- We remain positive on Sarawak’s construction sector, following a visit last week to the state’s Regional Economic Corridor Development Authority (Recoda), the agency tasked with managing the Sarawak Corridor of Renewable Energy (SCORE).

- We met with Recoda CIO Kamil Daniel Yap in Kuching. He intimated that SCORE is on track and there is “no stopping” the progress of the corridor now. In fact, it is shifting into the next phase that will now also focus on light and the downstream industries.

- Works at Samalaju Industrial Park (SIP), which houses energy-intensive industries, is ongoing, with more waiting to set up shop at there, pending confirmation of more power coming onstream. We are told the second wave will involve more downstream and labour-intensive industries at SIP itself and the other growth nodes.

- These include Tanjung Manis, the revised masterplan of which has been completed and ready for implementation. Sarawak chief minister Datuk Patinggi Tan Sri Adenan Satem recently said Tanjung Manis, which is designated as the industrial port city and Halal Hub, will be ready to receive local and foreign investors by end-2015.

- Notably, Recoda is working with MDeC and MCMC to entice Internet giants Google and Yahoo to set up data centres at another growth node in Mukah, which is SCORE’s administrative centre that will be developed as a smart city, and services and R&D hub.

- SCORE expects a total investment of RM334bil by 2030, 80% of which is expected to come from the private investors and the remaining 20% from government funding for basic infrastructure. The 10 priority industries are aluminium, oil-based, steel, glass, palm oil, timber, tourism, aquaculture, livestock and marine engineering. Incredibly, the SCORE programme even includes security plan along the state’s entire border.

- It was recently reported that as of Sept 2014, 19 SCORE projects – worth more than RM32bil in FDI – had been approved. So far, the government has only contributed to 6% of the investments. Broadly, the federal government is primarily responsible for financing the state’s infrastructure development.

- Driving SCORE is Sarawak’s cheap power generation potential. Long term, the state has the potential to deliver 20,000MW of power that will make it the leading producer of energy in the region by 2030.

- Starbiz recently reported that by the middle of the next decade, residential, retail and commercial customers in Sarawak will require 2,000 MW while heavy industries will consume at least 6,000MW. So far, industries have signed up for 2,584MW of power under 13 agreements with Sarawak Energy.

- Outside of SCORE, the federal government is fast-tracking the RM27bil 1,663km Pan-Borneo Highway, which includes 936km of road upgrading works in Sarawak. The priorities and award of contracts would be given to upgrading accident-prone sections of the highway.

- Under the Federal Budget 2015, Sarawak has been allocated RM972mil for rural basic infrastructure projects. Sarawak itself has set aside development expenditure of RM4.55bil, making up 71% of a RM6.36bil state budget for next year. Over 50% of the development expenditure will be for rural projects.

- Given the backdrop of rapid progress in the state, particularly within SCORE and the RM27bil highway project, we expect the main construction and infrastructure players such as Cahya Mata Sarawak (Non-rated), Hock Seng Lee (BUY, FV: RM2.40/share), KKB Engineering (BUY, FV: RM2.05/share), and Naim (Non-rated) to be primary beneficiaries.

- The key risks are the federal government withholding funding given the precipitous decline in oil prices, further declines in oil and commodity prices that would prompt investors to delay/cancel their investments, and acute shortage of labour. Nonetheless, Sarawak’s cheap power offers investors a distinct advantage. Also, the state has the highest reserves in the country, at RM22bil as of last year.

Source: AmeSecurities