This article first appeared in The Edge Malaysia Weekly on October 23, 2023 - October 29, 2023

THERE is a lot happening at Dagang NeXchange Bhd (DNeX). This is evident in all three of its business arms — technology, spearheaded by semiconductor fabrication company SilTerra Malaysia Sdn Bhd; energy under Ping Petroleum Ltd; and information technology (IT) under Dagang Net Technologies Sdn Bhd.

The increase in activity is part of a bigger internal plan by the shareholders and management to bump up DNeX’s revenue to RM2 billion by the financial year ending December 2025.

Businesses and developments that could add to DNeX’s revenue include: (i) a US$1.5 billion (RM7.1 billion) microchip wafer fabrication plant for electric vehicles (EV) in Negeri Sembilan, in partnership with Taiwanese giant Foxconn and Saudi Arabian outfit Ajlan & Bros Holding Group; (ii) a RM1 billion contract for the National Integrated Immigration System (NIISe) project, for which it is holding ongoing discussions with the government; and (iii) an award for the exploration of a late life asset or oil cluster off the coast of Peninsular Malaysia, if market talk is to be believed.

But it may be premature to pop the bubbly.

For the four financial quarters ended June 2023 — it changed its financial year to December in mid-August — DNeX suffered a net loss of RM118.66 million on the back of RM1.3 billion in revenue, with earnings dragged down by negative goodwill of RM264.51 million and lower revenue mainly in the technology segment because of lower wafer shipments.

In an exclusive interview with The Edge, executive chairman Tan Sri Syed Zainal Abidin Syed Mohamed Tahir says, “We were looking at a turnover of RM2 billion either next year or in 2025 … but focused on technology and IT as a core, [and] maybe float the energy division.”

Plans are still fluid, but he reveals a couple of mergers and acquisitions with Ping Petroleum may take place before a flotation exercise. “We want to create value.”

DNeX morphed into a different animal after it took over SilTerra Malaysia Sdn Bhd in February 2021 (from Khazanah Nasional for RM273 million in cash) in partnership with Beijing Integrated Circuit Advanced Manufacturing and High-End Equipment Equity Investment Fund Center — also known as the CGP Fund — on a 60:40 basis.

DNeX funded its RM163.8 million portion of the SilTerra acquisition with a combination of private placement, internally generated funds and borrowings.

Since then, DNeX and CGP have had issues and sought arbitration in two instances.

The first was over DNeX’s plan to appoint four new board members. The second involved Mimastronics Technology Co Ltd, a unit of CGP, with the dispute centred on an additional RM120 million investment DNeX and CGP had committed to SilTerra, which would jeopardise one of the conditions for its acquisition — that the wafer foundry has to be 55% owned by a Malaysian entity, failing which its manufacturing licence will be withdrawn.

The dispute has been ongoing since November last year.

Syed Zainal says, “It’s taking a bit longer than expected. The process has started, arbitrators have been appointed, [and] we are quite confident the decision will be in our favour … I can’t say much but we hope to conclude everything by the first quarter of next year. But while the arbitration is ongoing, it doesn’t stop the day-to-day operations. It’s business as usual. It’s just a dispute among the shareholders, it’s not about the business,” he emphasises.

DNeX lost more than RM750 million in market capitalisation when the dispute was announced, and its share price never really recovered, having slowly dipped to a 52-week low of 37 sen on May 30 this year. Last Friday, DNeX closed at 41.5 sen, translating into a market capitalisation of RM1.31 billion.

“The share price [is down] because of the speculation on the outcome of the arbitration,” Syed Zainal says.

The dispute arose after Foxconn, an assembler of Apple Inc’s iPhones, acquired a 5.03% equity interest in DNeX in June 2021, but ceased to be a substantial shareholder by the end of the month after DNeX warrants were converted. Foxconn still has 120 million shares or a 3.8% equity interest in DNeX.

In May 2022, DNeX and Foxconn inked a memorandum of understanding to set up a joint venture (JV) company to build and operate a new 12in wafer fabrication plant in Malaysia that is capable of producing up to 40,000 wafers per month in the 28nm and 40nm technology segment.

A month or two ago, DNeX resubmitted its proposal to build a US$1.5 billion wafer fabrication plant in Negeri Sembilan with Foxconn and Ajlan of Saudi Arabia. Syed Zainal says that the plan is to manufacture components for the EV industry.

Both Foxconn and Ajlan have EV aspirations.

“The project [building of a wafer fabrication plant] is very much being pursued. We have resubmitted our new proposal to the government. It will be focused on electric vehicles. Foxconn wants to position itself as a global electric vehicle component supplier, so, they (Foxconn) have already made a number of agreements with many companies, so to do that they need to secure the supply of microchip wafers. That’s where we come in. Saudi (Arabia) have also said they want to produce their own electric vehicles, so having access to semiconductor supply becomes very important.

“So we are investing with them (Foxconn and Ajlan) in Malaysia in a wafer foundry, on a specific technology meant for electric vehicles … this is what we have resubmitted to the government, in the last one or two months,” Syed Zainal says.

How this pans out remains to be seen.

Last Wednesday, DNeX announced that Dagang Net Technologies had secured a RM18.07 million contract from the Port Klang Authority to supply, install, develop, configure, integrate, migrate, test, commission, maintain and implement the Malaysia Maritime Single Window Phase 1 for the Ministry of Transport, for a 3½-year period.

This contract complements DNeX’s existing National Single Window (NSW) system for processing international trade through a single window. DNeX received a contract extension from early September 2021 until end-August 2024 for the NSW, despite talk of the government liberalising the process.

DNeX, Syed Zainal says, is in talks with Malaysia Airport Holdings Bhd and Malaysia Airlines Bhd on the handling of airport cargo. “DNEX is looking to be the platform operator for the government. We are looking at the platform for land, sea and air.”

However, with margins on a transactional basis, the rates charged are likely to be controlled by the government anyway.

Syed Zainal is not deterred by this. “It provides a sustainable income for us because the contract is quite long.”

In March, DNeX signed a JV agreement with Ajlan to undertake the business of systems integration in smart cities and large enterprise projects in the Middle East and North Africa.

The JV involves DNeX’s proprietary technology, TradeSwift DAGANGNET, an all-in-one trade facilitation super app for digital trade solutions, involving shipping and forwarding, for manufacturers, small and medium enterprises, importers and exporters, which DNeX plans to market in the Middle East with Ajlan.

In Malaysia, DNeX is looking at charging RM25 to RM28 per month for the use of the SuperApp, which is likely to be replicated in the Middle East.

Earlier this month DNeX also inked a collaboration agreement — to explore opportunities in IT for big data and analytics, and artificial intelligence — with Strateq Sdn Bhd, a global multidisciplinary technology enabler powering digital strategies for healthcare, energy, utility, financial services and the public sector with end-to-end digital capabilities.

Perhaps the icing on the cake for DNeX’s IT arm could be the RM1 billion NIISe contract from the Ministry of Home Affairs to modernise the Immigration Department, via the use of advanced digital applications.

Iris Corp was awarded the RM1.12 billion contract in May 2022, but it was terminated in August this year.

“All I can say [about the NIISe contract] is that we have put a proposal [to the government]. Discussions are ongoing, the government is still weighing out [things], they are looking at options … We leave it to the government to decide, but I must say we have the track record … Our track record with government projects has been very good,” Syed Zainal says.

However, there are bound to be other bidders as well, and this could dampen DNeX’s chances.

If there is truth in the market talk, Ping Petroleum — which is 90% controlled by DNeX — is slated to be awarded a contract by Petroliam Nasional Bhd (Petronas). In early 2022, the national oil company had called for bids for 14 exploration blocks, six clusters of discovered resource opportunities and one cluster of late life asset, in its Malaysia Bid Round 2022.

Ping Petroleum is said to be the front runner for the late life asset, the Abu Cluster off the coast of Peninsular Malaysia. Considering it is a brownfield asset, the cluster should be able to come into production very fast and contribute to DNeX’s bottom line.

Syed Zainal does not confirm or deny the speculation but says, “We are a Malaysian company so we want to have Malaysian assets.”

“Oil is at about US$90 per barrel today so the margins are quite hefty. Now, oil will not remain at US$90 per barrel, it’s not going to be there forever, but if it maintains at US$60 or US$70 per barrel, we will still have enough margin because we are a low-cost operator … That’s very important for people to recognise that Ping (Petroleum) is a low-cost operator compared with other exploration and production companies. It’s a skillset that we have acquired.”

In January this year, Ping Petroleum signed two production-sharing contracts with Petronas — for the development and production of the Meranti cluster off Kuala Terengganu, in a 60:40 partnership with Duta Marine Sdn Bhd; and for Cluster A off the coast of Miri, Sarawak, in a 70:30 partnership with Petroleum Sarawak Bhd.

Last month, Ping Petroleum signed a farm-in agreement for the Fyne oilfield, located near its existing Anasuria floating production storage and offloading (FPSO) vessel in the central North Sea.

Ping Petroleum and Hibiscus Petroleum Bhd both hold a 42.5% equity interest and Rapid Oil the remaining 15%.

“We are working with another company, together with Hibiscus (and) tie-in to our existing FPSO … so it’s not a standalone but a tie-in to our existing asset; so it enhances the efficiency of our existing asset,” Syed Zainal says.

DNeX has proposed a private placement to raise up to RM133.44 million to facilitate the expansion in the Fyne field.

DNeX suffered a net loss of RM239.77 million in its third quarter ended March 2023 after Ping Petroleum was hit with a RM252.4 million energy profit levy in the UK for its oil and gas operations, which resulted in DNeX’s total tax expenses rising nearly eightfold to RM277.97 million.

As at end-June this year, DNeX had cash and cash equivalents of RM417.43 million, and under its non-current assets it had restricted cash and cash equivalents of RM343.13 million. On the other side of the balance sheet, the company had secured long-term debt obligations of RM245.15 million and secured short-term debt commitments of RM43.79 million. DNeX’s finance costs for the period ended June were RM50.51 million. 

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