Local data centre-linked stocks were under hefty selling pressure in recent weeks following the news of tighter controls on Artificial Intelligence (AI) chip exports and caps on the amount of compute that can be shipped by the US. Following our channel checks, we gather that the impact is largely muted on the local players as they mostly deal with the US hyperscalers, while it may take longer lead time for the AI server assemblers and dealers to process their orders due to various audit checks and traceability. Overall, we think most of the technology stocks have overreacted to the negative news flow and some may even have limited exposure to the data centre play. Maintain Overweight on the sector and our top picks are Cloudpoint and QES.

• Tightening control on AI chip exports. The US Department of Commerce under Biden administration announced last week that it is proposing a new framework that would curb the Nvidia's AI chip exports, which command more than 80% of global market share. The move is part of a plan to divide access to advanced computing power to the US and keep its dominant status in AI by controlling the supply markets. Under the framework, about 20 key allies and partners under the Tier-1 category such as Australia, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Republic of Korea, Spain, Sweden, Taiwan, and the UK would face no restrictions on accessing AI chips. For those countries, including Malaysia, that are placed in the second tier, could only purchase up to 50,000 Graphics Processing Units (1 advanced AI server requires 8 GPUs) per country, and they could bump up the cap to 100,000 GPUs if their renewable energy and technological security goals are aligned with the US. Institutions in certain countries could also apply for a legal status that would allow them to purchase up to 320,000 advanced GPUs over two years. Computer chip orders equivalent to 1,700 advanced GPUs would not need a license to import or count against the national chip cap if they are meant to serve the educational and medical purposes. Companies that meet high security and trust standards are headquartered in close allies, and partners can obtain highly trusted "Universal Verified End User (UVEU) status, which allows them to place up to 7% of their global AI computational capacity in countries under the tier-2 category. Meanwhile, exports of AI chips will be prohibited for 22 countries categorised under third-tier, which include China, Hong Kong, and Macau, Russia, Iran, North Korea, Venezuela, Nicaragua, and Syria. The rules, which are set to take effect in one year, will give companies a 120-day comment period so that the incoming Trump administration has more time to settle in and made changes to the rule after consulting with industry players and other countries.

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Source: PublicInvest Research - 20 Jan 2025