Progress With Thilawa SEZ Fuels Positive Construction Outlook

BMI View: The strong interest from foreign investors towards Myanmar's first special economic zone in Thilawa suggests that a significant increase in construction activity is set to take place. As such, there is upside to our outlook of Myanmar's construction sector, however it is significantly dependent on the success of such SEZs.

On June 16 2014, Eleven Weekly Media reported that 45 companies from 11 countries had submitted proposals to invest in the Thilawa Special Economic Zone (SEZ), the first SEZ being developed under a public-private partnership framework in Myanmar. Most of the companies are from Japan and Hong Kong, but the first company to sign a lease contract to build a factory in the SEZ is US-based beverage cans manufacturer Ball Corporation. At present, the Thilawa SEZ, a joint venture between governments and private companies from Myanmar and Japan, is scheduled to start operations in 2015, with land acquisition for the 2,400 hectares (ha) SEZ currently underway.

We believe the outlook of Myanmar's construction sector is significantly dependent on the success of the Thilawa SEZ and future SEZs (such as Dawei and Kyaukpyu). Myanmar's severe deficit in infrastructure, industrial and commercial buildings means that many of these SEZs need to be established from scratch and we believe this will result in a lot of value creation in the country's construction and infrastructure sectors.

Japanese-Led
Myanmar-Japan Thilawa Development Company - Ownership Structure, %

Progress With Thilawa SEZ Fuels Positive Construction Outlook

BMI View: The strong interest from foreign investors towards Myanmar's first special economic zone in Thilawa suggests that a significant increase in construction activity is set to take place. As such, there is upside to our outlook of Myanmar's construction sector, however it is significantly dependent on the success of such SEZs.

On June 16 2014, Eleven Weekly Media reported that 45 companies from 11 countries had submitted proposals to invest in the Thilawa Special Economic Zone (SEZ), the first SEZ being developed under a public-private partnership framework in Myanmar. Most of the companies are from Japan and Hong Kong, but the first company to sign a lease contract to build a factory in the SEZ is US-based beverage cans manufacturer Ball Corporation. At present, the Thilawa SEZ, a joint venture between governments and private companies from Myanmar and Japan, is scheduled to start operations in 2015, with land acquisition for the 2,400 hectares (ha) SEZ currently underway.

Japanese-Led
Myanmar-Japan Thilawa Development Company - Ownership Structure, %

We believe the outlook of Myanmar's construction sector is significantly dependent on the success of the Thilawa SEZ and future SEZs (such as Dawei and Kyaukpyu). Myanmar's severe deficit in infrastructure, industrial and commercial buildings means that many of these SEZs need to be established from scratch and we believe this will result in a lot of value creation in the country's construction and infrastructure sectors.

For the Thilawa SEZ project, the strong interest from foreign investors suggests that a significant increase in construction value is set to take place due to the SEZ. There are not only plans to enlarge its port - on June 16 2014, the Myanmar Ports Authority announced eight tenders for the construction of a general cargo wharf and a container loading dock in the Thilawa SEZ - but also plans to build four new roads to cater for the SEZ (the main and lower Thanlyin-Thilawa road, the Pardagyi-Thilawa road and the Thanlyin-Seikkan road). There are also plans to build additional roads, sewage systems, waterworks and power distribution networks within the Thilawa SEZ, with a joint venture between Myanmar's Suntac and Japan's Penta Ocean Construction already in discussions with the relevant ministries for the projects since April 2014.

Besides infrastructure, the first phase of the Thilawa SEZ, which has land area of 400ha, is expected to focus on the construction of manufacturing plants for high-tech, textile, and labour intensive industries. Another 544ha is also reserved exclusively for governmental offices, quarters and religious buildings and glass, iron sheeting and sandal manufacturing plants run by the Myanmar Economic Corporation, according to the Myanmar government (cited from Eleven Weekly Media)

Major Construction Value Drivers
Myanmar - Location Of Key Maritime Hub Projects

As for Myanmar's other planned SEZs, the initial construction and infrastructure projects planned for the 2000ha Dawei SEZ are estimated to cost more than USD10bn, while there are plans to construct a deep sea port, industrial zones and housing estates in the 404ha Kyaukphyu SEZ. According to Myanmar officials in charge of the Kyaukphyu SEZ project, a master plan for the SEZ is expected to be finalised in November 2014. There are also plans to build a railway line to link the Kyaukphyu SEZ with China, with ground surveys for the railway line currently underway ( see ' Kunming-Kyaukphyu Railroad Highlights Opportunities For Chinese Companies', May 5 2011).

Political And Financing Risks Pertinent

While the Thilawa SEZ looks set to be a success, it remains to be seen if this will be the case for future SEZs. To attract foreign investors to these SEZs, the government is exempting foreign companies from income tax for the first five years and offering 50% income-tax relief on the profits of the business if foreign companies in the SEZ maintain the profits for reinvestment in a reserve fund. Foreign investors also do not need to form local partnerships in these SEZs and the Myanmar government had also reduced land prices at Thilawa SEZ by 30% for foreign companies.

However, we believe the key reason for the strong foreign interest in the Thilawa SEZ is the strong support from a foreign government - namely the Japanese government. The Japanese government is providing the initial loans to develop the Thilawa SEZ and has attracted several Japanese conglomerates to invest in the SEZ. On the other hand, the Dawei SEZ project, originally launched in 2010, failed to move forward due to the lack of financial support from the Thai government ( see 'Transport Infrastructure: Learning From Dawei's Difficulties', July 18 2013).

In addition, the country continues to present sizeable political risks over the near-term and we believe that the majority of investors could wait for greater political clarity before carrying out capital-intensive works in the construction sector. In fact, these risks have grown recently, with the Myanmar's constitutional review committee deciding to retain an article which effectively bars opposition leader Aung San Suu Kyi from running for the presidency in next year's general election ( see ' Suu Kyi's Presidential Hopes Dashed In Return To Politics As Usual', June 16 2014). Such a scenario would substantially undermine the legitimacy of the 2015 elections and set the stage for political turmoil within Myanmar. This scenario could also have implications on an international level, including the possible re-application of international economic sanctions (most likely led by the US, which has chosen to suspend rather than completely abolish many of its previous sanctions).

Dampened By Near-Term Risks
Myanmar - Construction Industry Value Forecasts

Therefore, even though we still expect Myanmar's construction sector to be one of the fastest growing markets in the Asia Pacific region, we believe that the sector is still unable to achieve its full potential due to financing and political concerns. We are currently forecasting real growth for the construction sector to reach 9.7% in 2014 and 8.5% in 2015, compared to 9.3% in 2012 and 9.4% in 2013.

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