Emerging Opportunities in Malaysia's Tech Landscape

Moomoo News MY wrote a column · Oct 28, 2024 08:24

Malaysia's technology industry continues to expand rapidly, supported by robust government initiatives and an evolving startup ecosystem. However, the tech sector has seen only a modest increase of 3.3% since the start of the year. Additionally, it has experienced a significant downturn of about 15% since July. In contrast, the construction and real estate sectors have recorded YTDgains of 54% and 32%, respectively.

Emerging Opportunities in Malaysia's Tech Landscape

Analysts at J.P. Morgan attribute this disparity primarily to the current development phase of data center projects, which are still in the construction stage. This phase typically lasts between 12-18 months from the initial groundbreaking.

Neoh Jia Man, a fund manager at Tradeview Capital, points to the July downturn as a result of the unwinding of earlier excessive optimism surrounding artificial intelligence (AI), mirroring the pullback observed in U.S. tech stocks.

Positive Signals Emerge in Malaysia's Tech Sector

Despite the recent downturn in the tech sector, analysts are pointing to several emerging positive signals that suggest a potential rebound and sustained growth, including:

1) Fit-Out Phase Under the Radar

The fit-out phase, crucial for installing servers, power systems, and cooling equipment, typically follows the 12–18-month core-and-shell construction phase. With the recent surge in investments in Malaysia's data center construction, the fit-out phase is expected to commence from late 2024 to the first half of 2025.

J.P. Morgan conservatively estimates that during this phase, Malaysia's AI server market could reach RM7.6 billion annually (~RM15 billion over two years), based on the 552MW of IT capacity currently under construction. When considering the broader pipeline of approximately 3,770MW, the potential market size could escalate to RM100 billion over the next six years.

2) Data Center Market Gains Momentum with Rising Foreign Investments

Malaysia continues to draw significant foreign direct investments, particularly in the data center sector, propelled by escalating demand for cloud services and AI technologies. Major tech companies, including Google, Nvidia, and Microsoft, are investing billions into Malaysian data centers. According to DC Byte's 2024 Global Data Centre Index, Johor Bahru has emerged as the fastest-growing data center market in Southeast Asia. If all the planned data center capacities in Malaysia be realized, the country is poised to become one of the largest data center hubs in Asia.

3) Early Stages of Semiconductor Upcycle

The semiconductor industry is experiencing a robust upcycle, with sales showing year-over-year growth for ten consecutive months. Due to the adoption of Edge AI, non-AI chip restocking, and favorable macroeconomic conditions,Analysts at J.P. Morgan believe thatthis cycle will expand into a broader market. Historically, these cycles last between 26-30 months, and currently, only 30-35% of the cycle has been completed. The KLTEC and $PHLX Semiconductor Index (.SOX.US)$ indices, which typically peak at 65-70%, indicate a potential 8-12 months of growth ahead. Additionally, the recent sector downturn, which has seen a 15% drop below its 5-year average P/E ratio, offers an attractive entry point for investors.

4) Favorable Policies

Malaysia, strategically located next to resource-limited Singapore, presents compelling advantages for data center expansion, including reliable electricity, stable internet connectivity, affordable land, and a multilingual workforce. The country's supportive policies, such as the New Industrial Master Plan (NIMP) 2030, have already attracted tech giants like $Oracle (ORCL.US)$, $Microsoft (MSFT.US)$, and $Alphabet-C (GOOG.US)$, culminating in investments exceeding USD 10 billion.

Additionally, the National Semiconductor Strategy (NSS) policy, with RM25 billion allocated to enhance Malaysia's position within the global semiconductor supply chain, is showing early signs of success. Just two months following its announcement, an integrated circuit design park in Puchong is now fully occupied by global firms such as aiStorage, Skyechip, and Weeroc.

J.P. Morgan's Picks

J.P. Morgan has expressed a positive outlook on the revival of the tech sector in the recent report, with a particular focus on companies related totech hardware. Analysts gavean overweight rating for $NATGATE (0270.MY)$(PT: 2.20), $UWC (5292.MY)$(PT: 2.60), and $FRONTKN (0128.MY)$(PT: 4.25). Here's an overview of these Malaysian data center supply chain companies:

NationGate: As an EMS (Electronic Manufacturing Services) provider, NationGate focuses on the assembly and testing of electronic components and products, delivering complete PCBs, semi-finished subassemblies, and fully-assembled electronic products. Notably, NATGATE is the only server OEM player in Malaysia approved under $NVIDIA (NVDA.US)$'s partner network.

UWC: UWC's expertise spans from module to full turnkey assembly manufacturing, catering to clients specializing in automated test equipment. The company manufactures a range of products including processor chips testers, flash memory testers, networking server testers, signal testers, and precision diffusion pumps.

Frontken: Specializing in precision cleaning and surface treatment, Frontken primarily serves wafer fabricators and foundries in the semiconductor industry. Its services are crucial for extending the lifespan of high-precision tools and include critical chamber components' recycle cleaning, re-coating, repair, and recovery.

Source: J.P. Morgan

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