Broker: UOB Kay Hian
Date of Report: 07 August 2025

China’s Anti-Involution Policy Sparks Headwinds and Opportunities for Malaysia’s Renewable Energy Sector

Overview: Solar Module Prices Surge Amid Policy Changes

Malaysia’s renewable energy (RE) sector faces a new challenge as China’s anti-involution policy triggers a sharp increase in polysilicon prices, a key input for solar panels. This development could drive solar module prices up by 12%, reaching US$0.10/watt by December 2025, and potentially increase the overall cost of large-scale solar plants by 20%. These changes are expected to compress project internal rates of return (IRRs) by 1-1.5%, posing significant implications for ongoing and upcoming projects.
Despite this, the sector outlook remains positive, with an elevated orderbook in the coming years and strong governmental support for solar expansion. UOB Kay Hian maintains an OVERWEIGHT rating on the sector, highlighting Pekat Group as the top pick due to its robust orderbook and proven execution capabilities.

China’s Anti-Involution Policy: Industry Impact and Price Dynamics

• Polysilicon Price Rebound: China’s crackdown on ‘involution-style’ low-price competition and the phase-out of outdated capacity has triggered a 26% surge in polysilicon prices over the past month. Wafer prices have also jumped 29-36% month-on-month, driven mostly by sentiment rather than actual demand improvements.
• Potential Supply Rationalization: Chinese producers are reportedly discussing a RMB 50 billion (US\$7 billion) fund to acquire and shut down about a third of capacity in the sector, though concrete actions remain vague.

Solar Module Price Outlook

• Solar module manufacturers are guiding for a US\$0.01/watt (12%) price increase by year-end, with prices expected to rise from US\$0.08-0.09/watt to US\$0.10/watt by December 2025.
• Solar modules account for 20-25% of the total project cost for a utility-scale solar plant, and 4-5% of the levelised cost of energy (LCOE) over the system’s lifetime. Financing, O&M, and system efficiency have a much larger long-term impact on LCOE.

Negative Impact on Solar Project IRRs

• Combined with a wider scope of Malaysia’s sales and service tax (SST), overall utility-scale solar plant costs are expected to rise by 20%.
• This will decrease project IRRs by 1-1.5%. For the upcoming LSS5 and LSS5+ projects starting construction in 2026-27, IRRs could hover between 5-7% due to low submitted tariffs.
• Winners of LSS5 awards may need to seek regulatory revision of project tenure or tariffs to ensure project viability.

Sector Ratings and Peer Comparison

UOB Kay Hian maintains an OVERWEIGHT stance on Malaysia’s RE sector, with Pekat Group as the top pick. Below is a summary table of the sector’s key players:

EPCC Players: Navigating Margin Pressure and Elevated Orderbooks

The cost pressures are likely to squeeze margins for EPCC (engineering, procurement, construction and commissioning) contractors, especially for LSS5 and LSS5+ projects. Asset owners may respond to lower IRRs by pushing for tighter margins among EPCC players, with margin contraction estimated at 1-2%.
However, this is expected to be partially mitigated by a strong pipeline of projects in the next three years. The government’s plans to tender 6-7GW of new solar capacity (LSS5+, LSS6) could result in RM13-16 billion in EPCC replenishment opportunities over five years. Furthermore, solar EPCC players may diversify into new areas such as SelCo and CRESS projects involving battery energy storage systems (BESS).

Pekat Group: Sector Top Pick with Strong Growth Drivers

Pekat Group stands out as the preferred pick, powered by:

• A robust orderbook of RM630 million and full-year consolidation of a 60% equity stake in EPE Switchgear.
• Strong earnings visibility and a growing orderbook in both the solar and Earthing, Lighting, and Protection (ELP) divisions.
• Potential for profit margin expansion, attributed to positive operating leverage from increased revenue contributions across all divisions.
• A projected three-year earnings CAGR of 40% over 2024-27.
• The company’s mainboard listing transfer is on track for completion by 1Q26. A potential 10% placement could trim the fair value to RM1.60, before factoring in proceeds from new solar contracts.

Major Sector Events in 2H25 and Key Risks

• LSS5+ winners announcement expected in August 2025.
• LSS6 bidding announcement anticipated for 3Q25.
• First round of BESS programme bidding slated for 3Q25.

Key risks to watch include:

• Low project IRRs in the highly competitive LSS5+ and LSS6 tariff ranges.
• Potential for sustained high solar module prices into 2026.
• Risk of changes in government direction regarding the National Energy Transition Roadmap (NETR).

Solar and BESS Programmes: Pipeline and Contract Value Overview

Tariff Trends: Large Scale Solar Projects in Malaysia

BESS and Rooftop Solar Policy Updates

• The Ministry of Energy Transition and Water Transformation (PETRA) will launch bidding for LSS6 in 2H25, including 2GW of capacity, and BESS for selected packages.
• BESS bidding (400MW/1,600MWj) opens to third parties in 3Q25, with TNB identifying 16 pilot sites for 4x100MW BESS projects.
• Net Energy Metering (NEM) 3.0 programme concluded on 30 June 2025, with high uptake: 94% for NEM Rakyat (residential), 80% for NEM GoMEn (government), and 71% for NEM NOVA (commercial/industrial), aided by the SolaRIS RM4,000 rebate.
• A new rooftop solar policy is in progress, expected to blend NEM and SelCo elements and align with the revised electricity tariff from July 2025. The new structure may extend residential solar payback periods from three to five years.

CRESS and Corporate Solar Prospects

• A slowdown in residential rooftop solar is anticipated due to tariff changes, but this is expected to be offset by a surge in CRESS (Corporate RE Supply) project announcements in 2H25.
• CRESS tariffs are projected at 52-55 sen/kWh (with a 25 sen/kWh service access charge), or 27-30 sen/kWh with BESS, over 20-year contracts.
• Tenaga Nasional recently signed Malaysia’s first CRESS contract with DayOne Data Centers to supply up to 500MW of RE for a 21-year term.

LSS5 Winning Bidders and Project Details

Conclusion: Navigating Near-Term Headwinds for Long-Term Gains

China’s anti-involution policy and the resultant price pressures pose immediate challenges for Malaysia’s solar sector, compressing project returns and contractor margins. However, with robust policy support, a large pipeline of solar and BESS projects, and strong players such as Pekat Group positioned to outperform, the medium- to long-term outlook remains bright. Investors should watch for upcoming tender announcements, policy changes, and evolving corporate demand for RE solutions as key catalysts shaping sector performance in the years ahead.