Chindata Grows But Founder CEO's Abrupt Departure Raises Risks

Summary

• Chindata went public in September 2020, raising $540 million in a U.S. IPO of its ADSs.
• The firm builds and operates hyperscale and prefabricated data centers in China and Southeast Asia.
• CD has grown revenue and produces profits but faces significant Chinese regulatory risks.
• The recent abrupt resignation of the founder and CEO has raised further questions about the company, so my short-term outlook is Neutral.
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A Quick Take On Chindata Group

Chindata Group (NASDAQ:CD) went public in September 2020, raising gross proceeds of approximately $540 million in a U.S. IPO that priced at $13.50 per ADS.

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

With abrupt founder/CEO departures, investors become wary of potential problems at the firm, so it will likely take some time for CD to bounce back, if it does at all on U.S. markets.

My outlook on the stock at around $5.65 is Neutral due to these numerous uncertainties.

Company

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 founder Mr. Jing Ju until his abrupt resignation in early December 2021 as CEO and member of the Corporate Governance and Compensation committees.

Below is a brief overview video of a newly launched data center:

(Source)

Currently, CD has a total of 15 data centers in service representing 588 megawatts of IT capacity.

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 main drivers for this expected growth 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 has resulted in an increase of data usage, so the industry has proven to be resilient in the face of this major economic challenge.

Major competitive or other industry participants include:

• Alibaba Cloud (BABA)

• GDS Holdings (GDS)

• China Mobile (CHL)

• Equinix (EQIX)

• Telstra (OTCPK:TLSYY)

• China Unicom (CHU)

• China Telecom (CHA)

Chindata’s Recent Financial Performance

• Topline revenue by quarter has shown steady and strong growth:

• Gross profit by quarter has followed roughly the same trajectory as topline revenue:

• Operating income by quarter has also grown considerably since the firm’s IPO:

• Earnings per share (Diluted) have produced positive results in the last three reporting periods:

(Source data for above GAAP financial charts)

In the past 12 months, CD’s stock price has dropped 69.2 percent vs. the U.S. S&P 500 index’ rise of 26 percent, as the chart below indicates:

(Source)

Valuation Metrics For Chindata

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

Measure	Amount
Market Capitalization	$2,300,000,000
Enterprise Value	$2,330,000,000
Price / Sales	5.17
Enterprise Value / Sales	5.73
Enterprise Value / EBITDA	14.06
Free Cash Flow [TTM]	-$584,770,000
Revenue Growth Rate [TTM]	61.40%
Earnings Per Share	$0.06

Click to enlarge

(Source)

As a reference, a relevant public comparable to CD would be GDS Holdings (GDS); shown below is a comparison of their primary valuation metrics:

Metric	GDS Holdings	Chindata	Variance
Price / Sales	6.53	5.17	-20.8%
Enterprise Value / Sales	10.68	5.73	-46.3%
Enterprise Value / EBITDA	26.73	14.06	-47.4%
Free Cash Flow [TTM]	-$1,050,000,000	-$584,770,000	-44.3%
Revenue Growth Rate	37.4%	61.4%	64.3%

Click to enlarge

(Source)

Commentary On Chindata

In its last earnings call, covering Q3 2021’s results, management highlighted its sequential megawatt growth of 2.5% over the previous quarter, with a stable utilization ratio of 72%.

The company also stressed its overseas business development efforts in Malaysia and Thailand as it seeks to diversify its client base.

CD has 9 data centers representing 218 megawatts currently under construction.

Notably, management considers the firm a first mover in buying green power, with a recently completed transaction of purchasing 100 million kilowatt-hours of energy from green power sources.

As to its financial results, the quarter’s topline revenue represented 59% year-over-year growth and a 10.6% net margin, which management believes is ‘among the best performance in the industry.’

The firm also mentioned Fitch’s reaffirmation of its BBB investment rating for the company’s debt despite negative macro headlines, likely in part due to Chinese regulatory concerns about overseas listings, especially companies with data assets such as Chindata.

Looking ahead, management intends to focus efforts on its prefabricated data center module business, as it promises to increase the firm’s penetration and diversification in the greater Asia-Pacific markets it has targeted.

Regarding valuation, compared to Asia-based data center company GDS, CD’s stock is being valued at reduced multiples despite a much faster topline revenue growth rate and producing net earnings.

While the stock had already dropped precipitously from its post-IPO high of around $23.65, the recent announcement of the abrupt resignation of its founder from his CEO position as well as member of two Board committees has sent the share price lower.

The primary risk to the company’s outlook is regulatory, with Chinese regulators making significant moves to restrict or reduce overseas listings through enhanced review processes, with special emphasis on data-oriented technology companies such as Chindata.

A secondary risk is governance, as evidenced by the founder’s exit from management of the company. As of the IPO, founder Ju had only 5.6% of company ownership and 13.5% of voting power, while Bain Capital Entities held 49.1% of ownership and 81.2% of voting power. (Source)

With abrupt founder/CEO departures, investors become wary of potential problems at the firm, so it will likely take some time for CD to bounce back, if it does.

My outlook on the stock at around $5.65 is Neutral due to these numerous uncertainties.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

This report is intended for educational purposes only and is not financial, legal or investment advice. The information referenced or contained herein may change, be in error, become outdated and irrelevant, or removed at any time without notice. You should perform your own research for your particular financial situation before making any decisions.

Comments

[Bill Stoller]

The core issue has always been the fact ByteDance is over 80% of revenue, making CD uninvestable.
This was prior to the CCP regulation risks.
Other than that it is a winner.

[bellbottomblues]

@Bill Stoller indeed, other than that Mrs. Lincoln, how was the play?