SECTOR UPDATE
14 May 2008
Water Services
The Who’s Who & Happenings in the Water Services sector
Analyst: Edmund Tham
LATEST SECTOR NEWS
Post Malaysian general elections (held on 8th March),
there appears to be some delays in the
implementation of 9th Malaysian Plan (9MP)
projects, especially in the new “opposition” states of
Kedah, Penang, Perak and Selangor. In addition, the
current soaring crude oil and food prices have
complicated the funding aspect of the infrastructure
projects.
The Pahang-Selangor raw water transfer project
could face some hiccups after Pahang Menteri Besar
Datuk Seri Adnan Yaakob remarked that he prefers
the project to be packaged together with the repair
and maintenance contract for Pahang’s water pipes.
Meanwhile in Selangor, the new Menteri Besar Tan
Sri Abdul Khalid Ibrahim is forging ahead with his
“election promise” of no charges for the first 20
cubic metres of water per month for domestic
households (inclusive high-rise dwellers) in the state
with individual water meters beginning 1st June.
THE WHO’S WHO - KEY WATER
SERVICE INDUSTRY PLAYERS
MINISTRY OF ENERGY, WATER &
COMMUNICATIONS
The ministry's role is to administer and manage the
nation's energy, communications (infrastructure),
postal services and water functions. The role of the
ministry has shifted from being a service provider to
a policy formulator and service regulator for the
Energy, Water and Communications sectors. The
ministry's main thrust is therefore to facilitate and
regulate the growth of industries in these sectors to
ensure the availability of high quality, efficient and
safe services at a reasonable price to consumers
throughout the country. The regulatory function of
the ministry is undertaken through its regulatory
bodies, namely, the Energy Commission and the
Communications and Multimedia Commission. The
newly appointed minister is Datuk Shaziman Abu
Mansor, who replaced the retiring Datuk Seri Dr Lim
Keng Yaik.
All information, views and advice are given in good faith but without legal responsibility. Mercury Securities Sdn. Bhd. or companies or
individuals connected with it may have used research material before publication and may have positions in or may be materially interested in
any stocks in the markets mentioned. Strictly for internal circulation only.
Mercury Securities Sdn Bhd
Recommendation: Not Rated
SURUHANJAYA PERKHIDMATAN AIR
NEGARA (SPAN)
SPAN, also known as the National Water Services
Commission, was formed to drive the Malaysian
water services industry forum. It was empowered via
the SPAN Act 2006. SPAN comprises of a chairman,
a CEO and 8 other commission members, which are
appointed by the ministry to serve for 2 years. Tan
Sri Dato’ Ir Hj Zaini bin Omar is the current
chairman. The commission typically meets at least 6
times a year to discuss issues such as managing and
regulating service providers, quality of services,
water rates and consumer complaints.
KUMPULAN DARUL EHSAN (KDEB)/
KUMPULAN PERANGSANG SELANGOR
(KPS)/ KUMPULAN HARTANAH
SELANGOR (KHSB)
KDEB is the Selangor state government’s investment
arm with interests in infrastructure/utilities, property,
hospitality/recreation and ICT. KPS undertakes
KDEB’s venture in the infrastructure/utilities,
property and hospitality/recreation sectors. KDEB
has grown to be a specialist in the utilisation and
management of water resources via KPS. It has
strategic stakes (via its 60.1% stake in KPS) in
KHSB (56.5%), SPLASH (Syarikat Pengeluar Air
Selangor Holdings Bhd) (30%) for the Sungai
Selangor Phase 3 Water Supply Scheme, ABASS
(Konsortium ABASS SB) (55%) for the Sungai
Semenyih Water Supply Scheme, Jaks Resources
(10.2%) and Taliworks Corporation (19.7%).
 Mercury Securities Sdn Bhd (Page 2/8) 14 May 2008

It also holds a 30% stake in SYABAS (Syarikat Venture/Venue Description

Bekalan Air Selangor SB). KHSB actually represents Sungai Selangor Phase Water treatment works
KPS’ interests in the property segment. 1 (SSP1)
Langkawi, Kedah Water supply and
In January 2008, KDEB had been awarded the distribution system
contract to build and operate the RM3 billion Langat Gurun, Kedah Construction of water
II water treatment plant that will process the raw treatment plant under
water obtained from Pahang. We note that post Kedah Tengah Scheme
general elections, there has been some changes to the Tianjin, China 21 year concession rights
board of directors at KPS, KHSB, and JAKS as well. to operate Tianjin Panlou
Life Waste Transfer station
JAKS RESOURCES (JAKS) & related assets
Agreement with Future collaboration on
JAKS Resources is principally involved in water Shenzhen Hanyang Inv clinical waste, water
supply construction projects, such as reservoirs, Holding Co Ltd, China supply, treatment of waste
water reticulation works and pipe-laying. Established water/ solid waste
since 1987, JAKS has grown to be a fully integrated Guanghan, China 30 year concession to
service provider for the water industry. JAKS’ manage the 50MLD
operating structure consists of its construction, Guanghan San Xin Dui
manufacturing and trading divisions. Currently, the wastewater treatment plant
group is equipped with a construction arm and in-
house pipe manufacturing facilities, and is amongst
PUNCAK NIAGA HOLDINGS (PUNCAK)
the largest steel pipes manufacturers in the country
Puncak, helmed by Tan Sri Rozali Ismail has
JAKS is expected to benefit from the various new
interests in infrastructure activities specialising in
and continuing projects planned under the 9MP, in
water treatment engineering and water-related
particular – the RM3.8 billion Pahang-Selangor
activities. Puncak holds a 70% stake in SYABAS
interstate raw water transfer project and the RM5
(the other 30% is held by KDEB). It was reported in
billion Langat II water treatment plant (WTP) that
the media before that KDEB could be interested in
receives raw water from Pahang. The two projects
taking over Puncak’s stake in SYABAS.
are expected to be developed in two stages over 8
years.
Venture/Venue Description
Sungai Sireh, Kuala Operate & manage raw
TALIWORKS CORPORATION
Selangor water intake & treatment
(TALIWRK) plant
SYABAS assumes 30 year concession (from
Taliworks Corporation is principally involved in
duties of PUAS 2005) for supply &
water services, waste management and construction.
distribution of water in
In 1987, Taliworks was awarded the first water
Selangor, KL & Putrajaya
supply privatization contract in Malaysia with the
Privatization Take over, operate &
privatization of the Operations and Maintenance of
agreement (till 2020), maintain, 27 existing WTPs
the 545 MLD nominal capacity Sungai Semenyih
Selangor
Water Treatment Works in Selangor.
Construction Finance, construct, operate,
Since then, Taliworks has expanded its core business agreement (till 2020) manage and maintain a new
under SSP 2 950MLD water treatment
in the privatized water supply sector to include the
plant at Bukit Badong
operation and maintenance of the Sungai Selangor
Water Treatment Works Phase 1 (SSP 1), which Wangsa Maju Maintain & operate WTP
supplies to large parts of Selangor and Kuala Sabah Turnkey water project
Lumpur, and the water supply and distribution India Exploring opportunities
system in Langkawi, Kedah. Taliworks currently
manages a total of 6 water treatment plants with a There are some pending court cases - SYABAS vs.
combined design capacity of 1,039 MLD (million ABBAS (related to purchase of water from ABBAS),
litres per day) that serve more than 2 million people and also JAKS/KDEB vs SYABAS/PUAS
in the Klang Valley and Langkawi. (Perbadanan Urus Air Selangor Bhd) (related to
supply of water pipes by JAKS/KDEB). This is
rather puzzling, as the plaintiffs and defendants are
somewhat inter-related parties. Perhaps there should
be some out-of-court arbitration or negotiation
instead.
Sector Update
 Mercury Securities Sdn Bhd (Page 3/8)14 May 2008

GAMUDA (GAMUDA) ALIRAN IHSAN RESOURCES (AIRB)

Gamuda is mainly known as the third largest AIRB is primarily engaged in providing water
construction player by market capitalization. The services in the state of Johor. Via its subsidiary SWC
company is also involved in engineering, and associate ESB, AIRB supplies approximately
water/highway projects and property development. 70% of Johor’s water needs.
Gamuda is involved in water services by virtue of its
30% in SPLASH. Given that water services are not AIRB will be discussing with representatives from
its core business, it was speculated in the media that the federal government and Johor state on a range of
Gamuda may sell its stake in water concessionaire issues which include outstanding arrears owed by the
SPLASH to KDEB, but nothing has materialized at state and the proposed migration to the new regime
this juncture. pursuant to the enforcement of the National Water
Services Commission Act 2006 and the expected
Gamuda’s managing director Dato' Lin Yun Ling had enforcement of the Water Services Industry Act 2006
caused a furore back in February when he disposed in January 2008.
of a large chunk of his existing Gamuda shares held.
However, Dato’ Lin has since reiterated his Given that RU and AIRB are both offering water
commitment to continue in his current role as services in the state of Johor, there are views that
managing director. they could have some sort of collaboration,
partnership or even a merger in the future. Of course,
RANHILL UTILITIES (RU BHD) this would only be possible if the 2 management
boards could work together – which is unclear at this
Ranhill Utilities (RU) is Ranhill Bhd’s water services point.
arm, with Ranhill holding a 70% stake. Both Ranhill
and Ranhill Utilities are helmed by Tan Sri Hamdan Venture/Venue Description
Mohamed. It was speculated in the media during Southern Water Operate 14 WTP in Johor
December 2007 that Tan Sri Hamdan may take RU Corp SB (SWC) totaling 450.7MLD in
private, but this has not occurred. Previously, RU had capacity
provided full turnkey services to construct and Equiventures SB Operate 2 WTP totaling
commission the Semangar Water Treatment Plant, (ESB) 636MLD at
which was completed in June 2004. The 160 MLD Sg Layang & Sg Johor
plant provides water supply to the people of Johor
Bahru and Pontian. SALCON (SALCON)

Venture/Venue Description Based in Subang, Salcon is primarily involved in the

Subsidiary SAJ 30 year potable water design, construction, commissioning, operation and
Holdings SB, Johor supply concession (till maintenance of municipal potable water and
2029) – also addressing wastewater treatment facilities. The company has
water quality and NRW successfully completed projects in Malaysia, China,
Malacca RM36m NRW contract Vietnam and Thailand.
Henan, China Build & operate the 50MLD
wasterwater treatment plant Additionally, as an end-to-end water engineering
in Xin Xiang Industry Park, company, Salcon also provides expertise in the area
Henan Province of NRW works, telemetry systems as well as
Alliance with Amata Among others – a 15 year installation of SCADA (supervisory control and data
Group, Thailand concession to build, operate, acquisition) products.
transfer plants for water,
waste water, recycled water In an intriguing development, Salcon is in the midst
Yichun City, China 29 year WTP concession of buying 74.2% of Oriental Capital Assurance,
Hefei & Xiao Lan, 29 & 25 year concession for though this is really outside the ambit of its core
China wasterwater treatment plant water engineering services. The acquisition from
Vietnam, Saudi Minor projects / exploring Maika Holdings Bhd involves a cash consideration of
Arabia, Libya, opportunities RM129.8m. Assuming all goes as planned, Salcon
Singapore would be calling a mandatory general offer (MGO)
NRW (non-revenue water) is water that is treated but for the remaining Oriental shares it does not own.
lost due to causes such as leakages, theft, pipe bursts
and meter under-registration. In a sense, Salcon is unique as it derives most of its
revenues from overseas instead of locally.

All information, views and advice are given in good faith but without legal responsibility. Mercury Securities Sdn. Bhd. or companies or
individuals connected with it may have used research material before publication and may have positions in or may be materially interested in
any stocks in the markets mentioned. Strictly for internal circulation only.
 Mercury Securities Sdn Bhd (Page 4/8) 14 May 2008

The company is looking mostly at its China projects GADANG HOLDINGS (GADANG)
in order to sustain its revenue growth.
Gadang’s core businesses are in construction,
Venture/Venue Description engineering and property development. Nevertheless,
Negeri Sembilan NRW project it has other businesses in manufacturing, trading and
Sabah Sewerage system project water concessions. The company is based at Sri
Binh An, Vietnam WTP concession Damansara in Kuala Lumpur. Currently, only a small
Sri Lanka Letter of acceptance portion of its revenues are derived from its water
for a WTP concessions.
Bekasi, West Jawa Water supply concession
Indonesia proposal submitted Venture/Venue Description
Changle, China Construction of a new Nanning China MOU for waste water
100MLD WTP treatment plant
Rokan Hilir, Riau MOU for intake works, Via Asian Utilities Interests in 2 WTP
Indonesia WTP, balancing reservoir Pte Ltd, Indonesia concessions
and raw and treated water
trunk mains
Haining City, China MOU for proposal for Yan
Cang WTP Phase III works
Nan An, China Develop water intake
project
Hong Kong, India Exploring
Singapore

PBA HOLDINGS (PBA)

PBA’s operations in Penang involve the sourcing,

treatment, supply and sale of water to the public. In
1999, Perbadanan Bekalan Air Pulau Pinang SB
(PBAPP) (Penang Water Supply Corporation) was
corporatised to serve as Penang’s water supply
company. In 2001, PBAPP became a wholly-owned
subsidiary of PBA Holdings Bhd (PBA). In 2002,
PBAHB was listed on Bursa’ Main Board. The
newly-elected Chief Minister of Penang, YAB Tuan
Lim Guan Eng is now the Chairman of both PBA and
PBAPP.
GEORGE KENT (M) (GKENT)
George Kent’s core businesses are the manufacturing
and trading of water meters (and other related
products), M&E engineering projects and
investments in water infrastructures. In April 2007,
the Company entered into an agreement with the
Binzhou City Government in Shandong Province,
China, to acquire, operate and upgrade a WTP and
supply and distribute water under a 30-year
concession.
Previously securing water services projects in Kedah,
Johor/Negeri Sembilan and Papua New Guinea,
George Kent is now bidding for water supply and
infrastructure contracts for projects under the Ninth
Malaysia Plan (9MP) to boost its earnings. These
contracts involve plans to build water treatment
plants and pumping stations, and for mechanical and
electrical works for the water and waste water
industry.
Sector Update
INDUSTRY REGULATION
The Water Services Industry Act (WSIA) comes into
force on 1st January 2008 together with the Water
Services Industry Licensing regulations and the
permit rules. The Act covers all state water agencies,
water operators, water treatment companies,
sewerage services operators and agencies. While
tariffs paid by water consumers are sufficient to
cover the supply of water, it is not enough to cover
the maintenance and capital expenditure of pipes and
water treatment plants.
“Consolidation coming up?”
There is talk of consolidation of water service
operators, in order to run water assets more
efficiently and profitably. The states of Selangor and
Johor have previously privatised their water services.
In an idealistic world, there’s no harm for KDEB-
Puncak-Taliworks to work together in Selangor and
the same goes for RU-AIRB in Johor. When the
government and water operators work together, then
the consumers would benefit from continuous water
supply and better water quality at an affordable rate.
 Mercury Securities Sdn Bhd
“PAAB to take over water assets”
Pengurusan Aset Air Bhd (PAAB) was formed by the
Ministry of Finance to take over all water assets from
the operators and states (including Labuan but
excluding Sabah and Sarawak). Then the operators
and states would have to lease back from PAAB for
continued usage of the water assets, such as treatment
plants, reservoirs and distribution networks. The
burden of funding for capital expenditure and
protecting consumer interests is thus shifted to the
government. SPAN would be regulating both PAAB
and the water operators.
Under the 9MP, RM8 billion has been earmarked for
specific water projects in Malaysia. This includes
allocation for inter-state water transfers and water
projects in Sabah and Sarawak. The government
allocation for these projects comes to about RM4
billion. PAAB is currently in discussions with the
Energy, Water and Communications Ministry and the
Economic Planning Unit (EPU) to obtain the
remaining RM4 billion to undertake uncompleted
projects under the 8MP. PAAB was expected to
bridge the funding gap of about RM8 billion,
according to PAAB’s CEO Suhaimi Kamaralzaman.
PAAB would build the treatment plant in Selangor
and the government would fund the tunnel and dam
for the Pahang-Selangor inter-state water transfer.
WHICH WATER STOCKS TO WATCH?
“Eyes on Selangor and Johor water players”
Looking at the government’s push for water industry
consolidation, it would be difficult to fathom who
would end up the dominant player in Selangor and
Johor. Nevertheless, it would look easier for KDEB
to manage Selangor’s water assets solely via KPS.
KDEB could either directly buy Puncak’s water
assets or it could end up buying a major stake in
Puncak. Nevertheless, now that KDEB is no longer
controlled by the Barisan Nasional (BN) state
hierarchy, this may also complicate any negotiations.
It was also reported in the media that Puncak may
seek to raise its water tariffs or extend its concession
period in lieu of it. Meanwhile in Johor, RU Bhd and
Aliran Insan could also collaborate. Alternatively,
RU or Aliran may sell its water assets to the other
party.
“What do the charts indicate?”
Most of the water services have been off their highs
since Febuary-March. On the first market day (10th
March) right after the general elections, KPS, KHSB,
JAKS, Puncak and Gamuda experienced sell-downs.
However, we believe Gamuda’s selldown was more
All information, views and advice are given in good faith but without legal responsibility. Mercury Securities Sdn. Bhd. or companies or
individuals connected with it may have used research material before publication and may have positions in or may be materially interested in
any stocks in the markets mentioned. Strictly for internal circulation only.
(Page 5/8)14 May 2008
in line with the overall market sentiment on that day
and perhaps some concern of delays or complications
with its “Northern” KTM double tracking project
(Padang Besar-Ipoh stretch).
Reviewing technical analysis indicators such as
trading prices and volumes, MACD, Stochastics and
RSI – only RU Bhd is currently showing a strong
buy momentum. The other water service stocks are
mostly showing a neutral bias.
“Which company has good fundamentals?”
Glancing at the fundamentals and financials of water
service stocks, we would end up with Puncak and
RU Bhd as the preferred stocks. We have not chosen
Gamuda as most of its earnings is from the
construction segment. This we have concluded based
on factors such as market capitalization, earnings and
P/E ratio. As we are not forecasting the future
earnings of these water service companies, we would
refrain from providing target prices for them.
SECTOR OUTLOOK
With Malaysia’s population increasing by 1.9-2.0%
per year and GDP growth of 5.0-6.0% expected by
the government, the need and demand for water
would increase steadily. Furthermore, there would be
a strain on water resources in urban areas as a result
of unsustainable household or domestic water
consumption patterns. In the 1970s, Malaysia
consumed less than 200 liters per day (LPD) per
capita. In the 1980s, water consumption increased to
about 250 LPD to an estimate of about 300LPD
currently. A recent study indicates that average water
consumption per person in urban centers is about 500
LPD. The United Nations international standard for
water use is 200 LPD. The demand for water in the
Klang Valley rises by around 6% a year.
“Steady growth in water demand”
We hope that with the WSIA legislation in place, and
with SPAN and PAAB working together, the
consolidation of water assets and water operators
would proceed smoothly. This is to ensure that the
objectives and needs of the government, water
operators and consumers are all met.
# This sector report only incorporates water-related
projects/assets of the PLCs and some projects may not have been
mentioned
 Mercury Securities Sdn Bhd (Page 6/8) 14 May 2008

Appendices

Water sector statistics 2005 Allocation under 9MP and 8MP

Areas Revenue Expenses Pipes 9MP 8MP 8MP

Allocation Allocation Expense
(RM mil) (RM mil) (km)
(RM bil) (RM bil) (RM bil)
Johor 610 460 11,125 Water supply 8.20 4.54 3.88
Kedah 163 128 9,537 Sewerage 3.13 1.67 1.35
Kelantan 57 42 4,491 Rural water 1.21 0.73 0.73
Kuching 75 61 1,957 Flood mitigation 3.99 0.00 1.79
Labuan 10 17 449 TOTAL 16.54 6.93 7.75
Laku 53 44 1,306 Source: TheStar
Malacca 115 113 2,979
N.Sembilan 163 114 6,408
Penang 173 129 3,575
Pahang 1003 149 12,394
Perak 231 185 9,771
Perlis 12 18 1,755
Sabah 255 295 7,814
Sarawak^ 25 36 4,420
Selangor# 1417 1510 13,341
Sibu 23 23 911
Terengganu 80 81 4,745
TOTAL 3,574 3,415 96,976
^ Excluding Laku, Kuching, Sibu
# Including Kuala Lumpur, Putrajaya
Source: Malaysia Water Industry Guide 2006
(Guide 2007 not out yet)

Stock financials

Bursa S. Name Unit KPS KHSB JAKS TALIWRK PUNCAK GAMUDA RUBHD AIRB SALCON PBA GKENT GADANG
Bloomberg TK KUPS KHSB JAK CI PNH GAM RANU AIRB SALC PBAH GKEN GADG
Bursa S. Code 5843 6246 4723 8524 6807 5398 5050 8516 8567 5041 3204 9261
Mkt cap RMm 931.2 317.3 337.5 657.5 1422.6 6371.4 954.2 196.7 329.6 331.2 48.4 94.4
Mkt price RM 1.96 0.71 0.77 1.75 3.46 3.18 3.24 0.89 0.74 1.00 0.50 0.80
52wk Hi RM 3.98 1.32 1.51 2.55 5.40 5.80 3.26 1.75 1.49 1.45 0.75 1.36
52wk Lo RM 1.00 0.33 0.51 1.60 2.44 2.80 2.02 0.63 0.55 0.99 0.44 0.65
Consensus TP RM 1.07 N/A 1.00 2.31 4.33 4.11 3.45 N/A 1.44 1.10 N/A 1.24
Cons. TP upside % (45.4) N/A 29.9 32.0 25.1 29.2 6.5 N/A 94.6 10.6 N/A 55.0
1 yr avg daily vol lots 61152 50563 101965 3159 6963 90007 2842 1462 22455 1735 1734 5478
EPS (ann) RM 0.07 0.05 0.01 0.09 0.24 0.20 0.82 0.16 0.03 0.13 0.04 0.08
P/E x 26.8 15.7 77.0 19.2 14.6 15.9 4.0 5.5 24.7 7.8 12.7 9.8
BV/share (last FY) RM 1.95 1.00 1.03 0.88 3.02 1.50 3.55 1.32 0.53 1.65 0.77 1.40
P/BV x 1.01 0.71 0.75 1.99 1.15 2.12 0.91 0.67 1.40 0.60 0.64 0.57
Div/share (last FY) RM 0.03 0.00 0.00 0.07 0.10 0.17 0.00 0.00 0.00 0.05 0.00 0.02
Div yield % 1.5 0.0 0.0 4.0 2.9 5.3 0.0 0.0 0.0 5.0 0.0 2.5
Revenue (last FY) RMm 425.6 226.0 282.2 191.0 1389.8 1516.4 638.4 61.7 134.6 181.5 89.7 226.0
NPAT (last FY) RMm 32.0 21.0 12.4 33.7 97.6 185.4 206.2 31.4 (7.8) 42.6 8.8 13.8
NPAT margin % 7.5 9.3 4.4 17.6 7.0 12.2 32.3 50.9 N/A 23.5 9.8 6.1
Water rev (ann)(est) RMm 134.1 0.0 172.0 134.4 1333.1 123.0 181.5 62.8 134.6 181.5 89.7 4.8
Water/total rev (est) % 31.5 0.0 60.9 70.4 95.9 8.1 28.4 100.0 100.0 100.0 100.0 2.1
Source: Bloomberg/Bursa

Sector Update
 Mercury Securities Sdn Bhd (Page 7/8)14 May 2008

YTD stock charts

KPS (5843) RM1.96 TALIWORKS (8524) RM1.75

KHSB (6246) RM0.71 PUNCAK (6807) RM3.46

JAKS (4723) RM0.77 GAMUDA (5398) RM3.18

All information, views and advice are given in good faith but without legal responsibility. Mercury Securities Sdn. Bhd. or companies or
individuals connected with it may have used research material before publication and may have positions in or may be materially interested in
any stocks in the markets mentioned. Strictly for internal circulation only.
 Mercury Securities Sdn Bhd (Page 8/8) 14 May 2008

RUBHD (5050) RM3.24 PBA (5041) RM1.00

AIRB (8516) RM0.89 GKENT (3204) RM0.50

SALCON (8567) RM0.74 GADANG (9261) RM0.80

Sector Update