Data center companies have benefited greatly from China's internet boom, yet have also eluded the attention of most investors. In this article, we introduce, examine and evaluate the performance thus far of China's three largest data center providers:
Chindata (Chinese: 秦准数据)(NASDAQ: CD)
GDS (Chinese: 万国数据)(NASDAQ: GDS)(HKEX: 9698)
VNET (Chinese: 世纪互联)(NASDAQ: VNET)
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What Are Data Center Providers?
A data center is a dedicated physical facility which houses the IT infrastructure necessary to store, process, and disseminate the data companies use in their daily operations. Organizations can develop and maintain their own data centers in-house or choose to outsource to a third-party data center provider if this latter option is more economical. Data center providers typically offer colocation services and managed hosting services, while other additional services may also be offered depending on the company.
Colocation services... refer to rental services where third-party client companies can rent rack space at a large data center facility to house their own IT equipment such as servers and other hardware. The term "colocation" comes from the fact that hardware equipment belonging to different companies are co-located together in the same facility.
Managed hosting services... refer to services where a data center provider leases IT infrastructure such as servers and other hardware to third-party client companies and manages the infrastructure on the client's behalf.
Data center providers can also be contracted to design and build data center facilities on a custom-made basis depending on client requirements.
Introducing China's Largest Data Center Providers
We provide a history of Chindata, GDS, and VNET in this section, while a business overview of each company follows in the next section.
Chindata
What is now Chindata Group resulted from the merger of Chindata (Xiamen) Science and Technology, a data center business founded by Chinese entrepreneur Mr. Jing Ju in 2015, and Bridge Data Centers, a data center company targeting India and Southeast Asia founded by Bain Capital in 2017. Bain Capital acquired Chindata (Xiamen) in 2019 and merged Chindata (Xiamen) with Bridge Data Centers the same year, with the final entity renamed Chindata Group Holdings in 2020.
Chindata Group went public on NASDAQ (NASDAQ: CD) in September 2020.
In December 2022, Mr. Jing Ju, who served as Chief Executive Officer of Chindata Group until the end of 2021, was removed as director of the company due to material breaches of non-competition and non-solicitation obligations.
As of the time of writing, Bain Capital holds 45% of Chindata's shares and retains a majority voting power.
GDS
GDS was originally founded in 2001 as an IT service provider focusing on business continuity and disaster recovery solutions. The company entered the data center business by developing in-house data centers starting in 2009 after noticing a shortage of high-performance data center capacity in China's major economic hubs.
In 2014, GDS established a long term strategic partnership with STT GDC, a wholly-owned subsidiary of ST Telemedia, a Singaporean strategic investment holding company and portfolio company of Temasek Holdings which specializes in investing in the communications, media, and technology industries. STT GDC has a portfolio of data centers across Southeast Asia, South Korea, Japan, China, and the UK, and is also GDS's single largest shareholder as of the end of 2022.
GDS went public on NASDAQ in 2016 (NASDAQ: GDS).
Starting in 2019, GDS entered into a joint venture with GIC, Singapore's sovereign wealth fund, to develop and operate hyperscale data centers for various strategic customers.
In 2020, GDS completed a secondary listing on the Hong Kong Stock Exchange (HKEX: 9698).
In 2021, GDS launched its "Singapore Plus" Southeast Asian expansion strategy with the goal of developing data centers in and around Singapore.
VNET
VNET commenced operations in 1999 as a large-scale high-performance internet data center and went public in 2011 on NASDAQ (NASDAQ: VNET).
In 2012, VNET signed an agreement with Microsoft to operate Microsoft Azure and Office 365 in China. In 2014, VNET entered the VPN industry by acquiring the VPN business of DYXnet, an ICT services provider in the Greater China area. The same year, VNET also formed a partnership (which expired at the end of 2019) with IBM to provide private cloud and hybrid services in China.
In 2016, VNET entered into strategic cooperation agreements with domestic cloud services providers including Alibaba, Tencent, Baidu, Kingsoft, and JD.
In 2020, VNET became the data center hosting partner for China Everbright Bank (中国光大银行). The following year, VNET signed a strategic cooperation agreement with Hangzhou Iron and Steel Group (杭州钢铁集团) and CHINT Group (正泰集团), an energy solutions provider active across 140 countries and regions.
In 2021, VNET released a new subsidiary brand named NEOLINK (互联科技), which focuses on providing internet infrastructure lifecycle services to clients.
Business Overview
In this section, we provide a business overview of each data center provider.
Chindata
Chindata offers colocation, managed hosting and custom-build data center services with a particular focus on providing high-quality yet cost-effective solutions to clients looking to grow their businesses in Asia's emerging markets. The company's facilities are primarily located on the outskirts of major cities (e.g. China's first tier cities, Shenzhen, Kuala Lumpur, Mumbai and Bangkok), which provide significant cost-saving advantages compared with facilities located in metropolitan city centers.
At the end of 2022, Chindata had a total capacity of 871 mega watts, of which 85.6% was utilized. The company's clients span a wide range of industries with notable mentions including ByteDance, which contributed to 83.2% of Chindata's total revenue in fiscal 2021, and Microsoft, a client for Chindata's data center solutions in Malaysia.
GDS
GDS develops in-house data centers with colocation and managed hosting services, and also has a Build-Operate-Transfer (B-O-T) option where the company builds, operates, and ultimately transfers data centers to clients at the end of a specified contract period. GDS's colocation facilities are primarily located in urban districts within China's major economic hubs (i.e. the four first tier cities as well as Hong Kong, Chengdu and Chongqing), while B-O-T data centers can be built at other locations depending on customer requirement. Additionally, GDS also offers managed cloud services, which refer to a management interface that allows client enterprises to integrate and control different aspects of their cloud computing environments.
At the end of 2022, GDS had an area in service (defined as the total area ready for service) of 515,787 square metres, of which 95.5% was committed by customers (i.e. committed to customers persuant to customer agreements). As of the time of writing, GDS has a customer base of 830 enterprises primarily consisting of large companies engaged in the general internet, cloud computing, and financial services industries. During fiscal 2021, GDS's largest customer accounted for 40.5% of total committed area, the company's second largest customer accounted for 16.6% of total committed area, while the third, fourth, and fifth largest customers accounted for 4.7%, 4.2%, and 4.1% of total committed area respectively. Collectively, GDS's five largest customers accounted for 70.1% of total committed area during the year.
VNET
VNET offers colocation and managed hosting services, custom-build services, cloud services, as well as VPN services. VNET's cloud services refer to a suite of Microsoft cloud services which VNET is contracted to provide to customers in mainland China as part of a joint agreement between VNET and Microsoft. VNET's VPN services span Greater China and the wider Asia Pacific region, and are primarily operated through Dermot Entities, the VPN business unit of ICT services provider DYXnet acquired by VNET in 2014. Previously, VNET offered managed network services (services that enabled clients to deliver data more quickly and reliably), but disposed of the segment in 2017 as it was loss-making.
At the end of 2022, VNET had 87,322 cabinets under management with a utilization rate of 55.0% and a monthly recurring revenue per cabinet of RMB9,371 in Q4 2022. VNET's customers include private and government agencies of various sizes engaged in a variety of industries, with notable mentions including Alibaba, JD, Meituan, Tencent, Xiaomi, Oppo, and BMW. During fiscal 2021, one undisclosed customer generated more than 10% of VNET's total revenue, while in Q4 2022, the top 20 customers contributed to 35.3% of total revenue.
Financial Comparison
Next, we turn to a financial comparison of the three companies.
We note that financial data for Chindata is only available from 2018 onwards, while the utilization rate metric used by each provider differs from company to company. We also note that all three companies only have one operating segment for financial reporting purposes, with the exception of VNET which had two operating segments in 2017 (Hosting and Related Services and Managed Network Services). As mentioned above, VNET's Managed Network Services segment was disposed of in 2017, after which the company adopted a single segment approach.
#1: In 2022, GDS Generated RMB9.3bn Of Revenue, Followed By VNET At RMB7.0bn And Chindata At RMB4.6bn
Although VNET was the leader in terms of total revenue in 2017 and 2018, GDS overtook both Chindata and VNET to become the revenue leader with an increasingly large revenue gap starting in 2019. During fiscal 2022, GDS recorded total revenue of RMB9,326 million, compared with VNET's RMB7,065 million and Chindata's RMB4,552 million. In terms of growth, Chindata had the highest compound annual growth rate (CAGR) of 115.3% from 2018 to 2022, a relatively unsurprising fact given the company's young age. GDS had the second highest CAGR of 33.9% from 2017 to 2022, while VNET had the lowest CAGR of 13.0% over the same time period.
Note: in 2017, RMB418 million (i.e. 12.3%) of VNET's total RMB3,393 million revenue were generated from the Managed Network Services segment.
#2: Chindata Had The Least Revenue But The Highest Gross Profit Margin
Although Chindata generated the least revenue out of all three data center providers, the company had the highest gross profit margin from 2019 to 2022. Specifically, in 2019, Chindata had a gross profit margin of 28.5% compared with 25.3% for GDS and 24.8% for VNET. During 2020 to 2022, Chindata's profit margin was in the low 40% range, nearly double that of VNET over the same period and nearly double GDS's gross profit margin over the past two years.
#3: Chindata Has The Highest and Most Resilient Growing Operating Profit Margin
Among the three data center providers, Chindata shows the most resilient growth in operating profit margin with continued increase from 2018 to 2022. In contrast, GDS's operating profit margin peaked in 2019 and 2020 at a level of 11.7%, while VNET's operating profit margin continually declined since 2018. In 2022, Chindata achieved an operating profit margin of 26.1%, GDS had an operating profit margin of 5.9%, while VNET only recorded an operating profit margin of 1.7%.
#4: GDS's Net Profit Margin Remains Negative, While Chindata's Net Profit Margin Shows Continued Improvement
All three data center providers had negative net profit margins until 2021, during which Chindata and VNET finally broke even with net margins of 11.1% and 8.3% respectively. However in fiscal 2022, VNET's net profit margin dipped below zero again, while GDS recorded negative net margins across all six years from 2017 to 2022. As a whole, Chindata exhibits the most resilient growth in net profit margin, with continued improvements year on year to reach an all-time high of 14.3% in 2022.
#5: All Three Companies Exhibit Similar Cash Flow Patterns
We briefly look at the three companies' cash flow patterns. All three data center providers exhibit relatively similar cash flow patterns comprising of growing net operating cash flows, large volumes of financing cash inflows, and extensive investing outflows.
#6: Chindata Had The Highest Utilization Rate, GDS Showed The Most Consistent Increase In Rate, While VNET's Utilization Rate Experienced A Continued Decline
Lastly, we compare the utilization rate of each data center provider. Each company defines its utilization rate differently which prevents a perfectly comparable analysis, however we believe there is still value in comparing the different utilization rate metrics across the three companies. Chindata defines its utilization rate as the utilized capacity as a percentage of total capacity in mega watts. In contrast, GDS computes its utilization rate as the ratio of area utilized to area in service in square meters, while VNET calculates the company's utilization rate as the number of billable cabinets as a percentage of the total number of cabinets in capacity.
Chindata's utilization rate fluctuated but was consistently the highest out of all three companies, ranging from a low of 69.4% in 2021 to a high of 85.6% in 2022. In contrast, VNET's utilization rate continually declined by 20% from 75.3% 2017 to 55.0% in 2022. Lastly, GDS's utilization rate showed the most consistent increase over the past six years, growing from 60.9% in 2017 to 71.8% in 2022 with only a small dip in 2021.
Note: Chindata only reports a utilization rate starting in 2020
The Future Of China's Data Center Providers
We move on to a discussion of the futures of China's major data center providers.
Broadly speaking, all three providers are still in the rapid expansion phase with significant amounts of anticipated capital expenditure and have yet to achieve economies of scale. The providers also face potential competition from internet and cloud companies that can develop and expand their own data center businesses, as well as telecommunication companies with data center services such as China Telecom (中国电信) and China Unicom (中国联通).
Company-specific plans as outlined by management are summarized below.