Ahead of the 11th Malaysia-Singapore Leaders Retreat happening this month, DBS Group Research remains “optimistic” on the Johor-Singapore Special Economic Zone (JS-SEZ), which they say could reshape the investment landscape in the two countries.
Analysts from DBS have named renewables and energy, data centres, logistics and technology as sectors that will be near term beneficiaries of the SEZ.
They keep their “buy” on Sembcorp Industries U96 , Seatrium, Mapletree Industrial Trust ME8U , Mapletree Logistics Trust M44U , Capitaland Ascendas REIT, Venture Corporation V03 and Grand Venture Technology JLB , with target prices of $7.35, $3, $1.75, $2.75, $3.25, $2.76 and 70 cents respectively.
Following the signing of the JS-SEZ memorandum of understanding in January this year, DBS analysts note that they have observed positive milestones through infrastructure progress and bilateral discussions.
Although there have been delays in the retreat originally set to happen this September, the analysts say that both governments have shown political will to implement the JS-SEZ, aiming to strengthen business ties and economic connectivity for mutual benefit.
Both governments have outlined 7 initiatives in their MOU — they center around adoption of passport-free movement, business/investment centres in Johor, and adoption of digitized processes across several industries, among others.
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While there has been skepticism towards the JS-SEZ, DBS analysts say that this partnership is “not déjà vu” of Malaysia’s Iskandar project, as it is rooted in bilateral cooperation.
“Bilateral cooperation is key to driving success of the JS-SEZ in our view, unlike the Iskandar Malaysia project, which experienced slow progress as it was mainly driven by the Malaysian government with limited involvement from Singapore,” they note.
They add that the Johor-Singapore RTS Link has also seen “positive progress” and is on track for completion by end 2026, helping to drive optimism in the fruition of the JS-SEZ.
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Although the analysts anticipate the JS-SEZ to be “more successful” relative to its Iskandar counterpart, they are of the view that the JS-SEZ will likely be developed in phases considering the complexity of negotiations.
DBS adopts a more conservative stance than the market, and anticipates three key issues to be ironed out from the upcoming leaders’ retreat. This includes the sub-industries of focus, tax incentives, and geographical coverage of JS-SEZ.
Implication on sectors
The analysts note that the following sectors, renewables and energy, data centres, logistics and technology are industries that will benefit most from the JS-SEZ.
In logistics, the segment could benefit from the “twin engines” model. Key manufacturing segments like R&D and sales which are housed in Singapore, and packaging and assembly are conducted in Johor Bahru, could see the increase of flow of goods between the two regions.
In addition, the China+1 strategy will drive more investments into the region, the analysts note.
“As businesses set up operations and supply chains across both sides of the border, we should see an increase in cross-border movement of goods,” they say. They name Mapletree Logistics Trust and Capitaland Ascendas REIT as key beneficiaries.
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On the other hand, given the lack of power supply in Singapore and limited approvals handed out for new data centre developments, Malaysia is emerging as a “major” data centre market in the region, says DBS.
Companies and major operators like Nvidia, Equinix, GDS and AirTrunk have already established operations, and as demand for capacity grows, ST Telemedia, and Singtel are well positioned to capitalize on this expanding market, they add.
“Notably, construction costs in Malaysia are up to 16% lower than in Singapore, while electricity costs are about 2.5 times higher in Singapore, making Malaysia a cost-effective alternative for data center operations,” DBS analysts note.
This data centre growth in Johor will also lead to growing electricity demand, economic development and urbanisation, they say.
By 2035, DBS analysts forecast power capacity to grow by 6% CAGR, 3 times historical growth rates to meet data centre demand.
As data centres are increasingly committed to reducing their carbon footprint, DBS analysts estimate solar projects in Malaysia to generate a firm double-digit internal rate of returns (IRRs) above global/Asean averages of 6%-10%.
“We expect the upcoming Retreat meeting in Dec 2024 to highlight renewable energy as an initial sector of focus, with companies such as Sembcorp Industries well positioned to tap onto JS-SEZ renewable energy requirements,” they note.
Finally, on technology, the analysts note that Singapore companies may shift lower value-added manufacturing to Johor, as wages are 5 times lower, providing opportunities for margin expansion.
They see potential for cost improvements for Singapore technology firms, should the JS-SEZ materialise. Within their coverage is Aztech, Frencken, Venture Corporation, and Grand Venture Technology, with the latter two being their top picks.
Meanwhile, DBS “does not foresee” any meaningful impact on the aviation sector at the moment, but also believes that Johor “may” emerge as the go-to destination for medical savings.
On property, the analysts note that Causeway Point Mall is the closest to the upcoming RTS and forms about 20% of Frasers Centrepoint Trusts’ (FCT) portfolio AUM. They therefore advocate investors to buy FCT “on weakness”, noting that the REIT’s share price will likely face some sentiment-driven pressure ahead of the opening of the RTS in end 2026 or early 2027.
