• Maintain O/W. The US is planning further restrictions on exports of artificial intelligence (AI) chips, as it aims to curb the use of these chips in data centres (DC) globally, targeting both countries and companies. We believe the direct impact on Malaysian technology firms is limited. While the indirect impact is difficult to ascertain, we note that local tech supply chains are insignificant in the global AI supply chain. We remain optimistic of a stronger 2025 on the back of a sector recovery, fuelled by firmer broad-based demand and the replacement cycle.
• Under the new restriction, US-based firms can apply for blanket permission to ship chips to DCs in most parts of the world, provided that no more than a quarter of their total computing power is located outside of Tier 1 countries, and no more than 7% in any one Tier 2 country. The vast majority of countries, including Malaysia, fall into the second tier of restrictions, which establishes maximum levels of computing power to a single nation is equivalent to 50k graphic processing units (GPU), from 2025 to 2027. Individual companies can access significantly higher limits if they apply for the validated end-user (VEU) status in each country and adhere to the rules and standards.
• The case of Malaysia. If the restriction comes into effect, it will likely affect DC expansion plans, especially outside Tier 1 countries including Malaysia. However, we understand that most of the new AI DCs in Malaysia are US-owned. Also, the 1.4GW capacity that is live (not all are AI DCs), under construction, or committed is well under the 7% threshold of the current 20.4GW DC size in the US alone (not including other Tier 1 countries), while the new 2.8GW capacity is still in the early stages. Hence, we believe the impact will be more evident for Chinese DC developers/offtakers dealing with more advanced AI chips.
• The new restriction could affect supply chains that are in the ecosystem of GPU and CPU servers. While the KLTEC took a dive (-2.44%) following the news yesterday, we believe only a few local companies are directly affected. Names like Nationgate (NATGATE MK, NR; >85% of revenue) and PIE Industrial (PIE MK, NR; <10% currently) could be directly affected given their businesses in the AI-server/switches assembly businesses. Potential indirect impact on other OSAT players such as Malaysian Pacific Industries (<38% of revenue) and Unisem (<18% of revenue) will be fairly minimal, limited to their exposure to certain power management chips used in the server/industrial segment due to potential slower output for servers.
• The potential curbing of AI-related chip exports, a major growth driver for the current semiconductor upcycle, could lead to a sector-wide slowdown, affecting the entire supply chain. Companies like Vitrox Corp (VITRO MK, NR), Mi Technovation (MI MK, NR), and Pentamaster, which produce semiconductor equipment, and Frontken Corp (FRCB MK, NR), which supports the largest fab, could see slower sales. Engineering support players to front-end equipment manufacturers such as UWC (UWC MK, NR), Sam Engineering (SEQB MK, NR), and Coraza Integrated Technologies may also face slower demand.

Source: RHB Research - 10 Jan 2025