Hello ladies and gentlemen, thank you for standing by for GDS Holdings Limited Second 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.

Thank you. Hello, everyone. Welcome to the Second 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'll 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’s Founder, Chairman and CEO, who will provide an overview of our business strategy and performance. Mr. Dan Newman, GDS’s CFO, will then review the financial and operating results. Ms. Jamie Khoo, CEO of GDS International, 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 at this conference call includes discussions of unaudited GAAP financial information, as well as unaudited non-GAAP financial measures. GDS’s press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures. I will now turn over the call to GDS’s Founder, Chairman and CEO, William. Please go ahead, William.

Thank you. Hello, everyone. This is William. Thank you for joining us on today's call. In Q2 2024, we achieved a revenue growth of 18% and adjusted EBITDA growth of 15%. This growth rate is quite remarkable in current market conditions. It reflects the progress we have made in stabilizing our China business and the uplift from the highly successful execution of our international strategy. For our China business, we have two key financial objectives. Number one is to grow EBITDA at a steady rate and number two is to generate a positive cash flow before financing. We believe that this combination can create significant equity value and help to drive our share price recovery. In order to achieve these objectives, we are focused on delivering the backlog, while at the same time taking a highly selective approach to new business, targeting orders that align with our inventory and have fixed move-in schedules. This will allow us to grow while minimizing the need for incremental CapEx. We have been following this strategy for a while, and it is starting to produce noticeable results. Over the past couple of quarters, the gross move-in rate has clearly stepped up. In Q2 2024, it was over 20,000 square meters, the highest level for the past three years. The main reason for this improvement is the contracts we signed with faster move-in schedules. These are mainly larger internet customers, whose business continues to grow strongly. However, we are also beginning to see improvements from orders that have been in the backlog for longer. We expect this trend to continue as our customers implement their AI plans. To support higher move-in rates, we need to complete some projects that have been in progress for a while. In the first half of 2024, we brought 45,000 square meters into service. As of June 30, this was already over 20% utilized. In the second half of 2024, we expect to complete another 32,000 square meters. The good news is that this does not require a lot of new CapEx, as we incur only the cost to complete. The first indications of improved demand are customers observing capacity for which they already made commitments. This is underway, and after that, we will start to see more new business opportunities. We are well-positioned to support AI demand as we are holding enough land and power quota. In the meantime, we will adhere to our strategy of being very selective about new business. In our international business, we are already seeing very strong demand. We had a phenomenal second quarter with 206 megawatts of new orders spread across our two campuses in Johor. More recently, we signed a master sales agreement with a global technology company for capacity at our new campus in Batam. This is a major breakthrough that will lead to further larger orders. Singapore-Johor-Batam is fast emerging as one of the largest data center markets in the world. We have a great market position here. Where is this demand coming from? Part of it is regional expansion, and part of it is spillover from the US, which is mostly AI-related. A critical success factor is that we were first movers into Johor and helped to create the market. We anticipated where demand would flow and secured this resource, which gives us a time-to-market advantage. We have shown that we can execute, delivering data centers in record time with state-of-the-art design and technology solutions. We have also shown that we can operate effectively by working with local institutions to source and train talent. From the perspective of our customers, these are really meaningful differentiators. As of today, we have 388 megawatts of total customer commitments, out of which 101 megawatts is already utilized, and 287 megawatts is backlog. The delivery schedule for most of the backlog is very short, and the customers undertake to move in quickly. As a result, based on the terms of the existing contracts, we expect to have over 350 megawatts of utilized capacity within 24 months. I will now pass on to Dan for the financial and operating review.

Thank you, William. Following the completion of the first external equity capital raising for our International business, we have started formal disclosures of segment financials. DigitalLand Holdings Limited and its subsidiaries comprise all of our business and assets outside of mainland China, except for some minor third-party data centers in Hong Kong. We refer to this segment as GDSI or International. GDS Holdings Limited and all of its subsidiaries excluding GDSI comprise our ultimate holding company and all of our business and assets in mainland China. We refer to this segment as GDSH or China. Starting with the China segment, in Q2 2024, GDSH revenue increased by 8.9% and adjusted EBITDA increased by 4.3% year-on-year. To show the underlying growth rate, we excluded previously disclosed one-time items from Q2 2023. GDSH revenue growth was mainly driven by an increase in total area utilized of 10.2% year-over-year. As shown on Slide 21, MSR per square meter comparing Q2 2024 with Q2 2023 was flat. However, EBITDA margin for Q2 2024, versus Q2 2023 was down by 2.1 percentage points. The main reason for this is the increase in power tariffs, which occurred during the second half of last year. Turning to the International segment, in Q2 2024, GDSI revenue increased by 24% and adjusted EBITDA by 80% quarter-on-quarter. During Q2 2024, there was a 28 megawatts increase in IT power utilized. The MSR per kilowatt per month was $135 including power income. As William mentioned, the ramp-up over the next 24 months will be extraordinary. The rate of progress quarter-by-quarter depends on the timing of capacity completions and contractual revenue commitments. The increase in the next couple of quarters is quite small, but thereafter it will take off. Turning to CapEx, in the first half of 2024, our China CapEx totaled RMB1.8 billion. We expect lower CapEx in the second half of the year, including the proceeds from the B-O-T data center transfer, and we still maintain our RMB2.5 billion guidance for the full year. In the first half of 2024, our International CapEx was also around RMB1.8 billion. In the second half of the year, we expect CapEx to increase significantly, and it is likely that we will exceed our CapEx guidance for International of RMB4 billion. Fortunately, the lead time from incurring CapEx to generating revenue in the International business is very short. Following the closing of the Series A new issue for International, GDSH received over RMB1.5 billion from GDSI on repayment of a shareholder loan. This is included in investment cash flow for the GDSH segment and financing cash flow for GDSI. Including these repayments, cash flow before financing for GDSH will be clearly positive this year, in line with our financial objectives. GDSI cash flow for Q2 2024 included $448 million or RMB3.2 billion of proceeds from Series A. The remaining $224 million from Series A was received by GDSI in July. At the end of Q2 2024, the cash balance of GDSH increased to RMB8.4 billion, and the net debt to last quarter annualized adjusted EBITDA multiple decreased to 7.2 times. To accelerate our financial transformation, we are working on a number of asset monetization initiatives. Our key strategic goal is to set up a REIT, listed in China holding data center assets. There is strong policy support for new infrastructure REITs, and we've selected a stabilized project to move forward and are working through the regulatory approval process. This will be a first-of-a-kind transaction for data centers in China, and we are strongly committed to making it happen. Lastly, at the end of Q2 2024, GDSI had a cash balance of RMB3.1 billion, pro forma for the second tranche of Series A proceeds. Given the existing level of customer commitments and the strong sales pipeline, we plan to raise further equity for GDSI in a Series B round. The process is already underway. There is strong interest from global investors, and we are confident this round will set a higher benchmark for the value of our equity investment in International. We’re maintaining our formal guidance for FY 2024 consolidated revenue, adjusted EBITDA, and CapEx. However, it is likely that we will raise our CapEx guidance at the time for Q3 2024 results when we have a firmer view on the timing and amount of CapEx for International. We'd now like to open the call to questions. Operator, please?

Thank you. We will now begin the question-and-answer session. 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. One moment for the first question. First question comes from the line of Yang Liu from Morgan Stanley. Please go ahead.

Thank you for the opportunity to ask questions. I want to start by congratulating you on the impressive results. I would like to inquire about the plans for the REITs in China. Can management provide more details regarding the timing of the infrastructure REITs and the potential valuation when assets are injected into the REITs? Additionally, what type of investor might be the buyer, and what are the current challenges or discussions between the buyer and the company, as well as between the regulator and the company? Thank you.

Thank you, Yang Liu. It's Dan here. I'll answer that question. In order to pursue this strategy, we've selected a single site with two data centers as the seed asset for the REIT. Typical REIT offerings in China historically have been around RMB2 billion per transaction, and that seems to be a size which the market is comfortable with. We have selected assets to fit with that. Under the REIT regulations, the asset must be stabilized. We must own the real estate, so the asset also qualifies on that basis. There is a series of regulatory approvals that we need to obtain, and we've already been working on this for over one year. We are getting to the level where the regulatory approvals would be sought at the central government level, and if that is successful, we will receive approval to be able to proceed with the offering, which is valid for one year. We hope to reach that milestone next year. It is not normal to do testing the waters or pre-marketing exercises in China, but we do have an active dialogue with major financial institutions in China. We have also been looking at pre-packaging some assets which are not yet stabilized as a way of creating a pipeline for the REIT, and we received very positive feedback. There is a significant appetite amongst financial institutions in China to get exposure to new infrastructure, including data centers, data centers which are green, which have very high-quality internet company or cloud customers. We think a substantial percentage of the offering to the public will be taken up by strategic or anchor type investors. Under the regulations, we will be required to retain 20%. Now there is a quite a significant public-listed REIT sector in China. Those REITs, which are real estate-based, trade on dividend yields that fall within a fairly well-defined range. If we take that range and look at it very conservatively based on the amount of income we think we will be able to distribute, it implies an EBITDA multiple that I think will be clearly accretive compared with where we are trading. If you look at our current public market value on a sum of the parts basis to strip out International, the last Series A price benchmark, our China business is being valued at somewhere between 9 times to 10 times current EBITDA. The China REIT sector is trading at implied EBITDA, which is a quantum higher than that. So hopefully we will be able to capture that.

Thank you for the questions. One moment for the next questions. Our next question comes from the line of Frank Louthan from Raymond James. Please ask your question.

Great, thank you. Can you characterize how much of the business in mainland China is AI-driven? And can you give us an idea of the current impact of the Chinese economy on the demand for that base of the business? Thanks.

Okay, Frank, this is William. The first question is about the current demand in China, which I believe is currently 70% driven by AI needs, including training and influence. The remaining 30% comes from internet companies and traditional cloud services. What's your second question?

How is the economy impacting demand?

I think, so far, I think for the training and cloud business, I think this is not directly impacted by the current China macro environment. It is totally opposite. There are a lot of giants continuing to invest CapEx to change their own model. In China, there are a lot of startup companies being invested in by venture capital to do more application-type, vertical-type AI stuff. So this appears to have created a very strong environment, right? So this is what is happening in China right now.

Thank you for the questions. Next question. One moment, please. Our next question comes from Sara Wang from UBS. Please go ahead.

Thank you for the opportunity to ask the question, and congratulations on the solid results. I have one question about the International business. As Dan just mentioned, there's quite a bit of CapEx needed for International business. May I ask what’s the future financing plan, especially in the near term, as well as in the mid-term, with regard to a potential spin-off or IPO? Thank you.

Before I respond to your question, I want to note that our financing needs are based on our projections for the next couple of years. Our goal is to double our current order volume within the next three years. I'd like Dan to provide more details about the financing plan.

I mentioned that we have started the process for a Series B round. This involves raising capital once again from external global investors using a similar type of security, specifically convertible preferred shares. Our base case assumption is that the new issue size will be similar to Series A, around $600 million to $800 million. There is a possibility to increase the size, as interest exists. After completing that offering, which we aim to finalize before the end of this year, the next financing at our International holding company level may involve mezzanine debt. We certainly plan to explore that option to optimize our overall cost of capital internationally. At the same time, we are establishing senior debt at the project level, typically in local currencies, and we are currently pursuing a large syndicated term loan for our Malaysian business to support various financing initiatives internationally.

Thank you for the questions. Next questions will come from the line of Daley Li of Bank of America Securities. Please go ahead.

Hi management. Thanks for taking my question. I have one question about the International business. It seems that the area in service has a good momentum in Q2, up like 50% in the quarter-on-quarter. How do we see the trend in Q3 and Q4 for the area in service for the International business in absolute value or like quarter-on-quarter gross? Thank you.

We gave some guidance in the earnings presentation and the prepared remarks about the timeframe for delivery of a very substantial part of the overall backlog. Currently, we have about 280 megawatts of capacity committed but not yet delivered and utilized. We said that 260 megawatts out of 280 megawatts will be delivered and utilized and revenue-generating within the next 24 months, which is a very rapid ramp-up. It implies that our revenue-generating capacity will increase by 3.5 times over the next 24 months. We did not give a quarter-by-quarter breakdown, but over the next two quarters, the second half of this year, the increase in capacity and service and the delivery and utilization will increase by a relatively small amount. But over the course of next year 2025, the increase will be very substantial.

Thank you for the questions. Our next question comes from Edison Lee of Jefferies. Please go ahead.

Thank you for taking my question. Congratulations again. I have two questions. Number one is that for your power capacity or power secured in Southeast Asia, I think that amount increased from 711 megawatts from your first quarter presentation to 797 megawatts. So may I know where that incremental is coming from? Which location is it coming from? And number two is you said that you won a big International technology customer in Batam. Can you discuss your customers in Malaysia? Is this still a single company right now? And what do you expect that to change or for the situation to change over the next couple of quarters?

The first question about the increase in secured resource developable capacity, that is in both of our sites in Johor where we completed land purchases for additional plots contiguous with our existing sites and where there is power infrastructure in place. The second question Edison asked about the customer mix in Southeast Asia?

Yeah.

I think we already have five customers from both China and International, right, or like the industry technology leaders. So we are very focused on trying to diversify the customer base. This has always been our target. Currently, the mix is around 70% from China. It is not a single customer; it's three of them. The remainder is also International customers. Based on our current forecast, I think in the next 12 months, the International customer will increase the percentage as well. Ultimately, it will be a 50-50 mix in this region.

Thanks. Can I follow up with one quick question? So you said that there are five customers, including China and International, and then you said that you won a big International customer in Indonesia. Can I assume that you have one International customer in Indonesia or just one customer in Indonesia, and that's International? And you have four customers in Malaysia, and that's China and International. Is my understanding correct?

Yes, yes, yes. Indonesia is the International. And four in Johor are Chinese and International. Yes, you're right.

Thank you for the questions. Next question comes from the line of Louis Tsang from Citi. Please go ahead.

Thank you management for taking my questions. Congratulations on a strong result set with solid International growth and then the domestic recovery. I actually have two quick questions. The first one is for the domestic market. I think the net move-in for this quarter is very encouraging and the MSR is trending up. How shall we think about the pace of the move-in and MSR recovery ahead? And more importantly, the sustainability of the demand? The second question is for the International segment. I think some regional or global peers also have their plan in Johor. Given the increasing DC supply, what is your strategy in Southeast Asia, and what are your advantages over the regional or global peers? Also, one more thing on the supporting infrastructures like the electricity grid; will those kinds of issues limit the near-term supply growth? Thank you.

Louis, I'll begin with your questions about China. Yes, there is a very clear step-up in Q1 2023 compared with the level of move-in over the past twelve quarters. That continued, in fact, it was even higher in the second quarter. This is partly a result of the contracts we signed in the last 12 or 18 months, which have faster moving schedules than those that we signed previously. We also see the pickup in the move-in by customers whose commitments have been in the backlog for longer. Based on the contractual terms and what we currently know about our customers' intentions, we expect the current level of move-in to continue through next year, as far as we have visibility, which I think is very encouraging. For the MSR, we look at MSR on a quarterly basis and compare the rate of change with the same quarter of the prior year. Over the past few quarters, on average, the MSR has decreased by a little over 2%. As we go into next year, there will be further decrease, probably less than the decrease during '24 as compared with '23. So it's also encouraging to see that the MSR is bottoming out.

Regarding our strategy in this region, we are the first mover in this region. In the next three years, we will still enjoy the first-mover advantage because the time-to-market and demand profile will maintain a very strong level. Even after three years, the market size will continue to increase. So, in the short term, in the next five years, I don't think there will be an issue for all players in this region. This is based on our understanding of the market. Of course, if we talk about five years down the line, we are looking not only at this regional market; we are also starting to get back into other markets in the region. Everybody knows GDS is a market creator, so we don't follow; we'll give you another surprise in the next three years.

Thank you for the questions. One moment for the next questions. Follow up questions from Yang Liu of Morgan Stanley. Please go ahead.

Thanks for the opportunity to ask another question. One more thing from my side is regarding the REITs plan in China. Could you please talk about whether the REIT will be a public traded REIT or a private REIT, or are you targeting both? Another thing is what could be the estimated debt reduction if you deliver one REIT project to inject one asset into the REITs?

Yeah, Yang. It's Dan here. The REIT will be listed on one of the stock exchanges in China, and it will be offered publicly. The typical REIT offering size, I mentioned earlier, is about RMB2 billion. As a guideline, I’d say that transaction size, we would expect to deconsolidate around RMB1 billion of debt. If we sell 80% of the equity, then we will receive equity cash proceeds for the disposal of the 80% at the valuation of the offering. The combined effect should be that it helps to increase our liquidity and decrease net debt, and also be accretive on an EBITDA multiple basis. That's for a single transaction. Of course, once the REIT is established, the possibility is there for us to drop further assets into it, and that's what we would hope to do over the longer term. For now, our focus is just on achieving the first step, which is to set up this vehicle. I mentioned earlier that we are also working on pre-packaging some assets that will be privately placed. This takes the form of asset-backed securities, which is technically listed on the stock exchange but is easier to think of as a privately placed security. It is a stepping stone in terms of packaging the assets so that they are ready to be injected into a REIT when the assets are stabilized.

Thank you. One more question regarding the International business. It's very encouraging to see the big new orders. Could you please update us on the IRR trend for the big new orders? Is it stable, rising a little, or declining a little? What's the trend compared with the previous orders?

I'd say it's very consistent. It's easier to talk about a development yield rather than IRR. The development yield is in the low teens, which is quite acceptable to us in terms of a return on our invested capital, and these are very high-quality customer contracts. They are priced for 10 to 15 years, some of them are priced in US dollars, and some of them have escalators. So we consider it a very high-quality business.

Thank you for the questions. Next question comes from the line of Jonathan Atkin from RBC Capital Markets. Please ask your question.

Thanks. I just got you a two-parter: one about China and then one about International. In China, I was just interested in any comments you would have about the contract renewals and churn outlook for the remainder of this year. It looks like you've got a fairly sizable amount coming up for renewal in the second half of this year, 12.1% of total area committed. And then Internationally, I would agree with William's comments about Johor. I think you have somewhat of an incumbency early mover advantage, but I'm interested because you were one of the winners of the CFA process. Is there any visibility in terms of timeline as to when you might get that project underway and when that might be ready for service, or is it too soon to have you on that? Thank you.

So Jonathan, it's Daniel. The first part of your question about churn in China: you are right; we have a large amount of contract renewals in the second half of the year. We look at the quantum of churn; we measure it in terms of area utilized, the churn as a percentage of our total area utilized. Over the past six quarters, it's been running at an annualized rate of about 5%, which I believe is relatively low by International standards. In absolute terms, it's averaged about 5,000 square meters per quarter. In the second half of this year, it will continue at about that rate. Looking into next year, I think the 3% to 5% of annual churn rate would be normal for us. We don't currently have any visibility on any churn, which is exceptional. Those numbers represent quite a small percentage of the total amount of capacity coming up for contract renewal, as you pointed out.

Regarding the Singapore project, it’s very difficult. We won the CFA, but it is challenging to get a very good location for the land. Fortunately, we are in the process of acquiring land right now. We believe it is progressing and should be completed in the next couple of months, and we aim to deliver before the end of 2026 to launch the service to the market. That's a pretty firm schedule.

Thank you for the questions. In the interest of time, that concludes the Q&A session. I would now like to turn the call back over to the company for closing remarks.

Thank you.

Thank you once again for joining us today, and we'll see you next time. Bye.

Bye.

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