GDS Holdings: Data Centers in China

12/07/2017 5:00 am EST

Focus: GLOBAL

Paul Goodwin

Emerging Markets Specialist and Analyst, Cabot Heritage Corporation

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 telecom carriers and to many financial services companies and large enterprises, explains global analyst Paul Goodwin, editor of Cabot Emerging Markets Investor.

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.

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 (BABA) and Tencent Holdings (TCEHY) — who accounted for 45% of total revenue in 2016. The company also expects to start hosting the cloud platform for Baidu (BIDU) in the fourth quarter.

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.

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.

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. It closed for the first time above $20 on November 20; the slight pullback looks like an advantageous buy point.

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