20211117-招银国际-Power_price_hike,_slower_move-in_weighed_on_3Q21_7页_1mb

GDS (GDS US) Company Update Summary

Core Content Overview

GDS (GDS US) reported its FY3Q21 results, which showed revenue and adjusted EBITDA growth in line with expectations, but with a notable decline in gross margin due to increased utility costs and a slower-than-expected capacity move-in. The company revised its FY21 guidance downward, reflecting the challenges posed by the power price hike and the impact of the power outage on operational costs. Despite these issues, the company secured a new hyperscaler customer (Meituan) and announced expansion plans in the SEA region, reinforcing its confidence in the long-term growth of the cloud computing market.

Key Financial Highlights

• Revenue: RMB2,061mn (+35% YoY, +11% QoQ)
• Gross Profit: RMB455mn (+11% YoY, +4% QoQ)
• Gross Margin: 22.1% (-4.7 pct pts YoY, -1.5 pct pts QoQ)
• Adj. EBITDA: RMB962mn (+34% YoY, +7% QoQ)
• Adj. EBITDA Margin: 46.7% (-0.4 pct pts YoY, -1.4 pct pts QoQ)
• Net Loss: RMB337mn (missed estimates)

FY21 Guidance

• Revenue Guidance: RMB7,700-7,850mn (+34.2% to +36.8% YoY)
• Adj. EBITDA Guidance: RMB3,660-3,730mn (+36.5% to +39.1% YoY)
• Capex: Increased by 33% to RMB16bn (+71% YoY)

Factors Affecting Performance

• Utility Price Hike: Had a more significant impact on gross margin than anticipated. Utility costs accounted for 37% of revenue in 3Q21, up from 26.9% in 2Q21.
• Power Outage: Resulted in RMB19mn spent on backup power, with unit prices 3x higher than traditional grid power.
• Slower Capacity Move-In: Customers delayed capacity move-in by several thousand square meters, attributed to market structural changes, server shortages, and the power outage.
• New Customer Wins: Secured a new customer, Meituan, and raised FY21 capex for M&A.

Valuation and Outlook

• Valuation Methodology: EV/EBITDA is used, based on 25x FY22E EV/EBITDA, in line with the 3-year mean.
• Target Price: Maintained at US$73.01, with a potential upside of +23.9%.
• Secular Growth: The long-term trend of cloud computing growth in China remains unchanged.
• Analyst Recommendation: Maintain BUY, despite the lack of near-term catalysts.

Financial Summary

• Revenue Trends: Expected to grow at a CAGR of 36% for FY20-23.
• Operating Income: Expected to increase from RMB480mn to RMB1,777mn.
• Adj. EBITDA: Expected to grow from RMB1,824mn to RMB5,613mn.
• Net Profit (Loss): Expected to remain negative, but at a decreasing rate.

Key Ratios

• Gross Margin: Expected to be 26.1% in FY21E, decreasing slightly.
• Avg. UTR: 70% in FY21E, expected to trend downward.
• Avg. MSR: Expected to decrease from RMB2,532 to RMB2,169.
• Net Debt/Equity Ratio: Expected to rise from 0.5 to 1.3.
• Current Ratio: Expected to decrease from 1.8 to 0.6.

Market Position and Peer Comparison

• EV/EBITDA: 24.3x for FY21E, compared to peers like 21Vianet (9.4x), Sinnet (14.0x), and Baosight (40.8x).
• EBITDA Margin: 47% for FY21E, compared to peers' margins ranging from 22% to 54%.
• Revenue CAGR: Expected to be 36% for FY20-23E, in line with industry trends.

Analyst Certification and Disclosures

• The analyst certifies that the views expressed are his/her personal views and not influenced by compensation.
• No trading in the stock covered in the report was conducted within 30 days before the report's issue.
• The report is not an offer or solicitation to buy or sell any securities.
• CMBIS does not provide individually tailored investment advice and recommends independent evaluation.

CMBIS Ratings

• BUY: Potential return of over 15% over next 12 months.
• HOLD: Potential return of +15% to -10% over next 12 months.
• SELL: Potential loss of over 10% over next 12 months.
• NOT RATED: Stock is not rated by CMBIS.

Conclusion

Despite the challenges posed by the utility price hike and slower move-in rates, GDS remains optimistic about the long-term growth of the cloud computing sector. The company has secured new customers and expanded into new markets, and its financial performance is expected to improve over the next few years. The analyst maintains a BUY recommendation with an unchanged target price, based on the company's valuation and growth prospects.