The technological construction industry in Penang, Malaysia is booming

Reporting by Lim Di Sheng

As the traditional center of Malaysia's electronics and electrical (E&E) industry, Penang is considered one of the most promising economic development centers in Malaysia, and is even hailed by some as the “Silicon Valley of the East.”

At a time when global semiconductors are expected to return to an upward cycle, Societe Generale Investment Bank took the opportunity to discuss the future of Penang as the locomotive of the Malaysian technology industry.

At the same time, with the support of key infrastructure projects such as the Light Rail (LRT), the future of Penang's real estate and construction market also seems bright and worth discussing.

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“Penang already has a strong foundation in high-tech industries and manufacturing. If it expands into higher value-added fields, including R&D, design and innovation, we believe this will enable the state to enhance its competitiveness and move up the value chain, thereby creating more skilled jobs and bringing higher income to local residents.”

The analyst also said that Penang has developed a mature manufacturing base, making the region a perfect location for vertical integration in global value chains.

“By vertically integrating all stages of production, from design to manufacturing to transportation, Penang can reap more value from the entire value chain and make greater contributions to the global value chain.”

He added that this also means that Penang can play a more important role in various technology and industrial value chains and attract more investment from multinational technology companies.

In fact, the analyst pointed out that foreign direct investment (FDI) attracted by Penang has increased significantly in recent years, and at the same time, new strategic investors continue to enter Penang.

In 2021, the amount of approved investment in manufacturing in Penang reached an unprecedented level of RM76.2 billion, which was equivalent to an increase of 5.4 times year-on-year at the time, mainly driven by reinvestment activities of existing investors.

Among them, one of the most notable investment projects is Intel (Intel)'s $7 billion (approximately RM30 billion) investment plan over the next 10 years.

“This investment is mainly used to expand Intel's local semiconductor package testing and manufacturing capabilities, as well as bare chip (die) preparation capabilities.”

The intensification of trade frictions between China and the US will, in the eyes of analysts, further expand the future potential of Penang's technology industry.

The US just escalated its trade war in mid-May of this year and significantly raised import taxes on various products from China, including semiconductor products. The tax rate surged from 25% to 50%.

“As companies around the world adopt the 'China +1' strategy and seek alternative production sites outside of China to mitigate geopolitical risks, Malaysia benefits from a strong semiconductor ecosystem, excellent infrastructure that can provide support, and vast human resources.”

Not only Western companies, but Chinese companies that supply overseas customers also need to move at least part of their production lines to continue supplying the world.

This means that in addition to having the above advantages, Malaysia, which also has advantages such as being geographically close and culturally closer, will become one of the top choices for Chinese merchants to go overseas.

In terms of investment, analysts believe that outsourced manufacturers in the local technology industry, such as outsourced semiconductor packaging and testing (OSAT) and electronic manufacturing services (EMS) operators, have the opportunity to benefit from various customers and production line distribution for various technology products, driven by China's +1 strategy.

Furthermore, the analyst believes that the automated testing equipment (ATE) and engineering support services industry in Penang will also benefit from China's +1 trend brought about by the Sino-US trade war.

“As the US supply chain shies away from Chinese suppliers, and the Chinese supply chain tends to procure equipment vendors that are not manufactured in the US, our local ATE and engineering support service providers will benefit from huge business opportunities.”

“Some major US technology equipment manufacturers, including Lam Research (Lam Research), will set up regional operation centers in Penang and provide localized supply chains and support services.”

In addition to the technology industry, according to analysts, the development of construction and industry is also an industry with great future prospects in Penang.

Due to the upcoming large-scale infrastructure projects, especially the much-anticipated Penang Light Rail Project, and various industrial development projects, the Penang construction industry has undoubtedly become one of the notable beneficiaries.

“In 2023, the value of construction projects awarded in Penang was RM15.4 billion, ranking 4th in Malaysia. At the same time, the value of construction projects completed in Penang gradually increased from 2020 until RM9.6 billion last year.”

Last year, the value of construction projects awarded surpassed that of Penang's domestic regions, only Selangor (RM31.6 billion), Johor (RM25.2 billion), and Kuala Lumpur (RM19.7 billion).

“The Penang Light Rail Mutiara Line project is estimated to be worth RM10.5 billion. Coupled with the further development of the Sri Tanjung Pinang Phase II Reclamation Program (STP2), it is likely to further boost the value of projects in Penang over the next two years.”

Over the next few years, analysts expect that various infrastructure projects in Penang, such as the Penang Transportation Blueprint and the Silicon Island Reclamation Development Project, will accelerate, and construction contracts worth RM10 billion to RM20 billion will be awarded.

So far, no engineering contracts have been officially issued for the Mutiara Line Light Rail Project, pending finalization of the details of Part 1 of the project by the SRS Foundation and MRT Corp (MRT Corp), and the completion of public tenders for Part 2 and Part 2.

“Currently, the only major projects that have started in Penang are the Penang South Island Reclamation Project (PSI), which began in the 3rd quarter of 2023, and the STP2 development project.”

Among the various infrastructure projects in Penang, the focus is on light rail. The light rail project is part of the PTMP worth RM40 billion, and the government just approved the relevant project officially named Mutiara Line in March of this year.

The Mutiara Light Rail will be divided into 3 parts: Part 1 from Silicon Island to Everbright, Part 2 from Everbright to Central Plaza in Penang, North Sea, and Part 3, which supplies light rail vehicles and system support.

“Through SRS, Jinwu University can also continue to participate in Part 2 and Part 3 public tenders. With its experience and technical strength in railway engineering, it may win more orders.”

In particular, analysts at Ma Resources believe that the company will be in a leading position when bidding for the Penang Light Rail Part 2 project based on the Klang Valley MRT Line 2 (MRT2) and Light Rail Line 3 (LRT3) operating records.

“Ma Resources is also the developer of Central Plaza in Penang, adding one point of success to the company.”

“Generally, all relevant railway system support is acquired by international companies.”

At the same time, analysts said that IJM, which is developing development projects such as The Light and Bayouri in Penang, is also benefiting from construction orders issued by its own projects.

Among them, IJM has so far received projects worth more than RM1 billion from The Light project.

“Considering that the tech industry in Penang is booming, we cannot rule out the possibility that IJM will continue to seek more industrial construction contracts locally.”

As the technology industry in Penang develops further in the future, analysts believe this trend may create greater wealth for the state's residents and have a positive spillover effect on the local real estate market.

“What is interesting is that we are beginning to see that the high-end and high-end Penang real estate projects launched by the owner in the past two or three years have received good market demand.”

Among them, The Meg, with a total development value of RM691 million, and Arica, with a total development value of RM410 million, have now sold almost all units, with an average sales price of RM750 to RM800 per square foot.

“The first phase of the Senna and Ferra project launched by the owner on an artificial island includes 36 three-story semi-detached houses and terraced houses, all of which have been sold. Based on the average price of a row house of RM3.8 million and the average price of a semi-detached unit of RM5 million, this shows that high-income cohort in Penang have strong housing spending power.”

Furthermore, analysts said that the development of industrial parks in Penang will also create natural housing demand in the region.

“Evergrande Land is relatively unactive in launching projects, and its profit prospects are quite mediocre.”

However, analysts pointed out that both Dongjia and Evergrande Land can benefit from the growth in local industrial activity and the Bayan Lepas Light Rail Project.