CONSTRUCTION CONTRACTOR April 2018 Niratsai Toomwongsa

Transcription

1 THAILAND INDUSTRY OUTLOOK CONSTRUCTION CONTRACTOR April 218 Niratsai Toomwongsa ext forecast that the domestic construction sector will see growth of 7-9% per year over the period , with benefit from an expansion of infrastructure investment projects which should proceed as planned. At the same time, private construction is forecast to recover, especially for residential and commercial developments adjacent to new mass transit routes and for factory construction in the Eastern Economic Corridor. The number of construction projects in neighboring countries will also grow as infrastructure spending expands and investment in real estate increases, and this will present an opportunity for Thai players to build a presence in the markets in these countries. Overview Over the past decade, construction investment has accounted for 8.4% of Thailand s gross domestic product (GDP) so the sector s health has important consequences for employment and linkages with related sectors, such as construction materials and real estate. The sector is split domestically into construction for the public and private sectors, with investment in the two occurring at a ratio of around 57:43. Public construction: The lion s share of public projects is concerned with infrastructure, which runs to around 8% of the total value of public construction, with the remainder being accounted for by construction of government buildings, housing for civil servants, and other items such as the development of public utilities. Large companies enjoy advantages in contracting for government work, especially for large infrastructure projects, due to their experience, expertise, financial efficiency, and ability to exploit specialist techniques and technologies. SMEs working in public construction tend to operate as sub-contractors. Private construction: 57% of this sector is accounted for by construction of residential property, 11% by industrial property, 1% by commercial property, and the remaining 24% by other projects, such as hotels and hospitals. Private construction tends to be affected by investors confidence, which is in turn dependent on a variety of factors including the economy, the political stability, the infrastructure investment, and government measures to stimulate investment. Larger operators which focus on private projects will typically tend to enjoy higher margin than those which contract for the government, while the latter will usually have a greater construction value than will private developments. Meanwhile, SMEs contractors usually undertake work on projects with a low total value and which are relatively simple and straightforward. In addition to the domestic market, Thai construction companies, especially larger ones, are increasingly expanding their customer base into overseas markets, in particular to Cambodia, Laos PDR and Myanmar (CLM) due to these countries rapid economic expansion and the concomitant development of their national infrastructure and built environment including, for example, road networks, rail links and power stations. In addition, Thai operators also have the opportunity to work on the repair and renovation of housing because Thai construction workers have high-skills and so are trusted in these neighboring countries % Figure 1: Ratio of Construction Investment to GDP Hamburger Crisis C/GDP = 8.8% C/GDP = 8.5% Flood in Thailand Thai Political Crisis C/GDP = 8.1% NCPO C/GDP = 8.2% Source: NESDB Note: C/GDP = Average construction value to GDP Over the period of 24-26, construction value to GDP averaged around 8.8%. During the Hamburger crisis in 27-29, construction value to GDP dropped to 8.5%. Meanwhile, Thai political crisis in , construction value to GDP decreased to 8.1% but recovered since 215, thanks to increased political stability. NCPO = National Council for Peace and Order Figure 2: Public and Private Construction Investment (at current prices) 1,5 1, 5 Source: NESDB Public Private Table 1: Growth of Public and Private Construction (at current prices) Average Growth Rate (% per year) Public Construction Private Construction Source: NESDB 1

2 Thailand Industry Outlook Construction Contractor Type Public construction Private construction Type of work Revenue recognition Bidding for projects Table 2: Comparison of Construction Work by Type Most work involves infrastructure development, which requires specialist knowledge, e.g., highway construction. Construction fees are adjusted according to the escalation factor, a tool for reducing risk arising from fluctuating costs. When it comes to making disbursements, current costs are compared with their level when bids were tendered and if they have changed by more than 4%, contractors will either make or receive compensation payments, depending on the direction of change. E-bidding is used to award contracts. Work is concentrated in residential accommodation, followed in importance by industrial and commercial property, e.g., department stores. There is no private mechanism for managing the changing costs of building supplies so if prices rise between bid submission and the completion of work, contractors need to swallow these costs themselves. On the other hand, if prices fall, their profits will benefit. There is no standard mechanism for bidding for private contracts and these may be awarded based on familiarity and experience with a particular construction company. For large projects, competing on price is common but this may be done via electronic methods or more traditional means. Project return Margins tend to be somewhat low. Margins are higher than in pubic construction. Sources of funding Funding comes from government budgets, state enterprises, public-private partnerships and the Infrastructure Fund. Funding is from the assets or borrowing (stocks or debentures) of the contracting organization. Source: Type Large operators SMEs Skills and expertise Financial strength Building technology Bargaining power with suppliers Cost management Source: Table 3: Comparison of Construction Work by Size of Operator Large operators are able to work effectively on both public and private sectors, particularly on mega projects, high-rise buildings, and other high-value projects with specific requirements and supply chain linkage. Work is therefore abundant and large operators are able to exploit economies of scale. Large operators enjoy financial strength and this allows them to take on large projects. These companies are able to invest in the development and deployment of modern technology, bringing savings in time and costs and reducing the risk of laborshortages. They may also have investments in companies which manufacture construction materials, such as prefabricated concrete. Larger companies are able to exploit economies of scale to extract advantages when negotiating with suppliers of materials. Large operators are professionally administered and are able to plan and manage stock systematically. Most SMES engage in general construction work, though some mid-sized companies may specialize in areas such as foundation work or road construction. SMEs have limited assets and this restricts their ability to undertake large projects, though they are able to participate in these as sub-contractors. At present, SMEs tend not to develop their own technology and still rely heavily on labor but they are beginning increasingly to use readymade materials, such as precast concrete and metal sheet walling. SMEs have a weaker bargaining position when dealing with suppliers. Most SMEs are family businesses and as such their stock management tends to be somewhat inefficient. 2

3 Thailand Industry Outlook Construction Contractor There are some 9, construction companies registered in Thailand (Department of Business Development, Ministry of Commerce). Of these, only around 3 qualify as large-scale operators but an examination of their income shows that these hold a 42% market share measured by income and that most are registered on the stock exchange. The three largest players, Italian Thai, Ch. Karnchang and Sino-Thai, account for over half of the combined income of all construction companies traded on the Thai stock market. Assessment of the construction sector will need to take into account: 1. Market factors. The possibility of realizing revenues depends largely on the state of the economy, political conditions, progress on public- and private-sector investments, and the regulations governing investment in particular countries, which may either support or hinder the sector. 2. Cost factors: Of particular importance are changes in the costs of construction materials and of labor, although at present, Thai construction companies face labor shortages, both in terms of quantity and quality, with skills at a level beneath that required by the market. As such, costs do not match productivity and this has had consequences for profitability. The cost-structure of construction companies is split approximately 6%, 2% and 2% between construction materials (construction steel, concrete, cement and other materials), labor and other costs respectively 1/. Situation In 217, the construction sector shrank by -1. to a value of THB 1.21 trn following growth of 11.7 and 5.5% YoY in 215 and 216, respectively. This decline in the value of construction for 217 was driven by a fall in public-sector building (57% of the total construction sector), which slid by - 2 to THB bn, caused by lower than expected spending on new infrastructure projects (which are caused by several factors. For example, some projects are in the environment impact assessments (EIA) process. Meanwhile, some projects are not able to find funding). The private-sector (43% of the total) expanded slightly, up.4% YoY to THB 526 bn but the market was held back by a supply glut and the slow progress made on government infrastructure projects. Public construction fell slightly in 217, although at the start of the year, the government increased spending on infrastructure projects relative to the previous year, for example on the Bangkok Mass Rapid Transit Green Line (Mo Chit-Saphan Mai-Khukhot). As a result, for 1Q17, the value of public-sector construction grew 1.3 but although the expectation had been that spending would continue at an elevated rate through the year, in reality, a number of factors conspired to hold back spending for the remaining nine months of the year and so overall, total spending declined for Table 4: Key Operators Market Share by Total Revenue Rank Source: NESDB Company Public Private Growth in Total (RHS) Market Share (% of listed company) Figure 3: Construction Investment Public/ Private Work 1 Italian Thai (ITD) : 47 2 Ch. Karnchang (CK)* 21 14: 86 3 Sino-Thai (STEC) 8 53 : 47 4 Uniq Engineering (UNIQ) 6 99 : 1 5 Nawarat (NWR) 4 98 : 2 6 Christiani&Nielsen (CNT) 3 14 : 86 7 Syntec Construction (SYNTEC) 4 4 :96 8 TRC Construction (TRC) 2 2 : 8 9 Sriracha (SRICHA) 1 : 1 1 Thai Polycons (TPOLY) 1 4 : 6 Source: Bloomberg, BOL and company annual report, compiled by Note: Top 1 of Listed contractors (as of 216) * Most private construction of CK s revenue structure are public projects which are done by subsidiaries. Figure 4: Disbursement of Government Investment Budget Others Land acquisition and construction Source: GFMIS 217 Fiscal year +8.4% Calendar year -.9% Fiscal Year Note: In 217 (calendar year), disbursement of land acquisition and construction (a part of government investment budget) dropped by.9. 1/ Calculated from the costs of large operators and from the Office of the National Economic and Social Development Board (NESDB) input-output tables, 21. 3

4 Thailand Industry Outlook Construction Contractor Important causes of this reversal included unseasonal rain, problems in making the land and buildings expropriation, problems with managing traffic (which caused work on construction to slow). In addition, some projects, such as for five lines in the first phase of the twin-track railway, saw problems with their bidding process. A new round of bidding was thus required and so spending has had to be postponed until 218. An investigation of government disbursements for construction shows that these fell by -.9% for the 217 calendar year. (figure 4) Private construction grew by.4 in 217 (figure 5), supported by growth in 2Q17 and 3Q17 in particular of residential properties, especially of condominiums along new mass transit routes in the Bangkok Metropolitan Region and of hotels and hospitals in the provinces, for which the situation has improved (NESDB, 217). This return to growth, following three years of decline, reflects the recovery in investor confidence which private-sector construction has witnessed, a fact which is seen in the increase in applications for construction permits for residential property, factories, and hotels, which have increased steadily since 2H16 (figures 6-8). However, private-sector investment remains somewhat soft, as investors are still awaiting greater clarity over government infrastructure spending, in particular that planned within the Eastern Economic Corridor (EEC). Figure 5: Private Construction Investment Figure 6: Construction Areas Permitted: Residential 56 Private Growth (RHS) 2 million sq.m Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17-6 Source: NESDB Source: REIC Low-rise Growth in Low-rise (RHS) High-rise Growth in High-rise (RHS) Figure 7: Construction Areas Permitted: Commercial and Industrial Buildings Figure 8: Construction Areas Permitted: Office Buildings and Hotels million sq.m. thousand sq.m Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17-6 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17-1 Commercial Industrial Growth in Commercial Buildings (RHS) Growth in Industrial Buildings (RHS) Office Buildings Hotels Growth in Office Buildings (RHS) Growth in Hotels (RHS) Source: REIC Source: REIC 4

5 Thailand Industry Outlook Construction Contractor The cost of construction materials rose by 1.9 in 217 on rising prices for construction steel and concrete products, which together comprise 4% of the value of construction materials. These increased in price by 9.8% and.9%, respectively, with the domestic price tag of steel being pushed up by rising prices on global exchanges, while the domestic cost of concrete products such as concrete piles and precast concrete was driven up by rising domestic demand as many construction projects prefer using prefabricated products. On the other hand, prices fell for a number of other items, including for cement, which declined by -3.8, partly on falling demand from public construction projects. Labor costs remained unchanged in 217 and the 217 immigration law has impact on labor shortage because the government pushed back the implementation of the 217 decree on foreign workers to mid-218, although in any case, given the combination of large operators ability to manage their workforce and their financial strength, this is unlikely to pose a problem for them. Outlook During , the value of construction generally is forecast to grow by an average of 7-9% per annum (figure 1), which benefits from the speeding up of government infrastructure investment, for which THB 3.2 trn is expected to be spent on 61 projects by 226 (figures 11 and 12). In addition, investment in the private sector is also recovering and this will be an important factor in supporting growth for construction companies. Public construction will see strong growth thanks to increased spending on mega-projects, especially in the EEC. It is expected that spending on public-sector construction will rise by 9-11 in 218 to reach THB bn. Partly, this high rate of expansion is a result of comparison with the relatively low levels of spending in 217 but for , spending is forecast to grow by 8-12% as investments are made in projects which were agreed upon in 217. This includes the mass rapid transit Pink Line between Minburi and Kae Rai, the Yellow Line between Lat Phrao and Samrong, and the initial five twin-track rail lines, construction of which should see progress in this period. Beyond this, in , competitive bidding should be held for a number of other new projects including the Rama III-Dao Khanong-Western Bangkok Outer Ring Expressway, the high-speed rail-link between Bangkok s three airports (Don Muang, Suvarnabhumi and U-Tapao), and Phase 3 of the Laem Chabang expansion. It is expected that the government will expedite work on these projects and will also arrange for competitive bidding on other projects in (Figure 12). Over the next three years, beyond spending on mega-projects, the government also plans to invest in small and mediumsized projects with financing for this coming from the annual budget. The majority of these projects involve the expansion and upgrade of road networks under the Department of Highways and the Department of Rural Roads. For the 218 financial year, THB bn has been earmarked for this , 1,5 1, 5 Figure 9: Construction material price movement CMPI Cement Concrete Steel Source: MOC Note: CMPI = construction material price index Figure 1: Construction Investment Trend F F F Total Construction Growth in Public (RHS) Source: NESDB, forecast by Forecast Growth in Total (RHS) 3 Growth in Private (RHS) Figure 11: Mega Projects Investment Value, worth THB3.2trn (plan for ) Disbursed Investment Value Planned Investment Value Source: Ministry of Transport (MOT), Office of Transport and Traffic Policy and Planning (OTP), compiled by Note: Mega Projects include ongoing projects, urgent infrastructure projects (action plan 218) and projects in EEC

6 Thailand Industry Outlook Construction Contractor Figure 12: Timeline of Mega Projects Investment during , worth THB3.2trn Investment Transport Infrastructure Development Value % Progress F219F22F221F222F223F224F225F226F () Ongoing Construction Projects (15 projects, THB676.8bn) as of Dec 17 1 Dual track railway: Chachoengsao-Klong19-Kaeng Koi Dual track railway: Jira to Khon Kaen Mass Transit System: Red Line (Bang Sue-Rang Sit) Mass Transit System: Blue Line (Hua Lamphong-Bang Khae & Bang Sue-Tha Phra) Mass Transit System: Green Line (Mochit-Saphanmai-Khu Khot) Mass Transit System: Orange Line (Thailand Cultural Center to Min Buri) Mass Transit System: Pink Line (Khae Rai to Min Buri) Mass Transit System: Yellow Line (Lad Phrao to Samrong) Mega projects in EEC: Motorway from Pattaya to Map Ta Phut Motorway: Bang Pa-in to Nakhon Ratchasima Motorway: Bang Yai to Kanchanaburi Harbor development project at Laem Chabang port Railway container depo at Laem Chabang port (phase 1) Suvarnabhumi airport expansion (phase 2) Regional airport development in Betong, Yala Urgent Infrastructure Projects in 218 (44 projects, THB2,21bn) Projects under bidding process/planned construction (23 projects) 1 Dual track railway: Nakhon Pathom to Chumphon Dual track railway: Lop Buri to Paknampho Dual track railway: Map Kabao to Jira Dual track railway: Paknampho to Denchai Dual track railway: Jira to Ubon Ratchathani Dual track railway: Khon Kaen to Nong Khai Dual track railway: Chumphon to Surat Thani Dual track railway: Surat Thani-Hat Yai-SongKhla Dual track railway: Hat Yai to Padang Besar Dual track railway: Denchai to Chiang Mai Dual track railway: Denchai-Chiang Rai-Chiang Khong Dual track railway: Banpai-Mukdahan-Nakhon Pathom Mega projects in EEC: High speed train for Bangkok to Rayong (Connecting 3 airports: 23.4 Donmueng-Suvarnabhumi-U Tapao) 14 High speed train: Bangkok to Nakhon Ratchasima (Thai-Chinese cooperation) Mass Transit System: Orange Line (Bang Khun Non to Thailand Cultural Center) Mass Transit System: Red Line (Taling Chan to Siriraj and Taling Chan to Salaya) Mass Transit System: Dark Red Line (Rangsit to Thammasat University) Motorway: Rama III Road to Dao Khanong and Western Outer Ring road Motorway: Northern expressway (Kasetsart-Nawamin road: N2) Rest areas for trucks 2 areas (Burirum and Khon Kaen).5 21 Regional airport development (Khon Kaen) Regional airport development (Krabi) E-tickets system.7 Projects being submitted for cabinet/ppp board approval (21 projects) 1 High speed train: Bangkok to Chiangmai High speed train: Bangkok to Hua Hin Mass Transit System: Purple Line (Tao Pun to Rat Burana) Mass Transit System: Red Line (Bang Sue to Hua Mak and Bang Sue to 44.2 Hua Lamphong) 5 Light rail in Phuket Light rail in Chiangmai Light rail in Nakhon Ratchasima Light rail in Khon Kaen Motorway: Nakhon Pathom to Cha am Motorway: Bangkok to Mahachai Motorway: Hat Yai to Malaysian border Motorway: Ruangsit to Bang Pa In Motorway: Katu to Patong in Phuket Mega projects in EEC: Laem Chabang deep sea port development phase Dry port development at Khon Kaen Maintenance repair and overhual (MRO) at U-Tapao airport Logistics centers at Nakorn Phanom Logistics centers in regional (border towns) Logistics centers in regional (main cities) Purchasing of 489 NGV buses Purchasing of 35 electric buses.4 Other mega projects in EEC (2 projects) 1 U-Tapao international airport Map Ta Phut deep sea port phase F Ongoing construction projects Feasibility Study and Detail Design Approving and Bidding Construction Source: compiled by (as of Apr 18) Note: The value of construction for Laem Chabang deep sea port development phase 3 sourced by EEC office. 6

7 Thailand Industry Outlook Construction Contractor Private construction is forecast to see improving conditions in line with a strengthening economy and also to benefit from the crowding in effects of government spending on mega-projects. For 218, the value of private-sector construction should grow steadily at 3-5 to a total of THB bn, and growth is expected to continue at 4-7% per year in 219 and 22 (Figure 1). This outlook is supported by the positive effects of government infrastructure spending, especially that planned in new areas with high potential, such as the EEC. These investments will help to build investor confidence over the next three years, and the latter is strengthening with regard to investments in residential, office, and industrial property, a fact which is reflected in the growing number of applications for building permits for residential, commercial, office and hotel buildings seen in 2H17 (figures 6-8). The market for industrial property is also expected to grow over these three years and this forecast is underlined by data on applications to the Board of Investment of Thailand (BOI) for investment support; in 217, the value of investment applications to the BOI increased by 22.4 to THB bn, the majority of which was concentrated in the EEC and in the central region of Thailand. 15, 12, Figure 14: Mixed Use Projects Opening (by real estate type) Units 9, 6, 3, Condominiums Hotels Service Apartments Source: Colliers International, compiled by (as of Feb 18) Over , investments in real estate, especially in condominiums, hotels and commercial property, will tend increasingly to be in mixed use projects, or projects which include a wide range of property types in the same development (Figure 14, Table 6) and this will be one factor that helps to support private-sector construction in this timeframe. Table 5: Construction Investment Forecast 218 F 219 F 22 F Construction Worse Best Worse Best Worse Best Total Construction () 1,289. 1, ,383 1,417 1, ,539.5 Growth () Public Construction () Growth () Private Construction () Growth () Mega Mixed Use Projects Table 6: The Projects of Mixed Use Total Value of Investment (THB, m) Opening Year One Bangkok 125, 225 The Forestias 9, 222 The Grand Rama 9 6, 22 Dusit Thani-Central 36,7 225 Samyan Mitrtown 8,5 22 Singha complex 4,2 221 Source: NESDB and forecast by Source: compiled by (as of Feb 18) 7

8 Thailand Industry Outlook Construction Contractor Turnover for construction companies will return to growth, in particular for those which concentrate on winning public-sector contracts as these should see a growing backlog of work. For , income for these operators should thus grow solidly but that said, growth may be lower than hoped for if public-sector work continues to be subject to delays, if labor shortages (especially of more skilled workers) continue to affect the sector, and if construction materials increase in price by more than anticipated. For operators focusing on the private sector, turnover will grow in line with demand for investment in real estate and this will be influenced by the state of the economy and progress with government infrastructure projects. Figure 15: Revenue Movement of Key Operators 2 Revenue Growth (RHS) E Source: Bloomberg In terms of operators size, income for large players will tend to grow at a good rate because large companies have advantages in terms of the size and supply chain linkage. These operators are also able to manage risks more effectively and to exploit technology to reduce costs. SMEs, on the other hand, tend to see their income grow to a more limited extent, since they are exposed to higher levels of risk from a less secure supply of work and because as sub-contractors, they have a weak negotiating position and so large operators are able to eat into their profitability. Beyond this, SMEs may see high levels of competition since they are so numerous and because the majority of SME construction companies are dependent on unskilled labor, rather than on mechanization and thus they may lack a steady supply of contracts, some players may have difficulty maintaining solvency if the labor market tightens. However, SMEs may also have the opportunity to undertake more public-sector work if the government divides construction contracts into smaller units, as it did with motorway construction contracts in 216. The construction sectors in Cambodia, Laos PDR and Myanmar (the CLM countries) also tend to expand, especially with regard to the construction of infrastructure, indicated by share of construction per GDP (Gross Domestic Products) in Cambodia and Myanmar growing at accelerative rate (figure 16). Meanwhile, share of construction per GDP in Lao PDR slow down during after mega infrastructure projects (e.g. hydroelectric power plants) have gradually been completely constructed. However, the value of construction in the CLM countries would expand next 3 years which benefits from economic growth (IMF forecasts that for , the economies of the CLM countries should expand by % per year). The rapid development of these economies will require continuing investment in the construction of infrastructure, utilities and facilities, especially in urban areas and in special economic zones, which are growing rapidly as tourism and the economy expand. This presents an opportunity for Thai operators, which benefit from their geographic location next to these countries, which this makes it easy to transport the construction materials and machinery used in building projects in the CLM region. Figure 16: Construction Investment per GDP in CLM % Cambodia Laos Myanmar Source: CEIC Data 8

9 Thailand Industry Outlook Construction Contractor 1. Cambodia: It is expected that investments will be made in a large number of infrastructure projects and that real estate projects will be developed along new communications routes. 2. Laos PDR: The forecast is that investments will increase in large-scale communications networks, especially those which involve international financing, a move that marks something of a shift from the earlier focus on developing electricity generating capacity. In addition, the opportunity exists for Thai companies to work on the construction and renovation of high-end real estate projects, since the perception of Thai designers and construction workers is that they are highly skilled and so within Laos PDR, they are more sought after. 3. Myanmar: The government of Myanmar is continuing to invest in infrastructure, while the real estate market is strengthening, especially for residential and commercial property, and this presents an opportunity for Thai construction companies. Table 7: The Investment Projects in CLM Countries Investment Projects Investment Value (USD, m) Time Period Countries Investment Projects Investment Value (USD, m) Time Period Cambodia Thai Boon Roon twin tower world trade centre project, Phnom Penh Luxury hotel (Guangzhou R&F properties), Phnom Penh Camko city (satellite city) phase 1&2, Phnom Penh Rovieng district steel plant, Preah Vihear Phnom Penh Sihanoukville highway corridor improvements 3, , , ,6 Planning stage 1, Lao PDR Myanmar The Park (Disney Laos) at Thakhaek SEZ, Khammuan High speed train (Kunming, China to Vientiane, Lao) (42 km) 1, , Motorway in Vientiane Transport infrastructure investment (ADB, 216) Steel smelting plant, Dawei maritime hub project HAGL Myanmar center (mixeduse project) 6, ,48 Planning stage Shangri-La hotel, Phnom Penh Yangon region gas-fired power & general facility 325 Planning stage Source: compiled by (as of Feb 18) As for the 218 increase in the national minimum wage, this is expected to have only limited consequences for the construction sector, although there is likely to be a shortage of skilled labor and this is a potential problem which needs to be kept under observation. The cost of construction materials is also expected to rise and work on public-sector projects may also be delayed by the tightening of regulations instituted by the 217 act on government procurements. The 218 increases to the minimum wage (effective from 1st April 218) will have only slight impacts on the construction sector since wages in the sector are already generally higher than the new minimum wage. This is especially so for skilled labor, but in the case of unskilled labor, construction companies are trying to reduce their dependency on this group and instead replace unskilled labor with mechanization and with the use of pre-fabricated construction materials. However, for SMEs, and in particular those which are engaged in general-purpose construction and so rely on labor more than on mechanization, the increase may have negative consequences for profitability. Figure 17: CMPI Trend during Source: MOC (as of Dec 17), forecast by 9

10 Thailand Industry Outlook Construction Contractor The consequences of labor shortages in the Thai construction sector may become more evident in the period as public-sector construction projects gather pace at the same time as the private sector strengthens. The result of this will naturally be increased competition for workers, particularly for those with higher levels of skills. In addition, the government held back on implementing the decree of foreign workers in 217 but from the second half of 218, its measures will come fully into effect and if employers do not register workers as required by the law, the availability of foreign laborers may decline over the next three years. This is because in the recent past, over 5% of workers in the sector have been migrant laborers from neighboring countries and the majority did not work legally in the country. Over the next three years, the cost of construction materials will tend to rise as the sector grows. This will be especially so for concrete products, such as precast concrete sections. On the other hand, some products may experience falling prices. For example, the American decision to impose 25% import duties on steel from many countries, including China, may lead to a supply glut on world markets and a flood of imports of Chinese steel into Thailand, with consequent downward pressure on prices. However, it remains unlikely that prices would touch the lows seen in 215 because the Chinese government is also maintaining a policy of lowering the domestic output of steel. The sector may also be affected by the stricter regulations imposed through the Government Procurement and Supplies Management Act of 217 (effective from 23rd August 217), which may trigger a slowdown in the progress of some public-sector building projects in 218 (as if take time to adapt) because the new legal specifies the process of procurement which involve other state agencies and is complicated, starting with a feasible study, bidding and disbursement for construction expenditures. 1

11 Thailand Industry Outlook Construction Contractor The view: From 218 to 22, income for construction companies contracted to work on public-sector projects would grow. For those undertaking private-sector work, there is the possibility of steadily improving income, although competition will tend to increase and cost pressures are forecast to rise. Investment in construction will likely strengthen following an improving economy, rising investment more generally, and strengthening consumer purchasing power and so income for private-sector construction companies involved in the building of residential, general-purpose, high-rise and large structures will tend to rise. Mid- and large-sized operators which build residential, industrial, commercial and mixed-use properties will see lengthening order books and construction companies will also be presented with greater opportunities to expand internationally, especially into markets in the CLM region. This will include work in infrastructure, residential properties, hotels and commercial and industrial buildings, and this will help to support businesses. However, small-sized operators working in these areas would face high competitive. This is partly because of the large number of small players and their weak negotiating position, a problem which is particularly acute for those operating in residential and general-purpose construction. These companies may be on a weaker financial footing and so they will typically be more reliant on labor than on technological solutions (such as the use of pre-fabricated construction materials) to reduce costs. Construction companies contracting for the public-sector, and especially large civil engineering companies, will benefit from the volume of work being made available on government mega-projects. Growth is returning to this area in 218 and this trend will continue through 219 and 22 but opportunities will be best for mid- and large-sized operators since work on major projects such as those involving the mass transit system and ports will depend on operators expertise and experience in these types of major developments. If work on these moves forward as planned by the government, income for operators will grow at a healthy rate. For small-sized players, although they will see high levels of competition, they will still have the opportunity to sub-contract for large operators and when public-sector projects are divided into smaller, more manageable contracts, it will be possible for small-sized construction companies to bid for this work, too. 11

12 Thailand Industry Outlook Construction Contractor KRUNGSRI RESEARCH Somprawin Manprasert, Ph.D. Phornphan Phoksuphat Head of Research Division and Chief Economist Head of Macroeconomic and Industry Research Macroeconomic Team Sarun Sunansathaporn Head of Strategic Economics Sujit Chaivichayachat Head of Forecasting and Macroprudential Economics Churailuk Pholsri Senior Economist Soison Lohsuwannakul Senior Economist (Regional Economics) Lookhin Varachotisate Economist Tanaporn Sriklay Economist Industry Team Chetchuda Chuasuwan Head of Agricultural and Manufacturing Sectors Taned Mahattanalai Head of Service and Real Estate Sectors Poonsuk Ninkitsaranont Senior Analyst (Healthcare, Modern Trade, ICT) Piyanuch Sathapongpakdee Senior Analyst (Transportation & Logistics, Industry Risk Ratings) Narin Tunpaiboon Senior Analyst (Power Generation, Biofuel, Chemical & Plastic Products) Puttachard Lunkam Analyst (Tourism Sectors, Real Estate in Upcountry) Niratsai Toomwongsa Analyst (Construction Contractor, Construction Materials) Wanna Yongpisanphob Analyst (Automobile, Electronics & Electrical Appliances, Beverages) Patchara Klinchuanchun Analyst (Real Estate in BMR) Intelligence Team Talublugkhana Thanadhidhasuwanna Senior Analyst (Financial Sectors) Rachot Liengchan Analyst (Oil & Gas, Petrochemicals, Industry Scenario Analysis) Arpakorn Nopparattayaporn Analyst MIS and Reporting Team Suratchanee Somprasong Administrator Thamon Sernsuksakul Administrator Chirdsak Srichaiton MIS Officer Wongsagon Keawuttung MIS Officer For research subscription, contact Disclaimer This document is based on public information believed to be reliable. Nevertheless, would not affirm the accuracy and completeness of this information. The opinions expressed in this document are our own, which are not necessarily the opinions of Bank of Ayudhya. We reserve the right to change opinions or forecast without prior notice. 12