We came away from the 3rd Data Centre and Cloud Infra Summit Malaysia 2024 feeling optimistic on the earnings potential for telco players emanating from the recent influx of digital investments in Malaysia. In particular, we believe the key beneficiary is TM, as we anticipate strong demand for submarine cables and landings that connect data centers (DC) to global networks. Meanwhile, to a lesser extent, other telco players may also gain from increased adoption of cloud services powered by artificial intelligence (AI). This is given the emergence of locally sited DCs that are capable of AI computations and offer low latency edge computing. We maintain OVERWEIGHT on the sector as we believe there are opportunities to monetize 5G solutions, managed services and generative AI cloud offerings from enterprise clients. Our sector top picks comprise TM (OP; TP: RM7.22) and CDB (OP; TP: RM5.83).

The key takeaways from the conference are as follows:

1. The Malaysia Digital Economy Corporation (MDEC) reiterated the importance of digital investments to boost the national economy. Moving forward, the vast network of DCs emerging in Johor will serve as the platform for the expansion of Malaysia’s cloud services. Meanwhile, MIDA (Malaysian Investment Development Authority) believes that tax incentives will continue to be one of the key drivers in attracting digital investments. This includes: (i) investment tax allowances of up to 100% of capex incurred to offset up to 100% of statutory income of up to 10 years, and (ii) 10%- 15% preferential tax rate up to 10 years for digital investments such as submarine cables, data centers, and cloud or data hosting facilities.

2. To capitalize on the recent stream of digital investments in Malaysia, MDEC plans to introduce the concept of ‘digital city’ that is distinct and “beyond” the notion of smart cities. These plans will be announced by MDEC soon alongside Malaysia’s Digital Ministry and the Ministry of Housing and Local Government.

3. All new DCs in Johor are designed to handle a minimum power load of 10 kW per rack. This is to accommodate highperformance graphics processing units that are capable of AI computations and tasks. Hence, this differentiates DCs in Johor from its legacy counterparts, which typically support power loads of less than 5 kW per rack. As such, these DCs are expected to attract hyperscalers that require high power capacities of 5-10 kW per rack. Meanwhile, DCs capable of hosting servers that are capable of generative AI tasks require capacities exceeding 10kW per rack.

4. The market for cloud services in Malaysia is finally poised for growth, mainly catalyzed by the government's recent adoption of these services. This is based on observations by Credence, TM’s cloud and digital services subsidiary. Therefore, TM has been actively engaging government agencies and key industries (e.g. manufacturing, banking, healthcare, energy, education, and utilities) to implement cloud solutions. This is aligned with TM’s appointment as one of the government’s cloud service providers, alongside Google Cloud Malaysia, Microsoft Malaysia, and Amazon Web Services.

5. TM is also committed to build enabling digital infrastructure (e.g. fiber backhaul, data centers and submarine cable landing stations), which is one of the key strategic thrusts under the MyDigital economic blueprint. On the back of this, TM plans to more than double its DC capacity (without specifying the timeline) via development of newbuilds at Cyberjaya and Johor. Furthermore, TM believes that there is robust demand for DC capacity, emanating from hyperscalers and content providers. To recap, TM One’s key DCs in Malaysia include: (i) Klang Valley Core Data Centre (20MW) in Cyberjaya, and (ii) Iskandar Puteri Core Data Centre (20MW) in Johor.

6. At this juncture, TM One’s Alpha Edge cloud services encompass 3+1 availability zones, covering seven industries with more than 70 services. Recent projects implemented for the government and its corresponding results include: (i) cloud-based platform for delivery of national exam results for the Ministry of Education enabled 4.5m results to be viewed online within the first 15 minutes after its announcement, and (ii) Smart Traffic Analytics and Recognition System (STARS), which incorporates AI-powered traffic lights reduced travel time by 33% and carbon emissions by 49%.

Stay overweight. We believe that investors are more upbeat on 5G as monetization opportunities emerge from selling managed solutions and cloud offerings to enterprise clients. Furthermore, as adoption of generative AI cloud solutions gain momentum, this could emerge as a future earnings growth driver. On top of that, the looming announcement of the official 5G Dual Network policy directive would finally resolve uncertainty that has dragged sentiment on the sector. We maintain our OVERWEIGHT recommendation on the sector with our top picks being TM and CDB.

Source: Kenanga Research - 15 May 2024