Fitch Ratings has affirmed China-based carrier-neutral data centre operator Chindata Group Holdings Limited's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) and foreign-currency senior unsecured rating at 'BBB-'.
The Outlook is Stable.
Chindata's ratings reflect its position as a major developer, owner and operator of hyperscale data centres, with a strong presence in China and other Asian emerging markets.
Chindata's business risk profile is characterised by high entry barriers, given the strategic location of its data centres and the mission-critical services it provides. Cash flow visibility is high, backed by long-term lease contracts with counterparties that have strong market positions. However, this is balanced by a smaller scale and shorter operating record than global rated peers.
Chindata's financial profile is solid, as we expect 2022 net debt/EBITDA to be around 2.5x, lower than that of US and EU-based data-centre peers.
Key Rating Drivers
Recurring Revenue; Long-Term Contracts: Chindata's ratings reflect a resilient business model with high cash-flow visibility backed by long-term contracts. Customers must pay the majority of revenue over the contract life should they choose to terminate contracts early. Mission-critical infrastructure is provided to customers with which Chindata has an average lease tenor of over eight years. Chindata's in-service data centre capacity was 89% contracted at end-March 2022.
Strong Asset Ownership: Chindata owns around 92% of its portfolio of hyperscale, high-specification, carrier-neutral data centres, as measured by capacity. Asset ownership provides good access to secured capital. However, we believe that institutional appetite for providing debt capital to data centres is weaker relative to more general commercial-property assets.
Strategic Location: The core of the company's asset portfolio is strategically located on the outskirts of China's core economic regions: pan-Beijing, Yangtze River Delta and Greater Bay Area. This brings significant cost advantages in terms of land and power, with low-latency network connectivity and reliable power suppliers.
Robust Growth: We expect Chindata's revenue and Fitch-defined EBITDA to increase by 44%-45% and 40%-42%, respectively, in 2022 (2021: 56% and 60%), driven by robust demand for data centres from leading internet companies and cloud-service providers.
Senior Unsecured Rating Not Notched: Chindata's senior unsecured rating is at the same level with its IDRs, despite structural and contractual subordination to debt held at the operating subsidiaries. This is because we believe there would be strong creditor recovery in a distress scenario, given the level of locked-in EBITDA. The company targets a secured debt/total debt ratio of 70%-75% in the next few years. We assume prior-ranking debt/EBITDA will fall below 4.0x by mid-2023 and remain below this level. Should this not occur, we may downgrade the unsecured rating to one notch below the IDR.
Cost Leadership: Chindata is a cost leader in the hyperscale data-centre industry. Its average construction costs for current total capacity of around USD3.3 million per megawatt is more than 50% lower than the global average of USD7 million-8 million. Average power usage effectiveness was 1.21 at end-1Q22 - much lower than the global hyperscale data-centre average of 1.59. This indicates power-usage efficiency thanks to proprietary electrical modules.
Stable EBITDA Margin: We expect the Fitch-defined EBITDA margin to remain stable at 48%-49% in 2022-2023 (2021: 48%) - higher than Chinese carrier-neutral data-centre peers. The margin is supported by the strategic location of Chindata's data centres, which lowers land and utility costs, with the latter accounting for around 40% of the average data centre's cash costs. Chindata also held 310 approved and pending patents at end-1Q22 and proprietary design modules that can be rapidly assembled to compress the construction cycle and control costs, further supporting the margin.
Smaller Scale: Chindata has a smaller scale than some global data-centre leaders, such as Digital Realty Trust, Inc. (BBB/Stable) and Equinix, Inc. (BBB+/Stable). It is also less geographically diversified than Fitch-rated investment-grade data-centre peers, as most of its data centres are in China. However, the company intends to tap into other Asian emerging markets to meet the business needs of domestic and foreign customers; around 47% of its under-construction capacity was located in Malaysia and India at end-1Q22.
Negative FCF on High Capex: We forecast negative free cash flow (FCF) during 2022, due to annual capex of CNY4 billion-5 billion in the same period to address high demand for hyperscale data centres. Net debt/EBITDA is likely to reach around 2.5x in 2022, from 0.7x in 2021. However, Chindata's leverage is significantly lower than that of Fitch-rated data-centre peers, which generally have a net debt/EBITDA metric of 5.0x-6.0x.
Data Limitations; Customer Concentration: ByteDance Ltd., Chindata's principal tenant that accounted for 83% of total revenue in 2021 (2020: 82%), is a private company for which we do not have detailed financial information.
Still, we believe the risk of ByteDance defaulting on its obligations to Chindata is limited because: ByteDance is a successful, fast-growing company with strong brands, a diverse product portfolio and solid market positions. Its large, loyal and monetisable user-base also rivals that of many established peers. Importantly, Chindata's data-centre services are essential to ByteDance's operations. We also expect demand for data-centre capacity to continue rising in China, providing both growth and substitution opportunities should demand from current customers ease.
Variable Interest Equity Structure: The ratings reflect our expectation that Chindata's relationships with the Chinese government and regulatory authorities will remain healthy. However, any change could affect its credit strength, as it does not have equity control over its onshore operating companies. These include Sitan (Beijing) Data Science and Technology Co., Ltd. and other consolidated affiliated Chinese entities with which Chindata has only contractual relationships due to foreign-ownership restrictions in China's value-added telecom businesses.
Derivation Summary
Chindata has a weaker credit profile than Global Switch Holdings Limited (BBB/Stable). Both companies have a smaller EBITDA scale than established US peers as well as concentrated high-specification data centres built in strategic locations close to business and communication hubs with reliable power supply. However, Global Switch has a stronger business risk profile due to its longer operating record, better access to capital and greater geographical diversification, with 13 data-centre assets across seven European and Asia-Pacific countries. However, Chindata has a longer average lease tenor of over eight years, compared with Global Switch's five to six years, while Global Switch has a Fitch-forecast 2022 net debt/EBITDA of 4.9x, compared with Chindata's 2.5x.
Chindata warrants lower ratings than global carrier-neutral data-centre leaders, Digital Realty and Equinix. Both peers benefit from an established and diversified global operating platform, deeper capital access and more mature liability profiles. A globalised footprint adds to customer retention, as customers can use a single company for data needs across countries. However, Digital Realty and Equinix have shorter average lease tenors of four to five years and two to four years, respectively, as well as higher Fitch-forecast net debt/EBITDA of 5.8x-6.0x and 3.8x-4.0x in 2022-2023.
Chindata merits a similar rating as Indonesia's second-largest independent tower company, PT Tower Bersama Infrastructure Tbk (TBI, BBB-/AA+(idn)/Stable). We believe Chindata's slightly weaker business risk profile is offset by a stronger financial risk profile. Most of Chindata's contracts are fixed-price without escalation clauses, while TBI benefits from an escalation clause that mitigates inflation risk. TBI's credit strengths are partially offset by a shorter average contract tenor of around five years and higher Fitch-forecast net debt/EBITDA of 4.8x-5.0x in 2022-2023.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
Revenue to rise by 44%-45% in 2022 (2021: 56%);
Fitch-defined EBITDA margin of 48%-49% in 2022 (2021: 48%);
Capex of CNY4 billion-5 billion in 2022 (2021: CNY3.6 billion);
No dividend payment over the medium term.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
An upgrade is improbable in the medium term without a longer operating record and increased operating scale, while net debt/EBITDA remains below 4.0x (2021: 0.7x) on a sustained basis;
Improved access to capital comparable with rated peers.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Debt-funded M&A, capex or large dividend payment or share buyback activity that raises net debt/EBITDA above 5.0x for a sustained period;
EBITDA interest cover below 2.5x on a sustained basis (2021: 5.4x);
Sustained adverse increase in regulatory risk that materially affects Chindata or its principal tenants;
Significant deterioration in access to capital;
Aggressive committed development capex, beyond the current pipeline, which is not pre-let or covered by existing liquidity;
The senior unsecured rating could be downgraded to one notch below the IDRs should prior-ranking debt/EBITDA not fall below 4.0x by mid-2023 and be sustained below this level.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Reliance on External Financing: Chindata's readily available cash of CNY3.5 billion at end-1Q22 was not sufficient to fund short-term debt and the current portion of long-term debt of CNY2.0 billion as well as our forecast 2022 FCF deficit of around CNY3 billion. However, we believe the company's solid relationship with local banks and strong ownership of assets can support sustained funding for its data centre expansion.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
CHINDATA GROUP HOLDINGS LIMITED 
