"All Nations" or the merger of "Qinhuai", the data center table can not squeeze the new players| focus analysis

Text | Deng Yongyi

Edit | Su Jianxun

A new rally in the data center industry has begun.

According to Bloomberg's April 22 report, data center service provider Qinhuai Data has received a preliminary intention to acquire," and the acquirer is "other companies in the industry." People familiar with the matter said that GDS is considering merging with Qinhuai Data. Other potential buyers include U.S. data center maker EdgeConneX and Asian private equity firm PAG.

At present, the negotiations are still in the start-up stage, and neither Qinhuai Data nor Wanguo Data has responded to this news. After the news came out, the market value of Qinhuai Data after the close of the market on the day was 1.757 billion US dollars, and the wanguo data was 5.450 billion US dollars.

The Internet Data Center (IDC) is the infrastructure of the Internet. The popularity of the Internet, and now the booming cloud computing industry, the Internet is built day and night on countless data rooms - these computer rooms are responsible for the transmission, calculation, storage of data, creating the IDC industry.

The two parties to the merger case, one is a third-party IDC industry leader in China, and the other is a rookie in ultra-large-scale data centers. Under the trend of regulatory storms and economic ups and downs in recent years, the two US listed companies have not had a good life. If the two sides finally complete the merger, it will create an IDC giant with a market value of more than $8.7 billion (about 57 billion yuan), which will undoubtedly open up a new situation in the data center industry.

A mirror of the Internet industry

As infrastructure, the IDC industry is a mirror that reflects the prosperity of the Internet industry.

In the 1990s, when the Internet was just emerging, the three traditional operators were the main players in data centers, building their own data centers and selling computing power to the outside world.

The third-party IDC is the result of the fine division of labor in the industry - equivalent to self-built or leased other computer rooms, providing more professional and refined operation services. The wave of cloud computing that began to develop around 2010 led to the second wave of rapid development of IDC. Many cloud vendors either build their own or choose to hand over to third-party IDC operations.

GDS and Qinhuai Data have eaten dividends in different periods of IDC industry development.

Founded in 2000, IWC is one of the old players. In the early days of its establishment, GDS started from third-party data center services and began to build its own data centers across the country in 2009, just in time for the rapid development of cloud computing. In 2016, GDS officially landed on nasdaq in the United States and returned to Hong Kong for a second listing in 2020.

In the face of the blowout market demand, GDS has not stopped the pace of rapid expansion and has become a regular customer on the M&A table. After the listing, GDS has carried out a number of acquisitions in Beijing, Wuhan, Shenzhen and other places.

According to the zero one think tank, as of 2021, GDS has the largest number of computer room cluster cabinets in the country, reaching 192,000, while the number of computer rooms under Qinhuai Data is about 88,000.

The capital market has also given an optimistic response, since its listing in 2016, the share price of GDS has increased 8 times in four years, and the highest peak has reached 100 billion Hong Kong dollars.

Source: Zero One Think Tank

However, the other side of the continuous expansion of market share is the high level of debt. From 2017 to 2019, the asset-liability ratio of GDS was 65.95%, 73.56% and 63.94%, respectively, and the long-term debt ratio in 2020 was 137.15%.

This has led to several short sellings. In 2018, J Capital Research released a report shorting GDS, saying that under high debt, it used financial means to inflate its revenue by at least 25% to raise funds. On the same day, Wanguo's stock price plunged 37.2%, and then slowly recovered.

Qinhuai Data, which received the takeover offer, is the "rookie" in the third-party data center, and has jumped to the forefront of the industry in less than 7 years since its establishment.

In 2017, Qinhuai was incubated by CDN manufacturer Wangsu Technology. However, just two years later, Qinhuai Data was sold to Bain Capital for 990 million yuan, and the latter led the merger with the data center Bridge Data Centres, and submitted a listing application in the United States in 2020, turning it into a new favorite of capital.

Before the IPO in the United States, Qinhuai Data's operating income from 2018 to 2020 was 98.48 million yuan, 853 million yuan and 811 million yuan, respectively, with a valuation of 4 billion US dollars. Because of this, the transaction that was previously sold by Wangsu Technology for 1 billion yuan has caused controversy over whether to sell assets at a low price in terms of transaction methods and prices.

However, QinHuai has pressed the cloud computing needs of super-large enterprises, and with the two large customers of ByteDance and Wangsu Technology, the rapid growth of performance has masked these doubts. At present, Qinhuai has the fastest revenue growth in the new generation of three-way IDC, and it also has a layout in the Indian and Southeast Asian markets. In 2021, Qinhuai's data revenue reached 2.852 billion yuan, an increase of 55.8% year-on-year, and the net profit was 316 million yuan, with a net profit margin of 11.1%.

But the turmoil came last year. In December 2021, Qinhuai Data suddenly issued an announcement announcing the departure of CEO Ju Jing, which was due to strategic differences, resulting in a one-third drop in Qinhuai Data's stock price. After a period of escrow at Bain Capital, in February 2022, Former China President Wu Huapeng took over as CEO.

Former CEO Ju Jing single-handedly created Qinhuai Data, with a decisive style, early layout of super-large data centers and double carbon directions, after his departure, the market also has concerns about the company's strategic stability. The change in management and the turmoil in today's overall market make the timing of the acquisition seem reasonable.

Either make it bigger or go home

On the surface, both companies are growing very rapidly, but neither the market prospects nor the company's business are a clear sky.

According to the white paper of the Chinese Academy of Information and Communications Technology, in 2021, the market revenue of the mainland data center industry will reach about 150 billion yuan, with an average annual compound growth rate of 30.69% in the past three years, which is much higher than the global growth rate.

The mainland data center market is still a vast market, but GDS and Qinhuai Data face stronger opponents. From the perspective of industrial structure, nearly 70% of the mainland stock IDC market is dominated by operators, and in the remaining market share, cloud vendors are catching up in the past two years and have built their own data centers.

The domestic grab race is accelerating, and it is entering the situation of strong and strong, leaving little time for third-party IDC.

Looking at the world, the IDC industry is a typical heavy asset, heavy operation industry, the early investment in real estate, equipment, etc. will be very high, but once built, the subsequent operating costs will gradually decline, and form a barrier that is difficult to surpass.

The data center construction cycle usually varies from 1-2 years, and in the case of sufficient funds, mergers and acquisitions are a common way to quickly seize market share and enter new industries.

Purely from the perspective of the business of IWD and Qinhuai Data, the two sides are also relatively complementary.

The data center service model is divided into wholesale and retail, the former is dominated by large customers, and the latter is dominated by small customers. GDS is a typical wholesale model, the business wins in the coverage of wide, the layout of various places is relatively uniform, mainly through the construction of large-scale data centers to provide hosting and management services to downstream customers in the industrial chain.

Qinhuai's advantage lies in the large data center, but it also serves small customers. In particular, the contract signed by Qinhuai Data and ByteDance lasts for 10 years and ends in 2027, which is undoubtedly a major guarantee for performance.

Another important background is that the world has begun to pay attention to energy conservation and carbon reduction, and data centers are the main carbon emissions of the Internet industry. The mainland put forward the "double carbon" target in 2020, launched the "East Number West Calculation" strategy in 2022, and has recently launched a number of policies for a new generation of data centers, including land acquisition, licenses, emission indicators, etc., and the future supervision will become more and more stringent.

In this regard, Qinhuai Data has obvious advantages, and former CEO Ju Jing invested in the low-carbon direction in the early days of the company. From the perspective of construction efficiency, Qinhuai Data can achieve lower construction costs and faster speeds than its peers.

In terms of energy consumption, when carbon neutrality was proposed in 2020, the annual average PUE (core energy consumption index) of Qinhuai Data had reached 1.22, the renewable energy utilization rate of its own computing power park had reached 51%, and the PUE of GDS was 1.34.

The cold winter of the capital market has also become a good time for the strong to join forces.

Although Wanguo and Qinhuai have maintained steady growth in the past two years, their market value has not been spared in the storm of Internet supervision and the shock of Chinese stocks. In the past 12 months, the stock prices of Qinhuai Data and Wanguo Data have fallen by nearly 40% and 62% respectively. For GDS, now is a good opportunity to carry out mergers and acquisitions.

Carbon neutrality, the arrival of 5G new outlets, global demand for computing power continues to explode, the Matthew effect in the IDC industry will become more and more significant. In fact, the wave of data center mergers and acquisitions around the world has been heating up in recent years – last year, global IDC giant Equinix (with a market capitalization of $67 billion) spent $320 million to acquire Nigerian data center and connectivity service provider MainOne to enter the African market; domestically, Baoneng Chuangzhan also acquired Dr. Peng's five data centers for 1.65 billion yuan.

For new and existing players, to write the next stage of the story, you first need to try to stay on the table.

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