Week Ahead 20 April on YTL & YTL Power

US stock markets were closed on Friday for Good Friday.

News flows related to the trade war was relatively thin in past 2 days in the US. The only major news from the US was the threat from Donald Trump to fire Fed Chair Powell last Thursday, causing US stock markets to drop.

The Hong Kong stock market was closed last Friday in observation of Good Friday, so I suspect it may open low Monday to reflect the prevailing uncertainties around US-China trade war. But the severe shocks related to trade war have been reflected in the huge drops in Hong Kong stock markets, with the Hang Seng index having dropped from a high of 24,500 points to below 20,000 points earlier this week.

Chinese exporters seek new markets to offset US tariff impact amid trade war

Chinese exporters have begun seeking new opportunities to tap into global markets in the face of the ongoing trade war with the United States.

Key to this are trade fairs, where many can showcase their products and create sales channels to offset tariff impacts, with the end goal of finding other opportunities beyond traditional markets like the US.

Of the several trade fairs, two major trade fairs—the Canton Fair and the China International Consumer Products Expo (CICPE)—serve as key platforms for businesses.

The booths of this year's Canton Fair in the southern Chinese metropolis of Guangzhou, Guangdong Province, are highly sought after among Chinese exporters hoping to build new business relationships in alternative markets.

"We will surely expand our markets abroad besides the United States. This product is a key focus at present. It has up-to-date functions. Clients from Poland and the Netherlands wanted to sign an exclusive distribution agreement with us right here," said Tang Shousheng, an exhibitor.

Beyond sales expansion, Chinese exporters are also investing in overseas production facilities to strengthen their presence in global markets.

Quest to diversify and keep resilience

"We plan to invest 10 million yuan (about 1.37 million U.S. dollars) in building overseas factories. In fact, we have already found local suppliers for essential components such as plastics, SMT (surface-mount technology) patches, and packaging materials like colour boxes," said Huang Shuyu, an exhibitor.

Organisers of the Canton Fair say around 31,000 firms are participating in this year's fair, which runs till 5 May, up by nearly 900 compared with the previous one.

At the just-concluded CICPE, many Chinese exporters tried to diversify their brands and supply chains, hoping to ensure they remain resilient in an unpredictable trade environment.

Some businesses are introducing proprietary brands tailored to specific international markets and to expand their domestic market share.

"We started to launch our own brands last year, and these products have performed very well in the Russian market," said Ran Yan, an exhibitor.

Despite the trade disruptions, many exhibiting businesses remain committed to global expansion "We have not given up the global industrial layout in terms of our overall brand strategy," said Li Rongsheng, said one exhibitor.

The US and China are locked in a trade row that has seen Washington impose tariffs of more than 145 percent on Chinese goods entering the US.

In March, China's exports jumped 12.4% from last year in a last-minute flurry of activity as companies rushed to beat increases in the tariffs, and analysts forecast sharp setbacks.

My take: This shows that Chinese exporters are trying all means to explore overseas markets besides the US. As stated before, exports to the US make up about 15%-16% of total China exports in 2024. With the high Trump tariffs, China exports to the US will plunge to low levels. With the exemption from tariffs granted for smartphones, PC and servers, which covers some 22% of total China exports to the US, the 145%-245% tariffs on other China exports will cause total China exports to the US to plunge by 70% or so, making total China exports to shrink by 10%-12%.

China is trying to explore new overseas markets and increase exports to markets other than the US, and to divert some US exports towards domestic markets. With all these efforts, total China exports may shrink by just 5% or smaller quantum even without the US market.

Australian pension giants worry about Trump

On a Monday morning in February in Washington, more than a dozen Australian pension executives showed why everyone in the United States with a big project to fund wants to meet them.

“We have capital to invest in the United States – that was the purpose, that was the key message,” said Sam Sicilia, chief investment officer of the A$115bil or about US$73bil pension fund Hostplus, after returning from the Australian Super Summit. “We’ve exhausted our home country. We come to you wanting to invest money in the United States.”

The executives were joined at the Australian Embassy by US Treasury Secretary Scott Bessent, Commerce Secretary Howard Lutnick and Australian Treasurer Jim Chalmers.

Industry analysis released to coincide with their arrival for the roadshow showed that Australia’s A$4.2 trillion workplace-based pension system – known locally as superannuation or super funds – has about US$400bil invested in the United States.

By 2035 that number is projected to climb to US$1 trillion.

Australia is also on track to surpass Canada and Britain to become the world’s second-largest retirement system by 2031, said the report commissioned by IFM Investors Pty Ltd, a global asset manager owned by more than a dozen pension funds.

“The fact that Australia is coming out into the world with such a powerful amount of capital means you have to be taken seriously, and people are going to cultivate that,” said Henry Cornell, founder and senior partner of private investment firm Cornell Capital LLC. “And I think that creates a huge opportunity for Australia.”

The summit had been planned for months, but it came at a time of great political uncertainty.

“It is truly a question that is on every investor’s mind, right?” Sicilia said when asked, before the April tumble, how pension funds could increase US investments with confidence.

He focused on the long-term nature of the investments that funds like his are interested in.

“When we collectively buy an airport, it’s a 50-year concession. You operate the airport for 50 years. When you buy a seaport, it’s typically 99 years – you are taking that risk. If you were worried, truly worried about things on that time horizon, you can’t invest anywhere.”

The shock that some of Australia’s institutional investors are feeling is palpable.

“Like every other fund in Australia, we have quite a large exposure to US assets, and that’s been a very good place to be investing over the last couple of years, particularly given the US tech story,” said UniSuper chief investment officer John Pearce in an investment update podcast in April. “We’ll be questioning that commitment. Frankly, I think we’ve seen peak investments in US assets.”

Michael Winchester, head of investment strategy at Aware Super, one of Australia’s biggest pensions, says the fund is looking to make the most of the global market drop by finding cheap stocks to buy.

But the fund will be more discerning about buying private assets in the United States.

“I think we definitely need to have a think about whether the United States is the right destination on that unlisted asset side,” he said.

About A$3.8bil flows into the pension system every week, Bloomberg Intelligence estimates. It’s the kind of capital many companies covet.

At the Super Summit in Washington, Bessent said the appeal of Australian super money as a source of investment was that its growth didn’t depend on commodity prices, unlike with many sovereign wealth funds.

“Your regularity, sustainability and trajectory are really preferable,” he said.

Mark Delaney, chief investment officer of AustralianSuper, a pension fund of A$365bil and the country’s largest, told a panel discussion in New York that the system could offer institutional heft.

“Think about the size of the US pension market: Most of this is run through advisers and retail individual-style transactions,” he said. Australia has a “more institutionalised model with bigger pots of capital, far more concentrated compared to, say, the United States or Britain.”

Australian pensions typically have about a third of their portfolios invested in global equities, a sizeable chunk from US companies.

Too big for home

US fixed income is also a mainstay of superannuation funds. Having outgrown their home country, the funds have been looking to deepen their exposure to private markets, which offer longer investment horizons.

“In the United States, we’ve always called your superannuation system the ‘wall of money’, ” says SS&C Technologies Inc chairman and CEO Bill Stone.

The Nasdaq-listed maker of financial-services software recently entered a partnership with Australian wealth manager Insignia Financial Ltd.

Australian investors were told during their visit that US infrastructure in particular is one area that needs money, according to people who attended the summit.

“If you look at the infrastructure deficit across the United States, just the quality of the roads and the bridges and all the rest of it, there’s an enormous amount of money that would be spent,” IFM Investors chair Cath Bowtell told a forum in Melbourne after returning from the United States.

Private capital from investors such as pensions, she said, “would improve the quality of the infrastructure in the United States”.

Ultimately, the depth of the US market makes it hard to ignore.

“There’s a government in there at the moment that appears to be more erratic than we’ve seen before,” said Hostplus’ Sicilia. “And yet capital still flows into the United States.” — Bloomberg

My take: This shows the depth of Australian pension funds - A$4.2 trillion or US$2.7 trillion! In comparison, our EPF has total investment funds of about RM1.1 trillion or just US$250 billion. There is another steady contribution inflows of some US$125 billion into Australian pension funds every year, plus potential investment income of some US$80 billion a year based on average return rate of 3% p.a. So Australian pensions have an investment war chest of US$200 billion every year.

They have invested about US$400 billion in US assets, and expect to pump that up to US$1 trillion in next 10 years. While they prefer long term infrastructure assets but there may not be so much of private assets in the US for their investment appetite. Hence, I expect a good portion of these investments will flow into US Treasuries, perhaps some US$200-300 billion to help resolve US refinancing needs.

YTL Communications lands fibre optic deal for 1,600km RAC railway tracks

YTL Communications Sdn Bhd (YTL Comms) has been selected by the Railway Asset Corporation (RAC) to develop fibre optic infrastructure along 1,600k of Malaysia’s railway tracks.

Transport Minister Anthony Loke Siew Fook said this initiative is part of efforts to strengthen the nation’s digital infrastructure by providing access to more network facility providers.

“This approach will not affect the existing systems or agreements currently in force. On the contrary, it will generate additional revenue that can be reinvested into the refurbishment of critical assets, upgrading of station facilities, as well as supporting the operations of Keretapi Tanah Melayu (KTM) and investment in new rolling stock.

“It demonstrates that with creativity and good governance, we can transform public infrastructure into a multinational engine of growth, physically, digitally and economically,” he said in his speech at RAC’s Customer Appreciation Ceremony and Open Day at Double Tree Hotel on Friday.

In a press conference later, Loke said YTL Comms was selected as they offered the highest returns to RAC in their proposal.

“After going through the RFP process, YTL Communications was selected because they offered the highest returns to RAC in their proposal. However, it’s important to note that this is not exclusive to YTL Communications.

“We have made it clear that there is no longer any exclusivity. From time to time, we will consider other telecommunications providers as well. This is to ensure, firstly, that we have more fibre optic networks in place to improve our digital reach and communications infrastructure.” he said.

The fibre optic infrastructure will cover 1,600 kilometres of railway tracks, running from Padang Besar to Johor Bahru and Tumpat in Kelantan.

This will be the second fibre optic infrastructure, built nearly 30 years after the first one.

My take: Though this new fibre optic infrastructure is not exclusive, but it gives great advantage to YTL Comms to capture the huge demand now from the new data centres being built in Malaysia and Singapore.

The existing 5,000km of fibre optic network is owned by Fiberail and was laid over 20 years ago. Fiberail has a 30-year concession to operate it from 2002 to 2032. This old fibre network cannot serve the new data centres of hyperscalers. Fiberail only developed parts of the railway track, it does not cover the entire 1,600km of railway tracks as what YTL Comms will cover.

When Fiberail developed the fibre network some 15-20 years ago, its business strategy was to sell bandwidth and to serve residential broadband and wholesale broadband to corporates. In fact, YTL Comms is leasing some bandwidth from Fiberail for its Yes 5G network requirements. Fiberail did not foresee how the fibre business would evolve, hence its fibre network cannot serve hyperscalers.

What YTL Comms will be laying is the new type of dark fibre. One cable of dark fibre can carry 4 ducts x 288 cores of fibre inside. A hyperscaler typically requires 100-500 cores of fibre connection between their data centres. That means one cable of dark fibre can serve three to five hyperscalers.

There is currently huge demand for such fibre connection between Malaysia and Singapore and connection from Malaysia / Singapore all the way to China. Hyperscalers now have to go through submarine cables via Singapore or wait for more landing points into Johor from the South China Sea.

Transport Minister Anthony Loke is set to undertake a working trip to Bangkok next month, aiming to enhance cooperation between Malaysia and Thailand regarding the Pan-Asian Railway network - an initiative aimed at connecting China to South-East Asia through an integrated rail network.

Loke noted that while the railway tracks linking Malaysia and China via the Pan-Asian route have been completed, operational hurdles remain due to varying government regulations, customs processes, and immigration clearances.

Since there is a railway network already all the way to China, it will be relatively fast for other countries to lay fibre as well. Once YTL Comms complete laying the dark fibre all the way from Johor Bahru to Padang Besar, and the connection to Singapore, hyperscalers will be able to use the land fibre network to connect their data centres in Singapore and Malaysia all the way to China.

The ongoing rate for dark fibre leasing is around RM5,000 per core per km per year, assuming a hyperscaler takes up 300 cores and the entire 1,600km of fibre network from YTL Comms, the potential revenue contribution from one hyperscaler may amount to RM2.4 billion a year. At the initial stage, even if we assume hyperscalers to take up fibre lease from Johor / Singapore to KL (~350km), the potential revenue contribution from one hyperscaler may amount to RM525 million a year.

I gather that hyperscalers such as Meta and Microsoft have expressed interests to lease dark fibre for at least 350km or even the entire 1,600km.

For my own earnings forecast, I assume a gross revenue contribution of some RM1,050 million (equivalent to 2 hyperscalers taking up the 350km connection between Johor/Singapore and KL/Putrajaya) a year from FY2027 onwards from this dark fibre projects (both Johor-Singapore and this 1,600km railway tracks). I assume an EBITDA margin of 70%+, so EBITDA of RM735 million a year. Assuming capex of RM1 billion and depreciation period of 30 years, potential depreciation charges of these projects may amount to about RM30-35 million a year. For simplicity, I assume all equity and no bank borrowing to fund these two projects (as YTLP is raising some RM4 billion cash from the bonus warrants proposal), the pretax profit contribution to YTL Power may amount to RM700 million x 60% = RM420 million a year.

If YTL Comms managed to secure a hyperscaler to lease the entire 1,600km, then potential pretax profit contribution to YTL Power would increase to RM1 billion a year. That would be massive!

YTL’s subsidiary NSL secures big contract for data centre project in Abu Dhabi

Dubai Precast LLC has been awarded the contract for the AUH08 Data Centre project in Masdar, Abu Dhabi.

The facility will feature a full precast building system, and includes G+1+R structure with sandwich walls, columns, beams, stairs and hollow-core slabs. The design phase is already underway, with production scheduled to begin by end Q2 2025 and installation targeted for completion by end Q4 2025.

This marks another major step for Dubai Precast in supporting the regions’s growing data infrastructure.

Dubai Precast is a subsidiary of NSL, Singapore which YTL acquired in 2024.

My take: While the contract sum is unknown, but this project award marks a significant milestone for NSL to break into the Middle East markets. Abu Dhabi, Saudi Arabia and other Middle East countries are building new data centres to expand their digital infrastructure. Furthermore, Saudi Arabia is also building its multi-billion mega city which will present opportunities of billions of construction contracts up for grab in coming years.

The NSL’s plant at Dubai Precast may be used later to serve the UK market as well. YTL Power is developing the GBP6.5 billion (RM37 billion) Brabazon property township project in the UK, and I expect the precast products will feature prominently in Brabazon housing projects.

YTL & YTL Power Bonus Warrants Proposal

YTL and YTL Power have set the date of April 28 for the EGM to approve the bonus warrants proposal. It may be timely here to discuss more about it.

Recall that I have suggested fellow investors to sell 1/5 of their current holdings in YTL / YTL Power and get the cash ready to exercise the free warrants later. In the process, we shall make a decent gain out of the process while maintaining our % holdings in the stocks.

For those who have not sold any yet, I understand that some are blaming on the YTL top management for the making the warrants non-tradeable and hence the share price drop. I want to reiterate my view that the share price drop had not much to do with the nature of the warrants being non-tradeable, it had more to do with recent market developments and the potential earnings dilution after the warrants are exercised.

Recall that YTL Power share price was at the RM4.40-4.50 level at early January. Then in mid January, US president then Joe Biden introduced the AI Diffusion Rule that would curb supply of AI chips to China and certain countries. Despite the fact that the amount of AI chips allowed for the US hyperscalers (except for Oracle who may face some restrictions) to use in Malaysia is well within the limits given under the AI Diffusion Rule, the market was spooked with any possible ban of AI chips for YTL Power’s AI data centres, causing YTLP share price to drop below RM4.00 immediately.

Then the emergence of DeepSeek in early February gave short sellers another excuse to spread unwarranted fears that the development of AI data centres by YTL Power might be impacted. I have written to explain that DeepSeek would not cause any impact on the development of AI data centres by YTLP, instead it will prompt enormous jumps in AI applications and AI inference work which will spur more data centre developments.

YTL Power announced the bonus warrants proposal on 23 Jan 2025, about the same time as the emergence of DeepSeek. With the double negative news, YTL Power share price dropped to the RM3.00 level in late January.

I would say that the share price drop from RM4.40-4.50 level to RM4.00 level was caused by the fear from US AI Diffusion Rule and foreign funds pulling out of Bursa in January. The drop from RM4.00 to the current RM3.00-3.20 level was probably due to market expectation of a 20% earnings dilution from the new warrants, and fears of a full-blown trade war from Trump tariffs.

Fund managers will realise that the emergence of DeepSeek and the US-China trade war will have no impact on YTL Power projected earnings growth if they understand the businesses of the company. Hence the real impact on the share price is the potential earnings dilution from the 20% expansion in YTL Power share base after full exercise of the warrants.

I have illustrated from above that the two new fibre projects secured by YTL Comms may potentially contribute earnings of RM400 million to RM1 billion a year. If YTL Power used the money (~RM4.0 billion) raised from the bonus warrants proposal to fund these two projects without resorting to bank borrowings, it would reap the maximum benefits as the projects are potentially lucrative and potential new earnings contribution from these two projects would increase its earnings by 10% to 25%. Hence, the potential earnings dilution from the bonus warrants proposal would be much less or gone from FY2027 once the dark fibre projects start to contribute earnings.

As the current trade war between the US and China may cause global recession or trade disruption for certain companies, those highly geared corporations or hedged funds may face financial difficulties in coming months if interest rates remain high or businesses turn sour due to trade war. YTL Power sees great opportunities for quality assets to be put on sale in coming months, but first it must have the cash ready to seize any of these opportunities arises.

Recall that YTL Power acquired 100% stakes in PowerSeraya in 2008 when Lehman Brothers collapsed and had to close the deal with Temasek within a week. Cash must be ready in order to close a deal like this.

With the cash raised from the bonus warrants, YTL Power would be able to acquire quality assets worth some RM10 billion, i.e. RM3 billion equity money at 70% gearing. At 15% IRR, such an acquisition may generate profits to be tune of RM1.2 billion to RM1.6 billion a year to YTL Power, which would be a 30% to 40% enhancement to its projected earnings base of RM4 billion for FY2026. Hence, there would be no earnings dilution from the bonus warrants proposal, if YTL Power managed to secure deals like this with the money raised.

Some retail investors are disgruntled with the current weak share price of YTL Power, blaming on the warrants proposal. I would suggest for fellow investors not to be disheartened by the temporary share price weakness and vote against the bonus warrants proposal using the excuse that the warrants are not to be tradeable.

Instead, we should look at the big picture. As I explain above, the money raised from the warrants proposal if put to good use will generate earnings accretive deals for YTL Power. We just need to have faith in YTL Power top management and its accument of finding good deals. For me, I have full confidence in YTL Power management who has demonstrated its ability to secure quality assets and deals, eg. Electranet in 2000, Wessex in 2002, Jawa Power in 2004, PowerSeraya in 2008, Jordan Power in 2013, colocation data centre in 2022, AI data centre in 2024 and dark fibre projects in 2025.

Just imagine, if YTL Power share price rises back to the RM4.00 level say in May when the warrants entitlement date is due, is there any more reason to complain about the bonus warrants proposal anymore?

This is likely to happen, as more funds digest the trade war impacts (which have no impact on YTL Power earnings) and EPF and local institutional funds keep on buying shares of YTL Power (on the basis that it is the cheapest big cap utility stocks in Bursa). EPF has the capacity to buy up to 10%-20% stakes in YTL / YTL Power, as seen from its earlier high stakes in AEON (13% at the peak) and BAuto (over 20% at the peak). PNB and LTAT have the capacity to take up at least 2% to 5% stakes each.

If YTL Power share price does rise to RM3.50 to RM4.00 by the time the warrants entitlement is due, it will then make sense to get the warrants entitlement, and sell a portion of the existing shares in YTL Power in the days after the entitlement, then exercise the free warrants at RM2.45 and get the discount of RM1.00 - RM1.50 from the process.

Similar arguments apply to YTL shares.

I will not be attending the EGM, as I have full confidence in YTL Power management to deliver good deals after they complete the exercise.

Net short positions on YTL Power increased slightly to 27.8 million shares at close Friday. Short sellers may be betting on further market volatility when any trade negotiation fails or trade negotiation tensions last until the last days of the 90-day pause, but I would not be bothered by these reckless bets.