Malaysia's Penang technology construction industry is booming

Report: Lim Di Sheng

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

In the current expected upturn in the global semiconductor industry, CIMB Investment Bank takes the opportunity to explore the prospects of Penang as the locomotive of Malaysia's technology industry.

At the same time, supported by key infrastructure projects such as the light rail transit (LRT), the prospects for Penang's real estate and construction market also look bright and are worth discussing.

And enhance its related competitiveness.

"Penang already has a strong foundation in high-tech industries and manufacturing. If it expands into higher value-added areas, including research and development, design, and innovation, we believe that it will enhance the state's competitiveness, move towards the upstream of the value chain, and create more technical jobs, bringing higher incomes to local residents."

The analyst also stated that Penang's mature manufacturing base makes it a perfect location for vertical integration in the global value chain.

"By vertically integrating the various stages of production, from design to manufacturing to transportation, Penang can reap more value from the entire value chain and make a greater contribution 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, attracting more investment from multinational technology companies.

In fact, the analyst pointed out that in recent years, Penang has attracted significantly increased foreign direct investment (FDI), and continues to attract new strategic investors.

In 2021, Penang's approved manufacturing investment reached a record high of 76.2 billion ringgit, an increase of 5.4 times annually, mainly driven by reinvestment activities of existing investors.

One of the most notable investment projects is Intel's 7 billion US dollar (about 30 billion ringgit) investment plan for the next 10 years.

"This investment is mainly used to expand Intel's local semiconductor assembly and testing manufacturing capabilities, as well as die preparation capabilities."

In the eyes of analysts, the escalation of the Sino-US trade friction will further expand the future potential of Penang's technology industry.

In May of this year, the United States upgraded the trade war, significantly increasing import taxes on various goods from China, including semiconductor products, with the tax rate increasing from 25% to 50%.

'With companies around the world adopting the 'China +1' strategy, seeking alternative production bases outside of China to mitigate geopolitical risks, Malaysia benefits from a strong and stable semiconductor ecosystem, excellent infrastructure support, and abundant talent resources.'

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

This means that in addition to the above advantages, Malaysia, with its geographical proximity and cultural closeness, will become one of the preferred choices for Chinese businesses to go global.

In terms of investment, analysts believe that local technology industry's outsourcing manufacturers, such as outsourcing semiconductor testing and packaging (OSAT) and electrical manufacturing services (EMS) businesses, have the opportunity to benefit from the production line diversion of various customers and various technology products, driven by the china +1 strategy.

In addition, the analyst believes that the automation test equipment (ATE) and engineering support service industry in Penang will also benefit from the China+1 trend caused by the US-China trade war.

With the US supply chain avoiding Chinese suppliers and the Chinese supply chain tending to purchase equipment from non-US manufacturers, our local ATE and engineering support service providers will benefit from vast business opportunities.

Some of the major tech equipment manufacturers in the USA, including Lam Research, will establish a regional operational center in Penang, and will provide localized supply chain and support services.

In addition to the technology industry, according to analysts, the development of the construction and industrial sectors is also a promising industry for the future of Penang.

Due to the upcoming large-scale infrastructure projects, especially the highly anticipated Penang Light Rapid Transit project, and the continuous arrival of various industrial development projects, the construction industry in Penang undoubtedly becomes one of the significant beneficiaries.

In 2023, the value of awarded construction projects in Penang is 15.4 billion ringgit, ranking 4th in Malaysia, while the value of completed construction projects in Penang has been gradually increasing since 2020, reaching 9.6 billion ringgit last year.

Last year, the value of awarded construction projects in Penang exceeded other domestic regions, including Selangor (31.6 billion ringgit), Johor (25.2 billion ringgit), and Kuala Lumpur (19.7 billion ringgit).

The Mutiara Line of the Penang Light Rapid Transit project is expected to be worth 10.5 billion ringgit, and with the further development of the Pulau Jerjak STP2 reclamation project, the value of engineering projects within Penang is likely to see further increase in the next two years.

In the coming years, analysts expect various Penang infrastructure projects, led by the Penang Transport Master Plan and the Sila Island reclamation project, to accelerate, with construction contracts worth 10 to 20 billion ringgit expected to be awarded.

To date, the Mutiara Line LRT project has not yet officially awarded any engineering contracts, awaiting the completion of the details for Phase 1 of the project by the SRS Consortium and MRT Corp, as well as the completion of the open bidding for Phase 2 and 3.

"Currently, the major projects initiated in Penang are the Penang South Island reclamation project (PSI), scheduled to start in the third quarter of 2023, and the development project for STP2."

The focus of various infrastructure projects in Penang is indeed the LRT. The LRT project is part of the 40 billion ringgit PTMP, and the government officially approved the project named Mutiara Line LRT in March this year.

The Mutiara LRT will be divided into three parts: Part 1 from Sila Island to KOMTAR, Part 2 from KOMTAR to Butterworth Penang Sentral, and Part 3 for the supply of LRT vehicles and system support.

"Through SRS, Kedah can continue to participate in the open bidding for Part 2 and 3, and with its experience and technical strength in railway engineering, it may win more orders."

In particular, for Malaysian Resources, analysts believe that based on their operational records for the Klang Valley MRT Line 2 and LRT Line 3, they will be in a leading position when bidding for the second phase of the Penang LRT project.

"Malaysian Resources is also the developer of Komtar, which adds to their advantage."

"Interestingly, we are starting to see decent market demand for the mid- to high-end and high-end property projects launched by developers in the past two to three years in Penang."

The first phase of the Senna and Ferra projects launched by the developer on the artificial island, including 36 3-story semi-detached houses and terrace houses, has been fully sold. Based on an average price of 3.8 million ringgit for terrace houses and 5 million ringgit for semi-detached units, this demonstrates the strong housing purchasing power of the high-income group in Penang.

In addition, analysts say that the development of industrial parks in Penang will also create a natural housing demand in the area.

Evergrande's project launches are relatively less proactive, and its profit prospects are quite mediocre.

However, analysts point out that both Dongjia and Evergrande can benefit from the growth of local industrial activities and the Bayan Lepas LRT project.