Key Summary:

Over the course of three days and two nights, we travelled over 400 km from Kota Bharu to Pekan, exploring various development projects within the East Coast Economic Region (ECER). Hosted by the ECER Development Council (ECERDC), our visit included sites in Kelantan, Terengganu, and Pahang, showcasing how the East Coast of Peninsular Malaysia is poised to become a major economic hub. Notable visits included the Pasir Mas Halal Park (PMHP), Tok Bali Integrated Fishing Port (TBIFP), and Kerteh Biopolymer Park (KBP) in Kelantan and Terengganu, as well as the Malaysia-China Kuantan Industrial Park 3 (MCKIP3), Pekan Automotive Park (PAP), Pahang Technology Park (PTP), and Kuantan Port. A significant development observed was the East Coast Rail Link (ECRL), now more than 70% complete, which will revolutionize the region’s infrastructure. Expected to begin operations in 2027, the ECRL will connect Port Klang with east coast ports, facilitating freight transport and easing traffic congestion along the East Coast Expressway. This will stimulate industrial growth, providing manufacturers with new logistics options for exports. The ECER region has already attracted substantial investment.

Strong take-up at ECERDC’s industrial parks in Terengganu and Pahang. In Terengganu, the KBP hosts international companies like CJ Bio and Arkema, while Pahang’s MCKIP3, a fully subscribed industrial park, includes major Chinese players such as Alliance Steel, Maxtrek Tyres, and Camel Power. The PAP and PTP also show promising investments, including Synapse Network, a Canadian data centre operator. In conclusion, the completion of the ECRL will serve as a key catalyst for economic growth, fostering trade and investment, especially in sectors like manufacturing, logistics, and technology, and benefiting local businesses involved in the supply chain. We conclude the report with the potential beneficiaries such as ANNJOO (Buy, TP: RM1.05), CITAGLOB (Not Rated), DRB-HICOM (Not Rated), GAMUDA (Buy, TP: RM10.98), IJM (Buy, TP: RM4.00), LBS (Not Rated), MUHIBAH (Not Rated), QL (Hold, TP: RM4.84). SIME (Hold, TP: RM2.74), TENAGA (Buy, TP: RM17.30) and WCT (Buy, TP: RM1.54).

Working Trip to the East Coast Economic Region: 13-15 November 2024

• Our team recently embarked on a productive working trip to the East Coast of Malaysia, visiting Kelantan, Terengganu, and Pahang from 13 to 15 November 2024, in collaboration with the East Coast Economic Region Development Council (ECERDC).

• Over the course of this enriching 3-day visit, we had the opportunity to explore several landmark projects facilitated by ECERDC, including the Pasir Mas Halal Park (PMHP), the Tok Bali Integrated Fisheries Park (TBIFP), the Kerteh Biopolymer Park (KBP), the MalaysiaChina Kuantan Industrial Park (MCKIP), and the Pahang Technology Park (PTP).

• We gained a deeper understanding of ECERDC's critical role in shaping the economic landscape of the East Coast. It covers Kelantan, Terengganu, Pahang, and the Mersing & Segamat Districts in Johor, encompassing 52% of Peninsular Malaysia (approximately 69,000 sq. km). Mersing and Segamat have been incorporated into the ECER because of their shared economic activities and their proximity to the borders.

• Serving as a bridge between investors and state governments, ECERDC plays a pivotal role in streamlining investments, offering tailored incentives to attract and retain businesses in the region.

• In addition to the support provided by MIDA (Malaysian Investment Development Authority), ECERDC offers a range of competitive investment incentives, which include:

1. 100% Investment Tax Allowance (ITA) on qualified capital expenditure over 5 years, or
2. 100% tax exemption on statutory income for 10 years

Other benefits include:

- Investment deductions for qualifying agriculture projects,

- Stamp duty exemptions,

- Income tax exemptions for industrial park developers, and

- Customised incentives based on the merit of each investment.

• Beyond ECERDC’s incentives, state governments also offer additional attractive benefits to bolster investment in their respective states. For instance, Pahang offers exemptions on local property tax (cukai pintu) and land tax (cukai tanah), further enhancing the region's investment appeal.

• We believe that fostering collaboration between federal and state governments, as well as various relevant agencies, is crucial for attracting meaningful investments and ensuring sustained regional development. This holistic approach should go beyond relying solely on ECERDC and MIDA incentives and involve a concerted effort to create a favourable business environment.

• During our meeting with ECERDC in Putrajaya, a day before our working trip, we were informed that ECERDC has successfully secured a remarkable RM44.4bn in realized investments for the East Coast Economic Region (ECER). This achievement represents an impressive 90% of the RM49bn target outlined under the ECER Master Plan 2.0 (EMP 2.0) for the period 2018 – 2025.

• The upcoming Master Plan, EMP 3.0, covering the period from 2025 to 2030, will be released soon, aligning its objectives with those of the 13th Malaysia Plan (13MP) and MADANI economy.

• In summary, ECER’s growth strategy focuses on four main pillars:

1. Food Basket (agriculture), targeting a RM5bn contribution to GDP by 2030,
2. Tourism development, targeting a RM8bn contribution to GDP by 2030,
3. Hard-to-abate manufacturing, targeting a RM8bn contribution to GDP by 2030, and
4. The Marine industry, targeting a RM1bn contribution to GDP by 2030.

Kelantan

• Our visit to Kelantan began with tours of the PMHP and TBIFP, two key projects in the region that showcase Kelantan’s growing potential in specialized industries. During a briefing by En Mohd Zaharuddin, the key representative of ECERDC Kelantan, we were provided with valuable updates on several ongoing initiatives, including the development of the Tok Bali Industrial Park and the Palekbang-Kota Bharu Bridge.

• As of September 2024, Kelantan has successfully attracted RM153mn in investments, surpassing the state's target of RM100mn for the year. This is a clear testament to the region's growing appeal to investors. Kelantan’s economic strengths lie in agriculture, tourism, and marine industries, making it a diverse and attractive destination for investments across multiple sectors.

• Special tax incentives offered by the Kelantan state government include:

1. A 100% income tax exemption for 15 years to encourage long-term investments.
2. A special income tax rate of 17% for an additional 5 years as an extension of the initial incentive period.
3. A flat personal income tax rate of 15% for non-citizens holding key positions in companies benefiting from these initiatives.

• ECERDC actively facilitates financing applications for investors, partnering with financial institutions such as Agrobank, Maybank, and MIDF to offer loans of up to RM2mn, subject to final approval, to support business growth in the region.

• To bolster its tourism sector, Kelantan plans to upgrade the Kota Bharu Airport with aspirations to transform it into an international airport, thereby improving connectivity and expanding its tourism potential. Ongoing discussions are taking place with AirAsia, Malaysia Airlines (MAS), and the Malaysia Airports Holdings Berhad (MAHB), with plans to introduce international flight routes, including direct flights to Jeddah, Madinah, and several major cities in Thailand. This move is expected to significantly enhance the state’s accessibility and appeal to both tourists and business travelers.

• Issues and challenges. In contrast to ECER projects in Terengganu and Pahang, which focus on heavy industry and manufacturing, the projects in Kelantan focus more on PMHP and face some issues like 1) water supply reliability that is a statewide problem, and impacts investor confidence 2) interest in PMHP is mostly from local investors, but many lack financial strength 3) competition from products from southern Thailand, which has a more developed F&B manufacturing sector. We believe that compared to Terengganu and Pahang, EDERDC’s projects in Kelantan will likely have longer gestation period due to these challenges.

Terengganu

• In Terengganu, we visited the KBP’s SME Complex, which has recently expanded to Phase 1B. This expansion is part of a key initiative aimed at driving the growth of small and medium enterprises (SMEs) in the region, while also creating additional employment opportunities and fostering innovation within the biopolymer industry.

• To date, ECERDC has successfully attracted investments totaling RM3.1bn in Terengganu, with an impressive 98% of these investments directed toward the manufacturing sector, while the remaining investments have been channeled into the tourism sector. The investment target for 2024 has been set at RM4.2bn, with ECERDC actively working toward meeting and exceeding this goal.

• The investment portfolio for Terengganu remains well-diversified, ensuring continued economic resilience. It is structured as follows: 77% in manufacturing, 13% in tourism, and 10% in oil and gas, which collectively contribute to the state's sustained growth and development across multiple industries.

Pahang

• In Pahang, we were briefed on the ongoing development of MCKIP Phase 3. The earthworks and infrastructure upgrades for this ambitious project are scheduled for completion by 2025, positioning MCKIP to further solidify its role as a key industrial hub. Jointly developed by both Malaysia and China, MCKIP is modeled along the same lines as its sister park, the China-Malaysia Qinzhou Industrial Park (CMQIP) in China. MCKIP is the first industrial park to be accorded the “National Industrial Park” status in Malaysia.

• MCKIP’s proximity to Kuantan Port and other industrial parks in ECER enables excellent synergies to promote high end and high technology industries such as stainless steel products, electric and electronics, information communication technology, renewable energy and others.

• Among the launched projects in MCKIP:

1. Alliance Steel - the first project to enter MCKIP 1. The project is jointly invested and constructed by the Guangxi Beibu Gulf International Port Group and Guangxi Shenglong Metallurgical Co. Ltd, with a planned investment of about USD1.4bn.
2. Maxtrek Tyre Manufacturing Malaysia Sdn. Bhd – under MCKIP 2. This project adopts the Industry 4.0 intelligent manufacturing system and internationally advanced green energy-saving and environmental protection technologies. Reports showed it produces 6mn car & light truck tyres and 500,000 truck/bus tyres a year.

• The MCKIP expansion is expected to attract RM1.5bn investment by 2027, underscoring the continued growth and international interest in the region's industrial capabilities.

• A significant development to note is the Synapse Network, a Canada-based company that has recently signed a 10-year lease agreement to relocate its operations from Hong Kong to Pahang Technology Park (PTP), signaling strong confidence in the region's business environment and infrastructure.

• There are also other potential investors exploring opportunities in Pahang. A Singapore-based company that specializes in data centers is currently studying a business plan to build a 250-MW data center at PTP, with a final investment decision expected next year.

• Another promising opportunity involves a joint venture (JV) between a local private company and the Pahang State Development Corporation. This JV is conducting a feasibility study for a 3-MW data center, with the study expected to be completed early next year. This would further diversify Pahang's investment portfolio and position it as a growing center for technology infrastructure.

• Pahang has already surpassed its 2024 investment target, achieving RM10.2bn in realized investments, significantly exceeding the RM5.7bn target for the year. This demonstrates the region's strong appeal to investors and its competitive edge in attracting capital across various sectors. Notably, 80% of these investments are directed toward the manufacturing sector, followed by the oil and gas and property sectors. These investments have generated 3,342 job opportunities and fostered 158 entrepreneurial prospects, contributing to the region’s economic vitality.

• A key infrastructure milestone for Pahang is the completion of the 29-kilometre interstate water supply project from Kemaman (Terengganu) to Gebeng (Pahang). This project ensures a reliable water source to support industrial expansion, attract further investments, and improve the operations of surrounding industrial parks in Gebeng. Looking ahead, the East Coast Rail Link (ECRL), set to begin operations in 2027, will greatly enhance the regional connectivity. This transformative project is expected to position Gebeng as a beacon of economic development on the East Coast, making it a strategic hub for future industrial growth and further strengthening Pahang’s role in the national economy.

• We also visited Kuantan Port during this trip. Kuantan Port has been operating since 1984 and now includes two sections: Kuantan Port 1 and the New Deep-Water Terminal (NDWT), which began operating in 2018. Kuantan Port 1 has a depth of 12 meters, allowing it to handle ships up to 55,000 tonnes. It supports various cargo types, including containers, making it highly versatile.

• The NDWT, with a deeper 16-meter draft, can handle much larger ships of up to 180,000 tonnes—three times bigger than those at Kuantan Port 1. In its first phase, the NDWT focuses on dry bulk and break-bulk cargo. It uses semi-automated systems, requiring less manpower compared to Kuantan Port 1.

• There is ample space for Kuantan Port to expand – NDWT can be expanded in Phase Two, while there is also potential for expansion via dredging behind the 4.6km backwater opposite the NDWT. Beyond that, there is another 6km shoreline towards Cherating that is earmarked for port development.

• Brand new Kuantan Airport. There are also plans for a new airport in Kuantan. The current airport is too small, surrounded by Kuantan’s growing suburbs and shares its runway with TUDM Kuantan Air Base. The new airport is expected to cost RM2bn, located right next to Cherating ECRL Station, will be capable of handling international passenger and cargo flights, and will have maintenance, repair and overhaul (MRO) facilities. The construction and operation of the airport is awarded by the state govt to Gading Group. Construction of the airport is expected to commence in 2025 with targeted completion by 2026.

Potential Drivers and Dampeners

• To support the development needs of land parcels across various states, we note that many infrastructure and building construction projects have predominantly been awarded to local construction firms. Among these is the new Kuantan International Airport project, valued at approximately RM2bn. Located next to the Aerospace City mixed development on a 5,042- hectare site, the airport is designed as a logistics hub with a capacity of 250,000 passengers per year. It aims to enhance air freight and passenger movement between China and Kuantan, given its proximity to MCKIP. Additionally, the airport is expected to complement the nearly completed ECRL, positively impacting the state’s GDP. To note, Gading Group Bhd – a local company with business portfolio spanning across the aerospace, marine, military defence and technology industry – has been appointed as the project developer, with completion slated for 2026. The open tender process is underway, with results anticipated by 1HCY25. We believe that GAMUDA (Buy, TP: RM10.98), IJM (Buy, TP: RM4.00), WCT (Buy, TP: RM1.54), and CITAGLOB (Not Rated) could emerge as potential beneficiaries, supported by their established track records in infrastructure construction.

• Meanwhile, given its near monopoly of the domestic power supply industry, TENAGA (Buy, TP: RM17.30) will likely play a role in power supply into the ECRL. However, Tenaga is governed under the Incentive Based Framework and earnings are tied to pre-determined parameters under the current regulatory period. On the other hand, ANNJOO (Buy, TP: RM1.05) is poised to benefit from the spillover effects of supplying electricity to the ECRL. This is underpinned by its unincorporated JV with PT Lumintu Insan Mandiri for the design and construction of electrification works for the ECRL feeder station. Notably, the RM297.9mn contract, awarded by TNB in June 2024, includes the construction of a 132kV switching station, overhead transmission lines, underground cable installation, and related tasks. The project is scheduled for completion by the end of May 2026.

• Furthermore, we believe that DRB-HICOM (Not Rated), a key player in Malaysia's automotive sector, has greatly benefited from the completion of the ECER's initiatives. ECER’s emphasis on infrastructure development is enhancing connectivity for DRB's manufacturing and distribution operations. Additionally, the ECER’s focus on attracting foreign direct investment is creating new opportunities for DRB to collaborate with global automotive companies. The development of Kuantan Port has also supported the export of vehicles and automotive components produced by DRB. Furthermore, the Pahang Automotive Park (PAP), designed as a “Green Automotive Industrial Park” with energy-saving features, solar-powered renewable energy, and an integrated waste management system, is expected to draw new investments in electric vehicle (EV) manufacturing. To recap, DRB is a pioneer of PAP, operating an assembly plant adjacent to the park. PAP currently houses two key firms: ZF Chassis Systems (a subsidiary of Taiwan’s Foxconn) and Yanfeng, both supplying parts to DRB’s Mercedes assembly line. We understand that more auto part suppliers are expressing interest in establishing operations at PAP, signalling growing business opportunities for DRB-HICOM in Pekan.

• Moreover, with ECER actively progressing MCKIP Phase 3 and attracting more investors to establish facilities, we anticipate a significant boost in Kuantan Port’s throughput, driven by robust import and export activities from an increasing number of industrial players. To recap, Kuantan Port has a cargo capacity of 45mn tonnes per annum, with an utilisation rate of approximately 50–55%. As more industrial players enter the region, we believe IJM (Buy, TP: RM4.00), which holds a 20.4% effective stake in MCKIP and 60% stake in Kuantan Port, is well-positioned to capitalise on the rising trade and investment flows between Malaysia, China, and Southeast Asia. However, the company has guided that near-term volumes may soften due to subdued economic activity in China. That said, these headwinds are expected to phase out, supported by the growing industrial activities in MCKIP and the completion of ECRL. Notably, Kuantan Port contributed a reported PBT of RM151.4mn in FY24, accounting for 15.7% of the group’s PBT for the year.

• The ECRL project will certainly enhance the connectivity between the key development corridors in Malaysia. In our opinion, however, we do not think WPRTS (Hold, TP: RM4.80) would benefit in a big way as the company derives its cargoes mainly from handling ship cargoes. So, when a cargo can now be transported via rail in the east coast of Peninsular Malaysia, or eventually for cargo from China, Laos, Cambodia, Vietnam and Thailand, Westports’ earnings could be affected. Having said that, the rail cargoes reaching Port Klang would provide storage income to port operators for utilising the container yards.

Other potential beneficiaries

• MUHIBAH (Not Rated) will be developing the Kuantan Maritime Hub, next to Kuantan Port. The 202.34-hectare project will include a world-class shipbuilding and maintenance centre, a specialised construction centre for the oil and gas industry, a technical training hub, a maritime industry centre and mixed-use property development. We passed by the site on the way to Kuantan Port but project progress seems to be minimal.

• SIME (Hold, TP: RM2.74). Subsidiary SIMEPROP (Buy, TP:RM2.00) owns an effective 15.3% stake in MCKIPSB. The industrial equipment division Sime Industrial also has distribution operations in Kemaman and Kuantan. However, other than these, Sime Darby’s exposure to ECER is somewhat minimal.

• LBS (Not Rated). The KBP will be competing for investors with the upcoming Kerteh Terengganu Industrial Park next door, spearheaded by listed developer LBS Bina via its listed subsidiary MGB (Not Rated) in JV with the state govt. We passed by the site at KBP but project progress seems to be minimal.

• QL (Hold, TP: RM4.84). ECERDC says that it has been in talks with QL Resources on the possibility of opening a tuna processing and canning factory at the TBIFP. Currently 50% of the catch landing at TBIFP is tuna, and ECERDC is keen for a higher value-added activity to be developed in Tok Bali but so far there is nothing conclusive yet.

Source: TA Research - 21 Nov 2024