Unmasking Asia Thematic Research

APRIL 2016

ASEAN Infrastructure:
THE NEW OLD THING

SEE PAGE 125 FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS Co. Reg No: 198700034E MICA (P) : 099/03/2012
REGIONAL INFRASTRUCTURE
Unmasking Asia Thematic Research Series

Stress Test Series, September 2015

Regional: I So Wanna Be Resilient
Hong Kong/China: The Devils in the Details
India: Asias Sanctuary
Indonesia: Finding a Foothold
Malaysia: Weathering Through
The Philippines: Stress Cuts Profit But FCF Stays Positive
Singapore: The Growth Conundrum
Thailand: Barely Resilient
Vietnam: Timely Deleveraging

Hong Kong/China Energy: Project Blue Sky, December 2015

Hong Kong/China Electric Vehicles: The Green Race, January 2016

ASEAN Infrastructure: The New Old Thing, April 2016

UNMASKING ASIA
Executive Summary
Is ASEAN Infrastructure The New Old Thing?
This report tackles the theme in two ways. From a strategy perspective, we
assess the needs and the sources of funding. We also look at each country
from a sector perspective to identify gaps, whether they will be filled and, if
not, what needs to happen for shortfalls to be met. This provides the basis
for identifying opportunities and investment recommendations. Our focus is
on Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam.
Our principal findings are:
Since the start of the year, the poor global cyclical environment has meant
greater fiscal impetus on infrastructure spend. Even Singapore is set to
accelerate development expenditure to 6% of GDP by 2020.
Structurally, looking at asset turnover globally suggests few reasons to
expect global growth to accelerate. And, given aggregate leverage, there
are few reasons to expect balance sheet expansion by developed markets
as well as China.
But while ASEAN infrastructure needs are well known, funding remains the
key question. We looked at savings rates against demographic and
urbanization trends and find there are reasons to expect rising domestic
savings rates in coming years. It also helps that ASEAN balance sheets are
under-leveraged with capacity to expand. While foreign capital is needed,
domestic funding is set to be a big factor.
Two of the countries have external funding needs. In Indonesia,
government development budgets are up 33% CAGR since 2014, and
spending in the first two months is running at over 40% YoY. Even so, interest
rates and the currency have been well behaved this year. Power is
interesting in that our team reckons IRRs have not changed in recent years,
even as they have dropped around the region. The team also sees
opportunities in transport.
In Vietnam, the government acknowledges that the state budget and
other forms of development assistance may meet at most half of budgetary
needs over the next 10 years. That implies that Public Private Partnerships
are a necessity and not an option, offering new opportunities.
In Thailand, there is sufficient domestic liquidity to fund spending as the
emphasis shifts to transport. This new focus reflects concerns over the threat
of high logistics costs to competitiveness. If projects can be successfully
executed, logistics costs could drop 2%-points to 12%, significant for the
manufacturing sector.
The Philippines has under-invested in recent years and has actually seen
deteriorating logistics performance in contrast to the rest of the region.
Infrastructure spending is set to be a key focus of the incoming government
following the May elections, with transport again the emphasis.
In Malaysia and Singapore, its about improving the quality of infrastructure
rather than increasing the infrastructure capital stock per se.
The biggest theme in Malaysia is the build-out of the rail system over the
next 5-10 years to improve and enhance local and regional connectivity
given the launch of the ASEAN Economic Community last December.
Singapore continues to invest in extending its lead as a regional hub, both
in LNG and in information and communication. Development expenditure
in the budget is set to accelerate.
Around the region, while we are seeing improving governance overall,
much remains to be done. The practicalities of land acquisition remain a
key risk throughout much of the region, particularly for executing transport
projects.
The teams best stock ideas are on page 2.
UNMASKING ASIA 1
ASEAN Infrastructure Best Ideas
Price Mkt Cap 3mth avg T/O PE (x) EPS growth (%) PB (x) DY (%) RoE (%) EV/EBITDA (x)
Name Ticker Sector Analyst (lcl crcy) (USDm) (USDm) Rating 15 16F 15 16F 15 16F 15 16F 15 16F 15A 16F
Indonesia
Adhi Karya ADHI IJ Construction Pandu Anugrah 2,670 719 5 Buy 12.1 13.9 23 -13 1.1 1.7 1.3 1.0 14 13 5 7
Bumi Serpong Damai BSDE IJ Real Estate Aurellia Setiabudi 1,835 2,671 4 Buy 13.7 13.5 -36 2 1.8 1.6 0.8 0.7 15 13 1 1
Jasa Marga JSMR IJ Construction Pandu Anugrah 5,375 2,764 3 Hold 24.9 20.8 3 20 3.5 3.2 1.3 1.4 15 16 13 12
Pembangunan Perumahan PTPP IJ Construction Pandu Anugrah 3,750 1,373 2 Buy 26.8 20.2 27 33 6.2 5.0 0.9 1.1 26 28 10 8
Summarecon SMRA IJ Real Estate Aurellia Setiabudi 1,590 1,735 3 Buy 27.6 20.5 -40 35 3.8 3.3 1.3 1.5 15 17 2 2
Waskita Karya WSKT IJ Construction Pandu Anugrah 2,090 2,145 5 Buy 22.0 22.3 81 -2 2.4 2.7 0.5 0.7 17 13 14 14
Malaysia
Gamuda GAM MK Construction Li Shin Chai 5.0 3,029 5 Buy 17.1 18.0 -7 -5 1.8 1.9 2.4 2.4 12 10 23 20
IJM IJM MK Construction Li Shin Chai 3.6 3,310 5 Hold 22.1 22.7 -14 -3 1.4 1.5 2.1 2.1 7 7 12 15
Sunway Construction SCGB MK Construction Li Shin Chai 1.6 534 1 Buy 16.5 13.5 12 22 4.7 3.8 2.5 2.6 33 31 9 7
Philippines
DMCI Holdings DMC PM Industrials Rommel Rodrigo 12.8 3,661 2 Hold 15.5 13.7 0 13 2.8 2.6 3.9 4.4 19 20 11 9
Metro Pacific Invt MPI PM Financials Rommel Rodrigo 5.8 3,515 5 Buy 18.7 19.3 2 -3 1.5 1.4 0.6 0.6 8 7 20 19
Singapore
Mapletree Ind Trust MINT SP REITs Joshua Tan 1.6 2,122 3 Buy na na na na 1.2 1.2 6.5 6.9 8 8 18 18
SingTel ST SP Telcos Gregory Yap 3.7 43,812 62 Buy 15.7 15.5 4 1 2.4 2.3 4.7 4.8 16 15 10 8
Thailand
Advanced Info Service ADVANC TB Telcos Maria Lapiz 153 12,913 77 Buy 11.6 15.0 9 -22 9.4 11.2 8.5 6.6 82 68 7 9
Airports of Thailand AOT TB Transport Sittichai D. 376 15,248 40 Buy 33.5 26.4 32 27 4.9 4.3 1.4 1.5 15 17 16 18
CH. Karnchang CK TB Construction Maria Lapiz 25.3 1,214 11 Buy 33.5 29.5 29 13 2.1 2.0 1.2 1.4 7 7 22 21
Vietnam
Cotec Construction CTD VN Construction Trung Thai Quang 178,000 374 0.4 Buy 12.1 9.8 100 23 2.6 2.2 2.8 3.1 22 24 5 6
Kinh Bac City Devt KBC VN Real Estate Trung THAI Quang 12,700 268 1 Buy 16.9 12.7 -17 33 0.9 0.8 0.0 0.0 6 7 20 15
Share price as at Apr 7, 2016 closing.
Source: Maybank Kim Eng

UNMASKING ASIA 2
 Table of Contents

ASEAN Infrastructure Best Ideas ......................... p2

Global: That Wonderful Elusive Sustainable

Balance Sheet Growth ....................................... p5

Indonesia: Stepping on the Gas ...................... p20

Malaysia: Going Down a Different Road ....... p36

The Philippines: If You Have the Will,

Youll Have the Way .......................................... p50

Singapore: While We Were Sleeping ........... p68

Thailand: Round 2! ............................................. p90

Vietnam: Still Below Potential ......................... p106

UNMASKING ASIA 3
REGIONAL INFRASTRUCTURE

Five Takeaways

1. ASEAN infrastructure remains an area where we see sustained growth.

2. Indonesia (power and transport), Vietnam (PPP projects throughout), the Philippines
and Thailand (both transport) are areas of opportunity. Malaysia and Singapore will
focus on quality rather than quantity.

3. Regulations and transparency need to continue to improve, particularly as transport

infrastructure needs clear land acquisition processes to be put in place.

4. Logistics performance has been improving. The Philippines has lagged in recent
years while Indonesia has seen the greatest improvement.

5. In ASEAN, we think the demographic and urbanization trends suggest rising domestic
savings rates in the coming years. It also helps that ASEAN balance sheets are under-
leveraged. While foreign capital is needed, domestic funding is set to be a big
factor.

Sadiq Currimbhoy
sadiq@maybank-ke.com.sg
(65) 6231 5836

Willie Chan
williechan@kimeng.com.hk
(852) 2268 0631

UNMASKING ASIA 4
 into some detail highlighting the rising foreign direct investment and intra-
REGIONAL INFRASTRUCTURE regional investment in key projects across the region.
This report focuses on just the ASEAN-6 where our country teams reckon we
could see government spending of USD84b this year. Of this, Indonesia provides
That Wonderful Elusive Sustainable the bulk at USD23b. After this is Vietnam at USD20b. Government efforts
amount to USD14b in Singapore and USD9b in Malaysia. Thailand is set to be
Balance Sheet Growth small this year (USD3b) but ramping up to an average of USD9b a year to 2020.
The Philippines has disappointed in recent years by spending significantly less
In our outlook report for this year, 6-for-16 (Jan 23), infrastructure build in than target. But the election provides an opportunity for new impetus.
ASEAN was a consistent theme. From a strategy perspective too, with some
indicators in the region consistent with recessionary readings, we felt there was Infrastructure Capital Stock
greater impetus and necessity for governments to implement projects.
From a macro perspective, to see where we are currently in the region, we used
Since then, the global environment has remained lacklustre and the urge for
IMF data on capital stock.
government-led infrastructure spending has arguably increased. And there has
been some response. In the Indonesia chapter, Head of Research Isnaputra Fig 1: Public + PPP capital stock per capita
Iskandar and team report faster government action and realized spending up
Public + PPP capital stock per capita in 2013
nearly 50% YoY. Even Singapore has gotten into the act. Our team highlights that
Public PPP
the government indicated public development expenditure could top SGD30b, or 40,000
6% of GDP, by 2020.
35,000
This report takes this analysis a step further by looking at Indonesia, Malaysia,
30,000
the Philippines, Singapore, Thailand and Vietnam and examining each of the
sub-sectors within infrastructure, assessing if they will be implemented and 25,000
highlighting the investment opportunity. For each country, 5 takeaways are 20,000
offered in addition to sector analysis.
15,000
In this strategy chapter, we focus on whether the ASEAN balance sheet can 10,000
sustainably grow to fund and build the needed infrastructure. We focus on three
things: 5,000

0
1. The Asean infrastructure opportunity;

Korea
Japan

Taiwan

Lao
Australia

Vietnam

Pakistan
China

Thailand

Indonesia
India
Singapore

Hong Kong
Malaysia

Germany
United States

Cambodia
Philippines
United Kingdom
2. The proposition in a global context; and,
3. The funding ability of the region.

ONE: UNDERSTANDING THE NEEDS

Source: IMF Investment and Capital Stock Dataset, Maybank Kim Eng

We know large parts of ASEAN are under-built. The ADB in its 2015 ASEAN The capital stock data is put together using national accounts and is measured
Investment Report on Infrastructure and Connectivity estimates that the region in constant 2005 dollars. The IMF accumulates the annual investment spending
needs USD110b per year until 2025 in infrastructure spend. The ADB report goes by any one country, applying estimated depreciation rates. The data is broken
up into three components: one, public sector (which we assume is

UNMASKING ASIA 5
infrastructure); two, public-private partnerships (PPP, which is likely On an infrastructure capital stock to GDP basis, the picture is somewhat
infrastructure given much is invested in power projects); and three, private different. More developed countries have lower infrastructure capital stock to
sector (which we assume is not infrastructure but may be factories, etc). For GDP essentially the built infrastructure has already resulted in much stronger
our analysis, we assumed that infrastructure capital stock was the combination income growth to support it or is of better quality. More developing countries
of both public and PPP. Removing PPP and looking only at public sector does not such as Malaysia and China (although we shall later disucss, we have some
change the analysis much. concerns that this number may be overstated) have much higher levels,
suggesting that some of the build has already occurred.
For this report, we used two different metrics: one is capital stock per capita
and capital stock as a percent of GDP. The latter we found more intuitive while The bulk of the ASEAN nations, however, continue to show very low levels of
the former helps to also understand the degree of the problem. capital stock. In this report, each team goes into their individual needs. Power
is clearly the focus in Indonesia and Vietnam. Interestingly, many discuss
Unsurprisingly, the bulk of Asia and ASEAN is underbuilt. Singapore has amongst
transport.
the highest per capita capital stock. Chinas infrastructure stock on this basis is
not overly extended, though Malaysia has one of the highest levels in the region. Quality Versus Quantity
On this metric, both have some way to catch up to Singapore.
Within Asean, there are very low readings for Indonesia, the Philippines and The issue of quality deserves a close look as less quantity but more quality
predictably, the Frontier markets of Vietnam, Cambodia and Laos. India, too, may be able to support higher economic activity.
exhibits a very low infrastructure capital stock per capita. Fig 3: Quality of overall infrastructure & public capital stock+PPP as % of GDP
Fig 2: Public + PPP capital stock as % of GDP Quality of
overall
Public + PPP capital stock as % of GDP 7.0 infrastructure
%
Public PPP Hong Kong Singapore
180 6.5
Japan
160 6.0 Germany
United States Malaysia
140 Korea
5.5
120 Taiwan
United Kingdom
5.0
100 Australia China
80 4.5
India Thailand
60 Indonesia
4.0
Pakistan Lao
40 Vietnam
3.5
20 Philippines Cambodia
0 3.0
India

Korea
Japan

Taiwan
Lao

Cambodia
Vietnam

Pakistan

Australia
Philippines
China

Indonesia
Thailand

Hong Kong

Germany
Malaysia

Singapore

United States

United Kingdom

0 20 40 60 80 100 120 140 160 180

Public capital stock + PPP as % of GDP
Source: IMF Investment and Capital Stock Dataset, World Economic Forum, Maybank Kim Eng

Using Quality of Infrastructure data from the World Economic Forum, we plotted
Source: IMF Investment and Capital Stock Dataset, Maybank Kim Eng quality with infrastructure capital stock as a percent of GDP. The data is part of
the Global Competitiveness Report. Not surprisingly, the developed world and

UNMASKING ASIA 6
Asias city states have the highest quality of infrastructure. And, while they Fig 4: Quality of overall infrastructure & private capital stock as % of GDP
have a high infrastructure capital stock per capita (Figure 1), they also have a Quality of
relatively lower level of infrastructure as a share of GDP (Figure 2 and 3). overall
7.0 infrastructure
Unfortunately, we do not have history to see how infrastructure capital stock Hong Kong Singapore
evolves over time from both a quantity and quality perspective. Only the 6.5
quantity metric is available. But this is instructive. Germany Japan
6.0
Taiwan Malaysia Korea
The Big Curl? 5.5 United States
Australia
While not shown here, infrastructure capital stock in Singapore exceeded 108% 5.0 United Kingdom
China
of GDP in 1990 and based on the latest 2013 data, its below 70%. We do not
4.5
know the quality then, but there has always been the approach of build it and Thailand
they will come. This continues today and Singapore still has a very proactive India Indonesia
4.0
economic infrastructure plan to be a regional hub. It is home to 50% of Pakistan Lao
Southeast Asias data centres and is expanding capacity. 3.5 Vietnam
Cambodia Philippines
From an aggregate perspective, this suggests that there is a Big Curl 3.0
initially, capital stock to GDP surges dramatically even as quality perhaps only 50 70 90 110 130 150 170 190 210

slowly improves. Eventually, there is less need for physical infrastructure build, Private capital stock as % of GDP
but a need to improve and optimize. Source: IMF Investment and Capital Stock Dataset, World Economic Forum, Maybank Kim Eng

On this logic, China and Malaysia are in this curl-phase. This comes out in the
Malaysian chapter put together by Suhaimi Ilias, Wong Chew Hann, Tan Chi Wei
and Chai Li Shin. They discuss the emphasis on improving the efficiency and
quality of infrastructure.
Chinas response has been natural: with less physical build-out ahead, One Belt,
One Road has the potential to allow companies that were previously building in
China to build elsewhere. And, the rest of ASEAN, and India too, have significant
scope to increase both quantity metric (which tends to exceed GDP) and
quality.
Why Quality Matters checking the data
Naturally, such quality measures may not be accurate. So, we plotted quality
against the private sector capital stock to GDP. The logic was that better quality
infrastructure will attract more private investment.
In Asia, which is still dominated by low-margin manufacturing, a small change in
logistics costs can mean much higher potential returns. And higher returns
attract private sector capital. The chart below shows this to be the case.
We were a bit surprised by the low readings in China given the expansion of
many private sector companies. One possibility is companies that are classified
as government should really be considered private sector. Even so, aggregating
both suggests that while the capital stock has increased, there is still more to
do. The difficulty for China is leverage, as we shall see later.
Importance of Institutional Systems
The ability to bridge such quantity and quality gaps is also a function of the
strength of a countrys institutions. That is, are the socio, political and legal
systems and structures in place so that the right projects are identified and
executed?
For example, one concern over the preceding analysis is that some capital stock
data may be overstated due to leakage and slippage. As the capital stock data
uses GDP components, if project values are over-stated due to corruption and
other losses then the value of the capital stock will also be too high.
In our previous work (Big Ideas: The Charts Of ASEAN, Chart 32, Corruption
Percentiles), we used data from Transparency International. We converted the
rankings data into percentiles: the higher the percentile, the higher the rank

UNMASKING ASIA 7
and so the stronger the institutional system. In ASEAN, the highest score is Fig 6: Corruption Percentiles
Singapore.
2005 Percentile 2010 Percentile 2015 Percentile
Our cross-check is again to use private sector capital stock: the higher the
100%
ranking, the more the private sector would want to come into the country and
90%
build capital stock. The chart below shows this is largely the case.
80%
Fig 5: Corruption percentiles & private capital stock as % of GDP 70%
Corruption 60%
percentiles
Singapore 50%
100% Germany
UK HK Japan 40%
90% Australia 30%
80% US
Taiwan 20%
70% 10%
Malaysia Korea
60% China 0%

South
Japan

USA
China

Thailand
India
Hong Kong

Laos

Malaysia

Singapore

Taiwan
Cambodia
Australia

Vietnam
Myanmar

Philippines
Indonesia
50% Philippines
India Thailand
40%
30% Pakistan
Vietnam Indonesia
Source: Transparency International, Maybank Kim Eng
20%
Cambodia Lao
10% As a case in point, throughout the country chapters, there is a great emphasis
on transport infrastructure, including road and rail. Thailand and the Philippines
0%
50 70 90 110 130 150 170 190 210 stress the needs in this space. In Thailands case, 93% of the Expedited Project
Private capital stock as % of GDP List is in rail and roads. Like other countries, the key is to be able to secure land
Source: IMF Investment and Capital Stock Dataset, Transparency International, Maybank Kim Eng
access and each team in this report discusses the latest developments.
In Indonesia, the Philippines and Vietnam, land acquisition is a central issue and
By using rankings and percentiles, we are looking for improvements in score by
progress is discussed in the country chapters. In the Philippines,
countries relative to other countries over time. Our underlying thinking is that
underinvestment in recent years has created significant bottlenecks. Michael
institutional improvements are keys to attracting capital in a competitive global
Bengson and Luz Lorenzo reckon that when the new president is elected in May,
environment. And, as such, we want to see consistent improvements from both
infrastructure will almost certainly be a top priority. There, a new law was
an absolute, and relative to the rest of the world, perspective.
passed last month (the Right-of-Way Act) and implementation will be the key.
The biggest improvements in recent years have been in Indonesia and the
Philippines. India, too, has shown encouraging improvement. The readings for
Why Technology Matters
Cambodia, Myanmar and Laos remain very low.
Our bias is that technology is the enemy of corruption. We think the success of
individuals using social media to expose misbehaving leaders and companies and
corrupt practices is set to continue. Other similar use of information (such as
Wikileaks and as we write, the Panama Papers) to reveal leakages, wrongdoings

UNMASKING ASIA 8
and malfeasance serves to put pressure on decision makers to behave in a way Fig 7: Logistics Performance Index and change since 2010
that minimizes losses for society. LPI score 2014
In Asia, the rapid digitization (Big Ideas: The Charts Of ASEAN, Chart 16, Getting 4.5
Ready for the e-consumer) could serve to accelerate this trend. Indeed, in each
of the country sections, what is clear is that communication capex and Singapore Canada EU - 8 US
4.0
penetration rates are high and are set to continue to increase as more and more Japan
HK
countries move to 4G. In short, the price of information is falling at a rapid pace AU TW Korea Malaysia
in the region. 3.5
China Thailand
Indonesia
Inter-connectedness and Trade Infrastructure
3.0 Philippines Mexico Vietnam
India
And that information is more easily shared and traded as ASEAN is increasingly
inter-connected (see also the Undersea pipe chart in the Singapore chapter). Cambodia
2.5 Bangladesh Lao
But while communication infrastructure is being built out, physical logistics
infrastructure is lagging. Myanmar
There are some estimates of logistics costs as a percent of GDP and in Thailand, 2.0
-0.3 -0.2 -0.1 0.0 0.1 0.2 0.3 0.4
this exceeds 14%. In the US, it is 8.3% as reported by the Council of Supply Chain
Change of Logistic performance index between 2010-2014
Management Professionals. Given that Thailand on the previous metrics has both
Source: World Bank, Maybank Kim Eng
more and better quality infrastructure than many other ASEAN countries, we
estimate logistics costs in other countries could be nearer 20%.
The Intra-regional trade perspective
The following chart shows the Logistics Performance Index (LPI). The LPI
includes 6 different metrics including customs, infrastructure, international With the launch of the ASEAN Economic Community earlier this year, there is
shipments, logistics quality and competence, tracking and tracing and much expectation of a surge in intra-regional trade. While intra-regional trade is
timeliness. not much more than 20% of total trade, in the EU and for NAFTA, this exceeds
40%.
The y-axis shows the latest reading as of 2014. The x-axis shows the increase in
points since 2010. So, one would want to be in the top right hand corner, Looking at the LPI, the bulk of European countries have the highest readings.
improving logistics performance that is at a high level. Cambodia and Indonesia Within NAFTA, Canada and the US have very high readings but Mexico is similar
show the greatest improvements in LPI over that 4-year period. In Indonesias to many ASEAN countries. So, logistics matters, but it is possible to have high
case, the improvements were driven by customs performance and logistics intra-regional trade even if not all the countries have the strongest
quality. Even so, were the total LPI improvement from 2010 to 2014 be infrastructure. In Mexicos case, this may be because the key manufacturing
replicated, it would still lag Thailand and Malaysia (which are very close to each areas are close enough to transportation networks to benefit trading partners. It
other and similar to China). So, further investment needs to occur. India and the still takes many years for businesses to identify, maximize and get comfortable
Philippines have been, on this metric, going backwards. with cross-border risk.

ASEANs case may not be dissimilar. As manufacturing is still a key driver of

growth, and many are low-margin businesses, any logistics improvements can
increase margins and profits significantly.

UNMASKING ASIA 9
However, we reckon intra-regional trade will move much faster than the pace Fig 8: Asset turnover in the US, Europe, Japan & Asia
seen in NAFTA, where it took almost 10 years for merchandise trade to double. US asset turnover Europe asset turnover
We base this on three reasons: Japan asset turnover Asia asset turnover
95%
1. The adoption of technology and communication infrastructure through
many countries lowers significantly the cost of market research, testing
out new products, access to consumers and businesses. This is 90%
particularly important in an environment where product cycles are
becoming shorter. 85%
2. The demographic patterns on young consumers mean a growing
consumer base. 80%
3. The mediocre outlook for the global economy pushing governments to
invest more into infrastructure build-out. This is the subject of the 75%
next section.
70%

TWO: SUSTAINABLY EXPANDING BALANCE SHEETS IS THE 65%

SCARCE COMMODITY 60%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E
Source: Factset, Maybank Kim Eng
Who can Expand Their Balance Sheet and Where?
Since the Global Financial Crisis in 2008, the balance sheet in the key countries
A great deal continues to be written about the lack of global growth. Rather has been generating fewer sales. We could posit any number of reasons, but one
than use macro data, we wanted to use company data. And we reckon one of these is that Quantitative Easing (or QE) helped keep weak companies from
reason for the weak global growth environment is the following figure. The going bust. Another is that the QE meant a rush of capital to Emerging Markets
chart shows asset turnover for the key countries globally defined here as just which resulted in excess capacity being built. The bottom line is that lower
sales divided by average total assets. The universe is the listed non-financial asset turns has meant downward pressures on returns on capital.
companies in the relevant benchmarks. These are aggregated by adding all the
sales and dividing by total average assets. Effectively, we are measuring how The Asia deterioration, across the board and so including the ASEAN countries,
much sales the balance sheet generates as if all the non-financials were one has been dramatic.
company.
What does this mean for returns on capital relative to the
cost of capital?
As asset turns have fallen, we compared returns on invested capital (RoIC) for
the non-financials against long term bond yields in each of the developed
regions. The logic is that a large gap between the returns and cost of capital
will be able to drive self-sustaining growth. Our RoIC calculation is a
simplification using the ROE decomposition framework: its simply net profit
divided by invested capital.

UNMASKING ASIA 10
The US Japan

The US-listed sector provides a relatively comforting picture. Despite lower In contrast, and perhaps unsurprisingly, Japans return on invested capital looks
asset turnover, record operating margins have meant the RoIC in the US has held much more linked to the exchange rate (red line on reverse scale below) than
up well compared to bond yields. In the chart below, the yellow line is RoIC domestic bond yields. Demographic and domestic debt issues are so large that
while the grey line is the US 10-year bond yield. This gap has allowed US growth Japanese returns do appear to be a function of the exchange rate and the self-
to continue to grow. With a wider gap, companies would be expected to sustaining nature of returns is therefore questionable.
continue to invest for growth.
Fig 10: Japan RoIC, 10-year government bond & real effective FX rate
Fig 9: US RoIC, 10-year government bond & US$ real effective FX rate
Japan RoIC Japan 10 yr govt bond BIS Japan REER (RHS, reverse scale)
US RoIC US 10 yr govt bond BIS US$ REER (RH, reverse scale) 10% 40
16% 80 9% 50
14% 85 8%
60
12% 90 7%
6% 70
10% 95
5% 80
8% 100 4% 90
6% 105 3%
100
4% 110 2%
1% 110
2% 115
0% 120
0% 120 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015F
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015F Source: Factset, Bloomberg, Maybank Kim Eng
Source: Factset, Bloomberg, Maybank Kim Eng
Europe
The positives are balanced by some potential negatives. First, despite very low
interest rates, thanks to low asset turnover, returns have not exploded to the Europe is also interesting as the demographic picture changes with aging
upside. Indeed, companies have focused on cost cuts. Operating margins are at populations. Lower bond yields have not meant higher RoICs in Europe. Asset
record highs and this may not be sustainable, particularly as the more cyclical turns have been declining as elsewhere but the economy has been poor and for
and globally related sectors of the economy suffer. Second, credit spreads have this universe of companies, part of the reason for improvement has been the
widened for High Yield and some Investment Grade debt and these could impact exporters.
growth and therefore, returns. Finally, the red line shows the US$ real effective
The red line again shows the Euro REER, on the right hand reverse scale. The
exchange rate (right hand reverse scale). This has risen sharply in recent years
annual nature of the analysis means there are unfortunately too few data points
and back to levels prior to the GFC. The US$ strength has yet to feed into the
but the weakening Euro has likely been improving returns of listed companies.
RoIC of US companies in aggregate but is worrisome enough for Fed Chair Janet
The European Central Bank (ECB), seeing weak inflation data and a soft
Yellen to sound very dovish. Nevertheless, the US is a relative bright spot.
economy, has been increasingly aggressive.

UNMASKING ASIA 11
Fig 11: Europe RoIC, 10-year government bond & real effective FX rate Fig 12: Debt to GDP distribution in Europe, US & Japan
Europe RoIC German 10 yr govt bond 2007 2014
Euro REER, BIS (RH reverse scale) Total Private Total Total Total Private Total Total
14% 60 Sector Debt Government Debt Sector Debt Government Debt
to GDP Debt to GDP to GDP to GDP Debt to GDP to GDP
12% 70 %) (%) (%) (%) (%) (%)
Europe
10% Germany 117 64 181 109 75 184
80
France 151 64 215 181 96 277
8% Belgium 167 87 254 209 107 316
90 Spain 206 36 242 185 99 284
6% Italy 113 100 213 121 132 253
100 Netherlands 221 43 264 241 68 309
4% UK 184 44 228 161 88 249

2% 110
US 228 56 283 211 97 308
Japan 175 167 342 188 230 418
0% 120 Source: BIS, Eurostat, World Bank, Maybank Kim Eng

2015F
2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014
Source: Factset, Bloomberg, Maybank Kim Eng
One implication of more aggressive policy by the ECB and the Bank of Japan is
the risk of currency wars given how returns in Japan and Europe have moved in
recent years. Interestingly, negative interest rates in neither Japan nor Europe
have done much to weaken their own exchange rates further. And that could
impact returns of exporters and could prevent self-sustaining growth. All this
before we get to the margin pressures on banks when there are negative
interest rates.
The stretched balance sheets could limit the ability of the developed world to
drive sustainable growth. While debt to GDP may continue to rise, the Japan
experience suggests that it is not a guarantee that growth will accelerate.
Rather, it may push more countries to reign in fiscal deficits1, putting more
pressure on monetary policy makers. But interest rates are already negative in
Europe and Japan, and yet to indicate any success. In short, the policy
credibility problem for central banks may persist for some time.
The China Factor

And the Liabilities Side is a Problem Too
We also need to consider the liabilities side of the balance sheet. Here, the
macro data, by including household and government debt, shows developed
economies are potentially too stretched.
The table below shows this. For every country, aggregate non-financial debt to
GDP is higher than before the GFC. Germany stands out as the least leveraged
economy. Furthermore, in Germany, the UK and US, the private sector has
deleveraged. But this has been more than balanced by a surge in government
debt as fiscal deficits rose sharply. In other countries, both the private and
public sector debt to GDP rose, and sometimes as nominal GDP remains very
weak in some countries.
We have found using the ROE decompositions useful in understanding Chinese
returns. In previous work, we have highlighted the decline in asset turns and
therefore in returns on invested capital.
The chart below compares RoIC for the listed Chinese non-financials universe.
While interest rates have trended down, the returns on capital have fallen at a
much faster pace. Indeed, the gap is amongst the lowest. The excess capacity is
such that there are not enough returns to get companies to invest and expand
their balance sheets again.
1
In this context, Peoples QE is understandable: if companies dont invest, then
governments need to invest in social and other infrastructure projects and this needs to
also be monetized by the Central Bank.

UNMASKING ASIA 12
Fig 13: China RoIC, 10-year government bond & real effective FX rate THREE: FUNDING SUSTAINABLE GROWTH
China RoIC China 10 yr govt bond BIS China REER, RH reverse scale
The persistent question is how infrastructure spend will be funded. That is, can
18% 80
the liability side of the domestic balance sheet expand to match the asset side?
16%
90 We approach this via looking at two separate sources:
14%
12% 100 1. The potential for domestic leverage in ASEAN; and,
10% 2. The outlook for domestic savings
110
8%
6% 120
The State of Leverage in ASEAN
4%
130
2% Unlike the developed world, and indeed China, ASEAN is under-leveraged. The
0% 140 table below shows the breakdown of aggregate debt to GDP for Asia by
household, non-financial corporate and government debt. The bulk of ASEAN is
2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015F
underleveraged and can expand their balance sheet. The levels in Indonesia, the
Source: Factset, Bloomberg, Maybank Kim Eng Philippines, Thailand and nearby India are very low and there is significant
scope to expand leverage.
Insofar as these returns reflect the environment in China, it is difficult to
expect too much from Chinese growth in coming years. We also plotted the RMB Fig 14: Debt to GDP distribution in Asia, as of September 2015
REER. While we are hesitant again to say that the currency has been driving Total Total Total Total
returns down, it is interesting that the strong RMB could be impacting returns Household Non-Financial Corp Govt
China * 39 166 44 249
negatively too. Instead, China is more likely to want to export its excess Hong Kong 67 218 5 290
capacity to the rest of the world adding to global disinflationary pressure. Indonesia 17 24 27 68
India 10 50 68 128
The problem for China, frequently discussed by us and others, is also leverage: Korea 87 106 42 235
the post GFC credit boom added roughly 100%-points of debt to GDP, resulting in Malaysia 70 68 55 193
an aggregate leverage ratio of 250%. So, while China has some infrastructure Philippines 10 29 53 92
quality improvements to do, a debt-fuelled boom may mean good money is Singapore 61 86 104 251
Thailand 71 52 31 154
being thrown at bad and this raises much greater longer term concerns (see The Source: BIS, Philippines Central Bank and Department of Finance, Maybank Kim Eng, Chinas * denotes
Cycle, Bank Cost of Capital and the Importance of AUDJPY, March 10, 2016). private sector observations of much higher non-banking sector lending.

The bottom line is the evolution and sustainability of returns in the developed
world and China gives little confidence that growth is set to recover sharply.
And there is therefore a greater probability of a low global interest rate
environment. The negative is that currencies may stay volatile and this means
that domestic savings will need to fund some of ASEANs infrastructure build.
This is the subject of the next section.
Can we see credit booms?
Indeed, if interest rates globally are to stay low for a prolonged period of time,
and disinflationary pressure persists, then interest rates in markets such as
India, Indonesia and Vietnam may ultimately be too high. Domestically,
infrastructure spending that reduces bottlenecks and allows inflation to be more
manageable could mean that interest rates can fall and do so substantially and
sustainably. That has the potential to translate into a domestic credit boom.

UNMASKING ASIA 13
Fig 15: Current account, fiscal account, interest rate, inflation & capital The Outlook for Savings Rates
adequacy
Current account Fiscal account Interest rate Inflation Capital But while domestic credit plays a role, there is also the potential of higher
(% of GDP) (% of GDP) (%) YoY (%) Adequacy (%)
10-yr Govt
savings rates.
2015E 2016E 2015E 2016E Latest 2015E
bond
For ASEAN as a whole, the Prime Savers Ratio, that is the percentage of the
Hong Kong 3.1 2.3 1.9 0.8 1.2 3.1 14.0
population aged 40-60, is set to rise for a further 15 years. This age group
Australia -4.6 -4.2 -1.9 -2.5 2.5 1.7 10.4
Taiwan 14.6 13.8 -0.2 -1.4 0.8 2.4 9.0
contains those with higher earnings but also who save as retirement approaches.
Korea 7.7 7.5 0.0 0.1 1.8 1.0 11.6
Malaysia 3.0 2.0 -3.2 -3.2 3.8 4.2 12.7 Fig 16: Demographics trends in ASEAN
China 2.7 2.7 -3.5 -3.0 2.9 2.3 11.3
(%) ASEAN (%)
Thailand 8.9 5.3 -3.0 -2.5 1.7 -0.5 13.9
Vietnam 0.7 0.3 -5.4 -5.0 6.9 1.7 13.3 28 280
Indonesia -2.1 -2.3 -2.4 -2.5 7.7 4.5 19.2
India -1.1 -1.0 -3.5 -3.9 7.5 5.2 5.5 26
Philippines 2.9 3.6 -0.9 -1.9 4.3 0.9 13.9 230
24
Singapore 19.7 20.0 -0.1 0.3 1.8 -0.8 13.8
Source: Bloomberg, World Bank, Maybank Kim Eng Estimates
22
180
20
The table above also shows that the need for external savings has dropped
18
sharply. Current account deficits are now surpluses in many countries helping to 130
create net domestic savings and no reliance on foreign capital2. Even in 16
Indonesia, where there is a current account deficit, import growth in US$ terms
14
as of February 2016 has been falling down 17% y-o-y (3 month moving average) 80
overall and down 42% y-o-y (3MMA, again) in for non-oil imports so the 12
correction could be faster than expectations.
10 30
Indeed, the team region wide is starting to see more domestic funding of many 1950 1960 1970 1980 1990 2000 2010 2020F 2030F 2040F 2050F
infrastructure projects. For example, in Thailand, our Head of Research Maria
Prime savers ratio Dependency ratio (RHS) Mid-young ratio (RHS)
Lapiz reports excess liquidity of THB2.4t (or USD68b).
Source: UN Population Database, Maybank Kim Eng
But foreign and private capital will be needed. In Vietnam, Head of Research
Lien Le Hong makes the point that the government admits that the state budget Drivers of Savings
and other forms of development assistance may meet only half of the budgetary
needs over the next 10 years. Private Public Partnerships are therefore a We also wanted to understand the drivers of savings. An IMF paper on World
MUST, and not an option. Saving by Francesco Grigoli, Alexander Herman and Klaus Schmidt-Hebbel tries
to test the drivers of savings using data across countries over time. Their model
tests a number of variables including real interest rates, the level of incomes,
growth rate, terms or trade, the flow of private sector credit among others.
We found two variables they used particularly interesting: one, old-age
2
Government deficit or G-T) + (Current Account surplus or X-M) = (Excess Domestic Saving dependency ratio (or the % of the population aged 65 and above) and the other,
or S-I)

UNMASKING ASIA 14
urbanization rate. These are slower moving in nature and also are areas where Second: Savings and Urbanization
we see material changes in ASEAN. The population is young with very low old-
age dependency ratio and the region is also seeing rising urbanization. In the IMF results, there is also a negative empirical relationship between
savings and urbanization. The theoretical relationship, in contrast, is
First: Savings and old age dependency ambiguous. This surprised us and we plotted it above for ASEAN, again excluding
Singapore and the Philippines. Again, we are looking if there is a simple
In the regression result from the IMF paper, which uses a global database, the
relationship and are not really econometrically modelling savings behaviour in
authors find a negative sign: that is, higher old age dependency means lower
the region.
savings rates. This is intuitive but we wondered if it really applied to ASEAN
given the young population. Fig 18: Gross saving as % of GDP & urban population % of total
Fig 17: Gross saving as % of GDP & old age dependency ratio Gross saving ASEAN
(% of GDP)
Gross saving 45
(% of GDP) ASEAN
40
45
35
40
30
35
25
30
20
25 y = -0.0098x2 + 1.1904x - 1.9437
15
20 R = 0.5382
10
15
5
y = -0.6413x2 + 12.416x - 28.495
10
R = 0.1863 0
5 0 10 20 30 40 50 60 70 80
0 Urban population % total
4 6 8 10 12 14 16 Source: World Bank - World Development Indicators, Maybank Kim Eng
Old age dependency ratio
Source: World Bank -World Development Indicators, Maybank Kim Eng
The relationship seems to be positive but again, the best fit is polynomial and
there is a rollover at high levels of urbanization. So, it could that at the early
So, given fewer observations, we did a simple scatter diagram to see what the stages of urbanization, households save more as earnings are higher than rural
link looked like in ASEAN. This is shown in Figure 17, but we excluded Singapore incomes and there is a need to save in order to secure a property. Plus, there is
as we use the same sample for the next analysis on urbanization and the city- also the need to send money back to rural areas, save for education, etc. Over
nation has 100% urbanization and the Philippines where repatriation means time, as urbanization levels rise, there is less need to do this and the costs of
much higher levels of gross savings. living in the city rise.

On this simplified basis, there does not seem to be a very strong link between
gross savings and old age dependency ratio. So it is possible there are other
factors at play given the young population. The best fit we tried was a
polynomial where savings rates seem to rise with old age dependency but then
fall thereafter. The key level appears to be around 10%.
The chart shows that its at around the 60% urbanization level where savings
rate peak out. While each country is different, and the caveat is that there are
many forces at play, the bulk of ASEAN is very much below these levels.
What is also interesting is the range of savings rates in the region (so the scale
of the y-axis) and how much it moves. Even though all the countries are put

UNMASKING ASIA 15
together, its still the case that increases in percentage points in Savings rates Financial Infrastructure, Risk Perception and a look at
are common for any one country!
IRRs
This leads us to the table below which shows current incomes and savings rates
against old age dependency and urban population as a % of total. For the more Naturally, in some countries, financial market deepening, the development of
developed nations, including China and North Asia, the rise in old age liquid bond markets and the insurance sector among other factors will also be
dependency ratios could be large factors driving future savings, and indeed, how key drivers and this will take some time.
strong future growth can be.
A Little IRR Analysis
Fig 19: GDP, old age dependency ratio, gross saving (% of GDP) &
urbanization (%) Ultimately, its about whether risk perceptions are declining over time.
GDP Old age dependency Gross savings Urban population
(USDb) ratio (%) (% of GDP) (% of total) We wanted to understand how the required IRRs of similar projects were
2015 2013 2020F 2013 2013 changing over time. We chose 2010 compared to today and asked teams in 4 key
Australia 1,241 22 25 25 89
countries to fill out the table below. The idea is that a declining IRR trend for
Cambodia 18 6.1 7.6 11 20
China 11,385 12 17 50 53 similar projects would be consistent with falling risk perceptions. The table was
Hong Kong 308 19 27 26 100 filled out by Isna in Indonesia, Maria in Thailand, Chi Wei in Malaysia and
India 2,183 8.3 9.8 32 32 Michael in The Philippines.
Indonesia 873 7.6 8.6 31 52
Japan 4,116 40 48 22 92 The results are spread over the next two pages and hopefully will help our
Korea 1,393 17 22 34 82 readers get used to reading tables that connect across 2 landscape pages!
Malaysia 314 7.9 10.0 30 73
Philippines 299 7.0 8.0 45 45 The bottom line is that IRRs have fallen in Malaysia, the Philippines and
Singapore 294 14 21 47 100 Thailand, but have actually stayed very high in Indonesia. If we continue to see
Thailand 374 14 18 27 48 the improvements in transparency (Figure 6) and logistics (Figure 7), and even a
Vietnam 199 9.3 12 30 32
United Kingdom 2,865 26 29 12 82
little clarity on land acquisition, the relative gap between Indonesia and
United States 17,968 21 26 18 81 elsewhere is arguably too high. Indeed, we think that infrastructure in Indonesia
Source: World Bank - World Development Indicators, IMF World Economic Outlook, Maybank Kim Eng is set to attract both regional and global capital in the coming years.

The Rest of the Report

In ASEAN though, we think the demographic and urbanization trends suggest
that there is a case to expect rising domestic savings rates in coming years. A
2%-point increase in Savings Rates for the ASEAN countries below means
USD47.4b in additional savings. In the context of the ADBs USD110b a year
target for all of ASEAN, this is a significant proportion of funding needs.
In sum, there is a reasonable chance that both the credit and savings part of the
ASEAN balance sheet can sustainably fund the asset growth part.
The rest of the report contains outlooks from each of our country teams in
Indonesia, Malaysia, The Philippines, Singapore, Thailand and Vietnam.
Each team looked at the individual sectors within infrastructure to assess
current and future plans and assess its viability and the ability to execute. They
then offered their highest conviction stock opportunities. A summary of the
stock lists for equity investors is on page 2.

UNMASKING ASIA 16
This page has been left blank intentionally

UNMASKING ASIA 17
Fig 20: IRRs Around the Region
Indonesia
1. What were the Around 11-15% in USD.
IRRs of greenfield
projects in 2010?
2. What sort of Coal fired power plants, but we suspect
projects do that this also applied to other types of power
reflect (ie, coal plants.
fired, etc)?
3. What risks are PLN was and has been the off-taker.
considered
The selling price was in USD.
reflected in this
calculation (eg, IPP did not carry fuel-price risk.
sometimes, the
The tenor of the contract is different
deals would only
from one power plant to another: 30 years
be done in USD
for mine-mouth coal power plants, 25
and with
years for non-mine-mouth ones and 20
guarantees), etc?
years for gas-fired power plants.
Given the IRR, private sector interested in
the projects normally worked together
with foreign financial institution. The
latter helping to lower the cost of fund.
The government didnt provide blanket
guarantee for IPP projects, and this
stance remains until now. In the past, for
the 10,000MW project the government
provided full guarantee. However, this
only applied to the 10,000MW project and
not to IPP ones.
4. Are there any Land acquisition was a very big issue then
other relevant (the law was passed only in 2012). The
points (execution timing was very uncertain to complete the
risk? Project land acquisition and the pricing could
refinanced upon skyrocket from initial estimates.
completion?)
Malaysia
Project IRRs were around 10%.
Both coal and gas plants.
PPAs are structured in ringgit and have
fixed tenures (25 years for coal, 21 years
for gas).
Power projects are usually financed by
ringgit bonds (usually >10 year tenures,
and Malaysia has a deep bond market),
issued upon PPA signing just prior
construction.
IPPs do NOT bear fuel price risk.
One IPP had to take on a little demand
risk, but IPPs in general, bore no demand
risk, and capacity payments are paid upon
fulfillment of availability targets.
The offtakers Tenaga (Peninsular Msia)
and Sabah Electricity (Sabah, 80% owned
by Tenaga), have no history of defaults.
Low execution risk, construction tends to
be completed when financing is secured.
IPPs have been around in Malaysia since
early-1990's. Regulatory framework is
mature, and industry players and
financiers are all very familiar with the
segment.
Thailand
10-16%.
Natural gas, coal fired, and co-generation
plants.
IPPs have highly insulated power purchase
agreements under Thailand's single-buyer
industry structure. EGAT shoulders
essentially all of the grid's demand risk
with payments to IPPs consisting of two
components including Availability payment
and Energy payment. Availability payment
are designed to compensate IPPs for their
fixed investment costs including debt
service obligations , fixed operating costs
as well as Fx risk. AP is the main revenue
stream that will generate return for power
plant. The energy payment is for
compensated IPP variable cost of
production (fuel consumption and other
variable opex). This payment structure
means that IPPs' returns over a project
lifecycle are dependent on the plant being
available and largely independent of the
plant's actual dispatch level.
So, the key risk for Thailand's IPP is the
plant outage.
Nope. Low execution risk, construction
tends to be completed because financing
is secured before the project is rolled out. beginning in 2001. In the 1990s, it used to
The regulatory framework is quite
mature, so we see no other risk rather
than plant outage.
UNMASKING ASIA
Philippines
Around 14% WACC.
Coal-fired power plants, diesel power
plants and hydro power plants.
These are long-term Power Supply
Agreements between a privately owned
generator and a distributor (either an
electric cooperative or a privately owned
distribution utility) approved by the
regulator. The rates are in Philippine
Pesos and the PSAs provide for full pass-
through of fuel cost. Project financing is
available and all Peso-denominated. Note
there are many electric cooperatives and
private distribution utilities in the
Philippines. Some have very good credit
standings such as Meralco, Visayan Electric
and Davao Light and Power. Some do not,
particularly among the electric
cooperatives.
The risks have changed with the
restructuring of the power sector
be that IPPs entered into Build-Operate-
Transfer projects with the state-owned
National Power Corp, which is a stronger
credit than a company. Also, the returns
were even higher in the early 1990s as
there was a power crisis and the
government at the time wanted to address
the issue as soon as possible by attracting
private sector capital.
18
Fig 20 contd: IRRs Around the Region
Indonesia Malaysia Thailand Philippines
5. What are the Around 11-15% in USD for coal- and gas-fired power 6-8% project IRR. A private sector guides that 6-7% for new Around 12.6% WACC.
IRRs of greenfield plants, and 15% for geothermal ones, which carry gas IPP but we see this as being theoretical
projects now? higher risk. because really the gas supply in Thailand is
running out. LNG, especially after the
price collapse could be a good substitute
but as of now the government has just
approved the proposal to allow a 3rd party
to do LNG terminal and importation
because state-owned PTT is not keen as
return is not attractive.

6. Are these IRR for coal and gas power plants are relatively Yes, still applies to coal and gas Not comparable. Yes, this applies to the same type of
comparable to unchanged. The case is different for geothermal ones plants. Regulatory framework projects.
the ones we are as the government has already increased the IRR in hasn't changed.
using for 2010? order to attract investments.

7. What risks are The structure remains the same i.e. IPPs sell their
considered (so electricity to PLN in USD during tenor of their
has there been contracts and they dont carry fuel-price risk.
any change?)
The main difference is the pass of land acquisition
bill, which - despite slow implementation - should
provide stronger legal basis than before.
Another development is that the government has
simplified the process, one of them being no approval
from Minister of Energy and Mineral Resources is
required if PLN has to buy electricity at the highest
price of the range.
Another point to note is that with declining energy
subsidy (energy subsidy has declined 60% since
President Jokowi took power), will this translate into
lower or at least fixed IRR going forward?
Risk parametres are largely
unchanged, but the perception of
the level of risk borne by Malaysia
IPPs hasbeen lowered. Five more
years of unblemished track record
at the off-takers, and financing is
generally not difficult to secure.
There is also a little bit of public
pressure.
Hence regulator is demanding
lower IRRs from operators.
Rising competition for the bidding will
pressure the new project IRR. In particular
we notice influx of interest from Japanese
producers who have very competitive
funding costs. However, with power
demand weak and local community
aversion against new coal fired power
plant the roll out of 2015 PDP could be
delayed.
Same risk structure. What has
changed is the availability of
financing from local banks has
increased significantly due to the
high level of liquidity in the
Philippine financial system.

8. Any other The private sector has voiced its concern that after
relevant points? adjusting for cost of fund, their net return is only ~2%.
They look pessimistic that they can compete with
foreign players from Japan and China, etc which have
lower cost of fund.
Some local banks are reluctant to fund power projects
for the following reasons: 1) they question PLNs
payment sustainability amid lack of guarantee from
the government, 2) they already have high exposure
to PLN through other channels, and 3) as the projects
are done in USD, funding should be is USD as well, but
local banks cant compete in USD funding with foreign
banks.
Source: Maybank Kim Eng Research. Isnaputra Iskandar (Indonesia), Tan Chi Wei (Malaysia), Maria Lapiz (Thailand) and Michael Bengson (The Philippines)
There is a general concern by
industry players that project IRRs
might have gotten too low (cost of
capital is usually in the 6-8%
range). Players are clamouring for
higher project IRRs.
Some concerns also on recent
direct awards (open tender
previously), particularly to a
previous state-owned entity.
Thailand is running out of gas, so they will
have to import LNG and that will push the
gas pool price up. While the more
expensive LNG cost would drive up gas
generation cost, IPPs' earnings would not
be affected by the higher LNG prices given
the pass-through clauses in PPAs with
EGAT. However, there is the question of
how much subsidization should EGAT bear.
It used to be that the PSAs were
negotiated bilaterally. However, the
Department of Energy issued a
circular in 2015 mandating electric
cooperatives and distribution utilities
to undergo a Competitive Selection
Process for their requirements.

UNMASKING ASIA 19
INDONESIA INFRASTRUCTURE

1. Infrastructure rollout in full throttle

2. Government has flagged strong commitment

3. Projects are not heavily reliant on government funding

4. Land acquisition: has the risk really receded?

5. Top picks: PTPP, WSKT, BSDE

Isnaputra Iskandar, CFA

isnaputra.iskandar@maybank-ke.co.id
(62) 21 8066 8680

Pandu Anugrah
pandu.anugrah@maybank-ke.co.id
(62) 21 8066 8688

Aurellia Setiabudi
aurellia.setiabudi@maybank-ke.co.id
(62) 21 8066 8691

Anthony Lukmawijaya
anthony.lukmawijaya@maybank-ke.co.id
(62) 21 8066 8690
UNMASKING ASIA 20
INDONESIA INFRASTRUCTURE
Stepping on the Gas
Indonesia urgently needs infrastructure to support economic growth and
competitiveness. It made good progress in the past two years, when its ranking
in the Global Competitiveness Report by the World Economic Forum climbed by
16 places. In the latest report, it is down slightly, from 34 to 37 among 140
countries. Infrastructure - where its ranking slipped to 62 from 56 - is still one of
its main problems.
Rankings aside, progress has been made in legislation in the last 3-4 years,
starting with a land-acquisition bill in 2012. This was followed by a higher
budget for infrastructure and kick-off of the MRT project in Jakarta.
2. Government has flagged strong commitment
1. Infrastructure rollout in full throttle
The government has set targets for all types of infrastructure development,
from power to water supply, until 2020, with no priority given to any. This is
understandable, as the lag can be seen almost everywhere: 1) domestic toll
roads grew by just a 5% CAGR in the past five years, half that of national car
sales; 2) an electrification ratio of 84% is one of the lowest in ASEAN; 3) port
dwelling time is five days on average, the worst in ASEAN; and 4) domestic
cement per capita of 240kg is much less than Malaysias 600kg, suggesting
under-construction.
Of all the segments, we think power will provide the best opportunities for
investors. This is because: 1) power generation is open to private investors;
2) electricity prices are set in USD, reducing currency-mismatch risks; and 3)
Indonesia has abundant sources of energy, especially low-CV coal. The next
attraction, we think, will be toll roads, with their main draw being periodic
tariff adjustments. We also think that property companies will gain from
infrastructure development.
Since President Jokowi took over at the end of 2014, the budget for
infrastructure has increased by a 33% CAGR, to IDR314t in 2016. On the flip
side, energy subsidies have been cut by a 45% CAGR to IDR102.1t. The higher
budget suggests that over 2% of GDP will be spent on infrastructure
development, one of the biggest ever. In order to accelerate spending, the
government has resorted to budget pre-funding and faster tendering.
Realised spending until beginning of February was up 40-50% YoY.
UNMASKING ASIA 21
3. Projects are not heavily reliant on government 5. Top picks: PTPP, WSKT, BSDE
funding
In our view, the main beneficiaries of infrastructure development would be
toll-road and construction companies. JSMR should be able to clinch toll-
Government funding is important, but that is mainly for land acquisitions
road construction contracts. Construction companies, ADHI, PTPP, WIKA and
and basic infrastructure such as bridges and water dams. For bigger projects
WSKT, could benefit from almost all types of development, ranging from
such as power plants, high-speed railways and toll roads, the government
power plants to ports and toll roads. Our top picks are those with strong
has limited funding capacity. For such projects, it normally engages SOEs
order books: WSKT and PTPP.
and/or private companies, mostly through public private partnerships (PPP).
Our rough estimates suggest that funding by SOEs and private companies will Property developers should also profit from any infrastructure boom. We
account for more than 50% of total project values. prefer those with mass-market exposure such as BSDE, CTRA and SMRA and a
strong presence in major cities. BSDE is our top pick for its ample land bank
The government will still not provide blanket guarantees for projects run by
and strong balance sheet. Another beneficiary could be GIAA, from
SOEs and/or private companies. It will continue to support them through
passenger-traffic growth, fleet expansion and the development of new
other mechanisms, such as accelerating land acquisitions process and faster
airports across the country. We dont think that the latter has been fully
permit issuance. We welcome this as it reflects fiscal prudence. Anecdotal
appreciated by the market.
evidence also suggests that an absence of government guarantees is not a
big deterrent to investors. Infrastructure development could even change other corporates operations
and cost base. This is already being played out in the power sector, where
major coal producers, ADRO, ITMG, PTBA and UNTR, have jumped onto the
4. Land acquisition: has the risk really receded? power-development bandwagon, mostly for business diversification. We
forecast their earnings in 4-5 years will be less volatile than now.
There have been notable improvements in land-acquisition regulations. A
law was passed in 2012 which provides legal support for completing land
acquisitions within specific periods. The government also allows private
parties to acquire land on their own if they believe that they can do it more
quickly than the government.
Passage of the law is one thing, implementation another. There is no
universal interpretation of the law, which leads to disputes and contentions.
Quick action by the government to address this is required, as delays may
dent confidence in the law. The Batang power project is the most high-
profile case of a stalemate caused by conflicting interpretations of the law.
Still, we think that foreign investors remain interested.

UNMASKING ASIA 22
Focus Charts

35,000MW power programme for completion in 2020 Governments infrastructure targets for 2019

Source: PLN Source: Bappenas

Typical sources of projects for SOE contractors Better clarity on land acquisition under the new land bill

Source: Ministry of Finance, Ministry of Public Works & Maybank KE Source: Jasa Marga

UNMASKING ASIA 23
Indonesia Infrastructure Facts & Forecasts
Expenditure
Sector State in 2010 Current State 2020 Targets
2015 2016 Forecast (2016-2020)
Power Coal: 12,031 Coal: 25,627 Coal: 46,155 No official data Estimated capex of IDR30t for Total funding for 2016-20
(capacity in MW) available. 4,212MW new power capacity. will be IDR1,127t:
Oil: 2,724 Oil: 2,923 Oil: 2,991
1) power plants
Gas: 3,363 Gas: 3,795 Gas: 7,349 Estimated 2015 total (IDR814t); and
Nuclear: 0 Nuclear: 0 Nuclear: 0 spending of IDR27t on
2) transmission and
3,782MW of new power
Hydro: 3,840 Hydro: 3,911 Hydro: 6,261 electrical power sub-
capacity.
stations (IDR313t).
Combined cycle: 7,806 Combined cycle: 9,584 Combined cycle: 19,269
Other Renewables: 1,108 Other Renewables:1,399 Other Renewables:1,799
Total: 30,872 Total: 47,239 Total: 83,824

Peak load (MW): 18,756
Electricity sales (TWh): 146
Electrification ratio (%): 66
Peak load (MW): 36,787
Electricity sales (TWh): 219
Electrification ratio (%): 84
Peak load (MW): 50,531
(by 2019)
Electricity sales (TWh): N/A
Electrification ratio (%): 96.9
(by 2024)

UNMASKING ASIA 24
Sector MKE View: Achievable
Power 2016
(capacity in MW) PLN's 2015-2024 business plan
calls for 4,212MW of new
power capacity in 2016:
2,885MW for PLN & 1,327MW
for IPPs.
Should be achievable as
funding has been resolved by
PLN.
2020
Government ambitiously eyeing
35GW new power capacity by
2020. PLN to build 30% and
IPPs, 70%.
Most new plants (56%) will be
coal-fired. Rest will use gas, oil
and renewable energy.
We think the 35GW programme
may be delayed by land-
acquisition hiccups. However,
since 70% will be added by
IPPs, execution should be
better than PLN.
We estimate a maximum 70% of
the target will be completed by
2020.
Challenges Reasons & Response
Land acquisitions still the biggest obstacle. Delays caused by land acquisitions, securing
fuels and funding.
Government responsible for acquiring land,
which doesnt help, given its typically slow Government passed land-acquisition bill in
execution. 2012, but implementation has been patchy
due to conflicting interpretations of the law,
among others.
In the most high-profile case which the
government eventually won, the law was
challenged by the local community. This
delayed the construction of the Batang power
plant, the largest in South-East Asia.
In order to accelerate land acquisitions, the
government allows the private sector to
acquire land if it believes it can do it faster.
While positive, we dont think it will fully
eliminate problems.
Despite hiccups, we dont see declining
interest from foreign investors. Batang is a
good example.
Other big power projects such as 2,000MW
Tanjung Jati B awarded to UNTR and Java 7
projects suggest still-strong interest.
Opportunities
Indonesias electrification ratio is lower than
neighbours. It also has abundant energy resources.
Government has to iron out land-acquisition
problems in order to build confidence. Construction
of Batang power plant, foreign-funded, is a
landmark case for FDIs.
Opportunities on funding side too, as most, if not
all, projects will be financed by foreign financial
institutions, given their more competitive costs of
funds.
Coal companies (ADRO, ITMG, PTBA and UNTR) to
benefit not only from their investments in power
sector but also from selling coal to the power plants.
Construction companies (ADHI, PTPP, WIKA and
WSKT) should be other beneficiaries. Among
construction companies, WIKA has highest exposure
to the power sector. This doesnt mean other
construction companies (ADHI, PTPP and WSKT)
cannot replicate its success in the sector.
UNMASKING ASIA 25
Indonesia Infrastructure Facts & Forecasts
Sector State in 2010 Current State 2020 Targets
Transport
Air 59.3m air travellers 82.5m air travellers in 2015 Within transportation we think
land transport will offer better
560 commercial planes 782 commercial planes as of opportunities than air and sea.
Mar 2016 This is because the government
230 airports in 2010 is working on regulations of
237 airports as at end-2015 land transport, such as
legalizing presence of
application-based
transportation operators, which
will change dynamics of the
industry. We believe this will
have impact to listed
companies such as Blue Bird
and Express Taxi.
Expenditure
2015 2016 Forecasts (2016-2020)
Garuda Indonesia alone Estimated industry new-plane N/A
spent IDR1.3t on aircraft down payments of IDR5.7t
pre-deliveries. Using its
domestic market share IDR11t capex by Angkasa Pura
of 40%, this implies II alone for airport
industry down payments development
of IDR3.3t for new
planes.
IDR7t for airport
development by Angkasa
Pura I&II

252 airports by 2019

299 airports in 15-20 years

time

Land - Roads National public roads National public-road 2,650km of new multi-lane Full funding by Ministry Full funding by Ministry of Estimated expenditure of
Paved roads: 277,755km estimates roads of Public Works with Public Works with estimated IDR125t
Dirt roads: 209,559km (2% CAGR for 2005-2010) estimated IDR25-50t for IDR25-50t for road
(source: Bappenas) Paved roads: 303,000km road development. development.
Dirt roads: 230,000km

Land - Toll roads 728km 936km 400-500km of new toll roads by Estimated capex of Estimated capex of IDR20t by Substantial projects in the
2020 IDR10t, mainly by Jasa Jasa Marga, Citra Marga pipeline involving more
Marga and Waskita Nusaphala Persada and than IDR100t for
Completion of 2,000km Trans Karya Waskita Karya. completion of Trans Java,
Sumatra by 2025 Trans Sumatra, Balikpapan
Additional IDR3-5t may be - Samarinda (Kalimantan),
spent by Hutama Karya on Greater Jakarta and Bitung
- Manado in North Sulawesi.
Trans Sumatra south section.
Part of the funding
requirement may be
shifted to 2020-2025 if land
acquisitions are delayed.

UNMASKING ASIA 26
Sector MKE View: Achievable Challenges Reasons & Response Opportunities

Transport
Air 2016 Delays in new airports the biggest Lack of airport development in Indonesia may Local airline fleet expansion and airport development to catch
Government targets 87.5m air travellers risk. Current airport capacity, impede growth. up with air travel.
for 2016. YTD arrivals suggest a shortfall. especially in big cities, is close to
100%. Ministry of Public Transportation plans to build Garuda Indonesia could benefit from growing demand for air
At least 50 planes will be delivered to 15 new airports over 2015-2019, revitalise 100 travel as it is the largest full-service legacy carrier.
Garuda Indonesia and Lion Air in 2016. Airport expansion may not be airports and increasing runway capacity for
accompanied by new runways, which 15. Cardig Aero Services provides aviation support services, food
Kertajati airport, run by regional will be problematic. solutions and facility management.
government, under construction. Should be
Low fuel prices have given airline companies
completed by 2017.
Runway development typically the financial ability to add new planes and New airport construction and capacity expansion could indirectly
Two other new airports could be stalled by problems in land open new routes. benefit all listed SOE construction companies such as Waskita
completed this year, in East Java and acquisition. Karya, Wijaya Karya, Adhi Karya and Pembangunan Perumahan.
Banten. Airports with low economic feasibility would
be developed by Ministry of Public
Transportation.
2020
If annual passenger traffic grows 5%, till Angkasa Pura will develop larger and/or
2020, passengers could reach 105m.
international airports. Would require
We estimate Garuda & Lion Air will take
financing.
delivery of at least 295 new planes by 2020
as Lion Air alone plans to operate 780 by
2028.

At least 15 new airports will be

completed by 2020.

Land - Roads Development of regional border roads in Quality of roads may not meet Government awarding higher budgets and Better access and potentially lower logistics costs may result in
Kalimantan-Malaysia and border roads international standards, requiring speeding up execution faster distribution of goods.
within Kalimantan. high maintenance costs For Trans Papua, better road network would create
opportunities for investment in agribusiness and mining.
Road development outside Java Island.
Beneficiaries: all listed SOE contractors of ADHI, WIKA, WSKT,
Trans Papua with total length of 827km and PTPP
Land - Toll roads Construction of remaining concessions of Execution, particularly in areas with Progress in stalled toll roads, after a spate of Property development alongside new toll roads. Toll-road
Trans Java: 697km with investment high population densities M&As in 2015 by companies with stronger completion typically results in new property development and
value of IDR45t. funding capability. improved logistics costs.
Listed property companies in Greater Jakarta: Bumi Serpong
Full connectivity of Trans Java with Enforcement of regulations on land Dama, Alam Sutra and Summarecon Agung
total 1,000km. Partial completion of acquisition.
Trans Sumatra. More toll roads in Listed property company in Trans Java: Surya Semesta Internusa
Greater Jakarta. Beneficiaries: all listed SOE contractors of ADHI, WIKA, WSKT,
and PTPP

UNMASKING ASIA 27
Indonesia Infrastructure Facts & Forecasts
Expenditure
Sector State in 2010 Current State 2020 Targets
2015 2016 Forecasts (2016-2020)
Land - Rail (km)
National railway and 6,714km (4,678km in 6,714km - no change from To add 3,400km by 2019-2020. Estimated IDR10-20t Estimated IDR10-20t More than 1,000km targeted
commuter lines operation) 2010 (4,718km in operation) required from annual required from annual across the country with
(Cawang Soeakarno budget budget estimated investment of
Hatta & regional rail) IDR106t. To be developed by
Ministry of Public
Transportation

Part of the funding

requirement may be shifted
to 2020-2025 on potential
delays in land acquisition.

Light Rail Transit - Nascent stage. Awaiting 180km for inner Jakarta with - - Estimated spending of IDR10-
(LRT) Inner city of revisions of Presidential 1st phase to be completed in 20t on 1st phase for Asian
Jakarta Decree on participation of 2018. Games
Regional State-Owned
Enterprises.

LRT Greater Jakarta Construction of 1st phase 73km for Greater Jakarta - Initial spending of IDR1-2t Investment of IDR34t for
for first-stage LRT. entire project

LRT Palembang - Nascent stage of construction 25km for Palembang, South - IDR700b-1.5t IDR7.2t
Sumatra

UNMASKING ASIA 28
Sector MKE View: Achievable
Land - Rail (km)
National railway and Greater Jakarta commuter line, from city
commuter line to airport, costing IDR3,800b
(Cawang Soeakarno
Hatta & regional rail) As intra-city railway will be mainly funded
by Ministry of Public Transportation,
budget may be limited.
Additional funding may come from soft
loans from France, Japan & Germany.
Light Rail Transit Potential completion of Presidential
(LRT) Inner city of Decree revisions. Existing regulations only
Jakarta allow for the appointment of SOE
companies without the involvement of
regional governments while the project
falls under the regional government of
Jakarta.
Regional government would want to take
full charge of project.
Potentially half the length target of 50km
LRT Greater Jakarta SOE contractor, Adhi Karya, appointed as
sole contractor.
Set to be completed in 2018-2019 with
funding of IDR34t.
For 2016, 1st stage will be development of
pillars with 10-25% completion.
We foresee completion by 2020. Further
development possible, to connect with
Tangerang, Banten province.
LRT Palembang Assuming completion of 20-30% pa, project Potential delays in construction, hindered
should be 100% finished by 2018. by land acquisition.
This would translate to IDR1.4-2.2t
spending per year. Feasibility is high, as
infrastructure would be built mainly above
ground, with minimal land-acquisition
needs.
Challenges
Funding highly dependent on annual
budgets allocated to Ministry of Public
Transportation.
Land acquisitions may not be difficult for
low-density population areas, but
development of commuter lines might face
resistance from land owners.
Funding shortfall most obvious, as capex
requirement is substantial.
Regional SOEs may need governments
capital injections, dedicated regional
budgets or third-party loans.
Potential hurdle in land acquisitions,
although requirements are small.
Although facility will be built elevated,
terminal development may be delayed by
hurdles in land acquisition.
Reasons & Response
Enforcing land-acquisition laws would hasten
execution.
Development of intra-city transport would
alleviate traffic congestion.
Regional governments to give top capex priority
to this, through regional SOEs.
Government has taken bigger role in acquiring
land to connect the commuter line with the
interchange of higher-speed rail.
Aims to finish project before Asian Games in
2018.
UNMASKING ASIA
Opportunities
Train-carriage procurement. Historically,
carriages are from Japan or SOE producer,
PT Industri Kereta Api.
Beneficiaries: all listed SOE contractors of
ADHI, WIKA, WSKT, and PTPP
Regional SOE, Jakarta Propertindo, is the
LRT Jakarta developer. Will likely invite SOE
contractors to build it.
Potential development of convenience stores
at terminals.
Funding pretty much secured from bank
loans and ADHIs recent rights issue.
Ministry of Public Transportation to repay all
construction expenses beginning 2017.
ADHI to benefit, given direct appointment by
the President as main contractor.
LRT development to reignite economic
growth for Palembang.
Potential opportunities in businesses that
support city development, such as F&B and
property.
Waskita Karya is main contractor.
29
Indonesia Infrastructure Facts & Forecasts
Expenditure
Sector State in 2010 Current State 2020 Targets
2015 2016 Forecasts (2016-2020)
High speed railway - Needs several permits 150km to be completed in 2019 - Expenditure hinges on Estimated investment of
Jakarta Bandung progress of permit IDR60t, of which IDR30t is for
issuance. Construction construction
may reach less than 5%,
translating to small capex .
of IDR500b-1t
Sea (incl ports) - Expansion of ports and 24 ports to be given priority Capex for SOE seaport Based on capex plans of Government aims to spend
construction of new ones in operators: IDR14t SOE port operators, 2016 IDR40t on new ports in 2016-
three parts of eastern capex should reach 2020.
Indonesia IDR14.5t

UNMASKING ASIA 30
Sector MKE View: Achievable Challenges Reasons & Response Opportunities
High speed railway Potentially low project delivery in 2016, as Land acquisitions and timely issuance of Administrative procedures, particularly permits Property development in vicinity. Listed
full permits have not been secured. permits. Financial closure for China soft from relevant ministries. company Summarecon has 400ha of land
loans might hinge on completion of all bank.
High chance of delays, from the need to legal procedures. WIKA will likely become
acquire land in several sections. 2019 the main contractor, given its indirect WIKA will be sole contractor.
target could be delayed to 2020. minority ownership.
Sea (incl ports) Largest new port of Kalibaru in Jakarta set Economically unfeasible, small seaports to Most major seaports will be developed by the Development of alternative international
for completion in 2016. be built by Ministry of Public SOE port operator, Pelindo. ports in Subang, West Java.
Transportation. As funding is mainly from
Consortium of SOE companies constructing the government, allocations may be Government has given top priority to To support industrial area of Cikarang,
Kuala Tanjung Port in North Sumatra. This limited. development and refurbishment of seaports to where most exporting automotive plants are
will operate as a bulk terminal. Investment cut logistics costs through "sea toll road" located.
may top IDR17t. SOEs to take charge of larger port concept.
development. Would impinge on their New Subang Port is under feasibility study.
Four new ports altogether: Kuala Tanjung capital positions. Will likely be chosen to replace Cilamaya
(North Sumatra), Bitung (North Sulawesi), Port worth IDR35t, which was cancelled
Sorong (Papua) & Kalibaru. Mega seaports to function as alternatives given its overlapping location with oil & gas
to international ones such as Subang projects.
Seaport. Their development is stalled by
bureaucratic red tape. Beneficiaries: all listed SOE contractors of
ADHI, WIKA, WSKT, and PTPP

UNMASKING ASIA 31
Indonesia Infrastructure Facts & Forecasts
Expenditure
Sector State in 2010 Current State 2020 Targets
2015 2016 Forecasts (2016-2020)
Communication
Telecom Mobile SIMs: 242.7m (100.8%) 343.2m (134.2%) 370.3m (138%) Big 3 spent c.IDR38t, Total capex of IDR45t, Total capex of IDR190t.
Pre-paid: 98.1% Pre-paid: 98.5% Pre-paid: 98.0% mainly on 3G mainly for 4G LTE IDR130t by TLKM.
Post-paid: 1.9% Post-paid: 1.5% Post-paid: 2% modernisation and early deployment. TLKM
2G: 201.5m 2G: 190.8m 2G: 86m 4G deployment. TLKM expected to spend IDR32t,
3G: 41.2m 3G: 147.9m 3G: 240.9m spent IDR26t, EXCL EXCL and ISAT IDR6-7t
4G: - 4G: 4.4m 4G: 43.5m IDR5t, ISAT IDR7t. each.

Internet/ Mobile data users: 33.3m or
digitalisation 13.70% of mobile subs.
Water Access to potable water
(% of population): 44.2%
Sanitation (% of population):
55.5%
140.1m or 40.8% of mobile
subs.
Access to potable water
(% of population): 68.9%
Sanitation (% of population):
62.4%
261.3m or 70.6% of mobile subs.
Access to potable water
(% of population): 100.0%
Sanitation (% of population):
100.0%
Around IDR1t, for funding Completion of Palapa Ring II
early- stage construction for West, Central and East
of Palapa Ring II, an (6.3k km) Indonesia. Will
under-sea fibre-optic involve another IDR7.5t.
network. Mainly for West
(2k km) and Central (2.7k Palapa Ring II to operate by
km) Indonesia. 2019.
Access to potable water Access to potable water Access to potable water
(% of population): Capex (% of population): Capex pa (% of population): IDR278t:
pa is about IDR55t is about IDR55t public sector 78%, private
sector 22%
Sanitation (% of Sanitation (% of population):
population): Capex pa is Capex pa is about IDR54t Sanitation (% of population):
about IDR54t IDR274t: public sector 73%,
private sector 27%

UNMASKING ASIA 32
Sector MKE View: Achievable
Communication
Telecom Development of backbone.
Also spectrum auctions of 2,100Mhz and
2,300Mhz to provide additional capacity.
High smartphone penetration with strong
demand for digital content and higher
usage of 4G LTE`.
Challenges
Lower network quality outside Java.
High interconnection fees.
Reasons & Response
Government plans to revise regulations on
interconnection fees. Lower fees would
encourage telcos other than TLKM to expand
networks outside Java.
Government plans to auction 3G spectrum in
near term.
Opportunities
Digital content such as social apps and
video streaming. Indonesias demographics
supportive of high data consumption.
Rising e-commerce to benefit telco
operators.
Start-up digital companies.

Transportation apps gaining popularity,

given lack of public infrastructure in big
cities such as Jakarta and Bandung.
Internet/
digitalization

Water Access to potable water (% of Main obstacle is funding as 70-80% will Over-ambitious annual targets of 6-8% If the sector is fully open to private
population): come from state and regional increases of population for access to drinkable investments, local banks (BBCA. BBNI, BBRI
governments. water and 8-9% for sanitation. In past 5 years, and BMRI) could have funding
2016: 70% only increased 1.1 % and 1.4% p.a., opportunities.
2020: maximum 80% Given low commodity prices, not sure if respectively.
the government has enough funds to
support projects. In the past the government had increased
Sanitation (% of population): access to drinkable water and sanitation at
around 1-2% p.a., which is slow due to as we
2016: 63-64% mentioned earlier lack funding. This is because
2020: maximum 75% main problem is funding, as 70-80% is from
state and regional government budgets.

UNMASKING ASIA 33
Indonesia Infrastructure Facts & Forecasts
Sector State in 2010
Housing Housing ownership in urban
areas at 67.90%
Housing ownership in rural
areas at 87.31%
Housing backlog at 13,600,000 Housing backlog at
units
House ownership at 78%
Number of households at
34,670,000
Slum-housing ownership at
13%
House purchases using
mortgages at 18%
Of the governments 1m
housing units per-year
programme, 400,000 units
achieved
50% population lives in urban
areas.
Current State
Housing ownership in urban
areas at 69.08%
Housing ownership in rural
areas at 88.26%
13,339,526 units
House ownership at 82.63%
Number of households at
39,170,000
Slum-housing ownership at
10%
House purchases using
mortgages at 26%
Of the governments 1m
housing units per-year
programme, 660,474
achieved
56% population lives in urban
areas
Expenditure
2020 Targets
2015 2016 Forecasts (2016-2020)
No targets for housing Government allocated Government allocated IDR7.6t. Government to allocate
ownership in both urban & IDR7.7t to subsidised IDR38t.
rural. housing.
Housing backlog at 6,000,000 We estimate private We estimate private sector We estimate private
units (existing demand + sector will supply contributed IDR34t. sector will contribute
additional annual demand IDR30t. IDR170t.
supplied houses)
Expect urbanisation to
House ownership: N/A continue, further
altering household
Number of households at composition in urban
43,670,000 (govt target) and rural areas.
Slum-housing ownership: 2016
target is 9%.
House purchases using
mortgages: No target
Of the governments 1m
housing units per-year
programme, 1m pa
By 2025, government expects
65% of the population to live in
urban areas.
UNMASKING ASIA 34
Sector MKE View: Achievable
Housing Houses built in 2016 should
exceed 2015 levels, in line with penetration.
economic recovery.
With that, government should
be able to build 1m housing
units a year by 2020.
Challenges
High mortgage rates and low banking
Reasons & Response Opportunities
Mortgage rates are being lowered and loan- Long-term property-market growth from burgeoning
tenure ratios relaxed. young population.
Bigger budgets for subsidised housing. Private developers to benefit from volume rather
than ASP growth, as developers had already enjoyed
Targeting lending to primary home owners significant ASP growth in the past 5 years which was
rather than investors. higher than income growth. As such, we think the
upside for further ASP growth is limited.
Lower property taxes.
More interest in mass-market supply, a segment
supported by the government.
We prefer developers with exposure to this: Bumi
Serpong Damai, Ciputra Development and
Summarecon Agung. These also have a strong
presence in major cities.
UNMASKING ASIA 35
MALAYSIA INFRASTRUCTURE

1. The rail thing: biggest area of business opportunities

2. Eyes on government debt

3. Improve and enhance network connectivity

4. Tapping into Chinas excess capital and capacity

5. Top picks: Gamuda & Sunway Construction Group

Wong Chew Hann

wchewh@maybank-ib.com
(603) 2297 8686

Suhaimi ILIAS
suhaimi_ilias@maybank-ib.com
(603) 2297 8682

Tan Chi Wei

chiwei.t@maybank-ib.com
(603) 2297 8690

Chai Li Shin
lishin.c@maybank-ib.com
(603) 2297 8684
UNMASKING ASIA 36
MALAYSIA INFRASTRUCTURE
Going Down a Different Road
Malaysia already has a developed and advanced ecosystem of physical social and
economic infrastructure, covering roads, bridges and highways, airports and
seaports, power, water, and information & communication technology (ICT), as
well as healthcare, education and housing.
Nonetheless, two of the six thrusts of the 11th Malaysia Plan (11MP, 2016-2010)
are related to infrastructure i.e. strengthening infrastructure to support
economic expansion and improving the wellbeing for all.
Strengthening infrastructure to support economic expansion is not just about
pump-priming to boost growth amid the challenging external and domestic
environment. It is about efficiency and quality of the infrastructure, as well as
getting the biggest bang for the buck from the investment, not just in terms of
multiplier effect during the construction phase but more importantly generating
productivity-driven growth and creating business opportunities. Consequently,
the targeted outcomes include: building an integrated transport system;
improving the coverage, quality and affordability of digital infrastructure; and
expanding logistics to enhance trade facilitation.
Improving the social infrastructure and narrowing the urban-rural infrastructure
gap underpins the effort to improve the populations wellbeing. Among the
infrastructure-related projects and targets are the Pan-Borneo Highway; rural
high-speed broadband; 99% of population served by clean and treated water;
construction of 3,000km of surfaced rural roads; building 653,000 affordable and
low-cost houses; and universal access to quality healthcare.
Underscoring the commitment to infrastructure, the Development Expenditure
allocation for 11MP is up 13% to MYR260b after the drop in actual spending to
MYR216b in 10MP (2011-2015) vs MYR222b in 9MP (2006-2010). Further,
development spending on physical projects was spared the axe in the revised
budgets 2015 and 2016, which were curtained due to the fall in crude oil price.
As a result, operating spending will be cut instead.
1. The rail thing: biggest area of business opportunities
Railway is a notable area of under-development / under-investment in
Malaysia. Therefore it is the biggest investment theme and area of business
opportunity within the infrastructure space in the next 5-10 years. At least
around MYR115b or 10% of 2015 GDP is earmarked for railway projects up to
2020-2025. The key railway infrastructure projects include:
MYR76b Klang Valley Mass Rapid Transit i.e. KVMRT1 (MYR23b), KVMRT2
(MYR30b) and KVMRT3 (MYR23b)
MYR3.5b Klang Valley Light Railway Transit Phase 2 (KVLRT2 i.e. Kelana
Jaya Line extended to Putra Heights; Ampang Line extended to
Puchong)
MYR10b Klang Valley Light Railway Transit Phase 3 (KVLRT3 i.e. Bandar
Utama-Shah Alam-Klang)
MYR8b Gemas-Johor Bahru Double Track
MYR0.5b KL Monorail Extension (Brickfields-Old Klang Road)
MYR8b Freight Relief Line (Seremban - Port Klang - Serendah)
MYR8b Express Rail Link (ERL) extension to Malacca
KL-Singapore High Speed Rail
Upgrade in Klang Valley Commuter Rail
KTMB Subang-Klang Freight Line
East Coast Railway e.g. MYR0.2b to upgrade East Coast rail lines
(Gemas-Mentakab, Jerantut-Sg Yu, Gua Musang-Tumpat); Kuantan-
Mentakab double-track
Sarawak Railway Line (320km between Similajau in Bintulu and Tanjung
Manis in Mukah)
Johor Bahru & Penang LRT
UNMASKING ASIA 37
2. Eyes on government debt
Rail infrastructure accounts for over one-third of Malaysias infrastructure
investment in 2016-2020, pointing to high public sector financing
requirement. The governments debt-to-GDP ratio is already very close to
the 55% self-imposed limit (end-2015: 54.5%), which it has committed to
observe as an integral part of its fiscal consolidation together with the
budget deficit reduction to achieve a near-balanced budget by 2020. This
limits the room for on-balance sheet financing by the government.
As a result, the attention is on off-balance sheet funding through
government-guaranteed debt (GG) issued by government-owned
infrastructure-related special purpose vehicles like Danainfra Nasional
Berhad and Prasarana Nasional Berhad. Over the past four years, GG debt
has been relatively stable at around 15-15.5% of GDP after rising from the
recent low of 9.0% in 2008. In managing GG debt, the government favours
the "user pay model for Public Private Partnership (PPP)/Private Finance
Initiative (PFI) projects (e.g. tolled highway projects), with the possibility of
soft loans secured by foreign - especially Chinese - contractors (e.g. railway
projects) and the potential for financing from the Asian Infrastructure
Investment Bank.
3. Improve and enhance network connectivity
The focus on rail infrastructure is to improve and enhance urban public
transport connectivity and network given the target to ramp up urban public
transport modal share to 40% for Greater KL and to 20% for other cities by
2020 following the marginal increase to 17.1% in 2015 from 16.9% in 2010. It
is also to de-congest roads and highways by making railway the logistical
mode of choice for freight transport as well as to connect and develop
industrial areas and ports.
There is also the need for better external connectivity, in view of the launch
of the ASEAN Economic Community in Dec 2015, Malaysias signing of the
Trans- Pacific Partnership Agreement (TPPA), and the trade and business
opportunities from Chinas One Belt, One Road initiatives. Key enabling
investments include KL-Singapore High Speed Rail and ports with industrial
and commercial developments, e.g. Kuantan Port & Malaysia-China Kuantan
Industrial Park; Melaka Gateway.
4. Tapping into Chinas excess capital & capacity
Malaysia can benefit from lower capital and construction costs by tapping
into Chinas surplus capital and excess capacity situation as Chinese
companies search for business and investment opportunities overseas. This is
further supported by the positive announcements by Chinese Premier Li
Keqiang during his visit to Malaysia at end-2015, which in essence endorse
and support more China investments into Malaysia, underscoring the cordial
and constructive diplomatic ties between the two countries.
Malaysia is seeing rising FDI from China. Chinese companies are increasingly
visible in Malaysias construction and property sectors, and are invested in
manufacturing (e.g. solar photovoltaic, metals), energy (e.g. China General
Nuclear Powers acquisition of Edra Global Energy; Shendong Hengyuan
Petrochemicals acquisition of 51% stake in Shell Refining), education (e.g.
Xiamen University Malaysia first overseas branch campus of a Chinese
state-owned university) and ICT (e.g. Huaweis Global ICT Training Centre in
Cyberjaya and Regional Data Hosting Centre in Nusajaya). Chinas railway
construction and engineering companies are the frontrunners in upcoming
railway projects like the Gemas-JB double track and the KL-Singapore High
Speed Rail.
5. Top picks: Gamuda, Sunway Construction Group
We prefer construction players with niche expertise and a strong track
record in infrastructure projects. They would be the key beneficiaries of the
slew of infrastructure job awards in 2016. Our Top BUY pick remains Gamuda
as we expect successful rollout of the Penang Transport Master Plan project
as a major positive. It could also clinch additional jobs from the mega rail
projects including KVLRT 3 and Gemas-JB double track rail. Sunway
Construction Group is our preferred mid-cap pick given its favourable pure
construction exposure and as it is poised to benefit from the infrastructure
mania that could lead its orderbook to a record high in 2016.
UNMASKING ASIA 38
Focus Charts

Malaysia Plan: government development expenditure (MYRb) Government debt (% of GDP)

300 80%
260 68.4% 68.4% 68.2% 69.9%
70%
250 230 230 62.7% 63.2% 64.7%
222 216 60% 15.2% 15.4% 15.5% 15.4%
52.3% 50.5% 11.8% 12.2% 13.2%
200 49.5% 48.8%
50%
10.2% 9.9% 9.4% 9.0%
150 40%

30%
100 50.8% 51.1% 51.5% 53.3% 53.0% 52.7% 54.5%
20% 42.1% 40.6% 40.1% 39.8%
50
10%

0 0%
9MP (2006-2010) 10MP (2011-2015) 11MP (2016-2020) 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Allocation Actual Spending Govt Debt Govt-Guaranteed Debt (Contingent Liability)

Source: Malaysia Plans, Ministry of Finance Source: CEIC

Govt development expenditure vs operating expenditure (% chg) Rising China FDI into Malaysia (USDb) reflecting Chinas surplus
capital & excess capacity
30 1.1
25 1.0

20 0.9

15 0.8

10 0.7
0.6
5
0.5
0
0.4
(5)
0.3
(10)
0.2
(15)
0.1
2016E
2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

0.0
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Operating Expenditure Gross Development Expenditure

Source: Bank Negara Malaysia, Ministry of Finance Source: CEIC

UNMASKING ASIA 39
Malaysia Infrastructure Facts & Forecasts
Sector State in 2010
Power
Coal, oil, fossil fuels, Peninsula Malaysia: 21,817MW
hydro, renewable capacity, 45% reserve margin
energy
Sabah: 1,111MW, 42% reserve
margin
Sarawak: 1,347MW, 23%
reserve margin
53 MW of installed capacity in Sarawak: 5,778MW, >100%
renewable energy (2009)
Current state
Peninsula Malaysia:
20,657MW capacity, 22%
reserve margin (new capacity
insufficient to offset old
power plants taken offline)
Sabah: 1,423MW, 45% reserve
margin (localised loads)
reserve margin
(commissioning of Bakun and
Murum, 2 large-scale hydro
plants)
243 MW of installed capacity
in renewable energy (2014)
i.e. 66% solar photovoltaic,
23% biomass, 6% mini hydro,
5% biogas
Expenditure
2020 targets
2015 2016 Forecasts (2016-2020)
Peninsula Malaysia: 24,145MW Peninsula Malaysia + Peninsula Malaysia + Sabah: Around MYR50b for
capacity, 23% reserve margin Sabah: MYR11.5b (all MYR10b (all private sector) Peninsula Malaysia +
private sector) Sabah
Sabah: 2,137MW, 60% reserve Sarawak: MYR700m (state)
margin Sarawak: MYR700m Over MYR10b for
(state) Sarawak if the two new
Sarawak: c.10,000MW (the new hydro dams proceed
hydro dams will only proceed
upon demand)
2,080 MW of installed capacity
in renewable energy i.e. 38%
biomass; 24% mini hydro, 17%
solid waste, 12% biogas, 9%
solar photovoltaic
UNMASKING ASIA 40
Sector MKE view: Achievable
Power
Coal, oil, fossil fuels, No risk for 2016. Construction
hydro, renewable of power plants is a multi-year
energy event, and will be completed
once started.
Up to 2020, Peninsula Malaysia
and Sabah projects should
proceed.
Sarawak is after wholesale
customers, and thus rollout
depends on the commodity
cycle.
Challenges Reasons & Response Opportunities
Some controversies towards direct awards. New capacity is to maintain reserve margin, Structuring and financing of capex requirements.
and grid integrity.
Structural issues such as localised
distribution of loads in East Malaysia The regulator is already quite holistic with
making it uneconomical for operators. capacity planning.
Has been moving towards open tenders until
recent years.
UNMASKING ASIA 41
Malaysia Infrastructure Facts & Forecasts
Sector State in 2010
Transport
Air (incl. ports) Passengers handled 61.3m in
2010
Aircraft financing Total fleet size was roughly
200
Land - Roads 137,200 km of roads in 2010,
43.7 km per 100 sq km land
area.
Rural road coverage was
45,905km in 2009.
Current state
Passengers handled 85.1m in
2015. KLIA2 started
operations in 2014.
Total fleet size of 239
230,300km of roads in 2015,
69.6km per 100 sq km land
area.
Expenditure
2020 targets
2015 2016 Forecasts (2016-2020)
Upgrading airport MYR0.05b MYR0.042b About MYR0.25b
infrastructure in Langkawi,
Kedah, Kelantan and Mukah
and air navigation system in
KLIA to cater for increasing
passengers.
Expanding air freight capacity
via new regional cargo hub at
the old LCCT and upgrading
cargo handling systems at KLIA
and Kota Kinabalu International
Airport.
Moving target, but the country MYR0.5b MYR1.1b Between MYR4b-7b
normally acquires 12-15 new depending on size of
aircraft per year. aircraft acquired
No official targets. MYR1.6b MYR6b MYR50b
The major road projects in the
Greater KL planned include
Duke Highway phase 2 and East
Klang Valley Expressway
(EKVE), Damansara-Shah Alam
Elevated Expressway (DASH),
Sungai Besi-Ulu Kelang
Elevated Expressway (SUKE),
DUKE Highway Phase 3, Jalan
Tun Razak traffic dispersal.
Intercity road projects include
Pan Borneo HIghway Sarawak,
West Coast Expressway,
Central Spine Road, Kota-
Bahru-Kuala Krai Highway, and
East Coast Highway.
3,000km rural roads to be
built.
UNMASKING ASIA 42
Sector MKE view: Achievable Challenges Reasons & Response Opportunities

Transport
Air (incl. ports) Largely achievable. Expenditure Execution issues, with cost overruns and Passengers handled have been growing as KLIA Capex financing. Malaysia Airports is also focusing on
relates mainly to system numerous construction delays at KLIA2. positions itself as a low-cost carrier hub. developing its commercial revenues.
upgrades, not major expansion. National carrier MAS is undergoing its latest
round of restructuring. Relationship
Current expenditure forecasts between AirAsia and Malaysia Airports is far
relate mainly to minor from ideal.
upgrades, and would materially
change if proposals for a third
terminal at KLIA take off.

Aircraft financing Achievable, this is the normal Rates have to be competitive; aircraft Part of replacement cycle and also to cater to Airlines like to hedge USD exposure to MYR if the
rate for Malaysian-based financing is in USD and competes globally organic growth that normally tracks GDP. forward rates are attractive.
airlines. Our visibility is for the for financing. AirAsia and Malindo also have a huge order
next two years, and we think pipeline that they have committed to and have
the momentum is pretty strong. to take in these aircraft.

Land - Roads Achievable. Construction of the
Pan Borneo Highway Sarawak,
DASH, SUKE, WCE, EKVE and
DUKE extension is starting or
have started.
Aside from the on-going highway
projects, more urban roads to
alleviate congestion and rural-
urban roads to boost rural area
growth would be proposed.
Financing for construction of non-tollable
highways is dependent on the government.
As for the tollable roads, financial
sustainability depends on traffic volumes
achieved.
Tollable road projects would be funded New roads especially rural-urban roads would spur
privately via PPP/PFI form under BOT economic development in rural areas including
concessions. industrial, commercial and property developments.
However, the non-tollable roads such as Pan
Borneo Highway and Central Spine Road would
have to be financed by the government via
bonds.

UNMASKING ASIA 43
Malaysia Infrastructure Facts & Forecasts
Sector State in 2010
Transport contd
Land - rail 1,665 km of rail lines.
Annual ridership of urban rail
in Greater Klang Valley was
171m.
Public transport modal share
for urban areas was 16.9%.
Sea (incl. ports) 10 federal container ports:
24m TEU capacity
Current state
2,250km of rail lines.
Annual ridership of urban rail
in Greater Klang Valley was
226m.
Public transport modal share
for urban areas was 17.1%.
In the Greater KV,
construction of KVMRT 1 and
KVLRT 2 is completing soon.
As for intercity rail, the Ipoh-
Padang Besar double track
rail and Padang Besar-Gemas
double track rail have been
completed.
10 federal container ports:
31m TEU capacity
Expenditure
2020 targets
2015 2016 Forecasts (2016-2020)
Target to achieve public MYR7.5b MYR8.5b MYR90b
transport modal share for
Greater KL to 40% and other
capital cities to 20% by 2020.
In Greater KL, KVMRT 2, KVLRT
3 will start construction soon.
As for the other cities, there
are Kota Kinabalu BRT and
Penang LRT.
As for inter-city rail, the works
on the Gemas-JB double track
rail could start soon. In terms
of inter-region rail, the KL-SG
high speed rail is now under
planning stage and is targeted
to be completed in 2020. Other
potential rail projects that
could be revived include the
East Coast Railway.
No masterplan for ports in About MYR1b About MYR1b About MYR5b
Malaysia. However, there are
talks for a third port in Port
Klang and a deep-sea port in
Melaka. Total capacity could
approach c.40m TEUs
UNMASKING ASIA 44
Sector MKE view: Achievable
Transport contd
Land - Rail KVMRT 1 has been progressing
smoothly. Major civil work
packages for KVMRT 2 have been
awarded, and construction
should begin soon.
Tender results for KVLRT 3 and
Gemas-JB double track rail
should be announced by 4Q
2016, with construction
potentially beginning in 2017.
The KL-SG high speed rail
depends on progress of
government-to-government
negotiations.
Sea (incl. ports) On track. Private sector
initiative. Third port at Port
Klang is likely to proceed and
could be awarded to a
concessionaire.
Challenges
Government financial conditions, given the
current environment of low crude oil prices
and fiscal consolidation targets to achieve a
near-balanced budget by 2020.
Structural issues such as suitable location
(with natural breakwater and deep depth)
and building of new infrastructure at the
new location.
Reasons & Response Opportunities
Implementation depends largely on availability Public transportation operators are also focusing on
of financing. Public infrastructure projects developing property and retail opportunities in an
that are not profitable are mainly financed by attempt to improve their financial standing.
government guaranteed corporate bonds.
Increasing demand for rail infrastructure would also
Gemas-JB double track rail and KL-SG high be beneficial to related local suppliers and services
speed rail could be financed by soft loans providers.
secured by foreign contractors.
Aside from financing, other issues that could
lead to implementation delay include land
acquisition, construction difficulties, poor
construction project management and a
shortage of foreign workers.
Malaysia has demonstrated strong execution
and construction capabilities via the Project
Delivery Partner under KVMRT 1 that is close to
full completion soon.
Port Klang (handles >50% of the country's Structuring and financing of capex requirements.
throughput) will face capacity constraint by
2025, hence, the construction of a third port
should start by 2020.
UNMASKING ASIA 45
Malaysia Infrastructure Facts & Forecasts
Expenditure
Sector State in 2010 Current state 2020 targets
2015 2016 Forecasts (2016-2020)
Communication
Telecom 120% mobile penetration. 150% mobile penetration. Fixed broadband penetration MYR6.5b MYR7.2b About MYR32b
95%
3G penetration 27% 60% smartphone penetration.

Fixed broadband penetration 3G penetration 85%.

56%
4G penetration 50%.

Fixed broadband penetration

75%.

Internet / 0.5m sq ft of data centre about 1.5m sq ft of data 5m sq ft of data centre space MYR0.3b MYR0.3b About MYR2b
digitalization space centre space

UNMASKING ASIA 46
Sector MKE view: Achievable
Communication
Telecom Largely achievable. Mobile
players have in fact
accelerated 4G rollout. Fixed-
line players are also actively
expanding coverage.
Challenges
Potentially punitive spectrum fees
affecting capex plans of operators.
Reasons & Response
Regulator has generally been holistic and
business friendly, and pro-investment. But
recent incident regarding spectrum fees has
affected its reputation.
Opportunities
The industry is already very entrenched, and
penetration rates are high. Capex largely revolves
around technology upgrades (eg 3G to 4G, fibre
broadband to homes).

Internet / Achievable. Expansion plans
Digitalisation generally revolve around
satisfying potential demand,
thus projects are seldom
disrupted once construction
begins.
Bandwidth is still a slight concern as both The data centre industry is one of the entry Data centres are not particularly costly in the
the domestic fibre footprint and Malaysia's point projects under the government's overall scheme of things. A data-centre themed REIT
international connectivity are not yet Economic Transformation Plan for income and has yet to take off in Malaysia.
optimal. job creation.

However, 5m sq ft data centre

space by 2020 is perceived by
operators to be a highly
ambitious target, and is thus
not likely to be met.

UNMASKING ASIA 47
Malaysia Infrastructure Facts & Forecasts
Expenditure
Sector State in 2010 Current state 2020 targets
2015 2016 Forecasts (2016-2020)
Water 94.2% clean water coverage in 95.1% clean water coverage Target 99% clean water MYR0.5b MYR1.5b MYR7.5b
2010. in 2014. coverage.

Non-revenue water at 36.3% Non-revenue water at 36.6% Reduce non-revenue water to

in 2010. in 2013. 25%.

(Note: Non-revenue water is
the difference between the
volume of water put into a
water distribution system and
the volume that is billed to
customers)
Water treatment production
capacity was at 18,421 MLD
Six states have migrated to
the new licensing regime.
Remaining five states are
expected to migrate to the new
licensing regime.

Water treatment production

capacity 16,779 m litres per
day (MLD)

Three states have migrated to

the new licensing regime
(sale and leaseback from the
federal government) from a
concession regime previously.
Housing
Urbanisation; 71% urban population in 2010. 74.3% urban population in Urban population to reach 77% MYR2.29b MYR2.588b MYR12.5b
affordable & low- 111,000 affordable & low- 2015. by 2020.
cost housing cost houses built between 102,200 affordable & low- 653,000 affordable & low-cost
2005 and 2010. cost houses built between houses to be built in 2016-
2011 and 2015. 2020.

UNMASKING ASIA 48
Sector MKE view: achievable Challenges Reasons & response Opportunities
Water Langat 2 water treatment plant Financing from federal government. Migration to new licensing regime transfers Apart from new water treatment capacity, capex
construction is in progress. ownership of water assets to the federal would be mainly in pipe replacement to reduce non-
government. revenue water.
Pipe replacement in Selangor
would pick up to reduce NRW This should see increased investment in water
post full-migration into new infrastructure to improve services, with a new
licensing regime. water tariff-setting mechanism potentially
being introduced.
Increasing migration to the new
licensing regime would protect
long term financial
sustainability and ensure
improvement of the water
industry.

Housing
Urbanisation; Affordable housing target is
affordable & low-cost achievable as the government
housing is partnering property
developers to launch affordable
housing projects. Development
costs are thus borne by
property developers.
Tightening of housing loan approvals could
slow down take-up of affordable housing
projects.
Partnering property developers shifts the Increasing demand for mortgages for affordable
burden of financing away from the housing to offset slowdown in the property market.
government. End demand is however an
increasing problem as banks tighten up on
credit approval criteria.

UNMASKING ASIA 49
PHILIPPINES INFRASTRUCTURE

1. Significant investment needed in transport infrastructure projects

2. Land acquisition remains the issue; political will is needed

3. Multiplier effects if inadequacies in transport infrastructure are

addressed

4. Regulatory risks evident in some PPP projects like water

5. Metro Pacific Investments (MPI PM, BUY, TP PHP7.00) best play

Michael Bengson
michael_bengson@maybank-atrke.com
(632) 849-8840

Luz Lorenzo
luz_lorenzo@maybank-atrke.com
(632) 849-8836
UNMASKING ASIA 50
PHILIPPINES INFRASTRUCTURE
When the new president elected in May
infrastructure will almost certainly be a
administrations, infrastructure has been the
various constraints. The key issue going
If You Have The Will, Youll Have The Way implementation. Current low interest rates,
should support faster implementation.
formulates the 2017-2022 PDP,
top priority. For the past five
focus but each government faced
forward will be the speed of
ample liquidity and low leverage

PPP projects have partially compensated for persistent government

Transport infrastructure is the one key area that is severely lacking investment underspending. Due to past successes, these have expanded beyond power
in the Philippines. There are 14 transport Public Private Partnership (PPP) generation. In the current list of PPP projects, an estimated PHP303b have been
projects costing an estimated PHP636b (~USD13b) that have yet to be awarded. awarded and PHP1,308b are in the pipeline. The projects in the pipeline will be
A law was passed in 2000 to expedite the right-of-way for national government left for the next government to execute, with over 90% addressing the transport
infrastructure projects. Yet land acquisition and right-of-way remain the key deficit. Again, political will in passing legislation and streamlining processes is
stumbling blocks for transport-infrastructure projects. While the government important in moving these projects forward.
can expropriate land and property by applying eminent domain, this is in
practice an extremely slow process as negotiations can drag on with one or
more land owners. In some instances, we understand the proponents of these PPP projects (2011-2016)
projects make part of the land acquisitions themselves to break the deadlock. PHPb
AWARDED 303.3
One example was the MCX, also called the Daang-Hari- SLEX link road project,
PPP projects for implementation
which encountered right-of-way issues and thus was delayed. MCX is a USD54m
Transport 251.2
4km, 4-lane expressway, which cuts through the New Bilibid prison reservation
Water 24.4
connecting the city of Bacoor, Cavite to the South Luzon Expressway. The
Others 27.6
project was awarded in Dec 2011 but it was not completed until 2015. This is
not ideal! PIPELINE 1,308.5
Projects under procurement 556.6
We note that a new law was passed in March 2016 (RA No. 10752 or The Right-
Transport 486.1
of-Way Act intended to improve the process of land acquisition. We believe
Water 18.7
this is a good step. However, much depends on the implementation.
Others 51.8
In the light of growth issues among the more developed markets, the Philippines
could truly lead GDP growth and is one of the few countries which can afford an Projects for roll-out 66.1
expansionary fiscal budget. If spending on infrastructure were boosted, we Transport 66.1
believe the countrys GDP growth would be as high as 7-8% from a baseline of 5-
6% growth. This is partly a function of political will. Every new government For approval of relevant government bodies 641.4
issues its own economic blueprint, known as the Philippine Development Plan Transport 619.9
(PDP). The 2011-2016 PDP set ambitious targets by aiming to expand GDP by an Others 21.4
average of 7-8% for the period with significant contributions from a sustained
increase in public infrastructure spending as a ratio to GDP. The target public Projects with ongoing studies 44.6
infrastructure ratio was 4.0% (PHP668b) for 2015 and 5.1% for 2016. However, Transport 44.6
public infrastructure spending growth reached only ~2.4% (~PHP400b) in 2015 Sources: PPP Center, Maybank ATRKE
while GDP growth averaged 6.4% in 2011-2015.

UNMASKING ASIA 51
1. Transport and water distribution mainly public
Transport: Horrendous traffic jams and airport /seaport congestion are
testament to the severe deficiencies in transport infrastructure. This is still
largely the purview of the government although in Luzon island major toll
roads are PPP projects. Over 90% of the PHP1,308b PPP projects in the
pipeline address the transport infrastructure deficit.
Water: The privatization of water distribution services in Metro Manila was a
key success story, particularly for the East Zone. We note that Manila Water,
the operator of the East Zone, was able to reduce non-revenue water
(leakages and / or pilferages) from ~60% in 1997 to ~11% presently. Also,
there were no issues with the regulatory framework back then. So it was all
the more unexpected when regulatory issues erupted in 2013. The issue is
whether or not corporate income tax is a recoverable expense and has
been brought before the Philippine Supreme Court. There were concerns this
would affect investor perception of other PPP projects in other sectors but
this did not happen.
In the rest of the country, water distribution is still largely the responsibility
of the government. The main issue is developing new sustainable water
sources to replace the prevalent practice of tapping ground water that leads
to subsidence and also in many cases may not be potable because of
extensive developments above ground.
2. Multiplier effects if glaring inadequacies in transport
infrastructure are addressed
Prolonged travel and delivery time is keeping costs of living and businesses
elevated. This was highlighted in 2014 when congestion in the main Manila
seaport increased delivery periods by months. Today, there are daily
reminders, especially for Metro Manila motorists and commuters, of the
delays caused by the lack of mass transport systems and alternate roads.
The decrepit state of airports is an obstacle to growing the tourism industry.
Boosting investment is appropriate as the multiplier effects on lowering the
costs of living and for businesses will be substantial, as well as accelerating
development of other industries, notably tourism. It can also lead to
decongestion of Metro Manila and spur development in provincial areas.
3. Private sector leads in power, telecoms and housing
Power: Private investment in the power generation sector ramped up
significantly following the restructuring of the industry in 2001. The
restructuring process has worked out quite well and there is confidence in
the regulatory framework. Also, we note there are more players and a
significant pipeline of power generation projects. There is better access to
Peso-denominated financing, partly due to the high level of liquidity in the
Philippine financial system. As a result, the typical WACC of a coal-fired
power generation project has declined from ~14% in 2010 to ~12.6%
presently. The returns for those who participated in the privatization of
state-owned plants were significantly higher in some cases.
Similarly, the Renewable Energy Act of 2008 was successful, resulting in
rapid buildout of wind, solar and other renewable energy capacity, and an
existing pipeline of greenfield renewable energy projects.
However, the restructuring of the sector may have worked too well as we
estimate the risk of an oversupply of baseload power plants in the Luzon grid
by 2019. A possible opportunity relates to the construction of an LNG
regasification facility needed upon depletion of the Malampaya natural-gas
field by 2024. Attractiveness of the project depends on whether the
government offers the right incentives and policy support.
Telecoms: Private investment, first introduced in the 1990s, has grown since
and has resulted in high mobile penetration (114% in FY15). However, we
note broadband penetration and download speeds remain relatively low.
There are presently only two players in the telco sector, the result of
consolidation. Being an archipelago, the cost of backhaul in the Philippines
is expensive. Also, unlike other countries, there is no National Broadband
Network. As a result, telcos have to build all the infrastructure themselves.
However, there is a niche opportunity in wireless broadband, particularly
LTE 4G on the 700 MHz frequency. Also, more private investment is required
to expand broadband service coverage and increase download rates. Another
possible growth area is financial technology (fin-tech). Globe Telecom and
Smart Communication have invested in the Automatic Fare Collection
System, which involves the use of a stored-value card and micro cashless
payment system. The card can be used to buy load for prepaid mobile
services.
UNMASKING ASIA 52
 Housing: public expenditure on housing has been estimated at less than 1%
of government spending. A highly fragmented private sector-led industry has
been unable to cope with the quantity and quality of housing units required
resulting in a big gap in meeting housing needs. This is evident in the
prevalence of slums in urban areas, especially in Metro Manila. In rural
areas, there are fewer slum areas but houses are not built of durable
materials so are more vulnerable to natural and man-made disasters.

4. Regulatory risks evident in some PPP projects

The Metro Manila water distribution system served as a model PPP

undertaking but in late 2013 the regulator reinterpreted key provisions of
the concession agreements. This led to international arbitration that is still
ongoing. Implementation of straightforward provisions in toll-road
concessions has been delayed, apparently for political reasons. Due to delays
in government deliverables, a hospital renovation PPP project was returned
to the government.

5. MPI best infra play

Metro Pacific Investments Corp (MPI PM, BUY, TP PHP7.00) is the most direct
infrastructure play. It derives earnings from toll roads (North Luzon
Expressway, Manila-Cavite Expressway, Subic-Clark-Tarlac Expressway),
electricity distribution (Manila Electric Co), water distribution (Maynilad
Water Services Inc), rail mass transit (LRT1) and hospitals. Regulatory risk on
its PPP projects has taken several forms. One is the ongoing second round of
arbitration of Maynilad with the water regulator on whether income taxes
should be included in the tariff. Another is delays of two to three rounds of
scheduled toll rate hikes for NLEX and CAVITEX. Despite these setbacks, MPI
continues to bid for PPP projects but makes proposals using conservative
assumptions to factor in regulatory risks.

UNMASKING ASIA 53
Focus Charts

Government infrastructure spending / GDP (%) Vehicle sales and YoY growth
6.0 350000 40.0
ACTUAL TARGET 5.1 Vehicle sales YoY Growth 30.0
300000
5.0
20.0
4.0 250000
4.0 10.0
3.5

Units
200000 0.0
(%) 3.0 (%)
2.5 2.4 150000 -10.0
2.2 2.2 2.3 2.2
-20.0
2.0 100000
-30.0
1.0 50000
-40.0
0 -50.0
-

1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2012 2013 2014 11M15 2016
Sources: National Economic Development Authority, Department of Budget and Sources: Chamber of Automotive Manufacturers of the Philippines Inc, Association of Vehicle
Management, Maybank ATRKE Importers and Distributors Inc, Maybank ATRKE``

Toll roads Growth in number of users / subscribers of major ICT services

250,000 10.0% 120.00 40
NLEX average daily traffic Fixed (wired)-broadband subscriptions
No. of Vehicle Entries

200,000 Mobile-cellular telephone subscriptions 35

5.0% 100.00 Fixed-telephone subscriptions

Users / Subscribers, in Millions

150,000 Percentage of Individuals using the Internet (%) 30
100,000
Vehicle entries 0.0% 80.00
25
50,000 Growth Rate

0 -5.0% 60.00 20 (%)

2010 2011 2012 2013 2014 2015
15
5,000 15.0% 40.00
NLEX vehicle-kilometers travelled 10
4,000
KM in thousands

10.0%
20.00
3,000 5
5.0%
2,000 Kilometers travelled
0.0% - 0
1,000
2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013
Growth Rate
0 -5.0%
2010 2011 2012 2013 2014 2015
Source: Metro Pacific Investments Corp Sources: Philippine ICT Statistics Portal, International Telecommunication Union (ITU)

UNMASKING ASIA 54
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UNMASKING ASIA 55
Philippines Infrastructure Facts & Forecasts
Expenditure
Sector State in 2010 Current State 2020 Targets
2015 2016 Forecasts
Energy
Coal, oil, fossil fuels, The Luzon grid accounted for FY14 GWh consumption grew The Department of Energy (DOE) Capex for power plants, Capex for the San Buenaventura Capex for coal-fired
thermal ~74% of total power by a CAGR of 3.3% from FY10. is projecting electricity demand particularly the 97 MW coal-fired power station in power projects may cost
consumption in the With regard to plant mix, we to grow by a CAGR of 4-5% up to Avion and 414 MW San Mauban. Quezon (460 MW) and as much as USD2.5m/MW
Philippines. note that coal rose to ~43% of 2030. This is for the guidance Garbriel nat-gas power other coal-fired power projects if the plant equipment is
generation from 34.4% in of private power generation facilities. Also, may ramp up beginning in 2016. sourced from Japanese
In FY10, Philippines power FY10. companies in planning capacity construction of SMC suppliers.
consumption was 67,743 GWh build-out. Global Powers coal-fired First Gen Corp may decide
and peak demand was 10,375 In FY14, the countrys power power projects in Limay whether or not to invest in an The planned LNG
MW. Total installed capacity consumption was 77,261 GWhThe DOE has talked about Bataan (300 MW) and LNG regasification terminal in regasification terminal
was 16,359 MW. and peak demand was 11,822setting a mandated capacity mix Malita, Davao de Sur (300 2016. Note there are ~2,700 may cost as much as
MW. Total installed capacity
by plant type with a minimum MW) started. MW of nat-gas power plants, USD1b. This would be a
GWh consumption breakdown was 17,944 MW. of 30% for nat-gas, which is which source the fuel from the completely private-
by grid: much higher than the existing Malampaya offshore field. sector-led project.
GWh consumption breakdown contribution. However, it is However, the field may be
Luzon: 74.3% by grid: uncertain whether the depleted by 2024 so there is a
Visayas: 13.3% implementation will be strictly need to develop an alternative
Mindanao: 12.4% Luzon: 74.4% enforced. source such as LNG. However,
Visayas: 13.3% the infrastructure must be built
GWH generation breakdown Mindanao: 12.3% Coal accounted for 43% of the first.
down by plant type: countrys FY14 GWh production
GWH generation breakdown and 32% of installed capacity. Note there must be enough lead
Coal: 34.4% down by plant type: This will grow further given the time for the regasification
Nat-gas: 28.8% existing pipeline of committed facility to be completed before
Geothermal: 14.7% Coal: 42.8% and indicative projects, which the Malampaya field is depleted
Hydro: 11.5% Nat-gas: 24.2% comprise mostly coal-fired in 2024.
Oil-based: 10.5% Geothermal: 13.3% power plants. However, there
Other RE: 0.1% Hydro: 11.8% is a growing concern among
Oil-based: 7.4% stakeholders that this may be
Other RE: 0.5% too much, particularly in light of
the UN Climate Conference in
Paris in Dec15.

UNMASKING ASIA 56
Sector MKE View: Achievable
Energy
Coal, oil, fossil fuels, With regard to the demand-
thermal supply situation we note there
is a comfortable reserve margin
in the Luzon grid and we
believe there is the risk of an
oversupply of baseload power
capacity by 2019.
There is ~5,000 MW of baseload
capacity, which will come on
line in Luzon by 2019. This is
based on the list of committed
projects from the Department
of Energy and certain projects
announced, which have a
good chance of happening,
although unfunded at this
point.
Challenges
The most pressing need is to develop an
alternative to the Malampaya field, which
may be depleted by 2024. Note this one
field supplies all the nat-gas requirements
of the country. One alternative is LNG.
However, the infrastructure must be built
for this to be an option and it will have to
be developed predominantly by the private
sector. The key for this project is a
government policy supporting nat-gas /
LNG such as the setting of a mandated
capacity mix.
Reasons & Response Opportunities
There are new players in the sector who are The development of an LNG regasification terminal
growing their power-generation business and is an opportunity if the right incentives and policy
adding to supply. However, as some of the are put in place to support the project.
projects have not started construction yet, an
oversupply situation may be averted if these
projects are phased-in. Also, there is
always the risk of delay with regard to power
projects in the Philippines due to any one of
the following reasons : 1) slow development
of the transmission infrastructure; 2) inability
to secure permits and / or an Environmental
Compliance Certificate; and 3) unable to
secure long-term offtake contract with a
distribution utility.
UNMASKING ASIA 57
Philippines Infrastructure Facts & Forecasts
Sector State in 2010
Nuclear
Hydro Hydro plants, including
impoundment dams and run-of-
river type hydro had a total
installed capacity of 3,400 MW in
2010.
Current State
The Department of Energy
continues to push for the
development of run-of-river
hydro power projects through the
incentives provided in the
Renewable Energy Act such as the
feed-in tariff.
Expenditure
2020 Targets
2015 2016 Forecasts
The DOE has an aspirational target Relatively small. Relatively small. Run-of-river hydro projects
of growing installed capacity of are typically less than 100
renewable energy by ~9,000 MW by MW and the cost to develop
2030 from ~5,000 MW in 2010. is as much as USD4-5m/MW.
Most of this will come from hydro
power at ~5,000 MW.

Other Renewables Geothermal power plants had a
total installed capacity of 1,966
MW in 2010.
Geothermal power projects are
eligible for tax incentives as
provided by the Renewable
Energy Act.
The DOE has an aspirational target Greenfield geothermal
of growing geothermal power power projects are typically
capacity by ~1,500 MW by 2030. small at less than 100 MW
and cost as much as
USD5m/MW to develop.

Solar There was a rush of building of A total of 550 MW of solar power

solar power capacity as the
capacity quota for feed-in tariff
was increased to 550 MW. This
includes the 50 MW quota in the
first allocation and an additional
500 MW in the second allocation.
capacity is eligible for feed-in tariff
(PHP9.68/KWh for the first
allocation and PHP8.69/KWh for the
second allocation).

UNMASKING ASIA 58
Sector MKE View: Achievable Challenges Reasons & Response Opportunities
Nuclear
Hydro Run-of-river hydro has significant potential in the
Philippines but these projects may be located in
remote areas with little infrastructure. They are
eligible for feed-in tariff (up to fixed quota) and tax
incentives.

Other Renewables Geothermal has significant potential in the

Philippines as the country is located within the
Pacific Rim of Fire, an area with significant tectonic
/ volcanic activity. However, the economic
feasibility of such projects is a bit challenged now
that energy prices (coal and oil) are at low levels.
Note that geothermal projects are not eligible for
feed-in tariff.

Solar Solar power development is an attractive

opportunity in the Philippines given the elevated
feed-in tariff and declining price of solar panels.
However, we understand the feed-in tariff quotas
for the first and second allocations are nearly taken
up.

UNMASKING ASIA 59
Philippines Infrastructure Facts & Forecasts
Sector State in 2010
Transport
Air (incl ports) Annual international and
domestic passenger traffic
48.08m
Annual international and
domestic cargo traffic 1,111m
kg
Ninoy Aquino International
Airport domestic and
international flights 200,100
Current State
95.94m as of 2014
1,232m kg as of 2014
236.440 as of 2014
2020 Targets
As published in the official 2011-
2016 Philippine Development
Plan and updated in 2013, the
end-target is 74.32m.
End-of-plan target is 1,677m kg
End-of-plan target is 274.88
thousand
Expenditure
2015 2016 Forecasts
According to national The government is targeting Conservatively, if GDP
government budget data, 5.1% of GDP in total grows on average by 5%
total infrastructure and infrastructure and other capital over the next six years of
other capital outlays in outlays in 2016 or PHP760b. the new administration
11M15 was PHP368b, However, the likelihood of and assuming inflation of
+23% YoY. underspending remains, 2%, as well as the share of
Still, this is only about although perhaps less so in an infra spending remaining
2.4% of GDP, well below election year. For transport PPP at 5% of GDP, public-
the official 4% target for projects, there are two ongoing sector infra spending
2015. Had the target construction projects for a toll could reach PHP1,036b in
been met, total national road and an airport. The total 2021. Currently, there are
government project cost of the Mactan-Cebu 14 transport PPP projects
infrastructure and other International Airport passenger where costs have been
capital outlays would terminal building is PHP18b. estimated at a total of
have reached PHP531b. PHP636b that have not
yet been awarded.

Land - Roads Total length of arterial roads 3,654 kilometres of arterial As published in the official 2011- San Miguel Corporation, a The NAIA expressway with
with roughness index of 3.0 roads as of 2014 2016 Philippine Development major PPP proponent, estimated cost of PHP24b is
(km) 1,400 in 2011 Plan and updated in 2013, the estimates 2015 spending almost complete. Other PPP
92.7% paved roads as of 2014 end-target is 6,600 kilometres on three ongoing toll transport projects that have
Proportion of paved roads (out road projects at been awarded but are in pre-
of the total 31,242 km) 80.9% 99.4% permanent bridges as of End-of-plan target is 100% PHP30.2b or about 8% of construction activities total
2014 the governments total seven and have combined total
Proportion of permanent End-of-plan target is 100% infra spending. project cost of PHP231b.
bridges along national arterial
roads, 96.3%
Land - Rail Annual ridership of passengers 243.58m as of 2014 As published in the official 2011-
219.27m 2016 Philippine Development
1.11 as of 2015 Plan and updated in 2013, the
Ratio of revenue to operation end-target is 270.10m
and maintenance cost (farebox
ratio) 1.05 End-of-plan target is 1.15

Sea (incl ports) Cargo throughput 168.24m MT 217.11m MT as of 2014 As published in the official 2011-
2016 Philippine Development
Number of water transport 54m as of 2014 Plan and updated in 2013, the
passengers 52m end-target is 228.37m MT

End-of-plan target is 75m

UNMASKING ASIA 60
Sector MKE View: Achievable
Transport
Air (incl ports) While the official target for
public-sector infrastructure
spending is 5.1% of GDP, we
believe what is achievable is
2.5-3.5%, which translates to an
estimated PHP360-500b. For
transport PPP projects, we
assume no new ones will be
awarded as the current
administration is about to end
its term while the new
administration is likely to have
to settle down first after taking
office in Jul-16. For the
transport PPP projects that
have been awarded, we
estimate 5% of project cost will
be spent this year for those in
pre-construction activities or
PHP12b. For those with ongoing
construction, about PHP30b.
Land Roads
Land - Rail
Sea (incl ports)
Challenges Reasons & Response Opportunities
The most obvious shortfalls in transport Underspending on the part of the government The greatest opportunities come from the PPP
infrastructure are: is due to more care in disbursement of funds transport projects. As these carry much regulatory
following an adverse ruling from the Supreme risk, companies guard against these by making
(1) The lack of quality mass transit that Court in 2014, weak coordination among conservative bid assumptions as a buffer against
has led to a surge in new vehicle sales government agencies, land acquisition issues delay in deliverables by the government. As major
and increased sharply the travel time and red tape, among others. Since 1986, transport infrastructure projects such as those
within Metro Manila and other urban different governments have manifested offered in the PPP programme will eventually
centres. varying degrees of political will that have increase land values in the vicinity, most bidders go
(2) Delay in building new roads to improve helped to accelerate or slow down into a consortium or are conglomerates that will
connectivity among various locations. infrastructure development. Because of the benefit from several aspects of the project.
(3) Inability to keep pace with the forthcoming May presidential elections, there
increase in passenger and cargo traffic is uncertainty on what the pace will be in the
at airports and seaports so that next six years. However, we believe that
passenger arrivals and departures are because there has been such a glaring deficit
not delayed, as is the withdrawal of in transport infrastructure, it will be among
goods. the top priorities of the new government.
(4) Safety on air and sea vessels as a
result of lack of equipment and/or
inadequate observance of safety
regulations.
Land acquisition / Right-of-Way A new law was passed in March 2016 (RA No.
10752 or The Right-of-Way Act intended to
improve the process of land acquisition.
Land acquisition / Right-of-Way A new law was passed in March 2016 (RA No.
10752 or The Right-of-Way Act intended to
improve the process of land acquisition.
UNMASKING ASIA 61
Philippines Infrastructure Facts & Forecasts
Expenditure
Sector State in 2010 Current State 2020 Targets
2015 2016 Forecasts
Communication
Telecoms/mobile There are two major players in Still two major players in the Increase CMTS coverage as a 2015: Combined capex of 2016: Combined capex of PLDT We understand SMC will
the mobile and wireline telecommunications sector: percentage of total PLDT and Globe Telecom and Globe Telecom forecast at launch a wireless
telecommunications market: PLDT and Globe Telecom. San municipalities from 94.7% in was PHP75.33b PHP81.3b. Both companies broadband service
PLDT and Globe Telecom. San Miguel Corp (SMC) increased its 2009 to 100% in 2016. continue to upgrade their offering before the end of
Miguel Corp bought a stake in stake in Liberty Telecom after The bulk of the spending network with regard to data the year. The investment
Liberty Telecom in 2009 in acquiring the stake of Qatar was related to expansion capacity. may cost up to USD1b,
partnership with Qatar Telecom. SMC group plans to and upgrade of network which was the figure
Telecom. launch a wireless broadband for wireless data. under discussion with
service offering before the end Telstra previously.
~102% mobile (SIM) penetration of 2016 and is open to other
using FY11 numbers. possible partners after JV talks
with Telstra broke down
Smartphone penetration was recently.
~15% for Globe Telecom in
2011. Mobile (SIM) penetration was
~114% in FY15.

Smartphone penetration was

~40% for both Globe Telecom
and PLDT in FY15.

UNMASKING ASIA 62
Sector MKE View: Achievable
Communication
Telecoms/ Mobile SMC may launch a wireless
broadband service offering
before the end of the year.
Challenges
LTE 4G wireless infrastructure is lacking.
Wireless data traffic is increasing
significantly for both Globe Telecom and
PLDT. This is partly driven by the rising
penetration rate of smartphones.
GLO and TEL launched Fiber to the Home
(FTTH) broadband services late last year.
But this service is only available in
selected areas in Metro Manila.
For the incumbents there is a lack of
available spectrum in the 700 MHz band,
which could be used for LTE 4G broadband
services (90 MHz of the 700 MHz frequency
band is held by SMC group companies).
Reasons & Response
A renewed push by SMC in the wireless broad
band space may spur competition and
investment, thereby increasing Internet
download speed, which is currently one of the
slowest in the region. Having said that, the
industry is already quite competitive despite
having only two players.
There are also a number of challenges for any
new entrant in the Philippines: 1) no tower
sharing; 2) low ARPU; and 3) high
interconnectivity costs. Regarding capex, the
Philippines being an archipelago means the
cost of back haul is significantly more
expensive than in other countries. Also,
increasing coverage can be delayed to some
extent by the many permits needed to
construct a cell site.
Opportunities
Wireless broadband service using LTE 4G on the 700
MHz frequency is a niche opportunity in an otherwise
slow growing sector.
Another area of possible growth is Fin-tech. Note
that Globe Telecom and Smart Communication
invested in the Automatic Fare Collection System
(AFCS) PPP. The new payment system, which was
rolled out, involves the use of a stored value card
(Beep) and micro cashless payment system, which
can also be used for purchases in certain retail
establishments. The card can be used to buy load for
prepaid mobile services. However, the revenue
potential is still unclear.
UNMASKING ASIA 63
Philippines Infrastructure Facts & Forecasts
Expenditure
Sector State in 2010 Current State 2020 Targets
2015 2016 Forecasts
Internet/ Download speed of ~1 mbps in Household download speed of Improve cost efficient broadband The government is
digitalization/ 2011 based on Akamai 3.64 mbps in May 2015 (ranking service delivery, network evaluating setting up a
big data 176 out of 202 countries) based infrastructure expansion and Universal Access and
on Ookla. upgrades through increased Service Fund, which can
competition based on Philippine be used for the
Digital Strategy 2011-16. development of broadband
Lowering of Herfindahl- infrastructure, particularly
Hirschman Index, which is a in underserved
measure of market communities. The plan
concentration. involves allocation of
Average price for basic ~PHP2b in spectrum users
broadband Internet falls by 5% fees collected by the NTC
annually. for the UASF. The
Investment in infrastructure spectrum users fees are
expansion and development currently remitted to the
increase by 10% annually. National Treasury.

Universal broadband Internet The Department of

service: Science and Technology
For businesses: all CBDs to plans a free Wi-Fi Internet
have broadband coverage with service. Once fully
average download speeds of 20 deployed, the project will
mbps for customers by 2016. serve 105,000 concurrent
For households, broadband users with 256 kbps each
with average download speed with data volume based on
of at least 2 mbps to be a Fair Usage Policy. The
available to 80% of customers budget for the project is
throughout the country. ~PHP1.41b.

Universal basic broadband

Internet by 2016 to all barangays
through publicly shared access.

Universal broadband Internet

access for public schools by
2016.

Increase the percentage of

households with broadband
connection from 13.8% in 2008 to
25.8% in 2016.

UNMASKING ASIA 64
Sector MKE View: Achievable Challenges Reasons & Response Opportunities
Internet/ N/A
digitalization/
big data

UNMASKING ASIA 65
Philippines Infrastructure Facts & Forecasts
Sector State in 2010
Housing Provision of socialized housing Updates are available only at
units, 10% of population.
Total housing need, which is
housing backlog and housing
for new households, was 3.7m
units.
Water Metro Manila East Zone:
Non-revenue water: 11%
Billed volume: 409.8m mcm
Metro Manila West Zone:
Non-revenue water: 51%
Billed volume: 373.8m mcm
Current State
the end of the plan period.
The two Metro Manila water
concessionaires depend on a
single source of raw water:
Angat dam
Metro Manila East Zone:
Non-revenue water: 13%
Billed volume: 476.7m mcm
Metro Manila West Zone:
Non-revenue water: 34.3%
Billed volume: 498.3m mcm
2020 Targets
The 2016 target of the National
Housing Authority and Socialized
Housing Finance Corporation is
to provide 578,756 socialized
housing units.
Total housing need in 2016 is
estimated at 5.8m units. Official
target is to provide 1.47m
housing units for the entire plan
period.
Marginal improvements in
concessionaires KPI over the
2013-18 rate rebasing period.
Expenditure
2015 2016 Forecasts
A 2009 estimate puts With a budget of PHP3,001b in With fiscal space, it is
government spending on 2016 total national government possible government
housing at less than 1% of expenditures, 1% or PHP30b spending on housing will
total national would be the upper limit to increase its share of
government housing spend. expenditures.
expenditures. If this
proportion still holds, We estimate the companies in The companies in our
2015 public sector our property universe will property universe are
housing spend would increase spending by about 9% currently working on
have been less than to PHP106b. reducing their receivables
PHP20b, perhaps flattish and inventory levels. We
YoY. expect an acceleration in
residential capex as
The private sector is the interest rates are
main provider of housing expected to remain
needs but it has not been subdued while household
able to close the gap, incomes are expected to
hence the continuing rise with declining
large housing backlog. unemployment.
The six listed companies
in our property universe
are among the largest in
the country but operate
in a heavily fragmented
industry. Between 2010
and 2015 their
residential project costs
almost tripled to around
PHP100b.
FY15 capex of PHP12.2b FY16 forecast capex for Manila PHP200b capex in the
for the two Water and Maynilad of East Zone from 2013-2037
concessionaires PHP23.9b.
PHP239b capex in the
West Zone from 2013-
2037
UNMASKING ASIA 66
Sector MKE View: Achievable
Housing The government has fallen
below its spending target for
several years and may do so
again but perhaps to a smaller
extent as it is an election year.
The companies in our property
universe have been
opportunistic in launching
residential projects as they are
bringing down inventory and
receivable levels. We think they
are likely to achieve our modest
targets.
Water Programmed capex can now be
implemented as the new rates
for 2013-18 have been
implemented in 2015.
Capex post-2018 subject to the
outcome of the next five-year
rate rebasing. Having said that,
we do not expect any significant
change from the existing plan.
Challenges
Underspending on the part of the
government is due to more care in
disbursement of funds following an adverse
ruling from the Supreme Court in 2014,
weak coordination among government
agencies, land acquisition issues and red
tape, among others.
Since 1986, different governments have
manifested varying degrees of political will
that have helped to accelerate or slow
down infrastructure development. Because Many housing units, both in urban and rural
of the forthcoming May presidential
election, there is uncertainty on what the because of inadequate planning or zoning.
pace will be in the next six years.
24/7 water supply is lacking outside Metro
Manila. Also, there is underinvestment in
the development of new water sources and
the upgrade / expansion of the distribution
networks outside Metro Manila.
Reasons & Response
The obvious shortfalls are in socialized
housing as is evident from the presence of
slums in urban areas, especially in Metro
Manila.
In rural areas, there are fewer slum areas but
housing units are not built of durable
materials so are more prone to destruction in
natural disasters.
areas, are situated in disaster-prone locations
Investment spending in the East and West
Zones was delayed because of regulatory
issues with regard to water rates. This needs
to be resolved before new investments can be
made in the two concession areas. The MWSS
approved implementation of the new rates for
2013-18 rate rebasing period mid last year.
Opportunities
The greatest opportunities are in providing decent
mid-income housing as this portion of the populating
is expected to broaden as the economy grows. This is
still inadequately served, especially in provincial
areas. Affordability is improving in a low-interest
rate environment amid rising incomes.
The greatest opportunity is in the development of
bulk water supply projects, particularly outside
Metro Manila. Also, there is the opportunity in the
upgrade and expansion of the water distribution
infrastructure outside Metro Manila.
UNMASKING ASIA 67
SINGAPORE INFRASTRUCTURE

1. NIRC provides recurring-income support for higher public spending.

2. Investing to enhance productivity and promote sustainable growth.

3. Jump in development expenditure to benefit social infrastructure.

4. Rail, LNG, airports & infocomm are needle-moving projects.

5. Stock picks: SingTel & MINT.

Gregory Yap & Singapore Research Team

gyap@maybank-ke.com.sg
(65) 6231 5848

UNMASKING ASIA 68
SINGAPORE INFRASTRUCTURE

While We Were Sleeping

Singapore underinvested in its infrastructure from early 2000. Development

spending was SGD12b in 2010, before spiking to SGD19-20b in FY15/FY16 or 5%
NIRC Supplements Government Revenue
of GDP. This is about to change. Deputy Prime Minister Tharman (SGD b)
80
Shanmugaratnam indicated that public development expenditure could top Total Operating revenue
SGD30b (6% of GDP) by the end of this decade. 70 Development expenditure
Every Singaporean is drilled that the country is not endowed with natural 60
Operating expenditure
resources; they are also vaguely aware that there are no cheap suburbs to retire Net Investment Returns Contribution
to. It is no state secret that after 50 years of prudent spending and market 50
pricing of public goods and services, a large pool of reserves has accumulated.
40
Somewhat publicised but not fully appreciated is that Singapores foreign
reserves compensate for its lack of natural resources. Investment income from 30
these foreign reserves now supplements the governments budgets through Net
20
Investment Return Contribution (NIRC).
The Constitution was amended in 2008 to embrace the NIRC Framework. From 10
FY09, this allows the government to spend up to 50% of expected long-term real 0
returns from the net assets of GIC and MAS. Temasek joined the framework in 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E
FY16. In the FY16 budget, NIRC income is SGD14.7b, up from SGD9.9b in FY15,
against operating revenue of SGD68.44b. Under the previous Net Investment ` Source: Accountant-Generals Dept
Income Contribution (NIIC) Framework in 2000-2008, the contribution was below
SGD4b.

UNMASKING ASIA 69
1. Creating ecosystems for enhancing productivity and
promoting sustainable growth
Three ways in which Singapores infrastructure are different from the rest of
ASEAN are:
i. Singapores spending is moving beyond providing amenities and basic
social/economic infrastructure. These are done with. Singapore
already has established extensive infrastructure networks. Power plants
and distribution grids, water plants, roads and housing are well designed
and maintained, now among the best in the developed world. This is
consistent with findings in our earlier section, which suggest that
Singapore fares well both in the quality and quantity of its
infrastructure. Still, the government plans to raise its development
budget from SGD12b (3.7% of GDP) in 2010 to SGD30bn in 2020 (6%). It
has a record of investing judiciously to cultivate ecosystems and create
new streams of income or through raising factor productivity. For
example, the oil industry is now 5% of GDP and Singapore has become
the undisputed oil hub in Asia. Behind this success is its plug and play
infrastructure and complete supply-chain integration.
ii. Proactive economic infrastructure development. Singapores
spending on social infrastructure may be patchy but not economic
infrastructure development. While the regions development
initiatives are aimed at resolving crippling bottlenecks, Singapore
builds infrastructure proactively to attract/retain foreign
investments. Its reclamation and extensive development of Jurong
Island raked in billions of investments from leading global oil and
chemical companies. Work on Changi Airports Terminal 5 and
Terminal 1 expansion commenced even before Terminal 4 is
completed. Singapore has also been working on water
independence decades before its 2061 water agreement with
Malaysia expires.
iii. Funding. Public finance is in good shape, more so with the adoption
of NIRC. Private-public partnerships (PPPs) play a role by marking
services to market and enhancing efficiency. Extraneous risks aside,
clarity on the framework should minimise execution missteps for
PPPs. Accordingly, cost of capital is also low and IRRs should be
lower than the region.

2. Rebalancing priorities
Fig 21: Total development expenditure as % of GDP
A rebalance of infrastructure priorities may shift more investments to social-
(%) oriented projects. Previously, Singapores economic agenda overwhelms its
9.0 8.6
social programme. The 2010-2013 flash floods, long queues for public
Total Dev Expd as % of GDP
8.0 housing, spiralling prices of HDB flats and congestions at public hospitals
7.0 were evidence of the underspending. A groundswell of disenchantment
7.0
during the 2011 general elections was a timely reminder that the social
6.0
6.0 5.7 fabric needed strengthening. Congestions in public transportation, long
5.5
5.0 4.9
waiting times for public housing and snaking queues at hospitals had an
4.7
5.0 4.5 economic cost. They compelled the government to slow down its intake of
3.9 3.7 foreigners and foreign labour.
4.0 3.6
3.4 3.4 3.3 3.5 3.2
Along with transport, healthcare is of priority. New hospitals, generous
3.0 2.5 2.6 subsidies for the pioneer generation & lower-income families and mandatory
2.0
healthcare insurance to reduce large-bill outlays are new initiatives. Its 2013
1997 2000 2003 2006 2009 2012 2015 plan targeted one new public hospital a year on average up until 2020,
Source: Accountant-Generals Dept, SingStats representing a 40% increase in public-hospital beds. From 2010-2015,

UNMASKING ASIA 70
 healthcare development expenditure has increased almost 3-fold to A third runway has also been planned. Changi Airport is currently highly
SGD1.6b. profitable with revenue of SGD2.1 b and net profit of SGD780m.
Changing demographics, annual smog problems from the region and global iii. LNG. Developing an LNG hub is of economic and strategic interest. It is
warming are additional hot spots. Addressing these would require raising a matter of timing, in our opinion. About 95% of the feedstock used to
spending on transportation, public housing, connectivity, elder-friendly generate energy is currently gas piped from Malaysia and Indonesia.
facilities, flood alleviation, food centres and community centres etc. But it Long-term take or pay fuel contracts will expire only in early 2020. As
by no means suggests that economic infrastructure will take a back seat. current legislation forbids power producers from entering into new
contracts to import piped gas, demand for LNG ought to accelerate
Fig 22: Economic and social development expenditure
towards early 2020. Singapore is Asias oil and gas trading and pricing
Total Dev Expd (LHS) (%)
hub. Adding LNG broadens its offerings but a second LNG terminal is
(SGD b)
% of social dev expd to total dev expd (RHS) crucial for this. The recent softness in commodity prices has been a
25 70
% of econ dev expd to total dev expd (RHS) setback but the clock is ticking and the investment looks imminent. The
success of LNG and LNG trading could add meaningfully to GDP.
60
20 iv. Infocomm. Singapore is already ranked the second most network-ready
country in the world, by the World Economic Forum. It hosts 50% of
50
South-East Asias data centres. To cement its position, it is forging
15 ahead with a Smart City platform that will tout an ultra-high-speed
40 digital super-highway and super connectivity. Already served by 15
submarine cable systems with a total capacity of 114 Tbps, the new
10
30 trustworthy ICT platform should extend its lead. Its aim is to create
80,000 new jobs, increase todays 4% contribution to GDP by two-fold
and infocomm export revenue by 3x.
5 20
1997 2000 2003 2006 2009 2012 2015
Source: Accountant-Generals Dept
4. Pricing, operating model and cost of capital
3. Projects that move the needle Singapore prices its public goods at full cost recovery, with an eye on long-
term financial sustainability. Where possible, they are pegged to market
i. Rail. Rails reliability should stay at the top of the new agenda. Stage 3 prices. For example, its water tariffs consider the cost of its entire water
of the 42km SGD20.7b Downtown Line, when completed in 2017, should system such as water collection, reservoir management, the treatment,
take some pressure off existing tracks. Traffic may also be diverted to a reclamation & desalination of water and their associated costs. Today,
new SGD18b 30km Thomson Line as it opens in stages from 2019. Singaporeans are familiar with the concept of paying market prices for
Solutions for bus transport are faster and easier to implement. By public goods.
transiting to an operator model, the government has more latitude to
The government has experimented with various models of executing
add operating assets and increase service frequency and accessibility.
infrastructure development. It has corporatised ports, divested energy
ii. Airport. Although Changi Airports Terminal 4 will only be completed in generation assets and instituted PPP for water desalination. Changi Airport
2017, work has started on the SGD1.7b expansion of Terminal 1 and a and PSA are highly profitable. Power producers are broadening and
new Terminal 5. Passenger capacity will increase to 135m by mid-2020. increasing their investments in Singapore. The models of bus and railway

UNMASKING ASIA 71
 operations are being calibrated. But statutory boards mainly use direct 5. Equity selection: usual suspects
contracting because the results have been satisfactory.
As the prices of goods and services reflect market prices, there is a higher Unfortunately, the dichotomy between the real economy and equity markets
probability of adequate returns of capital for infrastructure projects (ROIC > almost ensures that stock selections are uninspiring. Well-executed
WACC). And with PPPs mostly working successfully, we see no problems in infrastructure development directly and indirectly promotes economic
attracting further capital inflows. In recent government open tenders for bus production and precipitates foreign investments. This creates a positive
routes, more than 10 bids were thrown in by various countries. Foreign bus business climate and promotes lending. Given its genesis as a development
operators were willing to bid lower than the Singaporean incumbents. This bank, DBS (SELL, TP SGD12.68), an active infrastructure financier around
implies general recognition of low execution risks and accompanying the region, stands to be a key beneficiary. However, we are concerned
expectations of low returns for operating in Singapore. about the intermediate term asset quality cycle and rates it a SELL.
Direct proxies for the airport are SATS (HOLD, TP SGD3.82) and SIA
Fig 23: PPP Projects in Singapore Engineering (HOLD, TP SGD3.61). In the infocomm space, Singtel (BUY, TP
SGD4.40) should be the biggest beneficiary as it owns about 17% of the data
Public Sector Agency/Private
No. PPP Project Sector Partner Project Description centres in Singapore. Keppel DC Reit (Unrated) is another potential
beneficiary.
1 Singapore Sports Hub Singapore Sports Council/ 35-ha site development to replace
Singapore Sports Hub National Stadium for 25 years. Opened
For construction companies, the slack from residential property demand may
Consortium in Jun 2014.
be taken up by spending to improve social amenities. This is a fragmented
2 ITE College West Institute of Technical Education/ To design, build, maintain and operate
Gammon Capital ITE College West for 27 years. Opened industry, comprising small and medium-sized contractors. Opportunistic
in Jul 2010. players with access to capital may surface to consolidate capabilities and
3 SingSpring Desalination Public Utilities Board/ SingSpring Supply 30m gallons of water per day scale to bid for and undertake bigger projects.
Plant Pte Ltd for 20 years. Opened in Sep 2005.
Stretching the investment theme further, higher foreign investments should
4 Tuaspring Desalination Public Utilities Board/ Tuaspring Supply 70m gallons of water per day
Plant Pte Ltd for 25 years. Opened in Sep 2013. entice more better-paid expatriates, giving impetus to rental demand for
5 Keppel Seghers Ulu Public Utilities Board/ Keppel Supply 32m gallons of NEWater per
residential property. New business formation should be positive for
Pandan NEWater Plant Seghers NEWater Development day for 20 years. Opened in Mar 2007. landlords. We favour AREIT (HOLD, TP SGD2.23) and MINT (BUY, TP
Co Pte Ltd SGD1.71).
6 Sembcorp NEWater Public Utilities Board/ Sembcorp Supply 50m gallons of NEWater per
Plant NEWater Pte Ltd day for 25 years. Opened in May 2010.
7 Incineration Plant National Environment Agency/ Design, build, own and operate new
Keppel Seghers Engineering incineration plant next to Tuas South
Singapore Ptd Ltd Incineration Plant, which can
incinerate 800 tonnes of refuse per
day for 25 years. Opened in Jan 2009.
8 TradeXchange Singapore Customs/ Create one-stop integrated logistics
CrimsonLogic Pte Ltd information port. Develop, operate
and maintain software for 10 years
from 2007-2017.
Source: Centre for Liveable Cities Singapore, MND

UNMASKING ASIA 72
Focus Charts

Gas Demand-Supply Balance Rail Growth Not Keeping Pace With Population Growth
(metric tonnes per annum) (no. of persons, kilometres)
('000 persons)
(km)
6,000 190
Total Population (LHS) Rail length (RHS)

170

150
5,000
130

110

4,000 90
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Source: BG Group, Wood Mackenzie, Poten & Partners Source: LTA, SingStats

Submarine Cable Map Total Housing Stock (no. of units)

(000 units)
EC Public Private
60

50

40

30

20

10

0
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016E
2017E
2018E
Source: TeleGeography Source: HDB, URA, Maybank KE

UNMASKING ASIA 73
Singapore Infrastructure Facts & Forecasts
Expenditure
Sector State in 2010 Current State 2020 Targets
2015 2016 Forecasts
Energy
Coal, oil, Fossil Fuels, In 2005, natural gas was 74.7% Natural gas is 95.5% of fuel Most natural gas is piped from Not much visibility. Energy projects are typically -SGD500m for
Thermal of fuel mix. Petroleum mix. Petroleum products down Malaysia and Indonesia. undertaken by or in partnership development of second
products 23.1%. to 0.7%. Due to falling energy with private sector. Government terminal
LNG to play bigger role as it can prices, much-talked- undertakes preparatory work
In 2001, natural gas was just Consumption of electricity is be imported easily. LNG about second LNG such as land reclamation.
26%. 46.4t WH/year: households 7t, provides fuel diversification and terminal has been slow
industries 7t, commerce 17t. security. to get off ground. LNG Terminal 2 might be an
exception, like Terminal 1.
Of licensed generation To promote LNG usage, power Feasibility studies for Terminal 1
capacity of 12,889MW, gas is producers no longer allowed to started in 2005. But during the
95.5%. import piped gas for energy global financial crisis in 2009,
generation from 2006. the terminal became
9,718 MW is from combined economically unviable.
cycle cogen/tri-gen plants. Ban will be reviewed when LNG
imports reach 3Mtps or in 2018, Government took over its
whichever earlier. development and ownership out
of strategic interests. It might
To store and export LNG, work now just do the same with
on a first LNG terminal costing second terminal.
SGD1.7b on a 40 ha plot on
Jurong Island commenced in
2013.

Given its strategic importance,

government has been increasing
capacity ahead of demand.
Currently, 3 tanks, a secondary
jetty, regasification facilities
have LNG throughput capacity of
6 Mtpa.

Aim is 11 Mtpa by 2018.

Maximum capacity is 16 Mtpa.

Second terminal could be in the

works, in Eastern Singapore to
support new industrial sites and
power plants in that area.

Government hopes to develop

Singapore into an LNG hub.

UNMASKING ASIA 74
Sector MKE View: Achievable Challenges Reasons & Response Opportunities

Energy
Coal, oil, Fossil Fuels, Singapores electricity market Lack of feedstock diversification and Generators have locked in long-term piped LNG a key business opportunity. Will diversify
Thermal in oversupply since 2013. Likely locked-in long-term contracts. gas/LNG supplies. Current contracts are based feedstock for energy generation. Enhances Singapore
to remain so for couple of on take or pay. Domestic demand for LNG as oil trading and commodity hub.
years. Singapores heavy reliance on piped natural not expected to take off until these contracts
gas from Indonesia and Malaysia is end. LNG industry already attracting strong attention.
Not positive for power untenable from security standpoint. Although much of Singapores gas requirements are
generators but good for power Government keen to develop LNG and stop Several contracts will expire over next six locked in by long-term agreements, 9 bidders have
consumers. companies from importing piped gas. years. applied for the coveted LNG aggregator/buyer
licence.
In the long run, more secure LNG supply &
liberalisation should create a more stable and Singapore's demand for Gas demand is expected to
transparent market. May help Singapore be 1.1-2.9m tpa by 2020, 2.9-5.2m tpa by 2022 and
become LNG hub. 6.9-9m tpa by 2025.

Singapore wants to develop an electricity An LNG hub here could spark supporting industries
futures market. Aims to open electricity for LNG tracking, PPG terminal, cold energy
market to full competition by 2018. utilisation & LNG bunkering services.

Also wants to provide a clearer roadmap on Second SGD500m LNG terminal put on backburner
electricity demand in next 10-15 years to aid due to low crude prices. For international traders,
planning of capacity. additional products provide opportunities for
portfolio optimisation.

Risks are Indonesia and Malaysia have been in this

space longer. Japan and China have similar
ambitions.

UNMASKING ASIA 75
Singapore Infrastructure Facts & Forecasts
Expenditure
Sector State in 2010 Current State 2020 Targets
2015 2016 Forecasts
Energy contd
Nuclear Study started on whether But concluded that nuclear Still SGD63m set aside for
nuclear-based electricity can risks exceeded benefits. Nuclear Safety Research &
be added to energy mix. Education Program.
Hydro

Other Renewables

Solar Installed capacity of solar PV Aims to raise adoption of solar Solar the most viable renewable
systems doubled in 2014 YoY, power to 350MWp by 2020 or 5% energy.
driven by additional 13.7 of peak electricity demand.
MWac of capacity spread over Being in the tropics, Singapores
248 new installations. annual solar irradiance is 1,150
kWh/M2/year. SGD580m
There are 636 solar blueprint to grow clean energy.
installations with grid
connected capacity of
25.5MWac.
93% installed by non-
residential users.

Transport Government spent Development budget lowered to

Air (incl ports) Changi Airport had four
terminals with combined
passenger handling capacity of
73m pa.
Budget terminal with
passenger handling capacity of at the previous budget
7m closed in 2012.
Changi Airport handled 42m
passengers in 2010.
Following closure of budget
terminal, remaining three
terminals can handle 66m
passengers a year.
Terminal 4 under construction retail space to Terminal 1 and
terminal. Terminal 1 being
expanded, dubbed Project
Jewel.
Airport handled 55m
passengers in 2015.
SGD10.3b on all transport SGD8.8b from SGD10.3b after
development projects. completion of some airport work
last year.
Terminal 4 can handle 16m Changi Airport Changi Airport Development
passengers pa. Opening in 2017. Development Fund Fund raised by SGD1b.
introduced with a budget
Completion of Project Jewel in of SGD3b.
2018 will add over 50k sqm of
raise its annual passenger
handling capacity by 3m to 24m.
Terminal 5 will add 50m
passenger handling capacity by
mid-2020s. Airport will
introduce third runway for
commercial use by early 2020s.
Passenger handling capacity will
double to 135m by mid-2020s.

UNMASKING ASIA 76
Sector MKE View: Achievable Challenges Reasons & Response Opportunities

Energy contd
Nuclear

Hydro

Other Renewables

Solar Continuous review of policy
framework to encourage solar
installations.
Land scarcity limits most installations on
rooftops.
Needs to manage intermittency of solar
power.
Government studying feasibility of harnessing
solar energy at its reservoirs and land-based
facilities
Needs to ensure sufficient back-up power to
manage intermittency.
Of alternative sources of energy, solar appears most
credible.
Solar capacity expected to increase from 43.8MW in
2015 to 350MW by 2020. Should contribute up to 20%
of energy by 2050, from less than 1%.

Government studying possible enhancement of solar

capacity to 600MW by 2020 instead of 350MW.

Transport

Air (incl ports) Execution risks typically
minimal. T4 should open as
scheduled in 2017.
No shortfall, especially with T4.
Development of T5, even before T4 is Planned airport expansion will support long-term
completed, to stay ahead of the curve. Part of growth of aviation companies. Direct proxies for
government efforts to ensure that Changi airport expansion are SATS and SIA Engineering.
Airport keeps its top global ranking since
tourism has big spinoffs for the economy. SATS a dominant ground handler and provider of
inflight meals. SIA Engineering provides aircraft
Government also wants to ensure that maintenance, repair and overhaul services with lions
Singapore benefits from airspace liberalisation share of maintenance business.
in ASEAN.
While positive, we believe long-term outlook has
Government-owned Changi Airport is highly been priced in.
profitable with FY3/15 revenue of
SGD2,150m, net profit of SGD782m and ROEs CapitaLand could benefit from Project Jewel. So
of 13.2%. could CMT, as CapitaLand is its asset sponsor.

UNMASKING ASIA 77
Singapore Infrastructure Facts & Forecasts
Sector State in 2010
Transport contd
Land - Roads 3,377km of roads. In 2010,
8,300 ha or 12% of land was
used for land transport
infrastructure.
Started construction of Marina express bus lanes and cycling
Coastal Expressway, a 420m
undersea tunnel scheduled for
completion in 2013.
Current State
3,496km of roads.
Construction work started on
21.5km North-South
Expressway. Will include
routes.
Continuing upgrade of roads
and commuter facilities.
Expenditure
2020 Targets
2015 2016 Forecasts (2016-2020)
Aims to use only 9,700 ha or 13% 2016 budget of SGD260m for North-South Expressway
of land for land transport North- South Expressway. expected to cost SGD8b.
infrastructure by 2030.
Completion of integrated
transport hubs. One in Bukit
Panjang (2017) and one in
Yishun (2019).
Contract to build Next
Generation Electronic Road
Pricing (ERP 2) system recently
awarded to an NCS-led
consortium. Due in 2020. The
new satellite-based system
exemplifies Singapores use of
technology to manage urban
congestion.
UNMASKING ASIA 78
Sector MKE View: Achievable
Transport contd
Land - Roads Low execution risks for roads.
To transit to a Government
Contracting Model (GCM) when
licences for current operators
expire this year. Of the 12 bus
packages under the new
regime, three will be awarded
via tendering and nine retained
by incumbents.
Government wants to own all
bus assets. Transition details
for the nine packages retained
by incumbents remain under
negotiation.
Singapores taxi market is
under threat from new
entrants, Uber and Grab.
Challenges
No shortage of planned road expansion.
For buses, government will transit to GCM
where bus companies operate fleets on
designated routes and government owns
bus assets.
Should solve many problems over time as
quality of transport services should no
longer be compromised by operators
profitability considerations.
Government also prepared to pump in
capital to expand bus fleets to ease
capacity constraints and ply routes deemed have led to strong demand for taxi services.
unprofitable.
Government allows app-based new taxi
players to supplement traditional cabbies. to satisfy demand.
It may draft new regulations for new
entrants to address public concerns over
safety and service standards.
Reasons & Response
Roads are generally fine. Congestions
tolerable partly due to Electronic Road Pricing
and quota system for cars. But new roads
have to be judiciously planned as opportunity
costs of land are high.
Bus and rail services among the publics
biggest bugbears. Service
reliability/timeliness and overcrowding are
key frustrations. Government and transport
operators under pressure to raise capacity.
Shortage of taxis during peak hours.
Prohibitive costs of private car ownership
New taxi entrants such as Uber and Grab
introduced private car hiring in recent years
Opportunities
First two bus packages awarded to two foreign bus
operators under competitive tendering. 10-11 bidders
participated in each tender. Contracts awarded to
UK-based Tower Transit and Go Ahead Group with
annual values of SGD126m and SGD100m
respectively.
While it is difficult to estimate project IRRs due to a
lack of disclosures, we believe these bids should be
profitable.
Equity market eagerly awaiting transition to new
business model. As listed bus operators have been
losing money, a migration should boost bottom lines.
Market also looking for windfalls from the sale of
operating assets to the government. We are less
sanguine. Governments FY16 budget contains
planned expenditure of only SGD225m for the
purchase of bus assets vs the two bus operators
assets of SGD1b.
Overall, we are less bullish on benefits to the
operators in the transition process. The strong run-up
in stock prices of ComfortDelGro and SMRT since
early 2014 also suggests positives have been priced
in.
While incumbent taxi operators are under structural
threat, competitive landscape remains benign for the
time being, thanks to strong underlying commuter
demand.
UNMASKING ASIA 79
Singapore Infrastructure Facts & Forecasts
Sector State in 2010
Transport contd
Land - Rail Total rail length of 159 km
with Phase 2 of Circle Line
turning operational.
First announced Kuala Lumpur
(KL)-Singapore High Speed Rail Government adding train cars
(HSR).
Expenditure
Current State 2020 Targets
2015 2016 Forecasts (2016-2020)
Total rail length increased to By 2030, rail should reach Key rail expenditure in Key rail budget for 2016: Of the SGD65.5b budget
200km in 2015 with opening of almost 360km. 2015: Tuas West extension for rail projects under
Downtown Line Stages 1 and Tuas West extension (SGD0.25b), Downtown Line development, SGD38.7b
2. East West Line extension to Tuas (SGD0.57b), Downtown (SGD1.1b), Thomson East Coast has yet to be spent.
West to be ready in 2016. Line (SGD1.6b), Thomson Line (SGD2.8b).
East Coast Line
and upgrading network to Downtown Line Stage 3 to be (SGD1.65b).
raise capacity. opened in 2017.

To finalise commercial model Thomson-East Coast Line to

and procurement approach for open in phases from 2019.
KL-Singapore HSR by 2016.
Jurong Region Line and Cross
Island Line will open in 2025 and
2030 respectively.

KL-Singapore HSR completion in

2022.

Sea (incl ports) Handled 27.68 TEUs. Handled 30.6m TEUs.
57 berths at Tanjong Pagar,
Keppel, Brani and Pasir
Panjang, with capacity of 35m
TEUs
SGD3.5b for Phases 3-4 of Pasir Budget 2016 provides SGD600m SGD3.5b
Panjang Terminal, will add 15 for reclamation of Tuas
berths and 6,000m quay length. Terminal Phase 1
Cranes can arch across 24 rows
of containers. Handling capacity
to reach 50m TEUs.

Plans for mega port in Tuas to

consolidate all terminals.

UNMASKING ASIA 80
Sector MKE View: Achievable
Transport contd
Land - Rail Tuas West extension due to be
completed this year.
Downtown Line Stage 3 on
track for completion in 2017.
Sea (incl ports)
Challenges
While rail congestion has improved with
the ramp-up in capacity in recent years,
system reliability remains poor.
Still no progress in transition to a more
sustainable business model.
Reasons & Response Opportunities
Rail overcrowding and service unreliability 120km of the 360km of rail lines to be built by 2030
have been incurring publics wrath. yet to be awarded. We expect operating contracts to
be free of legacy contractual issues.
Current licensing regime requires rail
operators to own or buy over rail assets at This project presents growth opportunities for rail
some point but operators have little incentive operators, though we cannot rule out competition
to incur capex to improve capacity. As rail from foreign operators.
companies are for-profit organisations,
maintenance has also been neglected. Transition remains a work in progress. Announcement
of details could catalyse stocks. As the largest rail
Recognising this, government has introduced a network operator, SMRT should benefit the most.
new rail financing framework. It will take
charge of capacity expansion, and plan,
design & build train systems. Operators will
provide maintenance.
Government and rail operators have been
working on migrating from old licences to a
new and sustainable model in recent years.
Progress slow.
UNMASKING ASIA 81
Singapore Infrastructure Facts & Forecasts
Sector State in 2010
Communication
Telecoms/mobile 3 infrastructure-based players 3 infrastructure-based players Regulator dangling one more
<10 retail service providers
Market penetration: 143.6%
(mobile including 4G),
101.8% (wired residential
household broadband as of Mar sponsored and funded by
2011 following changes in
methodology)
Optical fibre broadband plans infrastructure and promote
only launched in 2H10. Data
became available only in mid-
2011
Expenditure
Current State 2020 Targets
2015 2016 Forecasts (2016-2020)
2015: Combined capex of 2016: Combined capex of three Two contenders for fourth
17 retail service providers facility-based operator licence three telcos at SGD2.4b telcos forecast at SGD3.1b network reportedly
and discounted-price spectrum seeking SGD250m-1b in
Optical-fibre Next Generation to new entrant through an funding. IDA has
Nationwide Broadband auction. projected capex of
Network (NGNBN) championed, SGD400-700m for fourth
Interest from two broadband network.
government. Up to SGD1b in companies operating in
financial incentives to telcos Singapore: MyRepublic and
to cooperate in necessary Consistel. MR reportedly raising
USD250m and Consistel, up to
fibre optics. USD1b.
NGNBN will increase carrying NGNBN to be enhanced through a
capacity and transport speeds Heterogeneous Network that
for data in Singapore allows devices to use best
tremendously. network needed for tasks at
hand and seamless switching
Market penetration: between networks.
148.4% (mobile including 4G),
102.8% (wired residential Masterplan recommends building
household broadband), a nationwide sensor network to
63.3% (total residential + gather data on public safety,
corporate optical fibre monitoring the environment and
broadband) building systems and managing
traffic through the deployment
of Aggregation Gateway Boxes.
UNMASKING ASIA 82
Sector MKE View: Achievable
Communication
Telecoms/ Mobile Government expected to
auction spectrums this year in 2
rounds: one for incumbents and
one for new entrants.
Challenges Reasons & Response Opportunities
Singapore a premium telecom market. If bidders emerge for the fourth As cost of access falls for consumers, more could be
148% mobile penetration, one of the licence/spectrum, they will be the first new enticed to consume content. There should be
highest in the region. 3 operators serving a challenger since 1998. explosion of demand for video content. Would expect
small market. But consumers are still more investments in video content creation by
paying above-region access costs for voice, ecosystem players, such as StarHubs recent
SMS and data. Also tied to contracts as long investment in MM2, a movie producer, distributor and
as 2 years. More competition needed. investor.
UNMASKING ASIA 83
Singapore Infrastructure Facts & Forecasts
Expenditure
Sector State in 2010 Current State 2020 Targets
2015 2016 Forecasts (2016-2020)
Communication contd
Internet/digitalization Number of data Number of data Singapores data centres host an
/big data centres/players: 40/28 centres/players: 47/28 estimated 50% of the regions
capacity. A widely-held view is
Data usage: 5.33 petabytes Data usage: 10.68 petabytes Singapore has reached a gateway
(2Q12) HH wired broadband subscriber status on par with HK, allowing it
HH wired broadband subscriber growth: 102.8% to be a bridge between China
growth: 102.9%(1Q13) and the world.
Strategic initiative to develop
a digital harbour. Robust More international companies
communications using Singapore to serve
infrastructure, national sensor customers in China. Chinese
network and complementary companies also using Singapore
infrastructure such as data to serve customers in Europe or
centres promote a vibrant North America.
cloud computing ecosystem.

Reinforces Singapores position

as regional
telecommunications hub with
the fastest broadband speeds
and largest Internet
exchanges.

In the 1990s, there were 3

major data centres: Equinix
(US), Global Switch (UK) and
Singtel (SG).

Now 47 centres, owned and

operated by 28 players, with
249 MegaWatts of IT power
supply.

9 more centres under

construction, with most to be
completed in 2016. This will
boost IT power capacity by 47%
to 364 MW.

Biggest players are Singtel

(17% market share by number
of data centres), followed by
Equinix, Fujitsu, Keppel and
Tata with 6% each.

UNMASKING ASIA 84
Sector MKE View: Achievable
Communication contd
Internet/digitalisation 9 new data centres under
/big data construction that will raise
capacity IT power supply by
47%.
Industry utililsation only
estimated to be 70% but
oversupply may actually be
forming in the market.
Challenges Reasons & Response Opportunities
Although booming, many data centres are Property consultancy, Cushman & Wakefield, Structure Research expects Singapores data
likely to be inefficient in use of energy and not alarmed by dip in occupancy. colocation market to grow from USD963.2m in 2014
space. to USD1.265b in 2016, +15%. Also sees opportunities
Sustained demand from growing tech/network in upgrading of data centres.
Infocomm Development Authority (IDA) content companies such as Facebook, Netflix,
launched Green Data Centre Roadmap to Uber. Major banks and insurers also Data centres could create jobs and provide economic
improve data-centre energy consumption outsourcing to data centres to comply with multipliers. Although not big direct hirers, they
and efficiency. MAS requirements. enable the digital economy and support a complex
and high-value supply chain of products and services.
A set of standards needed for operating data C&W expects occupancy to be back to 70% by
centres in a tropical climate. Part of the 2018, and a return to a landlords market with
masterplan recommends feasibility studies positive rental reversions once supply is fully
of building data centres underground. taken up.
UNMASKING ASIA 85
Singapore Infrastructure Facts & Forecasts
Sector State in 2010
Housing, urbanisation and environment
Housing and Singapore had 1.17m housing
urbanisation units in 2010: public 898.5k,
ECs 10.4k, private 258.2k. Low
private-home vacancy rate of
5.0%.
10,000 ha or 14% of land used
for housing.
In 2010, strong population
growth, underbuilding in prior
years and low mortgage rates
bumped up private and public
housing prices.
To reign in prices, government
introduced eight rounds of
cooling measures from late
2009.
Environment
Current State
We estimate 1.33m units as of
end-2015: public 985.9k, ECs
18.3k, private 327.4k. Ramp-
up in home building and slow
demand in recent years
swelled stock in the private
market.
In each of past two years,
private developers and HDB
completed almost 50,000
homes a year. Home prices
were 8% lower than their peak
in 3Q13.
Global warming has raised
temperatures and created
freak weather patterns.
Floods or droughts, scorching
heat and smog from forest
fires from Indonesia could
create pollution and health
problems.
Expenditure
2020 Targets
2015 2016 Forecasts (2016-2020)
Aggressive home building is
expected to continue. We
expect housing stock to increase
by 41.5k units: public 22.1k, ECs
4.4k, private 15.0k a year for
next three years. Should result
in surplus, fulfilling
governments aim of building
ahead of demand.
Official target: 13,000 ha or 17%
of land used for housing in 2030.
Singapores preferred solution is
to talk to the Indonesian
government and distribute
masks. Has not started
reviewing infrastructure to
tackle smog.
UNMASKING ASIA 86
Sector MKE View: Achievable
Housing, urbanisation and environment
Housing and Private developers and HDB
urbanisation likely to add 51,800 housing
units this year.
Pace of construction may be
slowed to let demand catch up.
Environment
Challenges
No shortfalls. Housing market has tipped
into oversupply.
Smog from forest fires may be aggravated
by dry weather and global warming.
Infrastructure can be improved to alleviate
the distress. For example, better
connectivity between buildings and public
amenities. Schools may need more
enclosed facilities.
We see more government expenditure in
the future.
Reasons & Response
With spiralling home prices under control,
market is increasingly concerned about
impending oversupply.
Opportunities
As evident from the dip in social expenditure/GDP,
the government may have underspent. Finance
Minister hinted that government spending could
jump.
We see a surge in spending on flood alleviation,
drainage, sewage, new food centres & neighbourhood
improvements. Such work typically undertaken by
small construction companies.
In anticipation of oversupply, property stocks have
been sold down. Now at 30-50% discounts to RNAV.
We see home prices bottoming in 2017 and
recommend positioning ahead of the turn.
As population ages & to keep the city vibrant,
government may have to spend on upgrading,
improving & refreshing housing estates.
As industry is fragmented and companies are not well
served by banks, it is possible to nurture a few such
companies as market consolidators.
UNMASKING ASIA 87
Singapore Infrastructure Facts & Forecasts
Sector State in 2010 Current State
Housing, urbanisation and environment contd
Healthcare Hospital beds in 2010: public New initiatives in 2013
8,881, private 1,402 included more public-hospital
Hospital beds in 2014: public beds, better subsidies for
9,602 (+8.1%), private 1,628 elderly & lower-income groups
(+16.1%) and mandatory healthcare
Hospital admissions per bed in insurance to reduce large
2010: public 38.7, private 67.2hospital bill outlays.
Hospital admissions per bed in 80% of primary healthcare
2014: public 39.8 (+2.8%), services provided by private
private 72.1 (+7.2%) practitioners and 20% by
government polyclinics.
Opposite is true for more
costly hospitalisation care.
Citizens aged 65 and above
have doubled from 220k in
2000 to 440k. Expected to
balloon to 900k by 2030. 20-
72% of population above 65
years old found to be
admitted to hospitals at least
once a year vs 4-15% for <65
years old.
Water Reservoirs accounted for 5% of Sources of water: water
land use in 2010. catchment, imports,
desalination, reclaimed
Sales of potable water 476.1 water.
cu m: domestic 59%, non-
domestic 40%. Sales of potable water 506.3
cu m: domestic 58%, non-
516m cubic metres treated domestic 42%.
(2008)
571m cu m treated water
New water:16%
Industrial water: 4% Unaccounted-for water: 5%
New water :18%
Largest NEWater plant in Industrial water: 4%
Changi built in 2010, capacity
50mgd. Treated water has capacity to
meet 30% and desalinated
water, 25% of Singapores
water needs.
Expenditure
2020 Targets
2015 2016 Forecasts (2016-2020)
Overcome bed shortages in Development FY16 development expenditure Aims to add one new
public hospitals, which are expenditure of SGD1.4b, of SGD1.6b, +14% YoY. hospital a year on
running at >85% occupancy. 3x more than 2010s FY16 public healthcare average, up until 2020,
Increase affordability and SGD0.5b. expenditure to increase by +40%.
accessibility for lower-income SGD1.8b or 19.0% YoY, the Beyond 2020, plans for
groups and elderly via targeted highest increment. four more new hospitals.
government subsidies.
Reduce outlays for large hospital
bills by introducing mandatory
life insurance coverage.
Reservoirs still to make up 5% of Development spending of Development expenditure of
land use by 2030. Water needs SGD1,363m SGD1,245m
to be met by treated or
desalinated water.
Treated water to meet 40% of
demand by 2020 and 50% by
2060.
Long-term target: desalination
to meet 25%.
Building 3rd desalination plant in
Tuas for SGD217m for 49.6 cu
m/year.
SingSprings capacity is 41.5 cu
m/year and Tuaspring, 96.7 cu
m/year
Fifth treatment plant
completing in 2016 with
capacity of 83.2m cu m/year. JV
between Beijing Water and
United Engineers. Concession for
2016-48. First years rate is
SGD0.276.
UNMASKING ASIA 88
Sector MKE View: Achievable Challenges
Housing, urbanisation and environment contd
Healthcare
Water Development on track. Water is not only needed for human
survival but also by many industries. Non-
households consume 42% of Singapores
water.
While water self-sufficiency is no longer an of Singapores water needs.
issue, cost of water production has to be
managed to maintain Singapores cost
competitiveness. Singapores selling price
to industries is already among highest in
the region.
Cost of water production tied to energy
costs. As technology improves, so should
production costs.
Reasons & Response Opportunities
Water key for national security. Singapore Balancing security with cost of water production. As
intends to be fully self-sufficient by 2061. open tenders are transparent, winning bidders are
either cost-efficient, prepared to accept lower
Agreement with Malaysia on water imports returns or possess breakthrough technologies.
runs out in 2061. This currently provides c.60%
Government should continue to develop
treatment or desalination plants and look out
for technology changes to minimise
production costs.
UNMASKING ASIA 89
THAILAND INFRASTRUCTURE

1. Transport this time: rail, motorways, ports

2. But naturally problematic. Expect delays in completion

3. Power & telco exciting

4. Strong PPP platform needed for road projects

5. Stock picks: ADVANC, AOT & CK

Institutional Research Team

& Tim Leelahaphan
maria.l@maybank-ke.co.th
tim.l@maybank-ke.co.th
(66) 2658 6300
UNMASKING ASIA 90
THAILAND INFRASTRUCTURE
Thailand is ranked in the middle
of ASEAN WB Infra Index
Round 2!
Over 1990-2015, a total of USD52b infrastructure projects were rolled out in
Thailand: 43% in power and 42% in telecoms, according to the World Bank. The
private sector executed 77% of these projects under various forms of private-
public participation (PPP). BOO and BTO were the most common. Some were
successful in generating positive IRRs; others were not. For example, the early
IPPs, which were essentially government divested assets, generated IRRs of 16-
17%. Private-sector projects yielded 12-15%. Among telcos, ADVANC and DTAC
generated 11.8% and 9.3%, respectively, on 2G BTO concessions. TRUE -
formerly TelecomAsia, the BTO concessionaire for Bangkoks fixed-line network
- produced a negative 3.89% over 2001-2012. The lessons learned seem to be: 1) Source: World Bank
single contracts work better; 2) counter-party state agencies matter; and 3)
multiple concessions in allied businesses have low chances of generating positive
returns. Thailands ICT Ranking Ambitions
th
The last build-out has put Thailand in the middle of the pack in ASEAN, at 30
position in the World Banks Infrastructure Index, out of 160 countries. More
would need to be done to take the country to the next level. Unfortunately,
execution has been slow. Thailands seven governments since 2006 had each
vetted this long list of infrastructure plans that was due for rollout a decade
ago. We dub this the Megaproject List (MPL). The MPL has hardly changed its
shape and form, though its capex has varied between THB2.5t and THB3.6t or
USD70-103b. The current military government has earmarked THB1.6-1.9t or
USD45-54b for projects to be expedited through 2016-2020, 53% under PPP.
Funding by the private sector is not an issue, given THB2.4t of excess liquidity
and 51.9% leverage for the non-financial sector. All the government needs to do
is to pave the way for the private sector to proceed, in our view. To that end,
the 1992/2013 PPP Act has been amended, mainly to facilitate negotiations.

Our top infrastructure picks are ADVANC (4G telephony), AOT (tourism/ people
connectivity) & CK (civil work, mass transit and utilities). Source: National Broadcasting & Telecommunications Commission

UNMASKING ASIA 91
1. Transport this time: rail, motorways, ports Fig 24: Thailands infrastructure rollout
1990-2015 Implemented 2016-2020 EPL
Thailands seven governments since 2006 had each vetted this long list of Sector USD m % share USD m % share
infrastructure plans that was due for rollout a decade ago. We dub this the Airports 455 1% 1,465 3%
Megaproject List (MPL). Earmarked for expedited implementation are 20 Power 22,988 43% na na
projects with a combined value of THB1.61.9t or USD45-54b, 53% under PPP Natural gas* 1,350 3% 616 1%
schemes. We call this the Expedited Project List (EPL). The value is a range Railroads ** 2,772 5% 32,898 63%
because of recent uncertainties over the structure of the TH-CN high-speed Roads 2,247 4% 15,811 30%
train. The Thai government may end up implementing this project; if so, the Seaports 199 0% 111 0%
time take could be shorter, potentially lowering the budget. Because there Telecom 22,138 42% 426* 1%
is already a THB95.4b budget earmarked for land Water & Sewerage 831 2% 568 1%
appropriation/expropriation we take this as a positive indicator that the * LNG Terminal 2 commercial in 2017, 5m-tonne capacity
projects are likely to go ahead. ** Railroads include 5 mass transit projects, USD11.258b & original TH-CN hi-speed train plan
Source: MKE-ISR
The energy and telco focus during the 1990-2015 rollout put Thailand on a
sound economic footing. Resulting from that, 83% of Thai households are
now electrified, with phone penetration hitting 108% by 2010. In addition, The current rollout involves 2,647km of roads for completion within five
with the private sector undertaking most of the projects, multiplier effects years. Accounting for 20% of todays road network, this is liable to cause
were faster. We think power reliability allowed power-sensitive industries traffic disruptions and hence, delay completion.
such as petrochemicals to flourish. This resulted in a multiplication of Yet, this is not the same as foot-dragging. The emphasis on transport
industries that, inter alia, turned Thailand into ASEANs auto-manufacturing underscores the governments concerns about the threat of high logistics
hub. costs to Thailands economic competitiveness, particularly as manufacturing
It could be different this time around. By our estimates, 63% of the EPL are accounts for 84% of its GDP. About 96% of the sectors output is moved by
rail projects - including the high-profile TH-CH and TH-JP high-speed trains - land. If transport projects are executed successfully, we estimate that
and 30% roads, mainly motorways. As these types of projects have long lead logistics costs could drop by 2ppts to 12.1% of GDP by 2020, saving Thai
times, returns are generally difficult to estimate. Thus, a successful industries THB260b per year.
execution with private sector participation needs a strong PPP platform
whereby risk/reward is well-shared. There is already a THB95.4b land
appropriation allocated for these projects so that is a positive indicator that 2. Delays in completion are common for transport
it is likely to go ahead.
As the amended PPP Act should iron out kinks in the negotiation process, we
believe rollout can begin this year. Terms of reference should start coming
out by mid-2Q16. However, we see several physical limitations to
construction work, including materials, manpower, seasonal weather and
the availability of good-sized civil contractors. This implies potential delays
in project completion, which have to be factored into risk/return-sharing
agreements; otherwise, there could be serious glitches and uncompensated
cost overruns. Thailands history of transport infrastructure rollout is
littered with contractors court cases the most prominent being the

UNMASKING ASIA 92
 Suvarnabhumi International Airport and Airport Link - and compensation From the EPL, we count THB990b worth of projects for rollout under PPP.
claims, some stuck with the court for over a decade. The government is amending the 1992/2013 PPP Act to accelerate the
negotiation process. Acting under urgency, we are a bit concerned that it
will fail to calibrate the sharing of risks/rewards properly, which could
3. Power & telco remain exciting, but are outside EPL generate problems down the road. However, the odds appear stacked in the
private sectors favour. Material prices are likely to remain low. Funding is
Our comprehensive list of infrastructure projects includes power and telco likely to remain cheap, given a sluggish economy and excess liquidity of
projects that have fallen more into the private sectors domain, thanks to THB2.4t in the system. Based on our estimates, liquidity should remain
PPPs record of smooth rollout. Power should top the agenda in the medium ample even at the peak of loan drawdowns in 2020, the year of completion
term due to the need to replace old gas-fired plants with other fuel types. for myriad projects.
Coal is the second fuel of choice as it is cheap and readily available. Of late,
however, new coal-fired power projects such as the 800MW plant on the
southern island of Krabi met with strong resistance from the local
5. There are now will, funds & stocks to play
community over environmental pollution. This will take time to sort out.
LNG is more expensive and PTT is the natural developer of its terminals, The 2016-2020 infrastructure rollout in Thailand should benefit from the
though it is reluctant because of unattractive returns (WACC equals IRR). longevity of this current military government and high PPP participation.
Alternative energy is an option and we have a whole array: solar, wind, The latter should ensure follow-through and fiscal discipline. In our universe,
biomass and municipal/industrial waste. Solar is by far the most popular and we see 35 stocks that could benefit. Our top picks are ADVANC (4G
we have both industrial and community projects. Capacity is set to treble by telephony), AOT (tourism/people connectivity) & CK (civil work, mass-transit
2036 from 1,420MW in 2015. This is the best growth prospect in ASEAN. concessions, power & water). We pick these companies for their high cash-
There remain substantial investment opportunities in alternative energy flow generation (AOT, ADVANC) and its diversified businesses and strong
because Thailand has limited other fuels. Imported hydropower from Laos execution (CK). Although CK looks leveraged at 21.6x net debt/EBITDA, this
and Myanmar could fill the gap but this has to be paced due to delivery has to be qualified. It has quasi-utilities in its portfolio with long-term
risks. Runoff on the Mekong River has been fluctuating wildly due to purchase contracts, especially in power and water.
damming in China.
Telco is another area awaiting major investments. Mobile operators 4G
Fig 25: Financial snapshot of our top infrastructure picks
build-out is expected to cost THB140b. The bulk will be spent in 2016. After
that, there will be a host of developments from cables to data centres and WACC EVA Spread Net debt/EBITDA
apps, to advance the countrys aim of scaling up the ICT Development Index Current 5-Y Avg Current 5-Y Avg Current 5-Y Avg
from 74th to 60th by 2017.
ADVANC 8.7% 11.4% 28.3% 31.1% 0.8 0.1
AOT 9.3% 10.8% 4.1% -4.4% -0.7 0.7
4. Strong PPP platform is key CK 5.3% 8.9% -3.8% -8.4% 21.6 35.7
Source: MKE-ISR
In the past, PPP was deployed predominantly in the power and telco sectors.
It worked well because EGAT, as the main partner in power, is a very strong,
well-run state enterprise. Telco had a clear addressable market and
concession owners left operators alone most of the time. PPP remains viable
for power and telco projects, in our view.

UNMASKING ASIA 93
Focus Charts

Power generation by fuel type (PDP 2015 plan) Airport of Thailands passenger capacity
(GWh) Million pax
300,000 180
Import Hydro Coal/Lignite Renewable 5Y CAGR (2015-2020): 11.4%
160
Gas Nuclear Others
250,000 140 Suvarnabhumi Don Muang
Phuket Chiang Mai +104%
120
200,000 51 Hat Yai Chiang Rai
47 48 48 47 100
54 50
58 80
150,000 67 59 59
60
100,000 18 18 18 18 18 40
16 17
20
11 13 15
50,000 5 0
27 26 26 27 23
21 24

2014

2015

2016

2017

2018

2019

2020

2015

Long-
21

term
18 24 22
0
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Anticipated savings in logistics costs Ample domestic liquidity to finance projects

over the next five years
18% (THBb) (THBb)
3,000 3,000
15.2%
16% 14.7% 14.4%
14.2% 14.1% 14.1% -2% Excess liquidty Gov't Borrow PPP Borrow
13.9%
1.4% 13.5% 13.2% 12.7% 2,500 2,500
14% 1.3% 1.3% 1.3% 12.1%
1.3% 1.3% 1.3% 1.2% 1.2%
12% 1.1% 2,000 2,000
1.1%
6.3% 5.9% 5.5%
10% 5.5% 5.5% 5.5% 5.4% 5.2% 5.0% 4.8% 4.4% 1,500 1,500
8%
6% 1,000 1,000
4% 7.5% 7.5% 7.6% 7.4% 7.3% 7.3% 7.2% 7.1% 7.0% 6.8% 6.6% 500 500
2% Transportation Inventory holding Logistic administration
0% 0 0
2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E
* Assume 2.3% growth on excess liquidity based on 6Yr CAGR
** Gov't Borrow factors in budget

UNMASKING ASIA 94
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UNMASKING ASIA 95
Thailand Infrastructure Facts & Forecasts
Expenditure
Sector State in 2010 Current State 2020 Targets
2015 2016 Forecasts (2016-2020)
Power
Power development
plan (PDP 2015) Total: 164,829 Total: 192,189 Total: 260,764 (year 2025) Total: New capacity over 2015-2036 = 57,459MW

Gas: 72% Gas: 67% Gas: 51% Gas: +22,847 (THB800b, USD1m/MW)
Total generation
(GWh)
Coal: 18% Coal: 18% Coal: 23% Coal: +7,390 (THB181b, USD0.7m/MW)

Renewables: 2% Renewables: 5% Renewables: 18% Renewables: +12,105 (details below)

Hydro & imports: 4% Hydro & imports: 8% Hydro & imports: 8% Hydro & imports: +13,117(mostly imports, so low capex)

Renewable plan
(AEDP) 3,788 (2013) 7,963 19,684 (year 2036) Total: +12,105 (c. THB750b, USD1.8m/MW)

(capacity in MW) Solar: 823 Solar: 1,420 Solar: 6,000 Solar: +4,580(THB502b, USD3m/MW)

Wind: 223 Wind: 234 Wind: 3,002 Wind: +2,768 (THB126b, USD1.3m/MW)

Hydro:109 Hydro:3,079 Hydro:3,282 Hydro:+204(THB4b, USD0.6m/MW)

MSW: 47 MSW: 132 MSW: 550 MSW: +418(THB15b, USD1m/MW)

Biogas: 265 Biogas: 373 Biogas: 1,280 Biogas: +907(THB32b, USD1m/MW)

Biomass: 2,321 Biomass: 2,727 Biomass: 5,570 Biomass: +2,843 (THB74b, USD0.75m/MW)

UNMASKING ASIA 96
Sector MKE View: Achievable
Power
Power development Implementing agency, EGAT,
plan (PDP 2015) has financial capacity. Can
execute 30% of new capacity
38% of new capacity will be for
IPPs/SPPs
19% hydro-power imports
mainly from Laos with some
from Myanmar
Renewables Will happen but some areas
might face delays
Challenges
Lack of decisiveness on fuel type a
handicap
Thailands gas reserves can last only 5-7
years. Coal is its next option but there is
public resistance to coal-based plants in
new locations
LNG the next option but country cannot
rely on PTT alone for terminal investments
as returns are not promising.
Grid capacity is main constraint for
renewables
Regulatory constraints as some projects,
especially those classified as community
solar projects, are undertaken by JVs.
Projects have to go through another series
of approval
Grid constraints as some locations do not
have adequate grids
Reasons & Response
More public hearings on clean-coal technology Private companies with WACC below 7.9% (PTT) can
Use LNG in gas power plants but government
has to subsidise so that WACC exceeds IRR
Government now allows third-party operators
to operate LNG terminals
Private sector more interested in renewables
as capacity is small and investments bite-
sized
Less urgency for __ as current reserve
margins are already high at 17% vs desired
15%. Low need for new capacity. 35-40%
increases needed over next 10 years.
EGAT, the monopoly operator of the power
grid, now in charge of developing a smart
grid for managing and smoothening out the
load system and increasing the mix from
renewables.
Opportunities
technically build LNG terminal. Government is
supportive. A 5m-tonne terminal can support over
3,000MW power capacity, based on our estimates
Existing LNG terminals are in Laem Chabang. Due for
expansion (see Port Development section)
Contracts for smart grid more than likely to go to
foreign companies as local EPCs do not have
competency
Private-sector interest in renewables is already high.
Solar is crowded. Low-speed wind turbines are more
suitable for Thailands slow wind velocity of
4.5km/hour.
Listed renewable stocks are GUNKUL (also an EPC),
DEMCO (also an EPC), EGCO, SPCG, EA, TSE, SUPER,
CHOW, SOLAR, BCP, IFEC and RATCH.
UNMASKING ASIA 97
Thailand Infrastructure Facts & Forecasts
Sector State in 2010
Transport
Air
Land Roads Interprovincial motorway to
hook up with motorway to
BKK and IE: 126km of
motorway now link Eastern
Seaboard, an industrial zone,
to Bangkok
Current State
Suvarnabhumi Phase 2:
Approved by Cabinet; two
out of seven contracts
already out for bidding;
construction starts in Jun
2016
Don Muang Phase 3:
Pending Cabinet approval
DM Phase 2 just finished
U-tapao airport :
Allows 12 flights per day
Major expansion for
commercialisation pending
approval from Cabinet and
waiting for EIA
Interprovincial motorway to
hook up with motorway to
BKK and IE: Starts this year
Expenditure
2020 Targets
2015 2016 Forecasts (2016-2020)
Suvarnabhumi Phase : Suvarnabhumi Phase 2: THB52b: AOT (SOE) to invest
Commercial operation by 2020
to raise capacity to 60m pax Don Muang Phase 3: THB27.4b: AOT (SOE) to invest
from 45m
U-tapao airport :
Don Muang Phase 3:
AOT will build new Terminal 3. THB620m for current expansion (small)
Will connect airports rail to
the new Red Line mass transit Tentative budget for repair and maintenance depot is
under PPP; COD likely in THB15b
2019/2020
No data for major terminal expansion
Completion expected in 2021.
Capacity +12m pax, +310
flights/day
U-tapao airport:
Plans to construct bays and
aviation bridges to
accommodate more than
62,000 flights a year and 5m
pax by 2020. A 15-year
development plan
Interprovincial motorway to Interprovincial motorway to hook up with motorway to
hook up with motorway to BKK BKK and IE: THB161b
and IE: Another 354km linking
3 routes; within the East,
north/north-eastern and West
COD in 2019-20
UNMASKING ASIA 98
Sector MKE View: Achievable
Transport
Air Suvarnabhumi Phase 2:
Highly likely to meet 2020
target.
Don Muang:
Phase 3Expect delays in
approval
U-tapao airport:
t Small expansion should be
completed this year
Major expansion could take
longer
Land Roads Interprovincial motorway to be
ultimately hooked up with BKK
and IE: Put under PPP fast-
tracking. Expect tenders out by
2H16
Challenges
Suvarnabhumi Phase 2:
Potential construction delays
Bigger airport might invite more noise-
compensation claims; negotiations should
be pro-active.
Changes in government may delay projects.
Don Muang:
Terminal specifications not yet clear;
neither is the budget
U-tapao airport:
Speed of government approval and limited
sources of funds.
As U-tapao is a navy base, there are several airport, though it will seek assistance from
hurdles to clear before commercialisation
of parts of it can happen
Interprovincial motorway to be ultimately
hooked up with BKK and IE: Availability of
contractors for north/north-eastern and
west links because these traverse long
distances and available contractors are
small
Reasons & Response
Suvarnabhumi Phase 2:
Suvarnabhumi running at 120% capacity. With
its tourism goals, government is very
amenable to hasten airport expansion
Rising LCC penetration may limit room to
absorb extra traffic of Suvarnabhumi.
Don Muang:
Discussions intensifying
Trying to raise efficiency of existing terminals; surpass HKIAs at estimated 74m pax
also trying to optimise traffic and ease
constraints
U-tapao airport:
Navy insists on taking complete control of the
AOT
Interprovincial motorway to be ultimately
hooked up with BKK and IE:
Negotiations with private sector under PPP
need to be fine-tuned.
Government may have to assume a bit more
risk to make the project attractive
Opportunities
Suvarnabhumi Phase 2:
Expect Phase 3 to start right away as traffic is likely
to ramp up quickly
Ancillary services have to increase with capacity and
aircraft.
ASEANs air liberalisation set for 2016/17. Thailand
aims to stake claim to ASEAN tourism hub
In 2020, Suvarnabhumis passenger capacity could
Don Muang:
Rising LCC penetration in Thailand. LCCs raising
capacity and aircraft by 12% and 10% annually
Optimising traffic and reducing constraints
U-tapao airport:
Well-placed to cater to eastern tourism flows,
helping ease constraints in Bangkok airports. Current
users of the airport are AAV, China Southern Airlines
and Bangkok Airways but at low frequencies
Eastern region receives 13-15% of tourism flows and
growing
U-tapao could facilitate executive movements from
Eastern Seaboard to Trat Special Economic Zone that
borders Cambodia
Interprovincial motorway to be ultimately hooked up
with BKK and IE:
THB161b funding for PPP fast track with negotiations
in nine months
Traffic gridlock starting to form in industrial zone in
Chonburi/Rayong, especially towards the port
Motorway can shorten travel between north-east,
central and west and resort destinations
Land transport is the most common mode of logistics
at 96% of total or 185,883mt km. Also expensive at
THB1.72/t km vs THB0.93 for trains.
UNMASKING ASIA 99
Thailand Infrastructure Facts & Forecasts
Expenditure
Sector State in 2010 Current State 2020 Targets
2015 2016 Forecasts (2016-2020)
Rail
Bangkok Mass Transit Three routes now operational One line will open this year, To complete all five mass- Total cost 131b THB245b funding for PPP, excluding newly completed
Purple Line, an extension transit lines with 136km by Purple Line
Two lines already approved 2022 Two lines approved this year. THB106b will be under PPP
Two pending approval: Red & fast track. Land-appropriation budget of THB12b from
Orange fiscal budget

Inter-city dual- Single-track rail, 1m gauge Now seeking PPP partners to Expect implementation in 2016 THB145b, funding by PPP and fiscal budget
tracking railway start work on five routes

Hi-speed train to Private sector has expressed 2020/2021 THB250b from private sector
tourist destinations interest: CP Group and BTS
(Huahin & Rayong) Group

TH-CN Hi-Speed Train JV talks with Chinese partner Expect implementation in 2016 Fiscal budget reduced from THB530b to THB200b
(BKK/Nong Khai) failed. Thai government will and COD in 2019
pursue project on its own.
Route has been shortened to
250km from 873km and
budget reduced
TH-JP railway Needs approval from Cabinet Expect implementation in 2016 THB449b
(Bangkok-Phitsanulok- and EIA
Chiang Mai)

UNMASKING ASIA 100

Sector MKE View: Achievable Challenges
Rail
Bangkok Mass Transit Expect delays by 3-5 years Handover of sites typically slow
Physical limitations, causing traffic
congestions and gridlock
Civil contractors have financial access but
labour may be in shortage.
Potentially problematic concession terms
Reasons & Response
Government just approved 2 new lines: Pink
and Yellow. Expect terms of reference by
2H16. It has also allocated land-appropriation
budget
PPP can provide access to private-sector
capital
Opportunities
Completed Purple Line could raise trips by another
147K/day from 260 in 2015 as distance doubles to
47km.
Extension can benefit operator of Purple Line 1,
listed BEM Plc
Cut commuters travel time and transportation costs
by est. 15%.

Reduce car ownership

Push urbanisation and economic production to outer

ring of Bangkok in the northwest direction.

New residential sites could open up and drive land

values by as much as 25%, going by previous routes.

Positive for branded residential developers with

limited land banks such as LPN Development.

Commercial complexes could also expand as new

neighbourhoods are formed
Inter-city dual-track Delays of no less than five years Finding PPP partners will be difficult No information available Reduce traffic gridlock and lower logistics costs from
railway because the economics is difficult to assess 14.1% of GDP to 12.1% by 2020, saving THB260b per
year.
Hi-speed train to Achievable if private sectors Negotiating benefits No information available Connecting resorts with Bangkok should stimulate
tourist destinations interest is real tourism.
(Huahin & Rayong) 3% of foreigners now visit Huahin province and 13-
15%, the east. All use bus transport.
TH-CN Hi-Speed train Long delays Government will roll out project; physical Government intent on rolling out this project Project duplicates the dual-track SRT while
(BKK/Nong Khai) resources limited with fiscal budget; this will crowd out other travellers are increasingly serviced by LCCs
No land-appropriation budget government-funded projects

TH-JP railway Achievable but may also be Design, environmental impact and cost- Continued talks Significant opportunity as this is a new route that
(Bangkok- delayed as undertaking is huge sharing still being discussed ends in Myanmars deep seaport in Dawei that opens
Phitsanulok-Chiang and greenfield up to the Indian Ocean. Dawei Development Area is
Mai) a major initiative to create a huge industrial
complex in Myanmar. Will be managed by an SPV
owned by governments of Thailand, Myanmar and
Japan.

Listed Thai companies developing Phase 1 are ITD

and ROJNA

UNMASKING ASIA 101

Thailand Infrastructure Facts & Forecasts
Sector State in 2010 Current State
Ports
Port development Two main projects approved
by Cabinet: port Terminal A
and container terminal
(Phase I)
Water
Water system In 2011, not 2010, Thailand Intensifying drought risks will
reeled under worst floods in further disrupt agricultural
50 years. Central plains output and manufacturing in
inundated for 175 days the lower north and central
regions, including Bangkok
Internet and telecommunication
Internet Broadband penetration 14% Penetration rose to 31% in
2015
300,000m submarine cables
connecting islands
Telecom Mobile penetration 108% Penetration rose to 140% in
2015.
4G auction completed, in
which TRUE won 25MHz and
ADVANC, 15MHZ.
4th winner, JAS, defaulted on
payment. Need to re-auction
10MHz on 24 Jun 2016
Expenditure
2020 Targets
2015 2016 Forecasts (2016-2020)
Start in 2016 THB4b
To avoid repetition of THB70.5b spent on ad- THB900b on urgent water-management projects
devastating floods and intense hoc solutions
drought as in 2006
Regulate water supply to
ensure all users receive
predictable supply
Increase broadband capacity to Mostly private-sector initiatives under licensing scheme
2,000-3,000gbps from 500gbps
with 53% penetration Expenditure from private sector not available
Drafting digital-economy policy National broadband project to connect 30K households
will cost THB15b. To be rolled out by state-owned TOT
Increase Internet users from and CAT
16m to 40m
No data available for submarine cables
Provide wifi access to 30,000
rural households by 2017 Very thin data on data centres planned by private sector.
WHA announced plans to build 10 and ILINK, 2
Install additional submarine
fibre-optic links
Add data centres to Thailands
current 14, 13 in Bangkok
Increase 4G penetration from THB148b, based on announced capex of ADVANC, DTAC
below 10% and TRUE
Another spectrum auction in
2018 for 850MHz, 1800MHz and
2600MHz
UNMASKING ASIA 102
Sector MKE View: Achievable
Port
Port development Able to implement on time
Water
Water system Likely to take a long time to
start. Urgent budget has been
instituted since 2012.
Internet and telecommunication
Internet Submarine fibre-optic project
by private companies likely to
start
Digital economy may take
some time
Telecom Adding subscribers will be
challenging.
Challenges
Community resistance has been resolved
No fewer than 10 agencies have their say
on management
Unclear sources of funding: annual
budgets, debt or PPP
EIA and HIA approval.
Difficulties in financing, given high budget
requirements
Delays in implementation due to unclear
policy
Fierce competition among operators
Reasons & Response
Increased public relations to promote
understanding
None. Government resorts to quick fixing of
problems
Private sectors interest is limited to
construction of dams
Clearer policy; improvements in security of e-
payment system
Clearer policy from regulators; improvements
in security of e-payment system
Opportunities
Laem Chabang Port is a major jumping-off point for
auto, machinery parts, petroleum and petrochemical
exports. In 2015, the port handled 6.6m TEUs
Higher handling capacity calls for parallel expansion
of ancillary facilities and terminal operators by
private sector. Listed terminal operators for Eastern
Seaboard are JWD and NYT
Engage private sector in water supply using the BTO
model used by listed EASTW and TTW
Secure water for industrial and agricultural
proposes.
Prevent and minimise flood/drought damages which
normally produce financial losses of THB100b a year.
Increasing 4G penetration will promote use of
Internet and Internet transactions
Opportunities in e-commerce.
e-commerce now valued at THB2.1t, 15% of nominal
GDP
Digital advertising expected to rise 25% to THB10b
this year mainly via Facebook and Youtube
Need for data centres. Listed ILINK, LOXINFO, BJC
and WHA (plan for 10 centres) are looking to expand
Demand for smart warehouses to support e-
commerce
More applications and solutions
UNMASKING ASIA 103
Thailand Infrastructure Facts & Forecasts
Sector State in 2010
Housing and urbanisation
Housing Number of households at
21.7m
Population at 63.9m
People per household at 2.95
Housing inventory at 125,000
units
Urbanisation 2.38 persons/household in
Bangkok Metropolis
Condos = 54% of housing sold
Average size of one-bedroom
condos= 45sqm
Current State
Number of households 24.7m
Population 65.7m
People per household 2.66
Housing inventory 160,000
units
Property stimulus targeting
low-income earners
2.13 persons/household in
Bangkok Metropolis
Condos = 60% of housing sold
Average size of one-bedroom
condos = 30sqm
Expenditure
2020 Targets
2015 2016 Forecasts (2016-2020)
Number of households to grow THB10b housing loans to THB70b: THB30b loans for developers of projects with
by 2.5% per year low-income earners for units not exceeding THB1.5m each
homes not exceeding
Population to grow by 1% per THB3m THB40b of 30-year housing loans for low-income earners
year seeking first homes at prices not exceeding THB1.5m
Low-cost housing scheme to
help low-income earners
Target of 40,000 units this year
with up to THB1m loan/unit
facility
Bring mortgage rejection rates
below 20% from 25%
UNMASKING ASIA 104
Sector MKE View: Achievable Challenges Reasons & Response Opportunities
Housing and urbanisation
Housing Property market should grow High mortgage rates and low banking Lower interest rates Banks should benefit
by 10% in 2016 penetration Ease in credit quality Developers which focus on low-price housing

Stringent bank lending

Urbanization Smaller households; more Lack of public transportation Government to build more mass transit and Services and development should target smaller
vertical living; smaller condos rail households

2.0 persons/household in Services for ageing population, considering fast

Bangkok Metropolis nuclearisation of the Thai household. Hospital
operator VIBHA plans to build care centre for the
Condos = 62% of housing sold aged

Average size of one-bedroom

condo = 28sqm

UNMASKING ASIA 105

VIETNAM INFRASTRUCTURE

1. Irrefutable need to speed more on infrastructure, urgently!

2. Public Private Partnership now a MUST, not a choice

3. Transport particularly under strain, so is power

4. Land acquisition & red tape are stumbling blocks

5. Top picks: KBC & CTD

Lien Le
Lien.le@maybank-kimeng.com.vn
(84) 8 44 555 888 ext 8181

UNMASKING ASIA 106

VIETNAM INFRASTRUCTURE

Most improved competitiveness index

Still Below Potential 100

80
Vietnam stood out in recent years for its stabilised macros and faster growth. Its 68

long-term growth potential is even more convincing, as it prepares to add to and 56

60 52
upgrade its infrastructure, which has lagged its socio-economic development. 47
Challenges are, in our view, accessing new sources of funds, refining planning 37
40 3132 33
processes, responding to rapid urbanisation and developing stronger institutions
20
to encourage private financing. The government has taken measures to improve 20 18
the investment environment and incentivise foreign and private investors
through more transparent and attractive public-private partnerships or PPPs. 0
Although progress remains slow, we are hopeful that things will speed up under Thailand Malaysia Indonesia Philippines Vietnam
a new cabinet, which will be formed in 2Q16. 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16
Source: World Economic Forum, the lower the score the better

Transport, power, water and energy have better growth potential. For the time
being, water supply and treatment not open to private participation. Much of it but still behind ASEAN-5 as infrastructure ranks
is still being regulated by municipal authorities. Investment opportunities in only higher than the Philippines
water mostly lie in loans provided to listed companies like CII VN and REE VN, 120
which have water projects in southern Vietnam, or via owning their shares.
Vietnam is still in need of more oil and gas as it has to import over two thirds of 100 91 90
its refined oil and lacks gas for industrial and individual uses. But investments in 81
76
80
oil and gas fields are likely to slow down in the foreseeable future, amid weak
62
crude prices. 60
56
48
44
40
25
24
20

0
Thailand Malaysia Indonesia Philippines Vietnam
2010-11 2011-12 2012-13 2013-14 2014-15 2015-16
Source: World Economic Forum, the lower the score the better

UNMASKING ASIA 107

1. Irrefutable need to spend more, urgently! 2. Public Private Partnership now a MUST, not a choice

Vietnam posted one of the highest and most stable growth rates in the Estimates vary but general consensus points to USD200-300b of funds
region in recent years, notwithstanding runaway credit growth, inflation and required for infrastructure development in 2016-2020 and at least similar
non-performing loans in the banking system. Its GDP growth ranged from quantums for 2020-2025. This is more than double the annual investments in
5.35% to 8.48%, averaging 6.8% between 2001 and 2015, one of the highest the last decade.
in the world. FDI has also climbed, to a record high recently.
Challenges have surfaced to force Vietnam to reconsider funding for its
Urbanisation growth, at 3% each year, has added 1m to its urban centers, infrastructure investments:
presenting planning and financing challenges. Vietnams infrastructure is
Its fiscal deficit has widened to over 5% again in the last five years, as
woefully inadequate, to meet this rapid urbanisation and rising demand from
spending increased faster than revenues. Vietnam has turned to higher
FDI companies.
public debt to fund these deficits. Although public debt is still below the
So far, Vietnam has relied heavily on its state budgets for development. 65% ceiling allowed by the National Assembly, its rapid increase the
However total investments increased at 12.1% on average during 2005-2015, bulk in general obligation bonds backed by tax payments rather than
at a lower pace of 18.4% by total fiscal spending - composed of investment revenue bonds backed by infrastructure revenue streams - has
and recurring expenditure. Investment over total fiscal spending dropped to heightened the countrys credit risk and borrowing costs.
only 18% in FY15, before returning to 21% in the 2016 fiscal year as Vietnam
still faces a serious lack of infrastructure in transport, energy, power, water
and telecom. Fig 26: Public debt has been rising to fund fiscal deficits
60.0 57.1
54.8
51.6
Fig 25: Insufficient investment spending on infrastructure 50.0 48.5
46.7
60% 30% 44.7
45.0
36.2
40%
20% 30.0

20%
15.0
10%
0%

0.0
2008 2009 2010 2011 2012 2013 2014E 2015F
-20% 0%
2005 2006 2007 2008 2009 2010 2011 2012 2013* 2014E*2015E* Source: SBV, MoF, IMF, WB
Fiscal spending - Investment growth (LHS)
Fiscal spending - Current expenditure growth (LHS) Vietnams allocation of Official Development Assistance funds have
Investment/total fiscal spending (RHS) dwindled. ODA is a cheaper source of funds which used to account for
Source: MoF, *2013-15: estimated by MoF, not finalised at National Assembly meetings yet 30% of its infrastructure financing. Vietnams upgrade to middle-

UNMASKING ASIA 108

 income status from low-income in 2013 hastened the decline. Its ODA
entitlement will be completely removed by 2018. This adds to its
urgency to find new sources of long-term financing.
The government admits that the state budget and other forms of
development assistance may meet only 40-50% of its infrastructure
budgetary needs in the next 10 years. The shortfall may, in part, be met by
private investors, including foreign ones.
This implies that Public Private Partnership or PPPs are now a MUST, not an
option. Past infrastructure projects had already adopted early forms of
build-operate-transfer, build-transfer, build-transfer-operate, build-own-
operate, build-lease-transfer, build-transfer-lease and operate-manage.
What has been lacking are reforms in consumer pricing, enterprise
restructuring and regulations to establish the credit-worthiness of
infrastructure enterprises.
Decree 78 was issued in 2010, to allow for and facilitate 38 pilot
infrastructure projects under PPPs. This was followed by Decree 15, which
provides for more PPPs in infrastructure projects from 10 Apr 2015. Decree
15 aims to plug shortfalls in previous regulations. It allows for more
investment types and widens the scope of projects to include telecom and
technology. To supplement, a Public Investment Law, the first in Vietnam,
was passed on 18 Jun 2014 to take effect on 1 Jan 2015. More recently, a
revised Budget Law was also passed, effective from FY2017. These are
attempts to improve the efficiency and transparency of planning and
executing public/public-private investments and thereby, ease fiscal
constraints.
Even then, various non-state infrastructure companies cite consumer pricing
as a hurdle, rendering the returns of PPPs unappealing. As consumer-pricing
reforms are likely to take longer, requiring the readiness of the masses to
accept higher toll fees for better roads etc, the onus is on the state to
provide clear and predictable rules for cost computation. These include
timelines for and assistance with land clearance, pricing mechanisms and
budget support. The new cabinet may have no choice but to accommodate
the demands of private investors in its bid to sustain economic growth,
retain FDIs and attract new ones rather than risk Vietnam losing out to
Myanmar, Bangladesh, Pakistan etc.
3. Transport is particularly under strain; so is power
Of the USD200-300b of infrastructure spending needed in 2016-20, transport
could take up 40%, 2.5x higher than in 2011-2015. Vietnamese still rely
heavily on roads, predominantly local roads, and not so much on urban roads
or highways. The countrys railway system is outdated, with no major
improvements since 1970s. Inland waterways are popular, thanks to over
40,000 km of natural waterways, which have somewhat limited the
development of large deep-sea ports. Air transport has only been used more
in recent years, with the allowance of private low-cost airlines. Most local
and national airports are fully utilised. Due to huge capital requirements,
transport is more open to PPPs, mostly through BOT and BT. However, costly
and time-consuming land clearance, bureaucracy and unattractive toll fees
have been holding back private bidding for projects. With the Ministry of
Transportation being the most efficient ministry in restructuring state-
owned transport companies in the past three years, we expect transport to
continue to lead the transformation in infrastructure PPP.
After transportation, power is the next sector where liberalisation has
picked up in the last three years. PPPs have been rather popular in this
sector, more so for small hydro-power plants due to lower rates of
investment and simplified selling-price negotiations in power purchase
agreements. However, due to more severe El Nino effects and the improper
construction of dams which precipitated light earthquakes near the Song
Tranh 2 power plant, power plants in the pipeline have been granted to
investors with a larger capital base and proven technical capability & track
records. Electricity demand in Vietnam has been growing by double digits in
the last 10 years, averaging 11.2%. Supply is constrained by: 1) financial
difficulties at state-owned enterprises such as Vinacomin and the Song Da
Group; 2) a lack of gas supply due to delays in the Block B Omon pipeline;
and 3) time-consuming, complex power-purchase-agreement negotiations
and finalisation. To meet its shortfall, Vietnam has been importing from
China. Its shortage could worsen in the next 2-3 years and more incentives
would have to be dangled to accelerate investments in new plants.
UNMASKING ASIA 109
4. Land acquisition & red tape are stumbling blocks 5. Top picks

Lengthy land clearance has long been the main stumbling block for most For exposure to infrastructure, we recommend: KBC VN (industrial-park
infrastructure projects in Vietnam. The acquisition, compensation and developer), CTD VN (civil contractor) and HPG VN (steel maker).
clearance of land for infrastructure projects are the responsibility of
municipal governments, under the 2013 revised Land Law and Decree
37/2014. Implementation and progress, however, depend much on
interpretation of the law by city/provincial authorities, as well as their
capability. That said, investors and contractors have secured stronger legal
backing over the years for the timely handover of land to implement their
projects. Delays that affect the returns of their projects could result in
monetary or other forms of compensation by the city/provincial authorities
eg toll-fee concessions or longer fee-collection periods. But their negotiation
and finalisation can be lengthy.
Three developments are expected to be game-changers. Firstly, fiscal
constraints have reduced the ability of the local authorities to pay penalties
for their late handover of land. In late 2014, the Hochiminh City Peoples
Council was notified that it had to pay up to USD100,000/day for delays in
handing over land for the Ben Thanh Suoi Tien metro project. Over in
Hanoi, the Hanoi City Peoples Council was sued for USD10m by Japanese
contractors for late land handover for the Nhat Tan bridge project.
Secondly, Decree 15/2015 on PPPs specifies the categories and criteria for
bidding process of all infrastructure projects. This would leave out incapable
pre-assigned contractors/investors as it had been popularly the case
before. Local authorities would also need to improve and upgrade
themselves to work with more sophisticated, highly demanding capable
contractors/investors. Last but not least, there are stronger calls for
ongoing reforms at ministerial and municipal levels and among state-owned
enterprises to hold responsible individuals liable for poor performances
regardless of rank and seniority. This may create an environment in which
all stakeholders work towards cutting bureaucracy and shortening the
procedures for land clearance.

UNMASKING ASIA 110

Focus Charts

State budget may meet 50-60% of infrastructure needs only Aims to reach ASEAN-4 standards for ease of doing business by 2016
60.0
Infrastructure development, Starting a business
USDb - by State funding
Dealing with
Resolving insolvency
to be filled up by private investors construction permits
Infrastructure development,
40.0 USDb - Total requirements by
MoIP Enforcing contracts Getting electricity
Infrastructure development,
USDb - MKE forecasts
20.0 Trading across borders Registering property

Paying taxes Getting credit

- Protecting minority
2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015E

2016F

2017F

2018F

2019F

2020F
investors

Vietnam Asean - 4, average

Source: MoF, MoIP, World Bank, MKE Source: World Bank

Steady pick-up in FDI disbursements Most urgent shortages are in power sector
USDm
4,000
3,500 250 Generation
(b kwh)
3,050 Actual demand incl. wastage during transmission
3,000 2,850 200
2,700 (b kwh)
2,500 2,540 2,500
150
2,000

100

1,000
50

0 0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015E
2016E
2017E
2018E
2019E
2020E
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16

Source: GSO, MoIP Source: various, MKE, on-going construction is not sufficient to meet demand

UNMASKING ASIA 111

Vietnam Infrastructure Facts & Forecasts
Sector State in 2010
Power Total designed capacity:
20,000MW
Total production: 90b
kwh/year
Power generation by type:
hydro (46%), thermal-coal
(15%), thermal-gas (34%),
others (5%) (DO/FO & diesel)
Direct investments or via
subsidiaries of state-owned
corporations: EVN, PVN, Song
Da Group
Coal, oil, Fossil DO/FO & diesel-fired power
Fuels, Thermal plants accounted for only 5%
of total capacity
Coal-fired plants consumed
9.4m tonnes or 21% of total
produced
Investors mostly state-owned
EVN, PVN
Current State
Total designed capacity:
35,000MW
Total production in 2015:
159b kwh/year, +11.23% YoY
Average growth in 2011-15:
10.37%/year
Power generation by type:
hydro (42%), thermal-coal
(34%), thermal-gas (19%),
others (5%) (DO/FO & diesel) hydro (34%), thermal-coal
EVN, PVN & Song Da still the others (9%) (DO/FO & diesel &
major investors. More private renewables)
investors in Phu My, Hiep
Phuoc, Mong Duong 2, Vinh
Tan 1 thermal power plants
and other small hydro-power and Song Da are expected to
projects (5% of capacity)
DO/FO & diesel-fired plants
are insignificant (<5%)
Existing gas-fired plants
consumed 9b cu m in FY15 or
90% of total production
Investors still state-owned
EVN, PVN. Sector has started
to appeal to private investors
who participate more through
JVs with EVN or PVN in Hiep
Phuoc, Phu My, Vinh Tan 1,
Mong Duong 2
2020 Targets
Total designed capacity:
60,000MW
Total production needed: 265-
278b kwh/year
Total production needed: 352-
379b kwh by 2025 or 80,000
MW; 506-559b kwh by 2030 or
140,000MW
Power generation by type:
(43%), thermal-gas (13%),
Foreign and/or private
investors other than EVN, PVN
account for 30-40% of total
production capacity
Dry gas supply may grow 40% by
2020 once Block B Omon is
completed. Ground-breaking in
early Apr 2016. Output mostly
for power plants in the pipeline
in the south.
80m tonnes of coal needed for
25,800MW coal-fired plants in
2020 pa, double current
production. More imports may
be unavoidable.
Mixed group of investors. More
foreigners in the pipeline,
mostly in JVs with
EVN/PVN/Lilama: Van Phong by
Sumitomo and Hanoinco; Vung
Ang 2 by One Energy & Lilama.
Standalone foreign investors:
Nam Dinh 1 by Tai Kwang; Dung
Quat by SembCorp; Long Phu 2
by Tata Power.
Expenditure
2015 2016 Forecasts (2016-2020)
Not disclosed. For every 5,000 MW addition Adjusted VII master plan
For 5,000MW capacity each year, USD5-6b is provides for
added in 2015, average required. USD7.9b/year in 2016-20.
construction period was MKE estimates USD5-6b
3 years for thermal- Disbursements in 1H16 likely pa
power and 5-7 years for will slow down, in anticipation
large hydro-power of new Cabinet in 2Q. Adjusted VII master plan
plants. Investments likely to resume provides for
MKE estimates for 2015: only from 2H16 USD10.8b/year in 2020-
USD2-3b of USD5b has 30. MKE estimates USD5-
been disbursed so far. VII master plan just signed on 6b pa
18 Mar 2016, confirming which
projects are approved, aka to Our assumptions are more
be implemented during 2016- conservative due to: 1)
30 caution over reliability of
hydro power; 2) pollution
caused by coal-fired
plants; 3) uncertainties
over timeline for new gas
supply from Block B
Omon; and 4) concerns
over ability to ensure
security of nuclear power
Coal-fired plants capex Coal-fired plants capex not Gas-related capex
not disclosed, est. disclosed, est. same as in FY15 unlikely significant due to
USD1.5-2b or USD1.5-2b Block B Omons delays
Gas-fired plants capex Gas-fired plants capex not
not disclosed. Should be disclosed likely to be
insignificant as there is negligible due to delays in
no gas supply yet, from Block B Omon
the delayed Block B
20Omon project
UNMASKING ASIA 112
Sector MKE View: Achievable
Power Vietnam historically falls short in
construction of power plants due to
bureaucratic red tape and lack of gas
for gas plants and environmental-
pollution concerns for coal plants.
Total spending this year estimated at
USD2-3b, FY15F levels.
2016-2017 electricity shortage could be consuming land clearance.
acute.
No choice but to accelerate
investments, especially by private
investors.
Coal, oil, Fossil Gas-related investments have to
Fuels, Thermal continue as capex requirements are
huge for LNG imports for gas-fired
plants, especially in the south.
Actual disbursements for Block B Omon main producers and previously main Most gas-fired power plants are bankable.
may be slow in 2016 but may need to be exporters of coal
accelerated from next year as gas
feedstock is needed for major plants in
the south
Challenges Reasons & Response Opportunities
Master plan for new plants spells out Substantially clearer guidance on power Investors positive on double-digit growth in demand for
type of plants, capacity and purchase agreements between power plants electricity. All approved power plants until 2030 have identified
investors. New investors normally and EVN. investors.
have to "buy" the project(s) or team
up with existing approved investors.5% of electricity now sold in open market vs FDIs in manufacturing at two-thirds of total FDIs - could be
fixed volume and prices under purchase further improved once access to electricity improves.
Approved plants may take years to agreements with EVN. Listed companies such
finalise power purchase agreements as NT2, PPC, VSH said to be more efficient,
with EVN. Compounded by time- selling 10-20% of electricity generated in open
market.
Maximum 12% IRR for power projects Adjusted master power plan VII (to 2030) has
in power purchase agreements more realistic adjustments/assumptions for
signed with EVN. May not be growth and type of power generation.
attractive in local currency. Many
companies have suffered from Government may liberalise generation and
sizeable FX losses for borrowings in distribution, reduce monopoly in distribution
foreign currencies. of electricity and lower wastage during
transmission, estimated at 10-11%.
Coal-fired plants want to import coal Shortage of electricity implies urgent need Thermal power will likely grow the fastest, as electricity
themselves while government for new gas supply. 2/3 of refined oil still demand is expected to surge while hydro power seems to have
prefers state-owned Vinacomin to imported. Urgent need to construct new oil so many constraints.
import then re-sell to these plants. refineries
Vinacomin and its subsidiaries are After the signing of master plan VII on 18 Mar 2016, expect
clearer guidance from the government
Obstacle is supply of materials: who will
import the coal, where will gas come from for
new projects?
UNMASKING ASIA 113
Vietnam Infrastructure Facts & Forecasts
Sector State in 2010
Nuclear Experimental, not yet commercialised
Hydro 46% of total electricity
supply.
Investors mostly state (EVN,
Song Da), private investors.
Mostly small hydro-power
plants of 20-30MW
Other Renewables Minor
Wind-power: private investors
Current State
42% of total installed
capacity.
Recently added large hydro
power plants: Son La
2,400MW, largest in SEA.
Investor is EVN
Ongoing construction of Lai
Chau 1,200MW. Investment is
USD1.8-2.0b, also by EVN
Investors mostly state (EVN,
Song Da), private investors.
Mostly small hydro power
plants of 20-30MW
Minor
Expenditure
2020 Targets
2015 2016 Forecasts (2016-2020)
To increase to 20.2K MW by Not disclosed, estimated at Not disclosed, estimated Not disclosed, estimated
2020 from 16.3k MW in 2015. USD0.5-1b the same as in FY15 or at USD0.5-1b
Less favoured due to weather USD0.5-1.0b
conditions, soil impact and lack
of financial resources for large
plants
EVN invested in about 50%,
remainder by independent
power producers (IPPs)
3% by 2020 n/a n/a n/a
4% by 2025 and 8% by 2030
UNMASKING ASIA 114
Sector MKE View: Achievable
st
Nuclear 1 nuclear power plants
approved but feasibility study
is on hold because of safety
and security considerations
Challenges Reasons & Response Opportunities
Safety & security concerns after Fukushima Status unclear Government seems keen on nuclear energy given
incident environmental issues for coal-fired plants & lack of
gas supply for gas-fired plants.

Hydro Likely can add 4,000MW or 25%
capacity in 2016-20 as hydro is
technically more feasible.
Vietnam has been ahead in
constructing the largest hydro
power plants in SEA.
As with other types of power plants,
negotiations for power purchase
agreements are lengthy, especially for
above 30MW plants. Deters investors and
bankers
Clearer guidance on PPA. Faster liberalisation About 50% of new capacity in the pipeline will be
of power sector built by private investors, mostly unlisted.
Opportunities more on financing side for bankers.

Investment rate is mostly

comparable with coal-fired
plants: USD1.2-1.5m/MW

Other Renewables Few wind power plants High investment rate. Not clear Not clear

But Cong Ly wind power plant with 99.2

MW capacity costs USD250m or
USD2.5m/MW, 2x more than hydro or
thermal power plants. Power purchase
agreement with EVN also said to be not
attractive enough

UNMASKING ASIA 115

Vietnam Infrastructure Facts & Forecasts
Sector State in 2010 Current State
Transport
Air (incl ports) Fewer than 45m 69.4m/year
passengers/year
Land - Roads Inadequate due to lack of Limited highways
efficient investments
Ongoing metro lines: 2 first
lines in Hanoi (Nhn Hanoi
station, Ct Linh H ng,
USD2.2b investments), first
Investors: not applicable line in Hochiminh (Bn Thnh
Sui TIn, USD2.5b)
Investors in Hochiminh: JV
between Sumitomo and
Cienco 6, listed in Dec 2015.
Investors in Hanoi: Official
Development Assistance from
Chinese government
2020 Targets
91m/ year or +32% from
current levels
3 metro lines in Hanoi and
Hochiminh scheduled for
completion in 2019-20
More state investments, funded
by Official Development
Assistance
Expenditure
2015 2016 Forecasts (2016-2020)
Aircraft purchases: No details Vietnam Airlines reportedly
VND21,208b or buying 35 planes for
USD0.95b for 7 units by VND100,000b or USD4.4b
Vietnam Airlines, listed
in 2014. Vietjet Air signed a USD9.1b
contract with Airbus in Feb
Jetstar is 66.9% owned 2014 to buy 62 units, with
by Vietnam Airlines. rights to buy 30 and lease 8.
In Nov 2015, it signed another
Exact number for contract worth USD3.6b for
Vietjet Air not 30 Airbus plans: A321 neo &
available. A321 ceo
Long Thanh new international
airport costs USD16b till 2025
Not available Not available Metro: USD4.7b for 3 ongoing
metro lines in Hanoi &
Hochiminh
2020-30: at least USD8.3b for
lines 2 and 5 in Hochiminh.
No estimates for remaining 4
lines in Hanoi, but should be
at least USD5-6b
Investors: Official
Development Assistance,
Public-Private Partnership
UNMASKING ASIA 116
Sector MKE View: Achievable
Transport
Air (incl ports) IPOs of airports & airliners
IPO of Vietjet Air in 2Q16 is
expected to raise USD800m
Capacity improvements should
be intensive for large
city/provincial airports.
Funding secured for new
international Long Thanh
Airport Phase 1. Construction
likely to commence in 2018
after land clearance.
Land - Roads Started 2 metro lines in Hanoi
out of 6 planned. 1 metro line
in Hochiminh out of 6 planned.
Scheduled for completion in
2019-20
Challenges
Lack of transparency and still-poor
customer service by airlines and airport
operators.
Long Thanh Airport could face strong
competition from airports in Singapore,
Bangkok, Kuala Lumpur and Hong Kong
Hochiminhs first metro line is on time for
2020 but Hanois is likely to be delayed by
slow and costly land clearance. Cat Linh
Ha Dong lines investment has jumped to
nearly USD900m from previous forecast of
USD552m. This may not be the end.
Hochiminhs first Ben Thanh Suoi Tien
line may also cost 2.5x more, at USD2.5b,
up from USD1.1b estimated in 2007
Reasons & Response Opportunities
Aviation infrastructure highly under- Airliners' fleet expansion, new airports, airport
developed upgrading/expansion
Although lagging, Vietnam is arguably the best
located in SEA since Hochiminh is closest to
most Asian cities
Huge demand for low-cost airlines
domestically and regionally. Vietjet Air has
started to fly longer haul, to Singapore,
Thailand, Taiwan etc.
The 2 biggest cities with high population Although open to PPPs, more likely to be undertaken
densities have under-developed their public by the state, which will rely more on commercial
transport for years. Metro appears to be the loans
most efficient for most passengers.
Despite close scrutiny by city authorities and
the media to ensure progress, Hanois project
progress has been slow
UNMASKING ASIA 117
Vietnam Infrastructure Facts & Forecasts
Sector State in 2010
Transport contd
Land - Rail No statistics available.
Railway system mostly
outdated. Not a popular mode
of transport. Rail use limited
to small amount of cargoes,
as most goods are still moved
by trucks
Current State
Old railway system. Limited
capacity and speed
improvements. High-speed
trains only compatible with a
completely new rail system.
Congress did not approve
replacement of north-south
railway with USD56b++
investment or more than 25%
of GDP.
2020 Targets
Hochiminh Nha Trang & Hanoi
Vinh high-speed railways are
under feasibility study. Each
about USD10b. To be proposed
for National Assembly approval
before 2020
Expenditure
2015 2016 Forecasts (2016-2020)
N/A N/A New railways (Hochiminh
Nha Trang & Hanoi Vinh) are
still under feasibility study.
USD2.3b under BOT & Official
Development Assistance for
upgrade of Hanoi Hochiminh
railway, aka north-south
railway

Instead, approved shorter

Hanoi Vinh, Hochiminh Nha
Trang routes, each estimated
to cost USD10b. Under
feasibility study. To be
proposed to the National
Assembly for approval before
2020

In Nov-Dec 2015, 24
subsidiaries of Vietnam
Railway Corporation were
privatised. Operational
improvements after IPOs. No
major capex. Capex funded
by parent holdings or through
PPPs
Sea (incl ports) 259m tonnes/year 427m tonnes/year 640m tonnes/year, mostly NA NA USD3-4b for the 2 new deep
through 2 new deep-sea ports: seaports
Investors: more local, private Investors: more local, in Haiphong, North and Cai Mep
private. Earlier foreign Thi Vai, South
investors in logistics,
transport & ports hit by 2008 Attracting more foreign
financial crisis investors due to large
investments required for deep-
sea ports

UNMASKING ASIA 118

Sector MKE View: Achievable Challenges Reasons & Response Opportunities
Transport contd
Land - Rail Still under feasibility study Funding of USD10b each needed for Hanoi Still under feasibility study Not clear
Vinh and Hochiminh Nha Trang new
railways. Modern technology needed for
these high-speed trains

Sea (incl ports) Most new capacity came from Huge investments for deep-sea ports, each To meet rising demand from higher trade Funding port development
upgrades & expansion. costing millions of USD following FTAs in the years to come
Development of new deep-sea Connectivity between ports and main roads
ports delayed by large funding Accelerate land clearance for investments and
requirements and lower-than- improve connectivity with main roads
expected throughput due to
slowdown in global trade.
Major projects may be resumed
in 2016-17 as existing ports are
fully deployed. Little left other
than going further deep-sea.
Improvements by
provinces/cities to connect
ports with industrial parks &
residentials.

UNMASKING ASIA 119

Vietnam Infrastructure Facts & Forecasts
Sector State in 2010
Communication
Telecom Fixed telephone coverage:
16% of population
Mobile phone subscriptions:
125% of population
Investors mostly state-owned
companies for
infrastructure/backbone
development
Internet/ Fixed broadband coverage: 4% Fixed broadband coverage:
digitalization Internet penetration: 31% 6%
Water Still very much regulated by
municipal authorities.
Statistics very scarce and
inconsistent
Investors mostly assigned city- 40%. Difference is mostly due
owned water companies
Current State
Fixed telephone coverage
declined to 6% due to
transition
Mobile phone subscriptions:
147%
Investors mostly state-owned
companies for
infrastructure/backbone
development
Internet penetration: 48%
(2014 data)
Less but still much regulated
by municipal authorities.
Huge water wastage,
officially 25% but unofficially
to absence of central
database. Data collected &
compiled by individual
companies
Investors mostly assigned
city-owned water companies,
which then turn to
partnerships with private
investors. They retain
controlling interest of half to
two thirds of stakes
2020 Targets
Fixed telephone coverage: 20-
25%
Nationwide telecom revenue:
USD15-17b or 6-7% GDP
No clear guidance on opening
of sector to more investors,
although government did agree
to sell its 50.2% stake in FPT
Telecom in 2015. This signalled
greater willingness to reduce
regulation/control
Fixed broadband coverage: 15-
20%
Mobile broadband coverage:
35-40%
Internet penetration: 55-60%
Operating structures as per
2015.
Expenditure
2015 2016 Forecasts (2016-2020)
Total IT spending in Total IT spending in 2016F: 5% CAGR
2015F: VND110,000b VND121,000b
Unclear but likely more
IT spending split Investors in telecom investments by private
between government & infrastructure still mostly sector eg FPT VN via FPT
private sector. No state-owned telcos such as Telecom
official statistics but Viettel, Mobifone, Vinaphone.
government said to have
spent more as private From 2016, all telcos are
sector is not willing to required to contribute 1.5% of
spend much on IT revenue to public telco fund
Investors in telecom
infrastructure still
mostly state-owned
telcos such as Viettel,
Mobifone, Vinaphone
N.A. N.A. N.A.
N.A. N.A. USD3.3b for water supply
& treatment in cities
only. Money from
Ministry of Construction,
Ministry of Resources &
Environment and Finnish
government, a long-time
donor to water projects
in Vietnam
UNMASKING ASIA 120
Sector MKE View: Achievable
Communication
Telecom 2016 could still be a slow year
for telecom infrastructure
spending. Ministry of
Information and
Communications spending
increased only 5.5% in 2015,
10% below plan.
5% CAGR in total spending over
2016-20
Internet/ 4G is next big thing this year
digitalisation
10% CAGR in total spending
over 2016-20
Water City/province-owned
companies are granted
projects. They then sell stakes
to investors for funding but
normally retain 51% to 2/3 of
the shares.
Challenges
Fixed lines may be in permanent decline
Broadband Internet fixed-line subscriptions Vietnam aims to modernise IT infrastructure
may fall behind government target, if not
budgeted properly and invested on time
4G launched in Hochiminh, Vung Tau and
Phu Quoc in Jan 2016. 3G not popular due
to perceived slow speeds. Wifi more
frequently used as widely free in cities
Water has to be sold to provincial water
companies for final distribution
Poor water supply/distribution, mostly by
state-owned enterprises, leads to
abnormally high wastage
Very low transparency
Reasons & Response Opportunities
Still much regulated Not clear
Indirect opportunities via listed company FPT VN,
nd nd
IPO of Mobifone, 2 largest and 2 most which owns 45% of FPT Telecom. FPT wants to
profitable telco, scheduled for 2H16. No purchase a 50.2% stake in FPT telecom when the
details yet state divests. Divestment approved in 2H15.
Awaiting more information on Mobifone IPO (2015
revenues USD1.4b, earnings USD330m)
Broadband Internet fixed lines, digital services
with tax incentives as it considers this a "high
tech" sector. However, as with telecom,
Internet infrastructure spending seems behind
its potential as the spending is by state-
owned enterprises, Mobifone, Vinaphone,
Viettel
Liberalisation still slow Mostly funding opportunities for projects. Direct
investment opportunities still limited.
Water is still subsidised, even though
subsidies have stopped for petroleum and
power
UNMASKING ASIA 121
Vietnam Infrastructure Facts & Forecasts
Expenditure
Sector State in 2010 Current State 2020 Targets
2015 2016 Forecasts (2016-2020)
Housing Housing numbers scarce Housing numbers still scarce n/a n/a n/a n/a
Urbanisation 17.5 sqm of residential floor 21.5 sqm of residential floor 25 sqm of residential floor per VND1,000,000b in gross 10% growth 10% CAGR
per head per head head construction output

Investors mostly private- Investors mostly private- Investors mostly private-sector

sector listed developers sector listed developers listed developers

Likely achievable due to more

stable interest rates

UNMASKING ASIA 122

Sector MKE View: Achievable
Housing
Urbanisation Social housing driven by private
sector, with tax incentives
from government. Previously
by state-owned developers
with bad reputations for
housing quality.
Challenges
Social housing, while aggressively led by
private sector, might still be
"undersupplied" in next 5-10 years, if
government does not encourage more
supply
Reasons & Response
Access to land and a confusing land-title
registry system are major impediments to
increasing social-housing stock
Opportunities
Affordable social housing with higher quality, led by
private developers, should be where the greatest
opportunities lie. Backed by mass demand and
affordability

Guidance is often provided for

social/affordable housing to
promote accommodation for
mass market eg minimum 20%
area has to set aside for social
housing for plots that are
bigger than 10 ha

UNMASKING ASIA 123

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UNMASKING ASIA 124

APPENDIX I: TERMS FOR PROVISION OF REPORT,
DISCLAIMERS AND DISCLOSURES
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Malaysia
Opinions or recommendations contained herein are in the form of technical
ratings and fundamental ratings. Technical ratings may differ from
fundamental ratings as technical valuations apply different methodologies
and are purely based on price and volume-related information extracted from
Bursa Malaysia Securities Berhad in the equity analysis.
Singapore
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The disclosure of the survey result of the Thai Institute of Directors
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policy of the Office of the Securities and Exchange Commission. The survey of
the IOD is based on the information of a company listed on the Stock
Exchange of Thailand and the market for Alternative Investment disclosed to
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therefore, is from the perspective of a third party. It is not an evaluation of
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the date appearing in the Corporate Governance Report of Thai Listed
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Kim Eng Securities (Thailand) Public Company Limited (MBKET) does not
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Except as specifically permitted, no part of this presentation may be
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DISCLOSURES
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issued by the Securities Commission in Malaysia. Singapore: This material is
member of the Indonesia Stock Exchange and is regulated by the BAPEPAM
LK. Thailand: MBKET (Reg. No.0107545000314) is a member of the Stock
Exchange of Thailand and is regulated by the Ministry of Finance and the
Securities and Exchange Commission. Philippines: Maybank ATRKES (Reg.
No.01-2004-00019) is a member of the Philippines Stock Exchange and is
regulated by the Securities and Exchange Commission. Vietnam: Maybank Kim
Eng Securities JSC (License Number: 71/UBCK-GP) is licensed under the State
Securities Commission of Vietnam.Hong Kong: KESHK (Central Entity No
AAD284) is regulated by the Securities and Futures Commission. India: Kim
Eng Securities India Private Limited (KESI) is a participant of the National
Stock Exchange of India Limited (Reg No: INF/INB 231452435) and the Bombay
Stock Exchange (Reg. No. INF/INB 011452431) and is regulated by Securities
and Exchange Board of India. KESI is also registered with SEBI as Category 1
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of/ and is authorized and regulated by the FINRA Broker ID 27861. UK:
Maybank KESL (Reg No 2377538) is authorized and regulated by the Financial
Services Authority.
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Disclosure of Interest

Malaysia: MKE and its Representatives may from time to time have positions or be materially interested in the securities referred to herein and may further
act as market maker or may have assumed an underwriting commitment or deal with such securities and may also perform or seek to perform investment
banking services, advisory and other services for or relating to those companies.

Singapore: As of 9 April 2016, Maybank KERPL and the covering analyst do not have any interest in any companies recommended in this research report.

Thailand: MBKET may have a business relationship with or may possibly be an issuer of derivative warrants on the securities /companies mentioned in the
research report. Therefore, Investors should exercise their own judgment before making any investment decisions. MBKET, its associates, directors,
connected parties and/or employees may from time to time have interests and/or underwriting commitments in the securities mentioned in this report.

Hong Kong: KESHK may have financial interests in relation to an issuer or a new listing applicant referred to as defined by the requirements under Paragraph
16.5(a) of the Hong Kong Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission.

As of 9 April 2016, KESHK and the authoring analyst do not have any interest in any companies recommended in this research report.

MKE may have, within the last three years, served as manager or co-manager of a public offering of securities for, or currently may make a primary market in issues of, any or all of the entities menti
may be providing, or have provided within the previous 12 months, significant advice or investment services in relation to the investment concerned or a related investment and may receive compensation for the services
provided from the companies covered in this report.

OTHERS
Analyst Certification of Independence
The views expressed in this research report accurately reflect the analysts personal views about any and all of the subject securities or issuers; and no part of the re
directly or indirectly, related to the specific recommendations or views expressed in the report.

Reminder
Structured securities are complex instruments, typically involve a high degree of risk and are intended for sale only to sophisticated investors who are capable of understanding and assuming the risks involved. The
market value of any structured security may be affected by changes in economic, financial and political factors (including, but not limited to, spot and forward interest and exchange rates), time to maturity, market
conditions and volatility and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a structured product should conduct its own analysis of
professional advisers as to the risks involved in making such a purchase.

No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior consent of MKE.

Ong Seng Yeow | Executive Director, Maybank Kim Eng Research

Definition of Ratings
Maybank Kim Eng Research uses the following rating system
BUY Return is expected to be above 10% in the next 12 months (excluding dividends)
HOLD Return is expected to be between - 10% to +10% in the next 12 months (excluding dividends)
SELL Return is expected to be below -10% in the next 12 months (excluding dividends)

Applicability of Ratings
The respective analyst maintains a coverage universe of stocks, the list of which may be adjusted according to needs. Investment ratings are
only applicable to the stocks which form part of the coverage universe. Reports on companies which are not part of the coverage do not carry
investment ratings as we do not actively follow developments in these companies.

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 Malaysia
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ASEAN Infrastructure:
THE NEW OLD THING

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