Amidst the uncertain global economic climate due to the U.S. subprime mortgage crisis and rise in energy prices, investing in regional telecommunications and infrastructure companies enables investors to participate in the roll-out of infrastructure services to meet the growing needs of the region. An estimated US$1.8 trillion1 is expected to be spent on infrastructure projects comprising roads, railways, power plants, water services and telecommunications networks throughout Asia over the next 5 years to 2012. As shown in Figure 1, about two-thirds of this amount is projected to be spent in China with 24% accounted by ASEAN and the balance taken up by Korea and Taiwan.
This will sustain investment spending in infrastructure resources in the region over the medium- to long-term.The growth prospects of the telecommunications and infrastructure sectors in Asia are driven by the following factors:
1. Large Population Base
A large and growing population base in Asia underpins the need for huge infrastructure developments. Greater China, Japan, South Korea and ASEAN have a combined population of almost 2 billion people, representing a third of the world population. In addition, the rising trend of urbanisation throughout the region means that a larger proportion of the population will live in urban areas, creating demand for electricity, transportation, water and sanitation.
2. Transportation Networks
The lion’s share of infrastructure spending in the region is generally focused on developing transport networks.
Construction of toll roads, expressways and railways, which accounts for more than half of infrastructure budgets in Asia, is expected to remain robust due to rapid urbanisation, rising incomes and rising car ownership. In China and Indonesia, car ownership rates are below 10%2 among urban households as compared to 75%-80%2 in developed countries such as Korea and Taiwan, indicating significant untapped growth potential for the transportation sector in these emerging economies. Rising car ownership and traffic congestion will lead to sustained spending on construction of roads and expressways in the next few years.
3. Power Generation
Power generation is another major driver of infrastructure spending in the region. Given the rapid growth in demand for power, countries in the region will have to step up their power generation capacities. Moreover, power generation per capita in countries such as Malaysia, China, Thailand, Philippines and Indonesia is significantly lower than their more developed peers such as Singapore, Korea and Japan which produce more than 8,000kWh3 of power per capita. To keep up with their developed peers, these emerging economies may have to expand their power generation capacities significantly over the next 20 years.
4. Telecommunications
The Asian telecommunications sector has experienced rapid growth in the past decade due to strong demand for mobile phone services and internet usage. However, penetration rates (defined as subscriber base as a percentage of total population) in countries such as China and Indonesia remain relatively low at about 48%4 in 2008 as compared to 80%5 for OECD (Organisation for Economic Co-operation and Development) countries. In addition, the introduction of broadband technology in recent years was well-received with some countries in the region achieving rapid subscriber growth rates.
Going forward, the telecommunications sector in the Far-East region is envisaged to enjoy sustained subscriber growth. The overall mobile penetration rate in the region is expected to increase from about 47.2%6 in 2008 to 63.3%6 in 2012, representing an annualised growth of 12.8% over the four years period.
5. Water Services
Globally 1.2 billion people lack access to clean drinking water. The United Nations has indicated that by 2025, water scarcity could affect almost 40% of the world’s population, a high proportion of whom will live in Asia7. As regional economies continue to grow, demand for treated water is expected to increase from the residential, industrial and agricultural sectors. Thus, there are significant opportunities for investment in water services and infrastructure in the region. In China, for instance, only 40% of the country’s surface water is drinkable and more than 300 million people do not have access to clean drinking water6. In view of these factors, China represents one of the largest potential markets for companies providing water technology and services in the next two decades.
Indonesia is another country which requires significant investments in improving its water services and infrastructure. According to Indonesia’s National Development Planning Board, only 30.8%8 of the country’s urban households and 9%8 of the rural population have access to piped water. The Indonesian government plans to encourage the private sector to meet the country’s requirements for piped water by 2015.
Tapping the Growth Potential of the Far East Region
Looking ahead, construction spending in Asia will continue to remain buoyant as the region will need to upgrade its infrastructure to support growth. In addition, several regional governments are embarking on fiscal policies to stimulate domestic demand and spending on infrastructure projects is expected to play a major role in their expansionary fiscal policies.
As demand for telecommunication services and energy generally grows at a faster pace than overall GDP growth, these sectors will continue to experience rapid growth in the years ahead. Demand for transportation and water services are also expected to gain pace with the increasing urbanisation and higher living standards of the regional emerging economies.
In view of the favourable demand and supply dynamics for the regional infrastructure sector, infrastructure companies and companies that supply services and products to the sector are well-positioned to generate attractive earnings growth and healthy cash flows. In addition, infrastructure assets offer a good hedge against rising inflation as the underlying cash flows of concession companies are usually stable and linked to an inflation index through a negotiated pricing formula.
Given the above factors, the Public Far-East Telco and Infrastructure Fund is expected to capitalise on the significant growth potential of the regional infrastructure, telecommunications & utilities sectors amidst the sustained economic growth and continued fiscal expansion in the Far-East region.
Performance Benchmark
The benchmark of the fund is a customised index based on selected sectors within the Dow Jones Asia Pacific IndexSM comprising Malaysia, Singapore, Thailand, Indonesia, Philippines, Hong Kong, Taiwan and South Korea. The stock universe also includes China ‘H’ shares from the Dow Jones China Offshore IndexSM. The selected sectors are customised to the following weights i.e. 40% Telecommunications, 30% Construction & Materials and 30% Utilities sectors. For the three-year period to June 13, 2008, this index has achieved an impressive total return of 57.2% in Ringgit terms (ie. annualised return of 16.3%).
1 Based on CLSA Asia Pacific Markets Report, “Ramping March 2008”
2 CLSA’s Mr & Mrs Asia Survey, Autumn 2007
3 CLSA Asia Pacific Markets, “Ramping Up Asia’s Infrastructure
4 CLSA Asia Pacific Markets
5 OECD ICT Key Indicators
6 CLSA Asia Pacific Markets
7 Association for Sustainable & Responsible Investment Sector, February 2007
8 Indonesia Millennium Development Goals 2007
Disclaimer: Reading materials in this site are obtained from its respective website and it is for information purposes only. It is not Malaysia Unit Trusts - administrator view and it is not to be used against Malaysia Unit Trusts - administrator.
