Surging AI Demand And Global Expansion Will Boost The Company's Earnings Growth

Key Takeaways

• Surge in AI demand and strategic positioning in Tier 1 markets are driving growth and enhancing future revenue prospects through hyperscale campuses.
  
• Expansion into international markets and monetizing assets via REIT and ABS are expected to boost revenue, liquidity, and reduce debt.
  
• Reliance on capital markets and high CapEx for expansion may strain cash flow and impact profitability amidst declining revenues and increasing operational costs.

Catalysts

Develops and operates data centers in the People's Republic of China.

• GDS Holdings is experiencing significant growth due to a surge in AI demand, particularly for machine learning and inferencing, which is expected to sustain and expand further, impacting future revenue positively.
  
• The company is well-positioned with large land and power resources in Tier 1 markets, enabling it to capture future AI demand growth through hyperscale campuses, potentially enhancing earnings and revenue.
  
• Expansion into new international markets, such as Thailand, with first hyperscale projects is expected to serve the growing digital economy, which will likely boost future revenue and market presence.
  
• Plans to establish a China REIT and asset-backed securities (ABS) for monetizing assets could lead to increased liquidity and enhanced capital recycling, thereby potentially improving net margins and reducing debt levels.
  
• Rapid growth and increasing orders, including a significant contract with a global tech company, suggest a strong sales pipeline and potential international revenue increases, supporting future earnings growth.

GDS Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming GDS Holdings's revenue will grow by 17.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from -36.3% today to 4.3% in 3 years time.
• Analysts expect earnings to reach CN¥770.8 million (and earnings per share of CN¥0.68) by about January 2028, up from CN¥-4.0 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CN¥927.3 million in earnings, and the most bearish expecting CN¥-1.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 52.2x on those 2028 earnings, up from -8.5x today. This future PE is greater than the current PE for the US IT industry at 46.7x.
• Analysts expect the number of shares outstanding to grow by 80.18% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.58%, as per the Simply Wall St company report.

GDS Holdings Future Earnings Per Share Growth

Risks

• The decline in MSR (monthly service revenue) per square meter over the past four quarters and expected further declines could negatively affect revenue growth for GDS Holdings.
  
• Increasing power tariffs, leading to a decrease in adjusted EBITDA margin, may affect the company's profitability and net margins.
  
• High capital expenditure (CapEx) requirements for international expansion and new development projects in China could strain cash flow and affect free cash flow targets.
  
• Heavy reliance on capital markets to fund expansion through mechanisms like REITs and convertible preferred shares increases financial risk, which could impact earnings if conditions are unfavorable.
  
• The execution of high-cost infrastructure in new markets like Thailand and Batam involves significant risk, including reliance on local governmental support and resource availability, which could impact financial results if demand does not meet expectations.

Valuation

• The analysts have a consensus price target of CN¥24.8 for GDS Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CN¥30.49, and the most bearish reporting a price target of just CN¥7.27.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CN¥17.9 billion, earnings will come to CN¥770.8 million, and it would be trading on a PE ratio of 52.2x, assuming you use a discount rate of 12.6%.
• Given the current share price of CN¥23.76, the analyst's price target of CN¥24.8 is 4.2% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.