Nationgate, PIE likely to be hit by US ruling

PETALING JAYA: The growth potential for Nationgate Holdings Bhd and PIE Industrial Bhd is expected to be affected by the latest ruling by the United States on exports of artificial intelligence (AI) chips.

Last week, the US government released an interim final rule on AI diffusion with new restrictions on exports of AI chips.

Dividing countries into three tiers, the framework outlines varying access to AI chips and strict limits for the purchase of graphics processing units (GPUs) for each category.

Malaysia along with a majority of countries fall under the second tier of restrictions, which establishes maximum levels of computing power that can go to any one nation – equivalent to about 50,000 H100-equivalent graphic processing units (GPUs), from 2025 to 2027.

Affin Hwang Investment Bank Research (Affin Hwang Research) said this would likely limit the pool of customers for AI server manufacturers in tier-two countries, and they would need to focus squarely on securing business with US owners of hyperscale data centres that are likely to qualify for Universal Validated End-User (UVEU) status, or entities in tier-two countries who are likely qualify for National Validated End-User (NVEU).

Countries that qualify for UVEU and NVEU will essentially be able to bypass the national chip caps, allowing them to import and utilise a greater number of AI chips for their infrastructure.

“However, given the restricted AI capacity and this being a nationalistic move by the United States, we think the appetite of US hyperscalers to deploy large infrastructure abroad, especially in tier-two countries, may likely be somewhat curtailed, with possibility of scaling back or change in their rollout plans, and thereby leading to a slowdown in demand for AI servers in tier-two countries as a result,” the research house said in a recent report.

Affin Hwang Research added there is also the risk where entities in tier-two countries may encounter longer-than-expected processing time to receive approval for NVEU status, or fail to be approved for the status.

“If the demand from entities with UVEU and NVEU status are not able to make up for the aforementioned smaller customer base or offset the loss of customers due to the restriction, it will need to fall back on to the individual country allocations of 50,000 GPUs or 100,000 GPUs under government-to-government arrangement, which will likely restrict AI capacity and the demand for AI servers especially in tier-two countries,” the research house noted.

Affin Hwang Research projected that the growth potential of companies in the electronics manufacturing services sector under its coverage that are involved in the production of AI servers, that is NationGate and PIE, may be affected.

For Nationgate, the research house said while the group’s target AI server deliveries of 3,000 to 5,000 for this year is small relative to global AI server shipments (less than 1% of Daiwa’s 700,000 global AI server shipments forecast this year) and could potentially be achieved this year, its future growth potential may be capped as AI server demand in tier-two countries may be adversely impacted by the restrictions.

“While PIE has not received qualification for server production, the group aims to commence mass production for servers this year, with the qualification likely to start after the Lunar New Year as its customer seeks more clarity from policy rollouts after Donald Trump’s inauguration.

“According to the company’s management, an estimated 30% of the projected additional RM1bil to RM1.5bil in revenue from its new plant may come from AI servers.

“Although this is only 300 AI servers based on our rough calculations, we think the future growth potential will likely be capped by the new restriction,” the research house said.

Affin Hwang Research said while it maintains its 2024 to 2026 earnings forecasts on NationGate and PIE pending further clarity on the implementation, it noted the news raises too much uncertainty and visibility on earnings has been adversely impacted.

Affin Hwang Research lowered its target price-earnings multiple (PE) for Nationgate to 30 times from 35 times previously.

It also lowered its target PE for PIE to 20 times from 23 times before.

It also downgraded the recommendations on both companies to “hold” with a target price of RM2.27 and RM5.68, respectively.