What Investors Need to Know About the GDS Holdings IPO

The American stock market is home to a growing number of ambitious China-based tech companies. It's no wonder, as this country's investors seem to have a generous appetite for issuers active in the massive Asian market.

Despite recent hiccups, Chinese stocks such as Baidu and NetEase have historically delivered impressive returns over their time on American exchanges. Investors of the country'sGDS Holdings will be hoping for the same after the stock hits the market on Wednesday. Here's a brief look at the company and a few words about its IPO.

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GDS Holdings

GDS Holdings develops and operates a network of data centers -- the facilities that centralize an organization's IT effort -- in China.

All told, as of the end of this past September, it operated nearly 49,000 square meters (527,432 square feet) of data center space located in the key cities of Beijing, Shanghai, Chengdu, Guangzhou, and the "special administrative region" of Hong Kong. Almost 94% of this space was committed. Another 37,000 square meters (398,265 square feet) are under construction.

In its prospectus, GDS Holdings cites data from 451 Research stating that it is the top high-performance, carrier-neutral data center service provider in China, with a market share of just under 25%. It also quotes a 451 Research estimate that the domestic market is anticipated to keep growing, from last year's $1.5 billion to $2.4 billion in 2018.

Judging by the financial statements provided by GDS Holdings, it seems the company has so far benefited from this growth -- at least on the top line. Full-year 2015 revenue was almost 704 million yuan ($104 million), well up from the 2014 tally of 468 million yuan ($69 million).

For the most recent six-month periods, January to June 2016 saw the company book revenue of 447 million yuan ($66 million), against 305 million yuan ($45 million) in the same period the previous year.

However, GDS Holdings posted net losses in all of those periods. In fact, full-year 2015's bottom-line deficit of almost 217 million yuan ($32 million) was almost equaled by the January-June 2016 shortfall of 216 million yuan ($32 million).

This Fool's take

By entering the U.S. market, GDS Holdings is coming into a field of established competitors. CoreSite Realty (NYSE: COR), Digital Realty Trust (NYSE: DLR), and QTS (NYSE: QTS) have all been popular stocks on the exchange for years.

It will be a challenge for the Chinese company to distinguish itself in such a crowd, not least because the American incumbents have performed very well in terms of both fundamentals and shareholder return. CoreSite has more than doubled its return over the past two years, with Digital Realty Trust gaining 49% and QTS rising 39%.

Also, unlike GDS Holdings -- which is structured as a traditional company -- those American companies are all real estate investment trusts. This structure requires an entity to pay out the bulk of its earnings as shareholder dividends. Since CoreSite, Digital Realty Trust, and QTS have been consistently profitable of late, this means a steady stream of investor distributions.

GDS Holdings, on the other hand, has never paid a dividend. And in its prospectus, it admits that it has no plans to do so in the immediate future.

So in spite of its obvious growth potential and those climbing top-line figures, I don't think GDS Holdings will look tempting next to those companies. Additionally, its fellow China tech companies are more established and reliably profitable, and thus more likely to be favored by investors who want to put money into that country's tech sector.

This stock will be an interesting and unique addition to the lineup of data center providers currently listed on our stock exchanges. But I wouldn't expect it to be any more popular than its American data center rivals or its fellow Chinese techs.

The details

GDS Holdings is selling 19.25 million American Depositary Shares in its IPO. These are set to be priced between $12 and $14 per ADS. The company will be listed on the Nasdaq under the ticker symbol GDS.

The issue's underwriting syndicate includes Credit Suisse, JPMorgan Chasedivision J.P. Morgan, and Citigroup.

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Eric Volkman has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Baidu. The Motley Fool recommends NetEase. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.