We have identified two companies that may potentially benefit from the growing demand for water pipes in Malaysia - Engtex Group (ENGT) and Hiap Teck Venture (HTVB). These leading Malaysian pipe makers will be able  to  beef  up  their  utilisation  rates  to  meet  the  expected  increase  in demand for their products. Our FV for ENGT is MYR2.00 (NR) while we upgrade HTVB to BUY, with a MYR0.97 FV.  
 
- Demand  for  water  pipes  growing.  We  believe  the  demand  for  water pipes  may  pick  up  strongly  in  the  near  term,  as  i)  non-revenue  water (NRW)  in  Malaysia  averaged  at  a  relatively  steep  37%  in  2011,  and  iii) ENGT’s management believes  that  to  reduce  NRW  from  current  levels, the country’s pipe replacement market could  be  worth  as  much  as MYR5bn.  This  year  alone,  some  MYR982.4m  has  been  allocated  to pipe-replacing initiatives. We also estimate that the total pipe network in 
Malaysia will continue to grow steadily at 6-8% per annum over the next 3-5  years  due  to  ongoing  construction  and  property  development activities.  

- Two  major  plants  to  boost  demand. We  gather  that  the  long-awaited Langat  2  water  treatment plant  requires  as much as  50k  tonnes  of  mild steel pipes worth about MYR200m. In addition, the proposed new water treatment  plant  in  Refinery  and  Petrochemical  Integrated  Development (RAPID) Pengerang is expected to require 40-50k tonnes of similar types of  pipes.  These  two  contracts,  could  be  worth  MYR400m-500m combined, and would certainly boost the demand for water pipes.

- ENGT  could  be main  beneficiary. We  see  ENGT  as  one of  the major beneficiaries should the ongoing deadlock in the proposed consolidation of  Selangor’s  water  industry  be  resolved.  We  value  the  stock  at MYR2.00 based on a 9.5x FY14F P/E, which is +1.5 SD from the mean of its 5-year historical P/E trading band, implying a 20.5% upside.

- HTVB  may  also  benefit.  We  also  think  that  HTVB  may  benefit  from potential water pipe replacement initiatives as the group has the ability to ramp  up  production  to  secure  a  portion  of  the  increased  demand.  The company  has  an  annual  capacity  of  600k  tonnes,  with  production currently  running  at  50-60%  capacity.  Besides  the  water  pipe replacement theme, HTVB also has other positive factors that may drive earnings higher (please refer to the individual company update reports). We  upgrade  HTVB  to  BUY  (from  Trading  Buy)  and  raise  its  FV  to MYR0.97 (from MYR0.66), based on 0.72x FY14F P/BV (from 0.5x).

- Risks. The water replacement projects may take longer than expected to roll out and companies’ earnings may be affected  by  the  fluctuations  in steel  prices.  Demand  growth,  meanwhile,  may  not  be  enough  to  offset the cost of production should raw material prices rally strongly.

Source: RHB