GDS Holdings, the Chinese data center behemoth, has long been viewed as a proxy for the growth of China's digital economy. While recent headwinds in China's tech sector have cast a shadow on the company's near-term prospects, a closer look at the latest earnings transcript reveals a potential game-changer: the company is incredibly well-positioned to ride the burgeoning AI wave, not just in China, but internationally as well.

While most analysts are focusing on the uptick in GDS's China move-in rate and its successful international fundraising, a less obvious yet crucial detail lies in the company's preparation for the unique demands of AI workloads. CEO William Huang, in response to a question about AI data centers, stated almost casually, 'Actually, we are already there.' This seemingly offhand remark carries significant weight. It highlights that GDS has not been passively waiting for the AI boom – they've been actively laying the groundwork for years.

Huang's comment, 'We already built a cooling type data – liquid cooling type data center four years – our two of the largest customer as well,' is particularly telling. It signifies that GDS has not only anticipated the power-hungry nature of AI workloads, which often require high-density racks exceeding 20kw per rack, but has also been proactively implementing liquid cooling solutions, a technology essential for efficiently handling such demands.

This preemptive move stands in stark contrast to the reactive approach many other data center players are taking. While competitors are scrambling to adjust their infrastructure to accommodate AI, GDS is already equipped to handle the scale and speed required by AI deployments.

GDS Capacity and 'Cost to Complete'

The numbers further underscore GDS's strategic foresight. In China, the company can expand its utilized area by over 50% with a relatively modest 'cost to complete' of RMB 7.4 billion. This translates to less than US$3 million per megawatt, a remarkably low figure compared to the typical cost of developing new data centers from scratch. This existing capacity, coupled with the company's proactive adoption of liquid cooling, positions GDS as a cost-efficient, one-stop shop for AI-driven deployments in China's key markets.

International Growth Fueled by AI

Internationally, the story is even more compelling. GDS's recent US$672 million Series A fundraising for its international arm, GDS International, highlights the remarkable value the company has already created in Southeast Asia. The implied valuation of nearly US$4 per GDS share for the international segment, coupled with an order book exceeding 130 megawatts, paints a picture of rapid growth.

GDS is capturing the AI-driven demand in Southeast Asia before many competitors even have a chance to set up shop. They are securing land and power at an unprecedented scale, allowing them to offer the rapid time-to-market that AI deployments require. This speed and agility are key differentiators in a market where customers are demanding shorter lead times and faster move-in schedules.

Is GDS Undervalued?

Here's where the hypothesis gets truly intriguing: What if the market is significantly undervaluing GDS's potential to become a leading player in the global AI infrastructure landscape? The Series A fundraising for GDS International provides a tantalizing clue. At 24 times the forecast adjusted EBITDA for 2025, the implied valuation might seem rich at first glance. However, consider this: GDS's international business is growing at a breakneck pace, fueled by AI demand, and the company has the resources to rapidly scale its capacity in key global markets.

Furthermore, GDS has a proven track record of execution in China, where it built a dominant position in a highly competitive market. If the company can replicate even a fraction of that success internationally, the current valuation of its international segment could prove to be extremely conservative.

GDS: A Company on the Cusp of Transformation

GDS Holdings is a company on the cusp of transformation. While the short-term focus remains on deleveraging and driving steady EBITDA growth in China, the company's long-term potential is tied to the AI revolution. With its preemptive investments in AI-ready infrastructure, both in China and internationally, GDS could very well emerge as the sleeping giant of the AI boom, leaving competitors scrambling to catch up.

Key Financials from GDS Q1 2024 Earnings

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"Fun Fact: Did you know that GDS data centers consume enough electricity to power a small city? Their commitment to sustainability has led them to explore renewable energy sources and implement energy-efficient technologies in their data centers."