Renewed Focus Clears Distractions for Chindata After Founder’s Abrupt Exit

Company’s shares rallied after it formed a new management team around executives with deep experience in its main data center business

Key takeaways:

•      Chindata reported its revenue grew 41% in the fourth quarter, as its full-year revenue and EBITDA for 2021 exceeded previous guidance

•      Results announcement follows company’s formation of a new management team to focus on its main data center business after abrupt departure of expansion-minded founder

By Warren Yang

Change can be good for companies, and the addition of new business lines is often critical to maintain growth over the longer term. But for a young company like Chindata Group Holdings (CD.US) that’s doing just fine, sticking to what it does best may be the smartest course of action.

The data center operator, which is controlled by private equity giant Bain Capital, has gone through some turbulence these last few months, leading to the abrupt departure of its CEO and installation of a replacement last month. But its latest quarterly results released last Thursday before markets opened show the company is performing well, making a profit last year to become the most profitable of China’s three main private data center operators.

Its latest report showed Chindata made a net profit of 114.7 million yuan ($18.1 million) in the fourth quarter of last year, compared to a net loss of 27.1 million yuan a year earlier. Its revenue rose 41% year-on-year as its capacity increased 14%. For the whole of 2021, the company made its first annual net profit since going public in 2020, as revenue grew an impressive 56%.

Both revenue and earnings before interest, taxes, depreciation and amortization (EBITDA) exceeded the company’s guidance. Plus, full-year earnings per American depository share (ADS), coming in at $0.14, handily beat a Yahoo Finance consensus of $0.08. There’s little question that these were strong results all around.

Unfortunately for Chindata, its shares plunged 10% on the day of the earnings release and lost another 16.5% the next day as concerns about potential forced delistings hit all U.S.-traded Chinese stocks hard.

Last Thursday, the U.S. Securities and Exchange Commission published a list of five U.S.-listed Chinese companies that it said were in danger of potential removal from the country’s stock markets under a law that require Chinese companies to make their audit information available to U.S. authorities. Chinese law currently prohibits such information sharing, though the U.S. and Chinese securities regulators are in talks for a deal that would make it possible.

But for now, at least, there’s no evidence that Chindata is any different from the nearly 300 U.S-listed Chinese companies that would make it a specific target of U.S. regulators. What matters more is that its business is booming. Chindata management projects that revenue will grow by 42.7% to 46.2% in 2022, and EBITDA by 43.7% to 49.3%. These figures, though not as good as last year’s, are still quite solid. And who knows? The company may exceed its guidance again as it did last year.

Investors appear to have high hopes for Chindata with a new management team in place following the sudden departure of founder Ju Jing at the start of this year.

Late last month, Wu Huapeng was named as the company’s new CEO. And early this month, the company unveiled a new top management team with its appointment of Xiao Qian as president, Fan Xinyue as chief operating officer and Zhang Binghua as chief technology officer.

Data center veterans

Wu joined Chindata in 2019 to lead the company’s bread-and-butter data center business in China. That year, Bain merged Chindata’s operations in China with another similar business in the run-up to an IPO the following year. Also, notably, the new CTO, Zhang, hailed from internet giant Baidu, where his tenure of more than a decade included time in the company’s data center department.

The formation of a new management team around executives with deep data center experience underscores Chindata’s commitment to concentrating on its main business, rather than seeking to expand into new areas that may be costly without short-term benefits. Signaling investors’ endorsement of this focus, Chindata stock rallied about 14% through last Wednesday following the two announcements of the management changes.

The new CEO and his lieutenants have a good foundation to build on. Under founder Ju’s leadership, Chindata pioneered the development of so-called “next-generation” hyperscale data centers, which are large campus-style facilities capable of faster transmission of data in large quantities at lower latency rates and more affordable costs than older centers.

In its latest earnings release, Chindata touted “a huge opportunity” for such hyperscale data centers in emerging markets in the Asia Pacific region amid expansion by both international and Chinese tech companies. It certainly makes sense. After all, why wouldn’t companies that need to store data somewhere welcome cheaper services? Also, a growing number of businesses will need to use data centers as their customers flock online and their need to cut costs through digitalizing their operations only increases, while their own capacity to store and manage data is limited.

Under Ju’s leadership, Chindata was also an early advocate of using green energy, in line with Beijing’s efforts to reduce carbon emissions. This is something the company’s competitors have yet to catch up on, which can be a critical advantage in government relations for obtaining approval for new projects.

Further, the company may be well positioned to capitalize on China’s “Eastern Data and Western Computing” campaign, where Beijing envisions a hub of data centers in the less-affluent western part of the country to process data transferred from the wealthier eastern coastal part.

Yet for all his vision, Ju wanted more than supremacy in the data center business. He made a push into component manufacturing and power generation, meeting with opposition from other board members. That disagreement eventually led to Ju’s abrupt departure, and sent the company’s stock into a tailspin, with Chindata initially failing to provide any explanation.

Ju’s ambitions for component manufacturing and power generation were problematic because both businesses are highly capital intensive, with no promise of generating profit quickly. Chindata had been loss-making, and even though it turned a net profit in 2021, its cash holdings decreased last year as investment grew.

In short, Chindata isn’t exactly in a position to splurge on new businesses at the moment, and shareholders should be rightfully concerned about any plan by the company to go into new areas, especially ones requiring big spending, without a strong justification.

Despite its recent turbulence, Chindata is still a relative favorite when compared with its two main rivals VNET Group (VNET.US) and GDS Holdings Ltd. (GDS.US; 9698.HK). The company trades at a lofty price-to-earnings (P/E) ratio of about 35 based on its 2021 net profit, even after a 65% decline from its IPO price. But that’s more than you can say for the other two competitors, which are expected to have been barely profitable or lost money last year, according to analyst estimates compiled by Yahoo Finance. 

If something’s not broken, it doesn’t need to be fixed. Chindata’s latest earnings show just that.

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