GDS Holdings Limited — Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2020; filed April 12, 2021. The filing is an annual report, not a quarterly filing. Financial statements are prepared under U.S. GAAP and audited by KPMG Huazhen LLP.
Business Context
GDS develops and operates carrier- and cloud-neutral data centers in China and Hong Kong, providing colocation, managed hosting, managed cloud, consulting and limited IT equipment sales. As of December 31, 2020, the company had 318,272 sqm in service, 137,070 sqm under construction and approximately 479,875 sqm held for future development, excluding build-operate-transfer joint venture data centers.
- Area in service was 94.3% committed and 71.1% utilized.
- Area under construction was 73.9% pre-committed.
- The company served 703 customers and operated 51 self-developed data centers plus approximately 19 third-party data centers.
- Cloud service providers represented 76.7% of committed area, while the two largest customers represented 35.8% and 22.3% of committed area, excluding B-O-T joint venture data centers.
Financial Performance and Liquidity
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net revenue | RMB5,739.0 million | RMB4,122.4 million | +39.2% |
| Gross profit | RMB1,550.5 million | RMB1,042.7 million | +48.7% |
| Gross margin | 27.0% | 25.3% | +1.7 percentage points |
| Operating income | RMB672.9 million | RMB479.8 million | +40.3% |
| Operating margin | 11.7% | 11.6% | +0.1 percentage points |
| Net loss | RMB669.2 million | RMB442.1 million | Loss increased 51.4% |
| Net loss attributable to ordinary shareholders | RMB737.7 million | RMB500.2 million | Loss increased 47.5% |
| Operating cash flow | RMB320.9 million | RMB293.4 million | +9.4% |
| Capital expenditures excluding acquisitions | RMB8,020.6 million | RMB4,552.6 million | +76.2% |
| Adjusted EBITDA | RMB2,680.6 million | RMB1,824.0 million | +47.0% |
| Adjusted EBITDA margin | 46.7% | 44.2% | +2.5 percentage points |
Colocation revenue rose 44.4% to RMB4,710.9 million and represented 82.1% of total revenue. Managed services and other services increased 20.8% to RMB1,005.9 million. IT equipment sales declined 20.6% to RMB22.1 million.
Interest expense increased 35.9% to RMB1,316.5 million. Income tax expense increased to RMB120.8 million from RMB15.7 million. A RMB55.2 million gain from a purchase-price adjustment related to the GZ3 acquisition partially offset other expenses.
Cash and cash equivalents were RMB16,259.5 million at year-end. Total cash and restricted cash were RMB16,492.9 million. Total consolidated indebtedness, including borrowings, finance leases, other financing obligations and convertible bonds, was RMB23,000.9 million. Short-term debt was RMB2,407.8 million and long-term debt was RMB20,593.1 million.
Net cash used in investing activities was RMB9,378.0 million, primarily reflecting RMB8,020.6 million of data-center development spending and RMB1,357.4 million of acquisition payments. Net cash provided by financing activities was RMB20,143.7 million, including approximately RMB15,974.5 million from ordinary-share issuance. The company reported RMB10,505.5 million of unused credit facilities and stated that available cash and expected operating cash flow should fund obligations and planned spending for at least the next 12 months, subject to changing conditions.
Material Changes Versus 2019
- Revenue growth was driven by increased utilized capacity, new data centers, customer move-ins and acquisitions, while utilization increased from 69.0% to 71.1%.
- Gross margin improved as revenue growth exceeded the increase in cost of revenue.
- Operating expenses increased 55.9%, led by higher depreciation and amortization, share-based compensation, land-related lease costs and business expansion costs. General and administrative expense increased 70.8%.
- Net losses widened despite operating profitability because interest expense, taxes, depreciation and other financing-related costs remained substantial.
- Accounts receivable increased from RMB880.0 million to RMB1,480.3 million, and receivable turnover days increased from 62.7 to 75.3 days, partly due to quarterly billing and slower collections during COVID-19.
- Total assets increased from RMB31,492.5 million to RMB57,258.8 million, while property and equipment increased from RMB19,184.6 million to RMB29,596.1 million.
- The company completed its Hong Kong secondary listing and raised approximately US$1.9 billion in net proceeds. It also issued US$505 million of Class A ordinary shares to Hillhouse and STT GDC in June 2020.
- Goodwill increased to RMB2,596.4 million, primarily from acquisitions. No goodwill or long-lived-asset impairment was recorded in 2020.
Outlook, Commentary and Unusual Items
The filing does not provide a clear formal numerical revenue, EBITDA or earnings guidance range. Management’s outlook emphasizes continued expansion of high-performance data-center capacity, growth in cloud and digital infrastructure demand, strategic acquisitions, B-O-T projects with GIC and development of managed cloud services.
- Management expects continued reliance on debt and equity financing because near-term operating cash flow is insufficient to fund planned expansion independently.
- COVID-19 did not interrupt in-service data-center operations or construction during 2020, but it contributed to slower collections, higher receivables and uncertainty regarding customers, construction schedules and future outbreaks.
- Customer concentration, power availability, construction delays, rising utility and development costs, regulatory approvals and access to financing are central operating risks.
- The company operates substantially through PRC variable interest entities. The VIE structure accounted for 95.0% of 2020 revenue, creating legal and regulatory uncertainty regarding control, licensing and consolidation.
- Foreign investment restrictions and evolving MIIT rules create risks related to IDC licenses, historical compliance, license renewals and possible penalties.
- Debt agreements include financial covenants, security interests, cross-default provisions and conditions tied to STT GDC ownership, listing status, corporate structure and IDC licenses. The company reported compliance as of December 31, 2020.
- The company has no current plan to pay ordinary-share or ADS dividends in the foreseeable future. Series A convertible preferred shares carry cumulative dividends of at least 5% annually during the first eight years, payable in cash or additional preferred shares at the company’s option.
- The company’s auditor reported effective internal control over financial reporting. The critical audit matter concerned the realizability of deferred tax assets associated with net operating loss carryforwards.
Important Facts Investors Should Verify
- Whether utilization and customer move-ins support continued revenue growth without disproportionate increases in power, lease, depreciation and financing costs.
- The sustainability of positive operating cash flow relative to capital expenditures, acquisition commitments and debt maturities.
- Debt covenant headroom, variable-rate exposure, refinancing needs and the maturity schedule, including RMB922.6 million of long-term borrowings due in 2021 and RMB2,398.9 million of current and non-current finance lease and other financing obligations due within one year.
- Accounts receivable aging, collection performance and the adequacy of the RMB2.2 million allowance for doubtful accounts.
- Customer concentration, renewal rates and the potential impact of termination, reduced commitments or pricing pressure from major cloud and internet customers.
- Progress in obtaining and renewing IDC licenses, compliance with PRC VATS regulations and the enforceability of the VIE contractual arrangements.
- Power availability, PUE requirements, energy quotas and regulatory restrictions in Shanghai, Beijing, Shenzhen, Guangdong and other operating regions.
- Acquisition consideration and contingent obligations, including the Beijing 9 acquisition and subsequent acquisitions announced for Beijing 15, Shenzhen 8 and Tianjin 1.
- Potential goodwill impairment, given RMB2,596.4 million of goodwill and the significant judgment required in forecasting utilization, revenue and cash flows.
- Implications of the PCAOB inspection restrictions, the Holding Foreign Companies Accountable Act and potential Nasdaq delisting requirements.