GDS Dials Up New Funds With Convertible Bond Issue

The data center operator will raise $580 million by issuing convertible notes, becoming the latest offshore-listed Chinese company to seize on positive market sentiment

Key Takeaways:

  • GDS will raise $580 million by selling convertible notes due in seven years, with a conversion price that is just 16.7% above its recent trading levels
  • The data center operator will use the money to fund its aggressive expansion in China and Southeast Asia 

By Doug Young

GDS Holdings Ltd. (GDS.US; 9698.HK) has become the latest to jump on a recent fundraising bandwagon of offshore-listed Chinese companies rushing to make hay while the sun shines on their stocks. The data center operator said Wednesday it will raise $580 million through the issue of convertible notes with the relatively long term of seven years.

This offering looks quite similar to one that GDS made nearly a year ago, in which it raised $620 million by issuing similar seven-year convertible notes. But there are also some key differences, most notably in the macro environment now versus a year ago.

Most notably, interest rates are much higher now than they were a year ago, following an aggressive series of rate hikes by the U.S. Federal Reserve to tame inflation. The company’s latest notes carry an annual interest rate of 4.5%, according to its announcement. By comparison, the notes it issued a year ago carried a rate of just 0.25%.

The other major difference is the big change in sentiment towards offshore-listed China stocks. Last year at this time such stocks were investor pariahs, dogged by concerns about regulatory crackdowns in China and a dispute between the U.S. and Chinese securities regulators. Both of those issues have now been largely resolved, igniting a big rally for this formerly beaten-down group since the end of October.

The return to favor for this larger group has sparked a wave of fundraising among offshore-listed Chinese companies over the last two weeks, as they rush to take advantage of improving sentiment.

Earlier this week we wrote about two of the latest deals, including a HK$1.6 billion ($250 million) share issue by e-commerce software maker Weimob (2013.HK) and a $260 million share placement by hotel operator H World (HTHT.US; 1179.HK). Others jumping on the fundraising bandwagon include Hong Kong-listed Jinxin Fertility (1951.HK), which announced plans to raise HK$1.2 billion.

Among the growing list of new fundraising companies thus far, GDS is the only one using notes rather than the issue of new shares. It’s not difficult to understand why all the others are issuing new shares, since current high interest rates would make bonds quite costly for the issuer. GDS probably chose such convertible notes because it’s more like a relatively slow-growth utility company whose shares are less attractive to investors than the others that are also raising funds.

The company’s revenue grew just 14.9% in last year’s third quarter to 2.4 billion yuan ($356 million), and it said it expects revenue for all of last year to grow about 19%. While those numbers aren’t bad, especially considering the terrible environment in China last year due to frequent Covid disruptions, they also don’t look too exciting when one considers GDS is expanding aggressively both in China and Southeast Asia in its bid to become a major regional data center operator.

GDS’s latest quarterly report showed it had 510,511 square meters of data center space in service at the end of the third quarter, up 12.4% from a year earlier. It is also currently building another 182,355 square meters of space, which will increase its total by more than a third.

Continued losses

The bottom line is that GDS’s net loss widened to 340 million yuan in the third quarter from 301 million yuan a year earlier, and analysts expect its losses to stay roughly the same this year as it spends heavily on its expansion.

The new notes in the company’s latest fundraising carry a conversion price of $24.50. That represents a modest premium of just 16.7% to the price for the company’s American depositary shares (ADSs) over the last 20 trading days before the announcement. That essentially means the stock only needs to rise 16.7% over the next seven years for investors who buy these latest notes to make a profit.

That said, the seven-year notes issued a year ago carried a conversion price of $50, which also represented a relatively small 16% premium over the stock’s price at the time. But at the stock’s latest close of $23.51, the shares would need to more than double to climb above the conversion price on last year’s notes. That shows how far GDS shares have fallen over the past year, despite the recent rally that has seen them nearly triple from a low at the end of October.

Investors weren’t too excited about the latest fundraising, with GDS’s New York-traded ADSs falling 7.6% on Wednesday after the plan was announced. But they bounced back and recouped most of those losses on Thursday.

Truth be told, GDS appears to be gaining investor favor over these last few months compared with its two main rivals, Chindata (CD.US) and VNET (VNET.US). The trio are China’s three largest private operators of data centers, which are used for both data storage and also hosting of cloud services. Such high-tech infrastructure is well positioned to thrive in China due to Beijing’s focus on building up the country’s digital economy.

Chindata was always the investor favorite of the group due to its faster growth, which included a 62% revenue jump in last year’s third quarter. It’s also the only one of the trio that’s profitable. Chindata, which is controlled by U.S. private equity giant Bain, currently trades at a price-to-sales (P/S) ratio of 5.1, while GDS trades at 3.4 times and the no-respect VNET trades at just 0.94.

But the gap between Chindata and GDS has narrowed considerably over the past year, as the latter’s stock price rose far more rapidly than the former’s in the recent rally. That could indicate that investors are finally warming up to GDS and its aggressive expansion strategy, even if that means the company is likely to continue losing money and will need to finance its growth through new fundraising for the foreseeable future.

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