In the previous report on China's fledgling data center sector, we pointed out that the industry will keep expanding rapidly. The reason lies mainly in the projected unprecedented growth of total Internet traffic over the next five years. In this article, we try to estimate the total data to be stored in 2025. In addition, we select three stocks that have the most valuable investment opportunities.
Data volume forecast
Typically, in China, structured data need to be stored for at least five years. This is why we make a 5-year projection. Our methodology is based on summing up the data produced within the six most important sectors: smartphone, video streaming, cloud gaming, movies and videos, TV and home IoT.
Here, we first find the total volume of unstructured data to be produced in 2025, then divide it by five to get the volume of structured data to be stored in the country's data centers.
We also assume that the consumer segment will still constitute the lion's share of the data pool, while up-and-coming business applications such as automated factory and autonomous driving, powered by 5G, will be just getting started in 2025.
Besides, Cisco (CSCO:NASDAQ) expects that 5G will generate 4.7 times more data than 4G did. International Data Corporation (IDC) projects data consumption in China to grow at a 30% CAGR from 2018 to 2025.
Key insights
Benefitting mainly from the ramp-up of the countrywide Internet connection speed of cellular and broadband, the data consumed in 2025 will be 9.6 times higher than that of 2019.
Used heavily by Chinese customers, 5G smartphones will be the most significant driver of producing data, due to the high penetration rate.
To keep up with the vast demand for data, local companies will need to build six times the current data center capacity. If the level of supply remains the same, the demand for data storage on only 9 of 365 days will be satisfiable (in 2019, the number was 56).
Stock picks
The potential gap between supply and demand will stimulate the sector to keep expanding business. To select the highly promising stocks poised to benefit from this data boom, we consider three factors:
1. Profitability, gross margin, operating margin and data center locations are significant indicators. We think companies with better indicators can grow steadily.
2. Funding is the key to a capital-intensive business like operating data centers.
3. Stakeholders like customers or shareholders. Partnerships with colossus companies in China provide many benefits: revenue visibility, utilization to ramp up quickly and even funding easily.
According to the above criteria, we pick GDS Holdings (GDS:NASDAQ), 21Vianet Group (VNET:NASDAQ) and Sinnet (300383:SZ) as the three best choices.
GDS
GDS was founded in 2001 and provides colocation, managed hosting, consulting and managed cloud services through a wholesale business model. Its primary clients are cloud service providers, internet and banking companies. In June 2020, it acquired USD 505 million equity investment from the Hillhouse capital group and the ST Telemedia.
DC locations
The 2019 financial report showed the company operates 50 data centers in total (36 data centers in service, 14 data centers under construction), 7 of which are self-owned, 48 of which are closed to the TMEC area, covering over 300,000 sqm. Besides, the company has a 244,794 sqm area held for future development in Tier 1 markets; over 90% of the area is intended to serve the firms located in the TMEC area.
Financials
The company raised CNY 4.4 billion revenue with a CAGR of 57.4% for the last four fiscal years. 57.1% of the revenue was generated from the top 3 customers. As of December 31, 2019, customers from the cloud services, internet and financial services industries accounted for 72.6%, 14.3% and 6.9% of its total data center area committed, respectively. The net income margin was -8.9%. Its good relationship with Alibaba cloud and internet companies provide revenue visibility and the ability to resist risks. The company mainly funds itself from equity offering. The future development area offers excellent growth opportunities.
21Vianet Group
It was incorporated in 1999, headquartered in Beijing. The firm provides hosting and related services to internet firms, government entities and small to middle-sized businesses through a retail model. The entity got USD 200 mill and 150 million from Goldman Sachs and Blackstone in February and June 2020, respectively.
DC locations
By the end of 2019, it operated 26 self-built and 51 partnered data centers in 20 cities, including 36291 cabinets. Over 88% of it are self-built and is located in the TEMC.
Financials
The company saw a CNY 4.0 billion topline for the trailing 12 months ended on March 31, 2020.
The CAGR for its hosting segment's revenue was 12.3% during the past four fiscal years. In 2019, revenue from its top five customers accounted for approximately 22% of the company's revenues. Like GDS, the enterprise's business is also money-losing with -8.2% of profitability margin. 21 VNET signed a memorandum with Alibaba to support Alibaba cloud's expansion. The companies' facilities are well located around the TMEC area; the main risk of the company is credit risks. We think this is partially mitigated by its good relationship with some colossuses as they have vested interests.
Sinnet
Sinnet provides cloud services (73% of total revenue) through its partnership with Amazon Web Services (AWS) and premium data center services (25%). Its capacity will reach 100,000 cabinets if all the current projects are finished. Sinnet announced seasoned equity offering for private placement and the proceeds would be CNY 5 billion cash to be used for facility building.
DC locations
Currently, the firm is operating 7 data center bases, most of it is located in Beijing and Shanghai.
Financials
The trailing 12 months' revenue is CNY 7.88 billion. Its fiscal topline has been growing at a CAGR of 45.23% during the last four years. Its net income margin was 11.6% in 2019 attributed to the good profitability of two segments. The top 5 customers accounted for 26% of total revenue in the most recent fiscal year. The entity is also providing service to Alibaba Cloud. Rumors said Alibaba Cloud might join the private placement. We think the proceeds will contribute to its future business expansion.