GDS Holdings Limited

Hello ladies and gentlemen, thank you for standing by for GTS Holdings Limited's first quarter 2025 earnings conference call. At this time, all participants are in a listen-only mode. After management prepare remarks, there will be a question and answer session. Today's conference call is being recorded. I will now turn the call over to your host, Ms Laura Chen, Head of Investor Relations for the company. Please go ahead, Laura.

Thank you. Hello everyone, welcome to the first quarter 2025 earnings conference call of GTS 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 this conference call, can be viewed and downloaded from our website at investorsgdservices.com. Leading today's call is Mr William Huang, GTS founder, chairman and CEO, who will provide an overview of our business strategy and performance. Mr Dan Newman, GTS CFO, will then review the financial and operating results. Before we continue, please note that today's discussion will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and circumstances. As such, the company's results may be materially different from the views expressed today. Further information regarding these and other risks and circumstances 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 the U.S. Securities Law. Please also note that GTS earnings press release and this conference call include discussions of unaudited gap financial information as well as unaudited non-gap financial measures. GTS press release contains a reconciliation of the unaudited non-gap measures to the unaudited most directly comparable gap measures. I will now turn the floor over to GTS founder, chairman and CEO, William Huang. Please go ahead, William.

Thank you, Laura. Hello, everyone. This is William. Thank you for joining us on today's call. We started at 2025 with very solid results. In the first quarter, we achieved revenue growth of 12% and adjusted the EBITDA growth of 16% year on year. It is the highest growth rate for the past two years. This is the result of our continued focus on backlog delivery and new orders with faster moving schedule. Our growth moving during 1Q25 was around 20,000 square meters all in cable markets. Our utilization rate reached 75.7%. Quarterly movement was at a consistent level since the beginning of last year. We expect the pace of moving to continue through this year with around 40% of the current backlog to be delivered by year end. The demand environment has turned the corner with AI developments. This led to an initial wave of demand for AI training in remote locations. Now the demand is coming to tier one markets with AI inferencing. We believe inferencing could be a much bigger and a more sustainable opportunity across multiple years. The meta deal of 152 megawatts is evidence of stronger demand during this AI era. This new order requires us to deliver data centers within six months. The customer committed to moving fully within the following six months. The whole cycle for obtaining the new order to full utilization is about one year. This is a high quality AI driven new business with no moving risk as we confirmed with the customer. Looking forward, there are still uncertainties around AI chip supply in China in the short term. Our customers are walking out their deployment paths. As a result of capacity supply, we are well positioned to capture these opportunities. We already have around 900 megawatts of capacity for future development in and around tier one markets. As I mentioned, we believe the coming wave for AI demand is going to be largely from inferencing, which requires large sites in tier one markets. We have multiple sites sustainable for AI inferencing around Beijing, Shanghai, and Shenzhen. As demand continues to grow and time to deliver becomes the key fact, our health for development capacity will become more valuable. We believe there is a good chance that we will develop all of these 900 megawatts and more within the next four years. On the financing side, we made significant progress with our asset monetization program. We completed the first ABS transaction in Q1, Q25. And we are making good progress on the seed rate transaction. Our asset monetization strategy gave us financing flexibility in terms of being able to recycle cash in China when we need to. It gave us an option to capitalize new projects. We are working on that. Lastly, I would like to share some operation updates for day one. In Q25, they added 70 megawatts of new commitments, which brings its total power commitment committed to over 530 megawatts. In the current quarter, they also made substantial progress in expanding its footprint. It obtained customer commitments for its Thailand project. In addition, it made a breakthrough into a completely new market, Europe, and landed its first project in Finland together with secured customer commitments. The order for Thailand and Finland are expected to total over 220 megawatts, which will be added to power commitment in the next few months. This will bring total power commitment to the over 750 megawatts. Day one is ahead of schedule to meet the target of one gigawatt of total power commitment within three years. The new market expansion demonstrates day one's capability of working with world-leading tech companies to provide total data center solutions. Day one creates new markets where customers can scale up efficiently and within a short lead time. It has done it successfully in Malaysia and Indonesia, and will do so again in Thailand and Finland. This capability is truly what sets day one apart. Now I will pass on to Dan for the financing and operating review.

Thank you, William. Over the past few years, our financial objectives were to get back onto a higher growth track in terms of EBITDA, while at the same time strengthening our financial position and deleveraging. With the advent of AI demand in China, we can look forward over the next few years to more and better growth opportunities. However, as we capture these opportunities, we will maintain strict financial discipline. We believe that this is the right approach which has potential to create significant equity value with low investment and financing risk. Starting on slide 13, in 1Q25, revenue increased by 12% year on year. This was a result of an increase in total area utilized of .6% and a decrease in MSR per square meter of .6% as compared with 1Q24. In 1Q25, adjusted EBITDA increased by .1% year on year. In addition, we realized a gain on deconsolidation of subsidiaries sold to the ABS of over 1 billion RMB, which we have not included in adjusted EBITDA. Adjusted EBITDA margin for 1Q25 was .6% compared with .9% in 1Q24. The higher margin was mainly due to lower operating costs. Over the next three quarters, we expect quarterly adjusted EBITDA to increase on average by high single digits percentage year on year. This takes account of deconsolidation of EBITDA with completion of the ABS transaction on 31st March 2025. As shown on slide 16, subject to achieving performance conditions, we will receive total cash consideration of up to 1.8 billion RMB from the sale of the ABS, out of which we will reinvest up to 500 million RMB for our 30% share of the ABS issue. The first installment of cash proceeds has been received and booked in 2Q25. In addition, we have deconsolidated debt and other liabilities of approximately 1.1 billion RMB. The implied EB to EBITDA for the sale to ABS is around 13 times, which we believe sets an important benchmark for our forthcoming C REIT offering and for the valuation of our stabilised China assets as a whole. We are making good progress with the establishment of an onshore listed C REIT. It is moving forward faster than expected. We have received approval from MDRC and it is now being reviewed by CSRC and the Shanghai Stock Exchange. The application documents are filed publicly. Subject to obtaining all necessary approvals, we hope to launch and complete the offering later this year. The C REIT transaction is going to be very strategic. It will establish a further valuation benchmark for our stabilised data centres in China and it will create a vehicle into which we can potentially drop down further assets in future if we choose to do so. On slide 20, we have shown the pro forma deleveraging effect of the ABS and C REIT. The ABS is a done deal while for the C REIT we made working assumptions for illustrative purposes. As you can see, we are able to support total capex in the current year of 4.8 billion RMB before taking account of the proceeds of asset monetisation while lowering our net debt and leverage ratios. Turning to slide 23 on business outlook, when we gave guidance at the last quarter end, we already assumed that the ABS will be deconsolidated from the beginning of Q25. If we complete the C REIT this year, it will have some impact on our financials but we still think that we can meet our original revenue and adjusted EBITDA guidance. Thus, we are keeping the previously provided guidance of total revenue and adjusted EBITDA unchanged. The C REIT transaction, if completed, will also impact our investment cash flow. As of now, we keep our capex guidance unchanged which just includes gross capex less the initial proceeds from the ABS transaction. Finishing on slide 24, now that we have deconsolidated day one, it is important to look at the equity value of GDS on a sum of the parts basis. In addition to our equity value creation in China, we expect the value of our equity interest in day one to appreciate significantly. Based on the series B benchmark from last year, our equity interest in day one was worth around 1.3 billion US dollars or 7 US dollars per GDS ADR. William mentioned that day one is already on track to achieve total power commitments of over 750 MW in the next few months. As day one achieves optimal operating leverage, its EBITDA per MW should trend upwards towards industry benchmark levels. This gives us indication of the current level of contracted EBITDA which can be converted to actual EBITDA as backlog contracts are delivered over the next few years. I would now like to open the call to questions operator.

Thank you sir. As a reminder to ask a question, please press star 1 and 1 and you telephone and wait for your name to be announced. To withdraw your question, please press star 1 and 1 again. Once again, please press star 1 and 1 and you telephone and wait for your name to be announced. To withdraw your question, please press star 1 and 1 again. For the benefit of all participants on today's call, please limit yourself to one question. If you have more questions, please re-enter the queue. Thank you. We are now going to proceed with our first question. The questions come from the line of Yang Liu from Morgan Stanley. Please ask your question.

Thanks for the opportunity. Two questions from my side. First, congratulations on the solid result. My first question is regarding the China demand, especially from the hyperscaler side. We start to hear a lot of noise on the chipset supply since March. Could management update us in terms of their demand quarter to date given a lot of things happened in the past two months? Is there still any order coming in in the second quarter, queue to date? That's my first question. My second question is regarding the financial guidance because Dan just mentioned that previous guidance does not factor in the ABS deconsolidation and now the deal got closed and actually you don't need to change the guidance. What should be the expectation on the three quarters of the contribution from that project to the two-year number? Thank you.

This is Wenem. Let me answer your first question. I think the demand is very strong in general and we see that AI related demand will continue to maintain a strong position. But the question we have to say we are lucky. We are sitting in all our assets sitting in the tier one market, which is this demand mainly driven by the inference. Inference that means the customer less relying on the GPU. They will use more hybrid and traditional systems. I will see our demand will continue. It's too early to say what's our target. But in general I have to say we have 900 megawatts held for future development capacity, well positioned. As I said in general, midterm, long term, we can digest, we can sell this 900 megawatts within four years. We are very confident on that. But I think maybe in short term, I think a lot of training demand will be impact. But it's not our target. In past couple of years for training demand it's not our target.

So

when we gave EBITDA guidance at the midpoint it implied year on year growth, full year 25 versus 24 of 8.5%. We had assumed that the ABS transaction would close at the end of one queue, which indeed it did. If we had not done that ABS transaction we would have continued to consolidate the underlying assets for the second, third and fourth quarter of this year. On that basis we actually showed the last cycle that our annual growth rate in terms of EBITDA would have been around 11%. So the impact of the ABS transaction closing at the end of one queue is to reduce full year EBITDA by around 130 million R&B. That's what we would have consolidated over the next three quarters and to reduce the annual growth rate from 11% down to the guided 8.5%. Now of course we completed the first quarter. We announced that in the first quarter our year on year growth rate was 16%, which is clearly well above that level of growth. That's why I try to give some indication of the expected growth rate year on year in the second, third and fourth quarter. I said it won't be as high in the first quarter, but it should be high single digits in percentage terms. On average each quarter two queue versus two queue, three queue versus four queue.

I want to add on one point. I think yes, based on what we know and understanding our customers already tested domestic GPU for a while. So I think if the chips are not working properly and the input get some issue, I think in the next 12 months domestic GPU will catch up. Jeff, I want to hear you.

Thank you.

We are now going to proceed with our next question. The questions come from the line from Farah Wang from UBS. Please ask your question.

Thank you for the opportunity to ask questions. I just have one question. Given GDS is actually expanding beyond Southeast Asia and even into Europe, can we compare the IRR profile or EBITDA yield across different markets for example, Johor, Thailand or Finland and also compare that to China? Thank you.

Sarah, I have to correct you. It's not GDS. It's day one. I'm sorry. Day one. Just

on single digit level.

What we've seen so far across several different markets, we simply take the development yields in the low teens, which is quite healthy and higher than what we currently achieve in China on a certain investment cost basis. That probably reflects that in the markets in which day one is operating, there's a slightly different supply-demand balance from China. It's a good, a good leading indicator because AI demand really takes off in China in day one markets. We can see that demand-supply balance shifting in China and hopefully that will lead to better yields in China as well.

We are now going to proceed with our next question. The questions come from the line of Frank Laughlin from Raymond James and Associates. Please answer your question.

Great. Thank you. Can you give us an idea of when you expect the China business to be self-funding and does this new wave of AI demand push that out a little bit? And then if you can comment on whether you have the full amount of funding for the 750 megawatts of commitments in day one, that'd be great. Thanks.

Let's have the first part of Frank's question about... So in China, we are roughly great even in terms of pre-cash flow before financing. We were actually positive pre-cash flow before financing last year and in the current year maybe we should... So looking at pre-cash flow before financing, we look at net debt and with the contribution from two asset monetization transactions, we should be able to bring down net debt over the course of the year. That means that we are already through operating cash flow and asset monetization able to generate sufficient cash flow and to de-consolidate debt on sale of assets so that it is at least equal to the amount of annual capex. William mentioned that we're quite confident that over the next four years we could potentially develop our entire land and power bank and tier one markets which is around 900 megawatts and maybe more. If we did that evenly over four years, it would equate to around 5 billion yuan per year of annual capex which is similar to this year's level. With the operating cash flow which we expect to grow over that time period and the ability to monetize assets through the listed C-week vehicle, I believe we'll be able to repeat the pattern of this year's financing in terms of investment cash flow being offset by operating cash flow and asset monetization proceeds. For day one, we take 750 megawatts, William mentioned, and day one to date has raised nearly 2.5 billion dollars of equity. Day one is fully capitalized to be able to develop and deliver that portfolio, that level of commitments.

Yeah, I believe if day one needs to raise money, it's not an issue and can well access all international capital markets.

Okay, great. Thank you very much.

As a reminder to ask a question, please press star 1 and 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 and 1 again. For the benefit of all the participants on today's call, please limit yourself to one question. If you have more questions, please re-enter the queue. Thank you. We are now going to proceed with our next question. The questions come from the line of Edison Lee from Jefferies, Hong Kong. Please ask your question.

Hi William and Dan. Congratulations on another great quarter. I have in fact two pretty quick questions. Number one question is about your growth new area committed in the first quarter at 46,000 square meters. I think that's a new high in many quarters. So can you share some color as to how many customers this new number is coming from and where the locations are for this 46,000 square meter? And then number two is there has been some talk in the industry in China about new government regulations controlling the expansion of AI data center. And right now they need to approve any project, seven megawatts or above. And also there is some talk in the industry that China in fact does not want or does not prefer private companies to be building AI data centers. They prefer SOEs to be building AI data centers. And I understand a lot of your power reserve actually has been obtained some years ago already. So I just want to know whether there's any risk that the government actually needs to reopen the book and re-approve some of your power. And yeah. And what is your thought on these market talks right now? Thank you.

OK, I think the first question is I think the Q1 mainly driven by one of our traditional hyperscale customers. I think it is located in Nangong, which is in Changsha, which is very close to Shanghai and Beijing. So this is exactly if everybody remembers during the cow era, we used to represent 50 percent of the cow population in this major city or around this major city. So we are very, very lucky at that era. So now inference, I think we are benefit from the inference demand because I just mentioned, right? So the inference model is more like a hybrid that uses the GPU plus CPU cow. So they will carve the cow brain together. So I think this is one thing. The first question. The other is about the control AI data sensors. So my understanding is mainly, I think, mainly for the SOE investment. So I think I should point out our 900 megawatts capacity. We already, most of them, we already obtained the power energy quota. So this is where new guidance, new policy will not impact us.

Okay. Thank you.

We are now going to proceed with our next

question. The questions come from the line of Daily Lee from Bank of America. Please ask your question.

Hi, thanks for taking my question. Congrats on the solid demand trend. I have two questions. Number one is about the overseas business. We received like 70 megawatts new orders. And could you give some color about the mix of the clients for China and overseas and or the mix of AI and non-AI? And given the AI diffusion policy has been withdrawn by the US, how could you share some color about the client feedback, about the future, you know, new orders or the moving progress for the international business? Some questions about our series insurance in China market. I saw the news which received the first round of feedback from the CSRC. And how do we see the progress? Can we expect to be in the second half this year? How is the timeline? Thank you.

And

the first question I think if everybody remembers, we used to talk about our clients in the first round. In general, it's mixed. We got successful orders from international customers and also Chinese customers as well. I think we used to talk about our clients, our major clients from China. They are major use. The purpose for their deployment is to support their e-commerce and the video business and the social media business. It's just to use it. It's used a high-performance CPU. So in general, in the last three years, based on our understanding, our total capacity serves 90% for GPU. CPU. Only maybe around 10% used to the purpose for GPU. So this is, I think if everybody remembers the last couple of quarters when we talked about the international market, that's been changed.

For the C-REIT offering, we've been through many rounds of review and approval. And the stage that we've now reached is that the listing application is being reviewed by the Chinese securities regulator, CSRC, and the Shanghai Stock Exchange. And this is a public process. So the perspectives and some other key documents have been filed and are available for the public to access. And we've been asked questions just like the US SEC process where applicants are asked to address a number of questions. And our responses will also be filed publicly. But typically this stage of the process takes a few months. We don't take anything for granted. But if all goes well, we would hope to receive the clearance to be able to proceed with an offering and a listing. And then we would have one year in which to make a decision as to when to launch that. Ideally, we would be able to do that later this year and complete the process and the C-REIT before the end of this year.

We are now going to proceed with our next question. The next questions come from the line of Eunice Liu from Goldman

Sachs. Please ask your

question.

Good evening, William, Dan, and Laura. Thanks for taking my question. I'm asking question on behalf of our analyst Timothy Zhao. So our question is first on GDS China. Could you elaborate more on the pricing outlook for the China business? And my second question is on day one. So we noticed your EU margin improved through the latest quarter. Could you explain the drivers behind? Thank you.

I think the article for the China business, we maintain very confidence in. Okay. The price of it, right? I think the current new business price is very stable. And I think in general, I think the new business is, let's say, maintained at a very, very stable level right now, whatever from the Beijing market or Shanghai market or Shenzhen market. So this is our outlook for the future.

Day one had an EBITDA margin in 1Q25 of 31%. But for a company that actually only started to generate revenue about five quarters ago, that's already quite remarkable. And my understanding is that day one ramp up over the next few years, it delivers its backlog, is going to be very rapid. As that happens, day one will be able to achieve higher operating leverage on its corporate costs and on its business development costs. And I think within a few years, you'll see that EBITDA margin hit some industry benchmark levels.

Thank you. This concludes the question and answer session. I'd like now to turn the call back over to the company for closing remarks. Thank you.

Thank you all once again for joining us today. I will see you next time. Bye bye.