GDS Forecasts Slowdown in 2023 Growth; Reducing FVE to HKD 28

No-moat GDS has guided to midpoint 2023 revenue growth of 8.7% and adjusted EBITDA growth of 6.2%, well below our estimate of above 20% growth for both prior to the result. This follows GDS reporting 19.3% revenue growth and 14.5% adjusted EBITDA growth in 2022. This year is expected to be affected by one large internet customer moving out of its downtown data centers in Beijing. As a result, GDS will record 17,000 square meters of churn spread across the first three quarters of 2023, and expects additional area utilized net of churn in 2023 to be similar to the levels seen in 2022 of around 50,000 square meters of net add. The international business is also expected to contribute around CNY 100 million of losses at the EBITDA level in 2023 as it scales up. The company announced customer commitments of 74,000 sqm in 2022 but at lot of this is expected to be back-ended in 2023 so will likely affect 2024 more. We lowered our near-term forecasts and our fair value estimate reduces to HKD 28 (USD 29) from HKD 37 (USD 38). The stock price has generally declined since early 2021 when it peaked at over HKD 110 per share. At current levels we see GDS as undervalued, trading on a price/book ratio of around 0.9 times. GDS does not revalue its data centers each year like a property REIT does and we estimate that its early data centers in major city central business district areas have substantially increased in value over time. We believe a price/book ratio of well over 1 is justified.