7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT
(Prepared for inclusion in this Prospectus) PROTEGE ASSOCIATES SDN BHD 1m;:,) II) SUITE (-06-06, PLAZA MONT’ KIARA 2 JALAN KIARA, MONT’ KIARA 5041>0 KUAL.A LUMPUR, MALAYSIA GEN -+603 6201 9301 FAX +603 62017302 www.p rot Ii! 9 e. COllI. nl Y ————————–~———–B 11.’ N0 I f IIi I>. N(E I MAR ~ ET
2 7 MAY 2014 The Board of Directors Econpile Holdings Berhad No. 55C, Jalan 5ungai Besi, 57100 Kuala Lumpur. Dear Sirs/Madams, Executive Summary of the Construction Industry with Insights into Piling and Foundation Services in Malaysia This Executive Summary of the ‘Construction Industry with Insights into Piling and Foundation Services in Malaysia’ is prepared by Protege Associates Sdn. Bhd. CProtege Associates”) for inclusion in the prospectus of Econpile Holdings Bhd CEconpile”) to the Securities Commission Malaysia in relation to its proposed listing on the Official List of Bursa Malaysia Securities Berhad. 1.0 Malaysia Economic Overview The Malaysian economy expanded by 4.7 percent in 2013 which was in line with the growth target of 4.5 percent to 5.0 percent set by the Malaysian Government. The Malaysian economy expanded by 4.1, 4.4, 5.0 and 5.1 percent in the first, second, third and fourth quarter of 2013 respectively on the back of robust domestic demand and accommodative monetary policy. Despite the positive results revealed in most of Malaysia’s key economic indicators for 2013, the Malaysian Government is mindful of the downside risks to global growth that may affect the growth in the local economy. In the near future, the growth in the Malaysian economy is expected to be anchored again by domestic demand. Domestic demand is expected to be led by private expenditure which is projected to register an increase of 8.3 percent in 2014. Private sector consumption and investment in 2014 are projected to expand by 6.9 percent and 12.6 percent respectively. The Malaysian Government has reiterated its intention to continue focusing on accelerating the national transformation process and supporting growth while improving public finance and ensuring fiscal sustainability. I 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (CONT’DI
, ,u ” “<‘ , ,,’,’ “_ -,,:, The Malaysian Government has also allocated RM1.6 billion under Budget 2014 for development in the five regional corridors. The Malaysian economy is expected to grow by 4.5 to 5.5 percent in 2014 on the back of expected improving external environment and favourable domestic demand. The private sector is expected to drive the growth momentum in domestic demand.
2.0 An 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 bridges, dams, roads, canals, et cetera (“etc”). 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, etc.
3.0 An Introduction to the Piling and Foundation Services Market Through its core subsidiary company, Econpile is principally involved in the Malaysian construction industry as a piling and foundation services prOVider. Econpile is a piling and foundation specialist, with services ranging across various piling and foundation solutions, geotechnical works and construction of structures below ground level. Econpile has over the years built keen expertise and capabilities in bored piling services in the Malaysian market. Like the broader construction industry in Malaysia, the local piling and foundation services market has also registered positive growth from 2007 to 2011. The local piling and foundation services market is dependent on government related construction projects. Since 2007, the growth in the industry was spurred by the implementation of government related projects particularly from 9MP and Tenth MalaySia Plan ClOMP”) projects. Many projects have been implemented such as the infrastructure development in Malaysia’s regional economic corridors particularly in Iskandar Malaysia and mega projects such as the Klang Valley Mass Rail Transit (“MRT”) project was also kick-started in 2011. The piling and foundation services market is expected to continue to ride on the growth in the demand for construction moving forward. 2 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (CONT’D)
. ‘” ,.”” I I,’.'”” \ 1 Substructure works involve the construction activities done below surface level such as foundation, basement walls and subfloors. Retaining walls are also considered a component of the substructure; it is a structure built on the sites that prevent earth from failing, collapsing or moving down. Conventionally, all sUbstructure works are required to be completed prior to the construction of superstructure. Foundation is an essential component of substructure work that upholds the load of the entire building built upon it. Playing a vital role in supporting the construction process as well as ensuring the safety and sustainability of the building, it is also an important prerequisite to urban construction activity for any infrastructure, residential and commercial development. The foundation of a structure is part of the substructure (structures below ground level) that is in direct contract with the ground and which transmits the load of the structure to the ground. It can be broadly classified into shallow foundations and deep foundations (or normally referred as piled foundations). Shallow foundation is built near the surface of the earth and is ideal when the soil immediately below the footing is strong enough to carry the building’s load. In cases where the underneath soil in contact is weak, compressible and inadequate to prOVide stable support for the structure, deep/piled foundation is reqUired. Deep/piled foundation’s bearing capacity is derived from the combination of end bearing capacity and shaft friction capacity. End bearing capacity of the pile is derived from the resistance of the stratum at the base of the piles and shaft friction capacity is obtained through its resistance from the shaft friction between the embedded surface of the piles shaft and the surrounding soils. In order to support the structure above them, piles has to be embedded to a sufficient depth into the ground to a point where the total bearing capacity of the pile is able to support the load imposed by buildings or structure. Deep/piled foundations are also used to support structures built over water as well as to resist uplift loads in tall chimney or basement tanks, or lateral loads such as foundations for bridges or jetty. 3 I 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (CONT’D) l).R
Figure 1: The Piling and Foundation Services Market Piling and Foundation Services Market
Source: IMR Report
3.1 Piling (Deep Foundation) There are various methods in deep foundation work known as piling systems. Driven piling system, jack-in piling system and bored piling system are the three most commonly used piling systems in the construction industry. 3.1.1 Driven Piling System Driven piles are pre-manufactured piles installed by driving into ground by means of continuous dropping a heavy hammer on the piles to required depth or resistant. Hydraulic hammer and diesel hammer are commonly employed with the former being a more enVironmentally friendly option. Driven piles are pre-manufactured from timber, steel, reinforced concrete or composites (piles that consist of two or more pile types). Each type of driven pile has its advantages and disadvantages; therefore, having a standard or favourite pile type over another is not recommended. Factors such as design requirements, cost, soil conditions, impact on nearby structures, availability of pile materials and capabilities of local contractors should be considered during the pile selection process. The most commonly pre-manufactured piles are precast reinforced concrete square pile and pre-stressed concrete circular spun pile. Driven piles do not bulge in soft soil conditions. During installation, they retain their shape while the surrounding soils are displaced. Displacement causes the surrounding soils to compress against the driven piles resulting in an increase in its load-bearing capacity. The piles are normally driven to hard stratum. Driven pile is also classified as displacement pile 4 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (CONT’D)
where by the soil is displaced during driving and there is no extraction of soil as in bored piles. Driven piling system is considered an environmentally friendly method because it does not require removal of soils during foundation installation which also makes it cost effective as no extra expenses are incurred for site clean-up. However, due to the displacement nature, driven piling method creates noise and vibration during installation. This causes disturbances to the surrounding environment and structures. This has restricted the use of driven piles in urban area Or in area where the surrounding environment is sensitive to the disturbances. Driven piles are normally used for medium loaded structures such as medium-rise apartment, factories and bridges with normal span.
3.1.2 Jack-in Piling System Jack-in piling system is a relatively new method for foundation work; it is an innovative variant of driven piling, and is an alternative to conventionally driven piles and bored piles. The jack-in piling system uses static force (dead weights) to push and insert piles into the ground. It exerts force that attains their reaction from counter weights placed on the jack-in piling frame. Similar to driven piles system, jack-in pile is suitable for medium loaded structures. Similar to driven piles, jack-in piling system does not excavate soil materials during installation. Its biggest advantage over driven piles and bored piles is that it exerts very low noise and vibration during installation process; thus ensuring minimal disturbance and disruption to the environment during installation. On its downside, jack-in piling system requires relatively larger, flatter and stronger working area as compared to driven piling system due to the bulk of the jack-in piling machine. Also unlike bored piling system, it can only install a certain size of pile and is unable to go through harder ground layers or boulders.
3.1.3 Bored Piling System Bored piles, also known as drilled piles or cast-in-situ piles are piles formed by boring a hole into the soil and filling it with concrete, used in a bored piling system. As opposed to driVing piles into the ground by driving or jacking methods, a bored piling system engages boring( drilling activities to remove soils and is non-displacement. Bored piling machines have specially designed drilling tools, buckets and grabs that are used to remove soils and rocks. To prevent surrounding soils from collapsing into the shaft during drilling, temporary casings are placed to support the walls of the shaft. Once the excavation 5 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (CONT’D)
.,,,.,,,,, f f’ ‘,_ ,0″ C • ‘,’.,,,” , r of the shaft is completed, negligible particles or unwanted debris remaining in the shaft are cleared using airlifting system. Instead of pre-manufactured piles such as those used in driven piling systems, the piles are cast-in-sltu which means “cast on site or in position”, this process is completed by pouring concrete into the shaft. For grounds that are less cohesive, a steel reinforcement cage is inserted into the shaft to provide stability before concrete is poured in. Bored piling systems produce little vibration and lower noise level as compared to driven piling. Adjacent piles or structures are not disturbed since the principle of soil removal is applied instead of soil dispiacement. In view of piles being cast-in-situ, piles of variable lengths and size can be cast through soft compressible soils into suitable bearing material. However, bored piling is more costly and slower in construction as compared to other piling systems. Removing soil would incur additional cost to dispose waste material while taking up more time to construct cast-in-situ piles. The advantage of this method is that a large diameter size can be installed to support very large vertical and horizontal loads. Bored piles are commonly adopted in tall buildings or heavy structures such as large span bridges, jetty foundations, or in congested areas where it is required to reduce the pile group sizes. Bored piling is the most commonly used system for high rise buildings.
3.1.4 Others Examples of other piling system are micropiles and caisson piles systems.
3.2 Foundation Services Foundation services refer to the construction of shallow foundation systems, pile cap and basement slabs as well as other substructure and related works. 3.2.1 Shallow Foundation Systems As indicated before, a shallow foundation system is used when the soil immediately below is strong enough the support the structure’s load. The construction of shallow foundation is considered simple and inexpensive due to the little soil excavation. It includes spread footing foundations and mat foundations. 6 I 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (CONT’D)
a) Spread Footing Foundations Spread footing, or sometimes termed as pad footing or strip footing, is by far the most common type of shallow foundation; is made up of a reinforced concrete slab which distributes the load from the column through the contact surfaces into the ground. It can be built in different shapes and sizes to accommodate structurai needs. Spread footing is a common method used for the construction of low rise residential or commercial structures; however, it is not sufficient to bear the load of a high rise structure. b) Mat Foundations Mat foundation, also known as raft foundation, is a relatively large slab usually made of reinforced concrete covering the entire footprint of the structure.
3.2.2 Pile Cap and Basement Slab Pile cap refers to a thick concrete slab that is installed above installed piles to support the imposed load while basement slab refers to the surface of the basement floor. Deep basement of up to six floors is common in buildings located in dense area and parking space within the building is required.
3.2.3 Others Examples of other foundation services include excavation works, retaining system such as temporary sheet pile, contiguous bored piles and diaphragm wall as well as ground improvement or soil treatment works which are normally used for road and infrastructure works. 4.0 Market Segmentation Analysis The construction industry in Malaysia can generally be segmented into two distinct segments namely, real estate construction and civil engineering & special trade work as follows: 1) Real Estate Construction Real estate construction refers to the construction of structures and bUildings for residential as well as non-residential purposes. Residential properties include singlestorey terraced, 2-3 storey terraced, singie storey semi-detached, 2-3 storey semidetached, detached, town house, cluster, low cost house, low cost flat, flat, service apartment, condominium or apartment and small office or home office (“SOHO”). 7 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (CONT’D)
Meanwhile, non-residential properties include commercial, industrial, agricultural and leisure properties. 2) Civil Engineering & 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, railways, etc. Meanwhile, special trade works consists of activities such as metal works, electrical works, refrigeration and air-conditioning works, painting works, plumbing, sewerage and sanitary works, glass works, carpentry, and tiling and flooring works, etc. Figure 2: Market Dynamics Scorecard for the Construction Industry in Malaysia
2014 Supply Conditions Accommodative financing will continue to Stable encourage uptake in properties. However, market participants must be
J _______~L_w_a_ry_of_i_ts_r_e_lia_n_ce_on_fo_re_i_gn_w_o_rk_e_rs_.__”-Source: IMR Report 5.0 Historical Performance and Growth Forecast of the Construction Industry in Malaysia 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 construction industry in Malaysia has been on the growth path since a turnaround in 2007 to register a positive growth after three consecutive years of 8 [I Company Number: 1017164-M II 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (CONT’D)
“””,’ r, , \contraction. From 2007 to 2011, the construction industry registered a single digit percentage growth each year save for 2010 with 11.4 percent in expansion recorded for that year. During this period, the growth was mainly supported by the implementation of projects under the Ninth Malaysia Plan (“9MP”). The growth in the local construction industry for 2011 expanded at a slower pace of 4.7 percent as compared to the rate recorded in 2010 due to slower activities in the non-residential and civil engineering segments foilowing the completion of major highway projects. Protege Associates estimates that the construction industry in Malaysia is worth apprOXimately RM26.53 biilion in 2012 and RM29.42 billion in 2013. The construction industry is projected to grow at a CAGR of 6.0 percent for the 2013-2018 period. The historical market size (market revenue) and growth forecast of the construction industry in Malaysia is as shown in Figure 3 below. Figure 3: Historical Market Size (Market Revenue) and Growth Forecast for the Construction Industry in Malaysia, 2007-2018
CAGR (2013-2018): 6.0 percent Notes: 1) All figures are rounded; the base year is 2013; 2) Numbers may not necessanly add up due to rounding; J) At constant price 2005. Source: IMR Report The local construction industry performed well in 2012 by registering the highest growth rate since 1995 (21.1 percent). The growth in the industry was supported mainly by the civil 9 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (CONT’D)
engineering sub-sector. Besides that, the residential and non-residential sub-sectors had also contributed to the growth in the construction industry. In 2013, the construction industry in Malaysia expanded by 10.9 percent on the back of robust activities in the residential and civil engineering sub-sectors. Going forward, expansion in the local construction industry is expected to be driven by factors such as the government-led initiatives and spending, a sustained economic growth boosting spending and investment in properties, accommodative financing 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 lOMP and ETP, along with the continued execution of various public-private partnership (“PPP”) projects. The implementation of civil engineering projects in the oil and gas, utility and transport segment is expected to support growth in the construction industry. However, the pace of growth in the local construction industry is projected to slow towards the end of the 10MP as more projects under the plan are expected to be completed by then before starting to pick up again in 2016 to 2018 with the expected implementation of more new construction projects under the 11t1, Malaysia Plan (“11 MP’). 6.0 Historical Petformance and Growth Forecast of the Piling and Foundation Services Market in Malaysia The piling and foundation services market is a sub-segment operating within the construction industry. Protege Associates has provided the historical performance and growth forecast of the piling and foundation services market in Malaysia based on the primary and secondary research as well as analytical works conducted. In 2013, it accounted for an estimated 10.1 percent of the total construction industry. The performance of the piling and foundation services market highly correlates to the performance of the construction industry; piling and foundation work is a prerequisite to the erection of all bUildings, and above-ground level infrastructures. Like the broader construction industry in Malaysia, the local piling and foundation services market has also registered positive growth from 2007 to 2011. The local piling and foundation services market is dependent on government related construction projects. Since 2007, the growth in the industry was spurred by the implementation of government related projects particularly from 9MP and 10MP projects. Many projects have been implemented such as the infrastructure development in Malaysia’s regional economic corridors particularly in Iskandar Malaysia and mega projects such as the Klang Valley MRT project was also kick-started in 2011. The piling and foundation services market is expected 10 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (CONT’D)
“‘l””’!’ ,.,,, t,,., <_ < to continue to ride on the growth in the demand for construction moving forward. The double-digit growth registered in the market for 2012 was supported by the on-going implementation of mega projects such as the first Klang Valley MRT, Kuala Lumpur International Airport 2 (“KLIA2″) and the second Penang Bridge. In 2013, the market continued its double-digit growth expansion supported by further growth in the construction of infrastructure and residential properties. Figure 4: Piling and Foundation Services Market Size (Market Revenue) within the Construction Industry, 2013 Piling & Construction Industry Foundation
Services _—Mlarl<et, 10.1%
j Source: IMR Report Figure 5: Historical Market Size (Market Revenue) and Growth Forecast for the Piling and Foundation Services Market in Malaysia, 2007-2018
2011 1.56 21.9 2012 2;38 52.5 2013 2_96 24.4 11 113 I 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (CONT’D)
CAGR (2013-2018): 9.1 percent Notes: 1) All figures are rounded; the base year is 2013; 2) Numbers may not necessarily add up due to rounding; Source: IMR Report Piling and foundation ordinarily occurs at the front-end of the construction workflow. Demand for its services usually occurs at the early stage of a construction workflow. As a result, piling and foundation services market growth rate may display greater fluctuation than the broader construction industry over a 3-5 year period. A longer term growth trend is expected to continue over the forecast period, with the pace of growth in the market being expected to taper to a single digit percent in 2014 and 2015 with the expected completion of several major infrastructure projects. The growth in the market is highly dependent on government projects. The Malaysian Government has already indicated that there is a possibility that major government projects with low multiplier effect may be rescheduled which can slow construction activities including piling and foundation services if materialised. Nevertheless, projects with a high positive impact on the citizen and low import value are expected to be implemented. The Malaysian Government has already announced the implementation of projects such as the 316-kilometre West Coast Expressway from Banting to Taiping as well as the double-tracking projects from Ipoh to Padang Besar and later, from Gemas to Johor Bahru. Besides that, RMl billion has also been allocated to PRiMA Corporation Malaysia [,PRiMA”) to provide 80,000 housing units at 20 percent below market prices. The projected upcoming infrastructure projects such as the MRT 2 and MRT 3 projects as well as continuing expansion of the existing light rail transit C’LRT”) line and the on-going property development in Iskandar Malaysia are also expected to be a growth catalyst for the market during the forecast period. The pace of growth in the market is expected to pick up again in 2016, 2017 and 2018 as new construction projects under the llMP are expected to be implemented. The market is expected to register a CAGR of 9.1 percent for the 2013-2018 period. The market is estimated to be valued at RM4.58 billion in 2018. 12 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (CONT’D)
“” .~ n” ,”” I. , ., I ‘,”, C. f k j\
7.0 Competitive Landscape of the Construction Industry in Malavsia It is mandatory for all contractors whether local or foreign to register with the Construction Industry Development Board (“CIDB”) 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. In 2013, C!DB Malaysia’s record showed a total of 66,672 registered contractors. As illustrated in Figure 6, a total of 52,578 of the contractors were registered under Gl, G2 and G3 grades (approximately 79 percent) while the rest consist of contractors registered under G4-G7 grades. Figure 6: Number of Market Participants in the Malaysian Construction Industry by Grade, 2011-2013
13 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (CONT’D)
Market Participants in 2013 G7,8.0% l
Source: IMR Report There were approximately 80.2 percent or 53,483 active contractors as at end-December 2013. In 2013, 6,179 new contractors entered the construction industry signalling the continued interest by new contractors to participate in the groWing construction industry. Majority of the contractors were concentrated in certain geographic locations where there were higher demand for construction activities and services. Selangor, Sabah, Wilayah Persekutuan and Johor had the highest number of contractors registered at 10,773, 9,674, 7,263 and 6,540 respectively. G7 contractors mainly comprise established contractors who are able to compete for and undertake projects of unlimited size as they have the required financiai strengths, track record and reputation and technical expertise to implement such large scale projects. As at end-December 2013, there were 4,630 active and 270 new G7 contractors while 432 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 which they are able to leverage upon to attain new projects. Some would have 14 [I Company Number: 1017164-M I 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (CONTD)
been pre-qualified with certain of their customers, allowing them to participate in closed tenders, giving them an edge in winning the bid. 8.0 Competitive Landscape of the Piling and Foundation Services Market in Malaysia Foundation service providers are market players that provide the construction industry with foundation solutions and piling systems. The fluid and competitive nature of the construction industry has led to a certain degree of differentiation and diversification in product and service offerings and business modeis. Foundation service prOViders serving the construction industry come in various sizes; they may excei in certain areas, utilise different piling systems, provide multiple construction services, focused on serving different geographical markets or diversify into other related/non-related businesses. Foundation service prOViders are involved in the activities pertaining to foundation work. It includes reviewing projects, assessing proposed construction site, designing types of foundation for each construction project, piling activities and engineering testing. As at 17 March 2014, there were 5,893 market players registered with eIDS for piling works under the civil engineering construction category, of which 37.5 percent of the total or 2,208 market players were G7 piling contractors. Meanwhile, the number of market players registered with eIDS for piling works under the buiiding construction category totalled 944, of which 346 market players were G7 piling contractors. Generally, G7 piling contractors are established contractors who are able to compete for, and undertake piling works in projects of unlimited size as they have the reqUired financial strength, track record and reputation as well as technical expertise to implement such large scale projects. Foundation service prOViders that are specialised in the area of piling systems are specifically known as specialised piling contractors. Focusing on prOViding piling solutions to the construction industry, speCialised piling contractors are well-equipped with specialised machineries and technicians to carry out piling works. Due to the specialisation and expertise in piling systems, they are often sourced for complex and large-scale projects. However, there are foundation service providers that are not specialised in the area of foundation work and are known as general contractors. In addition to supplying foundation solutions, they also provide other construction solutions, which can be any activity within the construction workflow. With a wider range of construction service offerings, general contractors usually have a smaller scale and/or limited capacity for foundation work; for 15 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (CONT’D)
example, focusing on a single piling system or less sophisticated boring machinery that can only reach a shorter depth. Meanwhile, some contractors do not possess the actual capabilities to carry out foundation work; they outsource the work to piling contractors. Although foundation work is not the principal activity of general contractors, they are considered as foundation service providers by virtue that they are able to supply some form of foundation solutions although they normally sub-contracting the works to the piling contractors. Figure 7: Selected Local Market Players Offering Piling and Foundation Services
Pintaras Jaya Berhad • A pUblic listed company on the Main Market of Bursa Malaysia Securities (“Pintaras”) Bhd. • Principal activities consist of undertaking of piling contracts, civil engineering and building construction works and rental of plant and machinery as well as investment holding.
Econpile Holdings Bhd CEconpileU ) • Its wholly owned subsidiary, Econpile (M) Sdn Bhd was incorporated in 1987.
• Through Econpile (M) Sdn Bhd, it is involved in the provision of piling and foundation services
• Revenue for its financial year ended 31 August 2013 was RM127.4 million.
16 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (CONT’D) 11.:>· l’~ (‘I>t….. /~ge<.1 .1. ,J”’>., A ~ S n IAT1 ~
Chuan Luck Piling Sdn • Incorporated in 1988. Bhd (“Chuan Luck”) • Is a builder and a general contractor.
• Revenue for its financial year ended 31 December 2012 was RM4S.1 million.
Source: IMR Report 9.0 Estimated Econpile’s Market Share Econpile is involved as a piling and foundation service provider specialising in bored piling and substructure works. For financial year ended 30 June 2013, Econplle generated revenue of RM386.1 million, equivalent to a 13.0 percent share of the piling and foundation services market during the year, as illustrated in Figure 8. This is based on Econpile’s revenue of RM386.1 million against total estimated market size (market revenue) of the piling and foundation services market in Malaysia of RM2.96 billion in 2013. As such, Econpile is considered one of the major players in the piling and foundation services market in Malaysia. 17 Company Number: 1017164-M I 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (CONT’D)
“” r,”” , “”” ,,,’ 1 , ,.. . Figure 8: Econpile’s Share within the Piling and Foundation Services Market in Malaysia, 2013
Source: IMR Report 10.0 Demand and supply conditions Demand and supply conditions refer to market factors that can positively or negatively affect future market size (market revenue) and growth by specifically altering demand or supply dynamics. These demand and supply factors can include trends, key developments or events that spur market expansion, leading to increases in sales or revenues, or developments that negatively affect market growth. The following figure depicts the demand and supply conditions affecting the value and growth of the construction industry, and highlighting the impact on the present market situation. The piling and foundation services market is a sub-segment within the larger construction industry. As such, its performance is largely influenced by market conditions affecting the construction industry. The demand and supply conditions detailed henceforth are seen to affect the construction industry and all its sub-segments, including the piling and foundation services market. 18 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (CONT’D)
Figure 9: Demand and Supply Conditions Affecting the Construction Industry in Malaysia, 2014
Reliance on Foreign Workers Supply Source: IMR Report 11.0 Reliance on and Vulnerability 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 cement, steel bars, pre-mixed and ready-mixed materials are readily available in Malaysia. The construction industry is however 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 local labour. 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. The eIDB is aware of the issue and has accordingly taken initiatives to transform and reduce the industry’s reliance On foreign workers. 12.0 Substitute Products or Services There are nO direct substitutes to construction services as it refers to a form of services and process in the construction or assembling of buildings and/or infrastructures. The construction services are generic in nature and may be provided by any construction companies. 19 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (CONT’D)
“” ,’,”” I “””” ,_, , ‘.'”””” 13.0 Relevant Laws and Regulations Governing the Market and Peculiarities of the Market
13.1 Lembaga Pembangunan Industri Pembinaan Malaysia Act 1994 The Lembaga Pembangunan Industri Pembinaan Malaysia Act 1994 (“ACT 520”) came into force on 24th July 1994. Pursuant to ACT 520, the CIDB 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 sub-contractors, be it local or foreign, are required to register with the CIDB and comply with the provisions of the ACT 520 before undertaking or executing any construction work in Malaysia. Any person who undertakes to carry out and complete any construction works without being registered as a registered contractor with the CIDB shall be gUilty of an offence under the ACT 520. As of July 2012, amendments to ACT 520 were passed in Parliament and slated to be gazetted in September 2012. The revised Act, now known as the Lembaga Pembangunan Industri Pembinaan Malaysia (Amendment) Act 2011, or “CIDB Act 2011” was amended to upgrade ACT 520 (the “Principal Act”) in line with best international practices in the industry and in view of the liberalisation of the industry when ASEAN Free Trade Area (“AFTA”) comes into play.
13.2 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. 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”). 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 ‘Sijil 20 I 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (CONT’D)
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. The scope of registration for SPKK can be further ciassified into two categories, namely civil engineering, bUilding or mechanical and electrical with six grades for each category. Each grade has different tendering capacity. 13.3 The Construction Industry Pavment and Adjudication Act 2012 (the “CIPAA”) The CIPAA, passed in May 2012, is set to come into force in 2013. Modelled along similar mechanisms in the United Kingdom, Australia and Singapore, CIPAA is sufficiently rehashed 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 its statutory rights given to affected parties to refer a dispute to adjudication. This inevitably compels parties to diligently compiy 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, inciuding 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.
13.4 Environmental Regulations Under the Environmental Quality (Prescribed Activities) (EnVironment Impact Assessment) Order 1987, an environmental impact assessment is required for the following activities inciuding the construction of airports, land reciamation, housing development, infrastructure, ports, petroleum, etc. -subject to certain conditions -prior to project commencement. 21 [I Company Number: 1017164-M II 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (CONT’D)
13.5 Other Related Regulations Other known related regulations Includes the Occupational Safety and Health Act 1994 CAct 514″), Factories and Machinery Act, 1967 (revised 1974) [Act 139J, i.e. (the “Principal Act”) and its amending act, Factories and Machinery Act (Amendment) 2006. Act 514 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 Principal 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 this 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.
13.6 Malaysia Standards As of 31 July 2012, the Department of Standards Malaysia, under the purview of the Ministry of Science, Technology and Innovation, had issued 48 mandatory standards for the Building, Construction and Civil Engineering category under “ISC D”. For the category Mechanical Engineering specified under “ISC F”, there are 8 mandatory standards, while Fire Safety and Prevention under “ISC M” features 38 mandatory standards. These standards fall under the purview of various legal articles, for example Street Drainage Act 1976 -Uniform Building ByLaws, the Fire Services Act 1988, the Customs Act 1967 and the Timber Industry Board Act 1965. 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 SIRIM Berhad. Previously, the MS are modelled after the British Standards. At the same time, the MS adopted International Organisation for Standardisation standards, i.e. the “ISO”, American Society for Testing and Materials CASTM”), American Concrete Institute CACI”), Joint Commission International (“JCI”) accreditation standards for hospitals and joint Australia/New Zealand CAS/NZ”) standards. In March 2010, however, British Standards shifted to 22 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (CONT’D)
, ‘.”, ” I~’ , Eurocodes for structural design. Consequently, the British Standards Institution withdrew 57 related/conflicting structural codes. 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):2011 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 CmB, state governments, Department of Occupation, Health and Safety, the Fire Department and Ministry of International Trade and Industry. Furthermore, the CmB, in collaboration with other organisations such as the Public Works Department, National Housing Department, REHDA, Malaysian Institute of Architects, Master Builders Association Malaysia (“MBAM”) 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 (“QLASSIC”). cmB 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.
13.7 Build-then-sell C’BTS”) Concept to be Implemented bv 2015 In order to reduce the number of project abandonment by property developers which leaves buyers with loan to pay without shelter, the government has proposed to implement the BTS concept to be implemented by 2015. The BTS concept wili require property buyer to pay a down payment of 10 percent and their property loan will only start after the completion of the property development. This condition exposes the developers to high financial risk, because the loan will be bore by the developers defying the traditional funding by the home buyers. The expected implementation of the BTS concept come 2015 has given rise to many uncertainties with no clear directions noticeable at least until nearer to its implementation date. 23 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (CONT’Oj
14.0 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 2014 to 2018. In 2013, the construction industry in Malaysia was estimated to be worth approximately RM29.42 biliion and it is expected to grow at a CAGR of 6.0 percent for the 2013-2018 period. Protege Associates projects the size (revenue) of the construction industry in Malaysia to reach RM39.45 billion in 2018. Figure 10: Market Size (Market Revenue) and Growth Forecast for the Construction Industry in Malaysia, 2014-2018 Oi’ 45.00 :I—~-::::l[Ii 40.00 ~ 35.00 …. ‘C 30.00 8.0% ‘;’ III 0 ….1: := 25.00 10= 6.0% ~ :::E: J:I 20.00 ..c’-‘:::E: III ~ 15.00 4.0% ~ N,-,Eiii 10.00 2.0% Cl ~ 5.00 :a 0.00 0.0% :::E: 2016 2017 2018 Year -Market Size (Market Revenue) (RM billion) __Growth Rate (%)
Source: IMR Report Factors pnmmg growth within the construction industry is likely to come from the government-led initiatives and spending, a sustained economic growth boosting spending and investment in properties, accommodative financing and steady population growth. On top of the 10MP, the construction industry is also set to benefit directly from the rollout of the ETP. Under the ETP, a number of major property development projects planned within the Greater KL along with infrastructure projects would support the growth of the construction industry. The industry as a whole is expected to benefit from the mammoth Klang Valley MRT project. 24 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (CONT’D)
“‘i”” i’ Meanwhile, the Greater KL initiative targets to increase the number of people living in the city from 6 million currently to 10 million by 2020. It is estimated that an additional one million homes would have to be constructed to meet the requirements of an enlarged population base. The Greater KL plan alone is expected to require a cumulative funding of RM172 billion from 2010 to 2020, of which 34 percent is expected to come from the public sector. Among some of the specific initiatives under the Greater KL plan includes an International Financial District in KL, redevelopment of the Sungai Besi airport, township development in Sungai Buloh, establishing a world class integrated convention facilities at Jalan Duta and a Malaysia Truly Asia Centre. Major investments is expected to be made to improve and extend the connectivity of public transportations including expanding the KL LRT coverage and the implementation of a high capacity mass rapid transit system supported by a network of feeder buses and covered walkways. The on-going property development in the Iskandar Malaysia including high-rise building projects as well as major oil and gas projects such as the Refinery and Petrochemical Integrated Development r’RAPID”) project in Johor are expected to continue driving the growth in the construction industry. Urban rejuvenation efforts including the redevelopment of Kampung Baru are also expected to be undertaken. Malaysia’s standard of living has improved tremendously, and this trend is likely to be sustained moving forward as the country continues its expansion. The Malaysian Government has committed to continued Vigilance in the economy, promising continued supportive and accommodative macroeconomic policies as the economy reverts to high gear moving forward. Favourable labour market conditions leading to rising disposable income is likely to fuel improvements in domestic demand, and is likely to have a positive effect on domestic consumer confidence. Malaysia’s real GDP is expected to remain resilient and expand by between 4.5 to 5.5 percent in 2014. During good economic periods, the general population can expect better access to more job opportunities and salary growth, and this will accordingly provide them with greater propensity to purchase, upgrade or invest in properties. Hence, the construction industry will benefit from the increase in uptake of properties. Taking into consideration the various government-led initiatives, coupled with the country’s continued economic expansion and increasing consumer and business sentiment the construction industry is projected to register healthy growth throughout the forecast period. In view of the piling and foundation services market operating within the construction industry, strong performance of the construction industry will directly affect the piling and 25 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (CONTD)
foundation services market positively. The increased of construction project, both real estate and civil engineering will likely increase the demand for piling and foundation work. The piling and foundation services market was valued at an estimated RM2.96 billion in 2013 and is expected to grow at a CAGR of 9.1 percent for the 2013-2018 period. Protege Associates has prepared this report in an independent and objective manner and has taken adequate care to ensure the accuracy and oompleteness 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 oonducted to present a view of the overall industry and may not necessarily reflect the performance of individual oompanies 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 oonsidered as a reoommendation to buy or not to buy the shares of any company or oompanies. Thank you. Yours sincerely,
SEOW CHEOW SENG Managing Director Protege Associates Sdn. Bhd. 26