Highlights

• Mega rail projects on the cards. We have identified 4 mega rail projects that will be rolled out over the next 2-3 years. These include the East Coast Rail Link (ECRL), KL-Singapore High Speed Rail (HSR), Gemas-JB Electrified Double Track (EDT) and MRT3 Circle Line. Collectively, these mega rail projects will have a total cost of RM171bn.

• ECRL: The eastern link. The 600km ECRL (RM55bn) will link Kelantan, Terengganu, Pahang and Selangor. Financing of will come from EXIM Bank of China while CCCC will lead the construction works. SPAD has given its conditional approval for the ECRL which is now undergoing a 3 month public inspection. Final approval is targeted for June and construction is to begin in July.

• HSR: 2 nations, 1 journey. In Dec 2016, Malaysia and Singapore inked a bilateral agreement to implement the 350km HSR. The JDP has been appointed and tenders for the asset company will be called by year end while the infra works are expected in 1Q18. Media reports have placed the HSR’s cost at RM60bn.

• Gemas-JB EDT: The final stretch. The Gemas-JB section (191km) is the final EDT stretch from the north to s outh of the Peninsular. A consortium of 3 state owned Chinese contractors was awarded the RM9bn job in Oct 2016. Work has yet to start due to issues with the state authorities.

• MRT3: Orbital link. Also dubbed the Circle Line, MRT3 will largely be underground, providing interchange stations with other radial rail lines (wheel and spooks concept). Currently at a feasibility study stage, the 45-48km MRT3 is said to cost RM50bn.

Risks

• A pull out of Chinese investments and/or funding would impact some of these mega rail projects (e.g. ECRL and Gemas -JB EDT).

Rating

Maintain OVERWEIGHT

• While the bulk of these mega rail projects will be led by foreign contractors, we estimate that 39% could be undertaken by locals, potentially generating RM67bn worth of job flows. The significance of these mega rail projects to the construction sector should not be underestimated. To illustrate, domestic job wins to listed contracts hit a high of RM28bn in 2012 and RM56bn in 2016 when the MRT1 and MRT2 was rolled out.

Stock Picks

• Gamuda: Strong track record in rail jobs such as the Kaohsiung MRT, Northern EDT, MRT1 and MRT2. Targets to add RM10bn to orderbook over the next 1- 2 years from these rail jobs.

• GKent: Only local player with expertise in rail related systems. Has experience with Ampang LRT extension systems, LRT3 PDP and MRT2 track works.

• IJM: Beneficiary of ECRL via 60% stake in Kuantan Port and 20% stake in MCKIP (industrial park). ECRL will have a station at Kuantan Port while MCKIP is located 12km away.

• MRCB: In negotiations to develop a transport terminal for the HSR at Bandar Malaysia. Can leverage on its track record in Transit Oriented Developments (TODs).

Source: Hong Leong Investment Bank Research - 15 May 2017