CD - Chindata: Spotlight On 2023 Guidance Potential Corporate Actions (Downgrade)

2023-04-17 13:24:29 ET

Summary

• Chindata Group Holdings Limited's fiscal 2023 financial guidance implying operating margin compression and a moderation in top line growth was disappointing.
• It appears to be less probable for CD to receive a privatization or buyout offer in the near term, based on a review of its peers' recent developments.
• I decide to lower my rating for Chindata to a Hold, in view of the company's below-expectations 2023 outlook and the low likelihood of corporate action catalysts materializing.

Elevator Pitch

I rate Chindata Group Holdings Limited's ( CD ) stock as a Hold.

In my prior November 23, 2022 update for Chindata Group Holdings Limited, I assigned a Buy rating to Chindata considering the company's favorable full-year FY 2022 guidance and the presence of potential corporate action catalysts. Chindata's shares initially rose from $6.45 (at the point of publication of my earlier article) to as high as $8.99 on February 1, 2023, but CD's stock has subsequently pulled back to close at $6.65 as of April 14, 2023.

With this latest write-up, I highlight that CD's 2023 outlook isn't as favorable as I would have expected, and note that the probability of Chindata's corporate action catalysts being realized is now much lower. As such, I have chosen to downgrade my investment rating for CD from a Buy earlier to a Hold now.

Chindata's 2023 Management Guidance Didn't Live Up To My Expectations

In the middle of last month, CD issued the company's financial guidance for this year as part of its Q4 2022 financial results announcement . Chindata guided for a top line in the RMB5.88-6.08 billion range and a normalized EBITDA of between RMB3.00 billion and RMB3.11 billion for full-year fiscal 2023.

In other words, Chindata expects to report a revenue of RMB5,980 million and a non-GAAP adjusted EBITDA of RMB3,055 million as per the mid-point of its guidance, which translate into slower growth and weaker operating profitability.

Specifically, CD's 2023 guidance points to its revenue expansion in local currency or RMB terms moderating from +59.6% for fiscal 2022 to +31.4% in FY 2023. The company is also expecting a slowdown in its normalized EBITDA growth from +67.3% for FY 2022 to +28.7% in FY 2023. Chindata's management guidance for the current year also implies that the company's EBITDA margin could potentially contract by -110 basis points from 52.2% last year to 51.1% this year.

I previously mentioned in my January 9, 2023 article for CD's peer, GDS Holdings Limited ( GDS ) [9698:HK], there are industry metrics implying "that the Chinese data center market suffers from a mismatch between demand and supply." Chindata has delivered very impressive revenue growth rates (in RMB terms) of +114.7%, +55.8% and +59.6% for FY 2020, FY 2021, and FY 2022, respectively. But Chindata's 2023 guidance might be a sign that supply is catching up with demand in the data center market for China, and a slower pace of revenue growth might be the new normal.

Notably, the sell-side analysts are currently projecting further top line growth moderation in the years ahead, taking into account the analysts' consensus revenue expansion rates of +21.9% and +18.6% for CD in FY 2024 and FY 2025, respectively.

With regards to the EBITDA margin contraction implied by Chindata's FY 2023 guidance, this is largely attributable to higher expenses relating to the company's geographical expansion in foreign markets. CD acknowledged at the company's Q4 2022 results call on March 15, 2023 that it will need to recruit "more staff on the business development" and "R&D side to support our company's growth in both China and overseas markets" as part of its "diversification strategy."

On the positive side of things, CD remains confident in maintaining an EBITDA margin of at least 50% for the long run, notwithstanding the company's geographical diversification plans.

There Might Be A Lower Chance Of Corporate Action Catalysts Materializing

I highlighted in my earlier late November 2022 article for Chindata that "a potential privatization" could be a key re-rating catalyst for the stock, but this seems less likely now in consideration of various developments.

For example, GDS was one of Chindata's peers, which was reportedly interested in buying over CD. However, GDS appears to be more keen on monetizing its assets and raising funds to support future growth, rather than acquiring other companies. A February 23, 2023 Seeking Alpha News article mentioned that GDS was "evaluating selling a minority stake in its international business." Similar to Chindata, GDS also seems to have placed a greater priority on its overseas expansion plans, so it doesn't make sense for GDS to allocate capital to the takeover of a Chinese peer.

Separately, it has gone quiet for another one of Chindata's listed Chinese data center peers. In late-2022, there was speculation about VNET Group, Inc. ( VNET ) either being privatized by the company's founder or accepting takeover bids from private equity firms in the media. Although VNET's share price has more than halved from the price levels it was trading at then, there hasn't been any further update on potential corporate actions or events for VNET. It won't be a stretch to assume that investor interest in China's data center assets and businesses has cooled considerably in recent times, and this might be linked to the more modest growth outlook for Chinese data center businesses as seen with CD's 2023 management guidance.

Concluding Thoughts

Chindata Group Holdings Limited's current valuations are still attractive, comparing its undemanding consensus forward next twelve months' EV/EBITDA multiple of 7.1 times now as per S&P Capital IQ with its decent revenue growth (high double digit percentage) and operating profitability (long term EBITDA margin target of above 50%) profile. But Chindata Group Holdings Limited's risk-reward is less favorable now, given that the company's revenue growth might continue to slow, and event-driven catalysts like privatization or buyouts are less likely.

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