After almost 10 months of negotiations, Malaysia and China finally struck a deal to resume the East Coast Rail Link (ECRL) project with a reduced cost of RM44bn, about two-thirds of the original cost. Macquarie Equities Research (MQ Research) summarised the details of the new supplementary agreement signed by the parties last Friday (12 Apr), and named MRCB as one of its top stock picks.

Event

• “Malaysia Boleh!” (English term: “Malaysia Can Do It!”) was a renowned slogan during Tun Mahathir’s first reign as Malaysia’s prime minister in the 90’s, intended as an inspiration for the nation’s people to push themselves, to endure and set challenges; in sum to excel. It appears to have been widely embraced again.

• Today Malaysia has embodied the full “Malaysia Boleh!” spirit as it managed to persuade China to sign a supplementary agreement to finally conclude the negotiations on the East Coast Railway Link (ECRL) project, with the cost revised to RM44bn from RM65.5bn. After almost ten months of negotiating, Malaysia has managed to get China to agree on the terms that Malaysia has set, particularly on the costing, while maintaining most of the specs agreed by Malaysia’s previous government. The completion date was revised to December 2026 from December 2024.

Impact

• What has changed from the previous agreement? China has agreed to cut the price by another RM21.5bn by i) shortening the alignment by 50km; ii) significantly reduced the tunnel alignment (distance to be decided soon); and iii) the alignment avoids the mountainous portion of the Main Range and will cut through the range at its southernmost tip at Bukit Putus, Negri Sembilan, thus requiring very little tunnel alignment.

• Project funding. China apparently agreed to most of Malaysia’s terms but could not change the financing terms. Initially the project will be funded 85% by China and 15% by Malaysia. The Chinese funding includes a USD bond with a seven-year moratorium at 3.25% coupon rate. At this juncture MQ Research is unclear whether the moratorium period has shifted, following the supplementary agreement.

• How much will civil works entail from the total RM44bn cost? MQ Research estimates one-third of the cost goes to tracks, systems and rolling stock. As such, only RM30bn will go to civil works costs. MQ Research understands that the previously guided RM10bn land acquisition cost is not part of the RM44bn project cost agreed today. Out of the RM30bn civil works costs, MQ Research could potentially see an allocation of up to 30% of the value to Malaysian contractors. As such, MQ Research estimates local players could win up to RM10bn in new orders from this project, with Lafarge and IJM having previously been named as the cement and concrete pile suppliers, respectively.

Outlook MQ Research believes awards will take place within three to six months from now. MQ Research’s top picks for ECRL are Gabungan AQRS, MRCB, HSS Engineers and Econpile. With only a limited tunnel portion, MQ Research believes tunnelling expert Gamuda could have little benefit or advantage in this project.

Source: Macquarie Research - 15 Apr 2019