Macquarie Equities Research (MQ Research) released a report early this morning after attending yesterday’s groundbreaking ceremony of the East Coast Railway Link (ECRL) project that was held in Kuantan, Pahang. In the report, MQ Research highlighted key takeaways from the event, which include ECRL’s progress and its funding structure, while retaining Econpile Berhad as one of top picks in the construction sector.

Event

• Yesterday, MQ Research attended the ground breaking ceremony of the East Coast Railway Link (ECRL) project in KotaSAS, Kuantan, Pahang. This momentous event was officiated by the Malaysian Prime Minister, Dato’ Seri Mohd. Najib Tun Razak. Also present at the event were China’s State Councillor – His Excellency Wang Yong, Chairman of China Communications Construction Company (CCCC) – Liu Qitao and the Chairman of Malaysia Rail Link (MRL) – Tan Sri Dr. Mohd Irwan Siregar.

Event’s Key Takeaways

Progress & Alignment

• MRL’s Chairman mentioned that the site offices for ECRL and mobilisation of assets will commence immediately after the ground breaking ceremony.

• All land acquisitions for the project have been completed; progress was mainly expedited by the push from all of the state governments involved.

• The PM mentioned that the total alignment for ECRL will be 688km, consisting of 622km of the main alignment and 66km of spur lines alignment. On the west coast, the alignment will terminate at Port Klang. Based on our initial estimates, phase 2 of the ECRL will cover over 156km connecting the ITT Gombak station to Port Klang.

• Along the ECRL alignment, there will be a total of 19 tunnels in order to minimise the impact on nature. The total tunnel alignment is 48.5km with the longest tunnel stretching for 18km between Gombak and Bentong. There will be a 16.5km stretch of elevated train track in Kelantan in order to avoid service disruptions from floods during monsoon seasons.

Funding Structure & Capacity

• According to the PM, 85% of the project value will be funded via a 7-year bond with a coupon rate of 3.25%, to be fully taken up by China EXIM Bank. The remaining 15% will be sourced from the issuances of sukuks from the local investment banks. ECRL (Phase 1 & 2) is slated to complete within 7 years.

• If the project value remains at RM55bn, this means RM46.8bn will be funded via the bond structure. Since the Chinese financing is deemed as “soft loan”, MQ Research believes the principal repayment at the point of bond maturity will not be made in lump sum. Instead, MQ Research thinks the principal repayment will be amortised based on the concession income of the rail system, which will be fully administered by MRL. MQ Research also does not discount the possibilities that the Chinese contractors will take up the maintenance works of the ECRL (tracks and rolling stocks) once the project is commissioned.

• By 2030, the government projects that ECRL will carry 5.4mn passengers and 53mn tonnes of cargo (dry bulk and containers) annually. The concession income breakdown is projected to be 30% passenger and 70% freight.

Impact

• MQ Research’s top picks for the ECRL project are Gabungan AQRS (AQRS MK, RM1.55, Outperform, TP: RM1.80) and Econpile Holdings (ECON MK, RM2.76, Outperform, TP: RM3.50).

Source: Macquarie Research - 10 Aug 2017