RHB Investment Research Reports

Market Strategy - Data Centre-Artificial Intelligence Party Pooper

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Publish date: Mon, 20 Jan 2025, 11:15 AM
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An official blog in I3investor to publish research reports provided by RHB Research team.

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  • Taking the wind out of the sails. We are turning cautious on the data centre (DC) theme as the US Artificial Intelligence Diffusion (USAID) rules present a structural risk to the multi-year growth story. Broadly, we expect the policy overhang to cloud the prospects of the DC market in the short to medium term, potentially stifling investments. The proposals may have wider implications across the entire technology value chain. We lower our TPs on IJM Corp (IJM) and Mah Sing to factor in DC execution risks and policy uncertainties.
  • Concerns are on co-location providers where growth may be impeded in the medium to longer-term. The new rules favour US-based hyperscalers with AI computational capacity controlled via trusted allies (Tier-1 countries). The policy response will likely crimp the exports of Graphics Processing Units (GPU) to Tier-2 markets, with non-verified end user (VEU) entities likely to be the worst hit via capacity caps and conditional quotas. In our view, wholesale co-location providers stand to lose more, specifically those with Chinese links and/or offtakers. Co-location providers make up 70% of DC inventories (including live supply, under construction and committed), by our estimates.
  • Construction: Manageable impact. The recent selldown on DC contractors is overdone, in our view. Valuations of DC builders such as Gamuda (GAM) and IJM are at forward P/E of 17x, while Sunway Construction (SCGB) is trading at 18.9x, near the levels last seen during the 2017 construction upcycle. We believe the stocks should still trade at higher multiples vs 2017 as we believe AI chip restrictions look to be manageable. Maintain BUY calls and TPs of GAM and SCGB. We lower our TP on IJM to MYR3.97 (from MYR4.39) to factor in DC execution risks.
  • Property: Price weakness presents re-entry opportunity. We expect sentiment on property companies that are in talks with DC operators and/or offtakers to turn more cautious. Negotiations may see a longer gestation while pipeline DC deals could take more time to seal. Uncertainties remain as to the ability of DCs to access AI chips, and commence operations as scheduled. We cut Mah Sing's TP to MYR2.15 (from MYR2.70) with BUY call maintained following the share price decline. Keep BUY and TP on Sime Darby Property.
  • Utilities: Long-term growth uncertain. We believe the long-term growth story is crucial to Malaysia's energy transition roadmap as electricity demand from DCs is needed to support the continuous upgrade in transmission and distribution infrastructure. The USAID rules will cast uncertainties over long term regulated asset base (RAB) growth for Tenaga Nasional (TNB). For YTL Power (YTLP), we believe securing the national validated end-user (NVEU) is crucial and as such, we impute 20MW and 40MW AI-DC contributions in our FY26F-27F. We value the colocation DC at MYR0.46/share based on DCF with the AI-DC valued at MYR0.67/share.
  • Strategy. We note near-term regulatory risks stemming from the increasingly insular political sentiments in the US. Expect more volatility under the Trump Administration, but refrain from adjusting our 1,820pt end-2025 FBM KLCI target at this juncture until we observe better clarity on the US policy package.

Source: RHB Research - 20 Jan 2025

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