The data center operator has forecast 30% revenue growth this year, but says there’s potential for upside as its customers roll out new data-hungry AI applications

Key Takeaways:

• Chindata has forecast its business will grow about 30% this year, with potential for upside fueled by the explosion in AI applications
• The data center operator is the most highly valued among its Chinese peers, but trails global rivals due to geopolitical factors

BEIJING, May 10, 2023 /PRNewswire/ — Go with the flow, and do business with the heavyweights.

Those are two key takeaways in the latest earnings from data center operator Chindata Group Holdings Ltd. (CD.US), which continued to power past its local rivals in the final quarter of last year, in no small part by syncing with Beijing priorities and focusing on a small group of big-name internet customers. At the same time, the company gave out relatively conservative guidance for 2023, at least compared to its breakneck 60% revenue growth last year.

But CFO Nick Wang told Bamboo Works there’s potential for upside to that forecast, as many of the company’s clients jump on the artificial intelligence (AI) bandwagon that burst into global headlines late last year with OpenAI’s launch of ChatGPT. That growing movement, which requires large volumes of data storage and computing power, is likely to create additional demand for Chindata’s services operating a regional network of data centers in China and Southeast Asia.

Chindata, whose largest shareholder is U.S. private equity giant Bain, forecast it would post revenue of 5.88 billion yuan ($854 million) to 6.03 billion yuan in 2023, which would represent 31.4% growth at the midpoint from last year’s 4.55 billion yuan.

The company’s second-largest customer is the world’s biggest software maker, which recently rolled out a new version of its search engine that incorporates ChatGPT capabilities in its U.S. edition. It hasn’t made any similar announcements for its China edition yet. But if and when that happens, the U.S. software giant’s needs in China could rise significantly.

“This forecast in 2023 growth does not capture anything ChatGPT AI-related in terms of the volume increase,” Wang said. “I will say from that perspective, (the forecast) is probably conservative.”

Chindata’s two-pronged strategy of focusing on a small group of high-powered customers and following government policy has made it an investor favorite. Syncing with government priorities is important in China by helping to grease the wheels of business for everything from getting permits to securing land rights for new facilities.

Chindata’s leading status among its peers is apparent throughout its operating metrics, which included a profit last year, even as its two main domestic peers lost money.

The company’s latest results released in late March show its revenue rose 78% in last year’s fourth quarter to 1.4 billion yuan, far outpacing the high single-digit gains for its main rivals. Its gross margin of 41% was also more than double that of its two rivals, and its utilization rate of 86% by year end was well ahead of them.

The company keeps down its sales and marketing costs by focusing on a small number of customers, which is every company’s ideal. It doesn’t name its customers, but the largest – using 75% of Chindata’s capacity – is reportedly one of China’s largest unlisted tech companies that is also the parent of a highly successful global short video-sharing platform.

In addition, the company reportedly counts another major U.S. search giant as one of its top five clients, and is in the process of signing on China’s leading game operator as another.

“We don’t necessarily chase the largest number of customers. We’re chasing whoever can produce the biggest data volume,” Wang said. “Essentially, our customers’ business is really strong, growing faster than anybody else. Their growth rate in the past three years is much faster than their peers.”

Aligning with national priorities

In the data center business, Chindata’s other core strategy of following government priorities means setting up its data centers in China’s less developed but energy abundant areas. Following the government opens the doors for the kinds of benefits we’ve previously mentioned, including low-cost land and, perhaps most importantly, low-cost power that is one of the top expenses for data center operators.

In the latest move on that front, Chindata is currently developing a new facility in Gansu province, in the country’s northwest. Beijing wants to develop areas like Gansu as part of a strategy to steer investment to China’s less developed areas, while also taking some of the pressure off overtaxed power and other infrastructure in its more developed East Coast cities.

The company’s general policy of setting up new data centers in places with abundant supplies of sustainable electricity, especially from renewables, with a special focus on less-developed interior regions aligns with Beijing’s recent “Eastern Data, Western Computing” plan for data centers. The company currently has two main hubs in China based on that strategy, one in Hebei province’s Zhangjiakou not far from Beijing and the other in Northwestern Shanxi province.

Wang said Chindata recently completed a framework agreement with the local government in Gansu for a facility that will eventually include up to 150 MW of capacity, roughly equal to about 17% more capacity on top of Chindata’s 871 MW of capacity at the end of 2022. But a number of things must happen before any building begins, most notably the laying of fiber cable that would provide the high-speed transmission capabilities to make the facility attractive to Chindata’s clients. Accordingly, any actual new capacity on the site is still at least a few years away.

Despite its best-in-class status among its Chinese peers, Chindata is still quite undervalued compared with global peers.

The big gap may owe at least partly to geopolitical factors associated with the company’s base in China. Those factors were at the forefront with the company’s recent decision to put its expansion into India on hold, as relations remain tense between the world’s two most populous countries. Chindata currently has a relatively modest 20 MW of capacity in the country.

The company continues to expand in its other major global destination of Southeast Asia, which is currently home to about 140 MW of capacity in Malaysia, or about 16% of Chindata’s total. Wang said the company is also actively exploring setting up new data centers in Indonesia, and could use a recent small acquisition in Thailand as a base for eventually adding more capacity in that country.

Chindata’s high-tech nature also puts it at potential risk of suffering from fallout if the U.S. decides to limit its access to some of the high-tech chips and other components used in its data centers. But Wang said the company has already considered such outcomes, and should be able to mitigate associated risk, for example by supplying more power to offset using lower-power computing chips by its customer if it loses access to the fastest high-power chips, if the U.S. ever takes such steps.

This article was originally posted by Bamboo Works at https://thebambooworks.com/chindata-set-to-ride-ai-powered-explosion-in-demand-for-data-storage-processing/.

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SOURCE Chindata Group