Renewable energy and ESG Sarawak 2 investment trump card

Exclusive Report: Xiao Weiyang

At a time when Malaysia became the darling of foreign investors, Sarawak was also intensively developing the state's economy, hoping to become a major economic center for Malaysia and the region.

Internally, Shazhou has drastically raised development expenses and is in full swing to launch more infrastructure projects; externally, the state government is actively attracting various high-tech investments to achieve industrial upgrading.

In the process, Shazhou was by no means alone; the federal government also had “blood transfusion” support behind it. Prime Minister Anwar has said he is full of confidence in Shazhou's economic potential.

The economic gears are rolling, what projects are getting a lot of attention? At the same time, which Malaysian stocks are worth paying attention to? After collating the opinions of major brokerage firms and current affairs topics, “Nanyang Commercial Daily” presents them to readers one by one.

At a time when Malaysia has become the darling of foreign investors due to global supply chain restructuring, Sarawak, located in Borneo, is also struggling and plans to upgrade to a major economic center through a series of investment projects. In the process, what development projects are attracting attention? Also, which Malaysian listed companies are involved, and are worth investors' attention?

When it comes to boosting the economy, Sarawak can be described as making every effort in recent years. The state has set a goal of securing more than RM100 billion in capital injections over the next 6 years, making it one of the “developed states” by 2030 at the latest. At that time, Sarawak's gross domestic product (GDP) is expected to reach RM282 billion, which is 93% higher than RM146 billion in 2023.

In line with these goals, Sarawak is also spending a lot of money to stimulate the economy. State Prime Minister Tan Sri Abon Zohari announced through the 2024 Sarawak Budget that RM9 billion will be allocated to fund development projects this year, an unprecedented amount.

“This is the largest budget in the history of the Sarawak government. We are adopting an expansionary budget, investing heavily in infrastructure, and putting the welfare of the people as the primary consideration.”

On its way to becoming a major economic center, Sarawak is not alone; the federal government is also behind “blood transfusions.” Looking back at history, between 2018 and 2022, the federal government allocated development budgets to Sarawak hovered between RM4.3 billion and 4.6 billion.

However, in 2023, the development budget soared to RM5.6 billion; by 2024, a further RM5.8 billion was allocated, the highest amount in history.

Prime Minister Dato' Sri Anwar said in June of this year that thanks to political stability and clear policy guidelines, Sarawak has great potential for development. “Apart from well-known states such as Penang, Selangor, and Johor, Sarawak is also emerging as a new economic giant in China.

“In several countries I recently visited, including Germany, Japan, etc., local investors are full of confidence in Sarawak's development potential. The state is regarded by foreign investors as a major stronghold in the region.”

The focus is on investment amounts. According to data released by Sarawak's economic planning agency, in the first half of 2023, the state's manufacturing industry approved a total investment of RM4.946 billion, accounting for 95% of the full year of 2022, of which 88% was foreign direct investment (FDI). At the same time, up to 92% of the investment went into the fields of electronics, electricity, and basic metals.

On the other hand, Sarawak's Deputy Prime Minister Dato' Amaavandengya also revealed in May of this year that the state approved a total investment of RM22.8 billion last year, with manufacturing being the most popular.

Sarawak's economic development is in full swing. What investment projects and participating Malaysian stocks are worth paying attention to?

To achieve economic goals, the Sarawak government has launched the “Post-2030 Pandemic Development Strategy” (PCDS 2030), which lists the fields of infrastructure, utilities, transportation, manufacturing, and renewable energy as key development projects, so as to accurately invest resources.

The industries named by the state government include everything. Currently, what projects are most worthy of investors' attention? After carefully reading the research reports and official statements of major investment banks, this newspaper is presented to readers one by one.

According to research by Societe Generale Investment Bank, thanks to the state government's huge development expenses, more infrastructure projects will be in full swing, benefiting the construction industry and contractors.

According to data from the Malaysian Construction Industry Development Board (CIDB), in 2023, Sarawak awarded engineering contracts worth RM9.9 billion, ranking fifth in the country, after Selangor, Johor, Kuala Lumpur and Penang. In addition, the state's completed projects worth RM14.6 billion in the same year, a record high of nearly July.

Construction activity is on the rise in Sarawak. What potential projects are attracting attention?

Let's talk about road engineering first. In the 2024 Sarawak Budget, the state government has announced an allocation of RM662 million to carry out various road and bridge projects. The largest projects include the Second Main Road (STR), Phase II Pan-Borneo Expressway (PBH), and the Sarawak-Sabah Link Road Project (SSLR).

On the STR side, once this RM5.6 billion project is completed, the driving distance between Kuching and Sibu will be drastically shortened from over 300 km to 225 km. According to Societe Generale Investment Bank research, STR includes a total of 20 contracts, and 8 have been issued so far.

As for PBH, as the first phase of PBH worth RM16 billion nears its end, it is estimated that the Shazhou government will soon launch a second phase project to link Limbang (Limbang) with Lawas (Lawas). Since the length of the second phase of the project is only 88 kilometers, far lower than the 786 kilometers of the first phase, analysts believe that the value of the project will shrink to RM1.8 billion, and the number of contracts will be drastically reduced, with the value of each between RM400 million and RM600 million.

The SSLR Phase 2 project has a total value of RM7.4 billion and will commence construction by the end of this year. According to analysts, since Golden Wheel companies need to focus on the first phase of the project, it is unlikely that they will participate in the second phase. At that time, Sarawak will join hands with contractors from West Malaysia to share the contract.

Road works aside, the construction industry is also eyeing a railway project, the Pan-Bornean Railway project which is estimated to cost RM63 billion. According to analysts, this plan comes at an opportune time. Since Indonesia has decided to move its capital from Jakarta to Kalimantan Island in southern Borneo, the cross-border movement of people between Sarawak, Sabah, and Kalimantan will become more intense in the future.

Despite this, as the federal government is focusing on other large-scale infrastructure projects, such as MRT Line 3 and the Longxin High Speed Rail, the Trans-Borneo Railway may not be launched quickly, or it may take 5 years.

At a time when awareness of carbon reduction is rampant, Sarawak is not left behind and is actively building itself into a major renewable energy center.

The state government has set three major goals. First, to make renewable energy reach 60% of total energy by 2030, of which hydroelectric power generation is a top priority; second, to reduce carbon emissions by 600,000 tons per year through electrification of means of transportation within the state; and third, to actively export renewable energy so that related revenue can reach 15% of total revenue.

Currently, Shazhou holds three large-scale hydropower stations, namely Batang Ai (Batang Ai), Bakun (Bakun), and Murum (Murum) dams, with a total capacity of 2 gigawatts (MW). In fact, as early as 2020, hydropower already accounted for 68% of Shazhou's total energy; in other words, the state had already achieved its energy transition goals early.

Despite this, Shazhou continues to expand hydroelectric power generation. Another large-scale hydropower plant, the Baleh (Baleh) dam, is still under construction and is expected to be put into operation in 2027. At that time, the hydropower capacity of Shazhou may reach 4,737 megawatts.

As for non-Shazhou contractors, analysts are optimistic that Jinwu University has a competitive advantage because the company has experience in developing hydropower projects in Sabah.

In addition to hydropower, another renewable energy source in Shazhou Nianzi is hydrogen power generation. Abon Zohari has set a goal. By 2027, Shazhou will become a hydrogen energy hub. “Achieving this goal is possible; Shazhou is on the right track.”

According to Kennag Investment Bank research, the Kuching Urban Transportation System (KUTS) in Shazhou will mainly use hydrogen energy. This investment will also have huge spillover effects, and developers, builders, and building materials suppliers will benefit from it.

Meanwhile, with the support of Japanese and Korean investors, the Sarawak Economic Development Council (SEDC) is carrying out two hydrogen energy development projects with a total value of about RM19.8 billion. According to research by Societe Generale Investment Bank, Xu Jiaming would be a potential beneficiary. The company has set up a new subsidiary called KKB Energy to provide engineering and manufacturing services for public and renewable energy projects.

Johor, located in southern West Malaysia, is being transformed into a data center hub as foreign investors rush in. Seeing attractive added value, Sarawak is also ambitious to become a regional data center hotspot.

Currently, Shazhou Mountain Duwang has a data center developed by Kuching Telecom company irix and put into operation in 2022. In June of last year, FutureData, a consortium formed by Sarawak and Singapore, announced that it would build another data center in Samarahan Province.

In November of the same year, Abon Zohari said that by 2030 at the latest, Shazhou will have at least 5 “level-5 data centers” to promote economic growth in Shazhou through cross-border data circulation. Level 5 means that technical requirements and safety meet the highest standards, and can ensure that the wire is never broken without warning.

In terms of building data centers, Shazhou does have certain advantages. The biggest selling point is sufficient energy supply, including green energy, which global investors value.

According to the forecast of Shazhou's Ministry of Utilities and Communications, by 2030, the state will generate 9529 megawatts of electricity per year, while exports to Sabah and Singapore account for only 1,130 megawatts, or 12%.

In other words, 8399 megawatts of electricity are still available to meet the state's economic activity; in contrast, after Johor attracted significant data center investment, concerns about power and water shortages gradually surfaced.

Sarawak's economic activity is intense. Which Malaysian stocks are highly favored and become potential winners?

The one most popular among brokerage firms is the financial sector. The BIMB Investment Bank is confident in its research. It has participated in infrastructure projects such as PBH and STR, and has the ability to obtain more projects, including in the field of renewable energy.

“Seeing that the Shazhou government may issue more contracts in the fields of infrastructure and renewable energy, and that financial services have extensive experience, the latter business may continue to grow.”

Analysts also mentioned that in the next 5 years, the Financial Services Conference will invest RM2 billion in the domestic and foreign renewable energy sector, and will increase its renewable energy asset portfolio to more than 800 megawatts within a few years. Supported by many advantages, analysts gave a “buy” rating, and the target price was set at RM6.30.

Societe Generale Investment Bank's research also shared the same view, indicating that Jin Muda can use its experience in the Sabah Padas (Padas) dam project to seek more dam contracts in Sarawak. Analysts are also calling for a big purchase, with a target price of RM6.46.

Analysts called for a concerted purchase, and the target price was RM6.45.

Analysts pointed out that by signing a power purchase agreement with the state government, OM Holdings can obtain 300 megawatts of low-cost hydropower.

“Overall, this helps reduce operating costs.” Analysts gave a “buy” rating, and the target price was RM1.96.

On the other hand, Societe Generale Investment Bank Research and Kenag Investment Bank Research named Xu Jiaming, which has the potential to share more engineering flatbreads. Societe Generale Investment Bank's research listed it as the preferred stock in the infrastructure sector. “The company participated in quite a variety of infrastructure projects in Shazhou, including highways, water supply, oil and gas facilities, etc.”

Analysts also mentioned that Xu Jiaming is still in a net cash position, which means there is plenty of room to borrow when expanding the business in the future. A “buy” rating was given, and the target price was RM2.02.

IJM plans to build a pile foundation

Last year, IJM and SEDC signed a Memorandum of Understanding (MOU) to establish a pile foundation manufacturing base in Shazhou. In addition, IJM's joint venture has also obtained a civil engineering contract worth RM260 million in Kuching.

Based on its strong potential, Societe Generale Investment Bank researched to buy IJM, with a target price of RM2.47.

Ibraco's potential should not be underestimated. In November of last year, the company's joint venture obtained a Kuching Smart Rail (ART) contract worth RM569 million, which attracted attention.

In the same year, Iblaco also received a contract worth RM530 million to be responsible for part of the STR project.