This article first appeared in The Edge Financial Daily on May 9, 2017

Construction sector
Maintain overweight call: Over the weekend, local newspapers covered several "what if" scenarios following the termination of the share sale agreement of the 60% stake in Bandar Malaysia to the 60:40 consortium formed by Iskandar Waterfront Holdings Sdn Bhd (IWH) and China Railway Engineering Corp (M) Sdn Bhd (CREC) - valued at around RM7.4 billion.

Developer TRX City Sdn Bhd recently said a new tender for the Bandar Malaysia master plan will be launched. On the surface, this may turn out similarly to the parcelled tenders by Kwasa Land Sdn Bhd for the Rubber Research Institute of Malaysia land in Sungai Buloh. We expect more news from TRX City in coming weeks.

A local paper reported that there was talk of Dalian Wanda Group of China bidding for the Bandar Malaysia project together with Malton Bhd, headed by Tan Sri Desmond Lim, who is also the new major shareholder and executive chairman of WCT Holdings Bhd. According to sources in the report, there is also the possibility that the Employees Provident Fund would take part in the group/consortium.

We note that Lim was one of the major contenders for the Bandar Malaysia deal. It was reported in 2015 that he together with a Qatari state-backed consortium and IWH CREC Sdn Bhd were the two front runners for the Bandar Malaysia deal.

We understand from management that Malaysian Resources Corp Bhd's (MRCB) memorandum of understanding (MoU) with Wondrous Vista Development Sdn Bhd, signed in June 2016, to explore opportunities to develop an integrated transport hub in Bandar Malaysia remains valid.

In late January 2017, MRCB announced that it intended to form a strategic alliance with Wondrous Vista and Bandar Malaysia Sdn Bhd to acquire, construct, develop and operate the transport hub.

Of the total 483 acres (195.46ha), 60 acres (12.4%) were allocated to the hub, where the High-Speed Rail (HSR) project's Kuala Lumpur terminus would be located. The MoU is valid for six months from January 2017. While we acknowledge that an MoU is still preliminary, MRCB's experience in transport hubs (Kuala Lumpur Sentral) and transit-oriented developments lends this option some credibility, in our view.

At this juncture, we view the failed IWH-CREC deal as negative for the progress of Bandar Malaysia. We understood earlier that the forgone RM7.4 billion injection of funds (from a sale of the 60% stake) would fast-track the execution of phase 1, primarily consisting of the transport hub (and the Kuala Lumpur terminus of the HSR project), which was initially slated for launch this year. On the infrastructure side, the latest news from MyHSR Corp Sdn Bhd highlighted the first quarter of 2018 as the new timeline for HSR civil works tenders.

Despite the fallout from Bandar Malaysia and the implications for China-driven contracts, we remain optimistic about job awards from the RM50 billion East Coast Rail Line and the RM9 billion Gemas-Johor Baru double-tracking project that are long overdue. Gamuda Bhd remains our top big-cap pick for the rail theme. Downside risks to our sector call include major delays in job roll-outs, including China-driven ones. - CIMB Research, May 7