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Penang Undersea Tunnel
Construction Sector - All eyes on Penang undersea tunnel project OVERWEIGHT
Author: kiasutrader | Publish date: Mon, 9 Sep 13:26
- Project set to take off this year. The Edge Malaysia’s cover story featured an article on Penang’s upcoming undersea tunnel project. The Pakatan Rakyat government in Penang had issued a letter-of-intent (LoI) to Consortium Zenith BUCG Sdn Bhd back in February 2013 after the latter submitted the lowest bid of RM6.3bil under a public tender exercise. While no details were unveiled, The Edge Malaysia report revealed that some of the other bidders include IJM, WCT, Gamuda and MRCB. The report added that Zenith BUCG hopes to sign a formal agreement this year – targeted within a month or so. This follows the finalisation of major points under the agreement with the Penang government following four months of negotiations.
- Key project components. The main segments includes:
- Expansion of an existing paired road from Tg.Bungah to Teluk Bahang (12km), which includes either a bridge or tunnel crossing Mt.Erskine (12km);
- Road and tunnel link between Lebuhraya Tun Dr. Lim Chong Eu and Ayer Hitam (5km);
- Road and tunnel link between Lebuhraya Tun Dr. Lim Chong Eu to Persiaran Gurney Highway (4.2km); and
- Penang-Butterwoth link (7.2km). This includes a 6.5km-long undersea tunnel connecting George Town and Butterworth.
- Ten-year project. We understand that the project would be broken down into four phases. The first three phases would involve the construction of the bypasses along Penang Island as highlighted above, while the final leg involves the construction of the main Penang-Butterworth link. The project forms part of the Penang government’s plans to mitigate traffic congestion and improve social economic linkages, especially within the mainland. The existing road network does not have a middle-ring road within the island that can channel traffic out, while roads within Georgetown and the city centre are too small to cope with heavy traffic load.
- Budgeted at RM6.3bil. The total cost of this project is estimated at RM6.3bil. The 6.5km-long undersea tunnel is seen as the third link that bridges Penang Island with the mainland. Comparatively, the ongoing Penang Second Bridge project – scheduled to be completed this month - has a 16.9km over-sea span that costs c.RM4.5bil.
- Funding. As consideration for building the tunnel and by-pass roads, Zenith BUCG would be: (1) Awarded a 30-year toll concession: The toll collection applies only to the undersea tunnel portion, with toll rates being tied to the second link. (2) Given 110 acres of reclaimed land: This large tract of land will come from the Eastern & Oriental Bhd’s (E&O) Sri Tanjung Pinang 2 (STP2) development. Out of this, 50 acres are located along the shoreline towards Gurney Drive while 60 acres would be on a man-made island. We understand that the first three phases would likely be funded using the land as collateral for the consortium to secure bank financing. As for the undersea tunnel that would likely account for a bulk of its cost, this portion could either be funded via future toll revenue or construction/development profits earned from the first three phases. The undersea works could start by 2020 To monetise its land entitlement, Zenith BUCG has reportedly signed MoUs with well-known international developers keen on gaining a foothold in Penang. However, no further details were revealed.
- Who’s behind the consortium? The Zenith BUCG SPV is made up of Malaysian and Chinese contractors. They are: Zenith Construction Sdn Bhd-China Railway Construction Co (CRCC) JV, Beijing Urban Construction Group (BUCG), Sri Tinggi Sdn Bhd and Juteras Sdn Bhd. While the exact structure has yet to be finalised, we understand that local parties would take up 90% of the SPV. The Chinese parties would not participate in the toll collection. Both state-owned CRCC and BUCG are construction heavyweights from China that would lend considerable financial muscle and construction capabilities within the consortium. On the other hand, Zenith is a G7-class contractor registered with the Construction Industry Development Board (CIDB). Some of its project portfolios include a luxury condominium on Jln Stonor KL, 1,000-unit low cost flats in Sabah under the Ministry of Housing & Local government and the rebuilding of Universiti Teknologi Malaysia’s management centre. Completing the team are Sri Tinggi and Juteras, both Class A contractors that have also obtained G7 CIDB certification.
- Litmus test. How the Penang undersea tunnel project is funded serves as a litmus test for future infrastructure projects in Malaysia. This comes amid fresh concerns that the Federal government may re-prioritise several major infrastructure projects to strengthen its fiscal position. Moreover, unlike other federal-funded initiatives that require the government’s financial assistance or guarantees, this project requires none of these. All said, we believe execution is key as this project would likely be cash flow negative for five years before the consortium can recoup some of its investments via the monetisation of the reclaimed land and future toll revenue.
- Who benefits? While details remain sketchy at this juncture, we foresee some potential contract outsourcing opportunities for local contractors – given the sheer size and time-sensitive nature of this massive project. As such, we see costcompetitive contractors such as WCT to be in a position to secure sub-contracting roles. Likewise, the ten-year horizon for this job would prod demand for building material products. Ann Joo Resources is well-positioned to benefit from this, given the strategic location of its steel plants that are located in Prai, Penang. Other key beneficiaries include IJM’s ICP (supply of largediameter pipes), Lion Industries (steel), Lafarge Malaysia (cement) and KimLun Corp (tunnel lining products). On the property front, we count IJM Land (The Lights), Mah Sing (Soutbay) and E&O (STP 1 & 2) as among the potential beneficiaries – as together with the second bridge – the undersea tunnel project would improve connectivity to their respective development landbanks within Penang island.
- Maintain OVERWEIGHT. The positive progress made on the Penang undersea tunnel project could be a marker for more large-scale project financing in Malaysia that can be unleashed with minimal or no government support while aiding the Federal government to balance its books. Intuitively, we believe three key drivers are vital to support these initiatives:- (i) non-cash considerations as payment-in-kind (e.g. land, concessions); (ii) innovative public-private sector partnership models (e.g. Gateway@KLIA2; codeveloped by WCT and Malaysia Airports Holdings); and (iii) foreign-backed funding at attractive rates tied with shared work opportunities between local and contractors from the funding country (e.g. Pahang portion of the PahangSelangor inter-state raw water transfer program – loan from the Japan Bank of International Corp, estimated at c.1%). More importantly, we expect newsflow momentum on the construction sector to pick up from 4Q13 onwards after a lull in 3Q13 - with the pronouncements of several catalyctic projects with low import content and high multiplier effects. To be sure, the Fiscal Policy Committee (FPC) chaired by Prime Minister Datuk Seri Najib Razak last week had announced that all three lines of the Klang Valley MRT would proceed as planned along with five other high impact projects (Menara Warisan Merdeka, Naza’s Matrade Exhibition Centre, the Rubber Research Institute development in Sg.Buloh, Pudu Jail redevelopment and Tun Razak Exchange). Other potential job opportunities in months ahead could come from Langat 2, the West Coast Expressway (WCE), basic infrastructure works for PETRONAS’ RAPID, as well as the rapid development agendas of SCORE and Iskandar Malaysia.
Source: AmeSecurities
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