Data centre investment charge in Asean - centres are a multi-year theme for capital market investment in region

DATA centres are a multi-year theme for capital market investment in Asean. What’s more, data centre-led accretion is expected to be sustained over the next five to seven years.

This is how Maybank Investment Bank (Maybank IB) Research summarises the outlook on the potential for further upside in data centre investments.

Amid the ongoing data centre boom in the region, the brokerage identifies Singapore Telecommunications Ltd (Singtel), Mapletree Industrial Trust (Mint), YTL Power International Bhd, Sunway Group, Gamuda Bhd, Sembcorp Industries Ltd (SCI), Solarvest Holdings Bhd, Gulf Energy Development PCL and CSE Global Ltd as key beneficiaries.

Maybank IB Research, which recently hosted data centre expert Daryl Dunbar on an investor call attended by 120 investors, highlights concerns over the lack of direct listed plays in the data centre space in Asean, while indirect plays, especially in Malaysia, have already surged, raising questions about whether the upside is fully priced in.

Citing Dunbar, Asia Pacific managing director at Digital Realty, the brokerage notes with high confidence that data centre operators in the private sector are likely to list soon.

Maybank IB Research points out that while investors agree on the growth in data centre demand, they see risk of oversupply, excessive announcements that may not hit the ground, a strain on power/water infrastructure and the lack of direct listed data centre plays.

However, the risk of oversupply is limited, according to Dunbar and Maybank IB Research’s analysis.

“Only a few investors we met are concerned about the risk of oversupply, given large announcements and high vacancy rates in markets like Manila in the Philippines and Ho Chi Minh City in Vietnam,” Maybank IB Research says.

“On the other hand, several investors are concerned the new capacities being projected are just announcements leading to share price rally but may not translate to new builds,” it adds.

Of the 6GW of announced new builds (four times increase versus live capacity), Maybank IB Research estimates that only one-third are under construction/committed, while the rest are at the early stage.

“We expect early stage announcements will materialise depending on demand, which in turn can help prevent oversupply,” it argues, adding that Dunbar points out that demand remains strong, led by hyperscalers and new builds can easily be absorbed.

Can Malaysia continue to capture a significant share of the data centre market, or will other markets catch up?

According to Maybank IB Research, Malaysia-based investors are concerned that following large announcements, power and water supply could constrain new data centre development.

Meanwhile, other Asean markets have favourable conditions, raising the risk of Malaysia losing its competitiveness.

“We think new data centres going live in Malaysia will not be as many as announced and they are likely to be spaced out and unlikely to strain infrastructure,” it says.

Based on its estimates, water usage for a 1GW or 2GW data centre infrastructure in Johor would account for 3% to 6% of the current water treatment capacity in the state.

“With improving data centre water usage effectiveness and potential expansion in Johor water supply infrastructure, we don’t see water availability posing major challenges,” MaybankIB Research says.

Quoting Dunbar, the brokerage notes the key bottleneck in data centre builds at the moment is the high lead time to secure electrical/cooling components, such as gensets, rather than power/water or permit limitations.

Key regional players

Among listed companies in Malaysia, YTL Power, Sunway, Gamuda and Solarvest are key picks for the data centre theme, according to Maybank IB Research.

It notes that YTL Power has two data centres, and is now building one in Johor of up to 72MW. The group is also collaborating with Nvidia to develop artificial intelligence in YTL Power’s data centre park in Johor.

YTL Power also benefits from its involvement in various elements of the data centre supply chain, including power generation, water and sewerage, telecommunications, and property development.

As for Sunway Group, Maybank IB Research notes that of the RM7.4bil outstanding order book as at end-June 2024, 51% are data centre contracts.

Meanwhile, Gamuda recently secured the construction of a hyperscale data centre in Elmina Business Park from Sime Darby Property valued at RM815mil.

Gamuda also clinched the mechanical, electrical and plumbing and fit-out works for the same data centre from Pearl Computing Malaysia Sdn Bhd valued at RM929mil, representing Gamuda’s first major win for data centre jobs worth more than RM1bil in total.

For power hungry data centres, renewable power requirement remains high. It benefits pure-play solar engineering, procurement, construction and commissioning players, and waste-to-energy asset owners like Solarvest will benefit.

In Singapore, Singtel owns 62MW of data centre capacity, and will be adding 58MW in the city-state, while its regional partners will take total capacity to 200MW by 2026 and 400MW over the long term. It aims to double data centre earnings before interest, tax, depreciation and amortisation by 2028.

Mint has about 50% of assets consisting of data centres in the United States, Singapore and Japan, while its sponsor has identified data centre as a key sub-sector to drive asset under management growth from S$77bil to S$100 to S$120bil.

Meanwhile, SCI is the leading power provider to data centres in Singapore with 33% of data centre energy requirements supplied by Sembcorp, while CSE is serving a major US cloud provider in the data centre space for power management systems and solutions, and is in the midst of qualification with other cloud providers.

In Thailand, Gulf Energy is on an aggressive capacity expansion phase from 2.7GW in 2020 to 8.4GW in 2025.

The company has a 40% stake in GSA Data Centre (first phase of 20MW), and it has announced a multi-year agreement with Google Cloud to develop sovereign cloud services in Thailand.