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As whole economies shut down due to the coronavirus outbreak, many industries are negatively impacted. However, for investors there will always be opportunities.
In China, people are slowly returning to work. However, some long-term trends will stay in place. One such trend is the growth of cloud computing, simply known as the “cloud”.
According to Canalys, a research firm, China’s cloud infrastructure market grew 66.9% year-on-year to US$3.3 billion in the fourth quarter of 2019. That was before the Covid-19 outbreak and subsequent lockdown in the world’s second-largest economy.
With the Chinese economy growing its computing power, here’s one Chinese data centre growth stock set to benefit.
Unstoppable growth of the cloud
GDS Holdings Ltd (NASDAQ: GDS) is a vertically-integrated provider of data centre and IT infrastructure services in China. It currently focuses on three verticals; Internet and cloud, financial services and large enterprises.
Earlier this month, the company delivered its fourth-quarter and full-year 2019 earnings. They were impressive. Total revenue grew 47.6% year-on-year in 2019 to RMB 4.12 billion (US$6.65 billion). Meanwhile, its adjusted EBITDA was RMB 1.82 billion for the whole of 2019.
Guidance given by management continues to be solid for 2020, even amid the Covid-19 disruption. Management expects the firm to post up to 39.5% revenue growth in 2020.
This isn’t surprising. Given how much “social distancing” is going on, stay-home activities such as online streaming and video-conferencing are taking place in huge numbers – particularly so in China.
Impressive customer growth
One thing to particularly like about GDS is that it serves the two biggest internet firms in China; Tencent Holdings Ltd and Alibaba Group. In fact around 50% of its revenue comes from the two giants.
However, it’s also continuing to grow its customer base as the overall China economy shifts to the cloud (see below).
Source: GDS Holdings Q4 2019 investor presentation
Given that Tencent and Alibaba are the top two providers of cloud services in China – by market share – GDS looks set to continue to benefit.
Remember the fundamentals
However, investors should also remember to focus on its growth rate and whether it can maintain its gross margin (it has so far).
One thing to note is that the company is currently in a net debt position, i.e. it has more debt than cash on its balance sheet.
Offsetting this though is the fact that the maturities of these loans are well spaced out. Most aren’t due until after 2021.
GDS Holdings is riding the digitalisation wave in China by providing the critical infrastructure required for the growth of the cloud.
For investors willing to think long term and think about how China’s economy may look in 10 years’ time, GDS could be a big winner.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Tim Phillips owns shares in Tencent Holdings Ltd.