Hello, ladies and gentlemen. Thank you for standing by for GDS Holdings Limited Third Quarter 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. After management’s prepared remarks, there will be the 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.

Thank you. Hello, everyone. Welcome to the Third Quarter 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, can be viewed and downloaded from our IR website at investors.gds-services.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, will then review the financial and operating results. Ms. Jamie Khoo, 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 US Private 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 the company's prospectus as filed with the US SEC. The company does not assume any obligation to update any forward-looking statements, except as required under applicable law. Please also note that GDS earnings press release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. GDS press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures. I will now turn the call over to GDS Founder, Chairman and CEO, William Huang. Please go ahead, William.

Hello, everyone. This is William. Thank you for joining us on today's call. The number one priority of GDS management is to create value for our shareholders and drive share price recovery. We are pursuing this goal by executing distinct strategies for our China and International business. For China, our financial objectives are to grow EBITDA at a steady rate, maintain positive cash flow before financing, and deleverage the balance sheet. We are getting there by, one, taking a highly selective approach to new bookings, which match our inventory and come with fast-moving rates. Second, delivering the backlog and increasing capacity utilization and setting a high bar for new CapEx to fulfill orders with first firm moving schedules. For International, our financial objectives are to create a second growth engine that enhances our equity valuation. We are leveraging our competitive strength to build a leading presence in regional hub markets, win landmark commitments from global and China customers, and finance the business independently. Now let's dive into our progress towards achieving these objectives. In 3Q '23, we won 21,000 square meters or 54 megawatts of new customer commitments, all in China. The two largest orders were from Internet companies in the live streaming and short video vertical, which continues to perform strongly. The orders were for additional capacity at our campuses in Langfang near Beijing, where they have already deployed, and the moving periods are faster than usual. Market demand in China has not yet picked up noticeably as large customers still have inventory to absorb. The data center market will recover when there is a broader recovery in the digital economy. We believe that the AI demand wave is coming. However, it will take more time for customers to further develop their models and applications, adapt to new regulations, and solve the chip supply issue. AI will require a lot of data center capacity in Tier 1 markets, which plays to our strength. When this demand starts to materialize in size, we will be very well positioned. Since the launch of our international strategy, new bookings from international have made up 40% of net additional area committed. In order to maintain this success, we are putting a lot of effort into securing attractive resource supply, just like what we did before in China. Our gross move-in for the third quarter was nearly 21,000 square meters, comprising 17,000 square meters in China and nearly 4,000 square meters internationally. Throughout the current phase of market development, the gross move-in for our China data centers has been sustained at a consistent level. Meanwhile, 3Q '23 was the first quarter in which international made a material contribution. We expect the contribution from international to ramp up significantly over the next few quarters. In 3Q '23, we brought around 23,000 square meters of new capacity into service. 13,000 square meters was at two of our campuses in Langfang, China. The capacity is 100% committed to a single customer, who is redeploying from other data centers. The move-in period for this new capacity is faster than usual. The remaining 10,000 square meters is the first data center at our NTP campus in Johor, Malaysia. This data center is also 100% committed with a move-in period of only a few months. In 4Q '23, we expect to bring another 20,000 square meters into service, half in China and half internationally. Once again, all of this new capacity is 100% committed with fixed move-in schedules. We are making good progress in the execution of our International strategy, starting with Hong Kong. Our first data center, Hong Kong 1, has entered service and is almost sold out to global and China customers. Our second data center, Hong Kong 2, is under construction. During the current quarter, we expect to secure an anchor customer commitment for Hong Kong 2 more than 15 months ahead of project completion. Moving to Johor, our NTP campus has 160 megawatts of power capacity across the first three phases, out of which 96 megawatts is already committed. In 3Q '23, we delivered 23 megawatts, which is already fully revenue-generating. Over the next few quarters, we will deliver the remaining 73 megawatts of committed capacity, which will also become fully revenue-generating within a short period. While we still have room for expansion at NTP, we have enhanced our resource supply by acquiring land for a second campus in Johor, which we refer to as campus Tech Park or KTP. In the first phase of development, KTP will have 108 megawatts of power capacity. We are seeing strong demand for our capacity in Johor from global and China customers. We are the only player to have two complementary locations, both of which are only a few kilometers from Singapore. Across these sites, we have secured 268 megawatts of power supply over the next three years. This gives us a time-to-market advantage, which is an important consideration as customers are accelerating procurement to meet AI demand. Furthermore, we have already proven our execution capability in Johor by deploying our prefab technology, including liquid cooling modules, to successfully deliver hyperscale capacity in just over one year. In Singapore, following the award of power quota, we are finalizing the site selection for our first data center. We are on track to deliver capacity in 2026. In Indonesia, we are very pleased to finalize a JV agreement with INA, the Indonesia Sovereign Wealth Fund. We believe that INA will be a great partner for us because of their complementary strengths, unique relationships, and value add. The JV is for all of our developments in Indonesia. We continue to make progress with our first project in Batam. We are working with INA to put in place the essential infrastructure. Finally, we are moving forward with the first round of private equity capital raising for our International HoldCo. It is going well.

Thank you, William. Turning to Slide 19. In 3Q '23, revenue increased by 6.4%, and adjusted EBITDA increased by 5.6% year-on-year. For the quarter-on-quarter analysis, we've excluded the one-time items, which arose in 2Q '23, as previously disclosed. On this basis, revenue grew by 4.9%, and adjusted EBITDA decreased by 1.4% quarter-on-quarter. The decrease was mainly due to higher utility costs, which I will come to in a minute. Turning to Slide 20. During 3Q '23, we achieved net additional area utilized of 16,000 square meters. During the past few quarters, our net adds have been affected by higher-than-usual churn, which is mainly due to one customer's redeployment. This will continue into the fourth quarter. However, we are now seeing the impact partly offset by a greater contribution from International. Monthly service revenue per square meter was RMB2,149 in 3Q '23. Compared with the third quarter of 2022, MSR decreased by 4%, in line with our expectations. Turning to Slide 21. Due to the seasonal fluctuations in PUE, we think it makes most sense to look at our margin trends by comparing with the same quarter in the prior year. For 3Q '23, our adjusted gross profit margin was 49.5% compared with 50.7% in 3Q '22, a decrease of 1.2 percentage points. During 3Q '23, utility costs as a percentage of revenue were 35.1% compared with 31.6% in 3Q '22, an increase of 3.5 percentage points. This reflects an increase in power generation and more recently, in power distribution tariffs. However, as you can see, we were able to mitigate some of the impact of high utility costs with other cost savings. Adjusted EBITDA margin was 44.7% in 3Q '23, which is only slightly down versus the same quarter of last year. Turning to Slide 22. Over the first nine months of 2023, our China CapEx totaled RMB3.1 billion. Our full-year guidance was for RMB3.5 billion, and we still expect to be within that figure. However, next year, we expect China CapEx to be materially lower at around RMB2.5 billion. Over the first nine months of 2023, our International CapEx was around RMB2 billion. Given the rapid pace of development in Johor to meet delivery schedules, we expect full-year CapEx for International to be around RMB4 billion, in line with our guidance. Our preliminary view is that International CapEx will be RMB4 billion or higher next year. On Slide 23, we plan to finance the International business independently. On the equity side, we are undertaking an equity private placement, the proceeds of which will be ring-fenced. On the debt side, we're aiming to finance International projects on a non-recourse basis. We should therefore look at our financial position in two distinct parts: GDS Holdings, excluding International, which is in effect, ListCo plus the China business, and International standalone. Over the first nine months of 2023, GDS Holdings, excluding International, had negative cash flow before financing of RMB1.8 billion. As William mentioned, our objective is to maintain positive cash flow before financing on an organic basis without assuming any asset monetization. Cash flow before financing for this segment was, in fact, positive in 3Q '23, but it will take another year or so before it is consistently positive quarter after quarter. International standalone will have negative cash flow before financing of around RMB4 billion this year and potentially a similar amount next year. We can finance this deficit with around 50% equity and 50% debt. For the equity requirement, we aim to raise at least $400 million or RMB2.8 billion in the current funding round. We've received very strong interest from regional and global investors and expect to close the capital raise in 1Q '24. Looking at our financing position on Slide 24. At the end of 3Q '23, our consolidated net debt to last quarter's annualized adjusted EBITDA was 8.6 times. Excluding the net debt and negative adjusted EBITDA of International, the multiple was 7.4 times to 5 times. If we continue along the same path, the leverage of GDS Holdings excluding International falls to below 6 times within three years. However, we continue to work on various asset monetization initiatives, including two data center funds, a potential C-REIT, and property sale and leaseback. This could enable us to de-leverage a bit faster. Turning to Slide 25. We are showing the loan maturity schedule for the first time with the depth of international separately identified. Over the next couple of years, we have, on average, RMB2.7 billion per annum of principal repayments, all of which are onshore RMB project loans. A large part of this can be refinanced as we have been doing successfully for many years, although we do intend to use part of our cash balance to pay down some debt where it is prudent and efficient. Turning to Slide 26. We are not changing our formal guidance for FY '23 revenue, adjusted EBITDA, and CapEx. However, we note that FY '23 revenue is tracking to the bottom end of our original guidance range, while FY '23 adjusted EBITDA is tracking to the top end of the original guidance range.

Now we're going to take our first question today from Jonathan Atkin at RBC. Your line is open. Please ask your question.

Thank you. I wondered if you could remind us of your expectations around renewal pricing and renewal spreads inside of China over the coming year, as well as your overall expectations around the pace at which utilization could increase in your existing campuses? Thank you.

Yeah. Thank you, John. I always prefer to address this question in a more holistic way. We have a KPI of MSR per square meter per month, which reflects a number of different factors, including renewal spreads and changes in the product mix and location. I think this year, we set expectations that it would decline by 4% year-on-year, which indeed it is doing so. I think next year, it will decline by less than that. So our preliminary view is about 2% year-on-year, which indicates that it's bottoming out. That gives you some indication of what's happening with renewal stress, although, as I say, it does also reflect a number of other factors. With regard to utilization rate, that will increase gradually. It will take about three years to get from where we are today, which is around 71%, 72% to over 80%. I think we will cross 80% during FY '26. And then it will take another couple of years to get up into the high 80s.

If I could just squeeze in an additional part of my question. So KTP, is that a different part of Johor or is that adjacent to Nusajaya? Maybe give us a little bit of color there. And then the demand signals that you're seeing in Indonesia, in Batam, is the JV constrained to Batam or would you look to potentially go elsewhere in Indonesia? Thank you.

Yeah. I think the KTP actually is very close to Singapore as well. I mean in there, if you look at it, it's around 10 kilometers from our NTP, right, 10 kilometers. So it's a typical fit for a lot of hyperscale clients, which is cloud-based or some hyperscale deployment structure. So the good thing and the beautiful thing is that it's very close to Singapore; latency is not an issue and also 10 kilometers away from our current NTP. So this is perfect for a lot of our customers to fit a lot of their IT structures in Singapore KTP and NTP. So we are working very closely with a lot of the potential customers. This structure is perfectly fit their future demand. In Batam, we have made a lot of progress in terms of construction. And we see a lot of potential demand on our hands. So currently, we are working on a lot of the potential demand. So we believe this is—selling in Batam is not a big issue for us. So I think now Batam has a unique position. Number one, it serves not only the region; it is also fully recognized by the Indonesia domestic market. And also the power cost is lower than any location in Southeast Asia, and potentially the renewable energy is coming soon. In the future, we will combine renewable energy and low power cost to serve a broader region. This is a very unique position for the whole region. So we are very confident to get a lot of demand for time data center. INA, okay. So INA is a very good partner. As I mentioned, they are very, very active in helping GDS set up more advantages in Batam and help us to introduce a lot of the renewable energy per year in this region. And also, they help us to find more potential data center sites in Jakarta as well. So we are very appreciative as they are a real value-added partner. I think we are looking forward to working more closely with INA.

Thank you.

Thank you. Now we are going to take our next question. Just give us a moment. And the next question comes from the line of Yang Liu from Morgan Stanley. Your line is open. Please ask your question.

Hey, thank you. My question is regarding the move-in outlook, because we see a pretty big delivery of the overseas projects in the third quarter. Should we expect, starting from the fourth quarter or maybe first quarter next year, we will see quarter-on-quarter improvement of the move-in speed? Thank you.

Yeah, I think the — Yang Liu, I think you're right. I mean we have very good near-term expectations with our overseas customers, right? So I think from Q4 and the next few quarters, the ramp-up is — we are very happy with this ramp-up speed, right? So I think you will see that overseas will contribute more moving forward next year.

Yeah. So in the third quarter, we look net of churn was 16,000 square meters, which is higher than it's been for the last five or six quarters. The International started to make a contribution there. I did mention that in the fourth quarter, there will be another portion, which shows some exceptional churn. That's the completion of what we've been talking about over the last four quarters. Nonetheless, I think the net additional area utilized in the fourth quarter, net of that churn, will be higher than what it was in the third quarter. And next year, I expect it to be significantly higher than what it is on a net basis in 2023.

All right. Thank you. I just want to make sure that the previous single customer churn will end in 4Q this year, right?

That's right. Maybe I'll just take this opportunity just to give some statistics about churn. We talk about it in terms of square meters of area utilized. It's easier to track it that way. We think that our normal churn rate going forward will be around 4% of area utilized, maybe 4% to 5%, which I believe is low by global benchmarks. In past years, it was 2% to 3%. But given the evolution of our business, it’s natural to expect that to be higher. In the current year, I think the total churn will be around 28,000 to 29,000 square meters, which is around 7.5%. So it's clearly higher, and the difference is what we call exceptional churn; the redeployment is actually the majority of that. Yeah, this will happen from time to time. And it could set us back in the short term; it can affect our growth rate by a small amount. But as it so happens, the redeploying customer has placed new orders with us, which are 1.5 times the amount which was terminated. So effect, it's one step back and 1.5 steps forward, albeit with a timing difference. But hopefully, that will be complete, and we will hopefully revert to just what we described as a normal level of churn.

Okay. Thank you.

Thank you. Now we're going to take our next question. Just give us a moment. And the next question comes from the line of Frank Louthan from Raymond James. Your line is open. Please ask your question.

Hey guys, good morning. This is Rob on for Frank. Are you seeing any demand for liquid cooling-based servers? And if so, who pays the extra capital costs required for that? Do you guys pay it and adjust the pricing? Or does the customer contribute some capital? Thank you.

Yeah. I think we are — as I just mentioned, we deployed—it's not — first of all, I think the liquid cooling was already deployed a couple of years ago in China already, right? We are very familiar with this technology. So we also — I just mentioned, we are deploying our NTP1, right? So our customers also require liquid cooling. So during the future, I think for the AI sector, these are very normal, but not every AI customer uses liquid cooling. It depends; different customers have different required profiles. But number one, we are very familiar with that. Number two, in terms of cost, it's—our view is that it's not significantly different than the costs we built before for the normal case, right? So I think the costs increase, we definitely will charge from our customer, which we already got a mutual agreement with our customer. So this will not impact any of our return.

Thank you. Now we're going to take our next question. Just a moment. And the next question comes from the line of Sara Wang from UBS. Your line is open. Please ask your question.

Thank you for the opportunity. I have a question on the overseas business, especially for the Johor campus. Besides China customers, shall we expect meaningful new orders from either international customers, cloud customers, or local customers? Given there are a lot of other data center operators announced a meaningful pipeline in the region, how shall we think about the competitive landscape going forward? Thank you.

So number one, we are targeting all kinds of customers. Our sales team is working on domestic demand, international demand, and also China demand. We don't care who the customer is; a customer is a customer, right? But I think in our Johor campus, two campuses, including the new future campus KTP, we are confident to get a combination of customers just like what we did in Hong Kong already, right? So I think this will not be the issue. We will not just specifically target one kind of customer; we target all, right? We believe GDS sales and our product will be welcomed by all kinds of customers. In terms of the competition, I think we're competing with everybody in China for 22 years. We're not afraid of competition, which we like. I think GDS will grow — we will grow from a lot of competitors, right? So I think it's good. And if you see, we have already demonstrated even in a very, very competitive market in China for the last 20 years, we are in the number one position, right? This is a win already — so we are not thinking about what our competitors are doing or whether they can do everything, but we believe we will win in every market.

Got it. And then is there any additional color on the gross new bookings for next year? Should it maybe be higher than this year, especially given the Johor campus continues to ramp up?

So we take this in two parts. For China, over quite a few quarters now, we've made it clear that we're not targeting a high sales volume. We're targeting a particular kind of business that matches the inventory that we have, where there's a fixed moving schedule faster than what we've experienced before and, of course, reasonable pricing. So we do any amount of business that meets those criteria. We don't forecast any change in China market conditions; our own internal business plan just assumes continuation of the current run rate. We're not crystal ball gazers. So we don't build in any assumptions about the change in market conditions. But of course, we are very well positioned to respond to any change. On the International side, I think the sales next year could be higher than this year. And this year, including the second data center in Hong Kong, if we were able to conclude that presale pre-commitment during the fourth quarter, then the gross bookings for International will be about 20,000 square meters over the course of 2023. We hope to lease that again next year. The order size has been very large on the international side. So it's hard to predict because one order can make a huge difference. It's not a widely dispersed book of orders, but it's a small number of very large orders.

Got it. Very clear. Thank you.

Thank you. The next question comes from Michael Elias from TD Cowen. Your line is open. Please ask your question.

Great. Thanks for taking the questions. Two, if I may. First, on the demand side. As we think about Mainland China, would it be possible for you to create — or provide a framework for how you're thinking about the evolution of demand in Mainland China? Specifically, you talked earlier about, it seems like there's some digestion that's happening in the market. But can you talk about your conversations with your cloud customers and essentially what it's indicating is driving the slowdown in the demand there? Then my second question would be, as we think about getting ready for the AI opportunity, what is the standard density, power density to which you build your current data centers? And then as part of that, as you consider the AI deals that are on the market, what is the density that those workloads are running at? And to the earlier point, do they require liquid cooling? Any color there would be great. Thank you so much.

First one was about what's holding back demand in China? What's the role of the cloud customers?

Okay. I think there are a couple of things I can say. The cloud players in China are currently adjusting their strategy. They are more focused on the quality of revenue, not just the quantity. This shift, I think, is beneficial for the data center business in the midterm and long term. Historically, there were a lot of discretionary numbers, including numerous services like CDN and system integration. Those figures were substantial, but now, it appears that these players are starting to focus on genuine public computing revenue, which we believe is the right approach. Given time, they will adequately grow their revenue and consequently drive a higher demand for quality data centers in the future—this is what we see. This marks a crucial evolution from our customers. Another point is that AI is now a hot topic in China; however, development timelines here have lagged behind the US. Although the demand for data centers driven by AI is on the horizon, it is still early days. The supply chain issues in terms of chips will require perhaps an additional 12 to 18 months to resolve. We expect to see significant developments in this area within a year or a year and a half.

The second question involved power density. GDS has always been a leader in power density in China. Looking back 10 years, our first data center was triple the high density of anyone else in the market. We have kept pace with global and IT trends. For the last couple of years, we have been building to very high-power density specifications. The average power density stands at 8 kW per rack; in recent years, we have increased it to between 10 kW to 15 kW per rack on average. This means we can serve requirements of up to 40 kW per rack without difficulty. Not only are we increasing the per rack power density, but we are also enhancing the total power capacity of each new campus. Therefore, we are well positioned to accommodate all AI demands in the next few years.

Thank you. Very helpful.

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

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 Piacente Financial Communications. See you next time. Bye.

This concludes this conference call. You may now disconnect your lines. Thank you for your participation. Have a good day.