CD - Chindata: Privatization Progress And Business Outlook In The Limelight (Rating Downgrade)

2023-12-07 11:09:02 ET

Summary

• Bain Capital's privatization bid for CD might be unsuccessful, as a closing condition wasn't met.
• But the latest disclosures from Chindata's peers provide favorable read-throughs for the company's future financial performance.
• I downgrade Chindata's rating to a Hold, which I deem to be fair considering both the progress of CD's privatization deal and its peers' recent developments.

Elevator Pitch

I have a Hold rating for Chindata Group Holdings Limited ( CD ) stock.

My decision is to lower my rating for CD from a Buy earlier to a Hold now. There is a risk that Bain Capital's bid to privatize Chindata isn't successful, as one of the closing conditions for this transaction wasn't fulfilled.

However, I am of the opinion that a Sell rating for Chindata is unjustified, as the outlook for China's data center sector is reasonably good judging by its peers' recent disclosures.

Chindata's Proposed Privatization Didn't Meet Specific Closing Condition

With my previous August 28, 2023 write-up , I highlighted that private equity firm made a privatization offer for Chindata's shares.

At the beginning of this week, CD issued a 6-K filing revealing key updates relating to Bain Capital's proposed privatization. Approximately 97.75% of the votes cast at Chindata's Extraordinary General Meeting or EGM on December 4, 2023 were in favor of the privatization deal. But CD also disclosed in the 6-K filing that it "received Objection Notices from" investors who hold "22.79% of the total issued and outstanding shares" for the company before the EGM.

I mentioned in my late-August article for Chindata that an important closing condition for this privatization transaction is that "shareholders of the Company holding less than 12% of the total issued and outstanding Shares immediately prior to the Effective Time (of the deal) shall have validly served and not withdrawn a notice of objection." In other words, one of the closing conditions for the proposed privatization wasn't met, as investors who own more than 12% (or 22.79% to be specific) of CD's shares have rejected this privatization offer from Bain Capital.

In the company's December 4, 2023 6-K filing, Chindata noted that it has asked for a waiver of this particular closing condition, but CD cautioned that the privatization deal might not go through if the waiver isn't successful.

As such, it is easy to understand why CD's share price declined by -0.9% and -1.1% on December 4, 2023 (the day of the privatization EGM) and December 5, 2023 (the day after the EGM), respectively. It is clear that the market is concerned that Bain Capital's privatization bid for Chindata might be unsuccessful following this recent development.

CD's shares went up significantly by +33.9% in the past six months, after the initial privatization offer from Bain Capital was reported in early June this year. There is a genuine risk that Chindata's stock suffers from a substantial price correction, if the closing condition associated with shareholder objection isn't waived and Bain Capital's privatization offer is withdrawn.

Peers' Disclosures Offer Positive Read-Throughs For CD's Financial Prospects

As indicated in the preceding section, there is a possibility that Chindata could possibly remain as a listed entity based on the assumption that the current privatization deal doesn't go through due to the failure to meet a closing condition. In that respect, it is critical to assess CD's financial outlook to determine how the company's shares might perform going forward if the privatization transaction is unsuccessful.

CD's most recent financial results announcement is for the second quarter of this year. The company didn't disclose its Q3 2023 financial performance because the privatization offer was still ongoing. Therefore, it is necessary to review the latest disclosures provided by Chindata's key peers to evaluate the prospects for CD and the China data center industry.

GDS Holdings Limited's ( GDS ) actual Q3 2023 normalized EBITDA amounting to RMB1,126 million beat the sell-side analysts' consensus estimate of RMB1,097 million (source: S&P Capital IQ ) by +2.7%, and this was equivalent to a reasonably decent +5.6% YoY expansion. More significantly, GDS stuck to its earlier full-year FY 2023 non-GAAP adjusted EBITDA guidance of between RMB4,430 million and RMB4,600 million when it revealed its latest third quarter financial performance in late November 2023. The mid-point of the company's EBITDA guidance points to a +6.2% growth for the full year, which is better than its +5.6% YoY EBITDA increase for Q3 2023.

On the other hand, another one of Chindata's peers, VNET Group, Inc. ( VNET ), disclosed in the middle of the prior month that it received a "$299 million strategic investment" from a company known as "Shandong Hi-Speed Holdings Group Limited."

Shandong Hi-Speed describes itself as "a state-owned capital investment company" with "assets exceeding RMB1.2 trillion" on its corporate website . Shandong Hi-Speed is expected to own a 42.1% equity stake in VNET after this investment deal is completed. In my view, the entry of a new strategic investor for VNET represents a huge vote of confidence in the long-term growth outlook for both VNET and the Mainland Chinese data center market.

The latest disclosures for CD's peers, VNET and GDS, suggest that Chindata's prospects for the near term (GDS' Q3 EBITDA beat and unchanged full-year guidance) and long term (new strategic investor for VNET) are decent. This means that even if Chindata's stock price does subsequently pull back in response to a failed privatization bid, the company's shares could potentially find some support from its listed China data center peers' favorable disclosures.

Final Thoughts

I award a Hold rating to Chindata, after considering both the progress of the company's privatization deal and the recent developments for CD's listed peers. I am disappointed that a closing condition for the privatization transaction wasn't met. However, I am encouraged by the positive read-throughs from the recent announcements for GDS and VNET.

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