Hall of Shame

Information Technology

GDS Holdings (GDS US)

Year: 2020

GDS Holdings Limited operates as a leading developer and operator of high performance data centers in China. The Company offers colocation and managed services, including direct private connection to major public cloud platforms. GDS Holdings serves large Internet companies, financial institutions, telecommunications, and IT service providers.

GDS started trading on the NASDAQ in November 2016 after raising US$200.71M.  Another three additional share offerings, in 2018 and 2019 raised another US$1.08B; (Jan-2018: US$328.9M,  Mar-2019: US$460M, Dec-2019: US$287.5M).

Blue Orca Capital
July 31, 2018 Blue Orca Capital published a report shorting GDS stock.   In the report Blue Orca states that its research indicated that GDS was borrowing crippling amounts of debt to enrich insiders by acquiring data centers from undisclosed related parties which were not nearly as valuable as the Company claimed.  It also believed that since becoming a public Company, GDS had borrowed recklessly to siphon off at least RMB 696 million to insiders by inflating the purchase price of undisclosed related party acquisitions. 

Blue Orca also discovered evidence that unrelated data center operators were selling a substantial amount of empty cabinet space in a building which was supposedly exclusively operated and 94% utilized by GDS.  In its opinion, this indicated that GDS was inflating the size of its service area, its utilization rates and therefore its reported revenues and EBITDA.  In its model, Blue Orca assumed that the Company had overstated utilization of its data centers by 20% and that its growth was largely illusory. After adjustment, it valued GDS’s shares at $4.32, 87.6% below its last traded price.  Blue Orca stated that even this valuation was likely conservative. Given management’s shattered credibility, its crushing debts, and evidence that the Company was inflating the value and performance of its data centers, it believed GDS’s equity could easily be worth $0.00.  

August 1, 2018. GDS issued a response saying the Report’s allegations were false, its conclusions were incorrect and its premises reflect a fundamental misunderstanding of the Company’s business.  It then addressed individually some of the issues raised  in the report.

August 9, 2018 Blue Orca issued a rebuttal saying GDS response failed to address the substance of its report or the independent evidence presented therein. It appeared to Blue Orca that the Company had given a more detailed response in private conversations with sell-side analysts.  In its Rebuttal, Blue Orca addressed not only the Company’s tepid Response but also the Company’s claims published second-hand to the market through sell-side analysts.

GMT Research
October 22, 2019 GMT Research, in its report "Flawed Compass - Free cash flow metrics misleading investors", discussed the fact that Investors were increasingly using free cash flow as a measure of performance and that it is particularly easy to window dress and is often unreliable.  Its research highlighted four of the biggest culprits, one of which was GDS Holdings.  With regard to GDS holdings its analysis stated "GDS’s growth has been driven by the acquisition of data centres. However, only about half the capex has been recorded in its cash flow statement. The remainder has been hidden through the use of geared subsidiary acquisitions, or omitted completely from the cash flow when purchased using finance leases. Worryingly, operating cash flow has been consistently weaker than cash profits, which raises the risk that profits have been enhanced using acquisition accounting. GDS trades at a premium to its global peer group on multiples such as EV/sales which we believe is unwarranted. The company owns just 9% of its data centres compared to an average ownership level of 83% for its peers, and ownership structure is crucial in valuing these highly rated assets. The window dressing of its cash flow metrics also undermines our faith in the quality of management."

J Capital Research
March 26, 2020 J-Capital released a report "GDS - Designed to Deceive".  In the report J-Capital said it believes that GDS is a fraud. That at least 25% of its revenue is fraudulent. That unlike most Chinese companies, GDS created the fake revenue by round-tripping its own debt and capex. That as GDS’s revenue line grew, so did the amount of debt it needs to raise to support the illusion. That, in addition to round-tripping, GDS aggressively recognizes future revenues, a portion of which it believes will never be realized. Faked revenue comes without costs, so the ploy also increased reported EBITDA and reduced operational leverage. J-Capital states that using this and other strategies, GDS has persuaded investors to accept its highly customized metrics and argued that it will be the winner in a take-all market. J-Capital says that is simply not true.

By examining dozens of financial statements submitted to the Chinese government,  J-Capital identified about ¥1.3 bln in unreported debt. It also questioned the cash balances. Interest income in 2018 was ¥19.2 mln, for an average 0.9% yield, while fixed-term deposits in China were yielding about 3% in 2018.  Meanwhile, GDS pays up to 9.7% for loans despite its large reported cash balances. Fixed-term deposits in China were yielding about 3% in 2018.  No wonder GDS is “actively” seeking new sources of debt to get through the year.   After about a year of research, more than 90 interviews, and visits to all but nine of the 70 data centers that GDS has reported in service or under construction, J-Capital have concluded that GDS is a sophisticated Ponzi. With financial markets repricing risk in the last few weeks, J-Capital believed the debt pyramid could collapse in 2020.

April 2, 2020 J-Capital issued a follow-up report titled "GDS - Self-Dealing?"  In the report, J-Capital said it had discovered that GDS board members control at least two undisclosed service companies that contract with GDS for services. It stated that these companies served as conduits for cash to management.   J-Capital asked If GDS had nothing to hide, why had it not disclosed the relationship?


Blue Orca Capital: Short GDS Holdings, 31 Jul 2018
GDS Holding: Response to Blue Orca Report, 1 Aug 2018
Blue Orca Capital:  Rebuttal of GDS Response, 9 Aug 2018
GMT Research: Flawed Compass - Free cash flow metrics misleading investors, 22 Oct 2019
J-Capital: GDS - Designed to Deceive, 26 Mar 2020
J-Capital: GDS - Self Dealing ?, 2 Apr. 2020
GDS Holdings: GDS Reports Fourth Quarter and Full Year 2019 Results, 19 Mar 2020
GDS Holdings: Annual Report 2018
GDS Holdings: Annual Report 2017


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