Oaklands Path


YTL Power (YTLP)

(This article was sent to our investors via monthly letter back in Apr 2023. A recent update was added at the bottom of this article.)

31 March 2023

YTLP has many business segment and we would like to touch on what matters as follows:

  1. Power plants in Singapore via Power Seraya and Tuaspring. The SG power market went into excessive over supply post 2013 as new capacities were added under the SG government LNG take-or-pay contract for 10 years. Under such a contract, those new power plants commit to a certain level of LNG supply volume and must take it regardless of electricity demand. Hence the electricity market went into super oversupply in the past 10 years. Hyflux went bankrupt and several inefficient plants were retired over that period and the average industry wide utilization slowly climbed back up to an inflection point now. With the remaining LNG take or pay contract expiring by Jun’23 and a reduced industry capacity, the SG electricity market has tilted into an under-supply situation. As with any commodities, marginal over/under supply would decrease/increase the industry profitability by several-fold.

    YTLP took over the 400MW Hyflux’s Tuaspring for SGD270m at the best possible time, just when the electricity market began to have undersupply. Based on our estimate, the payback period should be around 3 to 4 years and the asset has a replacement cost of SGD500m.

    In total, the SG power business is likely to generate a PBT of RM1.2bn per annum for YTLP.

  2. UK Wessex Water Wessex is a water supply and sewerage utility company serving an area of South West England. The return of Wessex is fixed by regulator every 5 years based on its Regulated Asset Base (RAB) and a fixed rate of return after taking into account the cost of capital. It has proven to be a fair and safe business over the years for YTLP. Its profitability has come down to RM0.2bn for FY06/2023 because there is a lag in tariff adjustment and the high realized inflation rate. The tariff is revised each April and we think it will take until April 2024 for the full inflated cost to be reflected in the tariff. The current year earning power should be around RM0.4bn year and moves towards RM0.5bn to RM0.6bn after April 2024.

  3. Power plant in Jordan via 45% owned Attarat Power (APCO) The power plant project went into force majeure due to Covid and the Jordan government seized the opportunity wanting to renegotiate the tariff. The case had been under arbitration for over 2 years but recently Jordan government agreed to have it start commercial operation soon under the original PPA because of national wise power shortage. We estimate the share of profit from Attarat to be around RM0.2bn per year.

  4. Telecommunication business via YES YES has been loss making since day one and this is a business which we think YTLP would have been a lot better off if it had decided to cut loss years ago. YES did not have a 3G license and had to compete with other telcos which had both 3G and 4G spectrum, this obvious weakness rendered them uncompetitive. However, the shutdown of 3G network and the formation of Digital Nasional Berhad to build nationwide 5G infrastructure have levelled the playing field. YES is the first telco to introduce low-cost access to both 4G and 5G and its subscribers have recently tripled to over 3m. The problem is that its customers are mostly in the low-end segment hence ARPU is very low. At the moment we think it is likely to lose RM0.3bn a year as before with a possibility that it might improve over time.

  5. Data Center (DC) YTLP ventured into DC business when it took over the control of DODID Pte Ltd in 2021. Currently, it is building a 48MW data center (Capex: RM1.1bn) for Shopee which will start commercial operation in 2024. YTLP also signed a partnership with GDS holding to co-develop 168MW if data center capacity but it is likely to take several more years to be built. In the near term we think this division will only contribute roughly RM50m of PAT a year beginning 2024.

YTLP has some other businesses such as its 20% stake in PT Jawa Power and other smaller operations which didn’t have major changes. We have been waiting for several years for the stars to align itself and we recently bought into YTLP in early March as we think its average earning power is likely to range between RM1.0bn and RM1.3bn p.a going forward. YTLP is also known for its very high dividend payout ratio when it earns good profit and we expect this to remain the same going forward.

Update on YTLP (10 Dec 2023)

Data Center (DC) Infrastructure – YTL Power – Ideal partner for DC

Knight Frank ranks Malaysia as the most attractive destination in Southeast Asia for data center (DC) investment. Over the recent months, there has been a notable influx of news regarding the acquisition of land in Johor by Singtel, Microsoft, AWS, and GDS for the establishment of data centers. The close proximity to Singapore ensures low latency, and Malaysia capitalizes on this advantage while Singapore restricts new DC investments due to power shortages.

We first wrote about YTL Power (YTLP) back in March 2023, back then its DC division was at its infancy, it has just secured the first anchor tenant (Shopee) for its green DC in Kulai. To recap, YTLP acquired the Kulai land in 2021 at RM4.50 psf, it allocates 275 acres for building up a total 500MW DC over the next 10 years. (The recent land transaction shows that commercial land in Johor for DC is being sold at RM125 psf.)

Initially, we anticipated a lengthy timeframe for YTLP to fill its Green DC Park. However, the recent news of securing Nvidia as a new anchor tenant accelerates the process significantly.

Considering the severe shortage of Nvidia GPUs and hyperscalers (Microsoft, AWS, etc.) designing custom AI accelerators, Nvidia is concerned about potential competition. To address this, Nvidia promotes its AI cloud services (DGX Cloud) directly to end-users, leveraging the shortage and its CUDA software platform. Nvidia initially placed DGX Cloud servers under hyperscalers, but as these entities show reluctance to promote Nvidia services (due to competition with DGX Cloud), the Information reports Nvidia is in talks to lease space directly from a data center operator.

Securing Nvidia as a partner (meaning YTL DC is getting the GPU and DGX Cloud from Nvidia and the resell) in YTL DC holds significant importance for several reasons: 1. It marks one of the first few independently run data centers supplied by Nvidia directly, with the initial phase set to commence operations in mid-2024.

  1. Given the substantial undersupply in the demand for GPUs, the data center is poised to quickly reach full capacity upon completion of construction.

  2. The energy-intensive nature of training AI models (and subsequent inference) is noteworthy, with an average AI data center consuming 3 to 4 times the power of a conventional data center.

  3. In summary, these factors indicate that the targeted construction of 500MW by YTLP may be accomplished much sooner than originally anticipated.

YTLP stands to profit from selling the GPU capacity to companies that would needs it to train AI model. Additionally, the company is constructing a 500MW solar farm adjacent to the Green DC park, anticipating returns through the sale of green energy to data centers at a later stage. Due to the lack of detailed information, making precise estimates of the DC business's profitability is challenging. However, a rough calculation suggests that the entire Green DC park could contribute an additional Profit After Tax (PAT) ranging from RM700 million to RM900 million annually once fully developed. At that point, it would be logical for YTLP to place these assets into a Data Center Real Estate Investment Trust (DC REIT), which typically commands high valuations in the market.

The three key things to consider when determining the location of a datacenter:

  1. Connectivity (fibre optics) – Johor is close to the main connectivity hub - Singapore

  2. Stable power supply, preferably from renewable sources. (YTLP is building its own solar farm)

  3. Water. (YTLP recently bought into Ranhill, a Johor based water utility company)

It is no wonder that Jensen Huang said YTL is the terrific partner for DC in Malaysia.

Notes and Disclaimers

  1. This essay and the information contained herein is not a specific offer of products or services. Information on this essay is not an offer to buy or sell, or a solicitation of any offer to buy or sell the securities mentioned herein.

  2. Oaklands Path may be long or short the securities mentioned herein and has no duty or obligation to disclose or update our action on these securities.

  3. This essay contains information and views as of the date indicated and such information and views are subject to change without notice. We have no duty or obligation to update the information contained herein. Further, we make no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss.

  4. Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources. Although we obtain information contained in our newsletter from sources we believe to be reliable, we cannot guarantee its accuracy. Moreover, independent third-party sources cited in these materials are not making any representations or warranties regarding any information attributed to them and shall have no liability in connection with the use of such information in these materials.