• We have visited a few agencies in Sarawak, namely Sarawak Energy Berhad (SEB), Regional Corridor Development Authority (RECODA), and InvestSarawak. From the site visits, we note that the state offers potential investors with attractive investment proposition leveraging on (i) its strategic location in Southeast Asia, (ii) competitive pricing in renewable energy, and (ii) government incentives.

• Sarawak emerges as a prime destination for ESG investments due to its abundant renewable energy (RE) resources and focus on nurturing local talent. With a commitment to developing rural areas, Sarawak offers a compelling opportunity for investors seeking sustainable and socially responsible ventures.

• Press Metal Aluminium, OM Holdings, and PMB Technology are among stocks under our coverage that has business presence in Sarawak. We believe these companies will continue to benefit from operational cost efficiencies thanks to their advantageous RE power purchase agreements with the state.

• On top of that, we think Gamuda is well positioned to capitalize on new opportunities in the region, having contributed to the Pan Borneo project and showing potential in the RE sector.

• We have a BUY call for Press Metal Aluminium (RM6.45), OM Holdings (RM1.96) and Gamuda (RM6.30) while a SELL call for PMB Technology (RM1.11).

Boosting Rural Development Through Key Industries in Sarawak

The Sarawak state government aims to stimulate investment-led growth in traditionally rural areas. This initiative focuses on attracting both domestic and international investors to boost economic development and infrastructure in these regions. By enhancing investment opportunities, the government seeks to create jobs, improve living standards, and reduce the urban-rural development gap. This strategy is part of a broader effort to ensure sustainable and inclusive growth throughout Sarawak. For manufacturing, twelve industries are being prioritised including four key sectors: (i) steel & ferroalloys, (ii) aluminium, (iii) oil & gas, and petrochemical, and (iv) glass (metallic & polysilicon industry). Additionally, Sarawak which is rich in natural resources has also undertaken several power-related projects, including the Bakun and Murum Hydroelectric Projects (HEP), the Tanjung Kidurung CCGT plant, and the Balingian and Mukah coal-fired plants.

Attracting Local and Foreign Investors

As of April 2024, 72% of the RM124.74bn in approved private investments in Sarawak comprises Foreign Direct Investment (FDI) amounting to RM89.37bn, while the remaining 28% consists of Domestic Direct Investment (DDI), totalling RM34.9bn. These investments cover locations such as Tanjung Manis, Sarikei, Mukah, Sibu, Samalaju, Bintulu, Miri, Baram, Kapit, Lawas, and Limbang. This private investment is projected to create 53,930 jobs across 425 projects. Notably, the manufacturing sector is the largest beneficiary, attracting around 77% of the total investments.

One notable project worth highlighting is the Samalaju Industrial Park (SIP). SIP covering an extensive 8,000-hectare area and dedicated to energy-intensive heavy industry with a primary focus on the four trigger industries as mentioned above: steel and metal-based (ferroalloys), aluminium-based, glass-based (metallic and polysilicon), as well as oil and gas products. In this area, there is a total approved private investment amounting to RM56.67bn, projected to create 20,603 jobs across 14 investors.

Another significant initiative spearheaded by Sarawak is the Petchem Industrial Park (PIP) Kidurong. Spanning approximately 1,000 acres in Tanjung Kidurong, Bintulu, this park is strategically positioned adjacent to the Mega Methanol Plant developed by Sarawak Petchem Sdn Bhd and is surrounded by key projects including PTTEP’s Bintulu Onshore Receiving Facility (BORF), SEB Combined Gas Cycle Project, and Petronas’ Bintulu Additional Gas Sales Facilities 2 (BAGSF2) Project. With a total approved private investment of RM25.2bn, this project is anticipated to generate 5,430 jobs and involves three major investors: Sarawak Shell Berhad (SSB) – Onshore Gas Plant 1 (OGP 1), PTTEP HK Offshore Ltd (PTTEP) – Onshore Gas Plant 2 (OGP 2), and Sarawak Medical Innovation & Technology Hub (SMITH).

Implementing Infrastructure Projects for Rural Development

The infrastructure projects are aimed at rural development. These projects are designed to improve connectivity, accessibility, and overall quality of life for residents in rural areas of Sarawak. Sarawak has established three regional development agencies, namely the Upper Rajang Development Agency (URDA), Highland Development Agency (HDA), and Northern Region Development Agency (NRDA) under the Regional Corridor Development Authority (RECODA). These agencies are tasked with overseeing mega projects which encompass 9 federal infrastructure projects and 251 state infra projects. We have concluded that each agency is focused on specific potential projects driven by factors such as location and land surface considerations. Additionally, it is evident that most of these projects prioritize the development of roads, bridges, and water supplies, with the aim to enhance connectivity across Sarawak as well as ensure access to essential water resources for its residents.

Sarawak's Mission Towards a Sustainable Future

By 2030, Sarawak envisions achieving three key targets. Firstly, it aims to maintain a renewable energy capacity mix of at least 60%, prioritizing renewable hydropower while expanding alternative renewable energy resources. Secondly, it seeks to reduce CO2 emissions by 600,000 tons annually through the electrification of Sarawak's mobility fleet. Lastly, Sarawak aims to generate more than 15% of its income from foreign markets, including the pursuit of power exports. These objectives are propelled by Sarawak's provision of cost-competitive electricity tariffs, implementation of business-friendly policies, and abundant renewable energy sources which stands as factors collectively contribute to Sarawak's ability to attract investors.

Notably, the energy generation mix has undergone a successful transition, shifting from 91% reliance on thermal generation (coal and fossil fuels) in 2010 to 68% hydropower generation by 2020. This transition has resulted in a 72% reduction in grid emission intensity between 2010 and 2020. We do note that renewable hydropower is poised to play a pivotal role in achieving the climate objective of transitioning from CO2 producing electricity generation to carbon-free generation for Sarawak.

Pursuing Growth and Economic Prosperity

In July 2023, according to the World Bank, Sarawak met the criteria of a high-income state, boasting a gross national income (GNI) per capita exceeding USD13,205 (RM61,442), joining the ranks of Penang and Federal Territories of Labuan and Kuala Lumpur. With aspirations to achieve developed state status by 2030, Sarawak aims for a gross domestic product (GDP) of RM282bn and a median monthly household income of RM15,000. Under the current trajectory, maintaining business as usual would result in a minimum growth rate of 3.4%, translating to a GDP of RM196bn, up from the baseline of RM136bn in 2019.

Amidst the backdrop of the Covid-19 pandemic, Malaysia faced a significant setback, witnessing a decline of 5.6% YoY GDP growth in 2020. Repercussion of this contraction, Sarawak's economy suffered, with exports shrinking by 24.2% and the unemployment rate rising to 4.3%. In response to these challenges, Sarawak has devised a comprehensive strategy known as the Post Covid-19 Development Strategy 2030 (PCDS2030), marking the beginning of its transformative journey. Comprising six primary economic sectors and seven key enablers, upon successful implementation, Sarawak is poised to achieve its GDP target of RM282bn, reflecting 8.0% growth rate from 2019 baseline, aligns with the overarching Sarawak 2023’s vision of attaining Economic Prosperity

From 2019 baseline, Sarawak’s median household income recorded at RM4,544, meanwhile as of 2022 the median household income has grown by 10% to RM4,978. Achieving the target of RM15,000 by 2023, it would represent a significant increase of 231% from the 2019 baseline. Realising the goal, Sarawak poised to generate an additional 195,000 high-paying jobs, bringing the total employment to 1.5mn by 2030, thereby raising income levels and the standard of living. To realize these objectives, initiatives will focus on education and human capital development, particularly skills development training to ensure individuals are equipped with the necessary skills for the created jobs. Interestingly, Sarawak plans to attract local talents residing outside Sarawak and Malaysia to come back and contribute their expertise, whereby the incentive includes considerations for hybrid and flexible working arrangements. We do note that Sarawak’s investment priorities lean towards industries that demand highly skilled workers which to be facilitated through technology transfer. This would further lead to the creation of high-paying jobs for the Sarawakian.

On the Road to Progress

PCDS2030 sets out to revamp Sarawak's economic framework by pursuing several core objectives. Firstly, it aims to elevate production scale to optimize upstream efficiencies, bolster downstream ventures, and expand the service industry. Secondly, the strategy focuses on modernizing and enhancing efficiency through enhanced digital and physical connectivity. Additionally, it seeks to augment household income relative to GDP by fostering job growth and entrepreneurial endeavours. Anchored by six key economic sectors and supported by seven key enablers (Refer to Chart 7), PCDS2030 charts a comprehensive path toward economic revitalization in Sarawak.

The strategy was being formulated by taking 2019 as a baseline, in respond to the COVID - 19, outlines a proactive approach to address key issues. These include the region's overreliance on resource-based economic sectors and the stagnation in productivity growth, evidenced by Sarawak's 6.8% contraction of GDP in 2020. This downturn underscored the urgent need to rectify deficiencies in the skilled labour force and improve household income levels. PCDS2030 capitalizes on these challenges by identifying opportunities to leverage Sarawak's abundant natural resources and biodiversity assets. This includes positioning the region as a leading food supplier for the broader region. Significantly, Sarawak has the capacity to dedicate 1,500 hectares of land to rice production, aiming to bolster food security through a rice cultivation project. This endeavour is backed by a fund allocation of RM173mn from the federal government. Furthermore, the strategy also includes the needs to accelerate digitalization efforts, leveraging the rapid emergence of digital platforms during the pandemic. To ensure the effective implementation of the strategy, inter-agency collaboration is essential in seamlessly executing PCDS2030 initiatives.

Building Connectivity for Prosperity

Realising the need to ensure seamless connectivity to propel the vision forward, accelerating the Pan Borneo Highway project has proven pivotal in linking diverse regions, highlighting the crucial role of infrastructure development in fostering accessibility. Setting up the infrastructure is vital before the state would be able to progress further as the landscape of Sarawak is quite challenging to begin with. Progressing steadily at 98.9%, the Pan Borneo Highway project is on track for timely completion, pending finalisation of highway design related to land issues. Additionally, the upcoming construction of the RM6.1bn Northern Sarawak Coastal Highway which slated to commence in 2025, will further bolster infrastructure development efforts. Envisaging significant growth along the corridor, plans include the establishment of a port and the construction of the new Lawas Airport. Furthermore, there has been also planning to develop recreational area in Limbang, overlooking Brunei Bay to further boost tourism in the area. At this juncture, we believe it will spare more infrastructure jobs for construction players.

Upon establishing the infrastructure, we can expect Sarawak to pivot its development emphasis from services and basic infrastructure to advanced high-value manufacturing sectors driven by renewable energy. This shift is part of the strategy to ensure that environmentally friendly and resource-efficient manufacturing accounts for 30% of Sarawak's gross domestic product (GDP) by 2030. The objective is to elevate the manufacturing sector along the value chain, enabling the production of premium goods, and fostering opportunities for increased income. According to Sarawak State Socioeconomic Report 2022, the service sector emerged as the primary contributor to Sarawak's GDP of RM140.2bn, accounting for 37%. Following closely by manufacturing, comprising 28%, and mining at 21%. With abundant opportunities, Sarawak remains an appealing investment destination and in 2023, total investments for Sarawak recorded at RM21.4bn with the manufacturing sector contribute to a significant chunk of it at 62%, supported by renewable energy initiatives.

From Traditional to Value Added Investment

Looking ahead, Sarawak is actively seeking increased investment in high-tech industries, leveraging advanced technologies and modern machinery. These include biotechnology, medical device manufacturing, food technology, and the design and production of highend furniture. This reflects Sarawak's strategic focus on investing in value-added sectors, facilitated by the region's ample land resources, which allow for the concentrated distribution of industrial clusters across the area (Refer to Chart 8). Additionally, offering rebates on land premiums serves as an attractive incentive for investors.

With agriculture being the second-largest contributor to Malaysia's economy at 14.7%, Sarawak aims to further stimulate the sector by integrating technology under the PCDS2030 framework. They have been proactive with the advanced Smart Farming initiatives, exemplified by the proposed development of the Tarat and Semenggok Sarawak Agro-Technology Park (SARTECH). Moreover, the region is establishing agroparks to promote modern agriculture practices, in which eight (8) sites have already been approved for agropark development across Sarawak, alongside plans for two agrotechnology parks. Among these developments, the Sg. Baji Agropark in Sarikei (Refer to Chart 9) has already been completed. Additionally, Sarawak's first bio-industrial park (Refer to Chart 10), developed through the Sarawak Biodiversity Centre (SBC), is attracting global investments for bio-related product manufacturing. The SBC's efforts to document traditional knowledge and collaborate with key research and development players aim to commercialize biodiversity discoveries. This initiative supports sustainable biodiversity use by partnering with indigenous communities to manage their bioresources and share benefits from product commercialization. A significant achievement is the establishment of the world’s largest mass microalgae biomass production facility, CHITOSE Carbon Capture Central (C4), in collaboration with Sarawak Energy Bhd (SEB) and ENEOS Corporation.

In a bold shift from its reliance on oil and gas, Sarawak is forging a new identity as Southeast Asia's green energy hub. The state government is proposing an innovative plan of selling excess green energy to Singapore in exchange for investments in data center projects. This strategic move not only addresses Singapore's energy and space limitations while capitalizing on Sarawak's abundant resources, but also translating into a high value investment which benefiting both parties. With current energy generation capacity of 5.75GW, exceeding its demand of 4.27GW, Sarawak aims to increase its capacity to 9.5GW by 2032. This growth is fuelled by a transition to run-of-river designs in hydropower generation, departing from large-scale dams. Alongside hydropower, Sarawak is exploring solar energy installations, mirroring efforts in other Malaysian states. Furthermore, Sarawak is positioned to lead in the burgeoning hydrogen energy sector, evident in collaborations with major Japanese and South Korean firms namely SK Energy, Sumitomo Corp., and ENEOS.

Powering Tomorrow

The future trajectory of Sarawak hinges on its commitment to green energy. Endowed with abundant resources, Sarawak strive to maintain 60% of its electricity from renewable energy mix and embracing a paradigm shift, the state is steering away from conventional energy models towards a future where renewable energy forms the cornerstone of both economic growth and environmental sustainability. Through strategic investments, collaborative partnerships, and a dedicated workforce, Sarawak is not merely conceptualizing but actively constructing a sustainable future. These endeavours bring more than just financial investments, whereby they also usher in knowledge and innovation, propelling Sarawak onto the global stage as a leader in renewable energy. However, the pressing challenge lies in cultivating a skilled workforce and fostering technological expertise to realize its renewable energy ambitions fully. Thus, initiatives aimed at enhancing education and repatriating talent are imperative for cultivating a workforce primed for Sarawak's renewable energy sector of tomorrow.

Conclusion

We concluded that several stocks within our coverage have significantly benefited from or are closely correlated with Sarawak's comprehensive development plan. The strategic initiatives and investments in renewable energy and infrastructure within the region have created a favourable environment, drove growth, and enhancing the performance of these stocks.

Sarawak is home to smelting plants for industrial companies such as Press Metal Aluminium, PMB Technology, and OM Holdings. Consequently, these companies benefit from competitive energy rates provided by the Sarawak state through power purchase agreements. This provided long-term sustainable electricity with commendable tariff increments per annum, ensuring fixed energy costs. Press Metal consumes about 1,700MW daily to run its smelters in Samalaju and Mukah. The company also benefits from an income tax exemption under the 15-year pioneer status awarded in 2013 to its 80%- owned subsidiary Press Metal Bintulu (PMB), which runs the smelters in Samalaju Industrial Park. On the flip side, its associate company namely PMB Technology also has majorly invested to have its phase 3 plant in SIP to raise the production capacity of metallic silicon by 50% per annum (or 36k tonnes per annum with c.25MW power capacity). The project will be undertaken by its Subsidiary PMB Silicon Sdn Bhd to manage the metallic silicon manufacturing operations. To note, its existing Phase 1 and Phase 2 combined annual installed capacity stood at 108k tonnes, supplied by a total power of 129MW. Meanwhile, OM Holdings through the agreement provides OM Holdings with 300MW of low-cost environmentally friendly hydropower. Overall, this should provide a cost-competitive advantage to these companies compared to their peers, who largely rely on nonhydropower sources such as coal, which are less environmentally friendly.

Conversely, we believe Gamuda is well positioned to seize opportunities, having played a role in the Pan Borneo project, and showing promise in the renewable energy (RE) sector. With Sarawak likely to issue more tenders in this field and given Gamuda's partnership with ERS Energy, the company could see further growth, alongside with its RM2bn investment over a five-year period in the Malaysian and international RE space. Additionally, in Gamuda Green Plan 2025 it has committed to increase its RE asset portfolio to over 800MW in coming years.

Source: BIMB Securities Research - 7 Jun 2024