China’s push for cloud-computing infrastructure has sent data-center stocks to the stratosphere. That rarefied air will likely prove too thin for some of them.
Data centers are one of the areas in China’s “new infrastructure” plan. Instead of building more bridges and roads, this new public-investment initiative is supposed to give a structural upgrade to the economy while boosting short-term growth. Other areas include 5G, artificial intelligence and electric-vehicle charging stations.
Many big Chinese companies have heeded the clarion call: Tencent and Alibaba have announced plans to invest tens of billions of dollars in cloud computing and cybersecurity infrastructure. That has sparked a rally in data-center stocks which count those technology giants as customers. Shares of Nasdaq-listed GDS Holdings have surged 66% this year, while those of its smaller rival 21Vianet Group have nearly quadrupled.
A China Telecom cloud-computing research park in China's Inner Mongolia.
Photo: Deng Hua/Zuma PressThe Covid-19 pandemic has driven many activities onto the cloud, which has raised demand for data centers. Beijing’s policy push will also bring benefits. Banks will likely lend money at more favorable rates, a big boon for asset-heavy industries such as running data centers. Higher share prices also make raising money easier: Both GDS and 21Vianet tapped the market last month.
And local governments will likely follow Beijing’s lead and roll out additional incentives. The biggest cities, for example, impose quotas on the power data centers can consume. Relaxing such quotas would make it easier for data-center operators to expand closer to customers, especially for uses where speed is crucial. A recent power-quota allocation for 12 data-center projects in Shanghai is higher than originally planned, according to Goldman Sachs.
But the push to build more data centers will also likely end up tempting new entrants, potentially creating excess supply. That would drive down prices in low-end segments such as data storage, in which proximity to end users isn’t that important.
After the epic rally this year, valuations of such companies have become stretched. GDS, for example, is still unprofitable with an enterprise value equal to 30 times next year’s earnings before interest, taxes, depreciation and amortization, according to S&P Global Market Intelligence.
The coronavirus downturn certainly has a silver lining for Chinese data-center operators. But some of those shares are likely to fall back to earth, particularly if a rush of new competitors emerges to push down margins, as is often the result of Beijing-backed industrial policies.
Write to Jacky Wong at JACKY.WONG@wsj.com
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