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The Global Economy Outlook

According to the World Economic Outlook Report (April 2018 edition) published by the International Monetary Fund (IMF), world growth strengthened in 2017 to 3.8%, with a notable rebound in global trade. It was driven by an investment recovery in advanced economies, continued strong growth in emerging Asia, a notable upswing in emerging Europe and signs of recovery in several commodity exporters.

Global growth is expected to tick up to 3.9% this year and next, supported by strong momentum, favourable market sentiment, accommodative financial conditions and the domestic and international repercussions of expansionary fiscal policy in the United States (US). The partial recovery in commodity prices should allow conditions in commodity exporters to gradually improve.

Over the medium term, global growth is projected to decline to about 3.7%. Once the cyclical upswing and US fiscal stimulus have run their course, prospects for advanced economies remain subdued, given their slow potential growth. In emerging market and developing economies, in contrast, growth will remain close to its 2018 – 2019 level as the gradual recovery in commodity exporters and a projected increase in India’s growth provide some offset to China’s gradual slowdown and emerging Europe’s return to its lower-trend growth rate. Nevertheless, 40 emerging market and developing economies are projected to grow more slowly in per capita terms than advanced economies, failing to narrow income gaps vis-à-vis the group of more prosperous countries.

Despite strong aggregate figures in the baseline forecast and buoyant market sentiment, the current momentum is not assured. Upside and downside risks are broadly balanced over the next several quarters, but risks farther down the road are skewed to the downside. With still-easy financial conditions and persistently low inflation that has required protracted monetary policy accommodation, a potential further build-up of financial vulnerabilities could give way to rapid tightening of global financial conditions, denting confidence and growth. The support to growth that comes from pro-cyclical policies, including in the US, will eventually need to be reversed. Other risks include a shift toward inward-looking policies that harm international trade and a worsening of geopolitical tensions and strife.

The current favourable juncture offers a window to enact policies and reforms that protect the upswing and raise medium-term growth to the benefit of all – strengthening the potential for higher and more inclusive growth, building buffers that will help deal more effectively with the next downturn, improving financial resilience to contain financial market risks and fostering international cooperation.

The Malaysian Economy

Growth in the Malaysian economy moderated for a second consecutive quarter in the first quarter of 2018. The economy expanded 5.4% year-on-year (y-o-y) in the January – March period; the result came in below market expectations of 5.5% and below the previous quarter’s 5.9% increase. However, on a quarter-on-quarter (q-o-q) seasonally-adjusted basis, economic growth sped up to 1.4%, up from the prior quarter’s 1.0%. A breakdown of the drivers of the annual growth rate showed that performance was spearheaded by resilient private sector spending and strong growth in net exports, while fixed investment growth was nearly flat.

Demand Side
Domestic demand recorded a moderate growth of 4.1% in the quarter under review (4Q 2017: 6.2%), due to lower growth of private sector expenditure at 5.2% (4Q 2017: 7.4%) and a marginal 0.1% decline in public sector spending (4Q 2017: +3.4%).

Private consumption registered a sustained growth of 6.9% (4Q 2017: 7.0%), supported by continued strength in wage and employment growth. Public consumption growth was lower at 0.4% (4Q 2017: 6.8%) on account of lower expenditure on supplies and services.
Growth of private investment moderated to 0.5% (4Q 2017: 9.2%), weighed down by lower capital spending in structures, particularly in residential and commercial properties, and machinery and equipment during the quarter. On a sectoral basis, private investment was supported mainly by the services sector, particularly the education and healthcare sub-sectors. Public investment continued to decline by 1.0% in the first quarter (4Q 2017: -1.4%), attributed to the contraction in spending on fixed assets by public corporations. The lower capital spending by public corporations was due mainly to the near completion of a few large-scale projects.

Supply Side
On the supply side, services and manufacturing sectors remained the key drivers of growth.

  • The services sector expanded at a faster pace during the quarter. The improvement was attributed mainly to higher growth in the finance and insurance sub-sector, resulting from higher lending activity, particularly in the household segment.
  • Growth in the information and communication sub-sector also improved, driven by increased demand for data communication services.
  • The wholesale and retail trade sub-sector continued to expand, supported by sustained strength in household spending.
  • The manufacturing sector registered sustained growth in the quarter supported by improvements in the export-oriented industries and construction-related cluster. These offset the sharp moderation in the consumer-related clusters, which was mainly due to slower production of food-related items and transport equipment. Stronger output growth in the primary-related cluster (e.g. chemical- and petroleum-related products) was supported by higher oil production. The higher growth in the electronic and electrical cluster reflected the continued expansion of the global technology upcycle. Higher growth in the construction-related cluster was in line with the strength of civil engineering activities during the quarter.
  • Growth in the construction sector moderated in the quarter. While growth of the civil engineering sub-sector was stronger, supported by transportation, petrochemical and power plant projects, the sector’s performance was affected by weaker activity in the residential and non-residential sub-sectors. This is consistent with the significant number of unsold residential properties and the ongoing weaknesses in the commercial property segment (oversupply of office spaces and shopping complexes).
  • Growth in the agriculture sector moderated, reflecting mainly lower rubber tapping activities amid weak rubber prices during the quarter.
  • The mining sector’s growth rebounded, supported mainly by higher oil production.

Economic Outlook
Growth is projected to remain favourable in 2018, with domestic demand as the key driver of growth. The positive growth prospects are supported by continued spill overs from the external sector to domestic economic activity. Trade performance is expected to benefit from favourable global demand, new export production capacity and exposure to the global technology upcycle.

On the domestic front, leading indicators such as the Department of Statistics Malaysia’s (DOSM) Composite Leading Index, Malaysian Institute of Economic Research’s (MIER) Business Conditions Index and MIER Consumer Sentiments Index point toward continued expansion of the economy. Private consumption will be underpinned by continued wage and employment growth, with support from new government measures such as the zero-rated goods and services tax (GST) while investment activity will be supported by capital spending for new and ongoing projects amid positive business sentiments.

Construction Sector Updates

A total of RM280.25 billion allocated in the Budget 2018 focuses on expanding an inclusive economy while looking forward to the Transformasi Nasional 2050 (TN50) goals and making Malaysia a top 20 country. While the Budget made no mention of initiatives or tax reliefs for the construction industry, the series of measures to strengthen the economy, build new infrastructure and increase home ownership, among others, is set to enliven the industry in the coming years.

According to the 2017/2018 Economic Report, the construction industry is forecast to grow at 7.5% this year, 0.1% down from 2017, supported by on-going infrastructure projects. Notably, major contracts that will be implemented are public transport/rail, including the RM55 billion East Coat Rail Link (ECRL), RM50 billion to RM60 billion Kuala Lumpur-Singapore High Speed Rail (HSR), RM40 billion MRT 3 (Circle Line) and RM9 billion Gemas-Johor Baru electrified rail double tracking projects.

Compared with Budget 2017, the combined allocation for public housing projects surged more than eightfold to RM3.5 billion under Budget 2018, while the budget for water/electricity infrastructure surged 60% to RM3.1 billion. Allocation for the construction of non-tolled roads (excluding road maintenance and the Pan Borneo Highway) surged 81% to RM2.4 billion. Separately, the RM2 billion allocation for Pan Borneo Highway is likely to focus on the 11 awarded packages in Sarawak and the five awarded in Sabah.
Despite being one of the main beneficiaries of Budget 2018, the construction industry is far from meeting its targeted level of activities due to the wait-and-see attitude adopted by industry players amid pre- and post-election uncertainties and subdued demand for properties.

The value of construction work done in the first quarter of 2018 recorded a moderate growth of 5.9% y-o-y to RM37.1 billion (against 7.7% growth and RM35.1 billion in value in the previous quarter). The increase in value of construction work done was driven by positive expansion in the civil engineering and special trades sub-sectors, which registered 19.5% and 8.6% growth respectively. However, the non-residential and residential buildings sub-sectors declined 1.2% and 3.4% respectively. In terms of contribution, the civil engineering sub-sector continued to dominate performance with 39.6% share of value of construction work done, followed by non-residential buildings (28.8%), residential buildings (26.6%) and special trade activities (5.0%). The private sector continued to fuel construction activity with a 60.9% share (RM22.6 billion) as compared to the public sector with a 39.1% share (RM14.5 billion).

Post-election and with the change of the ruling party, prospects for the industry had worsen as previously approved infrastructure projects are set to undergo review and could be postponed or cancelled. The earliest casualty recorded was the MRT 3 rail transit project, which was aimed at better integrating Kuala Lumpur city centre with its fringes like Bandar Malaysia, Ampang, KL Ecocity, Bukit Kiara and Sentul. The project was scrapped in May in a bid to control the country’s debt situation. HSS Engineers Bhd saw its RM289.9 million contract (awarded in April 2018) as the independent consultant engineer for the project being terminated by Mass Rapid Transit Corp Sdn Bhd. However, the termination is not expected to have any significant impact on the company since only preliminary works have commenced, which will be compensated for in accordance with the terms and conditions of the contract. The cancellation of the MRT3 project also left Gamuda Bhd scrambling to find alternative sources to replenish its order book, as the group together with MMC Corp Bhd and George Kent Bhd, was expected to win the turnkey contractor job.

The government has recently ordered the suspension of the ECRL project to facilitate negotiations for materials, alignment and stations in an attempt to bring down project costs. According to Finance Minister Lim Guan Eng, the final cost for the project has ballooned to RM81 billion and must be reduced significantly for it to be financially viable. The ECRL project was first approved in October 2016 while the engineering, procurement, construction and commissioning (EPCC) agreement was signed with China Communications Construction Company (CCCC) a month later. It is estimated that more than 200 locals, including contractors, engineering consultants and suppliers will be affected by the suspension of this project.

The original project scope was to build a rail line from the integrated transport terminal in Gombak (Selangor) to Wakaf Bharu (Kelantan) at a cost of RM46 billion. An additional agreement was later inked to carry out Phase 2 of the project to extend the line from ITT Gombak to Port Klang for RM9 billion. In May 2017, the northern extension of the project from Wakaf Bharu to Pengkalan Kubor (Kelantan) was approved, for RM1.28 billion. Subsequently in August 2017, the Cabinet further approved the upgrading of the ECRL to a double-tracking project at an additional cost of RM10.5 billion, bringing the total construction cost of the project to RM66.78 billion. However, the total cost of ECRL amount to RM81 billion after taking into account land acquisition, interest, fees and other operational cost.

The government also announced that the Kuala Lumpur-Singapore HSR project will be postponed due to its high cost. Construction players impacted were Gamuda, Malaysian Resources Corp Bhd (MRCB) and YTL Corp Bhd, which had been appointed as civil infrastructure project delivery partners. Touted to become the first high speed railway in South East Asia, the line will connect Bandar Malaysia in Kuala Lumpur with Jurong East in Singapore over a length of approximately 350km. It will facilitate seamless travel between the two fast-growing economic engines and reduce travel time to 90 minutes.

The uncertainties surrounding the implementation of these major projects and concern for future order book replenishments have prompted analysts to downgrade their view of the construction industry. On the flip side, the review of these mega projects which were mostly contracted to foreign contractors could also turn out to be positive should the projects proceed and the main EPCC contracts shift back to Malaysian contractors to control the country’s current account. Those with proven track record and experience in spearheading large infrastructure works could stand to benefit from this move.

In another related development, the government has agreed to pump in RM2.8 billion to bail out the 70-acre Tun Razak Exchange (TRX) project in Kuala Lumpur. The funds will help to complete all the necessary infrastructure works in TRX and would be released in stages up until 2024, with RM344 million to be disbursed starting this year. According to chief executive officer Datuk Azmar Talib of TRX City Sdn Bhd (TRXC), the master developer of TRX, the area’s total land value is worth about RM7.6 billion while the development cost is estimated to be around RM6 billion. As at end-June, seven plots of land on TRX totalling RM2.88 billion have been sold to Lendlease, Lembaga Tabung Haji, Mulia Group, Affin Bank Bhd, WCT Holdings Bhd, IJM Corp Bhd and HSBC.

Azmar said the renewed confidence following the recent elections has bolstered investor confidence in TRX and the company is currently in talks with numerous local and foreign parties for potential investment opportunities in the project. TRX will be developed in three phases. Phase 1 comprises Mulia’s Exchange 106 and IJM’s Prudential buildings, which are slated for occupancy early next year. The second phase, which will consist of a public plaza, streetscapes and a 10-acre central park, will be completed in 2020, in line with the opening of a mall and new headquarters for HSBC and Affin Bank. The final phase, which is the south-side parcel, will be completed by 2024.

In terms of performance, MRCB’s net profit for the first quarter ended March 31, 2018 (1QFY18) more than doubled to RM21.53 million compared to RM8.64 million in the previous year, thanks to a stronger performance from the engineering, construction and environment division. MRCB said the engineering, construction and environment division saw operating profit increase twelve-fold to RM16 million during the period, mainly due to the progress of the group's ongoing projects and other value engineering initiatives implemented to manage construction costs. Accompanying the division's stronger performance was an RM8.9 million profit after tax earned from its 50%-owned LRT3 Project Delivery Partner joint venture company. Currently, MRCB's external client construction order book totals RM6.2 billion.

Its property development and investment division, however, recorded a 7.2% decrease in revenue to RM222.4 million, and saw operating profit fall to RM24.1 million from RM47.9 million in the corresponding period in 2017. As at the end of the first quarter of 2018, unbilled property sales totalled RM1.6 billion. MRCB expects its unbilled construction and property development to keep the group busy this year, even as investors continue to fret over opportunity loss for the company following the government’s decision to postpone several mega infrastructure projects.

Eco World Development Group Bhd’s (EcoWorld) net profit rose 2.3% to RM34.45 million in the second quarter ended April 30, 2018 (2QFY18), from RM33.68 million a year ago, on contribution from its projects in the Klang Valley, Iskandar Malaysia in Johor and Penang. Quarterly revenue, however, fell 2.6% to RM498.69 million from RM670.02 million a year ago. The lower quarterly revenue was because the majority of projects undertaken by the group’s subsidiaries had been handed over the initial phases of properties sold.

For the cumulative six months (1HFY18), EcoWorld’s net profit dropped 60.9% to RM58.54 million from RM149.85 million a year ago, while revenue fell 15.9% to RM1.06 billion from RM1.26 billion in 1HFY17. The group said the lower earnings were largely because the previous year had included a gain on dilution of equity interest in its unit Paragon Pinnacle Sdn Bhd. While sales interest had picked up following the group’s successful Chinese New Year campaign and good response to the various localised marketing activities at its project sites in the Klang Valley, Iskandar Malaysia and Penang, buying momentum waned in the lead up to the country’s 14th general election.

Uncertainties over the outcome of election caused many customers to hold back from making commitments to purchase in the month of April up until early May 2018. There has been a notable shift in the public mood after the election, with greater optimism and renewed confidence expressed by many regarding their personal futures and that of their families going forward. Going forward, EcoWorld said the group’s profit will increasingly be derived from projects undertaken by its various joint ventures (JVs).

Ekovest Bhd's net profit for its second quarter ended Dec 31, 2017 rose to RM55.46 million compared with RM41.03 milion a year ago. Revenue increased to RM297.87 million from RM274.95 million previously, mainly due to higher sales recognition for EkoCheras project following advanced progress work done. In addition, the full opening of the Duke Phase 2 in October 2017 also contributed to the increase in the toll revenue recognised compared with the preceding quarter. For the cumulative six months period to Dec 31, 2017, net profit rose to RM96.60 million from RM81.12 million a year ago while revenue grew to RM528.51 million from RM478.50 million a year earlier.

As for prospects, Ekovest expects the ongoing construction of the Setiawangsa-Pantai Expressway (SPE), River of Life and related projects, the opening of the DUKE Phase 2's toll revenue and the recognition of unbilled sales from property development activities to contribute positively to its turnover and profitability in the current financial year.

Things are not as rosy for IJM Corp Bhd, which saw its net profit slumped 95.3% to RM11.19 million for the fourth quarter ended March 31, 2018 against RM236 million in the same quarter a year ago, dragged by lower contribution from all business segments and the absence of disposal gain. It posted a one-off gain of RM123.1 million in relation to the sale of 32-acre land at the Light Waterfront Penang in the previous corresponding period. Revenue also declined 16.2% to RM1.4 billion for the quarter under review from RM1.67 billion. In a filing with the stock exchange, it said the construction, property, manufacturing & quarrying, plantations and infrastructure divisions posted lower revenue contribution.

IJM’s full-year net profit contracted 46.5% to RM349.81 million from RM653.77 million, while revenue was marginally down by 0.6% to RM6.03 billion from RM6.07 billion. Commenting on the outlook, IJM said the construction division is expected to continue to grow based on its outstanding order book of RM9.4 billion. The property market looks to be challenging as the key issues of price affordability, overhang of high-rise homes, rising cost of living and tight financing will continue to have a dampening effect. Nonetheless, the property development division will remain steadfast in its efforts to grow its business in view of the strategic locations of its properties and the brand premium that it has established. With unbilled sales of about RM2.0 billion, the division is expected to maintain a satisfactory performance in the coming financial year.

The Cement Industry

The prolonged cement price war amid overcapacity and subdued demand is weighing on cement companies in Malaysia as they fight for earnings growth this year. The gloomy outlook is further dampened by the new government’s election pledge to review mega infrastructure projects that could lead to delays or even cancellations. Hence, analysts expect cement prices to remain under pressure in the near term.

In total, 4.5 million tonnes of new clinker capacity added a further 25% capacity to the industry. On the other hand, the annual domestic cement demand growth contracted further by 8.0% in 2017 on top of a 6.0% decline in 2016, after recording positive growth of 4.0% to 5.0% per annum the year before. This has intensified price competition among cement producers as they battle for market share.

One such company facing these headwinds is Lafarge Malaysia Bhd, Malaysia’s largest cement player with a market share of almost 40%. Analysts are concerned with Lafarge Malaysia’s prospects as it is the sole cement supplier for the ECRL project, which is one of the infrastructure projects under review by the new government. Its subsidiary, Lafarge Cement Sdn Bhd, secured a RM270 million contract in March this year to supply cement to all eight packages of ECRL project until end of 2019.

Earlier this year, Lafarge Malaysia announced it swung into a net loss for the first time since 1999, after it posted four consecutive quarters of net losses. For its financial year ended Dec 31, 2017 (FY17), the group made a net loss of RM215.16 million compared to a net profit of RM76.67 million the year before. Revenue, meanwhile, fell 11.9% to RM2.25 billion, from RM2.55 billion a year ago. The group attributed the losses to lower revenue contribution from the cement segment, higher costs, and higher depreciation of property, plant, and equipment, as well as higher one-off separation cost.

Similarly, cement manufacturer Tasek Corporation Bhd expects 2018 to be as challenging as 2017. The group had in 2017 saw its profit freefall to RM1.01 million on the back of RM549.11 million in revenue, compared to the preceding year when it posted a profit RM50.33 million with revenue of RM654.79 million. The decline in profit was the result of sluggish demand for cement arising from the weaker than expected job-flows from the private sector property market and overcapacity in the cement industry,” said chairman Kwek Leng Peck in the group's 2017 annual report. The existing large-scale property and public sector infrastructure projects were insufficient to drive demand for cement during the year. The lull in the demand for cement was further exacerbated by lack of new infrastructure roll-outs and the prolonged intense price competition among the manufacturers which had affected the company’s margins. This resulted in an operating loss of RM16.9 million in the cement segment for the year.

Hume Industries Bhd also fell into the red with a net loss of RM4.44 million in its second quarter ended Dec 31, 2017, after booking higher cost of sales, operating expenses and finance costs. In contrast, it posted a net profit of RM9.2 million in the previous corresponding period. Meanwhile, quarterly revenue slid 1.7% to RM162.89 million from RM165.73 million a year ago. Cost of sales grew 13% to RM128.56 million from RM114.23 million, while operating expenses rose 4% to RM37.14 million from RM35.6 million. Finance costs jumped near three times to RM7.66 million from RM2.82 million. In its cumulative first half (1HFY18), the group made a net loss of RM3.99 million compared with a net profit of RM17.22 million in the previous corresponding period, though cumulative revenue rose 3% to RM324.67 million from RM315.63 million a year ago. The decline in earnings was mainly due to lower selling price and higher operating expenses.
Analysts expect the troubled outlook for cement players to linger in 2018 amid weak demand from residential and commercial property segment as well as the slow infrastructure construction progress exacerbated by on-going overcapacity issue. To survive this difficult period, players need to place more emphasis on cost reduction through plant modernisation and operational efficiency, focus on differentiating their product offerings and services as well as explore the export market to reduce piling inventories.

Industrialised Building System

In any developing nation, one of the key mandates of the government is to ensure an efficient supply of affordable homes for its people. It is no different in Malaysia, where affordable housing has always been a key agenda to ensure the prosperity and upward mobility of Malaysians. However, constraints exist in the form of supply and demand mismatch, affordability levels and the need to manage profit against meeting the needs of the people. To ensure a continuous supply of homes, there is a need for a method of building that is efficient, productive and does not overburden the system. In many developed countries, the Industrialised Building System (IBS) was seen as a solution to a sector that was traditionally plagued with issues of low safety standards and high physical labour. IBS also addressed issues of high wastage and low productivity.

Gamuda, an established property and infrastructure player, was aware of the issues and looked towards adopting a version of IBS that would not only meet the country’s housing needs, but also be sustainable. With this in mind, the group pursued its vision to revolutionise the sector by having Malaysia‘s first fully automated digital IBS plant in Sepang that opened in July 2016. With the first factory operating at full capacity to meet the needs of property arm Gamuda Land, a second factory costing RM350 million is being developed over a 26.7-hectare site in Banting, due for completion by year-end. Both Gamuda IBS factories will employ 500 workers who will be trained to work with the machines to produce 8,000 property units per year. According to Gamuda IBS general manager Tan Ek Khai, IBS shortens the construction period from 36 to 24 months and will only require one-third of the labour force compared with the conventional method.

Gamuda IBS believes it is well-positioned to meet the government’s aspirations to build one million affordable homes over the next 10 years. Advanced technology used at Gamuda IBS meant stringent quality standards were met as the entire production process was carried out was a controlled and closed environment with the capacity to produce floors, walls, columns and precast concrete according to clients’ specifications and requirements. According to Tan, the second factory in Banting will be able to produce a wider range of products, including bathroom pods which are fully fitted out with sanitary wares and aesthetic options such as glass fittings to suit client preferences. He added that the superior technology used at the Gamuda IBS plants also enabled them to produce various proper ties, ranging from luxury homes to public utilities such as parking enclaves, hospitals, schools, factories as well as commercial centres. To date, Gamuda IBS has completed two affordable housing projects – Rumah Selangorku (RSKU) in Jade Hill (Kajang) and in Kundang Estates (Rawang). Currently, it is building — in its Sepang plant—864 units of affordable homes for PKNS in Cyber Valley.

Country Garden Pacificview Sdn Bhd (CGPV), the developer of Forest City in Johor, is set to invest about RM2.6 billion into building an IBS factory, comprising six facilities, in the new township. The IBS factory, once completed, will be the largest of its kind in the world. CGPV executive director Datuk Md Othman Yusof said the first phase of the project would involve the construction of three facilities. The company already invested a total of RM470 million into building the first facility, which is equipped with the latest technology and modern machinery from Italy, Germany and China. The factory will produce 260,000 cubic metres of materials that will cover one million square metres of built area annually, said Othman.

By introducing well developed design and construction concepts from Singapore and by cooperating with EBAWE of Germany and Eurofins of Italy, Forest City is developing a characterised IBS production system. It is more than a pre-fabricated component production factory. Instead, it is an industry innovation hub with excellent design mode, smart factory, digital logistics and a full informative industry chain. Once completed within the next three to five years, the factory would have a total manufacturing area of 510,000 square metres, making it the largest IBS factory in the world.

In line with the government’s manifesto to build one million affordable homes within 10 years, analysts foresee the near to mid-term outlook for IBS manufacturers to be favourable. This will augur well for the Malaysian construction industry, which lags 20 years in the usage of IBS technology due to the failure of construction companies and IBS materials suppliers to reach a consensus on its wide implementation. Besides improving productivity, enhancing safety and reducing waste, the widespread adoption of IBS can help to curb foreign workers in the industry. The adoption of IBS, which is in line with the government’s Construction Industry Transformation Programme (CITP) 2016, also targets to increase productivity by over 2.5 times by 2020. As at March 2018, there were about 230 suppliers of IBS components in the country, with most suppliers only operating between 50% and 60% due to lack of demand according to Master Builders Association Malaysia president Foo Chek Lee. To enhance IBS adoption in the private sector, it has been made compulsory for all projects worth above RM50 million to achieve a minimum IBS score point of 50 via the CITP programme. It will be implemented in stages from this year before full enforcement by 2020.