This article first appeared in The Edge Malaysia Weekly on November 4, 2024 - November 10, 2024

THE more than 40% sell-off over just four months in shares of YTL Power International Bhd (KL:YTLPOWR) and its parent YTL Corp Bhd (KL:YTL), which holds a 54.5% stake, is a stark contrast to the rally experienced before that.

Some quarters believe the euphoria has waned and reality has set in.

The powerful rally from March 2023 to this July reversed course partly because analysts have flagged the lack of updates from YTL Power’s Johor data centre project — touted as one of the first in the world to house the latest top-tier Nvidia chipsets used in artificial intelligence (AI). The current investigation by the Malaysian Anti-Corruption Commission (MACC)  into YTL Power’s unit YTL Communications Sdn Bhd added to the selling pressure.

In his first media interview since the announcement of the US$4.3 billion data centre in December 2023, YTL Power managing director Datuk Seri Yeoh Seok Hong dismisses any uncertainty surrounding its partnership with Nvidia Corp in the project.

“Don’t talk about rumours … Prove us otherwise. Then we will have something to comment on. In essence, we are doing a very serious programme.

“Go back to those announcements with Nvidia together with us, which we have made publicly [in December and March]. If we say something, we mean it. If not, we don’t say it. We believe in the AI future,” he stresses.

Information on YTL’s website shows that its data centre venture comprises co-location (the renting out of space to other companies based on take-up capacity) and providing AI cloud computing to data centre customers.

Typically, owners of AI data centres rent out processing power to interested parties such as hyperscalers, or even governments to develop and have full authority over their own sovereign AI. Sovereign AI refers to a country’s control over AI technologies and data. Malaysia has expressed its intention to be a top 20 AI nation globally.

First announced last December, the AI portion of YTL Power’s data centre project — fully funded by the company — was expected to house NVidia H100 Tensor Core graphics processing units (GPUs), the US giant chipmaker’s top product then.

In March 2024, this was changed to the newer and much faster GB200 NVL72 chipsets. “For the same space, you get more processing power,” a fund manager who follows the sector explains.

The delay in the project’s commissioning this year is attributed to the delay in the chipmaker’s production. In the latest update, Morgan Stanley reportedly said the situation had been resolved, with the first shipment expected by year-end.

“With the delay, everybody is getting more desperate to get the chipset,” says Yeoh, likening it to buying an Hermes bag. “You queue, you buy only one. They determine the price, and you have no say’.

“This is a seller’s market,” he adds. “Why do they (Nvidia) want us to invest? Their clients (such as hyperscalers) may design their own chips. If that happens, where does Nvidia reach its customers?

“For Nvidia, the relationship with cloud partners (under the Nvidia partner network programme or NPN) is where they can have a direct relationship with their customers without having to be a cloud player directly, [without] competing with their customers.

“They encourage us, give us priority over chips so we can grow. That’s the idea,” Yeoh explains. “That is why in the US you see the same model with CoreWeave (Inc) and Lambda (Labs), but there are only a few players doing this. The capital is huge.”

CoreWeave, in which NVidia has a stake, is listed as a “preferred” cloud partner of the chip giant, covering visualisation, compute and Nvidia AI. Lambda, meanwhile, provides both on-demand GPUs billed by the hour, and long-term capacity reserve to the bigger clients. It is listed as an “elite” solution provider using DGX Cloud and AI compute systems, among others. This offers fully integrated infrastructure solutions to deliver AI performance, according to Nvidia’s website.

Separately, Nvidia in its March statement with YTL Power said the facility, or supercomputer, marks “one of the first deployments” of the new chipsets on DGX Cloud.

At the 500MW data centre park in Johor, 48MW has reportedly been commercialised in phases since May, according to analyst reports. Another phase of up to 80MW is under construction. Among the parties involved are Singapore’s SEA Ltd (up to 72MW) and China’s GDS Holdings Ltd (168MW).

Of the 500MW capacity, 100MW is for the AI infrastructure, of which 20MW could begin operating from mid-2025 if the chipsets come in on time, analysts say.

But Yeoh is keeping mum on the details, saying only that the price to offer the services must be right, and that they “obviously” have offtakers ready. To be sure, there’s no official price tag yet for Nvidia’s latest chips, but Nvidia CEO Jensen Huang said early this year that it could cost US$30,000-US$40,000 a unit. Its predecessor cost US$25,000-US$40,000 a unit, according to analysts’ estimates.

“Obviously [we do have offtakers]! You must have clients or no bank will finance you ... We can’t announce it because of the NDA (non-disclosure agreement) … We have 500MW capacity and it is growing.”

When asked about the risk of US sanctions should YTL Power provide the processing power to China clients, Yeoh says “our legal and commercial team will have mitigated such risk before we can invest”.

Overall, the group is going through a capex-heavy cycle. YTL Power’s subsidiary Ranhill Utilities Bhd (KL:RANHILL) is investing in a 100MW gas plant in Sabah. In Singapore, its unit YTL PowerSeraya Pte Ltd is building a 600MW gas power plant at an estimated cost of S$800 million (RM2.7 billion) by end-2027.

Further away from home, in the UK, its wholly owned Wessex Water is expected to invest an estimated £3.5 billion (RM19.9 billion) in the next five years, compared with £1.4 billion in the current cycle. Even if tariffs are adjusted higher, one can still expect the higher depreciation in the assets to continue eating into profits from an accounting perspective, despite growth in the regulated asset base, Yeoh explains.

Asked about capex strain due to the aggressive growth trajectory, he says “the group never had capex issues”.

“We’ve always keep lots of cash. Just focus on our current businesses and profits, which is important. To invest, you must have a steady cash flow. 

“We have never failed to give dividends, good times or bad. The way we structure it, every investment is an SPV (special purpose vehicle), they borrow and are rated on their own, they give us dividends ... The [size of the] investment is not a real [concern]. It (YTL Power’s operations and expansion) will be disciplined.”

At end-June, YTL Power had cash of RM8.89 billion, and short and long-term borrowings of RM3.96 billion and RM28.43 billion respectively. Net gearing stood at 1.2 times, comparable to the likes of Tenaga Nasional Bhd (KL:TENAGA) and power producer Malakoff Corp Bhd (KL:MALAKOF).

Despite market rumours surrounding the data centre project, analysts have largely kept their bullish target prices (TPs) intact. Of the 14 analysts covering the firm, their TPs range between RM4 and RM7.45, with an average of RM5.64. All but one have “buy” calls on the stock, with JPMorgan having a “neutral” call at RM4. The counter closed at RM3.20 last Friday.

“At the present price, the market has heavily discounted the data centre valuation from YTL Power, which presents an opportunity to accumulate an AI/Nvidia proxy at 8-9 times FY2026 PE (price-earnings forecast for FY ending June 30, 2026),” says Kenanga Research’s head of research Peter Kong. The research house has a TP of RM5.20.

“But as YTL Power’s investment is no small sum, investors need to build conviction around clarity of end-user demand and earnings visibility. Kenanga views patience should ultimately be rewarded as onboarding speed may be dependent on various factors, including availability of official pricing for the latest GB200 superchips, for example,” he says, when contacted.

At this point, the valuation of YTL Power, not including any data centre contribution, is still at a discount to its ongoing operations, which includes its Singapore utilities, UK water business, Ranhill and the Yes 5G telco operations under 60%-owned YTL Telecommunications Sdn Bhd.

The uncertainty in the 5G network operating landscape does not help either, as Yes’ competitors mostly support a second network, leaving the first operator — Digital Nasional Bhd (DNB), in which YTL Power has a stake — at risk of losing customers.

Days after this interview, U Mobile Sdn Bhd was appointed to lead Malaysia’s second 5G network operator, beating Maxis Bhd (KL:MAXIS) and CelcomDigi Bhd (KL:CDB). It is understood that all parties that have signed agreements to buy wholesale capacity from DNB would have a chance to renegotiate pricing and lease terms if DNB is no longer the only party that can roll out 5G. U Mobile can also work with other mobile network operators, the Malaysian Communications and Multimedia Commission said when announcing U Mobile’s appointment.

In short, it puts DNB’s earnings prospects at risk. It also raises questions over the ownership of DNB should its existing shareholders exit to join the second network. Currently, Maxis, U Mobile, CelcomDigi, and YTL Communications each have a 16.3% stake in DNB. The remaining 34.9% is held by the Minister of Finance Inc. Telekom Malaysia Bhd (KL:TM) did not complete the equity subscription in time.

Asked to comment on the situation, Yeoh says, “The government said there is going to be two network [operators]. DNB will be kept whole and they will be able to compete with each other.

“We have a very clear position in our [DNB] shareholders’ agreement, where the government and all shareholders have agreed on how to do this. There’s a process that they need to follow.” However, he did not elaborate on the process.

Yeoh adds that “whoever takes over DNB must make it profitable”.

Over at YTL Power, the selldown in the stock continued in September, as it was dragged into a probe by the MACC on a previous government project to provide internet access and an e-learning platform to up to 10,000 government schools, called 1BestariNet, which was awarded in 2011.

On Sept 4, the group confirmed that MACC “requested information” from YTL Communications, which undertook the 1BestariNet project. Last week, it clarified that it had won the project via open tender against 18 other bidders, and asserted that it had not breached any contractual terms or violated any laws. Phase 3 of the project was discontinued by the government in 2019.

As the probe continues, MACC chief commissioner Tan Sri Azam Baki has reportedly said it is too early to draw any conclusions and that the agency would “consider the defence presented by YTL”.

“If people want to speculate or bet against you … the market is the market,” says Yeoh. “The important thing is [there is] no distraction. What is important is, are we in the right industry, and whether we are getting the right returns.”

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