Malaysia Rail Link Sdn Bhd (MRL), the state-owned asset owner of East Coast Rail Link (ECRL) project, and China Communications Construction Co. Ltd (CCCC) have signed a supplementary agreement to revive the ECRL project, complete it by December 2026 and reduce the construction cost to RM44bn from RM65.5bn previously. The key beneficiaries are HSS (BUY) and Lafarge (SELL), which were awarded contracts previously. Local contractors such as AQRS (BUY) and IJM Corp (HOLD) could also win subcontract works for the ECRL. Maintain our NEUTRAL call on the Construction Sector with SunCon, HSS and AQRS as top BUYs.

ECRL Project Revived

We believe the revival of the ECRL project augurs well for the government-togovernment relationship between Malaysia and China. The project was one of the largest projects under China’s Belt and Road Initiative. The supplementary agreement between MRL and CCCC was signed on 12 April 2019. More details about the project will be revealed during a press conference scheduled on 15 April 2019. MRL’s website has provided some details on the modified alignment for the ECRL running from Kota Bahru to Port Klang. The reduced project cost of RM44bn includes a provisional sum for double tracking. The key change is the alignment, which will avoid having to build a 18-km long tunnel through the Titiwangsa mountain range and hence substantially reduce the cost. The total length of the ECRL is also reduced to 640 km from 688 km previously.

More Local Participation Expected

We understand that the project will involve more local participation from the supply of materials to awarding work to local subcontractors. Lafarge secured a contract to supply cement worth up to RM270m and HSS won RM130m worth of contracts for engineering designs and construction supervision from CCCC previously. These are the potential immediate beneficiaries if the suspension of their contracts are lifted. Other potential beneficiaries are local contractors to be appointed subcontractors. In our view, we believe AQRS, IJM Corp, WCT, WZ Satu, Econpile, Advancecon, Sunway Construction (SunCon) are in a good position to bid for subcontract works for the ECRL.

Improved Prospects for Local Contractors

The revival of ECRL augurs well for the local construction industry and the potential positive multiplier effect on the domestic economy with the increase in local participation. Newspaper reports quoted Tun Daim Zainuddin saying local participation in ECRL will increase to 50% of all works from 30% of civil works. This indicates RM22bn worth of contracts could be up for grabs for local players. Construction stock prices have run up recently on expectations that the project will be revived. Hence, we believe the stocks could see some consolidation in the short-term. We believe it will take some time to finalise the detailed designs for the new alignment and undertake land acquisitions before construction contracts can be awarded.

Source: Affin Hwang Research - 15 Apr 2019