Company Reports

No-moat GDS has announced a USD 587 million capital raising for its international business, dubbed GDSI for now. A number of private equity investors, including Hillhouse, Rava Partners, Boyu, Princeville Capital, and Tekne Capital, will take a 43.9% stake in GDSI, with GDS retaining a 56.1% stake. GDSI will have USD 1 billion of paid-up share capital after the raising closes, which should be sufficient to capitalize the 330-megawatt current portfolio with a total development cost of USD 2.5 billion. However, given the very strong demand GDS is seeing in Southeast Asia and the potential for further expansion in North Asia and Europe, we believe GDSI will likely continue to expand. Given the investor base, a GDSI IPO at some stage down the track could be a source of future funding, in our view. While management expects demand conditions in China are likely to remain subdued for most of 2024, it is expecting some recovery at the back end of the year and into 2025. China has not yet seen the same artificial intelligence-led data center demand that the US is seeing, partly because of uncertainty around high-end chip supply. GDS management guidance for 2024 of midpoint revenue growth of 15.7% and midpoint adjusted EBITDA growth of 9.2% imply a stronger 2024 than the 6.8% revenue growth and 8.8% adjusted EBITDA growth reported in 2023, with the revenue line helped dramatically by the GDSI pipeline.

We expect GDS Holdings to continue to purchase and build data centers in and around its focus Tier 1 Chinese cities of Shanghai, Beijing, Shenzhen, Guangzhou, Hong Kong, Chengdu, and Chongqing. As its network of interconnected data centers grows it can more easily cater to the demand from its key cloud service provider customers allowing them to expand in a flexible way in their key markets. This also enables key enterprise customers to deploy their hybrid clouds in close proximity to the networked nodes of leading public clouds. The company is also excited about its international expansion into Southeast Asia. The company has announced an equity funding deal for its international business, raising USD 587 million for 43.9% of the business from private equity investors. The international business will then have sufficient equity to capitalize the 330-megawatt portfolio as at end-2023, with a total development cost of around USD 2.5 billion.

No-moat GDS has retained its previously announced 2023 guidance following a third quarter where it reported 6.4% year-on-year revenue growth and 5.6% year-on-year adjusted EBITDA growth. It is tracking toward the bottom end of its 6.6% to 10.7% revenue growth guidance but toward the top end of its 4.2% to 8.2% adjusted EBITDA growth guidance. The company had previously disclosed that 2023 would be affected by one large internet customer moving out of its downtown data centers in Beijing, which has affected its net additional area utilized numbers. It has also been affected by slowing demand from the large internet customers in China and has not seen the same artificial intelligence lead data center demand in China that the United States is seeing, partly because of uncertainty around high-end chip supply.

We expect GDS Holdings to continue to purchase and build data centers in and around its focus Tier 1 Chinese cities of Shanghai, Beijing, Shenzhen, Guangzhou, Hong Kong, Chengdu, and Chongqing. As its network of interconnected data centers grows it can more easily cater to the demand from its key cloud service provider customers allowing them to expand in a flexible way in their key markets. This also enables key enterprise customers to deploy their hybrid clouds in close proximity to the networked nodes of leading public clouds. The company is also excited about its international expansion into Southeast Asia with the with the commitment of a customer for Phase 1 of the Nusajaya Tech Park Data Center in Johor, Malaysia, and the announcement of its selection by the Singapore government along with three other data center operators for a total of about 80 MW of new data center capacity in Singapore. The company claims to have identified over 200 megawatts of demand from Chinese customers in Southeast Asia within the next five years.

No-moat GDS retained its previously announced 2023 guidance following a second quarter where it reported 7.4% year-on-year revenue growth, which was in line with the first quarter; and 16.3% year-on-year adjusted EBITDA growth that was well ahead of the 7.5% reported in the first quarter. However, the outperformance in the second quarter was largely driven by some one-offs, including an early termination from the backlog and a cash reimbursement. Excluding these, second-quarter revenue was up 3.9% year on year and adjusted EBITDA was up 7.5% year on year. The company had previously disclosed that it expects 2023 to be affected by one large internet customer moving out of its downtown data centers in Beijing. As a result, it will record around 17,000 square meters of churn spread across the first three quarters of 2023 and expects additional area utilized net of churn in 2023 to be similar to the levels seen in 2022 of around 50,000 square meters of net add. The company only added 12,248 net utilized square meters in the first half of 2023. However, it expects to start utilizing capacity from its international expansion in the second half with 1) around 30,000 square meters of Chinese move-in and 2) 20,000 square meters of international move-in in the second half, and so now expects to reach or exceed its full-year guidance.

We expect GDS Holdings to continue to purchase and build data centers in and around its focus Tier 1 Chinese cities of Shanghai, Beijing, Shenzhen, Guangzhou, Hong Kong, Chengdu and Chongqing. As its network of interconnected data centers grows it can more easily cater to the demand from its key cloud service provider customers allowing them to expand in a flexible way in their key markets. This also enables key enterprise customers to deploy their hybrid clouds in close proximity to the networked nodes of leading public clouds. The company is also excited about its international expansion into Southeast Asia with the with the commitment of a customer for Phase 1 of the Nusajaya Tech Park Data Center in Johor, Malaysia, and the announcement of its selection by the Singapore government along with three other data center operators for a total of about 80 MW of new data center capacity in Singapore. The company claims to have identified over 200 megawatts of demand from Chinese customers in Southeast Asia within the next five years.

No-moat GDS has guided to midpoint 2023 revenue growth of 8.7% and adjusted EBITDA growth of 6.2%, well below our estimate of above 20% growth for both prior to the result. This follows GDS reporting 19.3% revenue growth and 14.5% adjusted EBITDA growth in 2022. This year is expected to be affected by one large internet customer moving out of its downtown data centers in Beijing. As a result, GDS will record 17,000 square meters of churn spread across the first three quarters of 2023, and expects additional area utilized net of churn in 2023 to be similar to the levels seen in 2022 of around 50,000 square meters of net add. The international business is also expected to contribute around CNY 100 million of losses at the EBITDA level in 2023 as it scales up. The company announced customer commitments of 74,000 sqm in 2022 but at lot of this is expected to be back-ended in 2023 so will likely affect 2024 more. We lowered our near-term forecasts and our fair value estimate reduces to HKD 28 (USD 29) from HKD 37 (USD 38). The stock price has generally declined since early 2021 when it peaked at over HKD 110 per share. At current levels we see GDS as undervalued, trading on a price/book ratio of around 0.9 times. GDS does not revalue its data centers each year like a property REIT does and we estimate that its early data centers in major city central business district areas have substantially increased in value over time. We believe a price/book ratio of well over 1 is justified.

We expect GDS Holdings to continue to purchase and build data centers in and around its focus Tier 1 Chinese cities of Shanghai, Beijing, Shenzhen, Guangzhou, Hong Kong, Chengdu and Chongqing. As its network of interconnected data centers grows it can more easily cater to the demand from its key cloud service provider customers allowing them to expand in a flexible way in their key markets. This also enables key enterprise customers to deploy their hybrid clouds in close proximity to the networked nodes of leading public clouds. The company is also excited about its international expansion into Southeast Asia with the with the commitment of a customer for Phase 1 of the Nusajaya Tech Park Data Center in Johor, Malaysia. The company claims to have identified over 200 megawatts of demand from Chinese customers in Southeast Asia within the next five years.

We expect GDS Holdings to continue to purchase and build data centers in and around its focus Tier 1 Chinese cities of Shanghai, Beijing, Shenzhen, Guangzhou, Hong Kong, Chengdu and Chongqing. As its network of interconnected data centers grows it can more easily cater to the demand from its key cloud service provider customers allowing them to expand in a flexible way in their key markets. This also enables key enterprise customers to deploy their hybrid clouds in close proximity to the networked nodes of leading public clouds. The company is also excited about its international expansion into Southeast Asia with the with the commitment of a customer for Phase 1 of the Nusajaya Tech Park Data Center in Johor, Malaysia. The company claims to have identified over 200 megawatts of demand from Chinese customers in Southeast Asia within the next five years.

No-moat GDS Holdings has retained its 2022 guidance and announced a new, large customer commitment for its Nusajaya Tech Park data center in Malaysia with its third-quarter result. Indeed, GDS Holdings' international expansion is set to smooth the company's business at a time where demand in China is slowing, but demand in Southeast Asia is expanding.

No-moat GDS Holdings has been hit by the macro conditions in China and has mildly downgraded its 2022 guidance. However, the company has announced a new funding source and continues to expand its data center footprint both in China and the Asian region. GDS Holdings reported a decent second-quarter 2022 result in the circumstances with revenue up 24% year on year and adjusted EBITDA up 18.6% year on year. The adjusted EBITDA margin contraction to 46.0% from 48.1% a year ago is in line with management's comments and guidance at the 2021 result that 2022 margins would be reduced due to thermal coal-generated electricity price increases in China, with around 50% of its contracts not having full power cost pass-through.

We expect GDS Holdings to continue to purchase and build data centers in and around its focus Tier 1 Chinese cities of Shanghai, Beijing, Shenzhen, Guangzhou, Hong Kong, Chengdu and Chongqing. As its network of interconnected data centers grows it can more easily cater to the demand from its key cloud service provider customers allowing them to expand in a flexible way in their key markets. This also enables key enterprise customers to deploy their hybrid clouds in close proximity to the networked nodes of leading public clouds. The company has also taken the first steps on its international expansion into Southeast Asia with the acquisition of greenfield land in Nusajaya Tech Park in Johor, Malaysia, with developable capacity of 22,500 square meters or 54 megawatts. Beyond Johor, it is actively pursuing a number of other opportunities in Singapore, Kuala Lumpur and Jakarta. It claims to have identified over 200 megawatts of demand from Chinese customers in Southeast Asia within the next five years.

No-moat GDS Holdings reported a reasonable first-quarter 2022, with revenue up 31.5% and adjusted EBITDA up 28.5% year on year. The mild margin contraction is in line with management comments and guidance at the 2021 result that 2022 margins would be reduced due to thermal coal-generated electricity price increases in China with around 50% of its contracts not having full power cost pass through. Management retained its guidance for 2022 total revenue to grow between 19% and 24% to CNY 9,320 million-CNY 9,680 million, and for adjusted EBITDA to grow between 16% and 20% to CNY 4,285 million-CNY 4,450 million. Management also retained 2022 capital expenditure guidance of around CNY 12 billion with CNY 6 billion expected for organic growth in China, CNY 2 billion for Southeast Asia, and CNY 4 billion set aside for acquisitions.

We expect GDS Holdings to continue to purchase and build data centers in and around its focus Tier 1 Chinese cities of Shanghai, Beijing, Shenzhen, Guangzhou, Hong Kong, Chengdu and Chongqing. As its network of interconnected data centers grows it can more easily cater to the demand from its key cloud service provider customers allowing them to expand in a flexible way in their key markets. This also enables key enterprise customers to deploy their hybrid clouds in close proximity to the networked nodes of leading public clouds. The company has also taken the first steps on its international expansion into Southeast Asia with the acquisition of greenfield land in Nusajaya Tech Park in Johor, Malaysia, with developable capacity of 22,500 square meters or 54 megawatts. Beyond Johor, it is actively pursuing a number of other opportunities in Singapore, Kuala Lumpur and Jakarta. It claims to have identified over 200 megawatts of demand from Chinese customers in Southeast Asia within the next five years.

No-moat GDS reported a solid fourth-quarter 2021 result with revenue up 34% and EBITDA up 35% year on year. Management guided to 2022 total revenue growing between 19% and 24% to between CNY 9,320 million and CNY 9,680; and adjusted EBITDA growing between 16% and 20% to between CNY 4,285 million and CNY 4,450 million. The expected slight margin contraction was due to thermal coal power price increases in China. Management indicated that around 50% of billing contracts have full power cost pass-through with the company potentially wearing some pain on the others as power prices increased. In addition, management guided to 2022 capital expenditures of around CNY 12 billion with CNY 6 billion expected for organic growth in China, CNY 2 billion for Southeast Asia and CNY 4 billion set aside for acquisitions. We made minor adjustments to our forecasts and fair value estimate is retained at HKD 45 (USD 46). The stock price has been very volatile recently, falling to briefly to the low USD 20 range on concerns about a potential forced delisting from the Nasdaq over auditing rules; however, it has subsequently rebounded. In any case, GDS has a Hong Kong listing to fall back on, unlike VNET. We believe GDS is mildly undervalued at current levels.

We expect GDS Holdings to continue to purchase and build data centers in and around its focus Tier 1 Chinese cities of Shanghai, Beijing, Shenzhen, Guangzhou, Hong Kong, Chengdu and Chongqing. As its network of interconnected data centers grows it can more easily cater to the demand from its key cloud service provider customers allowing them to expand in a flexible way in their key markets. This also enables key enterprise customers to deploy their hybrid clouds in close proximity to the networked nodes of leading public clouds. The company has also taken the first steps on its international expansion into Southeast Asia with the acquisition of greenfield land in Nusajaya Tech Park in Johor, Malaysia, with developable capacity of 22,500 square meters or 54 megawatts. Beyond Johor, it is actively pursuing a number of other opportunities in Singapore, Kuala Lumpur and Jakarta. It claims to have identified over 200 megawatts of demand from Chinese customers in Southeast Asia within the next five years.

GDS reported a solid third-quarter result with both revenue and EBITDA up around 35% year on year and further site acquisitions and customer additions. However, as a result of a slower customer move-in rate in the second half and recent increases in power costs, management now expects total revenue and adjusted EBITDA for the full year of 2021 to be in the lower half of the originally provided guidance ranges of CNY 7,700–CNY 8,000 million for total revenue and CNY 3,660–CNY 3,800 million for adjusted EBITDA. Capital expenditure guidance was also increased to CNY 16 billion from CNY 12 billion. We made minor adjustments to our forecasts and fair value increased to HKD 45 (USD 46) from HKD 44 (USD 45) on CNY strength. While the stock price has fallen around 36% year-to-date we still see it as mildly expensive.

We expect GDS Holdings to continue to purchase and build data centers in and around its focus Tier 1 Chinese cities of Shanghai, Beijing, Shenzhen, Guangzhou, Hong Kong, Chengdu and Chongqing. As its network of interconnected data centers grows it can more easily cater to the demand from its key cloud service provider customers allowing them to expand in a flexible way in their key markets. This also enables key enterprise customers to deploy their hybrid clouds in close proximity to the networked nodes of leading public clouds. The company has also taken the first steps on its international expansion into Southeast Asia with the acquisition of greenfield land in Nusajaya Tech Park in Johor, Malaysia, with developable capacity of 22,500 square meters or 54 megawatts. Beyond Johor, it is actively pursuing a number of other opportunities in Singapore, Kuala Lumpur and Jakarta. It claims to have identified over 200 megawatts of demand from Chinese customers in Southeast Asia within the next five years.

We initiate coverage of GDS Holdings with a no-moat rating and fair value estimate of HKD 44 (USD 45). GDS is building up a valuable portfolio of data centers in and around Tier 1 capital cities in China using commitments from hyperscale customers to underpin data center construction and acquisition.