KUALA LUMPUR (June 25): Malaysia and Indonesia are expected to be the prime beneficiaries of rising demand for data centres due to artificial intelligence (AI) growth, according to CGS International.
The firm, in a recent report, discussed the implications of AI proliferation for sectors such as telecommunications, real estate, power producers, tech manufacturing and construction.
Nonetheless, CGS prefers data centre construction players over others, naming Gamuda Bhd (KL:GAMUDA) as its favourite in Malaysia. It has an ‘add’ call on Gamuda, with a target price (TP) of RM7.50.
“We prefer players involved in the value chain of data centre construction over operators, as they also benefit from a surge in investment by hyperscalers,” it said.
CGS also has a 'hold' recommendation for YTL Corp Bhd (KL:YTL), with a TP of RM3.88, and a 'hold' on its associate YTL Power International Bhd (KL:YTLPOWR) (TP: RM5.50), which has a 500MW green data centre park in Johor that will come on stream in 2024, and which has partnered Nvidia Corp.
Meanwhile, CGS said Sunway Construction Group Bhd (KL:SUNCON) is a leading choice in Johor for data centre projects, due to its first-mover advantage with two major projects (RM1.7 billion Sedenak and RM291 million K2).
In March, SunCon secured a data centre contract in Cyberjaya from a US multinational. Its integrated construction and prefabrication hub (ICPH) in Singapore and fully integrated structure also provide benefits.
“We have observed the smaller contractors (both listed and unlisted) also venturing into data centre projects. While we do not discount more competition in the future, we think the large hyperscalers who are setting up a presence in Malaysia will likely award construction contracts to the more established contractors, such as Gamuda, YTL and SunCon,” said CGS.
Property developers with extensive land, such as Sime Darby Property Bhd (KL:SIMEPROP), are leasing land to data centre operators.
Notably, Sime Darby signed a 20-year lease with a hyperscaler worth up to RM2 billion at the Elmina Business Park A, with renewal options for two additional five-year terms.
CGS said players involved in the value chain of data centre construction (such as equipment providers, real estate landlords and contractors) will benefit more in the next three to five years versus operators, due to the current stage of the industry’s growth cycle, which is still focused on building infrastructure for AI training purposes.
It said telecommunications operators may gain, but not significantly from an earnings perspective, although they stand to gain from increased connectivity requirements from a data centre capacity boom.
Malaysia top pick due to connectivity and RE potential
Citing DC Byte, CGS said Asean's data centre capacity could rise from 1,677MW in the first quarter of 2024 to 7,589MW by 2028, driven by increased data usage, AI computation demand, and land and power constraints.
It said Malaysia and Indonesia are top picks due to their prime locations for connectivity.
“Although Singapore currently has the highest data centre capacity in Asean, land and power constraints have pushed operators to explore alternative locations in Malaysia, Indonesia, Thailand, Vietnam and the Philippines,” CGS added.
Based on DC Bytes projections, CGS said the data centre capacity in Malaysia, Thailand, and Indonesia is expected to deliver a 32% to 56% compound annual growth rate (CAGR) in 2023-2028, far outstripping the 8% CAGR forecast for Singapore.
“We expect the rise in data centre demand outside Singapore to be driven by both global hyperscalers (Amazon, Google and Microsoft) and colocation providers, whose clients may require computing resources for AI development and deployment,” it added.
Meanwhile, CGS said with a current power reserve margin of 30% and planned new capacity of about 10.5GW by 2030, Malaysia is well positioned to meet growing energy demands. Additionally, about 5.5GW of retired gas power capacity can be utilised if necessary.
CGS said the National Energy Transition Roadmap is encouraging data centre operators to move to Malaysia, promoting the availability of renewable energy (RE) to meet sustainability and carbon reduction goals.
At the closing bell, Gamuda fell three sen or 0.5% to RM6.51, SunCon dropped two sen or 0.5% to RM3.73, while YTL Corp shed 15 sen or 4.4% to RM3.29. YTL Power was down 21 sen or 4.3% to RM4.67.