Mixed fortunes for NationGate

IT is a case of mixed fortunes for electronic manufacturing services (EMS) provider NationGate Holdings Bhd.

The company’s share price raced to a fresh high of RM3.03 on Jan 7, two days after it launched its latest artificial intelligence (AI) servers catering to clients from startups to hyperscale data centres.

Investor excitement was understandable as NationGate is one of few Asean assemblers of graphic processing units (GPUs) produced by US tech giant Nvidia Corp.

However, just 20 days later, NationGate plunged 38.6% to RM1.86, coinciding with Nvidia’s massive drop, on Jan 27. This was its lowest level since Oct 22, with the stock tumbling as much as 32 sen or 14.7%.

Nvidia, a dominant player in AI chip design, lost an astounding US$589bil in market value in a single day after DeepSeek’s latest model demonstrated a level of efficiency that could rival America’s AI supremacy.

Investors are also weighing in on how the new AI chip export restrictions imposed by former US President Joe Biden will affect players like NationGate.

To aggravate matters, President Donald Trump is considering more restrictions on Nvidia’s semiconductor chip sales to China, which accounted for more than 15% of the company’s revenue in its most recent quarter.

According to Affin Hwang Research, the restrictions on AI chip exports have varying effects based on the framework which categorises countries into three tiers.

Malaysia is in the second tier under which the maximum computing power that can be allocated to Malaysia is 50,000 H100-equivalent GPUs, between 2025 and 2027.

Essentially, with AI compute now being highly regulated and if the new rule materialises, Affin Hwang Research believes the growth potential of EMS players under its coverage that are involved in the production of AI servers, such as NationGate and PIE Industrial Bhd, may be affected.

“While NationGate’s target AI server delivery of 3,000 to 5,000 for 2025 is small relative to the global AI server shipment (<1% of Daiwa’s 700k global AI server shipment forecast for 2025) and could potentially be achieved this year, the growth potential may be capped as AI server demand in tier-2 countries may be adversely impacted as most countries, including Malaysia, fall under these restrictions,” the research house says.

However, NationGate is unperturbed with the US curbs. Managing director Datuk Ooi Eng Leong tells StarBiz 7 that the company has a diversified customer base from various business segments including aviation, medical devices, consumer electronics and semiconductor.

“The out-of-China story allowed us to tap into the server segment, which we started to deliver in 2024. We have been operating strictly and adjusting accordingly to the USA Chip Acts, which curtailed advanced components to be sold into China. Except for GPU servers, our traditional customers and segments are not impacted from the US sanctions.

“In fact, we begin to see more business opportunities for future growth as the Chinese companies have to set up their manufacturing base outside China,” he explains.

Ooi points out that the semiconductor, technology, data centre and AI sectors are navigating a dynamic global landscape shaped by geopolitical developments, regulatory changes and technological advancements.

He believes it is essential for investors to take a long-term and strategic view amidst the recent challenges. This is because the long-term demand for AI, cloud computing and semiconductor technologies remains robust.

According to analysts, while export restrictions and tariffs introduce uncertainties, they also lead to supply chain realignments, diversification strategies and increased regional investments.

Malaysia, in particular, is benefitting from the shift in global supply chains, with many companies expanding their presence in the region to mitigate geopolitical risks.

They believe NationGate and other Bursa Malaysia-listed tech firms play a crucial role in the global semiconductor and electronics supply chain.

Malaysia is a well-established hub for high-value manufacturing, semiconductor packaging and AI server assembly, offering good positioning for companies for continued growth and resilience. As such, investors should focus on companies with strong fundamentals, diversified customer bases and strategic investments in next-generation technologies.

As a contract manufacturer in AI and data centre infrastructure, NationGate remains well-positioned to capture opportunities in the evolving tech landscape.

Thinning margins

That said, the EMS segment is highly competitive where margins are thin. How is NationGate addressing this challenge?

“We focus on primarily non-consumer electronic segments. Unlike consumer electronics, the margin is frequently asking for cost down.

“Our qualification to build the product normally takes 12-24 months, sometimes longer. It is very costly, time-consuming and tedious. Therefore, we excel in this segment with more than 20 multinational corporations working closely with us,” Ooi says.

As it is, it recently posted a record profit in its latest quarterly results ended Sept 30, 2024 (3Q24). Profit more than doubled to RM46.59mil from RM17.28mil a year ago, buoyed by record-high revenue and unrealised foreign-exchange (forex) gains. Revenue surged eight-fold to RM1.35bil.

The company booked a net forex gain of RM76.22mil, based on its unrealised forex gain of RM138.2mil and a realised forex loss of RM61.98mil. Without this gain, the company would have posted a net loss of RM29.63mil in 3Q24.

Ooi explains that the unrealised forex gain was due to a customer being invoiced in ringgit, while the components were purchased in US dollar.

“The receivables outstanding was huge and with the appreciation of the ringgit against US dollar in July and August 2024, we fully hedged out the payable outstanding, which gave us a huge forex gain.

“It was unrealised because the US dollar payables are not yet due for payment as of the reporting date. In addition, we charged out RM6.5mil in product development costs and RM14.5mil in product liabilities on a contingent basis.

“All our segments showed revenue growth except for the semiconductor segment, in which the product has reached end of life and discontinued production. Given the pointers above, it is not reflective to surmise that we incurred operating losses,” he adds.

Ooi says the forex gain will be a one-off as it has changed its method to hedge immediately as and when the transactions take place, hence locking in its profit margin.