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The Malaysian Economy

The Malaysian economy grew by 4.5% in the first quarter of 2019 (4Q 2018: 4.7%), driven mainly by the expansion in domestic demand. On a quarter-on-quarter seasonally-adjusted basis, the economy grew by 1.1% (4Q 2018: 1.3%).

Domestic demand remained the key driver of growth. It expanded by 4.4% in the first quarter (4Q 2018: 5.7%), driven by firm household spending amid weaker capital expenditure. After three consecutive quarters of robust spending, private consumption growth moderated but remained strong at 7.6% (4Q 2018: 8.4%). This mainly reflected the normalisation in spending following the frontloading of purchases during the tax holiday period. Nonetheless, household spending continued to be supported by income and employment growth. Public consumption expanded at a faster pace of 6.3% during the quarter (4Q 2018: 4.0%), attributable to higher growth in spending on supplies and services.

Gross fixed capital formation (GFCF) contracted by 3.5% (4Q 2018: 0.6%), weighed down by weaker private and public sector investment. By type of assets, investment in structures declined by 1.3% (4Q 2018: 1.3%) amid subdued property market activity. Capital expenditure on machinery and equipment registered a larger contraction of 7.4% (4Q 2018: -1.3%), affected mainly by a decline in transport equipment spending. Investment in other types of assets also declined by 2.2% (4Q 2018: 4.5%) due mainly to lower research and development (R&D) spending.

Private investment growth slowed to 0.4% (4Q 2018: 5.8%). Investment activity was affected by heightened uncertainty surrounding global trade negotiations and prevailing weaknesses in the broad property segment. Nevertheless, spending on large multi-year projects provided some support to investment growth, particularly in the primary-related manufacturing and utilities services sub-sectors. Public investment declined further by 13.2% (4Q 2018: -5.9%), on account of lower capital spending by the Federal Government and public corporations.
On the supply side, moderation across most sectors was partially offset by a rebound in growth of the agriculture sector.

The services sector growth moderated as the wholesale and retail trade sub-sector registered slower growth following the post-tax holiday normalisation. However, this was partially offset by higher car sales following the release of new models. Growth in the finance and insurance sub-sector was sustained, supported by higher insurance premiums relative to claims which offset slower financing. The utilities sub-sector recorded an improvement given higher demand for electricity, particularly from households amid warmer weather conditions. The information and communication sub-sector remained supported by demand for data communication services.

Growth in the manufacturing sector moderated, mainly driven by the slowdown in the electronics and electrical (E&E) and primary-related clusters. The slower growth in the E&E cluster was due to lower global demand for semiconductors. The implementation of stricter vehicle emission standards in the European Union (EU) and expiring tax rebates for cars in China weighed on demand for automotive semiconductors. Growth in the primary-related cluster also moderated as unplanned closure of gas facilities in Sarawak in February affected the production of refined petroleum products, particularly liquefied natural gas. Meanwhile, recovery in the production of palm-oil based products led to an improvement in the consumer-related cluster during the quarter.

The agriculture sector’s growth rebounded due to the strong recovery in oil palm yields from the adverse weather last year. Additionally, natural rubber production improved as higher rubber prices spurred more tapping activities during the quarter.

Growth in the mining sector declined further as oil production was affected primarily by unplanned facility closures in Peninsular Malaysia and Sabah. Growth was also weighed by weaker natural gas production as operations were affected by unplanned closure of gas facilities in Sarawak.

The construction sector registered lower growth reflecting slower activities in the non-residential, civil engineering and special trade sub-sectors. The near completion of large petrochemical projects resulted in a lower growth for the civil engineering sub-sector. The special trade sub-sector’s growth moderated due mainly to declining early works from transportation projects transitioning to mid-phase. In the non-residential and residential sub-sectors, growth remained weak due to the oversupply of commercial properties and a high number of unsold residential properties.

The global economy is expected to expand at a more moderate pace in 2019. The temporary boost to US growth from fiscal stimulus is expected to fade, while domestic demand in the euro area is slowing. Economic activity in the Asian region is also expected to be lower, given softer external demand. Nevertheless, in China, active counter-cyclical policy will provide some support to the outlook as the government seeks to manage the external headwinds. On balance, risks to the outlook remain tilted to the downside. Policy support in China could lead to stronger-than-expected growth and spill-overs to emerging markets. However, downside risks predominate from prolonged weaknesses in the euro area, further delays and uncertainties in Brexit negotiations, as well as a potential escalation of trade disputes.

Against the backdrop of a challenging global environment, growth in the Malaysian economy is expected to remain broadly sustained for the year. Growth will be supported by continued expansion in domestic demand amid a moderate support from the external sector. Private sector spending is expected to remain the key driver of growth. Although consumer sentiments have moderated from its recent peak, household spending will be underpinned by continued income and employment growth.

Investment activity is estimated to improve, driven by ongoing capacity expansion in key sectors, with additional support from new manufacturing investments, as reflected by the high investment approvals. Nevertheless, overall growth may be partially weighed down by lower public sector spending.

Risks to growth remain tilted to the downside, arising mainly from external uncertainties such as further weakening of global growth and heightened financial market volatility. On the domestic front, unexpected interruptions in commodity production could also affect Malaysia’s growth prospects.

Value of Construction Work Done (Q1 2019)

According to Department of Statistics Malaysia (DOSM), the value of construction work done in the first quarter of the year (Q1 2019) recorded a slower growth of 0.7% year-on-year to RM37.4 billion (Q4 2018: RM36.5 billion).

The expansion in value of construction work done was driven by positive growth in the civil engineering sub-sector (9.5%) and special trades activities sub-sector (4.3%). However, the non-residential buildings and residential buildings sub-sectors declined 4.4% and 7.4%, respectively.

In terms of contributions, the civil engineering sub-sector continued to dominate the performance of value of construction work done with 43.0% share, followed by non-residential buildings (27.3%), residential buildings (24.5%) and special trades activities (5.2%).

The private sector continued to fuel construction activities with 56% share (valued at RM20.9 billion) while the public sector contributed the remaining 44% (valued at RM16.5 billion).

Construction Sector Statistics

In the latest Annual Economic Statistics 2018 report by DOSM, the construction sector recorded RM204.4 billion in value of gross output for 2017 compared to RM177.9 billion in 2015, with an annual growth rate of 7.2% per annum. The civil engineering sub-sector was the largest contributor with RM63.7 billion (31.2%) in value of gross output. The second largest contributor was the residential buildings sub-sector with RM50.5 billion (24.7%), followed by non-residential buildings sub-sector and special trades sub-sector which recorded RM48.0 billion (23.5%) and RM42.2 billion (20.6%) in value of gross output, respectively.

In line with the rapid growth in gross output, the value of intermediate input also increased by RM17.0 billion to RM131.8 billion, with an annual growth rate of 7.2%, resulting in a value added of RM72.6 billion in 2017 (against RM63.2 billion in 2015). Again, the civil engineering sub-sector recorded the highest value added in 2017 at RM22.9 billion (2015: RM17.3 billion), followed by the residential buildings sub-sector with RM17.6 billion (2015: RM16.1 billion) and non-residential buildings sub-sector with RM17.5 billion (2015: RM16.1 billion).

During this period, the number of persons engaged recorded a 1.5% growth to 1,330,266 persons compared to 1,290,474 persons in 2015. The civil engineering sub-sector registered the highest number of persons engaged with 349,765 persons or 26.3% (2015: 25.2%). The second highest was the non-residential buildings sub-sector with 337,838 persons engaged or 25.4% (2015: 25.2%), followed by the residential buildings and special trades sub-sectors which recorded 331,851 persons or 24.9% (2015: 25.5%) and 310,812 persons or 23.4% (2015: 24.0%), respectively.

Meanwhile, salaries and wages paid in 2017 amounted to RM39.2 billion compared to RM32.9 billion in 2015, translating to an annual growth of 9.1% while the value of fixed asset grew 5.4% per annum to RM27.9 billion in 2017 from RM25.1 billion in 2015.

Construction Industry Developments

Sunway Construction Group Bhd's (SunCon) net profit for the financial year ended December 31, 2018 (FY18) rose 9.4% to RM144.69 million from RM132.29 million in 2017. Revenue grew 8.7% to RM2.26 billion from RM2.08 billion previously, due to the construction segment which compensated for the reduction in revenue from the precast segment.

Its construction segment reported stronger revenue of RM2.12 billion from RM1.93 billion previously, mainly due to higher contribution from all divisions – civil, geotechnical, building and mechanical, electrical and plumbing.

Meanwhile, the precast segment reported lower revenue of RM133.7 million compared to revenue of RM144.9 million previously, due to the completion of several projects.

On prospects, SunCon had secured RM1.6 billion in new orders for the year ended 2018. For the year ending 2019, the group is targeting RM1.5 billion in new orders. SunCon said while there have been various decisions by the government to reduce cost, cancel and put on hold certain mega projects as an on-going effort for debt rationalisation, there are still pockets of opportunity in Malaysia with the Large Scale Solar 3 (LSS3) worth about RM2 billion, development of hospital by Malaysian Public Works Department (JKR) worth RM29 billion and the Subang Aerotech Park by Khazanah Nasional Bhd. Besides that, the group will be mitigating the anticipated slowdown in the local construction growth from its proposed overseas expansion in the Asean region coupled with in-house projects by its holding company, Sunway Bhd.

Kimlun Corp Bhd’s net profit for the first quarter ended March 31, 2019 (1QFY19) rose 26% to RM15.93 million, compared with RM12.65 million a year ago, on higher revenue. Revenue rose 44.2% to RM318.56 million from RM220.93 million, supported by its construction and manufacturing and trading (M&T) divisions. The improvement in construction revenue by 24.4% from RM194.05 million to RM241.34 million was mainly attributable to higher revenue contribution from the Pan Borneo Highway Sarawak project on higher percentage of completion.

Moving forward, the group’s performance is expected to be contributed by its current order book. As at March 31, 2019, the group has an estimated construction and manufacturing balance order book of about RM1.7 billion and RM300 million respectively, contributed by numerous construction and supply contracts. It said ongoing projects and sales orders comprise of contracts secured from, amongst others, Lebuhraya Borneo Utara Sdn Bhd, MMC Gamuda KVMRT (UGW) joint venture, UEM Sunrise Bhd Group, Sunway Iskandar Sdn Bhd, Hillcrest Gardens Sdn Bhd and China Railway First Group Co.Ltd. The group will continue to actively bid for new construction projects in Malaysia, specifically those in relation to affordable housing development, which continue to receive strong demand from the low- and middle-income groups.

UEM Sunrise Bhd’s net profit increased 19% to RM30.09 million in the first quarter ended March 31, 2019 (1QFY19) from RM25.29 million on account of strong revenue growth and gains from cost savings initiative. Revenue increased 45.7% to RM419.26 million from RM287.74 million in view of the recognition of ongoing local developments as well as the completion and settlement of the group’s developments in Melbourne, Australia – the majority of which is from Conservatory.

In a filing to Bursa Malaysia, UEM Sunrise said property development sales for the quarter was RM215.2 million. Total sales was 54% contributed by the Central region mainly from Symphony Hills, Residensi Astrea and Serene Heights Bangi, followed by 38% from Southern largely from the recently launched mid-market residences Aspira ParkHomes in Gerbang Nusajaya, Almas@Puteri Harbour and Denai Nusantara, while the remaining 8% was from Conservatory. To date, it has launched projects with a total gross development value of RM160.0 million.

On prospects, the group acknowledges the challenging outlook, but believes products with unique value propositions, strategic locations and attractive prices will continue to generate demand and create sales. In addition, the developer has included affordable and mid-market properties in its launches. The group will continue its smart spending initiative to attain gains from project cost-savings, general and other operational costs to preserve the group’s consolidated margins. The developer is also poised to continue with its asset divestment and land portfolio rebalancing strategy, having earmarked few non-strategic lands for divestment amounting to RM300 million.

Kerjaya Prospek Group Bhd's (KPGB) net profit for the first quarter ended March 31, 2019 (1QFY19) rose 8.4% year-on-year to RM35.12 million from RM32.35 million, on the back of higher revenue. KPGB said revenue for the quarter came in 3.5% higher year-on-year at RM264.18 million versus RM255.14 million. The increase in revenue was mainly attributed to its construction segment, which currently has a substantial orderbook comprising projects awarded by premier property developers in Malaysia. The property development segment is also expected to contribute positively to the group's earnings moving forward with the encouraging take-up rate in the group's property development project in Genting Permai.

On prospects, KPGB said that during 1QFY19, it has secured building contracts worth RM435 million. It targets to secure an orderbook of RM1.2 billion for the financial year ending December 31, 2019 (FY19). In comparison, its orderbook for the full year of FY18 stood at RM989.8 million. KPGB’s current outstanding orderbook stood at RM3.4 billion, which will give earnings visibility in the next three years.

For the nine months ended December 31, 2018, IJM Corporation Bhd's net profit fell 45.8% to RM178.10 million from RM328.79 million in the previous corresponding period. Its operating revenue fell by 7.6% to RM4.26 billion from RM4.61 billion due to lower revenue contributed by the construction, manufacturing & quarrying and plantation divisions. At pre-tax profit level, it fell by 40.3% to RM316.37 million from RM529.52 million mainly due to an increase in net unrealised forex losses of RM59.2 million compared with loss of RM8.6 million a year ago. The group also recognised a one-off loss on disposal of its remaining 30% equity interest in Swarna Tollway Private Limited amounting to RM41.4 million in the current period.

On outlook, IJM said its construction division expects a satisfactory performance based on an outstanding order book of RM8.4 billion, underpinned by the implementation of on-going domestic projects. The local property market is expected to remain challenging due to the key issues of price affordability, the overhang of high priced properties, rising costs of living and tight financing arrangements. IJM said its property development division remained 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 RM2.2 billion the division is expected to maintain a satisfactory performance in the current financial year.

Gamuda Bhd’s net profit fell 23% to RM173.14 million in the second quarter ended January 31, 2019 (2QFY19) from RM223.64 million in the previous year’s corresponding quarter, as it ceased recognition of its share of profits from Syarikat Pengeluar Air Sungai Selangor (Splash). Revenue for the quarter increased 13% to RM1.13 billion from RM998.92 million a year earlier.

Segmentally, the group saw lower construction earnings from Gamuda Engineering due to the reduction in contract value for the Mass Rapid Transit (MRT) Line 2 project. Gamuda Land also posted lower overall property earnings due to lower contribution from its new townships in Malaysia during the quarter, although this was partly offset by its two projects in Vietnam which continued to sell well, along with its GEM Residences in Singapore, which are almost fully sold and made significant contributions to its earnings.

For the first half of its financial year, net profit declined 19% to RM345.18 million from RM427.72 million in the corresponding period a year earlier, despite revenue climbing 15% to RM2.03 billion from RM1.77 billion. Going forward, the group said its performance for the year will be driven by overseas property sales in Vietnam and Singapore, the continued progress of MRT Line 2 and steady earnings contribution from the expressway division.

For its property division, the group said construction works for Anchorvale Crescent, its new project in Singapore, is expected to commence in mid-2019. The group said its overseas projects in Vietnam, Singapore and Australia now represent two thirds of its total property sales. In Malaysia, the group will be launching more landed and high-rise residential components within the next six months. For the expressway division, it said traffic volumes have been stable and resilient and that the group is currently in talks with the Government in relation to the proposed acquisition of all four tolled expressways under Gamuda.

Gamuda recently bagged a contract worth NT$3.95 billion (RM521.75 million) from Taiwan's state-owned energy company, CPC Corp, to construct a marine bridge and related works in Taiwan. The contract was awarded to both the group and a Taiwanese construction company, Dong-Pi Construction Co Ltd, and will be undertaken via an unincorporated joint venture company in which Gamuda will hold a 70% stake and Dong-Pi will have 30%. The new job involves the construction of a 1.23-km marine bridge connecting a receiving terminal to a man-made island, a 284m long road embankment and includes soil investigation, foundation, a temporary bridge and a working platform, together with environmental protection works. The contract commenced April this year and is expected to be completed by November 2022. It is expected to contribute positively to the revenue and earnings of the group for FY19.

Eco World Development Group Bhd’s (EcoWorld) net profit for the first quarter ended January 31, 2019 (1QFY19) came in three times higher at RM30.32 million, compared with the RM9.77 million it recorded a year ago, thanks to higher share of profit from its joint ventures. Revenue came in at RM491.23 million during the quarter, 5.4% lower than RM519.22 million in the previous corresponding quarter. Notably, its share of profit from joint ventures, both locally and abroad, came in at RM24.02 million, versus a share of loss of about RM3 million in the year-ago quarter.

Main projects that contributed to its revenue and profitability in 1QFY19 were Eco Majestic, Eco Forest, Eco Sanctuary and Eco Sky in the Klang Valley, Eco Botanic, Eco Spring, Eco Summer, Eco Business Park I, Eco Business Park II, Eco Tropics and Eco Business Park III in Iskandar Malaysia and Eco Meadows and Eco Terraces in Penang. Revenue recorded by the Group’s Malaysian joint ventures, namely Eco Grandeur, Eco Horizon, Eco Ardence and Bukit Bintang City Centre (BBCC), totalled RM296 million, of which the group’s effective share (unconsolidated) amounted to RM154 million. The international joint venture Eco World International Bhd (EWI) continued to record profit in 1QFY19, following the commencement of delivery of completed units at London City Island and Embassy Gardens in 4QFY18. This enabled the group to record RM6.1 million as its share of EWI’s profit in 1QFY19, as compared to a share of loss of RM2.7 million in 1QFY18.

EcoWorld and EWI are keeping to its target of achieving RM6 billion sales each or a combined of RM12 billion over the two financial years of FY19 and FY20, despite a slow start to FY19. The group is optimistic that the recently launched Home Ownership Programme with EcoWorld (HOPE) campaign together with EcoWorld Help2Own financing package will provide support for property sales.

Property Industry Outlook

The Valuation and Property Services Department (JPPH) has projected a more stable property market in 2019 as preliminary data suggests that the value and volume of transactions are on an upward trend. JPPH director Md Badrul Hisham Awang said preliminary data gathered by the National Property Information Centre (Napic) indicates a 5.1% year-on-year increase in value for the first quarter of this year (1Q19) to RM36.97 billion from RM35.17 billion in 1Q18. The volume of transactions has also risen by 6.9% over the same period. However, reasons for the uptick have not been determined. Md Badrul Hisham said the increase could be attributed to the government’s initiatives, such as the Home Ownership Campaign 2019 and stamp duty waivers for first-time homebuyers. Citing Napic’s annual report, he added that the decline in new launches that was recorded in 2018 could have also contributed to the improved figures.

The 2018 Property Market Report showed that the number of new launches in 2018 contracted by 14.9% to 66,040 units compared to 77,570 units in 2017, with Kuala Lumpur recording a major decline of 56.1%. Conversely, the state of Johor recorded an increase of 17.3% in new launches from the previous year. Construction activities tapered slightly in 2018, with completed units reduced by 0.7% to 93,547 units against 94,198 units in 2017.

The report also showed that the streak of contractions in overall transaction volume and value, which has plagued the market in recent years, has finally been snapped. Last year, the overall transaction volume rose 0.6% to 313,710 transactions while transaction value inched up 0.3% to RM140.33 billion after three consecutive years of contraction. Although the increase may be negligible, industry experts believe the property market is finally showing signs of stabilising, which may lead to a slight recovery this year. Residential property continued to support the overall property sector with a 62.9% market share, followed by agriculture property with a market share of 21.5%.

Nevertheless, the country’s residential overhang situation persisted. Last year, the glut in the residential sub-sector rose 30.6% to 32,313 units valued at RM19.86 billion, from 24,738 units worth RM15.64 billion in 2017. Among the states, the highest increase was seen in Kuala Lumpur, where overhang units almost tripled to 2,769 last year from 929 in 2017. Perak placed second with a 136% increase to 5,367 units in 2018, from 2,276 the previous year. Surprisingly, Penang managed to buck the trend, with residential overhang units declining 11% to 3,502 units from 3,916 in 2017.

The overhang situation can be eased if developers stop building the same products and offer alternative asset classes. Another strategy is to create more demand, such as the government’s Home Ownership Campaign (which ran from January to June 2019) and stamp duties exemption on residential units priced between RM300,000 and RM1 million.

The report also highlighted that house prices continued to see a steady increase. The Malaysian House Price Index in 2018 stood at 193.3 points, up by 3.1 points from 2017. House prices in Johor and Selangor were higher by 5.6% and 3.3% respectively over the course of the period. By type, the terrace house price index continued to record the highest increase.

The commercial property sub-sector recorded a significant increase in market activity last year with 23,936 transactions valued at RM29.51 billion, increasing 8.0% in volume and 16.0% in value. Selangor led market activities with 5,431 transactions (22.7%), followed by Kuala Lumpur with 4,079 transactions (17%), Johor (3,504: 14.6%) and Penang (1,304: 5.4%).

Shop sub-sector transactions dominated 54% of commercial property transactions and 36.4% of the total value, recording a positive movement of 5.0% in volume and 11.5% in value compared with 2017 (12,310 transactions worth RM9.63 billion). However, the shop overhang situation recorded an increase of 11.2% to 5,055 units valued at RM4.08 billion. On the outlook for this sub-sector, Knight Frank Malaysia in its 2019 Malaysia Commercial Real Estate Investment Sentiment Survey says that favourable factors affecting commercial real estate investment sentiment are strong influx of foreign direct investments in the manufacturing sector and the rapid adoption of Industry 4.0.

Separately, 29 office buildings were transacted in 2018, valued at RM1.19 billion. Kuala Lumpur recorded eight transactions and Selangor recorded seven. Other transactions include five in Sabah, four in Penang and one each in Johor, Perak, Sarawak, Labuan and Putrajaya. Knight Frank Malaysia says developers will be building less office, retail and hotel properties in 2019. While pockets of opportunities may still be present in selected office sub-markets, the overall outlook is gloomy in 2019 with the majority of respondents expecting occupancy and rental rates to fall. There is no immediate catalyst to address the growing mismatch in supply and demand.

The retail sub-sector saw a decrease in average occupancy rate to 79.3% from 81.3% in 2017, due to negative take-up in several states, especially Selangor and Pahang. Malaysian Association for Shopping and High-Rise Complex Management past president Richard Chan says the decline was due to the entrance of new malls that had been under-performing, causing the sub-sector to be weighed down. Analysts expect the retail local retail sector to remain stable in the second quarter of 2019, underpinned by the festive seasons which will spur spending.