GDS Holdings Limited

Hello, ladies and gentlemen. Thank you for standing by for GDS Holdings Limited second quarter 2020 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 has been 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.

Thank you. Hello, everyone. Welcome to the 2Q20 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 investorsgdsservices.com. Leading today's call is Mr. William Huang, GDS founder, chairman, and CEO, who will provide an overview of our business strategy and performance. Mr. Dan Newman, GSGFO, will then review the financial and operating results. Ms. Jamie Koo, our COO, is also available to answer questions. Before we continue, please note that today's discussion will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Security Delegation Reform Act of 1995. Forward-looking statements involve interior risks and uncertainties. As such, the company's results may be materially a bit different from the views expressed today. Further information regarding these and other risks and certainties is included in a company's prospectus as filed with the U.S. SEC. The company does not assume any obligation to update any forward-looking statements except as required under applicable law. Please also note that GDS earnings press release and this conference call includes discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. GDS press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable gap measures. I will now turn the call over to GDS founder, chairman, and CEO, William Huang. Please go ahead, William.

Thank you. Hello, everyone. This is William. Thank you for joining us on today's call. I'm pleased to report that we had another very strong quarter. We achieved record organic sales with over 26,000 square meter or 60 megawatt of new customer commitments. We stepped up our development activities. We now have 17 data centers under construction, our largest ever. Area utilized increased by over 14,000 square meter, nearly double the moving for the prior quarter. We grew just EBITDA by 48% year-on-year, and our EBITDA margin crossed 47% for the first time. The operating environment in China is now almost back to normal. And despite the escalating tensions between China and the U.S., we see no have all had adverse impacts on our business. Turning to our sales achievement on slide four. In the first half of 2020, our organic sales totaled over 48,000 square meters. Our original target for the full year was 80,000 square meters organic, but we are clearly are on track for a higher number. And since then, I'm confident that we can deliver over 90,000 square meters organic in FY20, which is a big step up from last year. Demand has clearly gone to a higher level. This is not a temporary break. is the continuation of a stronger digitalization trend. China is already far advanced in some area of the digital economy. But there are many other areas which are just getting started. New technologies such as 5G, AI, blockchain, IOT, and digital currency can be demand multiplayer. Chinese government policy is giving a strong push, leading Chinese companies and increasing their focus on the domestic market. For all of these reasons, we believe that demand will be sustained long into the future. Let's turn to slide five. In 2020, we obtained four organic high-scale orders each of which highlights the competitive advantage of our platform. Turning to slide six. Earlier this year, we acquired a large site in Shanghai, which we felt was particularly well suited to hyperscale development. We have now obtained an anchor order from the leading CSP customer who was attracted by the location and the ability to expand on the same site. 22, slide 7. In 4Q19, we signed a framework agreement with the government to set up a new data center campus in Changshu, serving the Shanghai market. The campus has a developable net floor area of around 65,000 square meters. In 2Q20, we entered into a sales MOU with a leading CSP customer for around 30,000 square meters on nearly half the entire campus. 6,000 square meters is already committed and the balance of 24,000 square meters will be committed over the next two years. By enabling high-scale customers to learn and expand in this way, we get high visibility into future year sales. Let's turn to slide eight. We established our first data center project in Langfang near Beijing in 2019. Within a short period of time, we have gone from one data center in Langfang to eight data centers in service or under construction, for which we have obtained over 48,000 square meters of commitments from several of our top 10 customers. We have secured a lot of land and power for expansion in Longfeng and have more coming in our pipeline. This will enable our customers to expand within our Longfeng cluster. Turning to slide nine, our top two customers continue to grow with us, both in tier one markets and remote locations. We fulfill about 30% of their incremental requirement. It's a great foundation for our business. And at the same time, we see a lot of growth potential. More than we realized from the next wave of high-scale customers. The demand from some of them could be almost as big as the top two. It's a strategic priority. for us to expand this part of our franchise, further develop our ecosystem, and diversify our customers' relationships. We already have significant relationship with almost all of the hyperscale cloud and internet companies in China. However, until recently, we were missing a few desirable names. I'm therefore very pleased to report that in 2Q20, we obtained our first order from ByteDance. And in the current quarter, we obtained our first order from the PDD. ByteDance is one of the high-scale orders shown on slide five. On the enterprise side, we have recently signed up a number of notable notable new customers, including Tesla, Starbucks, YamChina, BlackRock, and Dajia, a world leader in commercial drones. We won these customers because of the unique ability to set up a hybrid cloud architecture and access multi-cloud resources across our platform. We are also starting to see innovative industry cloud development. For example, we are working together with a technology company and one of our major cloud customers to set up a dedicated cloud for the auto insurance sector. We believe that hybrid cloud on our platform could drive significant enterprise growth. Turning to slide 10, one of the keys to achieve higher sales is to have the right kind of data center capacity in the right place and the right time. Over the past five quarters, we have stepped up our construction program from 78,000 square meters to 133,000 square meters, and at the same time, Our pre-commitment rates have remained over 60%. This demonstrates how our business is demand-driven. In order to manage this level of construction, shorten lead times, and lower cost, we have made significant progress in off-site prefabrication and modular construction. We are also working closely with strategic customers on joint procurement and the supply chain management. We believe that our unit's CapEx is the lowest in the market. Turning to slide 11. In order to maintain continuous supply, we have built up our pipeline in all tier one markets. Currently, we have nearly 350,000 square meters of highly marketable capacity held for future development, and we are still adding to it. We believe that this is far more than any other company, and it gives us a significant competitive advantage. Following the government's new infrastructure policy, we have not seen any change in the allocations of resource in urban Beijing. Shanghai is continuing with its quarter system, which is calibrated to demand. Shenzhen may open up to a small extent. In the edge of town areas, more land and power will be allocated for data centers, but the entry barrier is still high. because the government is very selective and maintains strong controls. We have to be creative in order to generate a new supply, particularly in the urban areas of tier one markets. This is the story behind the Beijing 13 project, which we recently announced. The opportunity was brought to us by a private equity fund. We will work with them and with the original project and the land owners during the development phase and then buy them all of it. The deal looks a bit complicated, but we have total control. This is a highly marketable capacity for which we will obtain 100% pre-commitment in the near future. We are working on several other opportunities in urban Shanghai and Shenzhen that will also give us highly marketable capacity. Turning to slide 12, we continue to ramp up the development program for our JV with GIC. We expect to transfer the first project during the current quarter. We have also won our first order for a remote site from a second customer. These remote sites are a totally different proposition from our core business. Our customers set up these remote sites themselves. and then look to all sorts of data center development and operation. It could be a high volume opportunity and we want to pursue it for strategic reasons. But in terms of returns, it's not the best use of our capital. We think the asset-light approach is the way to do it and we are working on further innovative Innovations to optimize our cost of capital. Lastly, on slide 15, I would like to say a few words about what makes GDS fundamentally different from the other players in China. As of today, GDS has nearly 60 connected