Nikada
Elevator Pitch
My rating for Chindata Group Holdings Limited’s (NASDAQ:CD) shares is a Buy.
I reviewed CD’s financial performance for the second quarter of this year with my earlier article for Chindata written on September 1, 2022. I turn my attention to Chindata’s most recent Q3 2022 financial results in my latest write-up.
Both CD’s top line and bottom line surpassed the market’s expectations, and this gave the company confidence to raise its financial guidance for this year. Separately, there seems to be a reasonably good chance of Chindata receiving a privatization offer sometime down the road, taking into account media reports and CD’s current valuations. Taking the above-mentioned factors into consideration, I turn positive on Chindata and rate it as a Buy.
Earnings Beat For Q3 2022
Chindata delivered above-expectations earnings for the third quarter of 2022. In USD terms, CD’s non-GAAP adjusted earnings per share or EPS increased from $0.02 in Q3 2021 and $0.05 in Q2 2022 to $0.06 for Q3 2022. The company’s actual third quarter non-GAAP EPS beat the sell-side analysts’ consensus forecast by +5%.
The Q3 2022 earnings beat for Chindata was driven by both robust top line growth and an improvement in profitability as detailed in the subsequent sections of this article.
Strong Revenue Growth
In local currency terms, revenue for Chindata expanded by +62% YoY from RMB741 million in the third quarter of 2021 to RMB1,203 million for the recent quarter. CD’s Q3 2022 top line also turned out to be +8% better than the market’s consensus top line estimate of RMB1,119 million according to data taken from S&P Capital IQ.
The increase in capacity was the top line growth driver for CD in the most recent quarter. Chindata’s in-service capacity went up by +56% YoY from 370MW in Q3 2021 to 579MW for Q3 2022. During the same period, the company’s utilized capacity grew by +69% from 268MW to 454MW.
Improved Operating Profit Margins
CD’s non-GAAP adjusted EBITDA margin widened by +140 basis points YoY from 49.7% for Q3 2021 to 51.1% in Q3 2022.
The expansion in Chindata’s adjusted EBITDA margin and growth in its revenue led the company to achieve a +67% YoY jump in non-GAAP EBITDA to RMB615 million in local currency terms for the most recent quarter.
It is also noteworthy that CD’s actual Q3 2022 adjusted EBITDA was +12% better than the analysts’ consensus EBITDA projection of RMB549 million as per S&P Capital IQ data.
Anchor Client
In my prior September 2022 article for Chindata, I noted that CD’s “anchor client”, ByteDance (BDNCE) was “the driving force for Chindata’s strong growth in Q2 2022.” ByteDance continued to be a major factor influencing Chindata’s financial performance for the third quarter of this year.
Chindata disclosed in its Q3 2022 earnings presentation slides that the growth in its in-service capacity for the recent quarter was largely supported by two of ByteDance’s data centers with an aggregate capacity of 48MW entering into service. Looking forward, the company’s Indication Of Interest or IOI capacity increased by 38MW as a result of ByteDance’s “project CN20 in the campus in Shanxi Province” as highlighted in its third quarter results presentation.
Short-Term Outlook Is Reasonably Good
I have a favorable view of Chindata’s prospects in the very near term. On the back of better-than-expected financial results for the third quarter of 2022, CD raised its financial guidance for full-year FY 2022.
Specifically, the mid-point of Chindata’s 2022 top line guidance was increased by +5% from RMB4,180 million previously to RMB4,380 million. CD’s non-GAAP adjusted EBITDA estimate for this year was also revised upwards by +4% from RMB2,140 million earlier to RMB2,230 million currently based on the mid-point of its guidance.
In other words, management sees Chindata’s revenue and adjusted EBITDA growing by +54% and +57%, respectively for full-year fiscal 2022. As such, it is reasonable to conclude that the short-term outlook for CD is good.
Potential Privatization
Based on valuation data obtained from S&P Capital IQ, Chindata’s consensus forward next twelve months’ EV/EBITDA multiple has derated from 13.5 times a year ago to 7.7 times now. In the past one year, CD’s consensus forward next twelve months’ Enterprise Value-to-Revenue metric has also compressed from 6.0 times to 4.0 times.
Taking into account the stock’s valuation de-rating in recent times, Chindata’s valuations might have got to levels that are sufficiently attractive for a potential privatization to take place. Recent media reports support this line of argument.
On September 21, 2022, Seeking Alpha News reported that Chindata “hired an adviser to consider potential asset sales or a take private.” Another more recent Seeking Alpha News article published on November 2, 2022 noted there are reports claiming that VNET Group (VNET), one of CD’s peers, has a “$8.20/share take private offer.”
In a nutshell, the probability of Chindata being privatized has increased, considering its current valuations and recent news flow.
Closing Thoughts
I upgrade my rating for Chindata from a Hold to a Buy. I have become more positive on CD, as I think its near-term outlook is good and there is a decent chance of a privatization happening in due course.
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