Q2 2023 GDS Holdings Limited Earnings Call
Speaker 2: Hello, ladies and gentlemen, thank you for standing by for the GDS Holdings Limited's second quarter, 2020 free earnings conference call. At this time, all participants are in listen only mode. After management prepared remarks, there will be a question and answer session.
Speaker 1: In the second half of 2023, we will bring another 50,000 square meters into service, 30,000 square meters in China and 20,000 square meters internationally. All of this capacity has confirmed moving schedules. Turning to slide 16, we recently held an opening ceremony to deliver our first data center at the New South Georgia Tech Park, Johor. 40 months ago, this was an empty piece of land.
Speaker 2: Today's conference call is being recorded. I would now like to turn the call over to your host, Ms. Laura Chen, Head of Investor Relations for the company. Please go ahead, Laura.
Speaker 3: Hello everyone. Welcome to the second quarter of 2023 earnings conference call of GDS Holdings Limited. The company's results were issued via newswire services earlier today and are posted online. A summary presentation which we will refer to during this conference call.
Speaker 1: Today, you can see three large data centers, one of which is for AI computing, with 70 MW of IT power capacity in total.
Speaker 3: can be viewed and downloaded from our AI website at investorsgdsservices.com. Leading today's call is Mr. William Huang, GDS founder, chairman and CEO , who will provide an overview of our business strategy and performance. Mr. Dan Newman, GDS CFO .
Speaker 1: For this project, we use our proprietary prefabricated liquid cooling and power modules. It gives us time to market and the development cost advantage, which are critical success factors in today's market. When we set up in Johor, our vision was to establish the Sijuri Data Center hub to serve the region.
Speaker 3: We'll then review the financial and operating results. It's Jamie Kuh, our COO, is also available to answer questions. Before we continue, please note that today's discussion will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Service Act.
Speaker 3: Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in accomplished perspectives.
Speaker 1: by integrating Johor, Bataan and Singapore. We are therefore delighted to be selected by the Singapore government alone with three other data center operators for a total of about 80 MW new data center capacity in Singapore.
Speaker 1: So the pilot data center calls for application DCCFA exercise. We are finalizing our development plans and will provide updates in due course.
Speaker 1: In Bataan, we continue to make progress with establishing the essential infrastructure for our proposed development.
Speaker 1: Our international expansion is gaining momentum.
Speaker 1: I will now pass on to Dan for financial and operating review.
Speaker 1: to them for financial and operating review. Thank you, William.
Speaker 1: Starting on slide 18, in conjunction with our strategic business objectives, we've adopted the following key financial targets.
Speaker 4: For the China segment, we aim to grow a dusted EBITDA at a mid-teens percentage cagum.
Speaker 1: to give us a shorter book-to-view cycle. We are prioritizing delivery of the backlog to grow revenue with less capex. We are increasing utilization rates to drive up return on invested capital. We are only initiating new projects based on firmly committed orders.
Speaker 4: We are reducing organic capex.
Speaker 4: and we will bring down net depth to adjusted EBITDA to below five times.
Speaker 4: For the international segment...
Speaker 1: and we are monetizing assets to achieve positive free cash flow as soon as possible. For international.
Speaker 4: We will be EBITDA positive next year.
Speaker 4: Based on our current business plan, International will generate over 15% of consolidated adjusted EBITDA after three years.
Speaker 4: Based on our current business plan, International will generate over 15% of consolidated adjusted EBITDA after three years. We are taking a low risk approach.
Speaker 1: We are developing a second growth engine. We are winning new business from reference China and global customers. We are leveraging our competitive advantages in cost and speed of execution. We are financing expansion without relying on GDS balance sheet. And we will benchmark variation creation through external funding round. By pursuing these objectives, we will strengthen our financial position and unlock value for GDS shareholders. As we review our performance quarter by quarter, we will measure our progress against these targets. Turning to the slide 5. In the first half of 2023, our gross additional area committed was around 28,000 square meters, 55% from China and 45%.
Speaker 4: only investing with the backing of firm customer orders and achieving similar returns to China.
Speaker 4: We will raise equity capital directly at the international level.
Speaker 4: and project finance on a non-recourse basis.
Speaker 4: Turning to slide 19, in 2Q23 we grew revenue by 2.6% quarter on quarter and adjusted EBITDA by 9.3% quarter on quarter.
Speaker 4: Here in CUCU 23, we recognize one-time service revenue.
Speaker 4: of 17.7 million RMB arising from early termination of 3,000 square meters from the backlog.
Speaker 4: and cash reimbursement of 22.1 million RMB from our depository bank.
Speaker 4: excluding these two items.
Speaker 4: Revenue was flat and adjusted EBITDA was up 1.1% on quarter.
Speaker 4: Turning to slide 20.
Speaker 4: During 1H23 we achieved net additional area utilized of 12,000 square meters.
Speaker 4: Well, Bruce, add.
Speaker 4: was sustained at historic levels.
Speaker 4: Net ad was impacted.
Speaker 4: by a single customer redeploying between our data centers as previously disclosed.
Speaker 4: This redeployment will continue into the second half of 2023.
Speaker 5: However...
Speaker 4: With contribution from the international, we expect net additional area utilized to step up significantly.
Speaker 4: Multi-service revenue per square meter.
Speaker 4: was 2170 RMB in 2Q23.
Speaker 4: excluding the one-time service revenue arising from early termination.
Speaker 4: MSR was 2108 RMB per square meter, a decrease of 1.9% versus the previous quarter.
Speaker 4: Comparing 4Q23 to 4Q22.
Speaker 4: we still expect an MSR decrease of around 4% over the course of this year.
Speaker 4: Turning to slide 21.
Speaker 4: For 2Q23, our adjusted EBITDA margin was exactly 50%.
Speaker 4: Excluding the one-time service revenue arising from early termination and cash reimbursement.
Speaker 4: The adjusted EBITDA margin was 47.6%, a small increase in the previous quarter.
Speaker 4: 47.6% a small increase in the previous quarter.
Speaker 4: In 3Q23, we are seeing higher power tariffs and higher power usage in the peak summer months.
Speaker 4: As a result, our margins will be seasonally impacted in the current quarter before recovering in the fourth quarter.
Speaker 4: Turning to slide 22.
Speaker 4: In 1H23, our organic cathecs in China was 2.2 billion RMB.
Speaker 4: We expect the full year to be in line with our guidance for 3.5 billion RMB.
Speaker 4: In 1H23, our international capex was 1.2 billion RMB.
Speaker 4: In 2H23, our international capex will increase to around 2.8 billion RMB as we deliver 70 watts in Johor by January of next year.
Speaker 4: All of this capacity is billable within a few months of delivery.
Speaker 4: Looking at our financing position on slide 23.
Speaker 4: At the end of 2Q23, our net debt to last quarter annualized adjusted EBITDA was 7.7 times.
excluding the debt and negative EBITDA of the International.
The multiple was 6.7 times.
During 2-2-23, we repaid US$300 million.
when a CB was put.
As a result, our cash position decreased.
to $8.2 billion RMB or $1.1 billion US dollars at mid-year.
We are still working on the debt refinancing which is required for the data center fund. When this is finalized it will raise our cash balance by 1.5 billion RMB. Up to the end of 2Q23 we provided around 400 million dollars of funding to our international group by way of paid up share capital and shareholder loans.
In addition, International had incurred around $400 million of external debt.
We now intend on moving ahead with the first round private equity capital raise.
Turning to slide 24.
We confirm that our guidance for FY23 revenue, Adacity, VIDAR and CAPEX remain unchanged.
We'd now like to open the call to questions.
Thank you. So, if you ask a question, you will need to press star one and one on your telephone and wait for your name to be announced to withdraw your question. Please press star one and one again. Once again, to ask a question, please press star one and one on your telephone and wait for your name to be announced.
To withdraw your question, please press star one and one again. For the benefit of all participants on today's call, please limit yourself to one question. If you have more questions, please re-enter the queue. Thank you.
We are now going to proceed with our first question.
And the questions come from the line of Yang Liu from Morgan Stanley . Please ask your question.
Thanks for the opportunity to ask a question. I have a question related with the international business. I think
You talk a lot in terms of the strategy going in the surrounding area of Singapore. And now you have a power quota or the permit to build a data center inside of Singapore. So what could be the updated strategy?
for the whole Southeast Asia Development Plan, especially what will be the business model for the Singapore Data Center. And of course, the
whether you have a plan to spin off the whole international business.
Thank you Yangli. I think the strategy for Southeast Asia from day one, we already from very, very clear view to do the data center in three major praise. One is Singapore, one is Johor.
or in the Bataan Islands. This is, in our view, is a perfect structure for the current requirement, even for the future requirement.
Because Singapore, as everybody knows, Singapore is a network hub.
And a lot of our customers who want to deploy the data center in this region try to get their network in Singapore, the PoP, whatever you call it. But these three, we also plan to link
these three data centers areas together to serve our customers as a platform. So I think this will give us a lot of advantages in the future compared with other competitors. We are the first ones who own this.
on the data center in three areas. So this is perfect for our future marketing.
So this is our major focus, is our core asset to give up in the next five years. But on the other hand, we're also looking for very active to looking for some opportunity in Jakarta, KL and also other countries.
But again, I say this is, we call it a sugary area, will be our focus in the next five years. And we believe that demand is getting more stronger and stronger. So
the future visibility is very, very high. The second question is the spin-off. I think definitely Dan already, last quarter we already introduced it. We will focus on, we will split the business to locate our business.
One is China portion, one is international. The two mark here actually is in the difference.
situation. In China, everybody knows that demand in the last two years is a slowdown, but we should echo this situation. So we affirm our new strategy to try to push China business moving towards the cash portfolio positive.
and strengthen our financial capability. This is our, we already introduced to the market and that's our business plan in next three years. But on that hand,
since the AI coming in a very big way. So I think we have, we can leverage our 20 years experience and capability to catch up, well catch up to this opportunity. So in an international business.
we will aim to grow more fast than in the China business. So we need more capital, but we don't want to use more our holding capital to defect the business. So in the next few months, we already started working on that to raise...
excellent funds to support our international business. We got a lot of the interest from the different private equity so far. Yeah. Your,
Southeast Asia footprint. I wonder if you could maybe provide us an update on the demand trends that you're seeing in Hong Kong. And then in Johor are you...
seeing continued potential for upsizing of your footprint based on the existing customer relationship, or could the demand there potentially diversify? Thank you.
Thank you, John . I will stop with the financial.
questions.
more one-time items like like the experience in the second quarter in the second half of this year or beyond so far as we can foresee. If these one-time items are material we will disclose them to try to establish a normalized number so that we can continue to track a quarter-on-quarter trend as we have done you know ever since we went public 2016. William do you like to talk about demand in Hong Kong and the next wave in Johor? Yeah I think the demand in Hong Kong still maintain the normal right.
So this is nothing changed so far. So we are still on track, the market demand. Supply also knows a significant change. So still in terms of supply, also very balanced. So I think the Hong Kong market is still on a very stable growth period.
What we can see is a lot of the international cloud players, also internet giants, all show more high increase in level into whole. So this has changed a lot, very encouraging us. So our target is definitely not just follow up our customer, existing customer. We are definitely very interested to gather some new customer name from the different region to diversify our portfolio.
just like what we did in China. That classification is very important for us, and we are good at that. And then lastly, on Singapore, given the tightness of supply and the fact that you were one of only a small number of companies to get the permission to proceed with new data center development.
Do you think that you're inclined to do more of a, kind of a wholesale, hyper-scale approach with a smaller number of tenants in order to stabilize the asset quickly once it's developed, or would you pursue more of a kind of a retail-oriented approach, do you have any thoughts on that?
So far, I think there are two types of customers that we are interested in. One is who will deploy their IT in three regions, including Bataan, Singapore and Singapore.
and Johor. This is our first priority to support, which means support our strategy, right? Which I think we already showed this plan to some of our customers, they are very interested. So, second priority definitely in Singapore is financial...
institutions demand and a requirement. So we also aim to sell some to retail customers. For example, like a financial institution, right, we can get a more high margin and a very stable commitment. That's our go-to-market strategy. Thank you.
We are now going to proceed with our next question. And the questions come from Donald Frank Lutson from Raymond James. Please ask your question. Great. Thank you. So looking out to your guidance, what does it take to hit the higher end of the range of your guidance?
the impact from China and also from the out of region business as well. Thanks.
Thank you. Thanks very much.
You're out. And I'll track record with guidance has been very good.
Normally the full year outcome is not deviated far from the...
The midpoint of our guidance range and
In prior years, it's a recurring revenue business.
And the moving rate is what dictates most of the growth year on year. So as we already halfway through the year.
I think the part that we're on within that guidance is already quite well set.
I mean, fit that.
in the second half this year particularly
have our Johor data centers come into service.
and also in China, some of the data centers which are...
the destination for the customer who is redeploying between our data centers.
and If
The moving rate for those contracts is quite fast.
In one case, a few months, in another case, perhaps one year.
So even if we assume that the run rate in China remains as it has been, at least the growth in the digital area utilized is obviously wrong, that the scan rate is Asset Max marginalized and difficult to get.
has been quite consistent, I think, for about the past 10 quarters.
So even if we assume that that remains at the current run rate, and there is no recovery because we can't.
to take that yet. Our growth will pick up because of the additional contribution from these contracts, particularly Jor.
So that will happen too late this year to make much difference to our financial results this year, but clearly it will contribute to higher year-on-year growth next year. So we look forward to that and obviously we'll reflect that enough.
And I'll guidance the next student when we come out with that. OK, great. Thank you very much.
the next shooter when we come out with that. Okay, great. Thank you very much.
We are now going to proceed with our next question.
And the questions come from the Land of Sara, one from UBS, please ask a question.
Hi. Thank you for the opportunity to ask questions. I have two questions. The first one is on the potential target of Southeast Asia business. I see that we are now targeting the overseas business to contribute more than 15 percent of
He's been out within three years. And then I recall December was around 10% doing last earnings release. So just wondering if there's any.
?ulars
What's your question? We lost the... hello? Did we lose the connection? Is this only a topic? Is that a visibility? Hello? Hello?
We missed the... Oh, can you hear me? Yes, you can now. Now, can you repeat your question? We just missed the... Sorry. Okay. Okay. Okay.
Yeah, sure. So I see the target for the overseas business to contribute 15% of EBITDA within three years. And then I recall the number was around 10% during our last earnings call. So I'm just wondering is this just a simple update because of federal visibility?
or actually we're being more optimistic. And then what's the key point for us to be more optimistic? This is my first question.
Thank you.
Your observation is correct. We did revise up that number. Moving from 10% to 15% is significant, but in absolute terms we're not talking about hundreds of millions of dollars, we're talking about tens of millions of dollars higher forecast.
And you would have noticed that in the second quarter we did upsize an existing order in Johor. So that was part of the reason for doing that. And frankly I also noticed that some analysts and leading analysts begin to put more focus on
international business and try to quantify how significant it can be within the context of GDS holdings as a whole. So, you know, responding to that, try to provide some more disclosure. Got it. Thank you. And then my second question is, what is the role of the GDS in the
attention to increase the shareholding in GDS. I'm just wondering if there's any update on this. Thank you.
Yeah, I already bought the 50% which I commit, right? So I still will continue to execute that.
Yeah, I already bought the 50% of which I commit, right? So I still will continue to execute that. Got it. Thank you.
We are now going to proceed with our next question. And the questions come from Valanotsi Masizao from Goldman Sachs. Please ask your question.
Sure, thank you Benjamin for taking my question. I think my question is regarding the AI demand. I think since last time that we spoke, I think I remember last quarter you mentioned that the AI driven demand was due in the early stage. Just wondering, given I think we have passed a quarter, three months, or maybe longer, just wondering if Benjamin has seen any updates.
what percentage of cab heads will be likely spend on the high-powered density cabinets or transforming the existing cabinets into the high-powered density ones.
Thank you. Okay. Yeah, in terms of AI demand, I think very clear that in the international market, now the currency globally, I mean, data center demand may be driven by the...
AI type of the application, right? So this is a very, very clear chance, which already happening in the US, in Asia right now. So we are, this is one part, but.
If we talk about AI demand in China, I think China, in terms of the AI model, is a little bit behind the US. So I think it's still in a very early stage. But of course, in the media, everybody talks about AI. That's an indication that everybody...
try to step in. So I think in terms of how impacted to the data center industry, I think maybe after 12 or 18 months, it will start to impact China data center demand. So in a significant way, in my view, yeah.
second part of your question on CAPEX. So I think maybe talk about
AI related capex or very high
power density capacity, then I think that goes with liquid cooling. So really it comes down to what percentage of our capex or what percentage of the capacity that we're developing will we deploy liquid cooling.
As a matter of fact, we have deployed liquid cooling going back more than two years in China. We've done projects both with
what's called cold plate calling and also full immersion.
cooling.
It's been a very small part of what we've done so far in China and for in the international expansion you would have mentioned that I think in the international market may be
We're seeing the flow through from AI demand come quicker.
So a significant part of what we developed in Johor is using cold plate liquid cooling and we developed a prefabricated cold plate liquid cooling module which we manufactured in China and shipped. So we developed a prefabricated cold plate liquid cooling module which we manufactured
chip to chip to Johor. We talked maybe a bit more generally about the economics deploying liquid cooling the overall unit development cost is
slightly higher than if we use more traditional air cooling. Because liquid cooling delivers a lower PUE and a higher power density,
slightly higher than if we use more traditional air cooling. But because liquid cooling delivers a lower PUE and a higher power density, it also means that when a cooler off road system is employed, we've been able to combine it.
there's more IT power capacity available to sell to the customer and to generate revenue. So you have to take into account these different components and overall in terms of total cost of ownership or economic returns to us as the data center operator, we think that liquid cooling will
create some cost efficiency where it can be deployed. So far we don't think it's going to be a very material change.
So I think the last part of your question talked about, I think you referred to
installing it in existing data centers. Yeah. So that's an interesting one because if you look at all the parts and equipment in a data center some of it is used intensively like cooling and some of it is on standby like power generation.
So there's already a replacement cycle for cooling which typically is every five years.
That gives us an in-built opportunity when we change out the cooling plant and equipment, we can always consider to change the technology as well.
Yeah, I think in the last two years, our new data center design is all very high-pitched.
That means we already assessed the trends in China. So our edge-of-the-town campus design all can fulfill the future AI demand.
already. This is all the campus which we developed in the last two years, whatever in Shanghai, surrounding Shanghai or Beijing or Shenzhen, Guangzhou, all very high power density and high power capacity. So that means we are well positioned to catch up the AI era.
Great. Thank you for the call. It's very helpful. Thank you.
As a reminder to ask a question, please press star one and one on your telephone and wait for your name to be announced to withdraw your question. Please press star one and one again. Once again, please press star one and one if you have any questions and wait for your name to be announced for the benefit of all participants on today's call. Please limit yourself to one question.
And the questions come from the line of Mingran Lee from CICC. Please ask a question.
I meant, man, thanks for taking my questions. I have questions about the margin. Uh, the 1st, 1 is why 1 time service revenue has nearly 100 margin because on this. 70M, what's all included in it? And also, excluding the 1 term impact.
The second quarter EBITDA margin was still better than the first quarter and the same quarter last year. What's the drivers behind this?
Thanks for the question. I couldn't hear so clearly.
profit margin on an incremental basis. Excluding that revenue as we did in our disclosures to normalize numbers set a base for the following quarters. EBITDA margin has fluctuates as always but it's been a similar range for a number of quarters. There is more pronounced seasonality now in our business since
difference between our EBITDA margins in winter and summer. So that's visible in our number. But overall, if we take a trend over a number of quarters, I think EBITDA margins are going to remain at quite a similar level to where they are today. I think the most significant negative impact has been the increase in power tariffs in China.
it's possible that that will reverse at some point in future we don't have any knowledge about that.
We're looking at EBITDA margins which already reflect that impact and we expect the margin to be looking over at how werecorded
improve but only slightly from current levels over the following couple of years.
Thanks for the clear.
We're now going to proceed with our next question.
And the questions come from the line of Michael Elias from TD Cowen. Please ask a question. Hi everyone. This is Cooper Bellinger on from Michael Elias. Thanks for taking my question. I kind of wanted to follow up on the AI discussion earlier and starting at a 2 coded answer question, should I be drive, or should I just leave that to Michael Elias?
Given that what we're seeing in the US right now with the incremental AI demand wave and kind of the subsequent shrinking of power supply, I just wanted to hear your thoughts on the upcoming power supply situation and I guess current.
as well as it relates to both mainland China and international. Thanks. I think in an area like Johor, they have the advantage in Johor is they have the rich, very rich power capacity. So I think in the short term or mid term, the power supply will not be the issue.
of course, is challenging in the future.
But fortunately for us, as I mentioned, in the last two years, we locked up a lot of the big power capacity and built a very high – designed a very high power density dataset. So I think the – but what I say – can I just say –
In short term, mid term in China, if the wave coming for everybody is a challenge. But in mid term, short term for us is a challenge.
more relaxed for that. But in the whole side, I think we are...
We got almost 50% of the power allocation into HAW so far. So I think we are moving more ahead than any player in the whole area.
OK, great, thank you.
Thank you once again for joining us today. If you have further questions, please feel free to contact GDS Investor Relations through the contact information on our website or the PS&T Group Investor Relations. See you next time. Bye-bye. Thank you.
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