GDS Continues Rapid Data Center Growth With Power Costs Expected to Crimp 2022 Margin

No-moat GDS reported a solid fourth-quarter 2021 result with revenue up 34% and EBITDA up 35% year on year. Management guided to 2022 total revenue growing between 19% and 24% to between CNY 9,320 million and CNY 9,680; and adjusted EBITDA growing between 16% and 20% to between CNY 4,285 million and CNY 4,450 million. The expected slight margin contraction was due to thermal coal power price increases in China. Management indicated that around 50% of billing contracts have full power cost pass-through with the company potentially wearing some pain on the others as power prices increased. In addition, management guided to 2022 capital expenditures of around CNY 12 billion with CNY 6 billion expected for organic growth in China, CNY 2 billion for Southeast Asia and CNY 4 billion set aside for acquisitions. We made minor adjustments to our forecasts and fair value estimate is retained at HKD 45 (USD 46). The stock price has been very volatile recently, falling to briefly to the low USD 20 range on concerns about a potential forced delisting from the Nasdaq over auditing rules; however, it has subsequently rebounded. In any case, GDS has a Hong Kong listing to fall back on, unlike VNET. We believe GDS is mildly undervalued at current levels.