GDS reported in-line FY4Q22 and guided a soft FY23E outlook with revenue/ EBITDA growth of +8.6%/ 6.2% YoY respectively as the company focuses on existing backlog delivery with tighter control on capex (-33.5% YoY to RMB7.5bn). Despite short-term pain, we like GDS improvement in customer and geographical mix and that the reliance on Alibaba and Tencent is decreasing.We remain positive on long-term data center demand given Digital Economy and AI development. Maintain BUY.
　　FY4Q22 weakness well-anticipated. GDS reported in-line 4Q22 results with revenue of RMB2,404mn (+9.9% YoY) and adj. EBITDA of RMB1,071mn (+4.3% YoY). Adj. EBITDA margin was 44.6% (-2.4 ppts). Net loss narrowed to RMB194mn (vs. -RMB351mn in 4Q21) due to RMB205mn gain from purchase price adjustment related to one of previous acquisitions.Excluding this one-off item, net loss widened by RMB49mn YoY.
　　FY23E focuses on existing backlog delivery with tighter control on　capex. Mgmt. guided FY23E revenue to be in the range of RMB9,940- 10,320mn. Mid-point of guidance is in-line with consensus and it implied a YoY growth of +8.7% YoY (vs. +19.3% YoY in FY22). GDS will focus on the delivery of existing backlog while new bookings is expected to be at similar level to FY22 (+73k sqm). FY23E Adj. EBITDA margin is guided at 44.6% (- 1 ppts YoY) with the ramp-up of overseas capacity. Mgmt. expects FY23E margin to be the trough and to improve gradually in FY24E. Meanwhile, organic capex is expected to be down 33.5% YoY to RMB7.5bn (vs.RMB11.3bn in FY22) as GDS focuses on quality growth.
　　Continuous change in customer and geographical mix. In terms of　customer mix, cloud service providers (CSP) took up 63.1% of GDS 4Q22 revenue (Alibaba + Tencent contributed 43.3%). Meanwhile, the net additional area committed by large internet companies (LI) was 63.1% of total (vs. 17.4% by CSP). Customer mix is expected to enhance going forward. Also, looking at the delivery schedule for current projects, >50% of new capacity to be delivered in FY23 comes from overseas market. We are positive on the diversification in both customer and geographical mix.
　　Digital Economy and AI will continue to drive data center demand. We　trimmed FY23-24E adj. EBITDA by -8-11% to reflect a slow recovery of China cloud market post COVID-19. However, we remain positive on the long term demand in China data centers with the building of Digital Economy and the development of AI. GDS is trading at 0.9x FY23E P/B. Maintain BUY with new target price of HK$20.54, based on lowered 15x FY23E EV/EBITDA to reflect slower growth.