Chindata Group Holdings Limited
Q4 2020 Earnings Call Transcript

Published: 25 Mar 2021

[Operator:]

Good morning, and good evening, ladies and gentlemen. Thank you, and welcome to Chindata Group Holdings Limited Fourth Quarter and Full Year 2020 Earnings Conference Call. We will be hosting our question-and-answer session after management's prepared remarks. Please note today's event is being recorded. I will now turn the call over to the first speaker today, Ms. Joy Zhang, Investor Relations Director of Chindata Group. Please go ahead ma'am.

[Joy Zhang:]

Thank you. Hello everyone. Welcome to Chindata's 2020 Fourth Quarter and Full Year Earnings Conference Call. I'm Joy, Head of the Investor Relations of our group. With us today are Mr. Alex Ju, our CEO; Mr. Nick Wang, our CFO; and Ms. Zoe Zhuang, our Finance Vice President. On behalf of our CEO, Nick will take you through the quarterly review of our operational performance and Zoe will present our financial results. Alex, Nick, and Zoe will be here to answer your questions afterwards.

[Nick Wang:]

Thank you, Joy. Hello everyone. Now, let's first take a look at some highlights for the fourth quarter and full year 2020. We delivered solid results once again in the period, as we continue to increase capacity, grow revenue, and control costs effectively. For capacity, we increased our in-service data centers to 13 by the end of 2020 from 11 at the end of third quarter; grew our total IT capacity in-service to 291 megawatts from 248 megawatts during comparable periods; and maintained client commitment of such capacity at 87%, thus demonstrating our ability to capitalize on robust market demand. Throughout China, India, and Malaysia, we had a total of eight data centers under construction in Q4 for a total IT capacity of 198 megawatts with 74% of its capacity already committed to clients. As we mentioned on the previous quarter, we measure our business scale in terms of IT megawatts, because we believe we are in the business of converting electric power into computing power. By the end of 2020, our full year power consumption had increased to 1,071 million kilowatt hours from 720 million kilowatts hours during the first three quarters of 2020, demonstrating our continuous improvement in capacity utilization and business growth. Meanwhile, we achieved an annual average PUE of 1.22 in 2020, once again validating our power utilization efficiency and commitment towards becoming the greenest data center in China. Additionally, we have continued to place a high priority on advancing our in-house design and R&D capabilities as an effective means to enhance our data center operating efficiency. By the end of 2020, we expanded our reservoir of approved and pending patents to 216 from 194 at the end of the third quarter. Owing to our technology powers and the effective cost management practice, we maintained our average construction cost for all in-service data centers at less than US$3 million per megawatt during the quarter, which is well below industry average.

[Zoe Zhuang:]

Let's now continue to slide 14. In the fourth quarter, our total revenue grew by 18.3% to RMB 553 million from RMB 467.5 million in the third quarter. This increase was primarily driven by the robust growth of utilized 80-megawatt capacity in fourth quarter to 201 megawatts from 174.8 megawatts in Q3, which includes organic growth of 34 megawatts from previous in-service data centers and organic growth of 12 megawatts from new in-service data centers. On a year-on-year basis, total revenue in Q4 grew by 59.2%. Moving on to slide 15, on our expense and margin trends. In line with our business expansion and revenue growth, total cost of revenues in the fourth quarter increased by 17.9% quarter-over-quarter. This increase was attributable to a quarter-over-quarter increase of 15.3% in our utility costs and a quarter-over-quarter increase of 43.9% in our maintenance and other costs. As demonstrated on slide 16, our adjusted EBITDA in the fourth quarter was RMB239.4 million representing a year-over-year increase of 72%. Our adjusted net income in the fourth quarter was RMB58 million compared to RMB1.4 million in the same period of last year and RMB48.2 million in the third quarter of 2020. Over the long-term, we are further to increase our operational and cost efficiencies to improve our operating structure and support our continued profitable growth. Turning to slide 17. In 2020, CapEx in Q4 was RMB968.9 million and the total CapEx in the full year of 2020 was RMB2.77 billion, which are mainly used for land acquisition construction and equipment purchase. As we continue to actively manage our capital efficiency and reduce our delivery time, we expect to improve our construction costs as well as our overall CapEx structure.

[Operator:]

We will now begin the question-and-answer session. Our first question is coming from Yang Liu from Morgan Stanley. Please ask your question.

[Yang Liu:]

Thanks for the opportunity. Congratulations on the strong results. First question is, I noticed that Chindata onboarded a new cloud customer. And we find there will be lease projects on the asset side. Could you please share more detail on the business model and the contract term ROIC profile for this new customer? And the second question is the 2021 EBITDA margin guidance. It implied a small year-on-year increase still lower than the level that the company achieved in third quarter last year. It looks like the cost will increase relatively fast. Could you please share more on what are the increase in terms of SG&A or cost of goods sold et cetera? The last question is a housekeeping one. It's -- what is the other net items in this quarter? It looks relatively big negative RMB 20 million. Could you please elaborate more about that? I will do the translation real fast.

[Nick Wang:]

Okay. Those are sort of good questions.

[Joy Zhang:]

Thanks, Yang. Yes. Thank you. Nick, could you please take the first two questions and we will turn to Zoe for the third question.

[Nick Wang:]

I think, yes, thank you for the good questions. About the first one, about new customer contracts, I think, first of all, it's a good very positive development showing our customer diversification strategy really works. And in terms of the contract, because we are bind by the confidentiality clauses in this new contract, what we can disclose to the public market at the moment is actually it's up to a three-year irrevocable contract. That's number one. Number two, a lot of the scope of the service is in line with the common industry practice. And number three, we're actually going to have a very, very, I think, reasonable schedule to put this contract and execute it in a timely fashion. So that's actually the first -- my answer to your first question. Second question, I think, as our guidance indicates you can see actually our -- both of our revenue and adjusted EBITDA are pretty much in line with most analysts' forecast range. As a matter of fact, if you take the midpoint of our revenue, which is RMB 2.74 billion and midpoint of adjusted EBITDA figures, which is RMB 1.31 billion, the margin rate should be very close to 48% and which are still among the industry top. On the revenue side, the primary driver force is the positive development on the customer acquisition and the contract execution-related areas. On the adjusted EBITDA side, we also expect it in the forecast range largely. But as we just introduced in our investor presentation, one of the company's 2021 strategic objectives is to make reasonable investments in three core competence building blocks

[Joy Zhang:]

Now turning to Zoe for the third question.

[Zoe Zhuang:]

Yes. I will further illustrate, the RMB 20 million other item in the financial statements. There is a non-recurring contingent provision in the fourth quarter of 2020 which impacts the EBITDA. That is because with our strategic regional expansion and deployment of China hyperscale model across Asian markets to further optimize the solution and enhance the cost and the efficiency advantage, we changed a more compatible vendor in India. On the best estimated basis, around $4 million contingent provision was made for the settlement with the regional vendor. Exclude this factor, our EBITDA margin is generally in line with the average full year margin. This quarter we newly signed a contract in India. And the current efficient and on-track project execution validates our judgment is appropriate and this also proves our deployment of hyperscale model in India is successful. Thank you.

[Yang Liu:]

Thank you.

[Operator:]

Our next question is coming from James Wang from UBS. Please go ahead.

[James Wang:]

Good evening management. Can I get an understanding of the rationale for setting up the three business groups; industry, power, and idea? And also is my understanding right that you will be more involved in the renewable energy generation business? And how will it impact on your costs and CapEx going forward? And the second question is on the overseas data center business. I noticed that you signed up more contracts in that segment. Can we get some idea of how much capacity reserve you have for overseas projects and what returns are like in these regions versus say Mainland China? And also for these global cloud customers what's your competitive advantage versus say the global data center provider such as Equinix and Digital Realty?

[Joy Zhang:]

Thanks James. Nick would you please take these two questions?

[Nick Wang:]

Sure. . So, essentially the Chindustry is committed to becoming the leading partner for our customers in the development and construction of next-generation computing infrastructure, so to be better able to provide more tailor-made service to our customers. The Chinpower is committed to becoming the driving force for ushering China's data center industry into the zero carbon emission eras. Assuming such role, Chinpower is actually dedicated to simultaneously promoting the development of new digital infrastructure, and the large-scale consumption of renewable energy, to accelerate energy revolution in the Internet age and also to create a new scenario of digital economy. So Chinidea is committed to promoting white-labeling of key digital infrastructure equipment facilitating product iteration for hyperscale data center campuses. And giving the world's leading hyperscale data center manufacturing platform, for accessory equipment, specialty equipment, integrated assembly lines and other high-end equipment, and ultimately becoming a trusted partner and providing a more tailor-made product service to the data center solution.

[Nick Wang:]

Okay. So I think the positioning of the retail three groups to the mother group which is the Chindata Group is very similar to Jingdong Logistics to the relationship between, Jingdong Logistics to the, Jingdong Holding Companies essentially. So the first stage their focus is on providing the logistics-related service to Jingdong its own business. As the economy scale become, bigger it started to grow its business to external customers and become the leading logistics service provider to the industry. Okay. That's actually the answer for your first question. The second question about overseas. There is some commonality for our business presence in overseas market, compared to our peers like Equinix and Digital Realty. So we have a little bit overlapping regional presence in the Asia Pacific region. But our geographical focus is more on emerging markets like Malaysia, India and also suburban area outside Tier 1 city. Their focus regional focus, geographic focus is more on the Tier 1 city the big cities, like, Singapore, like Hong Kong. And also, accordingly, so our business model is more on a Greenfield development and one-stack services solution. Using our successful precedence in China, as example, we believe, based on this emerging market outside Tier 1 city and Greenfield development and one-stack solution business model, we can provide a better more comprehensive and more valuable service to our clients. But for our competitors in those regions like Equinix and Digital Realty, their experience and their strength is more on the merger acquisition and the interconnection related to the business, which currently we're still playing catching up in. In terms of our financial margins, I think, I would say that, I cannot disclose too much at the moment. I think our margin should be among – should be in line with the industry, the common levels.

[James Wang:]

[Nick Wang:]

So I think that there's a high probability the company is going to go upstream to start the renewable energy, power generation and supply areas. I think that's pretty much analyzed on macro, the carbon neutral strategy set by the central government in China, as well as in line with company's accumulated experience and also strategy over the past three years in the related deal.

[James Wang:]

Thank you.

[Operator:]

All right. James, this is the operator. Can you kindly repeat your last question in English again? Thank you.

[James Wang:]

Sorry, my last question was just what the – whether the company will go more upstream into renewable energy which Nick has already answered. Is that – yes. Is that right? Yes. So I don't have any more questions. Thank you.

[Operator:]

Thank you. Our next question comes from from Goldman Sachs. Please ask your question.

[Unidentified Analyst:]

So first of all congratulations on management for the new customer and project wins. So my first question is on the pricing trends as well as margin trends with our recent projects also the comparison on relative pricing, as well as EBITDA margin levels between our domestic and overseas projects. And then the second question is in terms of our ESG roadmap. I've seen that in the PPT, we've shown that from 2020 to 2030 one of our key initiatives is to invest and develop the renewable energy power plant. So just wondering whether we have any investments or CapEx plans over how many years for this renewable energy power plant. And also after it's being constructed, what type of OpEx savings and margin improvement can we expect in the mid to longer-term? And then the third question is, I saw that the fourth quarter EBITDA margin was a little bit down versus third quarter. So wondering what was the reason there? And whether going forward that there will be similar seasonalities in the fourth quarter? And also what's our CapEx guidance for 2021? Thank you.

[Joy Zhang:]

Thank you, Tina. Zoe, would you please take up the pricing trend question and also the margin question? And then Alex would answer Tina's ESG roadmap question. Thank you.

[Zoe Zhuang:]

Okay. First let's look at pricing strategy in two sides. First is Chindata will still stick to our hyperscale model in the emerging marketing strategy. In this regard, we have been equipped with the experience and expertise of the integrated full-stack hyperscale solutions including the renewable energy solution, site selection, Greenfield development and MAE mechanical and equipment investments, maintenance and connection and experts. And in this regard, we will further keep on integrating to upstream and explore further cost advantage as Nick just introduced through the capability building. So I think for this part, the pricing strategy and the margin will be less impacted. But besides this, we can also provide the -- segmented the solutions on part of the value chain, which means we are able to provide certain customers for some traditional segmented services. And the market competition for this part will be more fierce and possibly there will be price reduction. However, in terms of the regions, as we mentioned, we have the advantage in the construction, in the equipment and also in the whole life cycle management. So we will still be very competitive among peers. And your second -- and your another question is regarding the comparison between China and overseas market. I think this depends on the different model. In China, as we introduced two models. And for overseas markets, if we will see that for certain cloud service provider, if they also include a full integrated solution that will be similar to China market. But if they have other requirements such as the power whether it's pass-through or whether it's integrated, the margin will be dramatically different. If power is passed through, the EBITDA margin will be much higher. Okay. And I will transfer to Alex for your ESG question.

[Alex Ju:]

[Joy Zhang:]

I will now translate Alex's answer. First we would like to say that in this industry we are the first corporation to disclose the detail of how we use up our energy. As of last year, Chindata as a single enterprise its operation in China have already taken up 1.4 or 10000th of the entire country's power usage. Based on this, based on our leadership, we have been experiencing a very powerful self-driven and self-pressure in our development. And also when you talk about our plan to build up the power plant, I believe you are referring to our first solar power station for a total megawatts of 150 megawatts. At this stage, I'm not in a position to provide the CapEx amount to the public. But we can be very confident in telling you that our operation costs will be -- keep on decreasing and will be lower than our current utility cost level. And the last, we would like to remind everyone that we will -- very soon we will publish our second ESG report to show everyone how we do in our ESG workstream for the entire year 2020. Also at -- on April 22 in the day of the Earth, we also will have some surprise for everyone. Thank you.

[A – Zoe Zhuang:]

Okay. Yes. I think there's another question regarding the Q4 EBITDA fluctuation. As I just introduced at the very beginning that this is due to the nonrecurring exceptional contingent provision of around $4 million for the settlement of a regional vendor in India. And this is to -- for the -- our hyperscale business model deployment in India. And we have already settled -- we have already ensured our project execution and signing new contracts in India. So this is -- will not be repeated for the future for the fourth quarter in the future I mean, yes. And another one is regarding the CapEx guideline. In the asset overview we have altogether 21 projects under construction or in service. And for 2021 we expected RMB 4 billion to RMB 5 billion for this project's capital expenditure. But besides this, we also have potential merger and acquisition pipeline new projects and the expansion in the overseas market as well. So we will have additional CapEx expenditure in this field yes.

[Christina Huang:]

Just a follow-up a quick follow-up. I saw that in the fourth quarter our maintenance costs increased by over 40% Q-on-Q. So the one-off that you mentioned is included in this item right?

[A – Zoe Zhuang:]

Yes, you are right. And if we exclude sector, it is within the average range compared with the previous three quarters yes.

[Christina Huang:]

Okay. Thank you.

[Operator:]

Your next question comes from Hongjie Li from CICC. Please ask your question.

[Hongjie Li:]

So, my first question is should we expect more M&A activities this year and beyond to scale more resources and catch up with customers' demand? If so, what are the natural steps you've taken into account from acquisition? And if we got into more areas the local natural environment do not support our existing energy saving technology. So, if that -- will that influence our construction costs and project returns? The second question is on the externally established subsidiaries because we have to implement CapEx in the beginning, but from our perspective these initiatives are more a driver for -- from the cost savings or the future revenue contribution. Thank you.

[Joy Zhang:]

Thank you, Hongjie. Alex will answer both of your questions. Alex, please?

[Alex Ju:]

Okay.

[Joy Zhang:]

Okay. I'll translate Alex's answer. So we are aware of the tools and targets on the market, but we are more focused on evaluating whether that target could provide the authentic and real core value to our key anchor customer and the end user of our customers. Also, we are focusing on whether the management team is qualified or equipped with the qualification to strive for the same goal as ours. Other than this, we do not think are the prioritized consideration. Further, as you mentioned in different areas -- in different geographic areas, they might have different business model or construction model than our current operation. We respect this difference. And when we're choosing our targets, we will keep our originality and also the innovation as much as we can. We will definitely adopt the model that is most benefiting and most appropriate for the local environment. Thank you.

[Alex Ju:]

[Joy Zhang:]

Okay. I'll take the translation for Alex's answer. We would like to draw everybody's attention to the details of our presentation this time. From this quarter, we are prepared to continuously publish the key metrics for measuring those three subgroups' or three subdivisions' key operations growth. As you can see, most of these metrics are focusing on the cost level. So, at the -- in a short period of time, we will not really measure the quality of their growth simply by the revenue they can generate. But in the long run, we plan to have them become an open platform for multi-party collaboration. And we want them to enable the entire industry from different perspectives. We would like to keep the openness with different business partners that can benefit both our growth and the industry in the long run.

[Alex Ju:]

Thank you.

[Hongjie Li:]

Thank you.

[Operator:]

This concludes today's conference call. Thank you for participating. You may now disconnect your lines.