Internet & Tech

Beyond the clouds

Bytedance’s data centre partner goes public on Nasdaq


ChinData Group chose to list on America’s Nasdaq despite TikTok issue

The startling crash in the oil price earlier this year was a boon for the world’s supertankers. As a floating means of storing surplus crude, the ships came to the rescue of traders waiting out what has been described as the biggest oil glut in history. Tanker lease rates soared, offering a rare chance at lucrative returns amid a decimated sector.

If data is to the digital age what oil has been to the industrial economy, an analogy can be made between internet data centres (IDCs) and the supertankers. The prospects for the leading IDCs look appealing, especially in China.

Fitted with uninterruptible power supply and round-the-clock temperature control, IDCs are now the vaults in which companies deposit vast amounts of information. Despite the lack of glamour IDCs are the fulcrum of the digital economy, supporting cloud computing operations and on-demand business applications of all kinds.

The deluge of data being processed and stored around the world – and which is set to increase dramatically with the rise of 5G, the Internet of Things, the reach of artificial intelligence and the wide range of applications powering smart cities – has Frost & Sullivan, a research firm, predicting that the capacity at hyperscale data centres will reach 11,811 megawatts (MW) globally by 2024. That’s an annual increase of 15% from 2019 and China’s data centres will grow faster at almost double the global rate.

The Chinese are expected to account for more than a quarter of the world’s IDC capacity within five years. China’s IDC market had already reached Rmb156 billion ($22.88 billion) in sales last year, up 27% on 2018, estimated IDC Quan, a Beijing-based consultancy. Income will more than double to Rmb320 billion by 2022, it forecasts.

One company set to benefit is ChinData Group, the third of the Chinese data centre firms to go public in the United States. Under Bain Capital’s stewardship, it was created in late 2018 via a merger of the data centre division of Wangsu Science and Technology, a Shenzhen-listed content delivery network, and Bridge, a Bain portfolio company that offered data centre services in India and Southeast Asia.

Pricing its newly offered shares on Nasdaq at $13.5 apiece – at the top-end of the range – ChinData raised $540 million on a valuation of over $4.9 billion on Tuesday. South Korean conglomerate SK Holding, Dutch pension fund APG and two Chinese property majors (Country Garden and Shimao) were anchor investors in its pre-IPO placement, with Bain owning 57% prior to the listing.

The valuation at IPO is all the more noteworthy considering that the majority of ChinData’s assets were acquired for $146 million from Wangsu in January 2019. The price tag saw the Shenzhen bourse question whether Wangsu’s assets were being unfairly valued in a connected transaction (ChinData’s CEO Jing Ju, also its fifth largest shareholder, was previously general manager of Wangsu, and its fourth largest shareholder Liu Chengyan is currently Wangsu’s chairman.)

Defenders of ChinData’s rapid rise in value over the past 21 months point to the sevenfold increase in sales last year to Rmb853 million ($121 million), two-thirds of which came from business with Bytedance, owner of the viral video app TikTok (which is known as Douyin in the China market).

In the period, ChinData’s server capacity more than doubled to 193 MW across six hyperscale data centres in China and one in Malaysia, making it the largest carrier-neutral provider in Asia-Pacific’s emerging markets with a 21.5% share.

In the first half of this year Bytedance became even more significant as a client, accounting for 86% of revenue.

About half of China’s data centre market is commanded by the three state-owned telecoms carriers: China Mobile, China Unicom and China Telecom.

Carrier-neutral platforms like ChinData, however, appeal to downstream players – mainly cloud services and digital solutions providers – because their product offerings tend to be less standardised, meaning they can support more customised offerings.

These dynamics help to explain the similarly rapid growth of GDS Holdings, China’s biggest carrier-neutral data centre firm. A preferred vendor to AliCloud since 2017, the Shanghai-based company saw its revenues jump 2.6 times to Rmb4.1 billion in the two years to 2019. Like ChinData it is yet to break even. But the GDS share price has increased more than eightfold since listing on Nasdaq in late 2016.

Another rival 21Vianet Group, backed by Blackstone, has enjoyed a bull run since the beginning of the year, returning 200% as of Wednesday.

Already in high demand before Covid-19 struck, data centres proved their worth during the crisis, as long periods of lockdowns forced consumers and businesses to become more digitally reliant.

Further impetus for the sector has come from the central government, which identified data centres as one of seven types of “new infrastructure” slated for favourable policies (see WiC488).

Policymakers’ expectations are twofold. First, they want the industry’s growth to generate new clusters of economic activity­ – buoying business creation and boosting the post-coronavirus economy.

Second, they see the sector as crucial to the government’s goal of fostering industrial data as an asset class (with a view to bolstering advanced manufacturing), as revealed by a directive from the Ministry of Industry and Information Technology in May.

The policy roadmap and the surges in Covid-stimulated demand have turbocharged investor interest in the sector.

Gaw Capital, a Hong Kong-based real estate investment firm, closed its first data centre financing vehicle in September after raising $1.3 billion in equity. The fund, which has the Abu Dhabi Investment Authority as its largest backer, was launched following the creation of a joint venture with Centrin, a data centre operator from Beijing, last November. Its seed project is a 6,400-rack facility in the city of Kunshan, with Tencent Cloud as one of the anchor customers.

Warburg Pincus is focusing on similar opportunities through its Singaporean platform Princeton Digital Group and local joint venture D&J China. The portfolio of the New York private equity firm’s latest $500 million push into the Asia-Pacific region features a 40 MW data centre under construction in Shanghai and various satellite facilities in the cities of Nanjing, Nantong and Wuxi in Jiangsu province.

The growing interest in Chinese data centres from US asset managers may strike some as counterintuitive, amid the context of an ever-worsening tech conflict between Beijing and Washington. But the strong fundamentals fuelling the sector seem to outweigh the geopolitical risks – at the moment, at least.

Investors in ChinData will also have assessed its overwhelming reliance on Bytedance as a customer, especially at a time when TikTok is under Washington’s threat of a forced sale.

Such a major dependence on a single company is a risk, ChinData admitted in its IPO prospectus, although their deal covers services in China, where Bytedance operates the Douyin app.

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