Highlights

• Decongestion needed. Penang’s population is expected to grow from the current 1.6m people to 2m by 2020 and 2.4m by 2030. Public transport usage is low at 5% while traffic congestion is increasing. Unless something is done, travel speeds in Penang will decrease 27% by 2030.

• Penang’s ambitious plan. To resolve its travel woes, the State has proposed the Penang Transport Master Plan (PTMP), a holistic transport network costing RM27bn. The PTMP has 2 main components, namely, roads (RM10bn) and public transport (RM16bn).

• More road connectivity. 5 major highways have been proposed - at the island’s north, 2 in the mid-eastern section, an undersea tunnel and 1 on the mainland. To get the ball rolling, Zenith BUCG will undertake RM6bn (4 packages) worth of works.

• Public transport boost. Various modes of public transport such as trams, LRT, BRT, commuter train and catamarans will be implemented, all of which, fully integrated to ensure seamless switching between the various modes.

• PDP method. The PTMP will be implemented via the Project Delivery Partner (PDP) method in which the Request for Proposal (RFP) closed on 16 Feb. Payment to the PDP will be in the form of reclamation rights, allowing it to reap a 2nd layer of profits if the land is reclaimed and developed.

• Valuing the rights. The identified reclamation site is a 1,500 seagrass area called Middle Bank located opposite the Penang Bridge. We estimate the reclamation rights to be worth RM33bn, sufficient to fund the PTMP.

Sector Impact

• Construction. PTMP will generate RM14-21bn worth of works for the PDP to undertake. The various work packages will be tendered out to contractors by the PDP. There should also be subcontracts dished out by the main contractors. Finally, the development of Middle Bank will provide a new lease of contract flows post PTMP.

• Property. The Klang Valley experience has shown how property values are enhanced with better connectivity (roads, LRT, MRT). We expect the impact to be similar for Penang with the PTMP, if not better, given its more holistic approach. Enhanced connectivity between the island and mainland should also narrow the price gap differential.

Stock Picks

• Gamuda - Only domestic contractor (aside MMC) with PDP experience and strong technical “know how”.

• IJM - The Light development to gain from enhanced connectivity (2 new highways).

• MRCB - PTMP compliments Penang Sentral which will serve as the main transport hub in Seberang Perai.

• Tambun Indah - Mainland Penang play with its Pearl City development benefiting from the PTMP’s connectivity.

Risks

• These include (i) politics getting in the way as the State and Federal are administered by different parties, (ii) environmental and execution challenges around the Penang Hill and (iii) decline in land prices would affect the PTMP’s funding.

Source: Hong Leong Investment Bank Research - 10 Mar 2015