Designed To Deceive

The following is a summary from a bearish research report by J Capital Research. It represents the opinion of J Capital Research, and is not meant to be construed as investment advice. J Capital Research may benefit from short positions a client has in all securities mentioned in the summary and subsequent research report, should those securities decline in price

GDS Holdings Ltd GDS is a fraud. At least 25% of its revenue is fraudulent. Unlike most Chinese companies, GDS creates the fake revenue by round-tripping its own debt and phantom capex. As GDS’s revenue line grows, so does the amount of debt it needs to raise to support the illusion.

In addition to round-tripping, GDS aggressively recognizes future revenues, a portion of which we believe will never be realized. Faked revenue comes without costs, so the gambit also increases reported EBITDA and reduces optical leverage. Using this and other strategies, GDS has persuaded investors to accept its highly customized metrics and argues that it will be the winner in a take-all market. That is simply not true.

By examining dozens of financial statements submitted to the Chinese government, we’ve identified about ¥1.3 bln in unreported debt. We also question the cash balances. Interest income in 2018 was ¥19.2 mln, for an average 0.9% yield, even though fixed-term deposits in China were yielding about 3% in 2018. The company pays up to 9.7% for loans despite its large reported cash balances. No wonder GDS is “actively” seeking new sources of debt to get through the year.

After about a year of research, more than 90 interviews, and visits to all but nine of the 70 data centers that GDS has reported in service or under construction, we have concluded that GDS is a sophisticated Ponzi. With financial markets repricing risk in the last few weeks, we believe the debt pyramid could collapse.