DCK Investor Edge
GDS Holdings saw more than half of its share price evaporate in less than one week. Devaluation accelerated to an unprecedented rate for the Chinese data center provider Tuesday, after a short seller published a report saying it was betting against the company.
Blue Orca Capital, which The Wall Street Journal described as a “Texas activist investment fund,” said GDS had been borrowing excessively, and that its interest payments would exceed its gross profits. The company’s market value had tripled since its American IPO in 2016, but Soren Aandahl, who runs Blue Orca, said investors had “indulged GDS’s staggering debt burden because of the belief in its supposedly impressive growth.”
The short seller also accused GDS of overstating the occupancy rate at one of its key data centers and suggested that the same could be true for its other locations.
Finally, Blue Orca said GDS could suffer if the Chinese government decided to further devalue its currency, since the data center provider’s debt is in US dollars, while it collects revenue in renminbi, according to the Journal.
GDS has traded like bitcoin for a few months. Usually, it’s neutral to positive. But the last few weeks have been devastating to shareholders.
GDS shares have been under siege for the last couple of weeks, and the reality of what has been driving them down has finally been acknowledged. But Blue Orca’s short thesis has dominated the headlines and trading on the last day of July.
Easy to Create Doubt
Prior to earnings, publicly traded companies have a quiet period, in which executives aren’t allowed to make any public statements. GDS reports second-quarter results August 14, which means we won’t see a response from them until then.
Short sellers often take advantage of the quiet period, publishing a thesis while knowing that there can't be a rebuttal.
Yes, it’s possible that GDS simply is the bitcoin of data centers. However, why would the executive team misrepresent leasing results that can be easily confirmed?
When It Comes to Owned Assets
GDS, like all data center REITs, owns assets marked to market at book value. This is not evil.
I have made the bitcoin analogy in a GDS article in the past, but in a different context. The company has been trading off the charts.
My sense is that it actually owns and leases what its executives say they do. Leasing to tenants who sublease to retail colocation customers is part of its business model. A colocation player usually takes down an x-amount of space but doesn’t fill it all on day one, which may be the reason behind Blue Orca’s assertion that GDS is overstating its occupancy rates.
Investor Edge
I am looking forward to hearing the GDS executive suite discuss this latest short thesis. I expect to learn why GDS is growing its footprint in China. If there is any doubt about what the company is saying, I will be the first to share it with readers.
This short of GDS is unprecedented, but I remain focused on Q2 results coming in August.
