GDS Maintains Buy: Strong Domestic Orders but Short-Term EBITDA Growth Pressured

Overview

Nomura issued research on GDS Holdings, maintaining a 'Buy' rating but lowering the target price from USD 60.4 to USD 48.4. The report notes that while the company demonstrates strong momentum in absorbing domestic orders and actively reserves land and power resources to meet AI demand, short-term EBITDA growth will be constrained by the ramp-up of domestic GPU chip capacity and declining service revenue due to concentrated contract renewals. Meaningful earnings acceleration is not expected until H2 2027.

Core views

Performance Forecast Adjustments and Short-Term Pressure: The report reduced adjusted EBITDA forecasts for FY26-28F by 3.5%-9.8%, primarily due to expectations of a relatively flat customer move-in pace before H2 27F. Specifically, year-over-year growth in adjusted EBITDA for FY26F is projected at only 5.1%, rising to 10.7% in FY27F, and accelerating to 22.0% in FY28F. The core factors limiting short-term growth include: first, limited production capacity of domestic GPUs constraining data center delivery and rack installation speeds; second, the existing IDC portfolio faces concentrated contract renewals, leading to a downward trend in Monthly Recurring Revenue (MSR). Strong Domestic Orders and Resource Reserves: Despite short-term performance pressure, the company has been proactive in securing orders from key domestic cloud service providers (CSPs). Management has set a target for annual new power commitments of 500-800MW over the next three years. In June 2026, the company signed a strategic cooperation agreement with the Ulanqab municipal government, planning to invest over RMB 30 billion in the region over the next five years to build a data center park, with green electricity penetration exceeding 80%. As GDS secures new resources in Inner Mongolia, Ningxia, Guangdong, and other regions, it is expected to expand its order backlog and fully unlock the potential of domestic AI demand. Valuation Logic and Segment Pricing: The report continues to use the Sum-of-the-Parts (SOTP) method for valuation. Considering lower near-term earnings visibility, the EV/EBITDA multiple for the domestic business for FY27F was lowered from 14x to 13x. Meanwhile, given the high growth potential of the international business, the FY27F EV/EBITDA multiple for the unlisted overseas subsidiary DayOne was raised from 20x to 25x. The C-REIT portion is valued based on current market capitalization. This yields a new target price of USD 48.4, representing approximately 43% potential upside.

Analysis framework

The report employs an analysis framework of 'Supply-Demand Mismatch + SOTP Valuation.' In fundamental analysis, the institution did not linearly extrapolate earnings based solely on signed order volumes. Instead, it delved into supply-side bottlenecks (domestic chip capacity) and the operational quality of legacy assets (MSR trends) to identify the time lag between 'strong orders' and 'slow revenue recognition,' thereby revising mid-term earnings forecasts. On the valuation front, recognizing the complexity of the company's business structure, the report abandoned a single multiple for overall valuation in favor of the SOTP method. It applied conservative multiples to the mature but slowing domestic business and premium multiples to the high-growth overseas DayOne business, providing a more precise reflection of the true value and risk-return characteristics of each segment.

Methodology notes

• Valuation MethodologySOTP Segment Valuation

  Sum-of-the-Parts (SOTP) Valuation

  When a company owns multiple business segments at different development stages, with distinct business models or risk profiles, valuing them separately and summing them up is often more accurate than applying a single multiple to the entire entity. This report values GDS by splitting it into three parts: Domestic IDC, Overseas DayOne, and C-REIT.

• Industry/Industrial Analysis FrameworkSupply-demand framework

  Supply-Side Bottleneck Constraint Analysis

  In industries with strong demand (such as AI computing power), short-term earnings realization often depends less on the volume of orders and more on supply-side constraints (e.g., domestic GPU chip capacity in this case). Identifying this constraint is critical for judging the timing of earnings release.

• Valuation MethodologyEV/EBITDA valuation

  Enterprise Value to EBITDA Multiple

  In capital-intensive industries like data centers, depreciation and amortization amounts are huge and capital structures vary significantly, often distorting net income. EV/EBITDA eliminates the impacts of capital structure, tax policies, and non-cash depreciation, better reflecting core operating cash flow generation capability, making it a universal valuation anchor for the IDC industry.

Asset mapping & comparison

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

• GDS Holdings (GDS.US)

  Core covered asset benefiting from increased domestic AI spending and own resource reserve advantages

  Strengths

  Leading neutral-operator IDC provider in China; actively acquiring resources in core regions such as Inner Mongolia, Ningxia, and Guangdong; reached large-scale strategic cooperation with local governments; overseas DayOne business receives higher valuation multiples

  Weaknesses

  Short-term EBITDA growth constrained by domestic chip capacity; MSR decline due to concentrated renewals of legacy IDC contracts; expects net loss in FY27F

  Risks

  Domestic AI-related data center demand falls short of expectations; overseas market expansion lags behind expectations; intensifying industry competition; geopolitical risks causing supply chain disruptions

Key data

• 1Q26 RevenueRMB 2.94 billionUp 7.9% YoY, up 0.6% QoQ
• 1Q26 Adjusted EBITDARMB 1.43 billionUp 8.0% YoY, up 4.7% QoQ (excluding one-off items)
• FY26F Adjusted EBITDA Growth Rate5.1%Expected mild full-year growth, downgraded from previous forecast
• FY27F/FY28F Adjusted EBITDA Growth Rate10.7% / 22.0%Growth rate expected to improve sequentially starting from H2 27F
• New Power Commitment Target500-800MW/yearGuidance for domestic business expansion over the next three years
• Ulanqab Project Investment Amount>RMB 30 billionFive-year investment plan; green electricity penetration >80%
• FY27F Net New IT Power Utilization451MWFY26F/27F/28F are 201/451/643MW respectively

Impact & implications

The report suggests GDS is in a 'preparation phase': although short-term EBITDA growth is below expectations due to chip supply and contract renewal issues, its reserve of power and land resources in core node cities and deep cooperation with local governments lay a solid foundation for the next wave of domestic AI computing power explosion. For investors, this means tolerating short-term performance stagnation and shifting focus from current profits to order conversion rates and resource acquisition progress, waiting for the earnings inflection point after H2 27F.

Risks

• Domestic AI-related data center demand falls short of expectations
• Overseas data center business expansion lags behind expectations
• Intensifying competition in the data center industry
• Rising geopolitical risks leading to supply chain disruptions

What to watch

• Specific implementation details of government-led AIDC promotion policies
• Development and落地 of policies regarding 'green electricity direct connection'
• Progress of domestic GPU chip capacity ramp-up and its impact on company delivery schedules
• Contract signing and move-in rates of key CSP clients