While not yet profitable, this Chinese data center business is growing exponentially.
GDS Holdings (GDS)
From Cabot Emerging Markets Investor
GDS Holdings (GDS) is a Chinese company in the data center business, and its carrier-neutral, cloud-neutral facilities allow connections to all major Chinese telecommunications carriers and to many financial services companies and large enterprises.
Founded in 2001 as a business continuity and disaster recovery vendor, the company relied initially on third-party data centers. But starting in 2009, the company started building big data centers of its own in key locations and courting users who needed substantial capacity and power. In 2011, GDS established new data centers in Kunshan, Chengdu and Shanghai, followed by its first Shenzhen data center in 2014 and two new centers in Beijing and Shanghai in 2015. (Data center capacity and customer utilization is measured in square meters) 2016 was a big year for GDS Holdings, as it powered up four new data centers and came public on the Nasdaq exchange on November 2.
GDS Holdings isn’t an earnings story, at least not yet. The company enjoyed revenue growth of 47% in 2015, 42% in 2016 and 56%, 40% and 43% in the first three quarters of 2017, respectively. But the price of building data centers is enormous, and while adjusted EBITDA was up over 70% in Q3, nobody expects GDS to turn profitable anytime soon. The story here is growth, and a client list that includes major players like Alibaba and Tencent Holdings (who accounted for 45% of total revenue in 2016). The company also expects to start hosting Baidu’s cloud platform (and their traditional search business) in the fourth quarter.
Including the 6,000 square meters gained in Q3, GDS Holdings added over 21,000 square meters of new customer commitments so far in 2017 and the company expects to end the year with $120 million of new bookings. After adding nine new customers in Q3, GDS has 496 customers and has six new data centers under construction. The company announced a few weeks ago that it had acquired a second data center in Guangzhou that is fully committed and used by a big internet customer. That takeover just closed. And since customer churn in the third quarter was just 0.1%, the future visibility of that revenue stream seems secure.
As if all that growth weren’t enough, GDS Holdings has so far concentrated exclusively on Tier 1 Chinese cities, leaving the entire Tier 2 and Tier 3 landscape open for expansion. And just for an extra, the company gets 10% of its revenue from customers outside China, and with its highly connected data interchange structure, GDS will be an attractive partner for more non-Chinese firms.
GDS came public at 10 a little over a year ago and went through a routine post-IPO correction to just below 7 in June 2017. The stock bounced to just below 10 in July, took a little break through the end of August, then blasted off on heavy volume (but no apparent news) on November 11. The stock climbed steadily through October and November, with frequent volume spikes on advancing days. It closed for the first time above 20 on November 20, and pulled back by less than a point during the Wednesday meltdown. This correction looks like an advantageous buy point.
GDS Holdings continues to act like the young stock it is, and for a young stock that’s run from 7 in June to 21 in November, a pullback to 18 isn’t unreasonable. GDS dipped to near 17 in the morning trading session today, but rallied back to trade up fractionally. It hasn’t breached its 50-day moving average, and we’re inclined to give GDS a reasonably long leash. BUY.
Paul Goodwin, Cabot Emerging Markets Investor, www.cabotwealth.com, 978-745-5532, November 30 and December 7, 2017