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On Monday, Morgan Stanley (NYSE:MS) reaffirmed its Overweight rating and $39.00 price target for GDS Holdings (NASDAQ:GDS), a prominent player in China’s IT Services industry that has seen its stock surge over 467% in the past year. The reiteration follows GDS’s announcement of a private REIT deal with an enterprise value of Rmb2.9 billion, which is consistent with the company’s prior guidance and values the equity at Rmb1.7 billion. InvestingPro analysis reveals the company currently commands a market capitalization of $7.07 billion, though it’s currently trading above its Fair Value estimate. GDS is set to sell a 70% interest for Rmb1.2 billion, receiving Rmb500 million in cash immediately and the remaining Rmb700 million after the utilization rate increases. This transaction will also lead to the deconsolidation of Rmb1.2 billion in debt from GDS’s balance sheet.
The deal is led by China Life and is expected to be finalized within the next three months. According to Morgan Stanley’s analysis, the full cash receipt from this deal could enable GDS to lower its net debt to EBITDA ratio by 0.5x, marking a significant step in the company’s efforts to reduce leverage. This is particularly crucial as InvestingPro data shows GDS operates with a debt-to-equity ratio of 2.73x and total debt of $7.24 billion. For deeper insights into GDS’s financial health and detailed metrics, investors can access the comprehensive Pro Research Report, available exclusively on InvestingPro. The firm anticipates that the influx of cash will be allocated to fund GDS’s capital expenditures starting in 2025 to meet the growing demand within China’s market.
In terms of financial impact, GDS will deconsolidate Rmb220 million of long-term EBITDA. The immediate negative effect is estimated to be around Rmb100 million, which represents approximately 2% of the projected EBITDA for 2025. Current EBITDA stands at $639.54 million, while the company maintains a current ratio of 1.19x, indicating adequate short-term liquidity despite operational challenges. Additionally, GDS is expected to record a considerable one-time gain and begin to receive a small amount of management fee income.
In related industry news, GDS’s peer Range (300442.SZ, not covered by Morgan Stanley) has filed the first public REIT application on the Shenzhen Stock Exchange in collaboration with Southern Asset Management. Morgan Stanley views this development as a positive sign for the data center industry’s asset monetization prospects and suggests that GDS might consider a similar approach in the future.
In other recent news, GDS Holdings has seen several notable developments that investors may find of interest. RBC Capital Markets recently downgraded GDS Holdings’ stock rating from Outperform to Sector Perform, despite raising the price target from $26 to $37. This decision reflects RBC’s view that the stock’s current price adequately values the company’s strong operational performance and increased demand from domestic hyperscalers. Meanwhile, Jefferies also downgraded its rating for GDS Holdings from Buy to Hold, with a new price target of $45, citing a balanced risk-reward scenario despite a positive outlook on AI infrastructure investments in China.
Additionally, Raymond (NSE:RYMD) James increased its price target for GDS Holdings to $53 while maintaining an Outperform rating, highlighting growth potential in the company’s DayOne platform. Morgan Stanley has maintained an Overweight rating with a $39 target, linking GDS’s growth prospects to upcoming earnings from Alibaba (NYSE:BABA), a major client. These analyst updates come amid expectations of increased AI investments and data center demand, which are pivotal for GDS Holdings’ future performance. Investors are closely monitoring these developments as they may influence GDS Holdings’ strategic positioning in the evolving tech landscape.
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