BABA - GDS Holdings' Secular Growth Story Unchanged Yet Price Fell 35% From Peak; Strong Buy

• Tightening power quota allocation in tier-1 cities should not weaken, if not consolidate GDS’s leading position as its strong data center pipeline will become more valuable.
• GDS’s diversified customer base, customer stickiness, and multi-market presence in tier-1 cities should allow GDS not to compete desperately to the detriment of shareholder return.
• All tier-1 cities remain supply constraint due to power quota inaccessibility, leading to high demand for GDS’s data centers, which are all strategically located in tier-1 cities.
• China’s cloud market is expected to grow at 31% CAGR during 2018-2023. As a reference, China’s cloud spending accounts for 1/12th of US’ US$124 billion cloud budget in 2019. The growth of cloud will then translate to demand for data centers.
• GDS is trading at 19x FY22 EV/EBITDA, one year low and below 3-year average 22x. Given that consensus EBITDA is expected to grow 35% CAGR during 2020-2023, I apply 30x FY22 EV/EBITDA to derive a target price of US$120, representing 60% upside. Recommend strong buy. Risk is rising interest rate outlook.

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