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spk03: The conference will begin shortly. To raise and lower your hand during... The conference will begin shortly. To raise and lower your hand during Q&A, you can dial star 1 1.
spk04: hello ladies and gentlemen thank you for standing by for gds holdings limited fourth quarter and full year 2022 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'll now turn the call over to your host, Ms. Laura Chen, Head of Investor Relations for the company. Please go ahead, Laura.
spk01: Thank you. Hello, everyone. Welcome to the fourth quarter and the full year 2022 Earnings Conference Call of GDS Holdings Limited. The company's results were issued via Newswire services earlier today and are posted online. A summary presentation, which we will refer to during the 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, GDS CFO, 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 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 US SEC. The company does not assume any obligation to update any forward-looking statements except as required under applicable law. Please also note that GDS earnings press release and its conference call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. GDS press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable gap measures. I will now turn the call over to GDS founder, chairman, and CEO, William Huang. Please go ahead, William.
spk02: Thank you. Hello, everyone. This is William. Thank you for joining us on today's call. Despite the challenging environment, our business continues to deliver solid results. In 2022, We grew revenue by 19% and adjusted EBITDA by 15% year on year. We won significant new business in China, while at the same time adjusting our development program to the current pace of growth. We accelerated our international expansion with notable success. And on the funding side, we took steps to accept new source of capital and strengthen our financial position. Entering 2023, we are looking forward to a recovery. Customers are more positive about their business outlook. When their business pick up, it will flow through to us quite quickly. We could see this happen over the next few quarters. Meanwhile, we are continuing to strengthen our operations and finances. Looking further ahead, the fundamentals for our industry remain very strong. On one hand, AI and other new technologies are driving waves of demand. On the other hand, data center supply in China's tier one markets is gradually becoming more constrained due to the limitations on land and power. As market conditions improve, we are well positioned to outperform with our customer relationships, country backlog, and established asset basis. In 2022, we won 74,000 square meters or 178 megawatts of next new bookings. all of which was for our organic data center developments in market. A big highlight was our 64-megawatt wind in Johor, with significant contribution from the international. Our full-year bookings were up to the level of the past few years. This highlights the importance of our strategy to follow the customer. For 2023, we are targeting a similar level of new bookings, with once again a significant contribution from international. In 4Q22, we want two new large, high-scale orders. LF15 is the first order for our new campus at Xianghe in Langfang, Hebei Province. The order is from a large internet company which is migrating from our downtown sites in Beijing. The customer is relocating to LF15 and to one of our other campus in Langfang. BJ14 phase two is the second phase of development at our Greenfield site in the Tongzhou district of Beijing. from a first-time large internet customer in the recruitment sector. This win typifies our strategy of matching resource inventory with high potential customers. The new commitments come with confirmed moving schedules. Over the past three years, we have made significant progress with new customer wins. and diversification. Large internet companies accounted for 63% of new bookings in 2022, as compared with 23% in 2020. Enterprise and financial customers averaged around 20% of new bookings. This shows how we have been able to evolve our strategy to capturing growth from the different customer segments and different locations. Customer moving in 2022 was affected by the lockdowns and other macro factors. Going forward, we are focusing on customers who can commit to fast moving schedules. Typically, large internet customers moving faster than car customers. Some of the large internet orders, which we won in 2022, have relatively short moving periods. Hence, the moving rates could pick up as these new contracts come towards the end of this year. We have a large backlog totaling 260,000 square meters, nearly half of it related to data centers which are moving ready. This gives us high visibility for future growth with reduced capacity. To adjust to the current environment, we have slowed down our capacity expansion. In 2022, we brought 28,000 square meters into service. In 2023, we plan to bring a few further 58,000 square meters in service, out of with 33,500 square meters in mainland China and 24,500 square meters in international. Going forward, we will target to reduce the lead time from investment to customer moving. Looking beyond our current construction program, We have over 300,000 square meters of area held for future development in mainland China, which can support multiple years of future demand. The mainland consists of land and power for campus-type developments at good locations in national hub markets. Our pipeline aligns with the government's East Data, West Computer policy. This is a valuable resource which will give us significant competitive advantages as supply becomes tighter in year ahead. All of these priorities are directed at further strengthening our strategic market position and improving our operating and financial efficiency. The initial phase of our international expansion is focused on Hong Kong as the regional hub for Great China and Singapore as the regional hub for Southeast Asia. These two hubs rank among the 10 largest data centers market globally. By leveraging our whole market customer relationships, cost advantages from our prefab product and the proven execution capability in high-scale development. We can accelerate delivery to our customers and rapidly establish the market leading positions. Our first self-developed data center in Hong Kong will enter service in the next couple of months. We have secured anchor customer commitments from leading China and the global cloud service providers. Hong Kong One is the first in a multi-year development pipelines of four purpose-built data centers. Classed in an ideal location for serving both hyperscale and enterprise customers. Hong Kong's position as the primary gateway for networking and connectivity between China and the rest of the world assures its long-term positions as a data center hub. We have put together a unique set of assets, ideally suited to meeting new waves of demand. We are making great progress with both land acquisitions and the customer commitments in Southeast Asia. In Johor, we are constructing three data centers for deliver later this year and early next year. We're going from breaking ground to deliver of 64 megawatt over five quarters. We have acquired or secured options over the adjacent sites to enable us to scale up. In the next few months, we expect to receive an additional order which would take us to nearly 100 megawatts of commitments in Johor alone. For existing projects, the priorities are to win further orders for Johor and Badang, build up our local management team, and deliver the initial capacity. At the same time, We aim to establish new projects in Kuala Lumpur, Jakarta, and other new markets in Southeast Asia and beyond. While our position in mainland China is well set for years to come, we believe that GDS International can become a significant second growth engine. Now I will now pass on to Dan for financial and operating reviews. Thank you, William.
spk08: Starting on slide 22, where we strip out the contribution from equipment sales and the effect of FX changes. In 4Q22, our service revenue grew by 1.5% and underlying adjusted EBITDA was slightly down by 0.2% quarter on quarter. For FY22, our service revenue grew by 19.2% and underlying adjusted EBITDA grew by 14.5% year-on-year. Turning to slides 23 and 24, service revenue growth is driven mainly by delivery of the committed backlog. Net additional area utilized during 4Q22 was around 10,700 square meters. Around 7,950 square meters was in Tier 1 markets. and the remaining 2,700 square meters approximately was from BOT projects. Net additional area utilized for FY22 was around 51,000 square meters. Around 29,000 square meters was in Tier 1 markets, and the remaining 22,000 square meters approximately was from BOT projects. For FY23, we expect additional area utilized net of churn to be similar to the level seen in FY22, i.e., around 50,000 square meters of net add. We disclosed on our last learning score that one large internet customer will move out of our downtown data centers in Beijing. As a result, we will record 17,000 square meters of churn spread across the first three quarters of 2023. we have already won back more than 17,000 square meters of new commitments from this customer for two sites in Langfang. They will start to move into these sites during 4Q23. As William mentioned, towards the end of the year, we will also start to deliver some other new contracts with faster move-in schedules. Accordingly, the cadence of move-in in FY23 will be quite heavily weighted to the back end. The good news is that a pickup later this year will feed into FY24 growth. Monthly service revenue per square meter was RMB 2194 in 4Q22, compared with RMB 2237 for the previous quarter, a decline of 1.9% quarter on quarter. Over the course of FY23, we expect MSR per square meter to decline by around 4%, comparing 4Q23 with 4Q22. This forecast decline is mainly due to change in location mix, including further BOT move-in. Turning to slides 25 and 26, for 4Q22, our underlying adjusted gross profit margin was slightly up on the prior quarter at 50.9%, while our underlying adjusted EBITDA margin was down at 44.4%. For FY22, our underlying adjusted gross profit margin was 51.2% compared to 53.3% in FY21, and our underlying adjusted EBITDA margin was 45.6% compared to 47.5% in FY21. The margin decrease was mainly due to elevated power tariffs throughout last year, which we estimate knocked 1.5 percentage points off our margin, and growth drag from international expansion of around a further 1 percentage point. The midpoint of our guidance for total revenue and adjusted EBITDA implies an adjusted EBITDA margin for FY23, which is similar to the level seen in 4Q22. We have assumed no reduction in power tariffs through the course of this year and continuing growth drag from international expansion. Turning to slide 27, 2022 was a transition year in terms of bringing down our capex in mainland China on the one hand, and accelerating international investment on the other hand. Our organic capex in mainland China was around 5.8 billion RMB for FY22, which is a few billion lower than in the past couple of years. International capex was 2 billion RMB, while acquisition capex was around 3.5 billion RMB. We are guiding the total capex in FY23 of around 7.5 billion RMB, comprising a further reduction to 3.5 billion RMB for mainland China and an increase to 4 billion RMB for international. Replacement capex included in the mainland China number is running at around 200 million RMB in 2023. On slide 28, we provide some further data points relating to CAPEX, starting with mainland China. At the end of 2022, we had around 152,000 square meters under construction. The total cost to complete this capacity is RMB 7.4 billion, which we expect to incur over the next three years. With this additional expenditure, our total capacity and service would increase to around 667,000 square meters, sufficient for us to grow our billable area by around 71%. As you can see, a relatively small amount of incremental investment is required to support a large amount of growth, because much of the investment has already been incurred. Turning to international, our total cost to date for the five data centers under construction in Hong Kong and Johor, totaling over 100 megawatts, is RMB 4.1 billion, or US dollars 590 million. The total cost to complete is RMB 3.4 billion, or US dollars 490 million. Looking at our financing position on slide 29, at the end of 2022, our net debt to last quarter annualized adjusted EBITDA ratio was 8.0 times on a consolidated basis. If we exclude the debt of the international business and add back the net assets to our cash, our net debt to last quarter annualized adjusted EBITDA ratio was 7.1 times. If we further exclude capital work in progress for our construction program in mainland China, our net debt to last quarter annualized adjusted EBITDA ratio would have been 5.0 times. Our effective interest rate for FY22 dropped to 4.7%. Over the course of 2022, we maintained our cash position and ended the year with 8.6 billion RMB or 1.2 billion US dollars of cash on our balance sheet. In accordance with our treasury policy, We put cash on deposit with banks, which are investment-grade rated and pre-approved by our board. In addition, we hold cash in equity and debt service reserve accounts as required by our project financing facilities. We previously had a small amount of cash in accounts with SVB for short-term operational purposes. As of today, this amounts to $2 million, which is in the process of withdrawal. Turning to slide 30, in January of this year, we raised $580 million gross proceeds from the issue of a new CB with seven-year maturity. We had subsequently repaid $150 million of working capital loans. In June of this year, we expect to repurchase $300 million of an existing CB when it is put. As a result, we will have almost no debt repayable at GDF's holdings level until 2027. The debt which is repayable over the next few years is amortizing long-term project-level loans, which we refinance on a regular basis. On slide 31, we provide some more color on current year funding requirements, starting with mainland China. We expect our operating cash flow to be around 1.5 billion RMB to FY23, and as I mentioned, organic capex to be around 3.5 billion RMB, resulting in negative free cash flow before financing of around 2.2 billion RMB. We aim to fund this gap using a combination of project debt and asset monetization. At the end of 2022, we had RMB 8.5 billion of committed but untoward project loan facilities in mainland China. We have recently obtained regulatory clearance for our offshore China data center fund. We expect to sign the limited partnership agreement and the sale and purchase agreement for the first data center asset shortly. The net cash proceeds will be approximately 1.45 billion RMB after deducting our 30% capital commitment to the fund. We will have the option to do more such transactions to release equity if we choose to do so. We're also in the process of signing a formal framework agreement with a leading Chinese insurance company for an onshore version of the China Data Center Fund. Over the next couple of years, we expect our operating cash flow for mainland China to increase, while CapEx remains at similar or lower levels to the guidance for FY23. Hence, we expect to become free cash flow positive for mainland China within three years. Turning to international, As mentioned previously, we expect total capex for international of 4 billion RMB for FY23. We expect to finance 50% of this, say 2 billion RMB or 290 million US dollars with project debt. For the balance, we are evaluating a number of options for raising equity at subsidiary level, including private equity at our international holdco level, and or by bringing in local partners at country Holdco or project Holdco level. Turning to slide 32. For the full year 2023, we expect total revenues to be between 9.94 billion RMB to 10.32 billion RMB, implying a year-on-year increase of between approximately 6.6% to 10.7%. We expect adjusted EBITDA to be between 4.43 billion RMB to 4.6 billion RMB, implying a year-on-year increase of between approximately 4.2% to 8.2%. In addition, as previously mentioned, we expect CAPEX to be around 7.5 billion RMB for the full year. We would now like to open the call to questions. Operator?
spk04: Thank you. If you would like to ask a question over the phones, please press star 1 and 1 on your telephone and wait for your name to be announced. And to withdraw your question, you can press star 1 and 1 again. And for the benefit of all participants on today's call, please do limit yourself to one question. And if you do have more questions, then please re-enter the queue. And we'll now take our first question. Please stand by. The first question is from the line of Jonathan Atkin from RBC. Please go ahead.
spk05: Thank you. So my question was mainly around Southeast Asia and wondered if you could maybe talk a little bit about where you see relatively greater challenges to developing capacity in Johor versus Batam, as well commercially in those markets. setting aside kind of the initial customer discussions that you've had and the anchor commitment that you have in Johor, um, what are the prospects for those markets to serve, um, sort of Singaporean requirements or act as a greater kind of Singapore availability zone versus serving kind of domestic and kind of regional demand on a, on a standalone basis? In other words, how, how tightly coupled, um, do you see Asian demand and maybe prospectively Western demand in, in, um, Johor and in Batam with respect to kind of Singaporean, you know, how tightly coupled is that with Singapore versus acting on their own as hubs? Thank you.
spk08: Hi, John. Let me start with the second part of your question. And the way we view the Singapore market and the surrounding areas, is as a proxy for the Southeast Asian market. I think the majority of the data in the capacity in Southeast Asia is concentrated in and around Singapore, and a large part of that is there to serve the region, not just to serve Singapore. When we look at the situation in Singapore, it's well known because of the historic moratorium since 2019, that the developmental capacity in Singapore is largely being built out. And what we've seen from third-party market research is that utilization rate capacity in Singapore has gone to low to mid 90%, which is more than full in industry terms. The Singapore government is going through a process. They may allocate some additional quota to allow some growth in Singapore, but we think that's only going to address a very small part of the incremental demand. Therefore, as we've seen in other markets where we have a presence like Beijing, Shanghai, Shenzhen, and so on, the excess demand will spill over. And we believe that it will spill over to Johor and Batam. We think they will both be vibrant and high-growth large-scale data center markets. We think that when you look at it from the perspective of how the hyperscale customers, particularly cloud service providers, deploy, they need the diversity of different locations. And I think having options on both sides of Singapore is operationally very beneficial. In terms of the pace of development, I think we've went out on our own in terms of making commitments to both Johor and Batam. Frankly, I think we leapfrogged many other players in doing that. And I think that having that dual strategy will give us a marketing edge and a solution that others cannot offer. So far, what we've seen is that Johor has taken off a little faster. primarily because of the existing infrastructure there, talking about power infrastructure and the network connectivity. But we are very confident that the time is coming. It may be one year or so behind. We've been talking to government in Singapore, the government in Indonesia. There's a very strong commitment to making Batam a successful location for data centers. And we're happy to be a pioneer. In the next few quarters, we'll be able to, I think, make progress in solving some of the basic infrastructure challenges, even if it necessitates investing in submarine cable networks ourselves to kickstart that. And then I think the market will start to pick up momentum.
spk05: Thank you. If I could just ask a brief follow-up. Inside of China, can you talk a little bit about customer availability for obtaining servers, other supply chain constraints that are affecting their ability to procure equipment and ultimately move in? And with respect to central Beijing, what are your prospects for refilling that capacity with other demand?
spk02: I think, John, this is William. I think in China, yeah, we just mentioned this year is a transition for China whole business. But based on in last couple weeks, I came back to China and visited a lot of governments and our customers as well. I think I'm quite encouraged by our customers, especially the large internet and cloud service providers. Based on our current pipeline, I think the demand, we can see the leading indication is pipeline. I think it is very strong. But for the cloud, when I visited the cloud service provider, they're all very ambitious, and I think they recovered maybe slightly a little bit later than all the internet companies and financial institutions. If you come to China, I think I see in the first two months, The leading data, which I mean the consumer data, rebound very fast. This is a leading indication that all the supply chain industry will catch up the recovery. But it still needs time. I think from the analysis, so in terms of the current market all the resource, I think we are very confident. We have just a very limited inventory. So I think this is a very valuable aspect. I believe and I'm very confident we will sell them easily in this year. So this is the question.
spk05: Thank you.
spk04: Thank you. We'll now take our next question. Please stand by. This is from the line of Yang Lu from Morgan Stanley. Please go ahead.
spk00: Thanks for the opportunity to ask questions. I have two questions here. The first one is regarding the demand. I think we believe one of the reasons to see very divergent demand from cloud and internet companies is that a lot of big internet companies are moving away from public cloud. So if we combine the cloud and internet together, when do you expect to see the the overall demand recovery? Or put another way, in terms of GDS full year guidance, what is the assumption of a demand recovery behind it? And my second question is, in terms of the competition, are you seeing more or more competitive bidding or price from Chinese telcos in front of your big customer. Thank you.
spk02: Okay, Yangliu, this is William. I answered your first question. In general, I think we just mentioned that our structure of the new booking has changed. If you look at the last year, last two years, right? We used to be leading by almost 85% or 90% incremental demands from the cloud service provider. This year, last year, almost zero from the cloud service provider. So we still reached 70,000 square meters. This is all from the structurally change to the internet plus enterprise. So we still maintain this. Assumption for our this year's new bookie. So we just wait if the cow Recovered that that's all upside. So that's that's the profile of which Assumption what we made.
spk08: Yeah Yeah, you asked about you know, what was the assumption in our you know, you know guidance or not in our business plan and So I think the key driver of revenue and ultimately of EBITDA is the move-in. I mentioned that we are expecting over the full year the move-in to be about 50,000 square meters. So we had some exceptional churn. I keep talking about it, but if you add that back, you'd see that the move-in this year will be over 60,000 square meters, which is around 15,000 square meters plus quarter, which is a little higher than the last few quarters, but similar to what it's been over the last six or eight quarters. So that doesn't really imply much of a recovery. But one of the factors which is behind that number is that, as we mentioned, a few contracts which start delivery in around September, October, November, December, have faster than typical move-in schedules. Some of it could be quite front-ended, which means that we may see quite a bit of move-in towards the end of the year. It's not this year, January of next year. And that boosts the full-year number without really boosting the revenue much this year. But it does set up, I think, for potentially a good rate of year-on-year growth in 2020, 2024.
spk02: Yeah, and I want to add a more point. I think the focus for the new booking, 75,000 square meters, right, the number of new guidance, this is all organic. This is all organic. Historically, when we reached some 90,000 square meters, including a lot of acquisitions, right, so this is still very high level compared with the all the global top players still bigger than most of the data center players in the world.
spk08: Okay.
spk02: I think in terms of the competition from the Telco, I think the Telco, yeah, you know, our strategy is the tier one market. We build out all our assets in the tier one market or edge of the top of the tier one market. This is, I think in the last, there's nothing changed in terms of supply. Telco still left investment in this region, right? So I think we are not worried about it. And on the other hand, we don't compete directly. They're also our customer. I think we have very good relationship with the work with the three Telco in the last 10 years. So recently a lot, A few, I mean, a few telcos came to us and tried to discuss some cooperation between us because they also deployed their cloud service, want to deploy their service in tier one market. And if someone want to deploy cloud service in tier one market, I think definitely GDS will be the first choice for them to partner with. Otherwise, no good. no possibility to provide their costs in this city.
spk00: Thanks a lot for the answer.
spk04: Thank you. We'll now take the next question. Please stand by. This is from the line of Gokul Hariharan from JT Morgan. Please go ahead.
spk09: Hi, thanks for taking my question. First, could you talk a little bit about what are you hearing in the last couple of months? William, I think you mentioned there is some excitement from the customers, but typically on the cloud side, which is still a significant part of your backlog if you think about the next couple of years, are they starting to see utilization pick up in their existing infrastructure that they need to now start accelerating the movement? Or you think that the cloud acceleration is still going to take a little bit more time? And secondly, also on the EBITDA front, we have seen some erosion in EBITDA because of power costs and some, I think, mix-related challenges. Do we see the guidance that we gave for FY23 as kind of like the sustainable level of the EBITDA margin, or we think it could be further pressure as more international business comes online in 2024 and beyond?
spk02: Hello, Gogo. This is William. In terms of a cloud service provider, I think number one, They're all making new business plan right now based on the current environment. Previously, a lot of overhead is in China, like lockdown policy. Now it's gone. It's mobile. And another is the new government, all the structure and all the platforms. They made a couple of times statements to support the platform and the social media private company, support their growth, continue to grow in China, right? So I think our customers are also very encouraged by the current environment. So they are making a new business plan right now. In general, I think based on my composition with our largest customer, top three customers. They're all very encouraged. I think in terms of business plan, they definitely will boost in the next few quarter. But in terms of moving, there's a lot of effects to impact the moving in terms of the shipment, in terms of the previous, they still have some inventory, right? So I think in general, I think the That's why we still very conservatively assume cloud service provider moving pace still maintain a solid level, neutral level, not aggressive. So it's normal. But given the whole environment, looks like it will improve in the next few quarters.
spk08: With regard to adjusted EBITDA margin, I feel like this year's margin is probably the trough, but it does depend on several different drivers. One, of course, is pricing. It's another topic for discussion, but we feel like pricing is important. there's a setup which could see pricing recover in future years. Secondly, the power tariffs. The input fuel costs have started to come down, but we haven't seen that reflected in power tariffs yet, and even if it is reflected, it wouldn't benefit us this year. It could benefit us in future years, and Chinese government policy may influence that if the government wishes to see power tariffs come down as was their inclination historically, their tendency historically. And then the third part is international, where we are creating significant value, or we will create significant value in the future, but at the moment it's EBITDA negative. EBITDA will break even in the first half of next year, but that's still depressing on the margin. before the EBITDA margin of international sales in the 30%, right? So that growth track will persist for some time. I think for forecasting purposes, maybe you use this year as a trough and then see a slight step up over the next couple of years as .
spk09: Got it. Thank you.
spk04: Thank you. We'll now take our next question. Please stand by. This is from the line of Frank Lawson from Raymond James. Please go ahead.
spk06: Great, thank you. Can you comment on the state of the market for the capital recycling and the appetite for those assets? Is it the same or better or worse than when you originally sort of put this plan together? And I apologize if I missed this, but can you quantify the amount of capital recycling you expect to do in each of the next two years? And is CapEx, is this sort of the low for CapEx this year? Thank you.
spk08: Let me start with the numbers. What I showed was that in 2023, our pre-cash flow before financing is negative by around, sorry, it's around just over $2.5 billion. Okay. Some of that can be financed by drawing down on project finance facilities, and then the remainder needs to be financed with our capital. Having done that convertible bond in January, assuming we go ahead and repurchase the CB that is portable, on a net basis we increased our financial resources. And so I think pro forma we have around 9 billion RMB of cash. So that is available to be allocated to China, to be allocated to international if we choose to do so. But we try to prioritize, you know, raising additional capital, recycling capital at the country level before we allocate our cash. In China, if we assume that the target for this year is to recycle around 1 to 2 billion RMB, we are already 10 months down the road of working on our offshore China data center fund. We had the regulatory approval. When we signed the limited partnership agreement, we also signed the sale and purchase agreement for the first asset to be transferred to that fund. And that will realize cash proceeds to us, net of what we put into the fund, the $1.5 billion, $4.5 billion, $1.4 billion. So that goes a substantial way to fulfilling whatever requirement we have this year. I think the chances are that next year the requirement will be similar, if not less, because operating cash flow will hopefully increase. In CapEx, I don't expect to be higher. It might be lower. I don't think it's very challenging for us to do monetizations at this scale. We have a substantial amount of capacity in this optional China data center fund to do more deals. We've been working for some time on onshore equivalent and now in the process of signing a formal term sheet, a framework agreement, an asset has been identified and initial diligence done by the investor, which would also recycle at least a few hundred million RMB of additional capital. And then just looking more broadly, the REIT market in China is beginning to really take shape. There's a lot of interest We're being approached continuously by investors and banks looking to structure something involving data center assets. I think it's an asset class that attracts a lot of interest in China. For the China REIT market regulations, it's really designed for stabilized assets. With these funds, we made the decision that it suited our purposes. to focus on pre-core projects that were still under development, de-risked to a degree, but under development. But that could be a stepping stone towards eventually being able to access the REIT market. So I think we're very comfortable. I think we're probably in a far better position than anyone in having potentially and offshore and onshore, and a lot of banks chasing us for a data center read. So that shouldn't be a problem.
spk06: Okay, great. Thank you.
spk04: Thank you. We'll now take our next question. Please stand by. This is from the line of General Ying from Nomura. Please go ahead.
spk07: hi i thank you for taking my questions i have just one quick one uh questions about china market so we are seeing you know the latest news about ai technology chart cpt so do we actually see any potential you know demand rising from the market about the ai data centers and do we expect the ai data centers will be uh you know could be the outsourcing by like companies like gds third parties or they will for some of the cloud companies who will do the self-building things that will be outsourced that i'll be self-built thank you
spk08: Yeah, I think you're right.
spk02: I think now everybody focus on the CHAP GDP, right? But then they forget that in China, this is already a lot of the big player already start to use the AI. AI is also very hot topic in China. And we also believe this will drive the new wave of the demand. And definitely GDS, our product, our location, all fits ai type demand in future in terms of power density in terms of total power capacity and the location what we we are so i think we are we are very very encouraged by the new wave of the demand this will affect our business in next few years and just what happening in the last eight years ago when the cloud starts right so i think we are very very happy i think the it Definitely, I think AI-type demands ask for more high-power density. It's very difficult to build by themselves. So also will be the trend.
spk06: That's what we believe.
spk07: Thank you very much.
spk04: Thank you. We'll now take our next question. Please stand by. This is from the line of Edison Lee from Jefferies. Please go ahead.
spk10: Hi. Thank you very much for taking my questions. My first question is about your build-up schedule or your delivery schedule, and I found that in 2023, 85% of your delivery is actually taking place in the second half, only 15% in the first half. So I wonder if that is driven by your demand assessment or driven by your construction schedule. Okay. That's number one. Number two is on your guidance for 2023, obviously the EBITDA growth lags behind the revenue growth. If you take out international business, what do you think the EBITDA growth can be in 2023? And then lastly, One of your peers recently said that a major cloud service provider in China has stopped self-building. And I don't know how true that is, but what is your view on the cloud service provider's self-building program, given the current state of the market? Thank you.
spk08: The first part about the delivery schedule We slow down pretty much our entire construction program. I think there's more than 20 projects in that program. But as you know, all those projects have customer commitments, and those customer commitments have a delivery date. So our ability to slow down depends on the customer agreeing to take delivery at a later date. Not all of them are. wish that to happen, and some of them would like us to keep to the original delivery schedule, which is, of course, perfectly fine by us. We're just trying to manage the occurrence of our capex to shorten the lead time between when we spend money and when the customers move in and start to generate income. So that's really what's behind the numbers. We do have a substantial amount of capacity in service, which is not yet revenue generating. I mean, our utilization rate is 71%. When you have a portfolio in service as large as ours, and the commitment rate is 95%, utilization rate is 71%. So that means there's 24% which is committed but not utilized. That's a big number. That's our backlog for air in service is 120,000 square meters. So that could move in practically with no additional capex. So you could take that into consideration, right? The completion of the projects under construction is not the only growth driver when we already have so much move-in ready capacity. William, do you have to answer the question about self-build?
spk01: What's the question?
spk10: The question is that one of your peers recently said that a very big cloud service providers, in fact, will stop self-build.
spk02: Yeah, I think this is the topic. I think it's not only one cloud service provider in terms of discussion. Yeah, I remember in the last cup of the earnings call, I think we are the largest distributor in China. We have a scale advantage. I think finally some of our customers start to realize that. So I think in terms of economic perspective, they realize it's not very efficient. So I think this is the topic. discussion there internally. So we are willing to, we are trying to encourage this for their future. And some of them can also talk about they sell some asset to us. We are also consider about this option.
spk08: That's not about the EBITDA growth rate. including international. We allocate SG&A to international using sound accounting principles. With that allocation, the EBITDA of international is negative about 100 million RMB in 2023. So if you like, you can add that back and that's what GDS looks like without international
spk10: Okay, so on the revenue side, do you have anything projected for 2023?
spk08: Yeah, I think about, I'm just looking at 1.7% of our revenue comes from international in this kind of year.
spk10: Okay, okay. Okay, got it, yeah. Thank you very much, Dan.
spk04: Thank you. I'd now like to turn the call back over to the company for closing remarks.
spk01: Thank you all once again for joining us today. If you have further questions, please feel free to contact GDS Investor Relations through the contact information on our website or the Pearsons Inc. Investor Relations. Next time, see you. Bye-bye.
spk04: Thank you. This concludes this conference call. You may now disconnect your line. Thank you.
spk03: The conference will begin shortly. To raise and lower your hand during Q&A, you can dial star 1 1.
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