economic highlights - the tenth malaysia plan, 2011-2015, no easy task in shifting to high income...

8/9/2019 Economic Highlights - The Tenth Malaysia Plan, 2011-2015, No Easy Task In Shifting To High Income Economy - 10/

1/14

10 June 2010

Economic Highlights

The Tenth Malaysia Plan, 2011-2015

No Easy Task In Shifting To High Income Economy

The focus of the 10MP will be on shifting the economy to a high value-added and high income

economy, via an increase in productivity, which will result in TPF contributing 38.5% of the

growth target. Also, to reduce the vulnerability of the country to external shock, an

important strategy under the plan will be to promote domestic demand to become a major

driver of growth. This will be done through energising the private sector as stated in one

of the Strategic Reform Initiatives (SRIs) under the New Economic Model (NEM).

Whilst driving domestic demand is important, the domestic market is just not big enough,

in our view, to sustain a robust economic growth, implying that it would be a challenge forthe Government to achieve the 6.0% per annum real GDP growth target set under the plan.

As it stands, Malaysia has not been able to achieve the economic growth target set in the

last three Malaysia plans due to economic crises and poor execution of the measures

proposed in promoting private investment.

Although Malaysias global competitive ranking has improved tremendously in 2010, we

believe it will still remain a significant challenge for the country to drive private investment

due to keen competition for FDI and rising outward direct investment by local investors. As

a result, we view the Governments target to grow private investment by 12.8% a year as

ambitious and optimistic. The Government also expects consumer spending to deliver

growth. However, we believe we should not push too hard on consumer spending.

The gross development expenditure will be kept at RM230bn in the 10MP, the same level as

in the 9MP, in line with the Governments efforts to contain its budget deficit. As a result,

the budget deficit will likely narrow to 2.8% of GDP or RM33.4bn in the final year of the 10MP

in 2015, from a deficit of 5.3% of GDP or RM40.3bn estimated for 2010. This will help to

improve the Governments debt level to 49.9% of GDP in 2015 but it will likely cap the

Governments spending going forward.

The services sector will likely be the key driver in the economy, suggesting that greater

emphasis will likely be focussed on promoting growth in the sector. As a result, the share

of the services sector will rise to 61.1% of GDP in 2015, from 58% estimated for 2010. The

manufacturing sectorwill complement the services sector but growth will be less robust, as

it would remain challenging for Malaysia to attract investment into the sector.

Executive Sum mary

Please read important disclosures at the end of this report.

Malaysia

PP7

767/09/2010(025354)

MARKETDA

TELINE

A comprehensive range of market research reports by award-winning economists and analysts

are exclusively available for download from w w w . r h b i n v e s t . c o m


2/14

THE TENTH MALAYSIA PLAN 2011-20152

A comprehensive range of market research reports by award-winning economists and analysts are exclusively available for download

from w w w .r h b i n v e s t . c o m

The Tenth Malaysia P lan, 2011-2015No Easy Task In Shifting To High Income Economy

Shifting To High Value-added And High Income Economy

The Tenth Malaysia Plan (10MP), which covers the period 2011-2015, represents the

first five-year blueprint of the countrys ambition to transform itself into a high

income nation by 2020. In this respect, the Government highlighted that it needs

to restructure the economy through the various transformation programmes launched

recently. These initiatives include the Government Transformation Programme (GTP)

launched in January and the New Economic Model (NEM) to transform the economy

unveiled in March this year.

Towards this end, the focus of the 10MP will be on shifting the economy to a high

value-added and high income economy, via an increase inproductivity. As a

result, total factor productivity (TFP) is projected to contribute 38.5% or 2.3%

of the target real GDP growth in the 10MP, compared with 34.7% or 1.5% in the 9MP

(see Table 1). This will be achieved through higher levels of input from human

capital, adoption of new technologies and development of entrepreneurship to drive

innovation and creativity. Nonetheless, this is not going to be an easy task given

the lack of skilled manpower in the country and we believe a drop in the countrys

education standard will likely be a stumbling block. Efficiency of capital is expected

to improve further with increasing efficiency in the production process and productive

utilisation of assets. Consequently, the contribution of capital to GDP growth is

expected to rise to 37.5% or 2.3% in the 10MP, higher than 34.5% or 1.4% recorded

in the 9MP. Labours contribution to GDP growth is projected to reduce to 24.0% or

1.4% in the 10MP, from 30.8% or 1.3% in the 9MP.

Malaysia will also focus its economic growth efforts on National Key Economic Areas

(NKEA), i.e. oil & gas; palm oil & related products; financial services; wholesale &

retail; tourism; information & communications technology; education; electrical &

electronics; business services; private healthcare; agriculture; and Greater Kuala

Lumpur.

At the same time, to reduce the vulnerability of the country to external shock, an

important strategy under the plan will be to promote domestic demand to becomea major driver of growth. This will be done through energising the private sector

as stated in one of the Strategic Reform Initiatives (SRIs) under the New Economic

Model (NEM). As a result, the 10MP sought to create an enabling environment which

encourages productivity, competitiveness and innovation.

The 10MP highl ighted a

need to res t ruc ture the

economy t h rough t he

var i ous t rans fo rmat i on

programmes

The focus of the 10MP w ill

be on shifting the economy

to a high value-added and

high income economy, via

an increase in productivity

An impo r t an t s t ra t egy

under the plan will be topromote domestic demand

to become a major driver

of growth

To focus on the 12 NKEA to

generate economic growth

during the plan

Factor Achieved

8MP 9MP Target 10MP

% of % % of % % of %

contribution o f contribution o f contribution o f to GDP GDP to GDP GDP to GDP GDP

GDP 4.7 100.0 4.2 100.0 6.0 100.0

Labour 1.5 33.2 1.3 30.8 1.4 24.0

Capital 1.8 37.8 1.4 34.5 2.3 37.5

TFP1 1.4 29.0 1.5 34.7 2.3 38.5

Table 1Contribution Of Factors Of Production,

2001 - 2015

Source: Economic Planning Unit.Notes: 1Total Factor Productivity (TFP) is estimated using the Cobb-Douglas

production function by subtracting from output growth, the position of growth

which is accounted for by increases in labour and capital.


3/14

3THE TENTH MALAYSIA PLAN 2011-2015



Real GDP Target Growth Of 6.0% Is Optimistic

Whilst domestic demand is important and more stable in generating growth for the

countrys economy, we believe we should give greater emphasis to promote export

markets which is far bigger. The Government expects real exports to grow by 7.2%

a year during the plan, compared with +1.8% in the 9MP. This is because the

domestic market is just not big enough , in our view, to sustain a robust

economic growth, implying that it would be a challenge for the Government toachieve the 6.0% per annum real GDP growth target set under the plan (see

Table 2). The 6.0% growth target is also slightly lower than the NEMs target of an

average growth of 6.2% during the period.

As it stands, Malaysia has not been able to achieve the economic growth

targets set in the last three Malaysia plans . Whilst the various economic crises

such as the 1997/98 Asian currency crisis, the dotcom bubble in 2001 and the global

credit crisis originating from the US subprime credit in 2008/09 (see Table 3) were

blamed, the failure to execute its plans to drive private investment was also a major

factor, in our view. As it stands, private investment only grew by a modest 1.2%

a year in the 8MP (2001-05) and it is estimated to inch up moderately by 2.0% a

year in the 9MP (2006-10), after recording a contraction of around 5.0% a year in

the 7MP (1996-2000) (see Chart 1). The performance paled in comparison to thestrong double-digit growth of 13.4% and 20.2% a year in private investment in the

5MP and 6MP, respectively. As a result, its share of GDP fell from a high of 36.3%

in 1997 to a low of 8.2% in 2002, before rising to 10.1% in 2009.

Given the challenges in executing the various initiatives under the 10MP and the

existence of global imbalances, we are of the view that a more reasonable

real GDP growth target for the Malaysian economy for the 10MP could be

in the region of 4.5-5.5% p.a. As it stands, the countrys real GDP growth has

been on a downward trend after reaching a peak of 9.5% a year in the 6MP. It

weakened sharply by almost half to +5.0% a year in the 7MP and further to +4.7%

a year in the 8MP and +4.2% a year estimated for the 9MP (see Chart 2) along with

the poor performance in private investment. If not because of more expansionaryfiscal policy and the introduction of economic stimulus packages to cushion the

economy from various crises, real GDP growth achieved could be even lower in the

last three Malaysia plans. Despite the increase in Government spending during this

The 6.0% target wi l l be

challenging to achieve, as

domestic market is just not

b ig enough to sustain a

robust economic growth

Malaysia has not been able

to achieve the economic

growth targets set in the

last three Malaysia plans

due t o t he va r i ous

economic crises and poor

execu t i on o f po l i c i e s

proposed

We are of the view that a

more reasonable real GDP

g ro w t h t a r g e t f o r t h e

Malaysian economy for the

10MP could be in the region

of 4 .5-5.5%

(%, p.a) 9MP 10MP

Real GDP 4.2 6.0

GNI per capita 6.7 8.0

Private consumption 6.5 7.7Public consumption 4.8 4.8

Private investment 2.0 12.8

Public investment 6.2 5.0

Exports 1.8 7.2

Imports 2.8 8.6

Inflation rate 2.7* n.a

Resource Balance (%GNI) 16.6 12.3

- Savings 36.3 34.5

- Investment 19.7 22.2

Source: Economic Planning Unit.

*RHBRIs estimate

Table 2Macroeconomic Achievements & Targets


4/14




Table 3Comparison Between Target And Actual On Real GDP Growth And Development Expenditure

Al locat ion

GDP Average Original Actual Deviation Remarks

growth GDP Allocation Spending from

target grow th (Development original

achieved expenditure) allocation

% % RMbn RMbn %

5MP 5.0 6.9 40.1 35.9 -10.4 Malaysia shifted its strategy to

(1986-1990) promote foreign direct investment

(FDI) and liberalised its manufacturing

sector.

6MP 7.5 9.5 55.0 54.7 -0.5 The country benefited from substantial

(1991-1995) inflow of FDI and privatisation

programme.

7MP 8.0 5.0 67.5 99.0 46.7 Regional currency crisis caused

(1996-2000) a severe recession in the countrys

economy in 1998. Efforts were

directed to strengthen domestic

demand through an expansionary of

fiscal policy.

8MP 7.5 4.7 110.0 170.0 54.5 The bursting of the dotcom bubble

(2001-2005) severly impacted the countrys

electronic exports and real GDP in

2001. The Government

introduced three economic stimulus

packages totalling RM14.6bn and

increased its spending by an

additional RM60bn.

9MP 6.0 4.2 200.0 223.0 11.5 The countrys economy in 2009 was

(2006-2010) impacted by the severe global

recession as a result of the global

credit crisis originated from the US

subprime credit crisis.

10MP 6.0 - 230.0 - A sharper than expected slowdown in

(2011-2015) global economic growth in 2011 mayderail the number.

Source : Various Malaysia Plans

period, real GDP growth continued to head south, indicating that Government spending

would not be enough to reverse a slowing trend but merely provide a cushion, as

its spending was perceived as less efficient in deriving economic growth due partly

to leakages.

Chart 1Malaysia Fai led To Drive Private Investment

In The Last 15 years

-10

-5

0

5

10

15

20

25

5MP 6MP 7MP 8MP 9MP

Averageayear(%)

Chart 2Malaysia's Real GDP Growth Losing

Mo m e n tum

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

5MP 6MP 7MP 8MP 9MP

Averageperyear(%)


5/14




Pushing The Private Sector To Do The Job

Although Malaysias global competitive ranking in 2010 as assessed by the highly

regarded Swiss-based Institute for Management Development (IMD) has jumped

from 18th to 10th, an unprecedented result, we believe it will remain a significant

challenge for the country to drive private investment due to keen competition for

foreign direct investment (FDI) and rising outward direct investment by local investors.

As a result, we view the Governments target to grow private investment by12.8% a year as ambitious and optimistic. A key component of the growth will

be from FDI, according to the Government. Priority will be given to improve the

business environment, including measures to further liberalise the economy, in order

to promote private investment. On its part, the Government will strengthen the

ongoing GTP to streamline bureaucratic process and reduce the costs of doing

business. Statutory and regulatory reviews will be undertaken to promote

entrepreneurship and improve risk-taking profiles of the private sector.

Having said that, we believe the initiatives put in place by the Government could help

Malaysia gain some headway in stimulating private investment even though the

improvement will unlikely be significant. Recall that in a move to promote private

investment, the Government has liberalised 27 services sub-sectors on 22 April2009. It had also repealed the Foreign Investment Committee (FIC) guidelines and

relaxed the 30% Bumiputera equity participation at the point of initial public offer

(IPO) on 30 June 2009. In addition, the Governments relationship with Singapore

has improved lately that could help generate some investment activities in the

Iskandar region, in our view. Also, the implementation of the Public-Private Partnership

(3P) and the Private Finance Initiative (PFI) is expected to generate some RM62.7bn

of investment in the country. Among the large projects to be implemented under

the 3P includes seven toll highways, five Universiti Teknologi Mara branch campuses,

redevelopment of Angkasapuri Complex Kuala Lumpur as media city, Integrated

Transport Terminal in Gombak and privatisation of Penang Port Sdn Bhd.

While these changes together with the initiatives under the GTP and NEM are helpfuland encouraging, Malaysia needs to do more and show to investors that it would

continue to do it right and deliver what it has promised in order to bring back

investors confidence. The enormous challenges in pushing private investment and

a slowdown in spending by the Government in order to reduce its deficit suggests

that consumer spending will likely remain as a key driver of the countrys economic

growth. As a result, the Government expects consumer spending to grow at a

faster pace of 7.7% a year in the 10MP , compared with +6.5% estimated for

the 9MP. Consequently, its share will rise to 58% of GDP in 2015, from 53.6%

estimated for 2010, making Malaysias share almost comparable to Japan (58.5%)

and higher than Thailand (51.3%) and Singapore (39.4%). Indeed, a pick-up in

consumer spending has led to an increase in household debt, which rose from 63.9%

of GDP in 2008 to 76.6% in 2009. The sharp jump was due partly to the effect ofa lower denominator as GDP contracted in 2009. Although Bank Negara was not

alarmed by the sharp rise in household borrowings, we believe we should not push

too hard on consumer spending to drive the countrys economic growth.

Government To Reduce Its Role And Budget Deficit

On its part, the Governments gross development expenditure will be kept at

RM230bn in the 10MP , the same level as in the 9MP, in line with the Governments

efforts to contain its budget deficit. Of which, an amount ofRM20bn or around

8.7% w ill be used as the PFI Facilitation Fund. We understand that one of the

purposes of the PFI Facilitation Fund is to make certain projects viable for

implementation. Also, it could serve as tipping-off for private projects to take offand will generate at least RM62.7bn of private investment under the 3P procurement

model. Under the 3P procurement model, the public sector will be the main purchaser

of the output. This implies that the Government will have to lease and pay rent for

those output and services. Whilst there is no doubt the move could help the

We view the target to grow

p r i va t e i nves tment by

12 . 8% a y ea r a s

optimistic, as it will remain

a significant challenge for

t he coun t ry t o d r i ve

private investment due to

keen competition

We believe the initiatives

pu t i n p l ace by t he

Government could still help

Ma l ays i a ga i n some

headway i n s t imu l a ti ng

private investment

The Government expects

consumer spending to help

d e l i v e r g r o w t h b u t w e

believe w e should not push

t o o ha rd o n c o n s um e r

spending

The g ro s s deve l opment

expenditure will be kept at

RM230bn in the 10MP , the

same level as in the 9MP,

i n l i n e w i t h t h e

Government s e f fo r t s to

contain its budget deficit


6/14


7/14




Growth In Serv i ces To Outpace The Economy And To Be

Complemented By The Manufacturing Sector

On the supply side, the services sector will likely be the key driver in the economy

and its growth of 7.2% a year projected for the 10MP will outpace that of the real

GDP growth during the period and faster than +6.8% a year estimated for the 9MP

(see Table 5). This suggests that greater emphasis will be focussed on promoting

growth in the services sector. As it stands, the Government already liberalised 27services sub-sectors as part of its efforts to draw in investors into these sectors and

we expect the Government to do more as the country moves forward. As a result,

the share of the services sector will rise to 61.1% of GDP in 2015, from 58%

estimated for 2010. According to the Government, growth in the services sector

during the 10MP will be driven by the expansion in intermediate services such as

finance & business services and transport, storage & communications sub-sectors.

Towards this end, Bank Negara Malaysia has issued few new banking and investment

licenses to foreign investors. It remains to be seen whether these foreign players

could eventually bring in more business from abroad to broaden and deepen the

countrys banking industry. These will likely be aided by a pick-up in final services

such as wholesale & retail and accommodation & restaurants in line with stronger

consumer spending projected during the period.

Similarly, the manufacturing sector is envisagedto grow at a faster pace of 5.7%

per annum under the 10MP, compared with +1.3% a year estimated for the 9MP, in

line with a recovery in exports and stronger domestic demand. Stronger growth will

be contributed by higher value add in the E&E sub-sector. The fact that growth in

the sector is envisaged to be less robust than that of the services sector suggests

that it would remain challenging for Malaysia to attract investment into the sector.

Consequently, its share of GDP is projected to drop to 26.3% in 2015, from an

estimate of 26.7% in 2010.

In the same vein, the agriculture sector is projected to experience a stronger

growth of 3.3% a year in the 10MP, compared with +3.0% a year estimated for the

9MP, implying that the sector would continue to be promoted by the Government as

one of the main engines of growth.

Also, the mining value add is projected to bounce back to expand by 1.1% a year

in the 10MP, from a contraction of -0.5% a year in the 9MP. Growth will likely be

driven by a pick-up in demand for LNG, while crude oil production will remain

modest, in line with the Governments conservation policy.

The serv i ces sec tor w i l l

likely be the key driver in

t he economy and i t s

growth w ill outpace that of

the real GDP growth

The manufacturing sector

is projected to grow at a

faster pace during the plan

The m in i ng ou tpu t i s

projected to recover

Agriculture output will inch

up as well

Growth Structure

(% p.a) (% to GDP)

9MP 10MP '05 10 15

Agriculture 3.0 3.3 8.0 7.5 6.6

Mining -0.5 1.1 9.5 7.5 5.9

Manufacturing 1.3 5.7 30.7 26.7 26.3

Construction 4.4 3.7 3.3 3.3 2.9

Services 6.8 7.2 51.2 58.0 61.1

-Utilities 3.1 4.1 3.1 2.9 2.7

-Trade & accommodation 7.7 8.3 13.7 16.1 17.9

-Transportation & comm 6.2 7.5 7.3 8.0 8.6

-Finance 8.0 8.3 10.0 17.4 19.4

-Government 6.3 3.4 6.8 7.5 6.6

-Other services 5.0 5.8 10.3 6.1 5.9

GDP 4.2 6.0

Table 5GDP By Sector (In Real Terms) , 2006-2015

Source: EPU


8/14




The construction sector, however, is projected to grow at a slower pace of 3.7%

a year in the 10MP, compared with +4.4% a year estimated for the 9MP, as activities

during the 9MP was boosted by the two economic stimulus packages implemented

by the Government in late 2008 and early 2009. The slowdown is also in line with

a slower increase in public sector investment, as the Government will maintain its

development expenditure unchanged during the plan. Meanwhile, the Government

expects the 3P and the PFI procurement models to help generate construction

activities worth RM62.7bn in the 10MP. This will help to take up some slack andcontribute to growth in the civil engineering segment, as the Government keeps its

development expenditure unchanged.

Higher Inflation, Employment To Improve

The 10MP is silent on inflation forecast. Nonetheless, by gradually removing subsidies,

particularly fuel and power tariff during the 10MP, and pushing for stronger consumer

spending, we expect inflation rate to rise to an average rate of around 3.0-

3.5% a year in the 10MP , from +2.7% estimated for the 9MP. The labour supply

is anticipated to increase by 2.2% per annum in the 10MP to reach 13.65 million by

end-2015, compared with +1.6% in the 9MP. Given that the economy is projected

to expand by around 6.0% during the plan and the Government expects employmentto grow by 2.4% a year, the unemployment rate is projected to ease to 3.1%

in 2015, from 3.6% estimated for 2010.

Smaller Current Account Surplus But Remains Sizeable

The current account surplus in the balance of payments is projected to

narrow to 10.5% of GNI by the final year of the 10MP in 2015, from a surplus of

14.6% of GNI estimated for 2010 (see Table 6). Despite smaller, at more than 10%

of GNI, the current account surplus in 2015 remains sizeable and will likely contribute

to a build-up in foreign exchange reserves and fuel domestic liquidity. Indeed, a

sustained large current account surplus implies that the countrys gross national

savings rate will remain high as well. As a result, the savings rate is projected to

average around 33.7% of GNI in 2015, albeit smaller compared with 35.6% of GNI

estimated for 2010. In absolute terms, the current account surplus, however, is

projected to widen to RM121.7bn by the final year of the 10MP in 2015, from a

surplus of RM109.2bn in 2010. This is due mainly to a larger surplus in the

merchandise account, which is projected to increase to RM169.3bn in 2015, from

RM145.0bn estimated for 2010. The widening services account surplus during the

year will also help. These will, however, be offset partially by a larger deficit in the

income account, as multinational companies send more money back home, and the

increase in current transfers due to repatriation of foreign workers remittances. The

latter indicates that Malaysia will still rely on foreign workers to generate economic

output in the near future.

RM billion

05 10 15

Merchandise account 128.9 145.0 169.3

Services account -9.6 1.3 6.8

Transportation -15.9 -19.4 -21.0

Travel 18.9 31.8 40.0

Other services -12.1 -11.0 -12.1

Govt. transactions -0.3 -0.1 -0.1

Income -23.9 -19.9 -33.1

Current transfers -17.0 -17.1 -21.3

Current account 78.4 109.2 121.7

% to GNI 15.7 14.6 10.5

Table 6

Balance Of Payments, 2006-2015

Cons t ruc t i on sec t o r ,

however, will slow dow n, in

l i n e w i t h a s t ag nan t

government spending

Inflation rate w ill likely rise

but unemployment rate to

improve

The cu r ren t ac coun t

surplus in the balance of

payments is projected to

narrow to 10.5% of GNI in

2015, from a surp lus of

14.6% of GNI est imated

for 2010

Source: EPU


9/14




Construction: Allocation For Physical Hardware Reduced,Transport Infrastructure In The Spot Light

As far as the construction sector is concerned, we rate the just announced 10MP as

mixed. While gross development expenditure comes in at RM230bn that is higher

than RM180bn guided earlier and matches the amount under the 9MP, the breakdown

between physical hardware and soft infrastructure has been changed to 60:40

under the 10MP from 78:22 under the 9MP as the new focus is on moving away

from merely building schools, to improving teachers. As such, the allocation for

physical hardware (that translates to construction jobs) effectively falls by 23%

from RM179.4bn (RM230bn x 78%) under the 9MP to RM138bn under the 10MP

(RM230bn x 60%).

On a positive note, 52 high-impact projects worth RM62.7bn to be implemented via

privatisation or the public-private partnership (PPP) model are under consideration

comprising, among others:

Seven toll highways worth RM19bn including the West Coast Expressway (potential

beneficiaries: Kumpulan Europlus and IJM), Guthrie-Damansara Expressway,

Sungai Juru Expressway and Paroi-Senawang-KLIA Expressway;

Two coal-fired power plants worth RM7bn (potential beneficiaries: Zelan and

Mudajaya);

Development of the Malaysian Rubber Boards 3,300 acres of land in Sungai

Buloh with a GDV of RM10bn (Potential beneficiary: MRCB);

Five Universiti Teknologi MARA (UiTM) branch campuses;

Redevelopment of Angkasapuri into a Media City;

Integrated transport terminal in Gombak (Potential beneficiary: WCT); and

Privatisation of Penang port.

Also, a RM20bn facilitation fund will be established to bridge the viability gap for

private sector investment in projects with high strategic value to the nation and

multiplier effects. Among the projects currently under consideration are: (1) Senai

Hi-Tech Park in Iskandar, Johor; (2) The raw water supply project for industrial

complex in Tanjong Langsat, Johor; (3) Land reclamation in Westport, Port Klang;

and (4) Malaysia Truly Asia Centre in KL.

Realising the importance of investing in transportation infrastructure to stimulate

economic activities as well as to ease worsening traffic congestion (that reduces

productivity), several major rail projects have been earmarked to be implemented

under the 10MP comprising: (1) The expansion of light rail transit (LRT) coverage

in KL (We take it as referring to the Ampang and Kelana Jaya light rail transit (LRT)line extension as well as the new Cheras Kota Damansara LRT line); (2) Gemas

Johor Bahru double-tracking; and (3) A new 150-km mass rapid transit (MRT)

system covering a 20km radius around KL with 2m passenger-trips per day (see

Table 7 for details of the projects).

Lower a l l o ca t i on f o r

physical hardware

RM62.7bn privat isat ion/

PPP projects, backed by

RM20bn facil itation fund

Rail projects in the spot

light

Table 7

Rail Projects Under The 10MP

Project Value*

(RMbn)

Ampang & Kelana Jaya LRT line extension 7

Kota Damansara - Cheras new LRT line 25Gemas-JB double tracking 5

KL MRT 30

Total 67

Status/Remark

17 and 15 players pre-qualified as main contractors and segmental box

girder sub-contractors in Apr 2010 (see Table 8)

PreliminaryReported to be led by Chinese contractors

This is one of the key initiatives to transform KL into Greater KL,

leveraging on its liveability, cosmopolitan population, Asian heritage and

world-class infrastructure.


10/14




While Gamuda and MMC Corporation are perceived by the market as the front-

runners for these rail projects given their solid track record in the Ipoh Padang

Besar double-tracking project (and for Gamuda, also the Kaohsiung Metropolitan

MRT in Taiwan), we believe those who pre-qualified for the Ampang and Kelana Jaya

LRT line will give Gamuda and MMC Corporation a run for their money (see Table

8). Nonetheless, given the size and scale of these rail projects, if they do get off

the ground, irrespective of who are in the drivers seats, the multiplier effect to the

construction sector (in terms of sub-contracting jobs), the building material sectoras well as the economy as a whole will be tremendous.

Tremendous mu l t i p l i e r

e f fec t

Other key projects identified to be implemented under the 10MP include:

1. Flood mitigation programmes (RM5bn);

2. Expansion of airports (RM3.3bn);

3. 3,580km of paved roads, of which 72% in Sabah and Sarawak (Potential

beneficiaries: Hock Seng Lee, Loh & Loh and Naim);

4. Remaining work for the RM3.7bn East Coast Expressway (Phase 2);

5. Kuala Lipis Cameron Highlands road;

6. Jerantut Sungai Lembing road;

7. Sewerage treatment plant in Lembah Pantai, KL;

8. Eight hospitals (including specialist hospitals), 197 clinics and 50 1Malaysia clinics;

9. 78,000 units of affordable public housing; and

10. Repair and maintenance of public/private low-cost housing (RM500m)

Like all previous Malaysia Plans, the key to the success of the 10MP is not so much

a grand plan or a long list of ambitious mega projects, but execution. On the heels

of disappointment from a few false starts to the Ampang and Kelana Jaya LRT line

extension project, we believe the market will want to see the real action before a

re-rating of the construction sector can take place this time around.

Execution is key

Table 8Contractors Pre-qualified For Ampang & Kelana Jaya LRT Line

Extension Project

1. Sunway Construction Sdn Bhd 1. Sunway Construction Sdn Bhd

2. Fajarbaru Builder Sdn Bhd Signatium Construction Sdn Bhd JV 2. Fajarbaru Builder Sdn Bhd Signatium Construction

Sdn Bhd JV

3. WCT Sinohydro JV 3. WCT Sinohydro JV

4. IJM Construction Sdn Bhd 4. IJM Construction Sdn Bhd

5. Ranhill CCCC JV 5. Ranhill CCCC JV

6. Muhibbah Engineering Sdn Bhd 6. Muhibbah Engineering Sdn Bhd

7. Gamuda Berhad 7. UEM Builders Bhd Intria Bina Sdn Bhd JV

8. UEM Builders Bhd Intria Bina Sdn Bhd JV 8. MMC- Zelan JV

9. MMC- Zelan JV 9. MRCB Engineering Sdn. Bhd

10.MRCB Engineering Sdn. Bhd 10.BPHB Tim Sekata JV

11.Trans Resources Corporation Sdn Bhd 11.Zabima Leighton JV

12.BPHB Tim Sekata JV 12.MTDC Persys JV

13.Zabima Leighton JV 13.Ahmad Zaki Sdn Bhd

14.Mudajaya Corporation Berhad 14.Bina Puri Acre Works SNC Lavalin JV

15.MTDC Persys JV 15.UEM Construction Sdn Bhd Projek

Penyelenggaraan Lebuhraya Berhad

16.Loh & Loh Constructions Sdn Bhd

17.Ahmad Zaki Sdn Bhd

Source: Prasarana

Main Contractors Segmental Box Girder Sub-Contractors


11/14




We maintain Neutral on

the construction sector

On one hand, we foresee improved investors risk appetite for construction stocks

following: (1) The massive underperformance of the sector vis--vis the market in

4Q2009 and 1H2010; and (2) A better sector news flow and new expectations on

the heels of the announcement of the 10MP. On the other hand, certain negative

elements remain such as: (1) The still slow pace of the roll-out of public projects,

shrinking margins and declining dominance of established players in large-scale

projects locally; and (2) The not-so-rosy outlook and increased operating risks in

key overseas markets (following the Dubai credit crisis, Dongs devaluation andrising arbitration cases). We maintain Neutra l on the construction sector.

Building Materials

We believe the higher-than-expected gross development expenditure will lift domestic

cement consumption as well as cement producers pricing power (on the back of

higher demand). However, we believe higher margins arising from increased demand

and better selling prices would be partly mitigated by higher energy cost, in particular,

thermal coal and electricity. We are keeping our numbers unchanged for now,

pending further clarifications from the cement producers.

While the higher-than-expected gross development expenditure would boost domestic

steel consumption, we believe the impact is likely to be muted, as fortunes of thesteel players are tied largely to the demand-supply balance in the region. We are

keeping to our stance that the near-term earnings prospects of the steel sub-sector

are weak on the back of: (1) Increased concerns on overcapacity in China arising

from mounting steel output and weak near-term steel consumption, which may

prompt steel producers in China to dump steel products in the international market

at cheap prices; and (2) Heightened risk on a sharper-than-expected slowdown in

global economy, which may affect global steel consumption, hence weighing down

on steel prices. Maintain Underweight.

Infrastructure sector - water

Under the 10MP, the Government indicated that it is keeping to the timeline of the

water sector restructuring (i.e. all states will migrate to the new licensing regime andbecome asset light water service providers by 2010 (see Chart 3). However, we are

keeping to our stance that water sector restructuring, in particular, the Selangor

state, is unlikely to materialise anytime soon (which means the Governments timeline

is unlikely to be achieved), given that: (1) The pricing issue remains unresolved; and

(2) All three parties (the Federal Government, state government, and water

concessionaires) are involved in the negotiation process, and this may complicate

and drag the entire negotiation process. Hence, we remain cautious on Puncak. Our

indicative fair value remains unchanged at RM2.55, at 30% to its DCF-derived NPV

of RM3.65 (based on WACC of 11.5%).

Cement sub-sector good

for demand and pr ic ing

power

Steel sub-sector good

for domestic demand, but

may no t he l p much i n

boosting earnings

Timeline on water sector

res t ruc t u r i ng rema ins

unchanged

Chart 3

Water Services Industry Reform Roadmap

Source: 10MP

8th Plan period2001-2005



Stabilisation Privatisation and corporatisation

of state water authorities

Planning for restructuring ofwater services industry

Consolidation

Operationalisation of NationalWater Services Commission

(SPAN) Enforcement of Water Services

Industry Act (WSIA), 2006 Pengurusan Aset Air Berhad

(PAAB) takes over existing waterassets from states at negotiated

values and is responsible for

implementing waterinfrastructure development

State water operators are asset-light and focus on serviceprovision

Moving towards efficiency in

operations and management

Tariff-setting mechanism to allowfull-cost recovery to be

completely phased in by 2013

Integration of water supply andsewerage services

Initial efforts towards theintroduction of integrated waterand sewerage tariffs


12/14




Water sector restructuring aside, the Government also allocated RM1.1bn for the

non-revenue water (NRW) programme, involving replacement of pipes and old meters

to improve the quality of water and reduce losses in water supply. It was also

mentioned that RM369m out of the entire RM1.1bn would be allocated in the first two

years of the plan. While it is unknown as to the exact amount that will be allocated

for pipe replacement activities, we believe this will benefit all pipe makers including

YLIand Engtex (ductile iron), Jaks Resources (mild steel), as well as Hiap Teck and

Choo Bee (bare steel that is the feedstock for mild steel), given the absence ofsizeable pipe replacement activities, resulting in poor demand for pipes over the past

few years.

P ipe makers to benef i t

from NRW programme


13/14


14/14

RHB DEALING AND RESEARCH OFFICES

MALAYSIA

RHB Investment Bank BhdLevel 10, Tower One, RHB Centre,Jalan Tun Razak50400 Kuala LumpurP.O. Box 1269950786 Kuala Lumpur, Malaysia

Tel (General) : (603) 9285 2233

Dealing OfficeTel (Dealing) : (603) 9285 2288Fax (Dealing) : (603) 9284 7467

RHB Research Institute Sdn BhdLevel 10, Tower One, RHB Centre,Jalan Tun Razak50400 Kuala LumpurP.O. Box 1269950786 Kuala Lumpur, MalaysiaTel (Research) : (603) 9280 2160Fax (Research) : (603) 9284 8693

Lim Chee SingDirector

RHBRI is a participant of the CMDF-Bursa Research Scheme and will receive compensation for the participation.Additional information on recommended securities, subject to the duties of confidentiality, will be made availableupon request.

This report may not be reproduced or redistributed, in whole or in part, without the written permission of RHBRI andRHBRI accepts no liability whatsoever for the actions of third parties in this respect.

IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI andRHB Investment Bank Berhad (previously known as RHB Sakura Merchant Bankers Berhad). It is for distribution only under suchcircumstances as may be permitted by applicable law. The opinions and information contained herein are based on generally availabledata believed to be reliable and are subject to change without notice, and may differ or be contrary to opinions expressed by otherbusiness units within the RHB Group as a result of using different assumptions and criteria. This report is not to be construed as anoffer, invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything statedherein in any manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever againstRHBRI. RHBRI and/or its associated persons may from time to time have an interest in the securities mentioned by this report.

This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financialcircumstances and objectives of persons who receive it. The securities discussed in this report may not be suitable for all investors.RHBRI recommends that investors independently evaluate particular investments and strategies, and encourages investors to seekthe advice of a financial adviser. The appropriateness of a particular investment or strategy will depend on an investors individual

circumstances and objectives. Neither RHBRI, RHB Group nor any of its affiliates, employees or agents accepts any liability for anyloss or damage arising out of the use of all or any part of this report.

RHBRI and the Connected Persons (the RHB Group) are engaged in securities trading, securities brokerage, banking and financingactivities as well as providing investment banking and financial advisory services. In the ordinary course of its trading, brokerage,banking and financing activities, any member of the RHB Group may at any time hold positions, and may trade or otherwise effecttransactions, for its own account or the accounts of customers, in debt or equity securities or loans of any company that may beinvolved in this transaction.

Connected Persons means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holding companyand the respective directors, officers, employees and agents of each of them. Investors should assume that the Connected Personsare seeking or will seek investment banking or other services from the companies in which the securities have been discussed/coveredby RHBRI in this report or in RHBRIs previous reports.This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewedby, and may not reflect information known to, professionals in other business areas of the Connected Persons, including investmentbanking personnel.

The research analysts, economists or research associates principally responsible for the preparation of this research report have

received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitivefactors and firm revenues.

economic highlights - the tenth malaysia plan, 2011-2015, no easy task in shifting to high income...

Documents