• Valuetronics entered into a joint venture called Trio AI with Beijing Sinnet Technology, 55% and 45% stake respectively, to provide GPU (graphic processing unit) and AI (artificial intelligence)- related value-added cloud services in Hong Kong.
• Valuetronics will acquire the GPU servers and ancillary hardware for HKD60mn and lease them to Trio AI for 60 months. The GPUs will be sourced from China and housed in a third-party data centre in Hong Kong. Valuetronics is planning a larger investment depending on the market response to this current project.
• We do not expect any material impact on earnings from this investment. We believe the near-term returns on a GPU as a service will be attractive due to the high demand and constrained supply of GPUs. Medium-term returns face the risk of technology obsolescence and price deflation of the GPUs. These risks can be mitigated by long-term contracts and value-added services. We maintain our BUY recommendation and target price of S$0.76.

Key highlights
i.    Revenue model: a) The joint venture will provide GPU as a service where it charges a fee for compute power and value-added services (data and large language model management); b) Valuetronics will acquire the GPUs (and related equipment) and lease them to the joint venture for 60 months. Revenue from this investment is unlikely to be significant.
ii.    Joint Venture: Trio Ai (Valuetronics 55%, Beijing Sinnet 45%)
iii.    GPU: Will use GPUs developed in China. The name is not disclosed, but it is ranked in the top five. The GPUs will be utilised in an existing data centre.
iv.    Target customers: Technology start-ups in Hong Kong
v.    Planned investment: HKD60mn (S$10.4mn) capex for GPUs and HKD7.7mn (S$1.3mn) for a 55% stake in Trio AI. Valuetronics will seek shareholders’ approval for any larger investment. Its balance sheet shows a net cash of HKD1.16bn (S$200mn).
vi.    Manufacturing: Will explore the opportunity to manufacture AI-related infrastructure. These include cooling solutions and PCBA for servers. Any manufacturing initiative will not be related to Trio AI.
vii.    Partner: Beijing Sinnet Technology (300383 SZ) is listed on the Shenzhen Stock Exchange and has a market cap of US$2.1bn. It has experience running cloud and GPU as a service. Sinnet will manage the business’s operations.

Comment: We believe the near-term attractiveness of this investment is due to the current shortage of GPUs. We expect a supply response to the current demand for GPUs, which raises the risk of technology obsolescence and price deflation of the GPUs. Therefore, the return profile of Trio AI will depend on the level of fees charged, contract tenure to lock in customers and the uniqueness of the value-added service it can provide.

Source: Phillip Capital Research - 1 Jul 2024