Key takeaways:

•      Chindata reported its revenue grew 41% in the fourth quarter, as its full-year revenue and EBITDA for 2021 exceeded previous guidance

•      Results announcement follows company’s formation of a new management team to focus on its main data center business after abrupt departure of expansion-minded founder

By Warren Yang

Change can be good for companies, and the addition of new business lines is often critical to maintain growth over the longer term. But for a young company like Chindata Group Holdings (NASDAQ:CD) that’s doing just fine, sticking to what it does best may be the smartest course of action.

Its latest report showed Chindata made a net profit of 114.7 million yuan ($18.1 million) in the fourth quarter of last year, compared to a net loss of 27.1 million yuan a year earlier. Its revenue rose 41% year-on-year as its capacity increased 14%. For the whole of 2021, the company made its first annual net profit since going public in 2020, as revenue grew an impressive 56%.

Both revenue and earnings before interest, taxes, depreciation and amortization (EBITDA) exceeded the company’s guidance. Plus, full-year earnings per American depository share (ADS), coming in at $0.14, handily beat a Yahoo Finance consensus of $0.08. There’s little question that these were strong results all around.

Unfortunately for Chindata, its shares plunged 10% on the day of the earnings release and lost another 16.5% the next day as concerns about potential forced delistings hit all U.S.-traded Chinese stocks hard.

Last Thursday, the U.S. Securities and Exchange Commission published a list of five U.S.-listed Chinese companies that it said were in danger of potential removal from the country’s stock markets under a law that require Chinese companies to make their audit information available to U.S. authorities. Chinese law currently prohibits such information sharing, though the U.S. and Chinese securities regulators are in talks for a deal that would make it possible.

Investors appear to have high hopes for Chindata with a new management team in place following the sudden departure of founder Ju Jing at the start of this year.

Data center veterans

Wu joined Chindata in 2019 to lead the company’s bread-and-butter data center business in China. That year, Bain merged Chindata’s operations in China with another similar business in the run-up to an IPO the following year. Also, notably, the new CTO, Zhang, hailed from internet giant Baidu, where his tenure of more than a decade included time in the company’s data center department.

The formation of a new management team around executives with deep data center experience underscores Chindata’s commitment to concentrating on its main business, rather than seeking to expand into new areas that may be costly without short-term benefits. Signaling investors’ endorsement of this focus, Chindata stock rallied about 14% through last Wednesday following the two announcements of the management changes.

The new CEO and his lieutenants have a good foundation to build on. Under founder Ju’s leadership, Chindata pioneered the development of so-called “next-generation” hyperscale data centers, which are large campus-style facilities capable of faster transmission of data in large quantities at lower latency rates and more affordable costs than older centers.

Under Ju’s leadership, Chindata was also an early advocate of using green energy, in line with Beijing’s efforts to reduce carbon emissions. This is something the company’s competitors have yet to catch up on, which can be a critical advantage in government relations for obtaining approval for new projects.

Further, the company may be well positioned to capitalize on China’s “Eastern Data and Western Computing” campaign, where Beijing envisions a hub of data centers in the less-affluent western part of the country to process data transferred from the wealthier eastern coastal part.

Yet for all his vision, Ju wanted more than supremacy in the data center business. He made a push into component manufacturing and power generation, meeting with opposition from other board members. That disagreement eventually led to Ju’s abrupt departure, and sent the company’s stock into a tailspin, with Chindata initially failing to provide any explanation.

Ju’s ambitions for component manufacturing and power generation were problematic because both businesses are highly capital intensive, with no promise of generating profit quickly. Chindata had been loss-making, and even though it turned a net profit in 2021, its cash holdings decreased last year as investment grew.

In short, Chindata isn’t exactly in a position to splurge on new businesses at the moment, and shareholders should be rightfully concerned about any plan by the company to go into new areas, especially ones requiring big spending, without a strong justification.

If something’s not broken, it doesn’t need to be fixed. Chindata’s latest earnings show just that.