Renewed focus removes distractions for Chindata after founder’s abrupt exit (undefined:CD)

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Change can be good for businesses, and adding new lines of business is often essential to sustaining long-term growth. But for a young company like Chindata Group Holdings (CD) who is doing very well, sticking to what he does best may be the smartest course of action.

The data center operator, which is controlled by private equity giant Bain Capital, has been through some turbulence in recent months, leading to the abrupt departure of its CEO and the installation of a replacement last month. But his last quarterly results released last Thursday before the market opened showed the company is doing well, turning a profit last year to become the most profitable of China’s top three private data center operators.

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

Revenue and earnings before interest, tax, depreciation, and amortization (EBITDA) exceeded the company’s forecast. Additionally, annual earnings per US Depository Share (ADS), at $0.14, easily beat a Yahoo Finance consensus of $0.08. There is no doubt that these results were solid all around.

Unfortunately, for Chindata, its shares plunged 10% on the day of the earnings release and fell another 16.5% the next day as concerns over possible forced delistings hit all US-traded Chinese stocks hard. .

Last Thursday, the United States Securities and Exchange Commission published a list of five Chinese companies listed in the United States that it said were at risk of being delisted from the country’s stock markets under a law requiring Chinese companies to make their audit information available to US authorities. Chinese law currently prohibits such information sharing, although US and Chinese securities regulators are in talks for a deal that would make it possible.

But for now, at least, there is no evidence that Chindata is any different from the nearly 300 US-listed Chinese companies that would make it a specific target of US regulators. What matters most is that his business is booming. Chindata management expects revenue to grow from 42.7% to 46.2% in 2022, and EBITDA from 43.7% to 49.3%. These numbers, while not as good as last year, are still pretty solid. And who knows? The company could again exceed its forecast as it did last year.

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

At the end of last month, Wu Huapeng was named as the company’s new CEO. And at the beginning of this month, the company unveiled a new leadership team with the 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 company in anticipation of an IPO the following year. Also, notably, the new CTO, Zhang, hails from internet giant Baidu, where his decade-plus tenure 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 focus on its core business, rather than seeking to expand into new areas which can be costly without short term benefits. Signaling investor approval of the move, Chindata’s stock rebounded around 14% through last Wednesday after the two leadership change announcements.

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

In its latest earnings release, Chindata touted “tremendous opportunity” for such large-scale data centers in emerging Asia-Pacific markets amid the expansion of international and Chinese technology companies. It certainly makes sense. After all, why wouldn’t companies that need to store data somewhere accept cheaper services? In addition, an increasing number of businesses will need to use data centers as their customers flock online and their need to cut costs by digitizing 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 for the use of green energy, in line with Beijing’s efforts to reduce carbon emissions. This is something that the company’s competitors have yet to catch up to, which can be a critical advantage in government relations to gain approval for new projects.

Additionally, the company could be well placed to capitalize on China’s “Eastern Data and Western Computing” campaign, where Beijing is considering a data center in the less affluent western part of the country to process data transferred from the more eastern coastal part. rich.

Yet for all his vision, Ju wanted more than data center supremacy. He ventured into component manufacturing and power generation, meeting opposition from other board members. This disagreement eventually led to Ju’s abrupt departure and caused the company’s stock to plummet, with Chindata initially offering no explanation.

Ju’s ambitions for component manufacturing and power generation were problematic because both businesses are capital-intensive, with no promise of turning a profit quickly. Chindata had posted losses, and although it made a net profit in 2021, its cash flow declined last year as investments increased.

In short, Chindata isn’t exactly in a position to splurge on new ventures at the moment, and shareholders should rightly be concerned about any plans the company has to venture into new areas, especially those requiring large expenditure, without solid justification.

Despite its recent turmoil, Chindata is still a relative favorite over its two main rivals VNET Group (VNET) and GDS Holdings Ltd. (GDS; 9698.HK). The company is trading at a high price-to-earnings (P/E) ratio of around 35 based on its 2021 net earnings, 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 barely been profitable or lost money last year, according to analyst estimates compiled by Yahoo Finance.

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

Disclosure: Any

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Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.

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