GDS Holdings Ltd (GDS) is a leading developer and operator of high-performance data centers in China. The company runs data centers in China’s economic hubs such as Shanghai, Beijing, Shenzhen, Guangzhou, Chengdu, and Hong Kong. [mepr-active membership=”1734″ ifallowed=”show” unauth=”message” unauth_message=”Please login or purchase a membership to view full text.”] GDS has an 18-year track record and delivers its services to major cloud service and internet companies, financial institutions, telco and IT service providers, as well as large multinational corporations. The company has about 615 customers that include the entire tech scene in China, such as Alibaba, Tencent, Baidu, Ctrip, JD.com, Huawei, and many others.
GDS was founded in 2001 and is headquartered in Shanghai, China. The company is listed on the US Nasdaq exchange since November 2016. Its shares can also be traded in Germany and Mexico. Major shareholder is Singapore Technologies Telemedia, a Temasek breed, with ownership of around 35 percent. GDS’ founder and CEO, William Wei Huang, holds about six percent in the company. Forty-eight percent of the shares are in public hand.
With a workforce of almost 900 employees, GDS reported revenues of 2.9bn RMB (420m USD) and a loss before tax of 326m RMB (46.6m USD) during the first nine months of 2019. This is an increase in revenues of 50 percent and an increase in losses of 8 percent compared to the same period a year ago. In 2018, revenues increased by 73 percent, while losses also rose 32 percent.
Revenues in 2019 grew mainly due to the booming cloud market in China and to new commitments of GDS’ large internet and financial service customers. GDS’ increased losses before taxes are primarily due to higher interest expenses. The operating margin of 11 percent is well above the industry average. GDS’s cash reserves are up by 166 percent to 5.8bn RMB (821m USD), while debts and lease obligations also rose by 25 percent to 13.5bn RMB (1.9bn USD) over the first nine months of 2019.
The company shows an acceptable balance sheet. The equity ratio is at 34 percent, but the gearing, defined here as total liabilities to total equity, is at high 196 percent. Moody’s daily credit risk score for GDS is 5, indicating a medium risk, based on the day-to-day movements in market value compared to the company’s liability structure. The company will announce its next earnings results mid of March.
GDS’ shares have been in an uptrend since January 2019 and gained around 150 percent in value since. The company is currently priced at a whopping 13 times sales, six times book value, and at 150 times operating cash flow. GDS does not pay a dividend so far. Nevertheless, almost all covering analysts have a ‘buy’ or ‘strong buy’ recommendation on the stock currently.
Our conclusion: GDS shows stable financial positions with good profitability, but just adequate financial strength. The valuation is high but comes with a compounded annual growth rate for the revenues of 31 percent over the last three years. The outlook for the cloud computing market in China remains very positive, with an expected annual growth rate of more than 30 percent over the next two years.
GDS is well-positioned in an intensely competitive environment. But despite the strong revenue growth of GDS, we believe the stock will have only limited potential to increase and will need some time to consolidate before picking up momentum again. Assuming a stable global economy, we expect only a sideward movement of the stock over the next six months.
AIS Rating: ★★★☆☆
| 2014 | 2015 | 2016 | 2017 | 2018 | 2019 Q1-3 only |
|
|---|---|---|---|---|---|---|
| EPS (RMB) | (1.9) | (1.0) | (1.4) | (0.4) | (0.4) | (0.4) |
| Change (%) | n/a | 48 | -36 | 69 | -2 | -13 |
| DPS (RMB) | n/a | n/a | n/a | n/a | n/a | n/a |
| P/E | P/E INDUSTRY |
P/B | P/CF | Equity Ratio* |
ROE | LIAB./ Equity** |
Div YLD |
|---|---|---|---|---|---|---|---|
| n/a | n/a | 6.4 | 150 | 34% | -6.4% | 196% | n/a |
* Equity / Total Assets, ** Total Liabilities / Equity
[/mepr-active]
