definition of Ratings Maybank Kim Eng Research uses the following rating system
BUY Return is expected to be above 10% in the next 12 months (excluding dividends) HOLD Return is expected to be between - 10% to +10% in the next 12 months (excluding dividends) SELL Return is expected to be below -10% in the next 12 months (excluding dividends)
Applicability of Ratings The respective analyst maintains a coverage universe of stocks, the list of which may be adjusted according to needs. Investment ratings are only applicable to the stocks which form part of the coverage universe. Reports on companies which are not part of the coverage do not carry investment ratings as we do not actively follow developments in these companies.
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Malaysia Maybank Investment Bank Berhad (A Participating Organisation of Bursa Malaysia Securities Berhad) 33rd Floor, Menara Maybank, 100 Jalan Tun Perak, 50050 Kuala Lumpur Tel: (603) 2059 1888; Fax: (603) 2078 4194
Singapore Maybank Kim Eng Securities Pte Ltd Maybank Kim Eng Research Pte Ltd 50 North Canal Road Singapore 059304 Tel: (65) 6336 9090
London Maybank Kim Eng Securities (London) Ltd 5th Floor, Aldermary House 10-15 Queen Street London EC4N 1TX, UK Tel: (44) 20 7332 0221 Fax: (44) 20 7332 0302
New York Maybank Kim Eng Securities USA Inc 777 Third Avenue, 21st Floor New York, NY 10017, U.S.A. Tel: (212) 688 8886 Fax: (212) 688 3500
Stockbroking Business: Level 8, Tower C, Dataran Maybank, No.1, Jalan Maarof 59000 Kuala Lumpur Tel: (603) 2297 8888 Fax: (603) 2282 5136
Hong Kong Kim Eng Securities (HK) Ltd Level 30, Three Pacific Place, 1 Queen’s Road East, Hong Kong Tel: (852) 2268 0800 Fax: (852) 2877 0104
Indonesia PT Maybank Kim Eng Securities Sentral Senayan III, 22nd Floor Jl. Asia Afrika No. 8 Gelora Bung Karno, Senayan Jakarta 10270, Indonesia Tel: (62) 21 2557 1188 Fax: (62) 21 2557 1189
India Kim Eng Securities India Pvt Ltd 2nd Floor, The International, 16, Maharishi Karve Road, Churchgate Station, Mumbai City - 400 020, India Tel: (91) 22 6623 2600 Fax: (91) 22 6623 2604
Philippines Maybank ATR Kim Eng Securities Inc. 17/F, Tower One & Exchange Plaza Ayala Triangle, Ayala Avenue Makati City, Philippines 1200 Tel: (63) 2 849 8888 Fax: (63) 2 848 5738
Thailand Maybank Kim Eng Securities (Thailand) Public Company Limited 999/9 The Offices at Central World, 20th - 21st Floor, Rama 1 Road Pathumwan, Bangkok 10330, Thailand Tel: (66) 2 658 6817 (sales) Tel: (66) 2 658 6801 (research)
Vietnam Maybank Kim Eng Securities Limited 4A-15+16 Floor Vincom Center Dong Khoi, 72 Le Thanh Ton St. District 1 Ho Chi Minh City, Vietnam Tel : (84) 844 555 888 Fax : (84) 8 38 271 030
Saudi Arabia In association with Anfaal Capital Villa 47, Tujjar Jeddah Prince Mohammed bin Abdulaziz Street P.O. Box 126575 Jeddah 21352 Tel: (966) 2 6068686 Fax: (966) 26068787
South Asia Sales Trading Kevin Foy Regional Head Sales Trading [email protected] Tel: (65) 6336-5157 US Toll Free: 1-866-406-7447
North Asia Sales Trading Andrew Lee [email protected] Tel: (852) 2268 0283 US Toll Free: 1 877 837 7635
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ASEAN Infrastructure: THE NEW OLD THING