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spk05: Good morning and good evening, ladies and gentlemen. Thank you for joining and welcome to Chain Data Group Holding Limited Second Quarter 2023 Earnings Conference Call. We will be hosting a question and answer session after management's prepared remarks. Please note that 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 Chain Data Group. Please go ahead, Don.
spk01: Thank you, Amber. Hello, everyone, and welcome to Chengya Group's 2023 second quarter earnings conference call. This is Don from the investor relations team of the company. With us today are Mr. Nick Wong of CFO and Ms. Zoe Zhuang of Senior Vice President Finance. And during this call, Nick will take you through the quarterly review of our operation performance, and Zoe will present our financial results. Management team will be here to answer your questions afterwards. Now I will 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-gap-to-gap 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 the supplementary material for today's call. Without further ado, I'll now turn over the call to Nick. Nick, please go ahead.
spk02: Thank you, Don. Hello, everyone, and thanks for joining the call. Concurrently with the ongoing progress of privatization of the company, the management and the entire team continue to work diligently on our business, delivering another strong quarterly performance in the second quarter of this year. As a quick summary for our quarterly performance, we adhered to our demanding schedule and delivery was on time. Demand from our existing clients remained satisfying, with demand in Southeast Asia market being a key driver during the second quarter. RenPub was usual as always, with overall and single project level utilization ratio in good shape. And we continue to build our partnership and invested in research and development to prepare ourselves for the further AIGC era. and patiently waiting for any signals of recovery of the market. To start with some key highlights for the second quarter. On slide four, two new projects were put under construction in the second quarter. Total capacity increased by 47 megawatts to 945 megawatts, and total number of data centers was 35. Two hyperscale data centers were put into service in our Datong campuses in Shanxi and Johor campuses in Malaysia, bringing our total in-service capacity to 730 megawatts, an increase of 91 megawatts during the quarter. Total client demand increased by 34 megawatts in the second quarter, bringing our total contracted and IOI capacity to 850 megawatts. with total client commitment rate remaining at a healthy level of 90%. Ramp up was strong as we added 48 megawatts of utilized capacity in quarter, bringing our total utilized capacity to 585 megawatts with a solid utilization rate of 80%. Financials remain under healthy momentum and in high quality Revenue in the second quarter was RMB 1,553.8 million, representing 49.7% year-over-year growth. Adjusted EBITDA grew by 49.9% year-over-year to RMB 816.1 million, with adjusted EBITDA margin remained well above 50%, at 52.5% in the second quarter. Net income grew by 9.8% year-over-year, to RMB 219.2 million with a net margin of 14.1%. With the current business momentum, we reiterated our full year guidance range with revenue in the range of RMB 5.8 to 6.08 billion and adjusted EBITDA in the range of RMB 3.1 to 3.22 billion. Let's go into details and first take a closer look at project delivery and construction on slide seven to nine. We continue to work on the highly demanding schedules to ensure timely delivery, especially for our Malaysia business. In the second quarter, we put two projects into service with a total capacity of 91 megawatts, CN20 A 49 megawatts hyperscale project in our Datong campus, Shanxi Province, was delivered as originally scheduled. The project supports the anchor clients and is currently 100% committed by the client. MY06 Phase II in Johor, Malaysia, was also delivered as scheduled. The 42 megawatts project supports the anchor client as well. and was already running at the 76 percent utilization ratio in the first quarter since operation. Two new under construction projects was added. Our flagship MY06 project saw further capacity expansion in the second quarter with the inclusion of MY06 Phase 4, a 12 megawatts new hyperscale project. It is scheduled for delivery starting from the first quarter of 2024. and was 100% committed. CN23, the other new end of construction project, is located in one of Zhangjiakou campuses in Hebei. The 26 megawatts hyperscale project is intended for one of our key international clients and is scheduled for delivery starting from the first quarter of 2025. The project is currently 49% contracted. Furthermore, Thanks to the healthy momentum of our clients in Southeast Asia market, our existing MY06 phase three project was further expanded by 10 megawatts in the second quarter, now reaching 53 megawatts. The project is currently 100% committed. With the above changes during the quarter, as you can see on slide nine, we have brought our total capacity up by 47 megawatts. reaching 945 megawatts by the end of the second quarter, with 730 megawatts in service and 214 megawatts under construction. Of the under construction capacity by quarter end, we currently expect another 15 megawatts to be delivered in 2023, and our teams in China and overseas are working diligently to ensure our supply readiness. Regarding demand on slide 10, we continue to receive additional demand on existing and new projects with overseas business contributed meaningfully. We received a total amount of 34 megawatts new demand in the second quarter, among which 22 megawatts of additional demand were received from our anchor client following the expansion of the MY06 project. and another 12 megawatts new demand received from one of the key international clients on a business under construction project in Zhangjiakou. Meanwhile, contractor capacity increased by 60 megawatts in a quarter, including 16 megawatts of IOI conversion from CE02, CN12, and CN23, supporting one of the key international clients, and 45 megawatts IOI conversion and newly contracted capacity on product MY06 Phase III for the anchor client. In general, we are optimistic about opportunities in the Southeast Asia market. The additional demand that we received during the quarter further strengthened our review, and the company has been devoting dedicated internal resources to ensuring timely product delivery while securing necessary resource for future development in advance. Regarding the market in China, we are patiently watching the involvement of the market condition, waiting for further signals of recovery to emerge, while we continue to build our partner ecosystem to lay the foundation for future opportunities. We believe our healthy business and financial profile, as well as our continued effort in research and development will be the key fundamentals for the company to win more opportunities as the market gradually recover and to compete in the AIGC era. With the dynamics of demand in the quarter, the commitment status of our asset portfolio continues to look healthy. On slide 12, for our existing 730 megawatts of in-service capacity, 95% was committed by clients in either contract or IOI by the end of the second quarter. The same proportion as in the previous quarter and in the same quarter of last year. For our total capacity on slide 13, the commitment ratio was 90% at the end of the second quarter compared with 91% in the previous quarter and 84% in the same quarter last year. The visibility of our business remains there As by the end of the second quarter, over 95% of our contracts were for 10 years term or longer, leading to a weighted average remaining term of the current contract capacity of 8.6 years. And we expect less than 4% of our existing contract capacity to expire by the end of 2027. Now, coming to customer move-in on slide 14. Our ramp-up remains healthy and in line with our schedule, with overseas projects as the key driver. We added 48 megawatts of utilized capacity in the second quarter, bringing our total utilized capacity to 585 megawatts compared with 401 megawatts in the same quarter last year. This represents 45.9% year-over-year growth. Quarterly move-in was contributed by projects in our Northern China campus, supporting the Anchor client and the Chinese Cloud client, as well by our overseas project in India and Malaysia, supporting the Anchor client and one of the key international clients. MY06 Phase II is 76% utilized in the first quarter following its opening, indicating a strong overseas demand. These quarterly dynamics lead to a quarter-end utilization ratio of 80%, compared with 78% in the same quarter last year. On a quarter-over-quarter basis, utilization ratio is 4% lower, mainly due to the inclusion of the 49 megawatts new in-service project that was just starting to ramp up. Looking at the utilization ratio at single project level, 16 out of the existing 27 in-service projects, or 59% of them, are over 90% utilized. Geographically, with the fast ramp-up of our JOHO projects, overseas business now contributed to 14% of total utilized capacity during and by the quarter end. On some other aspects of business development, on slide 16, We released our 2022 ESG report on July 24th, 2023. We continue to run our business in an energy efficient way with a total power consumption of 3.032 billion kilowatt hour in the year 2022. We managed to keep the annual PUE for our Chinese business at 1.21, remarkably lower than industry average. We reinforced our safe ESG strategy that was set forth in the year 2021, while committing ourselves to the mission of efficiently converting electricity into high-quality computational power in a stable, eco-friendly, and high-quality manner, thereby increasing operational stability and enhancing partner confidence and building a more sustainable brand. More information can be referred to in our EFG report. On slide 17, as the first mover in executing energy-abundant lower-tier region layout strategy, our years of operation in Huali County, Zhangjiakou City of Hebei Province, is gaining more recognition. Hebei Huailai, Hebei Qinghuai, excuse me, is subsidiary of Chin Data. has earned a place on a national list of specialized and innovative little giant enterprises. This accolade is bestowed upon companies that focus on niche markets, demonstrate strong innovation, maintain a significant market share, master core technologies, and attain remarkable levels of quality and efficiency. We are the first data center enterprise in Hebei to earn this esteemed recognition. Our four campuses layout in Huali County is now well established, with our IT capacity surpassing 300 megawatts and a server deployment scale constituting 80% of the total in Huali County. Furthermore, in this region, as we mentioned previously, We continue to build our partner ecosystem to lay the foundation for future opportunities. On slide 18, on July 28th, we entered into a 10-year strategic cooperation agreements with Zhangjiakou Construction Investment Group. This local SOE boosts a wealth of experience and capabilities in asset management, capital operation, resource development, and industrial investments. Through the partnership, both parties would engage in deep cooperation in land and water resource development, energy development, data center collaboration and operation, and integrated products of source grid load storage, and further explore other collaborative opportunities in the big data industry chain. This partnership signifies the continued commitment of Qindata in Huai Lai to further strengthen and optimize the local digital economy. With that, I've concluded my part, and I will turn to Zoe for the details of our financial performance. Zoe, please.
spk04: Thank you, Nick. Now, let me walk you through our quarterly financial performance. Generally speaking, we have maintained a very healthy financial momentum in the second quarter of year 2023. Our revenue growth in the second quarter remained healthy, recording a 49.7% year-over-year growth to reach RMB 1,553.8 million, which is in line with the 45.9% year-over-year increase in utilized capacity. Overseas business contributed to 14% of total utilized capacity in the second quarter, up from around 9% in the previous quarter. Looking further down, on slide 25, total cost of revenue in the second quarter increased by 51.3% to RMB $911.2 million from RMB 2.2 million in the same period of 2022, mainly driven by increase in utility costs and depreciation and amortization expenses. Total operating expenses in the second quarter of 2023 increased by 56.9% year-over-year to RMB 197.6 million, primarily due to more marketing activities conducted by the company, higher professional service fee, increase in research and development personnel, and higher share-based compensation expenses. Specifically, selling and marketing expenses in the second quarter of 2023 increased by 4.1% year-over-year to RMB 16.1 million General and administrative expenses in the second quarter of 2023 increased by 69.6% year-over-year to RMB 154.5 million. Research and investment expenses in the second quarter of 2023 increased by 39.3% year-over-year to RMB 27 million. As a result of this, operating income in the second quarter of 2023 increased by 43.5% to RMB 445 million, recorded an operating income margin of 28.6%. NAS income in the second quarter of 2023 increased by 9.8% year-over-year to RMB 219.2 million, with a net margin of 14.1% compared with 19.2% in the same period of 2025 and 17.5% in the first quarter of this year. The year-over-year change in the net margin was mostly contributed by increase in interest expenses. For breakdown of core cost and expense item on slide 26, with the growth of our business, we continue to maintain our adjusted EBITDA margin at above 50% level. Maintenance and other costs was 7.5% of revenue in the second quarter, compared with 6.6% in the previous quarter. Adjusted SG&A was 9.7% of revenue, compared with 6.8% in the previous quarter. On quarter-over-quarter basis, utility price did not see material fluctuations across the regions in which we operate, leading to stable utility cost percentage point of revenue at 31.2% in the second quarter, similar to the previous quarter. On the year-over-year basis, utility cost of revenue rose by roughly 2 percentage points. With this, on slide 27, Adjusted EBITDA recorded a 49.9% year-over-year growth or 0.3% quarter-over-quarter growth to reach RMB 816.1 million and a margin of 52.5%. Adjusted net income increased by 6.7% year-over-year in the second quarter to RMB 258.2 million at a margin of 16.6%. Details in the gap to non-gap reconciliation on EBITDA and net income would be available in our 6K filing or the appendix in our IRPPT. On slide 28, given the highly demanding delivery schedule, we continue to incur similar level of capex during the quarter that we covered existing under construction projects as well as some initial investments in potential pipeline project with good certainty. CapEx in the second quarter was RMB 1,254.6 million compared with RMB 1,653.9 million in the previous quarter. On slide 29. Our operating cash flow continued to recover and improve following the COVID-19 epidemic in 2022 and the completion of client system upgrade. Operating cash flow in the second quarter was RMB 1,186.8 million, which is around 145% of our adjusted EBITDA, compared with RMB $693.3 million in the first quarter of 2023. Such improvement of operating cash flow is also in line with substantial lower value of our account receivables by quarter end. Financing cash flow was RMB $259.1 million in the second quarter with another RMB $1,396.4 million invested cash flow we ended up with a higher total cash position of RMB 5,915.3 million by quarter end and a net debt position of RMB 5,569.3 million. Our leverage and coverage ratios remain in the reasonable and healthy range. On slide 30, key leverage ratios do not see much fluctuation quarter over quarter. neither are key coverage ratios. On slide 31, asset return continued to improve in the second quarter, with the overall utilization ratio of our total in-service capacity at 80%. We are seeing the company's defined pre-tax RIC further rise to 19.3% compared with 18.7% in the previous quarter and 17% in the same quarter last year. Finally, Based on the company's current and preliminary views on the market and operational conditions, we iterated 2023 revenue guidance in the range of RMB 5,880 to RMB 6,080 million and adjusted EBITDA guidance in the range of RMB 3,100 to 3,220 million. reflects the company's preliminary views, which are subject to change. This concludes our prepared remarks for today. Operator, we are now ready to take questions.
spk05: Thank you. We will now begin the question and answer session. To ask a question, please press star 1 1 on your telephone keypad. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. When asking the question, please state 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. Please stand by while we compile the Q&A roster. Once again, star 11 for questions. Our first question comes from the line of Yang Liu from Morgan Stanley. Please go ahead, Yang.
spk07: First of all, congratulations on the company's very strong performance. My question is about the company just emphasized the full-time AIGC data center support. The company has a lot of That's a related question, which is, I will translate my question in English. My question is related with the patent on the cooling technology supporting the AIGC future demand. We noticed that Hatching Data has a a lot of patent in liquid cooling and liquid cooling, et cetera. And I would like to ask, what is your customer's acceptance, especially anchor customer and global cloud customer's acceptance of such kind of technology route in AIGC-related computing or hosting? And a related question is whether such kind of technology can increase the existing power IC of the company. Thank you.
spk02: Hi, thank you, Mr. Liu Yang. I think the reason why we think that our anchor client and the future customer will be very willing to accept our diversified cooling solution is simply because we We are operated in such a diversified geography, especially if you compare our North China campus versus our Southeast Asia, Johor campuses. The weather conditions, humidity conditions, and also temperature conditions are completely different. So you need to have a lot of tools, you know, toolboxes. So when the customer, when the different conditions or the or the demand technique from technical perspective, given the AIGC more requirements on the air flowing and also cooling requirements, you know, you need to be ready. So therefore, we are very confident with all this technology patterns in their house. And most importantly, with our, the talent pool in-house leading by our CTO, Mr. Zhang Bianhua, we are very confident that All this liquid cooling patterns and technology and solutions will co-play the cooling solutions will be well accepted by our customer. And actually, as a matter of fact, some of them are already being applied in our campuses in China as well as overseas. In terms of a financial return, yes, there will be a marginal, I will say, the ROIC improvement, especially if you look at the full life cycle of the of this solution application. They're going to require a little bit more investment, but they're going to be cost-saving later, especially on energy-saving parts. So overall, I think our study shows that the ROIC is going to be improved marginally. Thank you.
spk05: All right. Thank you. Thank you. Thank you. Our next question comes from the line of Sarah Wong from UBS. Please ask your question, Sarah.
spk03: Thank you for the opportunity to ask a question. There is a question I would like to ask. According to our latest SEC filing, it seems that the capital expenditure in 2023 is expected to be $1.3 billion. So according to the latest SEC filing, it seems the 2023 CapEx is estimated at 1.3 billion US dollars. So just wondering what's the key driver of the CapEx for this year. Thank you. Thank you, Sarah. I think that you are referring to the
spk02: the documents or whatever failing we already filed to SCEC regarding the privatization issue, right? So that's where you see this 1.3 billion US dollar. I would say that first of all, that's actually the part of the work prepared by Citigroup, who is the advisor to our special committee who review the whole process. So for any, I would recommend for any evaluation, and also the financial forecast as part of the valuation process methodology, you'd better ask a city. But from our side, we're only focusing on the business. We're only focusing on our business progress, delivery schedule, and obviously the future pipeline, a potential project, not only the project we disclose to the marketplace. So having said that, in the previous conference call, we used to estimate our whole year CapEx number going to be around the 5 to 7 billion RMB. Now I would say that the number for the whole year 2023 is going to be in the range of 7 to 9 billion from the latest internal estimate for the whole year 2023. Now we already have, the first year you see the number, we already spent like 3 billion, you know, the cash outflow on CapEx related stuff. So on the second half, we're probably going to spend $406 billion further. We think that this potential upside or increased spending will be good news for everybody. Why is it good news? Because this is driven by the progress of some incremental pipeline project, new project, which company is optimistic to obtain in the second half of this year. And these pipeline projects may bring better revenue and EBITDA for future years, not necessarily this year, 2023, but future year, 2024 and 2025, beyond previous estimates. In addition, a large, significant portion of this incremental pipeline project, again, not the project we have disclosed, these projects, are actually driven by our overseas business in other words overseas project will have a larger than expected shares and that basically means the increase of the per the unit capex accordingly so obviously you know the timing of the spending may vary it around late 2023 or start of beginning of 2024 so part of the 1.3 billion you saw on those uh the privatization documents and a very small part of it may be carried over to 2024 to spend. But on an aggregate level, if you combine 2023 and 2024 cap as together, it should stay the same. So, yeah, that's hopefully I'm answering your questions. It's good news, actually, you know.
spk03: Yes, very clear. Thank you.
spk05: Thank you. Our next question comes from the line of Minran Lee from CICCP. Please ask your question, Minran.
spk06: Hello, Mr. Guan. I'd like to ask about the AI-related issues. First of all, Mr. Guan, can you help us clarify the AI-related needs this year, and the ratio of these new orders this year? Besides core customers, have we seen any other new customers' AI needs come out? Let me translate myself. I want to ask about more color about the AI-related demands. like what percentage of new capacity you bring this year is AI related? And beside our anchor customer, is there any new clients with new AI demand you're seeing recently? And also, if they found domestic IEP peers decided to buy their own GPUs to start computing infrastructure business, do you have any plan or strategy about this? Or are you just want to focus on our co-location service because your demand is strong. Thank you.
spk02: Thank you, Mingzhe. Actually, the client doesn't tell us when they install the server into our IDC centers and how many of them is AI related. But we can guess, right? So based on the application and utilization of the high density cabinets, And based on the servers type they put in our data center, we think that the AI portion, the AI-related servers probably account for around 5% of our current overall capacity. On an incremental basis, we are still under some serious discussion with them about incremental orders and projects. And I believe going to be a higher portion of them uh, going to be AIGC related for sure. Uh, and also you probably heard the same thing, you know, um, as myself from the market street that from the street that simply, uh, one of our anchor and the customers have the biggest reserve or inventory of the AIGC related, related the GPU units or chips or service, uh, in China for both their China business and also, uh, you know, their overseas business. So hopefully that, uh, we can get a significant share out of them when they're considered IDC partners for their future projects. And also, on top of the existing client, we do, these days, we do accommodate a lot of visits from quite a number of other AI customers, small and medium sized these days, particularly to our overseas campus. And we believe the portion will be higher moving forward. As regard to our future strategy on the computing power service, we will focus on co-location only, co-location service only. That is our current plan. And I haven't heard anything further about we're going to provide computing power business to our clients. Although we are doing, as everybody knows, we're doing the best job of converting the electric power to computing power business. But we will not offer the computing powers for now, and I believe in the near future as well.
spk06: Very clear. Thank you.
spk05: Thank you. As a reminder, to ask a question, please press star 1 1 on your telephone keypad. Next is a follow-up question from the line of Yang Liu from Morgan Stanley. Please ask your question, Yang.
spk07: I will translate my question. We recently observed that the anchor customer with another data center player in Singapore. Also, that partner also initiated a new project in Johor as well. At the same time, Qingyuan also got a new book, a new order from the anchor customer. So we would like to ask about the competition dynamic in Southeast Asia market. Thank you.
spk02: Thank you, Liu Yang. I think we've come back to the issue of whether we want a smaller share of the bigger pie or a bigger share of the smaller pie. But the Southeast Asia market, hopefully our goal is to get both, essentially. So, you know, the Southeast Asia offers a better perspective market in terms of overall IDC demand than China over the course of the next three years. That's our belief. uh and uh we believe that with our competence in the efficiency in terms of delivery and operation and the economy of scale which kind of sooner rather than later going to turn it into a huge cost advantage as well as our the credit uh the track record we demonstrate to our clients in china and in our joho project uh we will get a bigger bigger pie than everybody anticipated in the future So about, you know, the other reality we have to face is actually from day one, when we had a conversation about our chance in Southeast Asian market, I said, I keep saying that it's open field competition. So you need to show all your hands, all what you have in your pocket in terms of our cooling solutions, you know, your supply chain, entire supply chain solution from China all the way to Southeast Asian market, your talent pool, And your capital power how your power knows you know all these you you you gonna actually show much more Than you have been doing in China through a client in order to win a bigger bigger shares out of this bigger pie Okay, you can see the one she does you know you
spk07: And the follow-up question is that, do you have any sense on what is the wallet share for the chain data in this anchor customers demand in Southeast Asian market?
spk02: We're striving to get over 50% of the overall, you know, overall shares. And we believe with all the solutions we put on the table and all the good performance we put on the table, that we have a very good chance to get it. And our overall objective of the overseas business as a share of our overall portfolio is going to be around 30% probably by the end of 2025. Thank you. Thank you.
spk05: Once again, to ask a question, please press dial 11 on your telephone keypad. I am showing no further questions. Thank you very much for all your questions. I'll now turn this conference back to the company for any closing comments.
spk02: Oh, thank you. I think everybody has been focusing on chain data, which we highly appreciate it. And also, we highly appreciate all the investors and analysts, the friends, your support for the company in the past two or three years since the IPO. While there is a privatization process of the companies going on, we can assure you that the management and our entire team will continue to work very hard delivering our business, sticking to our original mission of converting, efficiently converting electric power to computing power. And again, striving to become the best IDC leader in the Pan-Asia Pacific regions. Thank you.
spk05: Ladies and gentlemen, we conclude our conference for today. Thank you for participating. You may now disconnect your lines.
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