GDS Earnings: Capital Raising for the International Business and Strong Guidance

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.