William Huang, GDS founder, chairman, and CEO GDS Holdings
William Huang, GDS founder, chairman, and CEO

GDS Says Information in Short-Seller Blue Orca’s Report False

Chinese data center provider GDS responded to an earlier report by short-seller Blue Orca that sent its shares tumbling • In its response, GDS said information in Blue Orca’s thesis had been fabricated and that its conclusions reflected fundamental misunderstanding of GDS’s business • GDS’s shares started climbing back up following the release of the rebuttal • The short-seller issued its own rebuttal to the rebuttal Thursday

Shanghai-China based data center operator GDS Holdings has been under siege for several months, drama accelerating in late July after short seller Blue Orca Capital accused the company of lying to the market about its ability to lease data center space, among other things.

As a result, GDS’s stock, which had been outperforming peers, traded in the range of $8.80 to $46.18 per share over the past 52 weeks.

On August 1, GDS responded to Blue Orca’s accusations, saying they were false and showed that the fund’s leadership did not understand the data center provider’s business:

The Report’s allegations are false, its conclusions are incorrect, and its premises reflect a fundamental misunderstanding of the Company’s business.

The response addressed the following alleged inaccuracies in Blue Orca’s report:

  1. Area in service and utilization of a data center
  2. Purchase price and related-party nature of certain acquisitions
  3. Capital raising and debt
  4. Mounting balance of unbilled receivables
  5. Lengthening payable cycle

GDS has a relatively brief history as a publicly traded company in the US. However, it has been a wild ride for investors since its IPO on Nasdaq in October 2016.

Bulls and Short-Seller Tug of War

Few equities on Wall Street have traded in range wider than GDS’s:

News Driving Shares Higher

GDS Holdings closed at $27.80 per share Wednesday. Today, its shares have traded as high as $32.28, as of this writing. That’s about a 16 percent price increase over half of one trading session.

In its original letter, Blue Orca based its accusations of misstated occupancy rates by GDS on statements allegedly made to the fund by GDS tenant GZIDC. The tenant recently put out a press release saying it had made no such statements to the short seller.

Here is an excerpt from the GZIDC release:

First of all, our company has no formal official contact with the short-selling organization Blue Orca Capital mentioned in the article. It has not received any interviews. The short recordings and information leaked by our staff mentioned in the short report are purely fabricated.

Secondly, the situation mentioned in the article about our company is also inconsistent with the actual situation. Our company rents only two computer room modules on the 5th floor in the G6 building, and the rate of our company is much higher than that described in the article.

Another statement in defense of GDS came from its largest shareholder, Singapore’s STTelemedia Global Data Centers, which owns 34.5 percent of the Chinese company:

Singapore, 1 August 2018 – We refer to the recent allegations made against GDS Holdings Limited (“GDS”) by a short-seller. We have been invested in GDS for close to 4 years and since its IPO, we have increased our investment in GDS. We remain confident in our investment in GDS.

Why the Volatility?

It is usually difficult to pinpoint the reasons why buyers and sellers diverge, and what the real catalysts for share-price movements are. But sometimes, the catalysts are clear. In this case, they appear to be a succession of conflicting claims that keep the pendulum swinging. And the swings have been wild.

Investor Edge

This saga is a boxing match heading into the championship rounds.

Today, Blue Orca struck back, after having lost millions of dollars on its short position. Prior to end of trading, it published this 15-page report:

https://static1.squarespace.com/static/5a81b554be42d6b09e19fc09/t/5b6c4b990ebbe85efff42837/1533823900851/Blue+Orca+Issues+a+Rebuttal+to+GDS+Holdings+August+9+2018.pdf

Bitcoin-like volatility will likely continue for some time for GDS. The company reports Q2 2018 results on August 14, and you can bet I will be listening closely.

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