Chindata Adds Capacity As China ‘Reopening’ Brings Opportunities

A Quick Take On Chindata Group

Chindata Group (NASDAQ:CD) reported its Q3 2022 financial results on November 22, 2022, beating revenue and matching EPS estimates.

The firm builds and operates carrier-neutral hyperscale and prefabricated data centers in China, India and Southeast Asia emerging markets.

With China ‘reopening’ after the end of its Zero-COVID policies, the stock may present further upside to risk-on investors.

Accordingly, my outlook for CD is a Buy at around $8.50.

Chindata Overview

Beijing, China-based Chindata was founded to develop state-of-the-art ‘hyperscale’ computing data centers for organizations in China and greater Asia.

Management was headed by Chief Executive Officer Huapeng Wu, who has been with the firm since 2019 as president of Chindata China and was previously vice president of Phoenix New Media.

The firm’s services include:

• Colocation and managed service

• Energy procurement and transmission

• Infrastructure service

• IT and network service

CD operates data centers in India, Malaysia, Greater Beijing Area, Yangtze River Delta Area and the Greater Bay Area.

The Greater Bay Area is a collection of cities surrounding Hong Kong, the Macau Special Administrative Region and the Guangdong Province of China.

The company primarily pursues clients seeking wholesale data center capacity and services, although it also provides colocation services at smaller retail data centers within major metro areas.

CD’s Market & Competition

According to a 2020 market research report by ResearchandMarkets, the Chinese market for data center services was valued at an estimated $13 billion in 2019 and expected to exceed $36 billion by 2025.

This represents a forecast very strong CAGR of 19.2% from 2020 to 2025.

The Chinese market for data center services is growing rapidly, driven by the increasing demand for cloud computing services, the growth of the internet user base, and the development of new technologies such as 5G and artificial intelligence.

The Chinese government has also provided support to the data center industry, including tax incentives and infrastructure investment.

Currently, the Chinese data center market consists of over 500 data centers, operated by a variety of service providers, including major telecoms, internet companies, cloud providers, and hosting companies. These providers offer a range of services, including colocation, managed hosting, cloud computing, and other services.

The main drivers for the expected future growth trajectory is the growing demand for computing power throughout China as well as continued growth of various providers and their service offerings.

Also, the outbreak of the COVID-19 pandemic resulted in an increase of data usage, so the industry has proven to be resilient in the face of this major economic challenge.

As the ‘Zero-COVID’ policy has been recently ended by the government, the demand for colocation and related infrastructure services may increase further due to greater economic activity.

Major competitive or other industry participants include:

• Alibaba Cloud (BABA)

• GDS Holdings (GDS)

• China Mobile (CHL)

• Equinix (EQIX)

• Telstra (OTCPK:TLGPY)

• China Unicom (CHU)

• China Telecom (CHA)

Chindata’s Recent Financial Performance

• Total revenue by quarter has risen sharply in recent quarters, as shown in the chart below:

• Gross profit margin by quarter has turned downward in the most recent reporting period:

• Selling, G&A expenses as a percentage of total revenue by quarter have continued to drop materially as the firm has scaled its operations:

• Operating income by quarter has grown remarkably

• Earnings per share (Diluted) have also risen substantially in recent quarters:

(All data in the above charts is GAAP)

In the past 12 months, CD’s stock price has risen 68% vs. that of the Nasdaq 100 ETF’s (QQQM) fall of 19.6%, as the chart below indicates:

Valuation And Other Metrics For Chindata

Below is a table of relevant capitalization and valuation figures for the company:

Measure [TTM]	Amount
Enterprise Value / Sales	6.8
Enterprise Value / EBITDA	14.7
Revenue Growth Rate	50.3%
Net Income Margin	16.5%
GAAP EBITDA %	46.6%
Market Capitalization	$3,151,014,910
Enterprise Value	$3,782,042,370
Operating Cash Flow	$107,861,472
Earnings Per Share (Fully Diluted)	$0.26

Click to enlarge

(Source – Seeking Alpha)

Below is an estimated DCF (Discounted Cash Flow) analysis of the firm’s projected growth and earnings:

Assuming generous DCF parameters, the firm’s shares would be valued at approximately $13.01 versus the current price of $8.60, indicating they are potentially currently undervalued, with the given earnings, growth, and discount rate assumptions of the DCF.

Commentary On Chindata

In its last earnings call (Source – Seeking Alpha), covering Q3 2022’s results, management highlighted the addition of another 45-megawatt capacity project to its existing portfolio of projects totaling 821 megawatts of capacity.

This is after the firm placed three projects into service totaling 68 megawatts.

Client commitments increased by 50 megawatts in Q3 for a total of 110 megawatts of client commitments through the first nine months of 2022.

Notably, business in the Greater Bay Area in China, which encompasses Macau, Guangdong and Hong Kong, accounts for 75% of its total capacity and 94% of its utilized capacity.

As to its financial results, revenue rose 52.4% year-over-year, while adjusted EBITDA increased by 66.8% year-over-year,

Management did not disclose any company retention rate metrics.

Selling, G&A expenses as a percentage of total revenue continued to drop and operating income was significantly higher year-over-year.

For the balance sheet, the firm finished the quarter with $590.9 million in cash and equivalents and $1.18 billion in total debt.

Over the trailing twelve months, free cash used was $511.7 million, of which capital expenditures accounted for a very high $619.6 million. The company paid $23.5 million in stock-based compensation.

Looking ahead, management raised its forward guidance a third time in the current year.

Regarding valuation, CD is being valued at lower valuation metrics than U.S. data center operator Equinix, even though CD is growing revenue at a much faster rate.

Also, my discounted cash flow calculation indicates the stock is trading at a potential discount to its fair value based on projected growth estimates.

The primary risk to the company’s outlook is its primary operations being located in China, with all the attendant and unpredictable regulatory risks that come with that.

However, a potential upside catalyst to the stock could include the ‘reopening’ of China post-Zero-COVID policies.

Accordingly, my outlook for CD is a Buy at around $8.50.