Thai Goverment spending favours contractors

Thai Goverment spending favours contractors
Published: 15 September 2004

Thailand’s major construction contractors are set to benefit largely from the government’s plan to spend over a trillion baht in mega infrastructure projects in the coming years.  The country’s two largest contractors, Italian-Thai Development PCL and CH Karnchang PCL, are the dominant players in big construction and are expected to get the lion’s share of the planned projects, analysts said. Although an uptrend in overall building material prices, especially escalating steel prices, may weigh on the performance of construction shares, the effect should be limited due to a government compensation scheme and vertical integration, they added.

"Most of the government’s planned mega projects will likely go to either Italian-Thai or CH. Karnchang. Their backlog is set to expand rapidly in the coming years," said Patti Tomaitrichitr, an analyst at Capital Nomura Securities.  Around 90% of both contractors’ work is government-related projects.  Despite a recent rally in construction shares, the two stocks are still offering an attractive upside compared with their current market price, analysts said.

Earlier this month, Thailand’s Cabinet approved a proposal to extend Bangkok’s elevated train and subway lines with a combined project value of THB500 billion in an effort to ease the capital’s notorious traffic jams.  The projects are due to be completed within six years. Besides the mass transit systems, the government also plans to spend hundreds of billions of baht on highway and expressway construction as well as on residential units for the poor.

Italian-Thai has already secured THB65.8 billion worth of projects, including the major parts of the New Bangkok International Airport Ltd., while CH. Karnchang has secured THB24 billion worth of projects.  Italian-Thai, along with its Japan partners Takenaka Corp. (TNA.YY) and Obayashi Corp. (1802.TO), has been awarded the contract to build the passenger terminal and concourse buildings of the new airport.

The two companies are also shielded from the rising building material prices being mostly involved in government projects. The government allows contractors to get reimbursed for any cost of materials in excess of the original budget.