Initiation Report: March 26, 2020
J Capital Research ("J Cap") is a stock-research company. J Cap has analyzed the U.S.-listed company GDS Holdings Limited (“GDS”) and is hereby publishing the outcome and the conclusions of our analysis, based on publicly available information. We may be short shares of GDS, and, for this reason, there might be a conflict of interest.
GDS is a fraud. At least 25% of its revenue is fraudulent. Unlike most Chinese companies, GDS creates the fake revenue by round-tripping its own debt and capex. As GDS’s revenue line grows, so does the amount of debt it needs to raise to support the illusion.
In addition to round-tripping, GDS aggressively recognizes future revenues, a portion of which we believe will never be realized. Faked revenue comes without costs, so the ploy also increases reported EBITDA and reduces optical leverage. Using this and other strategies, GDS has persuaded investors to accept its highly customized metrics and argues that it will be the winner in a take-all market. That is simply not true.
By examining dozens of financial statements submitted to the Chinese government, we’ve identified about ¥1.3 bln in unreported debt. We also question the cash balances. Interest income in 2018 was ¥19.2 mln, for an average 0.9% yield, although fixed-term deposits in China were yielding about 3% in 2018. Meanwhile, the company pays up to 9.7% for loans despite its large reported cash balances. No wonder GDS is “actively” seeking new sources of debt to get through the year.
After about a year of research, more than 90 interviews, and visits to all but nine of the 70 data centers that GDS has reported in service or under construction, we have concluded that GDS is a sophisticated Ponzi. With financial markets repricing risk in the last few weeks, we believe the debt pyramid could collapse.
Top three photos: Data center under development in Nantong, Jiangsu Province. Center three: Heyuan, Guangdong Province, site being developed for Alibaba. Bottom three photos: Zhangbei, Hebei Province, data centers reported fully utilized by Alibaba. All photos by J Capital.
Top from left: 1. GDS site at 21 Golf Ave in Shenzhen 2. Pengsen Haina building, where the SZ5 data center is located 3. Second row: SZ3 4. SZ1 5. SZ4 6. SZ5 Third row: 7. BJ4, BJ6 site 8. Zhangjiakou, Hebei site 9. Shanghai, industrial park where SH9 and SH10 are located. Fourth row: 10. Shanghai Jinkai office 11. BJ1, BJ2 12. Construction at Wulanchabu site in Inner Mongolia Fifth row: 13-14. Langfang, Hebei site 15. Wulanchabu, Inner Mongolia Bottom: 16-17. Hong Kong site in New Territories 18. Avenue in the new data center district of Wulanchabu