Chindata Group Holdings Limited

Good morning and good evening, ladies and gentlemen. Thank you and welcome to Chin Data Group Holdings Limited's second quarter 2021 earnings conference call. We will be hosting our question and answer session after management's bad remarks. Please note today's event is being recorded. I'll now turn the call over to the first speaker today, Mr. Don Zhou from Investor Relations of Chin Data Group. Please go ahead, Don.

Hello, everyone. Welcome to Chain Data's 2021 Second Quarter Earnings Conference Call. This is Don from the Investor Relations Team of the company. With us today are Mr. Alex Chu, our CEO, Mr. Nick Wong, our CFO, Ms. Zoe Zhuang, our Finance Vice President, and Joy Zhang, our General Counsel. On behalf of our CEO, Nick will take you through the quarterly review of our operation performance and Zoe will present our financial results. Alex, Nick, and Zoe will be here to answer your questions afterwards. Now I'll quickly go over the safe harbor. Some of the statements that we make today regarding our business, operations, and financial performance may be considered forward-looking, and such statements involve a number of risks and uncertainties that could cause actual results to differ materially. For more information, please refer to the risk factors discussed in our filings with the SEC. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in our earnings press release, which is distributed and available to the public through our investor relations website located at investor.chingdatagroup.com. We have also updated our quarterly presentation on the company's investor relations website, which you can refer to as a supplementary material for today's call. Without further ado, I will now turn over the call to Nick.

Thank you, everyone, for joining the call. Now let's first take a look at some key figures that summarize the highlights for the second quarter of 2021 on page four of the slide. We continue to grow our capacity. By end of the second quarter, our total IT capacity in service reached 361 megawatts, representing an additional 24 megawatts compared with the previous quarter. Our utilized IT capacity reached 251 megawatts, representing a 13 megawatt increase compared with the previous quarter. Meanwhile, utilization ratio was stable at 70% by end of the quarter. Our top and bottom line performance remained strong. Quarterly revenue was RMB $686 million, with a 64% year-over-year growth. Gap net income stayed positive for two straight quarters at RMB $65 million, with a 9.5% net margin. Our adjusted EBITDA was RMB 338.5 million, a 49.3% margin, again, showcasing the efficiency of our business model. Meanwhile, our business fundamentals received a strong recognition from major rating agencies. As in July, Fitch and Moody's assigned, respectively, a first-time BBB- and BA2 eShorts rating to the company. We remain fully committed to core capacity build-up, covering greenfield development, integrated energy solution, and wide labeling of key digital infrastructure equipment. Our total number of approved and pending patents, a good indicator of our in-house design capability, reached 256 by quarter end, compared with 231 by end of first quarter. Our comprehensive in-house design capability currently covers building, power distribution, cooling system, server rack and cabinets, wiring and supporting structures, et cetera. We remain highly committed to energy efficiency and sustainable development. Our year-to-date average PUE by end of the second quarter was 1.22 compared to the same figure in full year 2020. Our year-to-date total power consumption was 797 million kilowatts-hour. Now, let's take a closer look at data center dynamics in the second quarter, as you can see on slide five. In China, we continued our steady delivery and completed construction of CN11B project in northern China, adding a total in-service capacity of 24 megawatts in the second quarter. For ramp-up of our data center, we added around 13 megawatts utilized capacity in a quarter, and it increased our total utilized capacity from 238 megawatts in the first quarter to 251 megawatts in the second quarter. Such was contributed by the steady ramp up in projects including CN06, CN08, CN09, CE01, as well as the newly insured CN11B. Our under construction capacity further extended as we added three new under construction products, CE03, CN14, CN15, with a total capacity of 87 megawatts. On client commitment of capacity, we added 66 megawatts of new indication of interest capacity, mainly contributed by the inclusion of the three new under construction products. and new IOI capacity with an existing client on Project C Intel. We also added three megawatts contractor capacity, which is converted from listing IOI capacity on Project CE01 in Eastern China. With the above mentioned, we have brought the total number of our in-service and under construction data center to 15 and nine respectively. or 361 megawatts and 217 megawatts, respectively. Under our business model, we maintain strong control of our assets, indicated by 95.7% and 94% of cell phone capacity for in-service and under construction data center, respectively. Now, let's take a more comprehensive view at our total assets on page six and page seven. Client commitment remains high, taking IOI capacity into consideration. 496 megawatts out of our 578 megawatts capacity are contracted, making an 86% contracted ratio by end of the second quarter. Capacity in survey has the contracted ratio of 91%. Mutilation is healthy by end of the second quarter. total utilized capacity is 251 megawatt, making a utilization rate of 70%. Now, let's turn to some other recent development of the company on slide eight. Our effort continues in the pursuit of sustainable development. In May, phase one of the company's Taihang Mountain Energy and Information Technology Industrial Campus was awarded the first prize in the Carbon Neutral Data Center Evaluation of 2021. The evaluation was jointly organized by Recorded Organizations to promote the net-zero carbon development of the digital infrastructure industry. Located in Datong City of Shanxi Province, the Taihang Campus has now utilized 100% of its energy from renewable sources for two consecutive years, starting in 2019. We also motivate ourselves to stay in line with global practice and standards as we became the supporter of TCFD, or the Task Force on Climate-Related Financial Disclosure, and joined the Scientific Carbon Target Initiative in May and June, respectively. By becoming a supporter of TCFD, we expect to, pursuant to the framework of TCFD, constantly improve the disclosure quality of environment and climate-related information, integrate with the information disclosure system of the international capital market, and enhance the capital market's understanding of the company's sustainable development strategy in building new generation of hyperscale digital infrastructure. By joining the scientific carbon target initiative and committed ourselves to the business ambition for 1.5 degrees Celsius campaign, we have become one of nine companies in China to commit to the campaign and well strive to make our carbon emission target setting more in line with recommended standards. Diving deeper into our first-time issuers rating, Moody's assign a first-time BA II corporate examiner rating to the company with a stable outlook. As quoted, Qingdata's BA2 CFR reflects the solid demand for the data center in China, as well as the company's predictable earnings stream, with adequate committed pre-leasing, moderate leverage, and relatively quick ramp-up to a 90% occupancy rate for its newly completed data centers. Fitch Ratings, a line of company and issuer default rating, or IBR, of BBB-, with a stable outlook, Key rating drivers include recurring revenue and predictable earnings stream, long-term contracts, strong asset ownership, strategic location, robust growth, favorable industry dynamics, cost leadership, and a stable EBITDA margin, et cetera. With the rating, the company will further diversify our financing channel to support our long-term development. Several important regulation and industry policy were issued in the past few months, namely the implementation plan of computing power hub of collaborated innovation system of National Integrated Big Data Center issued by National Development and Reform Committee or NDRC in May. Three year action plan for the development of new data centers published by Ministry of Industry and Information Technology or MIIT. And some updated regulations issued by local government, such as Beijing municipal government, to further strengthen review on data center energy efficiency performance. Key directions were pointed out for the future development of the industry. We take a positive view on these policies and its impact on industry. We believe that the way we understand our data center business and our past performance were generally in line with the direction mentioned. The development of digital economy in China is a long-term prospect with less uncertainty. The value of IDC industry as key fundamental infrastructure is increasingly apparent. Guided by the understanding that our business is essentially to efficiently convert electric power to computing power, coupled with our constant in-house capability buildup to provide full-stack solution to realize such conversion, adding our early site selection and long-term commitment of integrating renewable energy into our solution. We think we are in good position with first mover advantage and we will continue to deliver value to our clients and contribute to the sustainable development of the society. Regarding the revised draft of cybersecurity review matters by the Cyberspace Administration of China in July, and a regulation on the security protection of critical information infrastructure. We currently expect limited impact on those given our business nature of non-involvement or processing of any external data or information. Meanwhile, multi-layered internal security matters have been carefully implemented by the company to ensure high level of cybersecurity and data privacy protection. eliminating any possibility of us or our employees accessing customers' business data in any manner. Going forward, the company will closely monitor such regulatory updates and take further necessary matters to comply with any new or updated regulatory requirements that a company may be subject to. With that concludes our business update. I will now turn over to Zoe, our VP of Finance, to go over key financial results for the second quarter of 2021. Being mindful of time, I encourage our listeners to also refer to our earnings press release, which is posted online and includes our quarterly results along with other additional details. Please note that all numbers today are in RMB terms and that all comparison on a year-over-year basis unless otherwise noted.

We grew our revenue as we increased our utilized capacity. In Q2, our total revenue grew by 6.7% quarter-over-quarter of 64.2% year-over-year. to RMB $686.4 million, utilized capacity increased to 251 megawatts by quarter end, compared with 132 megawatts in the same quarter last year, indicating a 77.4% year-over-year growth. For our cost and expense structure, our prudent cost control efforts enable us to keep our cost expenses and cost percentage within stable range, while continuing to grow out of adjusted EBITDA and adjusted net income. Looking into the details of cost and expense items on slide 13, utility costs made up around 25% to 28% of our revenues. Maintenance and other costs took around 10% to 12%. And the adjusted SG&A took around 12% to 14%. Take a closer look at our strong and stable profitability on slide 14. Adjusted EBITDA in the second quarter increased 65.8% year-over-year, or 10% quarter-over-quarter, to RMB 338.5 million, with a margin of 49.3%. Adjusted net income increased 289.6% year-over-year, all 3.4% quarter-over-quarter to RMB 113 median. Adjusted net margin for the quarter was 16.5%. Now, let's take a look at our cash and debt position and our CapEx on slide 15. CapEx in the second quarter was RMB $526.2 million. We had a cash position, which includes cash, cash equivalent, and the restricted cash of RMB $7,024.7 million by end of the quarter, with our equity debt ending at RMB 5,164.4 million. This was noted as a change behind the cash position on slide 16. The major contributor was the RMB 285.8 million cash flow from operations, or RMB 513.7 million cash flow from financing, offset by a negative RMB 616.2 million investment cash flow, and a negative RMB 65.2 million foreign exchange rate effect. Again, we grew with high quality indicated by our constant profit matching cash flow from operation and our healthy leverage. As you can see on slide 17, by end of second quarter, our total debt to capital ratio was 34.2%. Our total debt to last 12 months adjusted EBITDA ratio was 4.6%. Our last 12-month adjusted EBITDA to last 12-month interest ratio was 5.3, and both have been improving over the quarters. Finally, let's take a look at the guidance. We have decided to update our 2021 full-year guidance with revenue guidance rates for the range of RMB 2.78 billion to RMB 2.83 billion. compared with the previous RMB 2.7 billion to RMB 2.78 billion, indicating a midpoint increase of 2.4%. Guidance for adjusted EBITDA is reached to the range of RMB 1.35 billion to RMB 1.4 billion, compared with RMB 1.28 billion to RMB 1.33 billion, indicating a midpoint increase of 5.4%. This forecast reflects our current and the preliminary view on the market and operational position. This concludes our prepared remarks for today. Operator, we are now ready to take questions.

At this time, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the power or hash key. When asking the question, please take your question in Chinese first, then repeat your question in English for the convenience of everyone in the call. Please ask one question at a time. Your first question comes from Camille Xu from Morgan Stanley. Please ask your question.

Thank you, Guan Yucheng. Congratulations, Guan Yucheng, for achieving such a good performance. My question is about a series of policies. We also saw that the Ministry of Health and Welfare launched a three-year development plan for the data center industry. Thank you management for the opportunity to ask the question and congratulations on the very strong results. My question is about the regulations. So we see that MIT has recently published a three-year development plan. We would appreciate if the management could share more read on this new policy, how it will impact the data center industry and the Qingdao's business. Thank you.

Thank you, Kamrel. This is Nick. I'm happy to take this one. I think from the company's view, back in the day one of the founding of the company, We are aware that the intersection of business, energy, and data is actually quite critical to IDC business. Actually, our interpretation of the nature of IDC business is to find a way to efficiently convert electric power, sometimes green power, to computing power. So based on this understanding of the nature, we think that the recent policy is a three-year plan. Actually, we hold a very positive view over this policy, and we believe that its potential impact on the industry will be very beneficial to a company like us. And also, if you read these papers, coming down to detail, key directions were pointed out in these papers, including something like a more optimized layout of data centers, while encouraging development in overseas markets. They also, the policy also want to, they say objective to trying to improve the national internet linkage to support such a layout. They also, the policy also encourage larger scale, more intelligent, higher density data center to support various computing demand. And obviously, most importantly, you know, the policy going to require improved energy efficiency and going to encourage the development and usage of the renewable data center in such places with proximity to renewable power resources. So that can actually better contribute to the long-term carbon neutrality objective set by the central government. And also, as I just mentioned, when I went through our earnings release deck, What the company, Jindata, has always been doing is quite a lot has been in line with these key directions. Again, guided by the understanding of our business is essentially to efficiently convert electric power to computing power and coupled with our quite unique in-house capability built up to provide full stack solution including comprehensive energy solution to utilize such a conversion. And if you also add our early site selection and long-term commitment of integrating this kind of renewable energy into our solution, we think we are in a good position with first group advantage. And we will continue to deliver value to our clients and ultimately contribute to the sustainable development of SSI. Thank you.

Thank you.

Thank you. Your next question comes from Tina Ho from Goldman Sachs. Please ask your question.

Can you tell the management team about the competition? For example, what kind of competitors are we competing with? From the customer's point of view, they will mainly look at the indicators provided by each company. So congratulations management on very strong result and also raising your annual guidance. So my first question is around competition. Among the recently won projects, what is the competition landscape like? So for example, who are the competitors that we're bidding projects against? And what are the most important criteria customers are looking at? Is it pricing or something else? Also, what is the IRR for our latest projects? And lastly, if Benjamin could share your views around GLP, which is a new entrant into the market. Thanks.

Thank you, Tina. This is Nick. I'm happy to take this one again. I think you are referring to the most recent project as we indicated in the under-construction project. There are 87 megawatts roughly in total with the 66 megawatts with a strong indication of interest from the clients. And we actually believe this potential demand is based on our superior advantage, lower cost, sufficient resource, and secured power supply and solution, especially the potential, the future renewable energy supply into these data centers. And obviously our efficient maintenance And our business model, full-stack model, which makes the customer completely worry-free, are the winning ticket to win hard from these customers, as we did before. In regards to the competition, I think you can interpret it, we compete on cost, efficiency not necessarily on price, although our price is among the most competitive on the marketplace. In terms of who our competitor, all of them essentially. So I think we just emphasize our competency, our key advantage as I just mentioned, and it's the full package that's in the heart of the customers. In terms of customer criteria, we believe our customer are also looking at the same thing. As I just mentioned, I repeat, Our advantage as a full-stack model, customer worry-free package, low cost and operation efficiency, abundant and secure resource and power and green power supply. On the other side, our pricing is not final yet because they're just an indication of interest, but we believe that our price offering to the customer is going to be as competitive as it appears, if not lower, you know, as a result. In terms of project IR, we actually never and do not want to disclose financial from project level IR, but I believe with the addition of this new project, it's quite a big scale. We are very confident to maintain the current IR level for overall asset portfolio with the addition of this new project. Your last part is regarding the new entrance into this industry like GLP. We actually don't make a public comment for any specific peers, but we know some of them, including some of the new entrants, as you mentioned, have some certain leverage on land resources in selected Tier 1 cities. But in terms of our hyperscale data center operational expertise, track record, comprehensive and full stack capability, and also power solution side, we believe the chain data have sustainable advantage over most of industry peers because of our unique advantages just mentioned. I hope I answered your questions.

Yeah, thank you so much, Nick.

Thank you. Your next question comes from Alter Lai from Citi. Please ask your question.

Hi, thank you for giving us the time. First of all, congratulations on your high-quality performance. You have improved your hair power, and you have received guidance. That's probably the first one we've seen in this season. I think the investor was pleased to see the high quality growth. However, they are also very keen to understand what's the future development of the new client base. Thank you. Let me answer. Do we have an interpreter? Yes, we do. If you have any questions, I'll answer them directly. Sorry, I'm on a business trip. I think there are two questions. The first one is that we are working with all the global Internet head customers to carry out strategic cooperation and communication in terms of ecosystem building. However, we will still stick to our own super-large-scale three-dimensional development model. In terms of the overall customer cooperation method that meets our development model, we will consider through... The second question is the foreign market. We are still continuing to upgrade our existing Malaysian and Indian markets, and we are constantly expanding our research and business. At the same time, we are currently setting up a new company in Thailand and Indonesia. At the same time, we are looking at the future and other opportunities to enter some areas. Here's the translation for Alex's answer. For the second question, it is confirmed that we have been and we are very proactively in touch with all of the global Internet leaders.

to collaborate and establish a very well-comprehensive ecosystem. However, during the course of this, we're still going to insist and stand by our hyperscale Greenfield chain data model. When the business concerns and also the collaborations fit our business model and also our philosophy, we are Definitely going to take any opportunity that's presented in front of us and specifically maybe through mergers and acquisitions to establish a more diversified clientele space. And then going back to the related first question on the overseas layout, so we have constantly and also penetrate the markets that we have already established our operations, like in Malaysia and India. We are also very actively looking into the opportunities in other Southeast Asian or Asian countries, such as Thailand and Indonesia. We are also considering opportunities that are introduced from, say, Vietnam, Macau, et cetera. Thank you.

Your next question comes from James Wang from UBS. James Wang from UBS. James Wang from UBS.

James Wang from UBS. James Wang from UBS. James Wang from UBS. James Wang from UBS. James Wang from UBS. My question is around your pipeline. Is it getting more difficult to secure space with access to both renewable energy and fiber right now? And in terms of the pipeline, how long can you maintain the same road growth assuming the demand is there? Thank you.

This is Nick again. Thank you, James. Actually, as I just disclosed, we have just added three additional projects. under construction of a total capacity of 87 megawatts in a quarter located in the northern eastern part of China. Actually, these new products are taken out of our reserve or pipeline project. But in fact, we do have prepared ourselves a bounding reserve for future development. So the answer to your first part of the question is yes, we do have good preparation for that. But we have always been very conservative a conservative, you've probably already been noticing in the past three quarters when we released our earnings release, and we would only disclose further information when we believe there is an adequate and a relatively certain intention of interest from the client. Then we will report this kind of new project into our disclosed categories of capacity. So in terms of client-based expansion and diversification, We have been in constant contact with top-tier clients in China and overseas for potential strategic cooperation and would share with Merck when it is time. So it's not only the existing customers, but it's wider-based customers. For the second part of the question, in terms of more competition on the resource, we cannot say that we have advantage everywhere. But in certain key area, we believe going to be most suitable for the development of hyperscale, you know, the energy, green energy data center, we believe that we do have a certain first mover advantage or first accelerator advantage, especially in some part of China where we build our major hyperscale data center on campus. Thank you.

Your next question comes from Albert Hong from J.P. Morgan. Please ask your question.

Hello, Mr. Chairman. Thank you for accepting my question. I also want to congratulate you on this good result. The first question is about next year's growth. Because the market is concerned that this policy risk will have some growth impact on our customers. Of course, it seems that we have no impact on the planning of this part of the capacity. So I saw some of your plans in the seventh quarter. You are going to increase the capacity of 185 megawatts next year. Compared to this year's 100 megawatts, there is actually a big increase. Can you share with us the status of the capacity on the line next year and the average use rate next year? My question is about the demand outlook next year. Although the market has concern over the government policy, it seems that China has not seen any slowdown in capacity investment coin. Actually, when I look at page 7 in the presentation, they are going to need 185 megawatts next year versus only 100 megawatts this year. So how do you think about the red box schedule and utilization rates next year? Is it fair to say chain data has much more stronger growth hours next year versus this year, or the new capacity will have more impact in 2023? Thank you. This question is still for me to answer. First of all, as everyone knows, the growth of Qinhuai has always been very fast. We can only maintain the same fast growth in the next year that we can see. Because we have also publicly announced the order of our client's intention. The translation for Alex works. Thank you for your question. As everyone can witness, Qingdao's growth has always been maintaining at a very high C-perf.

And it is visible that next year we can also maintain this strong growth. This is based on our already public IOI interest and also customer orders. But on top of this, I still want to call everybody's attention that we will still stick to our business model on hyperscale and growth field development, so we are strike to not only grow fast, but also in a very healthy state. Thank you.

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

Good evening, Director. Congratulations to the company for achieving a very good performance. My question is about the contract signed with us in June. So thanks for management for taking my question. Congratulations on such good results. And of course, you're raising the guidance. So I wonder if you could mention a little bit more about partnership with Tencent, including some details on what kind of business will Tencent put on our data center, and what metrics that Tencent value most on this collaboration. Thank you.

Thank you for your question. Let's go back to our point of view. For a long time, we have been communicating with all of the global Internet headquartered clients including Tangxun. The information we have released is more focused on strategic cooperation and the establishment of an ecosystem. This is the content of our previous collaboration. The second problem is that When we communicate with these investment companies, we find that they are more concerned about our energy production, including our energy efficiency, and our land development experience, including our equipment. We hope that we can cooperate with these investment companies in the future.

So translation for Alex's work, as we tapped on in the answers previously. So we have been constantly in touch with the top-tier clients, including Tencent in China and overseas for the potential collaboration in the strategic way. So the communication has always been continued. In June, as we publish in our news, the potential or contemplated collaboration are going to be more focused on the strategic and also ecosystem collaboration. And also, we can see that for the potential collaboration, especially within China, we are definitely being valued by our capabilities, especially the capabilities of us in – relates to the renewable energy, our capabilities in the Greenfield experience, and also in the equipment or possible equipment intelligence manufacturing. I think this is the achievement that's putting our – drive our growth and is also a witness of market as well. Thank you.

Your next question comes from Yun Chen from Citix Securities. Please ask your question.

Thank you, Guanlin Chen. We can see that the largest number of self-driving cars in the company is planning to enter the Chinese market. Does this mean that we will see a very obvious increase in orders in the short term? In addition, overseas business in self-driving cars has been growing very fast in recent years. Is there a chance for us to do the same? We have seen that your most important customer, BitDance, will enter into the cloud computing market. Does that mean that we can see some significant order increase in the near future? In addition, does rapid growth of BitDance's overseas business also stand for a corresponding opportunity for us? Thank you. 我来回答这个问题。

We should be able to better support our customers' future global business development. Thank you.

Thank you for your question. So looking back, our collaboration with ByteDance in the past has been very successful, and we have achieved with very high quality delivery, and our clients are very happy. So looking forward, with our content capability building up and also the further layout in overseas markets, we believe that we are fully capable of supporting the development of our clients in China and beyond. Thank you.

Your next question comes from from Morgan Stanley. Please ask your question.

Thank you. My second question is related to the recent release of the latest energy index in Shanghai. The results may be slightly different from the previous market forecast. I would like to ask you to explain more about the distribution of energy in Shanghai. Thank you, management. My second question is about the power quota allocation in Shanghai. The recent new batch happened in the past few months. So could management share a little bit more read on this? What would be the implication on the industry and the future growth trend? Thank you.

I would like to answer this question. From the company's strategic point of view, we still insist on our super-large-scale area development business model. Currently, our main area is around the one-way city. Therefore, the one-way city's energy index has a certain impact on the company's business.

From the company's strategic view, we have been, again, adopting and adhering to our hyperscale model, the Greenfield development supported by our full stack solution and comprehensive in-house capabilities. So our model is to accept that our competitive edge is derived from the cost control and and we are less impacted by such policies in the Tier 1 cities, and we believe that our model is going to provide us greater buffer when it comes to the competition dynamics. Thank you.

Let me make an addition. The business model of the company has determined that we are going to use cost, efficiency, and comprehensive services to achieve competitive advantages. The company's first step is very cold, and this is well reflected. Therefore, in the future, No matter what the competition is like, the company is able to deal with various situations in a relatively calm manner.

Thank you. And compliments on the top of the answer just now. So our business model has shaped that we are shaping our competitive strength through the cost and efficiency and the total solution. So no matter what the competition landscape is going to become, we think we can handle that properly. Thank you.

Your next question comes from . Please ask your question.

Thank you, Manager Ceng. My second question is about the data security law, which is the latest and stricter data security law. Manager Ceng, what do you think about the short-term and long-term impact of the data center industry? And then from our main customers' point of view, from our recent exchanges with them, what do they think about this? Thank you. Oh, I'll just translate. So my second question is regarding the data security laws and regulations. What kind of impact in the near term and in the long term would this have on the data center industry? Also, we were talking to our anchor customer recently. What is their view on the data security law? Thanks.

This is Nick. I'm happy to take this one. The straight answer is actually the current assessment from Chin Data is actually we expecting this new policy to have a very limited impact to the company and the industry as well, both in the near term and the long term. And because I would like to, I'd also like to walk you through some several important facts and explain why. First of all, our business, our data center, target at the B business or the large corporation instead of individual end users. Actually, our service do not involve the ownership or processing of any external data or information. We only provide hardware infrastructure level service such as a co-location service including the deployment of the customer's servers and other equipment in our property And at the same time, we're providing the power, electricity, cooling, and other relevant utility. And so basically, an infrastructure or facility service to our clients. And as all servers are owned and independently managed and monitored by our customers, we and our employees have no access, I believe the other IDC companies as well, have no access to any of such customer data. And our primary focus of security lies in physical security rather than virtual ones, which are typically the key focus of a large customer. Secondly, you know, our hyperscale data center service in China strictly restricted to domestic use without any cross-border transfer of data information, therefore, bearing zero risk of potential overseas data leakage. So the customers, the impact on customers' side, international customer working overseas, domestic customers who are working in China, so there won't be a mix-up effect. So we don't think that the customer demand is going to be impacted at all. Moreover, we have, from the company itself, especially the QIN data, we have taken all necessary internal matter to promote high-level cybersecurity and the data privacy protection, basically eliminating any possibility of our employees to access and manipulate the customer's business data in any manner. However, we do hold the understanding that such relevant laws and regulations are still at a relatively preliminary stage of stipulation. We will closely monitor such regulatory updates and take further necessary measures to comply with any new or update the regulatory requirements that the companies may be subject to. Thank you.

Your next question comes from James Wang from UBS. Please ask your question.

Hello, Mr. Wang. My second question is, in the U.S., there are some policies that have been adopted by the U.S. So my question is around the uncertainties associated with U.S. Chinese companies with VIE structures. So how do you manage this risk and where this will affect your ability to raise funds to support your future expansion plans? Thank you.

This is Nick James. Thank you for your questions. I think this is probably one of the most commonly asked questions by any participant in the capital market. But the board, the candidate board and management have also been closely following this kind of issues. But as far as we understand, our interpretation on this is this VIE risk is actually quite small and all this rumor on the street and that reported potential risk will have a limited impact on us. The specific VIE requirements are more intended for those to be listed in the U.S. market. As a listed company, we have been in compliance and our VIE related information is already disclosed in a very proper manner in our previous filing submitted to SCEC. We're closing to monitor the whole situation. And don't forget, in the future, we always have the option and flexibility to consider other kind of listing outside the US. Thank you.

Your next question comes from Albert Hung from JP Morgan. He's asked your question.

Thank you, Mr. Guan. The second question is about the price. Because we are building a very high-end IOI center, I don't know if the price is still uncertain. But can you share with us, when we are launching these new projects, how is the customer feedback? How do you feel about the price? Has the customer become more positive? Or is this part relatively stable? So a follow-up question on pricing. The ROI ratio for a gas center under construction is quite high. Although the pricing has not been finalized, I know how is the pricing dynamics under your engagement with clients for new projects. Do you sense any deterioration of pricing or the pricing dynamics has become quite stable? Thank you. Let me answer this question. The company's development model is a large-scale land-based development. In this model, we often use internal capabilities to integrate into our upstream. So competition for the company is more of a model competition. In normal circumstances, price is not the main factor. We

Translations work. So first, we adopt our hyperscale greenfield development model, which is our most biggest advantage. And under this model, we have been constantly building up our in-house core capabilities and integrate and streamline our supply chain for efficiency and profitability. So based on this, we interpret the pricing trend or pricing pressure more into a business model factor. So based on that, The competition for us is more like a competition in the business model and not a competition in the pricing. And in such, the pricing is never going to be the first influencing factor and we can better facing the competition in the pricing and also throughout the entire market. Thank you.

Your next question comes from Junyun Chen from City Securities. Please ask your question.

Still can share some information about the future development plan in China's east and south area. We are adopting a more aggressive MMI strategy for customer and resource requirements. Thank you.

总体而言,公司认为我们的MMI的策略应该配合公司的发展战略。 and provide a large-scale green development model. At the same time, we provide a full-time service model to our customers to ultimately achieve healthy and fast growth. We are also based on this requirement to find the appropriate opportunity in the long triangle and the first triangle. Facing the long triangle area you just mentioned, from the information disclosed, you can see that our scale is expanding. On the basis of C01 and C02, Thank you.

Generally speaking, as we're looking for M&A opportunities, we need to align it with our strategy, which is to follow our fundamental hyperscale results and food stock development model, and to pursue a rapid, healthy, and high-quality growth. Under such precondition, we are constantly looking for the M&A opportunities in the Yangtze River Delta and also Pearl River Delta region. As for our development in the Yangtze River Delta region in particular, we are further expanding our scale by adding up a new 30 megawatts under construction capacity, namely CEO3, following the previous project. Thank you.

Thank you. I'll now hand the call over to management for closing remarks. Closing remarks.

Thank you, ladies and gentlemen, for participating in this Q2 earnings release. I think there's a lot of challenges laying in the capital market today, but the company believes what we are doing is the right way of doing things in this industry. We're going to center our business all around how to find the most efficient way to convert electric power, or in particular, green electric power to the computing power. And we're going to stick with this big plan and keep better serving our client and ultimately the contributor to the society. And thank you very much.

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may now disconnect your line.