From policy darlings to policy risk. When China announced in 2020 that big data centres were one of the seven categories of “new infrastructure”, share prices of leading companies soared on the news of policy support for this fast-growing industry. Prices have corrected sharply so far in 2021 due to the clampdown on internet companies, price competition, and difficulties in acquiring permits in prime locations. This report looks at industry growth drivers, weighs the risk-reward outlook, and identifies where we see value emerging.

Location. The prime sites for data centres in China are in the heart of big cities. This guarantees the fastest connection speeds and in turn means data companies can charge clients the highest fees. But these locations are becoming scarcer and permits harder to acquire, often due to limited electricity supply or regulations, and with more data centres being developed on the outskirts of cities. Although this means average selling prices (ASPs) will fall, we think this will be offset by cheaper land acquisition costs, protecting investment returns (page 16).

Client mix. The client base is split between wholesale (cloud service providers and internet companies) and retail customers (financial institutions, large enterprises, and public services). The wholesale business (GDS is a major player) is larger in scale, and lower in terms of monthly service revenue (MSR) as customers have greater bargaining power. The retail business (21 Vianet) is smaller in scale and higher in terms of MSR as more value-added services are required.

Connectivity. Better interconnection is a key competitive advantage as it allows customers to connect directly within or between data centres, increasing client stickiness and boosting margins. This gives SUNeVision, the largest Hong Kong player, an advantage over its peers in mainland China, which offer few interconnected services to maintain relationships with the big three telecom carriers.

Electricity and ESG. Data centres use a huge amount of electricity and the government is imposing new standards to address the issue; the results so far look promising.

We think that if the market leaders succeed in hitting the power targets, this will support their strong growth prospects, driven by the exponential rise in data use.