Industry Overview

7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT F l-{ (1T L:CE ;\ So S() CI f\ T E:’5-~; i iN B ~i f) SUITE C-t!()·O·:), !·;·Lf….?:J.\ 1\~{)N’r’ ;·~f,’\HfI, ;. .IALI-\N 1(~j4,Fi.f’i,. MONT’ ;(I,0′,Hit

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___________________________—:-i; il/’. N 0 i ,. 1 N A. NCr-I M1\ P. K lOT The Board of Directors, Advancecon Holdings Berhad No. 16 & 18, Jalan Pekaka 8/3, Seksyen 8, Kota Damansara, 47810 Petaling Jaya, Selangor, Malaysia 2 6 MAY 2017
Dear Sirs/Madams, Executive Summary of the Strategic Analysis of the Construction Industry in Malaysia with an Overview of the Earthworks and Civil Engineering Market
This Executive Summary of the ‘Strategic Analysis of the Construction Industry in Malaysia with an Overview of the Earthworks and Civil Engineering Market’ is prepared by Protege Associates Sdn. Bhd. (“Protege Associates”) for inclusion in the Prospectus of Advancecon Holdings Berhad C’Advancecon Holdings”) in relation to its listing on the Main Market of Bursa IVlalaysia Securities Berhad.
1.0 Malaysia Economic Overview The IVlalaysian economy registered a 4.2 percent growth in its real gross domestic product (“GOP”) in 2016 as compared to a 5.0 percent growth registered in 2015. The slower pace in the growth of the Malaysian economy can be attributed to an overall moderation in private sector consumption and investment growth in an environment of prolonged uncertainties particularly in the international economic, financial and political landscapes. The Malaysian economy is expected to grow by between 4.3 percent to 4.8 percent in 2017. The services sector is expected to remain the largest contributor to the economy by accounting for more than half of Malaysia’s real GOP in 2017. 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (CONTD)
2.0 Introduction to the Construction Industry Construction refers to the conversion of raw materials through the use of labour into various forms of bUildings and infrastructures. Construction is not limited to buildings alone but also includes infrastructures such as bridges, dams, roads and canals. A typical construction job is usually managed by a project manager and supervised by a construction manager, design engineer, construction engineer and/or project architect. To ensure the success of the project, the design and execution of the infrastructure must be effectively planned and should take into consideration various issues such as budget, timeline, construction site safety, the environmental impact of the job, the availability of building materials, logistics and bidding.
3.0 Market Segmentation The construction industry in Malaysia can generally be segmented into two distinct segments namely, real estate construction and civil engineering & special trade work as illustrated Figure 1. Figure 1: Construction Industry Segmentation
\,———————-_… ~ Involvement by:­Advancecon Holdings Source: Protege Associates

 

Real Estate Construction Real estate construction refers to the construction of structures and bUildings for residential as well as non-residential purposes. Other activities within the real estate construction category are the assembly and erection of prefabricated constructions on the site such as stairs, windows, walls, wall panels and floor panels as well as bUilding construction activities not elsewhere classified such as restoring of historical sites and buildings. 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (CONT’D)

 

Civil Engineering and Special Trade Work Civil engineering mainly refers to the construction of infrastructures such as roads and highways, utility structures and bUildings, and public infrastructures like bridges, stadiums, ports, dams and railways. Meanwhile, special trade works involve the construction of parts of buildings and civil engineering works without responsibility for the entire project. Special trade works consist of activities such as earthworks, metal works, electrical works, refrigeration and air-conditioning works, painting works, plumbing, sewerage and sanitary works, glass works, carpentry as well as tiling and flooring works. Advancecon Holdings is participating in the civil engineering and special trade work segment of the construction industry. 3.1 Introduction to Earthworks and Civil Engineering The earthworks and civil engineering market belongs to the broader civil engineering and special trade work segment of the construction industry in Malaysia. In a snapshot, earthworks relate to activities conducted to prepare land for development and construction while civil engineering involves engineering activities in the development of a structure. Through its core subsidiary companies, Advancecon Holdings is principally involved in the Malaysian construction industry as an earthworks and civil engineering market player. Advancecon Holdings has over the years built up expertise and capabilities in earthworks and civil engineering in the Malaysian market. 3.1.1 Earthworks Earthworks are excavations, embankments and all associated items of works such as drainage, foundations as well as stabilisation and reinforcement. Earthwork construction typically involves the excavation of parts of the earth’s surface particularly soil and rock, and the transportation of the resulting earth to another location. In addition, it may also involve the compaction of the resulting earth or piece of land into a desired shape. Earthwork construction generally involves various processes such as: • Preliminary work; This is the beginning stage where the topography of the project and the proposed erosion control plan is reviewed by the engineer and the contractor before the start of the construction to protect the project from the elements. It also needs to be ensured that the properties and facilities adjacent to the project are protected from environmental pollution that originates from the project. 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (CONTD) 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (CONTD)
•  Clearing and grubbing;  Clearing and grubbing refer to activities related to the removal of all trees, bushes, stumps and roots in all work areas. The work limits for clearing and grubbing should preferably be established so that the natural conditions outside the work areas are minimally or not affected unless otherwise designated on the plans.  •  Excavation;  Excavation is a key activity in earthwork construction involving the digging and removal of earth materials. The type of excavation involved is dependent on the type of earth materials that will be excavated. Three notable types of excavation are the topsoil excavation, the rock excavation and unclassified excavation (involving any combination of earth material types). The earth materials may also be ripped or blasted.  •  Embankment foundation work;  This work involves the creation of a base upon which the fill is constructed in accordance with the plans, standards, specifications and any special provision. The stripping of topsoil, removal of organic deposits and underwater backfill, compacting of ground surface and placement of a construction lift may be required in the preparation of the foundation. However, the construction procedures used depend on factors such as the firm or soft of the ground as well as the need for special treatment on foundation soils. Materials such as mine and municipal wastes, peats and organic soils as well as swelling and collapsible soils are considered not sUitable for embankment foundations and need to be removed, replaced or specially treated. Excessive and unsuitable materials are required to be disposed of in the areas designated on the plans.  •  Embankments;  The materials used for embankment construction are generally selected by the contractor and approved by the engineer. There are standard specifications for the soil types that are deemed acceptable for embankment construction that should be strictly adhered to for satisfactory embankments. There are also man-made materials that may be suitable for embankment construction.  •  Compaction;  The most important aspect of proper embankment construction is the compaction of a soil layer. Compaction can help to increase bearing capacity and slope stability as well as to decrease settlement and permeability. A satisfactory platform upon which to place the  4

base courses and pavement can be provided by a uniform, densely compacted embankment. The compaction equipment used depends on the type of soils encountered as certain types of compactors work better with certain types of soils than others as well as the accessibility to the area involved. Full-sized compactors can be used for compaction in large areas while highly manoeuvrable or hand-operated mechanical compactors are used for compaction in confined areas. During the compaction operations, various inspections are conducted by the field inspector. Examples of construction machinery that are typically used for earthworks include backhoes, bulldozers, dozer shovels, hydraulic excavators, landfill compactors, motor graders, skid steer loaders, soil compactors, track excavators, track loaders, vibrator asphalt compactors, vibrator soil compactors, wheeled dozers, wheeled excavators and wheeled loaders.
3.1.2 Civil Engineering Civil engineering consists of general construction for civil engineering objects that include activities such as additions and alterations, new work, repair work as well as the erection of prefabricated structures on the site and also construction of a temporary nature. It can be divided into three distinct groups namely the construction of roads and railways, the construction of utility projects and the construction of other civil engineering projects (except buildings). The construction of roads and railways includes: • Construction of airfield or airport runways;
• Construction of bridges, including those for elevated highways;
• Construction of motorways, roads, streets and other vehicular and pedestrian ways;
• Construction of railways and subways;
• Construction of tunnels;
• Surface work on bridges, highways, roads, streets or tunnels (including works such as asphalt paving of roads, road painting and other making as well as installation of crash barriers and traffic signs); and
• Construction of roads and railways not elsewhere classified.
• Construction of irrigation systems (canals);

The construction of utility projects includes: 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (CONT’D)
• Construction of power plants;
• Construction of sewer systems (including repair) and sewage disposal plants;
• Long-distance pipelines, communication and power lines;
• Reservoirs;
• Urban pipelines, urban communication and power lines as well as ancillary urban works;
• Water main and line construction; and
• Construction of utility projects not elsewhere classified. The construction of other civil engineering projects (except buildings) includes:

• Construction of dams and dykes;
• Construction of refineries;
• Construction of waterways, harbour and river works, pleasure ports (marina) and locks;
• Dredging of waterways;
• Land subdivision with land improvement, including but is not limited to adding of roads and utility infrastructure;
• Outdoor sports facilities; and
• Construction of other engineering projects not elsewhere classified.

Examples of construction machinery that are typically used for civil engineering include paVing equipment, asphalt track pavers, screeds, dump trucks, lorries, hydraulic crawler cranes and mobile cranes. 3.2 Linkage between the Construction Industry and the Property Development Industry There is a strong linkage between the property development industry and the constructionindustry. Thepropertydevelopmentindustryisa keyend-userofthe construction industry. The construction industry plays a vital role in supporting the property development industry through its construction services. As such, Protege Associates has also provided a write-up on the overview ofthe property marketin Malaysia forthepurpose ofthisreportin Section3.3.
7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (CONT’D)
3.3 Overview of the Property Market in Malaysia In 2016, the rvlalaysian property market registered a total transaction volume of 320,425, reflecting a decline in total transaction volume as compared to 364,105 in 2015. Similarly, the value of transactions also declined, registering a 3.0 percent drop from RM149.9 billion in 2015 to RM145.4 billion in 2016. In 2016, residential property continued to dominate market activity in terms of volume, accounting for 63.4 percent of total transactions, followed by agricultural (21.6 percent), commercial (7.4 percent), development land (5.9 percent) and industrial (1.8 percent). Figure 2 denotes the volume and value of property transaction by sub-sector in Malaysia for 2015 and 2016. Figure 2: Volume and Value of Property Transaction by Sub-Sector in Malaysia, 2015 and 2016 Total 362,105 Notes: 1) * Less than 0.1% 2) Figuresmay notaddupduetoround-offerror Source: National Property Information Centre (“NAPIC) 4.0 Market Dynamics Scorecard The market dynamics scorecard provides a snapshot of the overall market characteristics based on selected key market indicators and its respective measurements and trends. The market dynamics for the construction industry is shown in Figure 3. 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (CONTD)
Figure 3: Market Dynamics Scorecard for the Construction Industry in Malaysia
Sources:Department ofStatisticsMalaysia, BankNegaraMalaysia (“BNM’jandProtegeAssociates 5. 0 Historical Performance and Growth Forecast Protege Associates has provided the historical performance and growth forecast of the construction industry in Malaysia based on the primary and secondary research as well as analytical works conducted. The market size (revenue) of the Malaysian construction industry was estimated at RM50.09 billion in 2016, which was an increase of 7.4 percent over the previous year’s revenue of RM46.63 billion. In addition, the forecast CAGR for the Malaysian construction industry from 2017 to 2021 is 8.9 percent. The historical market size (revenue) and growth forecast of the construction industry in tvlalaysia are as shown in Figure 4. Figure 4: Historical Market Size (Revenue) and Growth Forecast for the Construction Industry in Malaysia, 2015-2021
2021 76.58 8.0 CAGR (2017-2021) (baseyear of2016): 8.9 percent Note: At constant price 2010 Sources:Department ofStatisticsMalaysia, BNM andProtegeAssociates 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (CONTD)
Going forward, expansion in the local construction industry is expected to be driven by factors such as the government-led initiatives and spending on the implementation of various infrastructure projects and affordable housing schemes, a sustained economic growth boosting investment in properties and steady population growth. Much of the construction industry’s growth prospects hinges upon the speed and effective implementation of the various projects identified under the Eleventh fVlalaysia Plan C11MP”) and Economic Transformation Programme C’ETP”), along with the continued execution of various public­private partnership projects. Some of the ongoing and expected future government-led mega infrastructure projects include the following: i. the Sarawak Pan-Borneo Highway; ii. the second line of the Klang Valley mass rapid transit namely the Sungai Buloh­Serdang-Putrajaya Line CMRT2”); iii. the Sungai Besi-Ulu Klang Elevated Expressway CSUKE”); iv. the Damansara-Shah Alam Elevated Expressway C’DASH”);
v. the third line of the light rail transit namely the Bandar Utama, Damansara-Johan Setia, Klang Line CLRT3″);

vi. the East Coast Rail Line CECRL”); and vii. the Kuala Lumpur-Singapore High Speed Rail CHSR”). The pace of growth in the construction industry in Malaysia is expected to grow by 8.0 percent and 8.5 percent in 2017 and 2018 respectively. Growth is expected to rise to 11.5 percent in 2019, boosted by more expected construction activities from the HSR and ECRL projects. From 2020 to 2021, the local construction industry is projected to continue expanding albeit at a moderating pace during this period. This is in line with the expected completion of some major government-led construction projects such as the LRT3 and SUKE during this period as well as more construction projects such as the MRT2 and the Sarawak Pan-Borneo Highway being at the later stage of completion with majority of the required works expected to have been completed by then. The development of these large-scale infrastructure projects is also expected to spur property development activities within the vicinity of the infrastructures and bodes well for the growth of the construction industry in 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (CONT’D)
Malaysia. The market size (revenue) of the industry is expected to reach RM76.58 billion in 2021. Figure 5: Estimated Share of the Earthworks and Civil Engineering Market in the Construction Industry in Malaysia, 2016
Note: *AII spedal trade work excluding earthworks Source: Protege Associates In Malaysia, the local earthworks and civil engineering market is largely dependent on government related construction projects, and growth in the industry was spurred by the implementation of government related projects particularly from the llMP and ErP. The earthworks and civil engineering market in Malaysia was estimated at a market size (revenue) of RM16.14 billion in 2016, which was an increase of 9.3 percent against the RM14.77 billion recorded in the previous year. Figure 6: Estimated Market Size (Revenue) and Growth Forecast for the Earthworks and Civil Engineering Market in Malaysia, 2015-2021
2019 25.78 25.4 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (CONT’D)
2021 32.82 12.8
CAGR (2017-2021) (base year of2016): 15.3 percent Notes: 1) All figures are rounded; 2) At constant price 2010; 3) Numbersmay notnecessarilyaddupduetoround-offerror. Source: Protege Associates A longer term growth trend is expected to continue over the forecast period. As the earthworks and civil engineering market in Malaysia is largely dependent on the construction industry, its outlook is encouraging in light of favourable growth seen for the construction industry with the implementation of infrastructure related projects under the l1MP. The market is likely to benefit from the implementation of large-scale infrastructure projects announced and planned for by the Malaysian government. These include: • Construction of highways and expressways such as the SUKE, the West Coast Expressway, the DASH, the Pan-Borneo Highway and the Central Spine Road.
• Expansion of the MRT and LRT with the future construction of the MRT2 from Sungai Buloh to Serdang to Putrajaya and implementation of the LRT3 project linking Bandar Utama to Klang.

These large-scale infrastructure projects are expected to be a growth catalyst for the construction industry, and by extension, the earthworks and civil engineering market in Malaysia during the forecast period. The forecast CAGR for the earthworks and civil engineering market in Malaysia from 2017 to 2021 is 15.3 percent. The size of the market is projected to reach a value of RM32.82 billion in 2020. 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (CONT’D)
5.2 Performance of the Earthworks Market in Malaysia As a major portion of Advancecon Holdings’ revenue (as depicted in Figure 7) is derived from earthworks services, Protege Associates has also provided the historical performance and growth forecast of the market size (revenue) of the earthworks market in Malaysia. Figure 7: Breakdown on Composition of Construction Contracts or Services Provided by Advancecon Holdings, 2014-2016
Source: Advancecon Holdings The market size (revenue) of the earthworks market in IVlalaysia stood at an estimated RM615.4 million in 2016, which was an increase of 3.2 percent from the RM596.5 million recorded in the previous year. The forecast CAGR for the earthworks market in Malaysia from 2017 to 2021 is 7.3 percent, with the size of the market projected to reach a value of RM875.4 million in 2021. Figure 8: Estimated Market Size (Revenue) and Growth Forecast for the Earthworks Market in Malaysia, 2015-2021
2021 875.4 6.8 CAGR (2017-2021) (base year of2016): 7.3 percent Notes: 1) All figures are rounded; 2) At constant price 2010; 3) Numbers may not necessarily add up due to round-off error.  Source: Protege Associates  12
7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (CONT’O)

6.0 Competitive Landscape of the Construction Industry The construction industry in Malaysia is regulated by the government, and it is mandatory for all contractors whether local or foreign to register with the Construction Industry Development Board CCIDB”) before they undertake to execute and complete any construction works in Malaysia. The construction industry is highly competitive and fragmented with different grades of contractors capable of bidding for varying project sizes according to their capabilities and levels of services. As at end of March 2017, there were 80,600 registered contractors in Malaysia, each categorised by a grade ranging from G1 to G7. As illustrated in Figure 9, 63,019 contractors were registered under the G1, G2 and G3 grades (78.2 percent of total) while the rest consists of contractors registered under the G4 to G7 grades (21.8 percent of total). Figure 9: Number of Market Participants in the Malaysian Construction Industry by Grade, 201S-March 2017
Total 71,799 100.0 79,883 100.0 80,600 100.0 Source: eIDS Out of a total of 80,600 registered contractors as at end of March 2017, the number of active contractors stood at 56,148, representing 69.7 percent of the total. As at end of March 2017, 11,941 new contractors entered the local construction industry -signalling the continued interest by new contractors to participate in the growing construction industry. 13 209 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (CONT’D)
The majority of the registered contractors were concentrated in certain geographic locations where there were higher demand for construction activities and services. Selangor, Sabah, Wilayah Persekutuan and Johor accounted for the highest number of contractors registered in Malaysia at 13,596, 11,151, 8,883 and 7,789 respectively as at end of March 2017. G7 contractors mainly comprise established contractors who are able to compete for and undertake projects of unlimited size as they have the required financial strengths, track record and reputation and technical expertise to implement such large-scale projects. As at end of March 2017, there were 5,756 active and 454 new G7 contractors while 705 were either semi active or dormant. G7 contractors are able to undertake and manage the entire project on their own and may work with or sub-contract certain portion/process to smaller contractors to benefit from cost and time savings. They typically have existing work relationships and track records with many customers that they are able to leverage upon to attain new projects. Some would have been pre-qualified with certain of their customers, allowing them to participate in closed tenders, giving them an edge in winning the bid. The earthworks and civil engineering market is part of the construction industry in Malaysia and it is also considered to be mature and fragmented with the presence of many market players. Among the licensed contractors that have registered with CIDB, more than 27,000 contractors have registered under the earthworks category while more than 69,000 contractors have registered under the general civil engineering works category. Figure 10 depicts the number of contractors registered with CIDB under the earthworks and general civil engineering works category by grade in fVlalaysia as at 31 December 2016.
7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (CONT’D)
Source: ClDS G1 contractors accounted for 63.3 percent and 47.9 percent of the total contractors registered with CIDB for the earthworks and general civil engineering works category respectively. G2 contractors came in at a distant second in terms of share of total contractors. G7 contractors, which are able to tender for projects of unlimited size, accounted for 9.1 percent of total contractors registered in the earthworks category and 8.7 percent of total contractors registered in the general civil engineering works category. Like in the rest of the markets within the construction industry, G7 contractors are typically considered the ‘big boys’ with the necessary financial strength and human resources to undertake large scale construction projects as compared to their counterparts. G7 contractors are generally established with a relatively long operating track record as well as technical expertise.
6.1 Market Plaver Analysis Advancecon Holdings is a registered G7 contractor. Among the categories that it has registered with CIDB include the earthworks and general civil engineering works categories. As at 31 December 2016/ the number of registered G7 contractors under the earthworks and general civil engineering works category in Malaysia stood at 2/537 and 6/116 respectively. For the purpose of this report, Protege Associates has used the following criteria when selecting other market players in Malaysia for comparison with Advancecon Holdings: • Registered as a G7 contractor for the category of CE21 (general civil engineering works) and CE36 (earthworks); and
• Registered an annual revenue of between RM100,000,000 and RM500,000,000;

The criteria are used to further narrow down the list of companies that can be selected for comparison with Advanceon Holdings. After taking into consideration the above criteria, Protege Associates has selected three companies namely, Ireka Engineering & Construction Sdn Bhd C’lreka”), Gadang Engineering (M) Sdn Bhd C’Gadang”) and ML Sepakat Sdn Bhd (“ML Sepakat”) for comparison purpose. It needs to be highlighted that the list of companies used for comparison purpose is not exhaustive and only serves as a reference for readers. 15 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (CONT’D)

 

 

 

Ireka Engineering & Construction Sdn Bhd Ireka was registered as a private limited company on 28 March 1996 with the Companies Commission of Malaysia. It is a wholly-owned subsidiary of Ireka Corporation Berhad, a public listed company on the Official List of Bursa Malaysia Securities Berhad. Ireka is involved in the provision of earthworks, civil, structural and building construction and renting of construction plant and machinery. For the financial year ended 31 March 2016, Ireka registered revenue of RM252.7 million.
Gadang Engineering (M) Sdn Bhd Gadang was registered as a private limited company on 24 June 1980 with the Companies Commission of Malaysia. It is a wholly-owned subsidiary of Gadang Holdings Berhad, a public listed company on the Official List of Bursa Malaysia Securities Berhad. Gadang is involved as a contractor for earthworks, building and civil engineering construction works. Gadang is also involved in investment holding. For the financial year ended 31 May 2016, Gadang registered revenue of RM462.2 million.
MI. Sepakat Sdn Bhd ML Sepakat was registered as a private limited company on 2 December 1994 with the Companies Commission of Malaysia. ML Sepakat is involved as a contractor for earthworks, civil engineering projects and involved in property development activities. For the financial year ended 31 December 2015, ML Sepakat registered revenue of RM155.1 million.
7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (CONT’D)
Notes: 1) Thelistofselectedmarketplayersabove isnotexhaustive 2) The above figures only provide an indication and are not considered directly comparable due to the following reasons: (a) Notallmarketplayershavethesamefinancialyearend; and
(b) Not all companies carry out adivities which are completely similar to each other or in the same geographical area

Sources: Advancecon Holdings, Companies Commission ofMalaysia and Protege Associates 6.2 Advancecon Holdings’ Market Share Analysis Advancecon Holdings is principally involved in the provision of earthworks and civil engineering in Malaysia. For the financial year ended (“FYE”) 31 December 2016, Advancecon Holdings generated revenue of RM234.7 million, equivalent to a 1.5 percent share of the earthworks and civil engineering market in Malaysia during the year. This is based on Advancecon Holdings’ revenue of RM234.7 million against total estimated market size of the earthworks and civil engineering market in Malaysia of RM16.14 billion in 2016 (as stipulated in Figure 6). Figure 12: Advancecon Holdings’ Share within the Earthworks and Civil Engineering Market in Malaysia, 2016 ,———————-_._—–_..,
—–_._—–­
7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (CONTD)

Source: Protege Associates On a closer look, Advancecon Holdings accounted for a 22.3 percent share of the earthworks market in Malaysia in 2016. This is based on Advancecon Holdings’ revenue of RM137.4 million (revenue derived from earthworks services only) against the total estimated market size of the earthworks market in Malaysia of RM615.4 million in 2016 (as stipulated in Figure 8). Figure 13: Advancecon Holdings’ Share within the Earthworks Market in Malaysia, 2016 Adva”cecon Hol~jngs* 2~:3~/Q Note: *Market share based on Advancecon Holdings’revenue generated from earthworks services only Source: Protege Associates 7.0 Demand and Supply Conditions
Higher Goods and Services Tax (“GST”)-Pushed Entry Price for Demand Negative New Properties Dampening Demand 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (CONT’D)
Lack of Traction in the Adoption of Industrialised Building Supply Negative System (“185”) Construction Source: Protege Associates 7.1 Demand Conditions Government-Led Initiatives and Spending The construction industry is expected to benefit from government-led initiatives and spending particularly those relating to the infrastructure development. A RM260 billion development allocation has been earmarked under the llMP. Of the RM260 billion development allocation, around half is for developing infrastructure -which is to be undertaken by the construction industry. The Construction Industry Transformation Programme (“CITP”) that covers the period from 2016 to 2020 which was introduced by the Malaysian Government under the llMP is also expected to drive the local construction industry forward. This programme has identified four main strategies under the llMP to transform the construction industry namely enhancing knowledge content, driVing productivity, fostering sustainable practices and increasing the internationalisation of construction firms. A Favourable Interest Rate Environment All the key stakeholders in the construction industry in Malaysia namely existing borrowers (for purchasing property), contractors and property developers generally rely heavily on financing for various purposes such as purchasing property, working capital and capital expenditure. As such, the interest rate environment in the country typically has a big impact on these stakeholders and they are likely to reap the benefits derived from any low interest rate environment given that the cost of borrowing for them will also likely to be lower as well. However, the extent of the benefits that they stand to enjoy is dependent on the type of financing that they are using or applying i.e. fixed rate loan and floating rate loan. 19 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (CONTD)
These stakeholders have been enjoying a favourable interest rate environment in fVlalaysia over the past years. The overnight policy rate [‘OPR”) in Malaysia has been relatively stable and it has only been hovering between 2.25 percent to 3.25 percent since 2010 with only four upticks of 25 basis points each recorded during the period from 2010 to the first quarter of 2017. Besides being stable, the interest rate is expected to trend downward during the forecast period. In July 2016, BNM already announced the decision to cut the OPR by 25 basis points from 3.25 percent to 3.00 percent. The interest rate environment in the banking and financial institutions in Malaysia is expected to remain stable with room for further cut in OPR during the forecast period and has continued to be closely supervised by BNIVJ. With the growing uncertainties in the world’s economy which is expected to grow at a slower pace, the central bank is expected to be more inclined towards maintaining a low interest rate environment. The Push by Property Developers to Boost Property Sales Property developers have been struggling to secure sales for the past few years since 2014 as BNM’s measures in curbing property speculation as well as cheap credit and financing schemes have led to many genuine property buyers facing difficulty in purchasing a property. This is expected to drive more promotional activities and incentives for the sales of properties by property developers in Malaysia. Promotional activities and incentives offered may vary from developer to developer but generally have two common features. The first feature involves the reqUirements for a low initial financial outlay and having a larger commitment at a later date. The second feature is premised on two assumptions, namely the credit profile of buyers/borrowers will improve in the future as well as the hope for a rebound in the property market within the next few years. These schemes are generally available for a limited time frame and/or apply to certain properties only. Sustained Economic Growth to Boost Investment in properties Malaysian consumers are generally attaining greater affluence as a result of broad economic growth seen for the country over the past half-century. In addition, the per capita income in Malaysia rose by 4.6 percent from RM36,078 in 2015 to RM37,738 in 2016. This figure is projected to reach RM39,656 in 2017. 20 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (CONT’D)
Malaysia’s real GDP expanded by 4.2 percent in 2016. It is projected to grow by between 4.3 percent to 4.8 percent in 2017. During good economic periods, the general population can expect better access to more job opportunities and salary growth, and this accordingly is expected to provide them with greater propensity to purchase, upgrade or invest in properties. Hence, the construction industry stands to benefit from the increase in uptake of properties. Steady Population Growth The Malaysian population is expected to continue growing at a steady pace. According to the Population and Housing Census, Malaysia 2010, the total population of IVlalaysia was 28.6 million in 2010. This figure is projected to grow steadily to reach 41.5 million in 2040. The demand for properties is positively correlated to the growth in population. A higher population can translate to a higher demand for housing which is one of the life’s basic necessities. A higher population can also create a bigger pool of potential demand for recreational needs offered by leisure properties such as shopping complexes and hotels. In addition, infrastructures need to be built or upgraded in order to cope with higher frequency of usage stemming from a higher population. As such, the construction industry in Malaysia can look forward to more construction activities with the expected growth in population. Stringent Policies Dampening Growth in the Property Market Amidst concerns over spiralling prices and home ownership issues, the Malaysian Government has put in place various measures and initiatives to curb speculative activities and promote responsible financing practices over the past years. Some of these measures and initiatives include the following: • Implementation of a maximum loan-to-value ratio of 70 percent for the third mortgage and above taken out by a borrower;
• Implementation of new gUidelines that require financial institutions to apply the net income calculation method instead of gross income when computing the debt service ratio for potential borrowers;
• Implementation of maximum tenure of 35 years for financing granted for the purchase of residential and non-residential properties (from 45 years);

7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (CONT’D)
• Implementation of maximum tenure of 10 years for financial extended for personal use (from 25 years) and prohibition on the offering of pre-approved personal financial products;
• Raising the real property gain tax (“RPGT”) to 30 percent for gains on properties disposed of within three years, 20 percent for four years and 15 percent for 5 years;
• Imposing 30 percent RPGT for properties disposed of by non-citizens within five years and 5 percent for disposals after five years;
• Prohibiting the Developer Interest Bearing Scheme; and
• Increasing the minimum price of property that can be purchased by foreigners from RM500,OOO to RMl million.

The implementation of these restrictive measures has dampened the growth in the property market which is one of the key catalysts for the construction industry in IVlalaysia. Any unfavourable impact to the property market can hinder the progress in the construction industry. Higher GST-Pushed Entry Price for New Properties Dampening Demand The implementation of GST since 1 April 2015 has inevitably led to higher inflationary pressure on the prices of properties in Malaysia. With the GST, there is now a 6 percent tax rate on construction input materials such as cement, bricks, steels, floor tiles, pipes, fittings, paint as well as outsourced construction works along with the related architectural, legal and professional services. Unless property developers are Willing to sacrifice their total profit margin, the higher increase in construction cost is likely to be passed to property buyers, either partially or in entirety, resulting in higher selling price for new properties launched. With the entry cost of owning new properties being pushed higher post-GST, potential buyers are in a weaker position to accommodate a revised budget for new investment. This is expected to weigh on demand for new properties. Some of them may delay or postpone their property investment plans due to the need to save more money over a longer period of time. In addition, the implementation of GST has affected consumer sentiment and this is expected to remain a concern due to possible aversion to spending on big-ticket items such as properties. 22 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (CONT’D)
7.2 Supply Conditions CIDB Providing the Necessary Leadership in Spearheading the Development of the Local Construction Industry CIDB is a name synonymous with the construction industry in Malaysia. It was established under the Lembaga Pembangunan Industri Pembinaan Malaysia Act 1994 (Act 520) (“LPIP Act”). Over the past 20 years, CIDB has been playing an active role in helping to shape the direction and spur the growth in the construction industry in Malaysia. Various reforms and innovations have been initiated under the leadership of CIDB to bring positive changes and cohesion to the industry. Moving forward, CIDB is expected to continue playing a prominent role in helping to drive the local construction industry to a successful future. CIDB has already developed the industry blueprint, CITP that outlines strategic goals and milestones to bring the local construction industry to the next level as espoused in the thrusts of 11MP covering the period from 2016 to 2020. In addition, CIDB was given more power under the recent Lembaga Pembangunan Industri Pembinaan Malaysia (Amendment) Act 2011. Active Role Taken by MBAM in Pushing for the Betterment of the Construction Industry in Malaysia The MBAtv’1 strives to become the prime mover and the recognised voice of the local construction industry. It was established in 1954. MBAtv’1 has also been actively utilising various media platforms to create awareness and promote the betterment of the local construction industry as well as to highlight industry related issues faced. It publishes three issues annually of its official journal, Master Builders Journal (“MBJ”). Besides that, all relevant and updated information are constantly disseminated to its members via its websites. Moving forward, MBAtv’1 is expected to continue playing a signiFicant role in helping to address any issues or problems faced by the local construction industry and guide the industry to a successful future. 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (CONT’D)

 

Strengthened Mechanism to Address Payment Disputes and Facilitate Adjudication The construction industry in r-Jlalaysia has been grappling with long history of lengthy payment times and contract disputes as well as non-payment issues. These have resulted in many contractors suffering from cash flow problems leading to delayed projects. However, local construction industry players have reasons to be optimistic on resolving these long­standing issues following the introduction of the Construction Industry Payment and Adjudication Act 2012 [‘CIPM”) and the establishment of specialised construction courts in Malaysia. Both developments can go a long way towards helping to alleviate the prevalent and pervasive practice of delayed, underpayment and/or non-payment for works carried out under a construction contract in Malaysia. Labour Shortage and High Dependency on Foreign Workers The construction industry in Malaysia is labour intensive. However, it has continued to grapple with labour shortage including for skilled workers. Poor participation from Malaysians has also further exacerbated the problem. Most locals shun these jobs as they view them as dangerous, dirty and difficult, and they expect higher wages. Therefore, the construction industry has been relying heavily on foreign workers. The Malaysian Government announced that foreign workers in the construction sector need to pay a levy of RM2,SOO, up from RM1,2S0, with effect from 1 February 2016. However, the levy was subsequently revised to RM1,8S0 following the outcry from employers and it came into force in Peninsular r-Jlalaysia with effect from 18 March 2016. This development will likely raise the cost of hiring foreign workers leading to higher cost of operations. In March 2016, the Malaysian Government announced the stop of recruitment of foreign workers but in May 2016, the ban was partially lifted with four sectors being allowed to hire foreign workers, including the manufacturing, construction, plantation and furniture-making industries. On a more recent note, the Malaysian Government had announced that beginning 1 January 2017, employers are required to pay for foreign worker levies instead of deducting it from the foreign workers’ wages under the Employer Mandatory Commitment. However, following an outcry from the public on increased operating cost under the new policy, the levy ruling under the Employer Mandatory Commitment was deferred to 2018. 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (CONTD)

Higher Capital Demand from Elevated Post-GST Cost of Construction Notable cost components for a contractor namely, construction input materials, outsourced construction works as well as related architectural, legal and professional services in Malaysia are subject to a 6 percent GST. In addition, local construction industry players need to invest in more manpower and related software to undertake the additional administrative works required and comply with the regulatory requirements. Hence, contractors need to commit more working capital to undertake construction activities. The amount of additional working capital required is higher as businesses start to scale up their operations. It does not help also that there is expected to be a gap in the timing of GST refund, if any, due to the processing and investigation time required by the authority. In light of this, local construction industry players may need to have additional working capital to address any issues pertaining to the resulting mismatch in the timing of cash flow. , Lack of Traction in the Adoption of IBS Construction Despite being introduced in Malaysia in the 1960s, the adoption rate of IBS construction has failed to gain significant traction due to various hurdles related to industry preparedness and cost considerations. Higher initial costs required seem to be deterring construction industry players. Construction industry players need to fork out a huge upfront deposit to IBS manufacturers which can impact their cash flow. They are likely to be less motivated to make the switch towards IBS construction given the continuing availability of foreign labour at a cheaper cost comparatively. It also does not help that existing import duty rates have rendered the costs high too for importing the reqUired heavy construction machinery. In the absence of a mass adoption by the local construction sector, it is hard for construction industry players to obtain meaningful economies of scale that can lead to economic viability. There is also a lack of standardisation of IBS in Malaysia as customised components for one project not necessarily fit into another project leading to higher costs incurred for new mould and design. Besides that, design consultants are not adequately trained or fully equipped to undertake IBS design related tasks. In addition, there is limited number of construction industry players that are ready to fully immerse themselves in an IBS-driven environment. 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (CONT’D)
8.0 Substitute Products or Services There are no direct substitutes to the activities conducted by the construction industry as it refers to a form of services and process in the construction or assembling of bUildings and/or infrastructures. The services and processes in the construction industry are generic in nature and may be provided by any construction company. There is however a considerable degree of substitutability in terms of differing business models and strategies in which market participants can select as their own. 9.0 Reliance on and Vulnerabiljty to Imports The construction industry is generally not reliant on imports of raw materials. Major raw materials typically used in the construction industry such as diesel, cement, steel bars, pre­mixed and ready-mixed materials are readily available in Malaysia. The construction industry is however, reliant on the import of construction machinery and equipment especially on the import of heavy construction machinery. The construction industry is also reliant on foreign workers in particular low-skilled foreign workers due to the labour-intensive nature of the industry. Foreign workers are employed in the construction industry due to cost reasons as well as poor participation by the local labour force. Most locals shunned these jobs as they view it as dangerous, dirty and difficult, and they expect higher wages. Therefore, the construction industry is highly reliant on foreign workers. eIDS is aware of the issue and has accordingly taken initiatives to transform and reduce the industry’s reliance on foreign workers via the adoption of ISS and creation of a local skilled construction workforce. 10.0 Relevant Laws and Regulations Governing the Industry and Peculiarities of the Industry 10.1 Regulations Lembaga Pembangunan Industri Pembinaan Malaysia Act 1994 (Act 520) The LPIP Act came into force on 1 January 1994. Pursuant to the LPIP Act, the eIDS was established as the governing body entrusted with the responsibility to provide effective leadership and coordination among construction industry players in Malaysia. All builders, contractors and subcontractors, be it local or foreign, are reqUired to register with the eIDS and comply with the provisions of the LPIP Act before undertaking or executing any construction work in IVlalaysia. Any person who undertakes to carry out and complete any construction works without being registered as a registered contractor with the eIDS shall be guilty of an offence under the LPIP Act. 26 222 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (CONT’D)
Amendments to the LPIP Act were passed in Parliament and gazetted in 2011. The revised LPIP Act, now known as the Lembaga Pembangunan Industri Pembinaan Malaysia (Amendment) Act 2011, or “CIDB Act 2011″ was amended to upgrade the LPIP Act to be in line with best international practices in the industry. Registration as Contractors The Certification of Registration issued by the CIDB is valid for a minimum period of one year and a maximum term not exceeding three years, unless cancelled, suspended or revoked earlier by the CIDB. There are three categories of registrations, namely building construction, civil engineering construction and mechanical and electrical. The scope of registration can be further classified into seven grades with each grade haVing different tendering capacity as depicted in Figure 15.
Notes: * Paid Up Capital (for Private Limited Company/ Public Company) ** Net Capital Worth (for sale proprietorship/ partnership) in the form of current account bank statement (average balance considered)/ balance from savings accountj overdraft facilities/ uncharged fixed deposit statementj Amanah Saham Bumiputera (‘:4SB’// Amanah Saham Nasional (”ASN”) shares/ Premium Saving Certificate # Group A -Degree holder in construction related fields Group B -Diploma holder in construction related fields or other degree holder with experience in construction works
Source: CIDB 27 223 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (CONTD)
The CIDB registration also applies to foreign contractors providing construction services in Malaysia. A foreign contractor is a company incorporated in Malaysia or abroad, with equity owned by foreign individuals or company of 30 percent and above. A foreign contractor must apply for a Provisional Registration Certificate before participating in any tenders in Malaysia. Companies are not allowed to participate in any tenders before obtaining a Provisional Registration Certificate from CIDB. After that, a Foreign Contractor Registration Certificate is required to undertake construction services. A Foreign Contractor Certificate is only issued to foreign contractors to carry out construction projects stated within the certificate. A foreign contractor is not permitted to carry out or undertake to carry out any construction project before obtaining a Foreign Contractor Certificate. The Malaysian Government had implemented the ‘Sistem Satu Pendaftaran Kontraktor’ (“SSPK”) with immediate effect from 15 October 2012. SSPK is a method that combines the registration procedures of CIDB and Construction Services Centre (“PKK”). The PKK, which is an agency under the Ministry of Works, is involved in granting the bumiputera status to eligible contractors. PKK also plays an active role in developing quality and competent bumiputera contractors in Malaysia. Under the new system, all the contractor licences issued by PKK in relation to participation in tenders called by the Malaysian Government authorities, statutory bodies, regulatory authorities or an entity that is otherwise regarded to be in the public sector are cancelled and replaced with ‘Siji! Perolehan Kerja Kerajaan’ (“SPKK”) issued by CIDB. Nevertheless, the issuance of ‘Sijil Taraf Bumiputera’ for the identification of bumiputera status has remained under the control and supervision of PKK. Companies that apply for bumiputera status must fulfil the conditions stated in Surat Pekeliling Perbendaharaan Bil. 4 Tahun 1995 which are: i. Majority or at minimum 51% company shareholders .are held by bumiputera whereby bumiputera individual share ownership should exceed non-bumiputera individual shares; ii. Majority or at minimum 51% of the Board of Directors are bumiputera; iii. Post of Executive Chief, Managing Director or General Manager and other key posts (key post) are held by bumiputera; iv. Majority or at minimum 51 % of employees are bumiputera; 28 224 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (CONT’D)
v. Financial operations must be managed by bumiputera; and vi. Company organisation chart and management function must show full dominance by bumiputera. The scope of registration for SPKK can be further classified into two categories, namely civil engineering, bUilding or mechanical and electrical with six grades for each category. Each grade has different tendering capacity. CIPAA Modelled along similar mechanisms in the United Kingdom, Australia and Singapore, CIPAA has been developed to take in local legal and business requirements. It aims to set a benchmark for industry players to honour cash payments, paving new ways of doing business. With the enforcement of the CIPAA, late payments -which is characteristic of the industry is expected to trickle out and cash flow issues are also expected to be resolved speedily and professionally through the adjudication process. The industry stands to gain from the implementation of the CIPAA, as one of its defining features is the statutory right given to affected parties to refer a dispute to adjudication. This inevitably compels parties to diligently comply with their respective contractual obligations. Hence, major potential disputes arising out of non-conformance to contractual obligation is automatically averted. CIPAA is applicable to most written construction contracts for both the government and private sectors irrespective whether the contracts use local or international forms of contracts. It covers all construction works carried out wholly or partly within Malaysia, including construction works entered into by the government. However, there are a few exceptions. CIPAA does not apply to construction contracts entered into by a natural person for any construction works in respect of any bUildings which is less than four storeys high and which is wholly intended for his (own) occupation. 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (CONTD)
Environmental Regulations Under the Environmental Quality (Prescribed Activities) (Environment Impact Assessment) Order 1987, an environmental impact assessment is required for the following activities including the construction of airports, land reclamation, housing development, infrastructure, ports, petroleum, etc. -subject to certain conditions -prior to project commencement. Other Related Regulations Other known related regulations include the Occupational Safety and Health Act 1994 (Act 514) [‘OSHA”) and Factories and Machinery Act 1967 (revised 1974) (Act 139) (Factories and Machineries Act (Amendment) 2006) (the “Act”). OSHA covers several pertinent issues such as the general duties of the employers and self-employed persons to ensure, so far as it is practicable, the safety, health and welfare at work of all his employees as well as persons other than employees, duty to formulate safety and health policy, as well as duties of designers, manufacturers and suppliers so far as it is practicable, that the plant is so designed and constructed as to be safe and without risks to health when properly used. Meanwhile, pursuant to the Act, provisions relating to safety, health and welfare were outlined in Part II, Section 10. The aforementioned Section was not affected by the amending act except where amendments were made pertaining to terms and definitions. Further regulations were introduced under the Act such as Factories and Machinery (Building Operations and Works of Engineering Construction) (safety) Regulations 1986, and Factories and Machinery (Safety, Health and Welfare) Regulations 1970, Factories and Machinery (Person-in-charge) (Amendment) Regulations 2014 and Factories and Machinery (Special Scheme of Inspection) (Risk-based Inspection) Regulations 2014. Malaysia Standards (UMS”) As of 31 January 2016, the Department of Standards Malaysia, under the purview of the Ministry of Science, Technology and Innovation, had issued 58 mandatory standards for the BUilding, Construction and Civil Engineering category under “ISC D”. For the category Mechanical Engineering specified under “ISC F”, there are 14 mandatory standards, while Fire Safety and Prevention under “ISC M” features 45 mandatory standards. While ISC D mainly covers code of practices and specifications for raw materials used in construction, ISC F includes safety rules for construction and installation. Some safety rules also extend to the installation of electrical equipment and wiring systems under “ISC E”, The Malaysia Standards [‘MS”) is published by SIRIfVl Berhad. 30 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (CONT’D)
The MS was initially modelled after the British Standards. Over time, other standards including standards from the International Organisation for Standardisation [‘ISO”), American Society for Testing and Materials (“ASTM”), American Concrete Institute [‘ACI”), Joint Commission International [‘JCI”) accreditation standards for hospitals as well as joint Australia/New Zealand standards were also adopted by the MS. In March 2010, following the shift of British Standards to Structural Eurocodes, the European Standards [‘EN”) was also adopted into the MS. With the arrangement of the European Committee for Standardisation (“CEN”), the structural Eurocodes will be published as “MS EN”. As such, this shift has already been implemented in Malaysia, for example, MS EN 10025: Part 1:2009 (P):201l for structural steels as well as MS EN 197-1:2007 and MS EN 197-2:2007 for specifications of cement and cement conformity evaluation respectively. As the scope of these mandatory standards is so wide, many different authorities are tasked with its enforcement. Among these include CIDB, state governments, Department of Occupation, Health and Safety, the Fire Department and Ministry of International Trade and Industry. Furthermore, the CIDB, in collaboration with other organisations such as the Public Works Department, National Housing Department, Real Estate Housing Developers’ Association Malaysia [‘REHDA”), Malaysian Institute of Architects and National House Buyers Association [‘HBA”) had issued its own construction industry standard (CIS 7:2006) on Quality Assessment System for Building Construction Work. This standard specifies requirements on quality of workmanship and assessment procedures for bUilding construction work, as part of the Quality Assessment System in Construction C’QLASSIC”). CIDB had also engaged in efforts to encourage local construction companies to attain ISO 9001 and ISO 14001 certifications to ensure the existence of a balanced environment where economic and social goals are in equilibrium. CONQUAS, QLASSIC and SHASSIC The Construction Quality Assessment System or CONQUAS is a workmanship assessment system developed by the Building and Construction Authority Singapore C’BCA”) for a quantitative measure of the overall quality of a bUilding’s workmanship. The Quality Assessment System in Construction or QLASSIC is a system or method to measure and evaluate the workmanship quality of a bUilding construction work based on Construction Industry Standard (CIS7:2006). QLASSIC enables the quality of workmanship between construction projects to be objectively compared through a scoring system. 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (CONT’D)
I, The Safety and Health Assessment System in Construction or SHASSIC conducted by the CIDS, is a new independent method to assess and evaluate the safety and health performance of a contractor in construction works/projects.
10.2 Policies In mapping the future of the construction industry, the government had formulated distinct policies and tasked certain agencies to sustain the momentum and growth of the industry. These policies are described briefly in the subsequent sub-sections. Construction Industry Transformation Programme (2016-2020) The CITP is developed by the CIDS to empower and strengthen the construction industry as espoused in the thrusts of the l1MP. The CITP, which sets important strategic goals and milestones to bring Malaysia’s construction industry to the next level, aims to transform the construction industry encompassing four strategic thrusts as listed below:
Source: ClDB Third Industrial Master Plan (“IMP3″) 2006 -2020 The IMP3 is a blueprint for greater industrial development, i.e. for the manufacturing and services sectors for the period 2006 to 2020. For the construction industry, key highlights from the HVIP3 include: (1) Measures to encourage greater growth and contribution of small and medium enterprises in terms of technical expertise as well as to form linkages with large construction companies to participate in construction projects domestically and overseas; 32 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (CONT’D)
(2) To enhance exports for construction and related engineering services (identified as one of the growth areas) -tasked to Malaysian External Trade and Development Corporation C’MATRADE”), the Professional Services Development Corporation, the National Professional Services Export Council C’NAPSEC”) and other relevant agencies;
(3) Greater Iiberalisation under the World Trade Organisation C’WTO”) agreements such as General Agreement on Trade in Services (“GATS”) (the construction services is recognised as a service sub-sector) and ASEAN Framework Agreement on Services (“AFAS”) increases competition in the domestic sphere. Hence, the government encourages consolidation of smaller construction companies to increase their tendering capacity in emerging markets such as India, China and West Asia; and
(4) Measures to shift construction providers to a cluster-based bidding strategy, encompassing related services such as architectural, engineering and financial services, to bid for larger projects (shifts to total solutions providers).

National Housing Policy (UNHP”) Launched in 2011, the NHP was designed to provide adequate, comfortable, quality and affordable housing to enhance the sustainability of the quality of life of the people. The NHP comprised of six thrusts and 20 policy statements. Investment Policies and Initiatives To encourage investments in Malaysia, the government had initiated several policies. Among the investment-friendly policies which impact the construction industry include: Incentive for IBS Companies that incur expenses on the purchase of moulds used in the production of ISS components are eligible for Accelerated Capital Allowances C’ACA”) for a period of three years. Applications should be submitted to Inland Revenue Board C’IRB”). Industrial Building Allowance (‘TBA “) An IBA is granted to companies incurring capital expenditure on the construction or purchase of a building that is used for specific purposes, including manufacturing, agriculture, mining, infrastructure facilities, research, Approved Service Projects and hotels that are registered with the IVlinistry of Tourism. Such companies are eligible 33 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (CONT’D)
1 f 1 !’l ,~ for an initial allowance of 10.0 percent and an annual allowance of 3.0 percent. As such, the expenditure can be written off in 30 years. Claims should be submitted to IRB. IBA for BUildings in MSC Malaysia To encourage the construction of more buildings in Cyberjaya for use by Multimedia Super Corridor CMSC”) Malaysia status companies, IBA for a period of 10 years will be given to owners of new bUildings occupied by MSC Malaysia status companies in Cyberjaya. Such new buildings include completed bUildings but are yet to be occupied by MSC Malaysia status companies. Claims should be submitted to IRB. International Services Commitments Ih context of a borderless world, fVlalaysia had taken part in several cross-border commitments in line with its efforts to implement open economic policies. Through various government agencies such as the Ministry of International Trade and Industry Malaysia (“MITI”) and Malaysian Investment Development Authority CfVIIDA”), the Malaysian Government had pledged progressive liberalisation of the domestic construction industry as per several international service agreements. These agreements are classified based on the Central Product Classification, i.e. (the “CPC”) and four modes of selVices trade: (a) Mode 1 ­Cross Border Trade: Supply of services by selVice producers of one country to purchasers in another country, but where there is no movement of the service supplier/ purchaser across border (e.g. Internet e-trading); (b) Mode 2 -Consumption Abroad: Supply of services in the territory of one country to the selVice consumer of another country (involves travelling, e.g. tourism and education services); (c) Mode 3 -Commercial Presence: Supply of services by a service producer of one country through the commercial presence in the territory of another country (e.g. foreign direct investments in services); and (d) Mode 4 -Movement of Natural Persons: Supply of service by a service personnel who travels to another country to prOVide the service (e.g. expatriates, business and professional services abroad and foreign workers). 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (CONT’D)
11.0 Prospects and Outlook of the Construction Industry in Malaysia The outlook for the construction industry is positive for the immediate term, and steady growth is projected throughout the forecast period from 2017 to 2021. For 2016, the market size (revenue) of the construction industry in Malaysia stood at an estimated RM50.09 billion and has a forecast CAGR of 8.9 percent from 2017 to 2021. Protege Associates projects the market size (revenue) of the construction industry in Malaysia to reach RfV176.58 billion in 2021. Figure 17: Market Size (Revenue) and Growth Forecast for the Construction Industry in Malaysia, 2017-2021
90.00 80.00 70.00 60.00 50.00 40.00 30.00 -­20.00 10.00 0.00 2017 2020 2021
Note: At constant price 2010. Source: Protege Associates Similarly, the outlook for the earthworks and civil engineering market is also positive for the immediate term and is expected to post moderate growth throughout the forecast period from 2017 to 2021. For 2016, the market size (revenue) of the earthworks and civil engineering market in Malaysia stood at an estimated RM16.14 billion and has a forecast CAGR of 15.3 percent from 2017 to 2021. Protege Associates projects the market size (revenue) of the earthworks and civil engineering market in Malaysia to reach RM32.82 billion in 2021. 3S 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (CONT’D)
Figure 18: Market Size (Revenue) and Growth Forecast for the Earthworks and Civil Engineering Market in Malaysia, 2017-2021 35 -1 -. 30
Q,l ::::I
c 25­Q,l-.>C Q,l Qe:.= 20 Q,l’­N..Q .-:E 15U’)cr::: …. “”‘” ~ 10 ~ 5~ 01—-­2017 2018 2019

Year Note: At constant price 2010. In 2016, the market size (revenue) of the earthworks market in Malaysia stood at an estimated RM615.4 million and has a forecast CAGR of 7.3 percent from 2017 to 2021. Protege Associates projects the market size (revenue) of the earthworks market in Malaysia to reach RM875.4 million in 2021.
7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (CONTD)
Figure 19: Market Size (Revenue) and Growth Forecast for the Earthworks Market in Malaysia, 2017-2021 1000 900 …….
~ 800 c ~ ……. 700
CJ c=.2 600
…….=
~’s 500 Vi:::: 400
… = ~ ……. 300
I­~ 200 100
a 2017 2018 2019 Year Note: At constant price 2010.
Factors priming growth within the construction industry is likely to come from the government-led initiatives and spending particularly that relating to the infrastructure development, a favourable interest rate environment, the push by property developers to boost the sales of properties, a sustained economic growth (albeit at a more moderate pace) boosting spending and investment in properties and steady population growth. However, stringent policies imposed on the property market by the Malaysian Government and higher GST-pushed entry price for new properties are expected to dampen demand for properties. Ih addition, a weakened property market is expected to weigh on the overall performance of the construction market in Malaysia. However, the push for more affordable housing is expected to provide impetus for the growth in the property market in Malaysia. On the supply side, the industry is expected to be boosted by efforts from industry bodies such as eIDB and MBAM by providing necessary leadership in spearheading the development of the local construction industry as well as raising profile and pushing for the betterment of the construction industry in Malaysia. In addition, the introduction of the eIPM has also served as a strengthened mechanism to address payment disputes and facilitate adjudication within the industry. On the other hand, the Malaysian construction industry is expected to be hampered by factors including labour shortage and high dependency on foreign workers, high 37 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (CONTD)
capital demand from elevated post-GST cost of production, as well as the lack of traction in the adoption of ISS construction. Protege Associates has prepared this report in an independent and objective manner and has taken adequate care to ensure the accuracy and completeness of the report. We believe that this report presents a true and fair view of the industry within the boundaries and limitations of secondary statistics, primary research and continued industry movements. Our research has been conducted to present a view of the overall industry and may not necessarily reflect the performance of individual companies in this industry. We are not responsible for the decisions and/ or actions of the readers of this report. This report should also not be considered as a recommendation to buy or not to buy the shares of any company or companies. Thank you. Yours sincerely,
SEOW CHEOW SENG Managing Director Protege Associates Sdn. Bhd.

 

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