Fitch Ratings has affirmed China-based carrier-neutral data-centre operator Chindata Group Holdings Limited's Long-Term Foreign-Currency and Local-Currency Issuer Default Ratings (IDRs) at 'BBB-'.
The Outlook is Stable. Fitch has also assigned a 'BBB-' rating to the proposed US dollar senior unsecured notes to be issued by Chindata.
The proposed notes are rated in line with Chindata's Foreign-Currency IDR of 'BBB-' as prior-ranking debt in subsidiaries where the proposed notes are senior to the USD500 million loan issued by wholly owned subsidiary BCPE Bridge Stack Holdco Limited - accounting for around 50% of Chindata's EBITDA - will be less than 3.5x EBITDA.
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 2022-2023 EBITDA net leverage to be around 2.2x-3.2x, lower than that of US and EU-based data-centre peers.
Fitch has also affirmed and withdrawn the foreign-currency senior unsecured class rating of 'BBB-' as it is no longer considered to be relevant to the agency's coverage.
Key Rating Drivers
Recurring Revenue; Long-Term Contracts: Chindata's ratings reflect its resilient business model. Customers must pay the majority of revenue over the contract life should they choose to terminate contracts early. It provides mission-critical infrastructure, with average lease tenors of over nine years. Chindata's in-service data-centre capacity was 96% contracted at end-September 2022.
Strong Asset Ownership: Chindata owns around 92% of the capacity of its hyperscale, high-specification, carrier-neutral data centres. Ownership provides good access to secured capital. However, we believe institutional appetite for providing debt capital to data centres is weaker than for general commercial-property assets.
Strategic Location: Its main assets are strategically located on the outskirts of China's core economic regions of 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 estimate Chindata's revenue and Fitch-defined EBITDA increased by 52% and 59%, respectively, in 2022 (9M22: 53% and around 63%), driven by robust demand for data centres from leading internet companies and cloud-service providers.
Proposed Bond Rating Not Notched: The proposed notes' rating is the same as the IDRs, despite structural and contractual subordination to project debt held at operating subsidiaries. This is because we believe there would be strong creditor recovery in a distress scenario, given the level of locked-in EBITDA. We expect prior-ranking debt/EBITDA for assets for the part of the business where the bond is senior to the USD500 million syndicated loan to be sustained below 3.5x. We may downgrade the bond rating to one notch below the IDRs should prior-ranking debt rise above 3.5x.
Bond Guarantees: The proposed bonds do not carry a guarantee from any of Chindata's six principal onshore wholly owned foreign entities (WFOEs). However, the proposed notes are senior to the loan with respect to certain WFOEs, as they benefit from a guarantee from Stack HK Limited. Similarly, the proposed notes are senior to the loan in offshore assets due to a guarantee from BC Asia Investments V Limited. Investors should be aware that the notes contain few protections about movement of assets outside the guaranteeing group or to other parts of the guaranteeing group.
Cost Leadership: Chindata is a cost leader in the hyperscale data-centre industry. Its average construction cost 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, lower than the global hyperscale data-centre average of 1.57. This indicates power-usage efficiency due to proprietary electrical modules.
Smaller Scale: Chindata has a smaller scale than 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 centres are in China. However, the company intends to tap into other Asian emerging markets to meet the needs of domestic and foreign customers; around 50% of its under-construction capacity was located in Malaysia and India at end-3Q22.
Negative FCF on High Capex: We forecast negative free cash flow (FCF) of around CNY3 billion per year in 2022 and 2023 due to annual capex of CNY4 billion-5 billion to address high demand for hyperscale data centres. We expect EBITDA net leverage to reach 2.2x-3.2x in 2022-2023, from 0.7x in 2021. However, Chindata's leverage is significantly lower than that of Fitch-rated data-centre peers, which generally have net debt/EBITDA of 5.0x-6.0x.
Data Limitations; Customer Concentration: ByteDance Ltd., Chindata's principal tenant that accounted for 83% of total revenue in 2021, 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. 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: We expect 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 nine years compared with Global Switch's five to six years, while Global Switch has a Fitch-forecast 2022-2023 EBITDA net leverage of 5.4x, compared with Chindata's 2.2x-3.2x.
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 EBITDA net leverage of 6.2x-6.8x 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 4.6x-4.7x in 2022-2023.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer
Revenue to rise by 52% in 2022 (2021: 56%);
Fitch-defined EBITDA margin of 50%-51% 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 unlikely 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 proposed bond rating could be downgraded to one notch below the IDRs should prior-ranking debt/EBITDA for the parts of the group where the bond is senior to the USD500 million syndicated loan exceed 3.5x on a sustained basis.
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 CNY4.2 billion at end-3Q22 barely covered short-term debt and the current portion of long-term debt of CNY1.0 billion as well as Fitch-forecast FCF deficit of around CNY3 billion in the next 12 months. 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.
Issuer Profile
Chindata is a leading Chinese carrier-neutral hyperscale data-centre service operator, with data-centre operations in India and Malaysia. It has high customer concentration as its largest customer is ByteDance, which accounted for 83% of 2021 revenue.
Sources of Information
The principal sources of information used in the analysis are described in the Applicable Criteria.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ByteDance - Chindata's principal tenant - is a large, rapidly expanding business with valuable brands and a substantial active consumer base. However, it is a private company for which we do not have detailed financial information. We have information on key numbers from a 2020 income statement and data for monthly and daily active users.
We believe the risk of ByteDance defaulting on its obligations to Chindata is captured in the 'BBB-'/Stable rating, despite the lack of access to detailed financial information. This is because ByteDance is a successful and fast-growing company with a strong brand, product portfolio and market positions, and a large monetisable user base rivalling that of many established peers. ByteDance is also reliant on Chindata's centre capacity, making it essential to ByteDance's operations.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
CHINDATA GROUP HOLDINGS LIMITED 
