HSBC Maintains Buy Rating on GDS, Lowers Target Price to $51.40

Overview

HSBC published a research report maintaining its 'Buy' rating on GDS Holdings while lowering its U.S. stock target price from $70.50 to $51.40 (equivalent to lowering the HK-listed target from HK$68.70 to HK$50.10). The downgrade primarily reflects slower-than-expected capacity delivery, resulting in modest adjusted EBITDA growth in H1 2026 and 2027. Nevertheless, underlying demand remains robust, and with new orders beginning to contribute revenue in 2028, the long-term growth outlook is clear. Additionally, a potential IPO of its international platform DayOne is viewed as a significant value-unlocking catalyst.

Core views

Near-term growth under pressure, but long-term thesis intact: The report notes recent share price weakness stems from two factors: (1) timing of backlog delivery leading to modest adjusted EBITDA growth in 2026 and H1 2027 (HSBC forecasts 5%/8% YoY growth for 2026/2027); and (2) market concerns over intensifying competition. However, underlying demand remains strong—GDS has signed 346MW of new orders YTD 2026, surpassing the full-year 2025 total of 317MW. HSBC expects full-year 2026 new orders to reach 646MW. Given the 6–8 quarter build-out and ramp-up cycle for data centers, these orders will start contributing revenue from H2 2027 onward, driving adjusted EBITDA growth back up to 27% in 2028 (previously forecast at 26%). DayOne IPO offers upside catalyst: GDS currently holds a 19.9% stake in DayOne. The report suggests a future IPO of DayOne would unlock this embedded value. Conservatively, HSBC now values GDS’s stake based on DayOne’s Series C round valuation rather than prior EV/EBITDA multiples. Excluding DayOne, GDS trades at approximately 10x 2027E EV/adjusted EBITDA, compared to competitor VNET’s 8.6x (note: relative valuation context required). Valuation methodology adjustment leads to lower target price: HSBC continues to apply a sum-of-the-parts (SOTP) approach. For DayOne, based on the Series C round valuation, GDS’s 19.9% stake is worth ~$2.2B, or $11.18 per ADS. For GDS’s Mainland China business, HSBC maintains a 13x forward EV/EBITDA multiple (reflecting a discount for the mix of mature and under-construction assets), applied to the average of 2026/2027E adjusted EBITDA, yielding $40.22 per ADS. Summing both components gives the new target price of $51.40.

Analysis framework

The report employs a classic sum-of-the-parts (SOTP) valuation, separating GDS into 'Mainland China Data Center Business' and 'International Business (DayOne)' for independent valuation before aggregation. This method is commonly used for companies with complex structures or subsidiaries exhibiting distinct growth profiles or risk characteristics. For the core business (Mainland China DCs), HSBC applies an EV/EBITDA multiple using a two-year average to smooth volatility during the capacity ramp-up phase. For the subsidiary (DayOne), equity value is derived from the latest financing round (Series C), reflecting a prudent approach in the absence of public market pricing. Additionally, the report explains the disconnect between short-term financials and long-term fundamentals by tracking the time lag between 'new order signings' and 'capacity delivery cycles' (6–8 quarters).

Methodology notes

• Valuation MethodSOTP Valuation

  Separately valuing different business segments (e.g., domestic IDC vs. international DayOne) and summing the results

  Suitable for diversified businesses or companies where subsidiary value isn’t fully reflected in the parent’s valuation. Here, domestic operations are valued via EV/EBITDA, while DayOne uses latest financing valuation, enabling more accurate capture of each segment’s intrinsic worth.

• Industry/Thematic Analysis FrameworkVolume-price decomposition

  Breaking down revenue drivers into cabinet area (volume) and Monthly Service Revenue (MSR, price)

  Data center revenue depends on occupied area and unit pricing. The report monitors new orders (future volume) and MSR trends to assess sustainability of long-term revenue growth.

• Industry/Thematic Analysis FrameworkCapacity Cycle

  The 6–8 quarter lag between data center contract signing, delivery, and revenue recognition

  Understanding revenue recognition lags in capital-intensive industries. Orders signed today require construction and ramp-up before converting to profit in 6–8 quarters, explaining why near-term results may be soft despite strong long-term prospects.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• GDS Holdings (GDS.US)

  Direct beneficiary, owning core Mainland China data center assets and DayOne equity stake

  Strengths

  Strong underlying demand, ample new orders, high certainty of 2028 growth acceleration

  Weaknesses

  Slower near-term capacity delivery, modest earnings growth in 2026–2027

  Comparison

  Excluding DayOne, GDS trades at a more attractive valuation than VNET (10x vs. 8.6x EV/EBITDA; note: interpretation depends on specific multiple definitions)

  Risks

  Capacity delivery delays, intensifying competition, DayOne growth slowdown

Key data

• U.S. Target Price$51.40Lowered from $70.50
• HK Target PriceHK$50.10Lowered from HK$68.70
• 2026E Adjusted EBITDA Growth5%YoY growth, impacted by delivery timing
• 2028E Adjusted EBITDA Growth27%Raised from 26%, reflecting contribution from new orders
• New Orders Signed YTD 2026346 MW68% of full-year 500MW target achieved
• DayOne Stake Value$11.18/ADSCalculated based on Series C round valuation

Impact & implications

While the report acknowledges a lack of strong near-term share price catalysts and a lower target price due to valuation model adjustments, the implied ~47% upside still supports a 'Buy' rating. Investors should focus on the 2028 growth acceleration narrative and potential developments around DayOne’s IPO. For long-term investors, current share price weakness presents an opportunity to position for AI-driven structural demand, though near-term earnings volatility must be tolerated.

Risks

• Failure to secure new large-scale orders or delays in finalizing the 500MW pipeline
• Slower-than-expected delivery of new capacity in Inner Mongolia, Ningxia, or Shaoguan
• DayOne growth deceleration reducing the value of GDS’s equity stake
• Chip shortages slowing data center utilization ramp-up or order growth
• Slower new data center tenders from internet or short-video clients
• Inability to secure capex funding or refinance debt
• More intense price competition compressing margins

What to watch

• Whether full-year 2026 new orders reach the expected 646MW
• Progress and timeline of DayOne’s IPO
• Revenue acceleration from new capacity contributions starting H2 2027
• Capacity delivery progress in Inner Mongolia, Ningxia, and Shaoguan