Quick Take

Chindata Group Holdings Limited (CD) has filed to raise $500 million in an IPO of its American Depositary Shares [ADSs] representing underlying Class A ordinary shares, according to an F-1 registration statement.

The firm provides hyperscale data center location and technology services to organizations in China, Malaysia and soon to India.

CD has a reasonable debt load, strong growth plans, positive industry demand dynamics and a fair IPO price, so the transaction is worth considering.

Company & Technology

Beijing, China-based Chindata was founded to develop state of the art ‘hyperscale’ computing data centers for organizations in China and greater Asia.

Management is headed by founder and Chief Executive Officer Mr. Jing Ju, who has had significant experience developing the infrastructure for over ten large data center campuses with a combined capacity of more than 1,000 MW.

Below is a brief overview video of a newly launched data center:

Source: Chindata Group

As of June 30, 2020, the firm had 9 data centers in service and another 6 data centers under construction, with a footprint as shown below:

Chindata has received at least $517 million from investors including Bain Capital, Boloria Investments, Zeta Cayman, Datalake and Abiding Joy.

Customer Acquisition

The company primarily pursues clients seeking wholesale data center capacity and services, although it also provides colocation services at smaller retail data centers within major metro areas.

CD has certain large customers, such as ByteDance which accounted for 81.6% of its total revenue in the first half of 2020. ByteDance usually signs contracts of ten years in duration.

Selling and Marketing expenses as a percentage of total revenue have been uneven but trending lower as revenues have increased, as the figures below indicate:

Selling and Marketing

Expenses vs. Revenue

Period

Percentage

Six Mos. Ended June 30, 2020

4.6%

2019

5.7%

2018

5.2%

Source: Company registration statement

The Selling and Marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Selling and Marketing spend, was a still strong 8.8x in the most recent reporting period, as shown in the table below:

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Selling and Marketing

Efficiency Rate

Period

Multiple

Six Mos. Ended June 30, 2020

8.8

2019

15.9

Source: Company registration statement

Market & Competition

According to a 2020 market research report by ResearchAndMarkets, the Chinese market for data center services was valued at an estimated $13 billion in 2019 and expected to exceed $36 billion by 2025.

This represents a forecast very strong CAGR of 19.2% from 2020 to 2025.

The main drivers for this expected growth is the growing demand for computing power throughout China as well as continued growth of various providers and their service offerings.

Also, the outbreak of the Covid-19 pandemic has resulted in an increase of data usage, so the industry has proven to be resilient in the face of this major economic challenge.

Major competitive or other industry participants include:

Financial Performance

Chindata’s recent financial results can be summarized as follows:

  • Topline revenue growth, partially through acquisition

  • Increased gross profit and gross margin

  • Growing operating profit and margin

  • Sharply increased cash flow from operations

Below are relevant financial results derived from the firm’s registration statement:

Total Revenue

Period

Total Revenue

% Variance vs. Prior

Six Mos. Ended June 30, 2020

$ 114,733,000

67.1%

2019

$ 155,466,000

973.4%

2018

$ 14,482,941

Gross Profit (Loss)

Period

Gross Profit (Loss)

% Variance vs. Prior

Six Mos. Ended June 30, 2020

$ 44,774,000

99.7%

2019

$ 49,447,000

-1014.3%

2018

$ (5,408,235)

Gross Margin

Period

Gross Margin

Six Mos. Ended June 30, 2020

39.02%

2019

31.81%

2018

-37.34%

Operating Profit (Loss)

Period

Operating Profit (Loss)

Operating Margin

Six Mos. Ended June 30, 2020

$ 11,305,000

9.9%

2019

$ 2,107,000

1.4%

2018

$ (17,859,706)

-123.3%

Net Income (Loss)

Period

Net Income (Loss)

Six Mos. Ended June 30, 2020

$ (8,411,000)

2019

$ (20,063,000)

2018

$ (20,317,794)

Cash Flow From Operations

Period

Cash Flow From Operations

Six Mos. Ended June 30, 2020

$ 43,643,000

2019

$ 5,686,000

2018

$ (3,764,853)

(Glossary Of Terms)

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Source: Company registration statement

As of June 30, 2020, Chindata had $251 million in cash and $807.2 million in total liabilities.

Free cash flow during the twelve months ended June 30, 2020, was negative $263.8 million).

IPO Details

Chindata intends to raise $500 million in gross proceeds from an IPO of 40 million of American Depositary Shares [ADSs] representing underlying Class A ordinary shares, offered at a midpoint price of $12.50 per ADS.

Class A shareholders will be entitled to one vote per share and Class B shareholders will have 15 votes per share.

The S&P 500 Index no longer admits firms with multiple classes of stock into its index.

Certain investment firms have indicated an interest to purchase shares of up to $135 million in the aggregate at the IPO price in a concurrent private placement.

Assuming a successful IPO, the company’s enterprise value at IPO would approximate $4.8 billion, excluding the effects of underwriter over-allotment options.

Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 11.11%.

Management says it will use the net proceeds from the IPO as follows:

approximately 70% for development and construction of new data center projects;

approximately 20% for potential investment or acquisition of assets serving strategic value; and

approximately 10% for working capital and other general corporate purposes.

Management’s presentation of the company roadshow is available here.

Listed bookrunners of the IPO are Morgan Stanley, Citigroup, UBS Investment Bank and China Renaissance.

Commentary

Chindata is seeking U.S public investment capital to build more of its hyperscale data centers in China and greater Asia.

The firm’s financials show strong revenue growth, though some of that is via acquisition, a swing to operating profit, reduced net losses and growth in cash flow from operations.

Even though the firm is private equity owned, its long-term debt load is $570 million, not an unreasonable amount.

Selling and Marketing expenses as a percentage of total revenue have dropped; its Selling and Marketing efficiency rate has also dropped but remains at an impressive level.

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The market opportunity for data center services is expected to grow substantially in the coming years in the Asia Pacific region, so the firm has strong industry dynamics in its favor.

Like many Chinese firms seeking to tap U.S. markets, the firm operates within a VIE structure or Variable Interest Entity. U.S. investors would only have an interest in an offshore firm with contractual rights to the firm’s operational results but would not own the underlying assets.

This is a legal gray area that brings the risk of management changing the terms of the contractual agreement or the Chinese government altering the legality of such arrangements. Prospective investors in the IPO would need to factor in this important structural uncertainty.

As to valuation, compared to direct competitor GDS Holdings, the Chindata IPO is valued at higher multiples, although the firm is producing higher revenue growth is almost at breakeven EPS. However, its EV/EBITDA multiple is sharply higher than GDS’, so that is a concern.

Given the company’s reasonable debt load, growth plans, industry demand dynamics and a fair IPO price, my the IPO is worth considering.

Expected IPO Pricing Date: September 29, 2020

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