Investment Highlights

• Thailand evaluating US$30bil land bridge to bypass Malacca Straits. Reuters reported that Thailand is assessing a massive land bridge project potentially costing THB1tril (US$30bil) located south of Thailand to bypass shipping routes in the narrow lane of the Straits of Malacca. The project will be divided into 4 phases: the first phase will account for 56% of the entire cost, the second 15%, the third 21% and fourth 8%.
  Part of a 3-century old Kra Isthmus canal dream, the land bridge project was recently initiated by the Thai government in 2021 to drive the country’s economy. The project, involving 2 deep-sea ports in Ranong and Chumphon together with a 90km road and rail connecting transport between the Andaman Sea and Gulf of Thailand, is envisioned to reduce congestion and cut shipping times through the Malacca Straits.
  The Transport Ministry plans to host roadshows in China, Europe and the United States to meet potential investors next month with land expropriation beginning in 2025. The cabinet will meet to consider the project for approval in July-August 2025 with concerns raised by the Natural Resources and Environment minister regarding potential environmental impact on forests in Ranong.

• Potential direct impact to Malaysia’s ports and oil & gas sectors. The United Nations Conference on Trade and Development (UNCTAD) estimated that 60% of global maritime trade passes through Asia in 2016, with the South China Sea carrying an estimated one-third of global shipping. If this Thai project is approved and completed, Singapore could lose up to 30% of its shipping trade. The land bridge could slow down Malaysia’s future economic growth, with direct negative impact to ports and oil & gas sectors.
  This project could compete directly with ports in the Strait of Malacca area including Port Klang operations of Westports, the largest listed port operator in Malaysia. While not revealed at this juncture, the development may also include crude oil pipelines which could bypass Petronas’ US$27bil Pengerang Integrated Complex, in which Saudi Aramco has a 50% equity stake in the Refinery and Petrochemical Integrated Development (RAPID). Listed companies such as Dialog Group, Petronas Chemicals and Petronas Gas with substantive Pengerang-based investments could be negatively impacted.

• Yet does not appear viable at this juncture. From our channel checks with local port operators, the project does not appear to be viable unless financially supported by the China government, which we deem unlikely given current geopolitical tensions with US against the backdrop of China’s slow economic recovery. Rerouting from the Malacca Straits will only reduce shipping by 2 days vs. 7 days in the Suez and Panama canals. Based on current bunker prices of US$718/tonne and daily consumption of 225 tonnes for an 8k-TEU container ship, this translates to a saving of only US$40/TEU. Assuming a normalised US interest rate of 6% and depreciation rate over 20 years for the cost of the first phase of the land bridge with an initial capacity of 10mil TEUs translates to a charge of US$185/TEU – 4.6x the current savings from bunker fuel used in sailing around Peninsular Malaysia.
  We estimate after the completion of the project when capacity reached 40mil TEUs, the combined interest cost and depreciation charge will decline to US$82/TEU, still double the current bunker savings. However, we highlight that this estimate excludes day-to-day operational/maintenance expenses of the train system and potential project cost overruns. Additionally, traffic may not be able to reach anywhere full capacity as envisioned by Thai authorities given that not all shipping traffic would automatically reroute via the Thai land bridge as cargo still need to be delivered via existing Eastern shipping lanes to the substantive population centres of Indonesia and Philippines, as well as further south to the Australasian region.

• Maintain our base-case end-2023 FBM KLCI target at 1,515, pegged to an unchanged 2024F P/E of 15x – at its 5-year median albeit at 3 standard deviation below pre-pandemic 2017-2019 median of 17x. Nevertheless, we still expect some upward traction towards the end of the year on ample local liquidity, below-median P/E valuation of 14x, highly compelling dividend yields and year-end window dressing activities against the backdrop of improving corporate earnings growth for next year, moderating political noises, 16-year foreign shareholding low of 19.5% currently and prospects of a normalising ringgit.
  OVERWEIGHT on oil & gas, autos, consumer, power, property and REIT sectors with top picks being CIMB, RHB Bank, Tenaga Nasional, Telekom Malaysia, Dialog Group, Gamuda, Yinson and Pavilion REIT. We also like small cap stocks with strong brand names which can safely navigate inflationary pressures such as Spritzer and niche agrichemical producer Ancom Nylex, as well as grossly undervalued companies such as Deleum. Our ESG champions are Maybank, Petronas Chemicals Group, Petronas Gas, IHH Healthcare, Telekom Malaysia, Westports Holdings, Inari Amertron, Sunway Holdings, Sunway REIT and Gamuda.

Source: AmInvest Research - 19 Oct 2023