Chindata Learns Investor Relations Lesson After Keeping CEO Departure a Mystery

Shares in the datacenter operator plunged by a third after it announced the sudden departure of its top executive without explanation

Key takeaways:

•      Last Friday, Chindata abruptly announced founder Jing Ju had resigned as CEO without saying why, sparking a massive selloff in its stock

•      The data center operator hosted a conference call several days later to explain Ju’s departure was because of disagreement on strategy

By Warren Yang

Bad communication with investors can cost a company hundreds of millions of dollars in market value. Data center operator Chindata Group Holdings (CD.US) recently learned that lesson the hard way, just over a year after listing its shares in New York.

The company, which is backed by private equity group Bain Capital, last Friday suddenly announced its founder Ju Jing, also known as Alex Ju, had resigned as CEO, effective immediately, in a statement blandly headlined: “Chindata Group Announces Leadership Change.” Xu Fei, an executive vice president at Bain, will fill the void until the company finds a permanent new CEO.

The trouble was that Chindata didn’t provide any explanation for the departure of a top executive who helped to craft his company’s “environmentally friendly” strategy that has made it an investor favorite among its peers. Also, while the company said Ju will no longer serve on the board’s compensation, corporate governance and nominating committees, it didn’t say whether he will remain on the board or was severing his ties with Chindata completely.

Investors naturally perceive such sudden leadership changes as signs of trouble, even when companies try to reassure them that the departure was for “personal reasons” and the leaving executive will assist with the transition. In this case the total lack of explanation didn’t help to calm anyone’s nerves. Instead, spooked by the news about Ju’s exit, investors dumped Chindata’s stock en masse, sending it down by a third.

The harsh market reaction led Chindata to scramble to hold a “special” conference call on Tuesday U.S. time before the market opened. During the nearly hourlong call, management said the board removed Ju because of disagreement on strategies. Specifically, the board didn’t endorse Ju’s push for expansion into component manufacturing and power generation; instead, board members want the company to remain focused on its core datacenter business. Company executives also clarified that Ju will keep his board seat.

Chindata already has a power business called Chinpower, and it’s building a solar power plant – part of the company’s practice of being environmentally friendly by building green energy plants to feed its power-hungry data centers. But on the conference call, management said the company’s energy operations will be limited to generating power for its own datacenters. It appears that Ju may have wanted more than that, perhaps selling power to other companies as well. Chindata executives didn’t explicitly say to what extent Ju sought to expand the power generation business.

The objection to moving into manufacturing and power generation is understandable because both are highly capital-intensive businesses that don’t promise decent returns on investment, especially when building datacenters is already costly.

Chinadata shares regained about 12% on Monday after announcement of plans to hold the call, and increased by a similar amount the next day after the actual call. But the stock is still 13% below where it was before the company dropped the CEO change bombshell. The shares are also down by more than a half from their IPO price from late September last year.   

Sudden CEO Changes

Across the broader technology sector, Chindata isn’t the only company that has announced a sudden CEO change lately. Others to do so include internet giant Bytedance, which accounts for the bulk of Chindata’s revenue and is also the owner of the wildly popular TikTok short video app. Just a month ago, ByteDance founder Zhang Yiming stepped down as chairman, a role he had assumed after resigning as CEO in May.

And at the end of October, Su Hua, co-founder of Kuaishou Technology (1024.HK), operator of an app similar to TikTok, resigned as chief executive. Last year Colin Huang resigned as CEO of social e-commerce giant Pinduoduo (PDD.US), and went on to give up the chairman title of the company he founded in March.

Like Chindata, none of these companies took the trouble to explain why their top executives left in moves that appeared to come from out of the blue. In each case, the surprise departure sent the company’s share price down, though not to the magnitude of Chindata stock’s plunge.

Boardroom dissent aside, Chindata, the smallest of China’s top three independent datacenter operators, is faring quite well financially. Its revenue increased almost 60% in the third quarter from a year earlier, according to its latest report issued in late November. The company also turned a profit for the period, reversing from a loss in the same period last year.

According to Yahoo Finance, six analysts on average expect Chindata to make a net profit of $0.06 per share this year, which gives its stock a forward price-to-earnings (P/E) ratio of 123 based on its price at the close of trading on Tuesday. That’s lower than 174 for rival VNET Group (VNET.US). But analysts project earnings at Chindata will increase next year, while VNET, formerly known as 21Vianet, is expected to fall back into the red. Analysts don’t see the third major independent operator GDS Holdings (GDS.US) turning a profit this year or next.

Chindata’s strong third-quarter results reflect soaring demand for datacenters as a growing number of heavy data-using companies outsource their management of that data.

In addition to the general trend, Chindata stands apart from its rivals in its emphasis on using renewable energy to power its energy-guzzling data centers, an important advantage in government relations as Beijing tries to reduce carbon emissions. Last year, Chindata became the first datacenter company to get more than half of its energy from renewable sources, compared to about 20% for GDS.

Currying favor with the government can be doubly important for Chindata as Chinese authorities tighten regulations and laws affecting technology-related companies. One area of recent government focus has been data security, which can be directly relevant to Chindata due to its focus on data management. In September and November, two sets of laws took effect in China, introducing a range of requirements for companies handling data to protect national security and personal information.

China has also made other moves to crack down on internet businesses, which could hurt Chindata’s customers and eventually Chindata itself. For example, China recently banned children under the age of 14 from using Douyin, the Chinese version of TikTok, for more than 40 minutes a day and stripped them of access to the app altogether from 10 p.m. to 6 a.m., after introducing restrictions for minors in online gaming.

Now, of course, Chindata executives have also realized that maintaining good investor relations through transparent, clear communication can be just as important as good government relations.

To subscribe to Bamboo Works free weekly newsletter, click here