My funding ranking for GDS Holdings Restricted (NASDAQ:GDS) [9698:HK] inventory is modified from a Maintain to a Purchase. There are a number of positives for GDS, comparable to a positive full-year EBITDA steerage, strong progress in worldwide markets, and the enchancment in metrics regarding monetary leverage. This has prompted me to turn out to be bullish on GDS, and this explains why I’ve upgraded my ranking for the inventory.
With my prior Might 24, 2024, replace, I assessed the outcomes and outlook for GDS’ Mainland Chinese language and abroad information heart operations. This newest write-up touches on GDS Holdings’ second quarter efficiency and full-year steerage.
GDS Delivered A +6.3% EBITDA Beat For Q2
GDS issued a press launch on Wednesday, August 21 disclosing its Q2 2024 monetary outcomes.
The corporate’s income expanded by +14.3% YoY to RMB2,826.4 million within the second quarter of the present yr. This represented an enormous enchancment as in comparison with GDS’ precise Q1 2024 top-line progress price of +9.1% YoY. Based on information taken from S&P Capital IQ, GDS’ Q2 2024 prime line got here in +1.2% larger than the promote aspect analysts’ consensus projection of RMB2,792.5 million.
Non-GAAP EBITDA for GDS rose by +6.2% YoY to RMB1,312.2 million for the most recent quarter. As a comparability, GDS reported a extra modest +4.7% YoY normalized EBITDA progress in Q1 2024. The corporate achieved a +6.3% EBITDA beat within the latest quarter, because the market’s consensus estimate was decrease at RMB1,234.4 million (supply: S&P Capital IQ).
In its Q2 2024 outcomes launch, GDS indicated that “an bettering pattern in gross move-in” was the key issue driving the corporate’s above-expectations income and EBITDA.
The important thing consumer move-in metrics are the realm utilization price and the change in space utilized. The corporate’s total space utilization price expanded by +120 foundation factors YoY to 73.3% for Q2 2024. GDS additionally noticed its whole quantity of space utilized develop by +20.9% YoY to 462,673 sq. meters in the newest quarter.
GDS famous on the firm’s Q2 2024 analyst briefing that its new or more moderen offers are with “bigger web prospects” which have “sooner move-in schedules.” This gives an evidence for the corporate’s favorable consumer move-in metrics and Q2 2024 EBITDA beat.
The corporate expects that its normalized EBITDA will enhance by +9.2% to RMB5.05 billion in full-year FY 2024 based mostly on the mid-point of its steerage. That is higher than GDS’ precise non-GAAP adjusted EBITDA progress charges of +4.7% YoY and +6.2% YoY for Q1 2024 and Q2 2024, respectively.
GDS anticipates that “the present degree of move-in” will “proceed by way of subsequent yr” contemplating the brand new offers’ “contractual phrases” and these shoppers’ “AI (Synthetic Intelligence) plans” as per its Q2 earnings name commentary. This suggests that the corporate’s vital utilization price enchancment and strong progress in space utilized for Q2 2024 may doubtlessly be sustained in 2H 2024 and 2025 with the favorable change in consumer combine.
Robust Progress For Worldwide Markets
The worldwide phase continued to be a key progress engine for GDS in the newest quarter.
The corporate’s worldwide markets enterprise witnessed a +690.2% surge in phase income to RMB255.5 million in Q2 2024, which was equal to 9.0% of its prime line for the quarter. In its second quarter outcomes launch, GDS drew consideration to “vital new buyer orders in Johor,” Malaysia. In distinction, GDS’ Mainland China phase’s income elevated by a relatively extra modest +8.9% YoY.
Capital investments are a number one indicator for future monetary efficiency, as an organization will sometimes make investments extra when it’s assured of its future prospects. Because it stands now, GDS is guiding for its capital expenditures for its worldwide phase to develop by +41.4% from RMB2,827.9 million final yr to RMB4,000 million this yr.
GDS talked about at its Q2 2024 analyst name that “it’s probably that we are going to elevate our capital expenditure steerage on the time of 3Q ’24 outcomes” announcement, with expectations that 2H 2024 capital expenditures will “enhance considerably.” This means that there’s a good probability that GDS’ total monetary outcomes will get higher within the coming quarters, contemplating the potential upward revision in capital expenditure outlook.
Enchancment In Monetary Leverage
A inventory will often be capable to command a extra demanding valuation a number of, if and when its credit score dangers turn out to be much less of a priority. As such, it’s encouraging to watch an enchancment in GDS’ key credit-related metrics within the newest quarter.
The corporate’s internet debt-to-EBITDA ratio declined meaningfully from 7.7 instances within the first quarter of 2024 to 7.2 instances within the second quarter of this yr. Throughout the identical interval, GDS’ curiosity protection metric went up from 2.47 instances to 2.74 instances. I sourced these numbers from GDS’ Q2 2024 outcomes presentation slides.
GDS revealed at its most up-to-date quarterly analyst briefing that it’s “engaged on various asset monetization initiatives” to scale back its debt, and one in every of them is to ascertain “a REIT, listed in China holding information heart belongings.”
GDS’ internet debt-to-EBITDA metric is projected to lower to 7.08 instances, 6.16 instances, and 5.67 instances (supply: S&P Capital IQ) for FY 2025, FY 2026, and FY 2027, respectively. In my opinion, the consensus monetary leverage ratio estimates are lifelike, contemplating the truth that GDS has the intention and plans in place to scale back its credit score dangers.
Variant View
Readers ought to take note of these two key danger components.
One danger is that GDS’ key shoppers select to delay their “move-in” plans, and this would possibly translate into lower-than-expected income and earnings.
The opposite danger is that the corporate takes a a lot longer-than-expected time frame to decrease its internet debt-to-EBITDA ratio to a extra comfy degree.
Concluding Ideas
GDS’ progress adjusted EV/EBITDA a number of is an undemanding 0.57 instances (12/21). The inventory is now buying and selling at a consensus subsequent twelve months’ EV/EBITDA a number of of 12 instances, in line with S&P Capital IQ valuation information. The promote aspect analysts are forecasting that GDS’ adjusted EBITDA will increase by a CAGR of +21% (supply: S&P Capital IQ) for the FY 2023-2028 timeframe.
Just like how a PEG or Worth-to-Earnings Progress valuation metric works, a inventory is often deemed to be undervalued if its EV/EBITDA ratio is decrease than its ahead EV/EBITDA progress price (an implied progress adjusted EV/EBITDA a number of of underneath 1 instances). In that respect, the inventory’s 0.57 instances progress adjusted EV/EBITDA ratio is interesting, and this means that the a number of positives for GDS have but to be totally priced in.
Editor’s Observe: This text discusses a number of securities that don’t commerce on a serious U.S. trade. Please concentrate on the dangers related to these shares.