GDS bets on a new AI cycle, finding a balance between expansion and deleveraging

Artificial intelligence ignites a new wave of construction in China's data centers, GDS is listing assets in a REITs model while seizing the AI computing power fast track, but can this balance be sustained?

Key Points:

• In the third quarter, the company reported revenue of 2.887 billion yuan, a year-on-year increase of 10.2%
• Asset injection into C-REIT brought 1.369 billion yuan in termination merger gains, with a net profit of 729 million yuan recorded during the period

Li Shida

For China's data center industry, 2025 is likely to be seen as a watershed: on one hand, the demand for artificial intelligence training and inference is sparking a new round of infrastructure construction; on the other hand, the listing of China's first batch of data center infrastructure real estate investment trusts (Infrastructure REITs) is introducing new financial tools to this traditionally high-leverage, heavy-asset industry.

This is the portrait of GDS Holdings Limited (GDS.US; 9698.HK), benefiting from a new wave of artificial intelligence construction by large tech companies, while also constrained by years of accumulated financial pressure.

According to the company's latest financial report, for the third quarter ending September, GDS recorded revenue of 2.887 billion yuan (406 million USD), a year-on-year increase of 10.2%, maintaining double-digit growth for the second consecutive quarter. The company revealed that new signed orders reached 75,000 square meters in the first nine months of this year, equivalent to about 240 megawatts of new installed capacity, with the annual total expected to approach 300 megawatts, of which about 65% is related to artificial intelligence.

New Order Growth Slows

This indicates that the demand for artificial intelligence is driving a new round of computing power investment, but the companies themselves have not fully controlled the pace. Management admitted in a briefing that the pace of new orders after the second quarter has slowed compared to earlier periods, meaning that next year's revenue growth may not continue the strong momentum of this year. Additionally, renewal negotiations are causing unit revenue to decline by about 3% to 4% per month, reflecting that while demand for artificial intelligence is strong, the price pressure from traditional internet businesses has not disappeared.

Although GDS benefits from the demand boom ignited by artificial intelligence, the rapid expansion on the supply side in recent years has made the space for supporting artificial intelligence no longer scarce, resulting in decreased negotiating power.

A more significant turning point is that GDS has injected a batch of projects into China's first batch of data center real estate investment trusts this year, with total assets of about 2.4 billion yuan. The transaction brought about 1.369 billion yuan in termination merger gains, allowing the company to record a net profit of 729 million yuan during the period, achieving a turnaround from loss to profit.

Change in Survival Model

However, the significance of REITs is not in one-time profits, but in the complete reshaping of the company's survival model. For the past decade, GDS relied on extensive borrowing, land acquisition, and data center construction for rapid expansion. This model worked when the credit environment was loose; however, after the tightening of credit in China, the heavy asset model is no longer sustainable, and leverage has begun to compress the company's space. REITs provide a cash flow channel that allows GDS to expand without having to rely entirely on debt, maintaining a cycle of scale This has also brought about an improvement in the company's financial structure. The financial report shows that the ratio of net debt to annualized adjusted EBITDA has decreased from 6.8 times at the end of 2024 to 6 times at the end of the third quarter of 2025, with the average borrowing cost dropping to 3.3%. In the context of a tightening financing environment in China, it is not easy to reduce both leverage and interest costs, which further highlights the importance of REITs to the company's operations.

GDS's business model is highly dependent on power supply. The company currently has approximately 900 megawatts of land reserves with power indicators, allowing it to quickly launch new projects amid the surge in demand for artificial intelligence. Management also pointed out in the briefing: "Land with power indicators is becoming extremely scarce." While artificial intelligence indeed brings incremental demand, the supply side—land, electricity, approvals, and construction speed—is becoming more competitive and more influenced by policies.

The overseas data center platform DayOne is also a future consideration. Although the platform has potential in the Asia-Pacific and Europe, it recorded a loss of 461 million yuan in the third quarter of this year, which will continue to drag down overall profits in the short term. The company needs to continuously prove its ability to develop, operate, and sell assets, rather than relying solely on the demand for artificial intelligence itself.

Currently, GDS's price-to-sales ratio (P/S) is approximately 4.15 times, significantly lower than Equinix (EQIX.US) at 8.42 times and Digital Realty (DLR.US) at 9.31 times, but higher than the still-restructuring Century Internet (VNET.US) at 1.99 times. This indicates that although the Chinese market is more volatile, GDS's scale, customer quality, and capital circulation ability are still viewed positively.

Since the beginning of this year, GDS has risen about 30% in the Hong Kong stock market, similar to the broader market, but has seen a pullback of about 7% in the past month, with the stock price at HKD 30.1, down about 40% from the 52-week high of HKD 48.9. In the context of still discounted valuations and sustained AI-driven demand, there seems to be a reasonable range for positioning. As a popular AI infrastructure target, when demand for artificial intelligence remains strong and REITs asset injections proceed smoothly, it is believed that the market will be willing to raise valuations