Singapore Construction Sector - CIMB Research 2018-01-04: Building Hope


Construction - Building Hope

  • We estimate S$9bn p.a. of public civil engineering contracts could be awarded in Singapore in 2018-2021F, leading to construction sector recovery.
  • North-South Corridor is a key project, in our view.
  • In the private sector, we are seeing a multiplier effect from the en bloc deals, which we estimate could add S$1bn in construction value in 2018F.
  • Signs of easing competitive pressure could indicate better profitability for construction firms ahead. Maintain sector Overweight.
  • Yongnam is our top pick in the sector. Other key players of sizeable market cap highlighted in this report are Wee Hur, Lum Chang, Pan-United and Koh Brothers.

Major infrastructure projects to set the pace 

  • Last year, Singapore’s Building and Construction Authority (BCA) projected that public sector construction demand would be worth between S$18bn and S$23bn per annum for 2018-21F, of which 50% is expected to comprise civil engineering projects. 
  • We estimate this translates into at least S$9bn worth of contracts from civil engineering, exceeding the c.S$7.2bn value of civil engineering works awarded in 2017, of which S$5.4bn was attributed to three major projects; namely, North-South Corridor (NSC), Deep Tunnel Sewerage System (DTSS) phase 2, and Circle Line 6 (CL6).

North-South Corridor (c.S$13bn outstanding) 

  • In our view, the bulk of demand in 2018F could come from the NSC, with the entire project worth c.S$15bn in construction value. The first civil contract for the project was awarded for S$809m in Nov 2017. The Land Transport Authority (LTA) expects the rest of the project’s tender packages to be awarded in 2018/19F. 
  • At least eight contracts have already been put up for bid and we expect them to be awarded this year. This could lead to increased construction activities for several main contractors, subcontractors and building material suppliers that will be involved in these infrastructure projects.

Deep Tunnel Sewerage System Phase 2 (c.S$2bn outstanding) 

  • This is another major infrastructure project that comprises a massive 100km used water conveyance network, which will run largely under the Ayer Rajah Expressway, crossing undersea at Tuas Bay and ending at deep inlet shafts within the future Tuas Water Reclamation Plant. 
  • To date, the Public Utilities Board (PUB) has already awarded five contracts worth a total S$2.3bn for work on 50km of deep tunnels and link sewers for DTSS phase 2. The PUB expects subsequent contracts for the building of the remaining 50km to be awarded in 2018F onwards. 
  • By proportion, the estimated value of the remaining 50km could be worth about S$2bn, based on our estimates. The PUB has targeted for the completion of DTSS phase 2 project by 2025F.

Circle Line 6 

  • The 4-km CCL6 will close the loop for the MRT Circle Line by connecting HarbourFront Station to Marina Bay Station. When the three CCL6 stations of Keppel, Cantonment and Prince Edward are completed in 2025F, the Circle Line will have a total of 33 stations, including 12 interchange stations with other MRT lines. 
  • Civil contracts worth S$2.3bn for the CCL6 project have been awarded in 2017 to several main contractors, which could create opportunities for other civil engineering specialists to take on subcontractor works.

KL-Singapore High Speed Rail (c.S$14bn-15bn) 

  • A joint tender was called in Dec 2017 by Malaysia’s MyHSR Corporation (a unit of Malaysia’s Ministry of Finance) and Singapore’s SG HSR (subsidiary of the Land Transport Authority, LTA) for an asset company for the High-Speed Rail (HSR) project. The asset company will be responsible for designing, building, financing and maintaining all rolling stock and rail assets, as well as operating these assets for the 350km high-speed rail. 
  • We estimate the tender could be awarded by the end of 2018F and construction works are expected to span 2018-25F.

Sustainable public sector tenders from housing and institutional projects 

  • New public housing supply for 2018F largely in line with 2017 level Over 70% of the construction value for building projects from the public sector in 9M17 came from the residential, institutional and other building categories, according to data from the Singapore Department of Statistics. 
  • The Housing and Development Board (HDB) plans to release 17,000 built-to-order (BTO) flats in 2018F, keeping supply largely in line with the 17,548 flats launched last year.

Upcoming healthcare facilities 

  • Supply of new institutional and other building projects in the public sector could include healthcare facilities such as the National Skin Centre and Woodlands Health Campus (estimated project cost of S$78m). 
  • Construction companies such as Keong Hong (KHHL SP, Not Rated), Koh Brothers (KOH SP, Not Rated), Tiong Seng (TSNG SP, Not Rated) and Lum Chang (LCH SP, Not Rated) have put in bids for these projects. We expect to hear the results of the tender bidding process by the end of 2018F.

Private residential to provide additional growth 

  • Launch of projects from en bloc sales could drive demand In our view, construction demand from the private sector could start to strengthen in 2018F, with a good portion of the demand coming from awarded en bloc sales. 
  • A total of 26 en bloc deals were transacted in 2016-17, of which we think several projects may be relaunched this year, potentially yielding c.S$1bn in construction value.

Government land sales 

  • In addition, the government announced that it will be keeping total supply of private dwelling units for 1H18F at about the same level as the supply of units from the 2H17 Government Land Sales Programme. Thus, we think this could lead to growth in construction demand from the private residential space. 
  • The residential segment accounted for c.30% of total private sector construction contract value over the last three years.

Other potential catalysts 

Tender price index could rebound with higher demand 

  • The tender price index (TPI) slid in 2015-16, coinciding with the fall in construction contracts awarded. However, we started to see the index find a floor at 96.0-97.0 over the first nine months of 2017, which could indicate that competitive pressures on construction project bids may be starting to abate.
  • BCA revealed that overall business confidence for 2H17 among contractors and consultants improved slightly compared to the preceding six months, although there is still bearish sentiment on project profitability amid keen competition. The TPI could see a rebound if the demand for construction activity picks up in 2018F, in our view.

Industrial land supply for 1H18F trimmed 

  • The government is trimming its industrial land supply for the first half of 2018F, after industrial prices and rents fell (in 2016-17) as hoped amid the supply spike in recent years. According to the Ministry of Trade and Industry, it will launch six sites on the Confirmed List and seven sites on the Reserve List, with a total site area of 12.56ha for 1H18F. 
  • We estimate this translates into a decline of 9.6% in site area from the eight Confirmed List sites and six Reserve List sites that were launched in 2H17, which had a total site area of 13.9ha.

What to expect beyond 2018F? 

Second CBD in Singapore: Jurong Lake District 

  • Major growth prospects in the sector include the future redevelopment of the Jurong Lake District (JLD), which spans 360 ha of land (similar in size to the Marina Bay area) and is poised to be Singapore’s second central business district (CBD), in our view. 
  • Recall that private construction demand from residential and commercial sector swelled to a total of S$10.7bn in 2007 from S$6.4bn in 2006, largely fueled by development of the Marina Bay area. Excluding S$600m worth of contracts from Resort World Sentosa, this implies a yoy increase of S$3.6bn in construction demand. 
  • In comparison, the redevelopment of JLD could lead to over c.S$3.6bn worth of construction contracts. The Urban Redevelopment Authority (URA) said it hopes to finalise the details of the master plan by 2019F. 
  • Construction activity on the redevelopment would start with the area around the terminus of the Singapore-Kuala Lumpur High-Speed Rail, which is slated for completion by 2026F.

Other major public infrastructure projects 

  • Over the next five years, we expect public sector demand to be supported by other mega infrastructure projects, including the Jurong Regional Line, Cross Island Line and various developments for Changi Airport Terminal 5.

1,800 hectares of land up for redevelopment in 2030F 

  • According to URA, the relocation of the City Terminal and Pasir Panjang Terminal to Tuas will free up 325 and 600 hectares of waterfront land, respectively. The land – that is 3x the size of Marina Bay – will come up for redevelopment after 2030F. The other large plot of land that will be put up for development in 2030F is currently occupied by Paya Lebar Air Base, whose assets and facilities will be relocated to Changi Airbase East and Tengah Airbase.

Which part of the value chain stands to gain? 

Main contractors – pick the laggards in order book growth 

  • Main contractors are appointed by the principal and they are responsible for the total construction and completion of the building project. They follow the plans of architects and sometimes, design the actual structure. 
  • Main contractors also play an important role in managing health and safety risks during the construction phase. Wee Hur and Lum Chang are two of the major builders in this space. The value of their order books were below the historical 6-year average as at 30 Sep 17.

Concrete suppliers 

  • Ready-mixed concrete (RMC) is a major part of any concrete construction project. The RMC is delivered to the site mixed and ready to be cast, which saves time and money. 
  • Pan-United (PAN SP, Not Rated) is Singapore’s biggest concrete supplier to the public and private sectors, with RMC market share of 40% by volume in FY16, according to the company.

Tunnel construction and civil engineering 

  • Civil engineering companies that are specialists in tunnel engineering are the ones that take full responsibility for the design, planning, construction, maintenance and safety of tunnels. The key player in this segment is Koh Brothers, which is involved in the construction of cut-and-cover tunnels for part of Circle Line 6, as well as works relating to DTSS Phase 2 project.

Structural struts and steelworks – preferred pick 

  • Steel strutting systems provide deep excavation support during the construction of stations and tunnels for transportation systems and building of basements, while structural steel forges the skeletons of buildings and infrastructure. 
  • A major player in this field is Yongnam (YNH SP, Add, TP: S$0.53), which has over 40 years of experience in structural steel work and specialist civil engineering. As at end-FY16, it had 208k tonnes of struts assets and structural steel fabrication capacity of 84k tonnes p.a.


Yongnam Holdings (YNH SP, Rating: ADD, Target Price: S$0.53) 

  • Yongnam is our top pick in Singapore’s construction sector, with several near-term catalysts from potential major order wins as the bulk of tender packages from NSC project come up for grabs in 2018F. 
  • Given that Yongnam owns the biggest strutting asset base in Singapore and its strong track record, we believe the group could clinch at least half of the strut works for the NSC project. This would significantly boost the overall utilisation of Yongnam’s struts and order book (S$208m as at 30 Sep 2017). Strut works from NSC form part of c.$844 worth of contracts in Singapore and overseas that Yongnam is gunning for in 2018F, based on our estimates. 
  • Our target price of S$0.53 is based on 0.8x FY18 P/BV (10% discount to the long-term average of 0.9x).
  • See report: Yongnam Holdings - CIMB Research 2018-01-04: Major Order Win Catalysts Ahead

Pan-United Corporation (PAN SP, Not Rated) 

Wee Hur Holdings (WHUR SP, Not Rated) 

  • Wee Hur’s core businesses are construction, property development and dormitory operations in Singapore. Its construction order book stood at S$304m as at end Sep 2017, comprising mainly residential and industrial projects. 
  • Its current property development pipeline includes Parc Botannia and Mega@Woodlands in Singapore, as well as a condo project and several purpose-built student accommodation projects in Australia.
  • See report: Wee Hur Holdings Ltd - CIMB Research 2018-01-04: Gaining Traction In Australia

Lum Chang Holdings (LCH SP, Not Rated) 

  • Lum Chang is an established main contractor firm with a construction order book of S$542.6m at end-Sep 2017, comprising a mix of residential, commercial and civil infrastructure works in Singapore. 
  • We expect Lum Chang to launch One Tree Hill Gardens, a landed property site within the prime Orchard Road district, in 2018F and it is also developing other residential and commercial properties in Singapore, Malaysia, and the UK.
  • See report: Lum Chang Holdings Ltd - CIMB Research 2018-01-04: Expanding On Property Investment

Koh Brothers Group (KOH SP, Not Rated) 

  • Koh Brothers is an established contractor, developer and civil engineering specialist, with a legacy in drainage management and water resource engineering. As at end-Sep 2017, its construction order book stood at S$844m, boosted by the securing of two landmark projects in 2H17 – Circle Line 6 and the Deep Tunnel Sewerage System Phase 2.
  • See report: Koh Brothers Group Ltd - CIMB Research 2018-01-04: Gunning For North-South Corridor

Colin TAN CIMB Research | LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2018-01-04
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