Vivocom eyes East Coast Railway project


Following on from recent developments that would see the Hong Kong listed main board company CNQC International Holdings Limited (CNQC Intl) emerging as its single largest shareholder, Vivocom Intl Holdings Berhad (Vivocom) has made another breakthrough with the signing of a Heads of Agreement (HOA) with MACfeam Sdn Bhd (MSB) for the “Project East Coast Railway Lines” (ECRL).

In an announcement to Bursa Malaysia, Vivocom said that its subsidiary company, Vivocom Enterprise Sdn Bhd (VESB) and MSB are forming a consortium with the purpose of jointly submitting an application for prequalification, tendering for, obtaining the award and performing the contract in relation to the states of Terengganu and Pahang that has been called by the China Communications Construction Company Ltd and China Communications Construction Company (M) Sdn. Bhd.

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The partnership between VESB and MSB constitutes 60% and 40%, respectively

Project cost and financial benefits derived from the Proposed Collaboration cannot be ascertained at this point of time. Barring unforeseen circumstances, the Proposed Collaboration is expected to contribute positively to the future earnings of Vivocom.

The ratio of amount of investment in the proposed consortium is not ascertained at this juncture. The company will make further announcement once the quantum is confirmed and will seek shareholders approval if necessary.

The ECRL, meanwhile, is expected to measure more than 51% of the total area of Peninsular Malaysia. ECER covers the states of Kelantan, Terengganu and Pahang, as well as the district of Mersing in Johor. The electrified railway line which would eventually connect the east and west coasts of Peninsular Malaysia would boast a 688km line from Pengkalan Kubor in Kelantan to Port Klang in Selangor.

The ECRL project cost is estimated at RM55 billion. The rail link will be built by China Communications Construction Company. 85% of the project cost will be funded by China Exim Bank while the remaining 15% to be funded through sukuk or Islamic bonds from Malaysian investment banks. The project is targeted to complete by year 2024.

The 668km line would promote the development of industrial areas and the growing trend of Transit Oriented Development (TOD) that would nurture compact residential districts and commercial centres along the rail stations, hence benefiting the major towns designated as main stations for the project.

The ECRL would link the key economic industrial areas with the ECER such as the Malaysia-China Kuantan Industrial Park (MCKIP) and Gambang Halal Park in Pahang, Kertih Biopolymer Park (Terengganu) and Tok Bali Integrated Fisheries Park (Kelantan).

The government has forecasted the gross domestic product (GDP) for the three east coast states to grow by 1.5% at the current rate with the implementation of this project.

MSB is wholly owned by Pegasus Diversified Berhad, and provides services to engineering, construction fields, manufacturing, together with fabrication and supply especially in the oil and gas industries, both on on-shore, off-shore and power generation development. The company has broad experiences in bending, welding, heat treatment, non-destructive testing of various types of steels used in the markets.

Over the last decade, MSB has been accredited by PETRONAS for major onshore fabrication and construction works. In addition, it has also received various accreditations from a number of reputable bodies such as American Petroleum Institute (API), Moody International Certification Ltd, The American Society of Mechanical Engineers (ASME), The National Board and also Construction Industry Development Board (CIDB).

Vivocom “tapping directly into the OBOR network”

Just last Friday (13 October 2017), Vivocom said that its current two largest shareholders are embarking on a corporate exercise to pave for the emergence of CNQC as its single largest shareholder eventually with a 29.15% equity interest.

CNQC is part of a global construction powerhouse, the Qingjian Group which had been accredited as one of China’s Top 500 Enterprises and ENR Top 250 International Contractors.

The Qingjian Group is one of the first batch of premium quality construction enterprises of the Ministry of Construction in China; and is continuously accredited as one of China’s Top 500 Enterprises and ENR Top 250 International Contractors and has won awards including the highest honour in China’s construction industry of engineering quality – the “LUBAN AWARD”.

According to the Engineering News-Record annual Top Lists, the Qingjian Group’s ranking was at 77th and 64th on the ENR TOP 250 International Contractors in 2016 and 2017, respectively, and is regarded within China’s construction industry as one of its best private companies to have successfully ventured abroad.

CNQC, meanwhile, is currently listed on the Main Board of the Stock Exchange of Hong Kong Limited, with a market capitalisation of approximately HK$4.02 billion (equivalent to approximately RM2.18 billion) as at early October 2017. As at 31 August 2017, the total issued share capital of CNQC Intl is HK$14.29 million comprising 1.43 billion ordinary shares of HK$0.01 each. For the financial year ended 31 December 2016, CNQC Intl registered a net profit after tax of HK$669.1 million (equivalent to approximately RM363.1 million) on the back of a turnover of HK$8.61 billion (equivalent to approximately RM4.7 billion).

CNQC has built a solid reputation for being a respected and proven property developer and contractor primarily engaged in the development and sale of condominiums in the Outside Central Region of Singapore, with 3 subsidiaries entitled with the highest classification of “A1” grading registration under the Singapore Building and Construction Authority (BCA).

In 2012 CNQC Intl was ranked number 1 “in terms of the number of property sales in Singapore among foreign property development enterprises”.

To date, the total sales of property projects by CNQC Intl in Singapore amounted to approximately HK$50 billion. The Company was also accredited as one of the “Singapore Top 10 Developers” by BCI Asia, and awarded multiple honours for its quality property developments and construction projects.

In a research note earlier this week, MIDF Research described this development as Vivocom “tapping directly into the OBOR network”. OBOR is China’s vision of creating a “One Belt, One Road” vision for the region.

MIDF viewed CNQC’s subsequent emergence into Vivocom “as a positive influence on Vivocom to expand its capacity and capabilities.”

“CNQC is expected to compliment Vivocom’s construction team in areas such as sub-structure, water infrastructure construction, real estate financing and residential development. All in, with the crosspollination of expertise, we estimate that construction margin will improve by +1.2% in FYE18/FYE19 due to the slated expansion of the project team to undertake higher volume of construction activities,” said MIDF Research.

“Furthermore, CNQC’s track record will strengthen Vivocom’s expertise to bid for higher-scaled project such as the East Coast Railway Link,” it emphasised.

“Altogether, we maintain our BUY call with an adjusted target price of RM0.395 per share based on discounted cash flow (DCF) with WACC of 7.4%,” it further said. Vivocom closed at 14.5 sen last Tuesday (17 October 2017) – giving potential upside of 25 sen, approximately 172% profit of its existing share price.