Earnings Alert: 1Q22 results in line; short-term impacted by lockdowns in major cities in China
- 1Q22 results in line; adjusted EBITDA grew by 28.5% y-o-y
- Management guidance for FY22 is unchanged
- Lockdowns in tier 1 cities in China has impacted project delivery and customer move-in
- Maintain BUY on GDS for benefiting from strong data centre demand in China and ASEAN, despite a lower TP of HK$57
1Q22 results highlights
Revenue increased by 31.5% y-o-y to Rmb2,244m in 1Q22, mainly driven by 32.2% increase in area utilised to 332k sqm.
Total area committed and pre-committed increased by 24.5% y-o-y to 575k sqm. Area in service increased by 36.6% y-o-y to 492k sqm. Utilisation rate contracted by 2.2ppts y-o-y to 67.4% while expanding by 1.9ppts q-o-q. Commitment rate was stable y-o-y at 95.3% and expanded 1.5ppts q-o-q. Areas under construction slightly decreased by 1.2% y-o-y to 168k sqm, with pre-commitment rate down by 6.9ppts y-o-y to 63.1% while expanding 1.3ppts q-o-q.
Adj EBITDA increased by 28.5% y-o-y to Rmb1,051m in 1Q22, with adjusted EBITDA margin contracting 1ppt y-o-y to 46.9% while stable q-o-q. Net loss expanded 34% y-o-y to Rmb373m in 1Q22, mainly attributable to higher utility cost, depreciation and amortisation, and net interest expenses.
Outlook
FY22 guidance for revenue and adj EBITDA were unchanged at Rmb9,320m-Rmb9,680m and Rmb4,285m-Rmb4,450m respectively. The company also maintained its capex budget at Rmb12bn for FY22.
Organic sales target is maintained at 90k sqm for FY22. In 1Q22, the net additional areas committed by cloud service providers, large internet companies, and financial institutions/large enterprises were c.28%, c.28%, and c.44%, respectively. However, project delivery and customer move-in will still be adversely impacted by lockdowns or control measures in tier 1 cities in China at least in 2Q22. Net addition of area utilised in 2Q22 will be similar to 1Q22. The move-in is expected to gradually recover to levels in FY21 after the lockdowns are lifted in China.
Monthly service revenue (MSR) decreased by 1.8% y-o-y or 2.3% q-o-q to Rmb2,296. Management expected a mid-single-digit decline in MSR in FY22 due to the increasing portion of edge-of-town and B-O-T data centres, which have lower prices than in tier 1 cities. The electricity price is expected to gradually stabilize, after another c.10% q-o-q increase during 1Q22 in tier 1 market due to higher coal price. Management expects 1-1.5ppts impact on the overall adjusted EBITDA margin in FY22, since the additional electricity cost could be passed to c.50% of its customers.
GDS is well on track to expand its presence in Hong Kong and SEA to serve the growing demand for overseas expansion by Chinese companies. GDS recently announced to partner with YTL Power International Berhad (“YTL Power”) to co-develop 168MW data center capacity, across 8 individual data center facilities in Johor, Malaysia, in Apr 2022. This will double GDS’s capacity in SEA and complements its previously announced two hyperscale data center projects at Nusajaya Tech Park, Johor and Nongsa Digital Park, Batam, Indonesia in 2021.
We have lowered our adjusted EBITDA estimates by 1.6% and 1.7% for FY22 and FY23, respectively due to delay in project delivery and customer move-in due to recent lockdowns of tier 1 cities in China. We forecast adjusted EBITDA to grow by 16.2% and 21.3% for FY22 and FY23, respectively. We still remain positive on the company’s long-term outlook despite short-term macro uncertainties in China. We maintain our BUY call, as GDS is a key beneficiary of the strong demand for data centres in China and ASEAN, despite a lower TP of HK$57. Our TP is based on 25x FY22 EV/adjusted EBITDA (unchanged), in line with its historical average.