Source: Beast Finance Author: Beast Finance
Revenue growth outlook
When GDS released its fiscal 2022 financial results in mid-March, it provided the company with full-year revenue guidance for fiscal 2023. Considering the market's expectations for GDS and the historical performance of its stock price, Beast Finance believes that GDS's revenue growth prospects for fiscal year 2023 may disappoint the market.
GDS expects its full-year revenue for fiscal year 2023 to be between 9.94 billion yuan and 10.32 billion yuan, which means the median value of its revenue guidance is 10.13 billion yuan.
Before the company announced its results for fiscal year 2022, sell-side analysts predicted that GDS's revenue for fiscal year 2023 would reach 10.407 billion yuan. 1% lower.
This implies a revenue growth rate of 8.6% for GDS in FY2023. Since the company's IPO in the US stock market at the end of 2016, GDS has maintained a double-digit revenue growth rate every year. Assuming that GDS's actual revenue this year will eventually be close to its guidance, FY2023 will be the first year in which GDS's revenue growth rate will drop to single digits after its listing.
Boldbeast Finance believes that supply and demand factors will also have an impact on GDS's revenue guidance for fiscal year 2023, which is lower than market expectations.
In our previous article on GDS, we cited data from some third-party companies, which showed that China's Internet data center market is facing an oversupply situation. In addition to the oversupply of the industry, weak demand from major customers also hurt GDS
's Prospects for income growth. At the company's 2022 fiscal year financial report meeting held on March 15, GDS revealed that the proportion of "new bookings" or "incremental demand" contributed by cloud service providers has dropped significantly from 85%-90% two years ago to "Almost 0%" in 2022. Cloud service providers are the largest customer group of GDS, accounting for 63% of the data center based on the area promised by customers.
To sum up, due to unfavorable demand and supply factors, GDS's revenue growth outlook in FY2023 may be lower than market expectations.
Declining profitability
In addition, GDS's earnings before interest, tax, depreciation and amortization (EBITDA) guidance for this year may also disappoint.
GDS management expects the company's normalized EBITDA to rise 6.2% to 4.515 billion yuan at the midpoint of its financial guidance, from 4.251 billion yuan last year.
There are two things worth noting about GDS's adjusted operating profit guidance. First, GDS expects FY2023 EBITDA growth (+6.2%) to be lower than the company's guidance for revenue growth this year (+8.6%). Second, the company's EBITDA guidance for fiscal 2023 indicates that its EBITDA margin is expected to decline by -100 basis points from 45.6% last year to 44.6% this year.
If GDS's actual EBITDA comes close to its guidance, the company's FY2023 EBITDA margin will hit a four-year low. In comparison, GDS’s EBITDA margins in fiscal 2020, 2021 and 2022 are 46.7%, 47.5% and 45.6%, respectively.
GDS' FY2023 operating profitability guidance suggests that the company is not enjoying any benefits associated with positive operating leverage. For most companies, their operating profit and net income typically grow faster than their revenue because their percentage of fixed costs does not change with revenue.
Also, the company's geographic diversification plans and high power-related expenses have negatively impacted its profitability.
Currently, only 0.2% of GDS's data centers (measured in square feet) are located outside mainland China. GDS is currently actively investing to expand its scale in overseas markets. It is worth noting that the company's capital expenditure in FY2023 is 7.5 billion yuan, of which more than half of 53% is used for overseas expansion. As part of the company's expansion plans in markets outside China, GDS will incur more additional expenses in fiscal 2023, which will further drag down its profitability for the year.
In addition, GDS revealed at its 2022 financial report meeting that although "input costs have begun to decline", this has not been "reflected in the cost of electricity-related expenses." For reference, GDS's EBITDA margin has fallen from 47.5% in FY2021 to 45.6% in FY2022, a decrease of -190 basis points, of which approximately -150 basis points of the margin decline was caused by increased power-related expenses of. Boldbeast Finance has reason to believe that IWC's power-related costs may continue to remain high in 2023.
Valuation is close to historical lows
Since 2023, GDS's stock price has fallen by more than half, a drop of 51%.
According to valuation data from S&P Capital IQ, the stock's current valuation multiple is approaching its all-time lows. At present, the market expects the enterprise value multiple and revenue value ratio of GDS in the next 12 months to be 5.2 times and 11.6 times respectively. In contrast, GDS's enterprise value multiple and revenue-to-value ratio indicators were at historical lows of 4.3 times and 10.6 times, respectively.