GDS Holdings Limited
Q1 2024 Earnings Call Transcript

Published: 22 May 2024

[(Transcript provided to Seeking Alpha by the company.):]

[Operator:]

Hello ladies and gentlemen. Thank you for standing by for GDS Holdings Limited’s first quarter 2024 earnings conference call. At this time, all participants are in listen-only mode. After management’s prepared remarks, there will be a question-and-answer session. Today’s conference call is being recorded. I will now turn the call over to your host, Ms. Laura Chen, Head of Investor Relations for the Company. Please go ahead, Laura.

[Laura Chen:]

Hello everyone and welcome to the first quarter 2024 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, can be viewed and downloaded from our IR website at

[William Huang:]

Hello, everyone. This is William. Thank you for joining us on today's call. The top priority of GDS senior management is to create value for our shareholders and drive share price recovery. Our business now has two distinct segments, China and International. For China, we believe that the key to creating shareholder value is

[Daniel Newman:]

Turning to Slide 15. From 2Q24, we will start to provide segment reporting in our earnings release. As you can see, we have already included most of the segment information in our 1Q24 earnings presentation. We will define two segments

[Operator:]

Thank you. [Operator Instructions] Thank you. We will now go ahead with our first question, which is from Jonathan Atkin from RBC Capital Markets. Please go ahead.

[Jonathan Atkin:]

Thanks. I got one question around China domestic business and then maybe one international, if I could throw that in. Inside of China, what are you seeing apart from the utilization rate on a square meter basis that you have reported? What are you seeing with respect to power draw and customer behavior around increasing the draw of power that they're contractually able to utilize? Any trend there that might be instructive in terms of increasing demand or maybe follow on demand from customers? And then my question on internationals is that the GDSI, it appears they have a lot of project loans, and I wonder if you could provide a little bit of color on cost of capital and just the sort of counterparties that you have for these loans. Are they domestic, international, et cetera? Thank you.

[Daniel Newman:]

Yes. Jon, hi, it's Dan. I'll try to answer your questions. The first one about the power draw in China. Most of our established data centers, which are utilized by large cloud and Internet customers already operating at maximum power levels. The entire available power capacity of the data centers is committed to the customers and they, of course, operate their own business at a very high level of operating efficiency. So, we don't have a situation in which there is spare power capacity which is not being utilized or monetized. On the other hand, for new data center developments, we are typically constructing at a higher power density. The power density for new developments is quite often over 3 kilowatts per square meter, so that may be an indicator of what is behind -- what you're asking behind your question. For the project loans in the international business, we're taking a similar approach to the way in which we financed China business, which is to allocate capital project by project and then to leverage that with debt at the local level. The customer contracts which have been signed mainly in Malaysia, are priced either in US dollars or in Malaysian ringgit. So our income is both US dollar and Malaysian ringgit. So far, we are borrowing in Malaysian ringgit, and we are aiming to minimize the FX exposure to that. The loans are with -- are from a syndicate of banks already very familiar with us, and we expect to go through the same pattern that we did in China of establishing a structure, developing relationships with local banks and over time, transitioning to having very predominantly local bank -- local bank relationships.

[Jonathan Atkin:]

Thank you. And then for Japan, the 36 megawatts, can you give us a sense of when you would intend to start construction?

[Jamie Khoo:]

Jonathan, this is Jamie. So on the Japan side, our partner, which is Gaw Capital, will be doing up the construction of the core and shell. So that will be completed and passed on to us by 2025 -- end 2025, or early 2026. So then we will start our M&E construction and that will bring us to Q4 2026 for delivery.

[Jonathan Atkin:]

Thank you.

[Operator:]

Thank you. We will now take our next question. This is from the line of Yang Liu from Morgan Stanley. Please go ahead.

[Yang Liu:]

Thanks for the opportunity. I have two questions here. The first question is regarding the asset monetization in China because previously management mentioned about this strategy. What are the opportunities you are seeing in the market and what is the current plan? Or what should we expect on this front? And should we think the transfer of B-O-T is part of that or not? That is the first question.

[Daniel Newman:]

Yang, let me answer that question, then you ask your next question. First of all, on the B-O-T transfer, this is very specific. We have 15 B-O-T data centers. This transfer involves three of them. One of the three is at a campus where it is -- the only data center that we have invested in and operate. So that is being transferred for the sake of operational efficiency. The other two data centers, the customer has a change in plan in terms of how they wish to utilize those data centers, which includes the way in which they are fitted out. But this is not a -- this is not any change of strategy. It's not a something that we expect to happen in future. We came to a mutual agreement. We will recover our investment plus a reasonable return over the period of time in which our capital has been invested. And it will make a small positive contribution to our cash flow before financing when the proceeds are received, either in this quarter or next quarter. They talk more generally about asset monetization. Yes, I appreciate we have talked about that for some time, and it is most definitely a strategic objective of ours. And I think that we are moving in the right direction. We have not ceased to make efforts, and currently, we have a number of projects ongoing, including one end of the spectrum, C REIT or China REIT. One degree over from that is what's referred to in China as a private REIT, which involves exactly the same structure as a public REIT, but doesn't have the public REIT at the top of it, but is a stepping stone in terms of monetizing an asset which can then subsequently be injected into a public REIT. And we also have other structures which are more like financing, and we're dealing with China's leading insurance companies, leading RMB and private equity funds, and even some US funds who are looking at assets in China. I think we're very determined about this. And I think there's a chance we get something done before the end of this year because it's not in any of the numbers or guidance that we've provided, but clearly, it would make a contribution to our free cash flow before financing, and I'm quite sure it will be accretive.

[Yang Liu:]

Thank you. Yes, I have another question. In terms of the CapEx outlook beyond 2024, do you think the China part of CapEx can further come down next year if the demand stay at current level or if the gross move-in stay at current pretty good run rate? Thank you.

[Daniel Newman:]

Our business plan assumes that our growth rate picks up mainly because of the contracts between the backlog. So, we're not taking a view on broader market developments. We're simply basing that on what we already have secured and are working to deliver. So, we expect the move-in to go already has at a gross level to go to a high level and to continue at that level for the foreseeable future. The CapEx guidance for this year was RMB2.5 billion. Well, it's too early to give guidance, but in our business plan, CapEx in the next -- each of the next one or two years is around that level or lower.

[Yang Liu:]

Thank you.

[Operator:]

Thank you. We will now take our next question. This is from Frank Louthan from Raymond James. Please go ahead.

[Unidentified Analyst:]

Hey, guys, This is Rob on for Frank. You might have touched on this a little bit earlier, but what's the impact of higher interest rates on your customers business? And how should we think about that -- how should we think about that impact going forward?

[Daniel Newman:]

Yes, Rob, I have to say, in China, the interest rate trend has been the opposite of what you've seen in the US and most of the developed markets. The reference interest rate for us, which we refer to as the over five-year loan prime rate, is the lowest that it's been in since we started our business. Not only that, but the margin that banks charge in our project financing facilities, which is a spread over the over five-year loan prime rate, has come down to either just a few basis points over, or quite often now, several tens of basis points under the loan prime rate. So, our financing costs in China -- debt financing costs in China is the lowest -- it's the lowest it's ever been. Our customers are mainly large cloud and Internet companies, which in China, most of them don't have any debt. So I don't think it probably affect our customers’ business very much either way.

[Operator:]

Thank you. We will now take the next question. This is from the line of Cooper Elias from TD Cowen. Please go ahead.

[Cooper Belanger:]

Hi, everyone. You have Cooper Belanger on here for Michael Elias. I wanted to ask a quick question regarding the segmentation. Obviously, you provide guidance for GDSI and GDSH CapEx separately. Should we expect the same thing going forward in terms of revenue, adjusted EBITDA, et cetera?

[Daniel Newman:]

Thank you, Cooper. For the time being, the answer is not in a formal sense, but during the prepared remarks, we will continuously update and give some direction on the key performance indicators, both operating and financial KPIs. Maybe after a few quarters, we might revisit that. But for now, I think we split out on a historical basis all the numbers that really matter. I think the only one which we have not split is MSR because for now, it's not material to look at China and international MSR because there's not enough difference. But when there is, we will split that out, and then we will provide commentary on each of these metrics on a China and international basis. So I think that will probably get you a long way until we provide formal guidance for GDSH and GDSI separately.

[Cooper Belanger:]

Thank you.

[Operator:]

Thank you. And we now have a follow-up question. This is from the line of Yang Liu from Morgan Stanley. Please go ahead.

[Yang Liu:]

Thanks for the opportunity to ask a question again. Yes, I would like to ask first, on the demand side. Do you see that the demand from China customers are getting better maybe than three or six months ago? Because we saw that leading Internet companies increasing their CapEx meaningfully in recent quarter. Not sure if that is transferring to GDS demand. And of course, previously, we saw the overseas demand is pretty good. But I just want to have an update on that front compared with three months ago. Is it getting better or moderate a little bit? And another question I also would like to ask because we saw the financing -- PE financing got upsized. So that means the GDS Holdings -- stakes in GDSI will further decline to 52 something. I just want to ask whether GDS has the strategy to consolidate GDSI in the long run. Do you feel comfortable if the future financing round, the stakes drop below 50%? Yes, that is my question. Or if another thing, do you have a firm plan to spin-off GDSI? Thank you.

[William Huang:]

Okay. I think I answer the demand question. I mean, in China, I think that we see the demand start to recover. But I think it's already implicated to us because if you see our first quarter move-in speed up and it's -- since 2020, it's the most highest quarter in the last two years -- last four years even, right. So this is already -- that's where we expect and we will benefit on that. And for the new incremental, I think we already seen some new incremental, mainly driven by the AI, right? Maybe it's training purpose. This is also as I just mentioned, some deal is to go to the remote area which is not our focus. But we will see the demand will follow up is -- follow up the demand from the let's say inference or AI-enabled application. So we will see this trend definitely will benefit to us in near future. So I think in general, the demands recover -- start to recover. And we -- our target is getting more customer move-in more fast. This is what we expect. This is what happened in China. For the international, I think the simple answer is that demand is getting more strong. So then three months ago and this is -- number one is there's more different customer, multi-national customer coming to discuss with us or try to find some resource in Johor and Batam as well. And the deal size is getting more bigger. So I think we have very, very confident we will get more deal in the next 12 months. Let's see. I think that's what happening -- is happening in the international market. Even in Japan, I think after we just announced that there's a lot of the sales leads, it's coming up. So I think if we deliver that by the end of 2026, definitely we have some pre-sale in Japan.

[Daniel Newman:]

So, answer -- let me answer the other part of your question. So, from the perspective of GDS Holdings, what really -- what really matters is that GDS International is as successful as possible, and that the value of our investment in GDS International appreciates as much as possible. In order to optimize the success of GDS International, it is highly likely that GDS International will undertake further capital raisings. When that happens, we have seen what the consequences are in terms of our ownership percentage and ability to consolidate. To some degree, we already anticipated this when we structured the Series A new issue. We included certain unique rights to protect the position of GDSH, but also to ensure that in future, we are able to initiate an IPO and spin-off, meaning distribute the shares to our shareholders. If we think that that is in the best interest of our shareholders, because it's important not only that the value of our investment in international increases, but that value accrues to our shareholders. If it's not reflected in our share price, then we have to find another way to ensure that the value accrues to our shareholders. So that was one of the things that we have a unique right to make a decision in the future on whether we wish to go down that path.

[Yang Liu:]

Thanks. Quite encouraging to hear the plan. Thank you.

[Operator:]

Thank you. [Operator Instructions] And we will now take our next question. This is from the line of Gokul Hariharan from JPMC. Please go ahead.

[Gokul Hariharan:]

Hi. Thanks for taking my question. William, you did talk about some of the initial AI demand that is starting to show up in China, especially for training. Could you talk a little bit about what kind of data center capacity or power profile that you need to prepare? Are there distinct differences in terms of the kind of data centers required for AI workloads that you are hearing from your customers compared to the regular cloud data centers that you always had? And do you feel that you will have to start increasing to build some of these data centers eventually, or you don't think that you can accommodate them in the existing data center themselves?

[William Huang:]

Okay. Yes, I think the AIDC, it depends on how you define it, right? So I think if you think the data center host, the GPU is AIDC. Actually, we are already there, right? So -- but in typically, I think our existing, let's say data center in all the Tier 1 market or in the edge town of the Tier 1 market, the big city already has enough power capacity to fulfill the high density server. That's what -- that configuration we already set up in a couple of years ago. So our new data center in the last -- let's say, at least last six or -- five or six years, we already built a very high power density data center already. This is number one. Number two, I think in terms of the differences, maybe not it's popular right now, but I think the China AI data center request required more -- maybe in the future, more cooling -- air cooling system to calibrate their cooling stuff. But this is nothing new for us. We already built a cooling type data -- liquid cooling type data center four years -- our two of the largest customer as well. So I think this is already -- for us, I think AI data says nothing new for us, right? We also build a lot of the similar liquid cooling data center in Johor in the last -- since last year. So this is many difference. Number one, I think in terms of the profile, number one is larger scale. Number two is high power, maybe future [Technical Difficulty]

[Gokul Hariharan:]

Hello?

[Operator:]

Yes, we're still here.

[Gokul Hariharan:]

Okay. Sorry I missed out the last part of William's answer. Sorry about that. My next question is on the [Multiple Speakers] international business -- okay, go ahead, William. Sorry.

[William Huang:]

Yes. Gokul, I think my conclusion is that start to implement it a couple of years ago for the [Technical Difficulty] data center. This is meaning now everybody call this as an AI data center, right? So, we already have most of our Tier 1 market data center suit for this kind of requirement.

[Gokul Hariharan:]

Got it. My second question is on international, maybe to William and Jamie. What are you seeing in terms of the local competitors, especially in Malaysia and to some extent, we are also seeing in Indonesia, there's a lot of announcements coming through from local competitors, coming from the data center industry, coming from other utility industries as well. Are you starting to see them in some of the bids that you're participating in, or this is still separate market for you compared to these local players who are announcing big data center deals?

[William Huang:]

So I think in Malaysia typically, let's say Malaysia or Indonesia, Batam, right, I think we definitely have the first movement advantage, number one. I think because we are the pioneer to step in this market and because we already know, we know better than anyone else in this region about the technology trend, and we know we are much better understanding our customer needs, so we know where they will go and when they will go and how we will do, right? So, I think this is a different advantage we already have than anyone else in this market. So, frankly speaking, before 2028, I think most of the power in this region, we already secured most of the power. So I think even a lot of new players jump into this market. I think the time to market will way behind us.

[Gokul Hariharan:]

Got it. Yes. Thank you very much. Thanks.

[Operator:]

Thank you. We will now take our next question. Please stand by. Next question is from the line of Sara Wang from UBS. Please go ahead.

[Sara Wang:]

Thank you. Just one quick question. So, for the China business, given the backlog might be signed a couple of years ago. So I'm just wondering if the AI-driven demand will simply drive acceleration of execution of the previous backlog, or will there be any changes to the contract terms signed maybe previously. Thank you.

[Operator:]

Thank you. [Operator Instructions]

[Laura Chen:]

Sorry, we tried to answer this question, operator.

[Operator:]

Thank you. Your line is open.

[William Huang:]

Yes. Of course, I think the move-in -- I think in China, the main driver is the Internet and [indiscernible] the traditional growth and AI. Traditional growth still very slow. And now the most of the demands are driven by the AI and the Internet. So I think we have -- as I mentioned, we already start to benefit on that, right? So our first quarter move-in is mainly driven by the AI Internet company, and we expect that it will continue.

[Sara Wang:]

Got it.

[William Huang:]

Is that your question?

[Sara Wang:]

Yes, not really. So I'm just wondering if the AI-driven demand will simply drive acceleration of backlog ramp-up or will there be any changes to the contract terms, given the backlog might be signed a couple of years ago?

[Daniel Newman:]

Yes, let me have a go. Obviously, our backlog is mainly cloud service provider. Yes. So, I listen to China's largest cloud service providers' earnings call, and they talk about how they're integrating AI into their cloud business and how AI development is driving demand for their cloud business. So I think if you have cloud service providers in your backlog, then yes, their successful development and bringing to market AI-enabled products and services will contribute to, you could call it AI growth, but also to demand for cloud services.

[Sara Wang:]

Okay, got it. Thank you.

[Operator:]

Thank you. As there are no further questions, I'd like to now turn the call back over to the company for closing remarks.

[Laura Chen:]

Thank you all 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 Piacente Financial Communications. See you next time.

[Operator:]

This concludes this conference call. You may now disconnect your line. Thank you.