Selloff in Malaysian construction stocks overdone — MIDF

• Despite turbulence in global data centre (DC) trends, MIDF assured that Malaysia remains an attractive destination for DC investments, highlighting the country’s strategic location, abundant resources and cost advantages. 

KUALA LUMPUR (Jan 31): MIDF Research has raised concern over the sharp selloff in Malaysian construction stocks, suggesting that market reaction may be overdone. 

The research house believes that concerns surrounding the US’ AI chip restrictions, the Stargate initiative and developments surrounding DeepSeek have unduly influenced market sentiment, particularly in stocks such as Gamuda (KL:GAMUDA) and Sunway Construction (KL:SUNCON).

Despite turbulence in global data centre (DC) trends, MIDF assured that Malaysia remains an attractive destination for DC investments, highlighting the country’s strategic location, abundant resources and cost advantages. 

It said industry feedback suggests no significant disruptions to upcoming DC projects, underscoring the nation’s ongoing role as a vital player in the DC ecosystem.

MIDF attributed the recent market volatility to external factors, such as the AI chip restrictions imposed by the Biden administration and concerns surrounding the Stargate initiative — a US$500 billion (RM2.2 trillion) plan backed by Microsoft and Meta to expand DCs in the US.

According to MIDF, while these developments may have rocked market confidence, fears about Malaysia’s diminished role in the global DC market appear to be overstated.

One factor that could moderate the impact of the AI chip restrictions is the emergence of DeepSeek, a Chinese AI model that has reportedly achieved ChatGPT-level performance with a fraction of the Nvidia chips required by other AI models.

If DeepSeek’s efficiency claims prove valid, MIDF suggests that US companies would be able to achieve the same processing power using significantly fewer graphics processing units.

This could, in turn, support the expansion of DCs in Malaysia or enable existing facilities to scale up, offsetting potential disruptions caused by AI chip limitations.

"If efficiency truly increases, Malaysia could see a shift towards lower-value yet higher-frequency DC projects, which could impact revenue projections for major contractors. This is a key area to monitor going forward," the research house said in a note on Friday.

Beyond the AI chip debate, MIDF highlighted that the DC sector is not solely reliant on AI chips.

It noted that DCs, including those focused on cloud-based services, serve various functions, such as providing resilience against natural disasters through geographically distributed infrastructure.

For example, a backup DC in Johor Bahru could mitigate service disruptions if an undersea fibre-optic cable connecting a US DC fails.

These factors underscore Malaysia’s long-term attractiveness as a DC hub, regardless of fluctuations in AI chip availability.

Looking ahead, MIDF believes that the construction sector’s long-term strength is intact, bolstered by strong job flows, ongoing mega infrastructure projects and sustained private-sector investments.

Key government initiatives, such as the Johor RTS Link and the Penang LRT are expected to provide further support for the sector.

MIDF’s top picks for the sector were Gamuda (“buy”, target price: RM5.42), IJM Corp (“buy”, TP: RM3.89), Sunway Construction (“buy”, TP: RM4.46) and Malayan Cement (“buy”, TP: RM6.81).

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