The growth in the Asia data centre sector – and how will it end?



 


BroadGroup Consulting has now conducted over 30 commercial due diligence exercises globally in the data centre market for investors.  Often investors are new to the space, and their first question is whether demand is sustainable, writes Steve Wallage, MD at BroadGroup Consulting.

 

The reality in Asia is that demand has only just started.

Many markets remain tremendously under-developed, with most data centres in-house and most colocation in a different country.

Cloud computing is still in the early stages and there are a wide variety of new applications and drivers to the market.

The chart on US government data usage highlights this variety of data drivers and how this encapsulate so many industries, from energy to defense to medicine to physics.

The chart shows how usage is changing from Terabytes to Petabytes, and Petabytes to Exabyte, the scale of which is difficult to imagine.

US government data usage

Whereas there is much talk in Europe and the US of new applications such as driverless (autonomous) cars and buses, these are already becoming a reality in countries such as Singapore.

 

 Driverless cars and buses in Singapore

What we also see across the different Asian economies is support from governments to enable these drivers, and the importance of IT and cloud in facilitating such drivers.

Take the Malaysian government public-private relationship with Alibaba which extends into e-payments, financing and fulfilment for Malaysian SMEs.

Or the breadth of vision in the India 2030 plans.

What does this mean for co-location spend?

In the most recent quarter, some of the US data centre players reported disappointing earnings and updates (for example, QTS shares down around 30% in February).

By comparison, RBC described the recent NextDC results in Australia as “NXTroardinary!” While European and US markets are seeing growth, still strong, of around 12-16% in 2018, markets such as India will see growth of ~33%.

When does this data growth end?

With 5G and then 6G mobile networks, or with the potential in e-medicine or Industry 4.0, it is difficult to see anything but continued high growth rates.

As ever, there is a risk of technology innovation, or co-location being superseded by cloud offerings, and there is a need for data centre providers to ensure they are providing a ‘sticky’ and compelling offering to their clients.

For investors, though, there are challenges in finding the right company, business model and financial plan.

Valuations can seem incredibly high – for example, Equinix paid more than 16X revenues for Metronode in Australia.

However, such valuations not only reflect the well-established business and clients of Metronode, but also its scarcity value, with Equinix paying a premium to ensure it was not acquired by a competitor.

Steve Wallage, MD of Broadgroup Consulting

There are often specific risks associated with individual investments, and these can be loosely categorized into four areas.

I. Location – including the site itself and possible risks from threats including environmental and legislative, as well as at a more country level, such as political unrest, changes in the law and issues such as FX risk;

II. Operational – not just technical risks, but also management issues and sales and marketing teams;

III. Financial – often one of the biggest risks is securing anchor tenants, but can also be maintaining and growing existing clients, and ensuring robust financial management and controls;

IV. Strategy – general areas such as fulfilling strategic plans and more specific areas such as finding suitable acquisition targets or, if relevant, remaining attractive to possible trade buyer (if this is planned exit route).