Booming data centre industry. In recent years, Malaysia has garnered billions of investment from both domestic and global players in data centre (DC) development. The turning point was the moratorium introduced by Singapore to restrict the growth of data centre development in 2019, which resulted in players shifting their focus to Malaysia in search of land and infrastructure (for instance, cable landing stations, fibre & undersea cable connectivity, stable power & water supply). Malaysia has become an appealing destination and recognised as a prominent regional data centre, reporting a total investment of RM76bn between 2021 and 2023. Some of the key hyper-scalers include Microsoft Corp, Amazon Web Services, K2, GDS Holdings, Yondr Group and NTT Ltd while local players are Telekom Malaysia and YTL Power. Currently, there are more than 40 DCs in Malaysia with a total capacity of 120-150MW, and expected to grow to 1,400MW over the next 5-10 years.

What are the concerns? The surge in new capacity addition is driven mainly by the booming cloud services, big data processing and development of artificial intelligence as well as technology advancement. Undoubtedly, demand for data and storage is on a rising trend but the exponential growth in new capacity could potentially lead to an oversupply situation. We believe those with secured offtakers would be in a better position as they would have generally locked in longterm commitments of perhaps 10 years or more. Meanwhile, water and electricity demand from hyper-scale DC is expected to be enormous, particularly for the purpose of running an effective cooling system and power supply system. Tenag Nasional Berhad (TNB) was reported to have received 74 applications from DC customers with a total maximum demand of over 11,000MW, compared to 635MW delivered in 2023. TNB projects a potential demand from DC in excess of 5,000MW by 2035. Although renewable solar energy may be an alternative to conventional gas or coal-fired power, it is restricted by interrupted supply (only 8 hours of sunlight). The significant water usage also presents issues such as insufficient water supply and environmental contamination.

Competition in fixed broadband. Given a saturated mobile penetration rate, future earnings growth of MNOs will be dependent on their ability to provide convergence solutions. With the increasing demand for internet access, most major operators are expanding into fibre business to safeguard their market share. Based on the latest available statistics, fixed broadband penetration is relatively low at 41% compared to mobile broadband of 128%. However, pricing is expected to remain competitive following the revision in wholesale prices of the new Mandatory Standard on Access Pricing (MSAP). Therefore, any growth in subscriber base may not necessarily be accompanied by strong earnings growth for the telcos.

Neutral on telco sector. Telekom Malaysia (TM) is our preferred pick as the increasing demand for mega bandwidth from hyper-scalers connecting Malaysia to Singapore should benefit TM Global and TM One. Although TM is currently one of the largest DC owners in the country, it only has ~20MW capacity. The group is expected to increase capacity by 40MW over several phases with the first phase to be operational by 2026. Additionally, it has established a joint venture with Singapore’s Singtel to build a 64MW greenfield data centre in Johor. As details remain sketchy at this juncture, we believe visible earnings impact will only be apparent earliest in 2029. While we believe that CelcomDigi (CDB), being country’s largest mobile player, has the capability to execute a successful deployment of 5G services, we are not likely to see any meaningful contribution in the near future. Given the low take-up rate for 5G, slow monetisation would suggest a subdued FY24F earnings growth for the sector.

Source: PublicInvest Research - 26 Jun 2024