20230316-招银国际-万国数据-SW-09698.HK-Focus_on_quality_growth_with_cautious_expansion_plan_10页_1mb

GDS (9698 HK) Summary

Core Content

GDS (9698 HK) reported in-line FY4Q22 results with revenue of RMB2,404mn (+9.9% YoY, +1.5% QoQ) and adj. EBITDA of RMB1,071mn (+4.3% YoY, +0.5% QoY), which was above consensus for gross profit. The company guided a soft FY23E outlook with revenue growth of +8.7% YoY and adj. EBITDA growth of +4.2% to +8.2% YoY. The adj. EBITDA margin is expected to remain at 44.6% in FY23E, down from 45.6% in FY22A, and the company expects this to be the trough, with gradual improvement in FY24E. Capital expenditure is expected to decline by -33.5% YoY to RMB7.5bn, with a focus on quality growth.

Main Points

• FY4Q22 Results:

  • Revenue: RMB2,404mn (+9.9% YoY, +1.5% QoQ)
  • Gross profit: RMB488mn (+0.2% YoY, -1.0% QoQ)
  • Adj. EBITDA: RMB1,071mn (+4.3% YoY, +0.5% QoQ)
  • Net loss narrowed to RMB194mn, excluding a one-off gain, it widened to RMB399mn from -RMB351mn in FY4Q21.

• FY23E Guidance:

  • Revenue range: RMB9,940-10,320mn, implying growth of +6.6% to +10.7% YoY
  • Adj. EBITDA range: RMB4,430-4,600mn, implying growth of +4.2% to +8.2% YoY
  • Capex: RMB7.5bn, down -33.5% YoY, with RMB3.5bn for organic expansion in China and RMB4bn for regional expansion

• Customer and Geographical Mix:

  • CSPs accounted for 63.1% of FY4Q22 revenue, with Alibaba and Tencent contributing 43.3%
  • Net additional area committed by large internet companies (LI) was 63.1% of total, up from 17.4% by CSP
  • Over 50% of new capacity in FY23E is expected to come from overseas markets

• Valuation:

  • Maintained BUY recommendation with a new target price of HK$20.54 (down from HK$33.96)
  • Based on a lowered 15x FY23E adj. EV/EBITDA, reflecting a slower growth phase
  • EV/EBITDA is used as the valuation methodology due to high depreciation and interest expenses

Key Information

• Earnings Revision:

  • Sales: 10,141mn (down -1% from previous estimate)
  • Gross profit: 1,894mn (down -13% from previous estimate)
  • Operating profit: 428mn (down -40% from previous estimate)
  • Adj. EBITDA: 4,323mn (down -8% from previous estimate)
  • Net profit: -2,384mn (down -1% from previous estimate)
  • EPS: -1.67 (down -65% from previous estimate)

• Valuation Comparison:

  • GDS: EV/EBITDA of 13.4x for FY23E
  • Peers: Mean EV/EBITDA of 16.5x, Median of 14.2x
  • EBITDA margin: 42.6% for FY23E (down -339 bps from FY22A)
  • Revenue CAGR: 43% for FY21-24E

• Financial Highlights:

  • Net gearing is expected to rise to 251.0% in FY23E
  • The company is trading at 0.9x FY23E P/B
  • Net loss in FY23E is expected to be -2,384mn, with a net margin of -23.5%

Figures and Assumptions

• Figure 1: Revenue and YoY growth
• Figure 2: Area in services and YoY
• Figure 3: Total operating cost per area in service
• Figure 4: EBITDA margin vs. utilization
• Figure 5: Total area committed vs. forward area utilized
• Figure 6: Net adds in area under construction
• Figure 7: 4Q22 results review
• Figure 8: Earnings revision
• Figure 9: CMBI estimates vs. consensus
• Figure 10: Operating model
• Figure 11: Operating model (quarterly)
• Figure 12: Peers' valuation
• Figure 13: 12M forward EV/EBITDA chart
• Figure 14: 12M forward EV/EBITDA band

Summary Table

Conclusion

Despite the short-term challenges, GDS is making progress in diversifying its customer and geographical mix, reducing reliance on Alibaba and Tencent, and focusing on quality growth. The company remains positive about long-term data center demand driven by the Digital Economy and AI development. The revised earnings and valuation reflect a more conservative outlook for FY23E, but the long-term prospects are still viewed favorably. The BUY recommendation is maintained with a new target price of HK$20.54.