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Temasek-backed GDS Holdings hits back against short-seller

TEMASEK-backed GDS Holdings has hit back against a short-seller report a day after allegations of chicanery knocked off 37.2 per cent of the Nasdaq-listed company’s value on Tuesday.

“The report's allegations are false, its conclusions are incorrect and its premises reflect a fundamental misunderstanding of the company's business,” GDS Holdings, a Nasdaq-listed developer and operator of datacentres in China, said in an initial rebuttal issued on Wednesday night.

ST Telemedia (STT) is GDS’s single largest shareholder with a 37.4 per cent stake. ST Telemedia is wholly owned by Temasek Holdings, and three executives from ST Telemedia Global Data Centres (STT GDC) sit on the GDS board.

STT GDC told The Business Times: “We have been invested in GDS for close to four years and since its IPO (initial public offering), we have increased our investment in GDS. We remain confident in our investment in GDS.”

On Tuesday morning in the US, Texas–based short-seller Blue Orca Capital launched a short campaign against GDS, accusing the company of inflating its performance and profits, and overpaying for acquisitions from related parties.

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In a 53-page report, Blue Orca alleged that company insiders “looted” RMB 696 million (S$139 million) from GDS by overstating the purchase price of three datacentre acquisitions since its IPO in November 2016.

GDS has denied this: “The amounts of consideration paid as disclosed in the company's SEC (Securities and Exchange Commission) filings are accurate.”

The short-seller also alleged that GDS had lied about its flagship datacentre GZ1 fully occupying a six-storey G6 building in Guangzhou with a 94 per cent utilisation rate, since rival operators also claimed to occupy entire floors out of the same building.

GDS reiterated on Wednesday that it has commitments for 100 per cent of the space at GZ1 from two customers.

It said “GDS is currently receiving revenue for 94 per cent of the total committed space of GZ1 from these two customers, which is in line with the company's definition of ‘area utilised’. The two operators referenced in the report are leasing the capacity from one of the above customers.”

Other issues flagged by Blue Orca included GDS’s high leverage, which resulted in interest costs exceeding gross profits in the first quarter.

The short-seller also noted that “unbilled receivables” made up 70 per cent of GDS’s accounts receivables, amounting to 16 per cent of total sales last year. Unbilled receivables are more difficult to audit and can be used to overstate revenue.

GDS clarified that its accounts receivable cycle, including unbilled receivables, lasts about 70 days.

“Higher unbilled accounts receivables reflect the shift in GDS' customer profile to large cloud customers, primarily the major Chinese Internet companies. GDS's accounts receivable days are well within market practice, and the company has had no bad debt for three years,” it added.

So far, one broker has come out in defence of GDS.“We believe STT is a highly credible stakeholder,” RBC Capital Markets analysts wrote in a report on Wednesday, noting that other early investors include the International Finance Corp and Softbank.

And despite Tuesday’s panic selling, Credit Suisse analysts have stuck to their US$47 target price for GDS.

They wrote: “While GDS is cash flow negative... the company has successfully raised US$600 million in the past 12 months. GDS will need a return to ‘friendlier’ stock markets by end-2019 to finance growth in 2020 and 2021, but in our view... there are no capital constraints on growth this year or the next.”

In May, Blue Orca launched a short attack against Hong Kong-listed Samsonite. Shares of the luggage maker still trade below where they were before the short-seller questioned its accounting practices.

GDS chairman and chief executive William Wei Huang said: “The report (against GDS) reflects the opinions of an acknowledged short seller, whose sole interest is in profiting from a decline in the price of the company's shares... As a leading data center service provider in China with a 17-year track record, we pride ourselves in the trust and relationships we have built with our customers.”

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