GDS Holdings Limited

Hello, ladies and gentlemen. Thank you for standing by for GDS Holdings Limited's second quarter 2025 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 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 second quarter of 2025 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 investors.gdsservices.com. Leading today's call is Mr. William Compton. 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. 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 certainties. As such, the company's results may be materially different from the views expressed today. Further information regarding these and other risk conservatives is included in the 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 its conference call include discussions of an audited gap 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 GAAP measures. I'll now turn the call over to GDS founder, chairman, and CEO, William Huang. Please go ahead, William.

Okay, thank you. Hello, everyone. This is William. Thank you for joining us on today's call. We delivered a solid second quarter. growing revenue by 12.4% and adjusted EBITDA by 11.2% year-on-year. We raised the net proceeds of US dollar 676 million through the issue of convertible bonds and equity in the international capital market, strengthening our HODLCO balance sheet More recently, we achieved a significant milestone in our onshore asset monetization strategy. With the successful completion of our CREITs IPO, the units of our CREITs are now trading on the Shanghai Stock Exchange at an implied cap rate of below 5%. This is a major breakthrough, giving us access to China equity capital market on highly advantageous terms. Our growth moving during 2Q25 was around 20,000 square meters, which is consistent with the level over the past five quarters. Our utilization rate has continued to climb. reaching 77.5%. Moving over the next few quarters will remain solid, driven by delivery of the 152 megawatts order, which we signed in 1Q25. We expect to deliver 35% of our total current backlog in the second half of 2025. In 2025, most new bookings were 23,000 square meters, mainly from traditional internet and the cloud business, with a good mix of customers and the locations. AI demand was relatively quiet due to the uncertainty of chip supply in China. Customers have a number of options across both imported and domestically sourced chips. It's a complicated matrix of performance, technology, availability, and other considerations. We think that it will take some time for customers to decide which way to go. We are very confident about AI-driven demand over the medium and long term. However, we are still in a period of wait and see. We should have a clear view after a few more months. During this period, we think that the most important thing is for us to be ready to respond. ready in terms of developable capacity and ready in terms of access to capital. On the capacity side, we have around 900 megawatts of power land held for future development in and around the tier one markets. We believe the coming waves of AI demand is going to be mainly for inference. This kind of demand is latency sensitive and will require relatively large sites distributed across the tier one markets. For operational reasons, customers will seek to deploy capacity for inferencing within established cloud regions and availability zones. We have multiple sites suitable for AI inferencing around Beijing, Shanghai, and Shenzhen. We have undertaken preliminary site preparations so that we can develop with a short lead time. This is an important consideration for customers. We believe there is a good chance that we will develop all of the all of these 900 megawatts and more over the next few years. The issue is only the timing of takeoff. On the financing side, we completed the first ever data center ABS transaction in China in late March. We then followed this up with the first ever data center REITs IPO in China in August. By pioneering these transactions, we have proven our ability to recycle capital from stabilized data center assets. This comes at the perfect time as we can use the proceeds to fund the new investment opportunities. Furthermore, the terms on which we have monetized the asset, established a benchmark for the value of our stabilized asset data center in trade markets, creating potential to unlock more value for shareholders. Our power of the land and our monetization vehicles are unique in China and give us significant competitive advantage as we enter into the AI era. Lastly, I would like to share some operation updates for our equity investment in Day One. In 2Q25, Day One added a phenomenal 246 megawatts of new commitments, which bring its total power committed by customers to over 780 megawatts. The new order in 2025 included an anchor customer commitment for its Thailand project. More recently, they announced that it has secured a second campus site in Finland, building on its successful market entry. Taiwan is well ahead of schedule to meet the target of one gigawatt of total power commitments within three years. I will now pass on to Dan for the financial and operating review.

Thank you, William. Starting on slide 13, in 2Q25, revenue increased by 12.4% year on year. This resulted from an increase in total area utilized of 14.1% and a decrease in MSR per square meter of 1.7% as compared with 2Q24. In 2Q25, adjusted EBITDA increased by 11.2% year on year. Adjusted EBITDA margin for 2Q25 was 47.3% compared with 47.8% in 2Q24. Following completion of the ABS transaction in late March, we deconsolidated the underlying projects for the whole of 2Q25. Following completion of the sale of stabilized data centers to the CREIT in late July, we will deconsolidate these projects during 3Q25. As we report earnings over the next three to four quarters, the reported revenue and EBITDA growth will be impacted because the comparison will not be apples to apples. We estimate that the apparent year-on-year growth rate without making adjustments to normalize for the asset monetizations will be about six percentage points lower. We will continue to call this out on future earnings calls so the underlying trend is clear. Starting with 2Q25, without the ABS transaction, the year-on-year adjusted EBITDA growth rate would have been 13.9% as compared with the reported 11.2%. As shown on slide 17, the ABS transaction took place on an EV to EBITDA multiple of 13.3 times based on the maximum potential sale proceeds and the projected stabilized EBITDA. This was a good start considering where GDS is trading as a listed company on NASDAQ and the Hong Kong Stock Exchange. However, for the CREIT IPO, we achieved an even higher multiple of 16.9 times at the IPO price of 3 RMB per unit. The units started trading on the Shanghai Stock Exchange on the 8th of August. The closing price yesterday was 4.04 RMB per unit, about 35% up from the IPO price. At this level, the CREIT is trading on 22.8 times the projected 26 EBITDA disclosed in the offering memorandum. This is close to double the current year trading multiple for GDS China business after adjusting for the assumed value of our equity investment in day one on a sum of the parts basis. Under the current CREIT regulations, we must wait 12 months before undertaking the first post-IPO asset injection. We started preparing some candidate assets of various sizes to give us the flexibility to dimension the next monetization in accordance with our financial requirements. It's important that we continue to grow and diversify the CREIT so that it remains a viable option for us to recycle capital when it is in our interest to do so. With a CREIT platform in place, if we assume that we invest in new projects, ramp up, operate, and monetize after five years at a cap rate in, say, the 5% to 6% range, the return on investment is at a very acceptable level. Turning to slide 18, when we gave CapEx guidance earlier this year, we spoke of 4.8 billion RMB of organic CapEx. There's 500 million RMB net proceeds in the current year from the ABS transaction, resulting in CapEx guidance of 4.3 billion RMB. We are now deducting a further 1.6 billion RMB net proceeds from the CREIT transaction, which was not previously factored in. This brings our capex guidance down from 4.3 billion RMB to 2.7 billion RMB. On slide 19, in 2024, we achieved positive cash flow before financing with the benefit of some capital recycling from day one back to GDS. In 2025, despite the fact that our organic capex is much higher than for the past few years, we expect our cash flow before financing to be close to break even with a contribution from our asset monetization transactions. Turning to slide 20, during the second quarter, we raised 535 million US dollars through the issue of a seven-year CB with 2.25% coupon and 35% conversion premium. We also raised 142 million US dollars through a simultaneous follow-on equity offering. One of the main purposes of this capital raise was to enable us to repay short-term debt at Holdco level and to either repurchase, if possible, or potentially redeem a CB issued in 2022, which is currently out of the money and putable in March 2027. Our net debt to LQA adjusted EBITDA decreased from 6.6 times at the end of 1Q25 to 6.1 times at the end of 2Q25. The reduction in consecutive quarters was partly due to the cash proceeds of the ABS which were received during 2Q25 and to the cash proceeds of the follow-on equity offering. As shown on slide 21, if we take account of the CREIT transaction on a pro forma basis, the net debt to LQA adjusted EBITDA ratio will come down to 5.9 times. If we further adjust for the value of our reinvestment in the ABS and CREIT listed securities, the ratio will come down to 5.7 times. On slide 22, we have already used part of the proceeds of the offshore capital raise to repay a working capital loan due in 2026. As you can see, we now have three CBs outstanding. As I mentioned, the 2022 CB is out of the money. Hence, we show the maturity based on the potential put in 2027. The liability is covered by cash which we are holding on reserve. The 2023 CB and the recently issued 2025 CB are both in the money and hence the maturity is shown based on the final maturity dates in 2030 and 2032 respectively. Turning to slide 23, when we gave guidance earlier this year, we already assumed that the ABS would be deconsolidated in 2Q25. However, the C-REIT transaction, which we completed during late July, was not factored into our 2025 guidance at all. Nonetheless, We are maintaining FY25 revenue and adjusted EBITDA guidance unchanged, notwithstanding the deconsolidation of the CREIT assets, while we are making mathematical adjustment to CAPEX guidance to deduct the CREIT cash proceeds. Finishing on slide 24, day one power utilized jumped from 143 megawatts at the end of the first quarter to 213 megawatts at the end of TUKU 25. This contributed to revenue growth of 244% and adjusted EBITDA growth of 265% year over year during the second quarter. Considering its fast expansion, including the recently announced second campus in Finland, Daewon is currently working on a Series C equity raise. We'd now like to open the call to questions. Operator?

Thank you, dear participants. As a reminder, if you wish to ask a question, please press star 11 on your telephone keypad and wait for your name to be announced. To withdraw a question, please press star 1 and 1 again. Please stand by. We'll compile the Q&A roster. This will take a few moments. For the benefit of all participants on today's call, please limit yourself just to one question. If you have more questions, please re-enter the queue. Thank you so much for understanding. And now we're going to take our first question. And it comes from the line of Yan Liu from Morgan Stanley. Your line is open. Please ask your question.

Thanks for the opportunity, and I congratulate on the very solid results. I would like to ask about the future strategy in terms of asset monetization in China after the successful series IPO. In terms of future injection, does management benchmark the previous set target of five times net debt to EBITDA? a long-term operation target for GDS leverage, or you are more keen to go a little bit more aggressive towards the SLI model to achieve better investment return via the five-year development cycle. How do you think about your future strategy here? Thank you.

Thank you for the question. There are a number of different considerations in the asset monetization strategy. One, of course, is the value at which we can monetize assets. And the benchmark which has been established in the ABS transaction and then at a higher level in the CRE transaction remains far above the level at which GDS shares are trading in the international capital markets. The implication of that is that every asset monetization is highly accretive for our shareholders, and I think that alone would be a strong rationale to monetize assets. Secondly, as we described in the prepared remarks. We feel like we are on the threshold of the start of another growth phase, multi-year growth phase in this industry, which should present some very good investment opportunities. The return on investment potentially is enhanced now that we know that we will be able to monetize assets cap rates, which is certainly higher than what we used to assume in our internal underwriting case. The implication is that if we can monetize assets and reinvest, then we can create more value for our shareholders. You mentioned the consolidated net debt to EBITDA ratio. I did check back, I think in 2023, I mentioned that we would target it five times within three years, which would be give me about another one year, I think. I think we're approaching that level already. But, you know, we're now, as I mentioned, at a stage where some attractive new investment opportunities could present themselves. I don't think it's necessary for us to be too aggressive about deleveraging if those opportunities arise. If they don't arise, then if we monetize on accretive terms, the deleveraging will naturally happen.

Thank you. I have another question, if I may, regarding the development of day one. Given the companies believe that the previous one gigawatt target will be achieved far ahead of schedule, what is the current new target for, for example, by the end of this year or next year in terms of the total area committed or megawatt committed? Thank you.

Yeah, I think based on current footprint, we build each growth engine in a different region right now. So Finland is a very good example in Europe. And in Asia Pacific, we already built up very solid and sustainable growth resource, land bank, and the power, right? So our growth will be very solid in the next few years. So in general, we target every year, let's say, at least at, let's say, 500 megawatt. Yeah. This is some internal . internal uh uh uh uh uh kpi but uh we are we commit to the market is this at least 300 right internally the five yeah that's our but we now we are we have the very very solid base to talk about this this kind of number because we are not just uh grow in one country one region we have the two region and the in the next couple of quarter, maybe we will enter some new region as well. So that will allow us can talk about more big number, more high growth. Yeah, thank you very much.

Thank you.

Thank you. Now we're going to take our next question. And the question comes to the line of Sarah Wang from UBS. Your line is open. Please ask your question.

Hi. Thank you for the opportunity to ask a question. And again, congratulations on the solid results. I have one question regarding the customer profile. So given the second quarter broth moving or new orders signed, are still quite solid despite all the uncertainties around US GPU export. So may I ask, who are the key customers separately for the move-ins and also for the new orders? And then what kind of workload do we set for these new orders to carry? Is it mostly CPU or GPU? And then if it's CPU, is it because the oversupply in the industry has been digested? Or if it's GPU, does that mean the domestic substitution has achieved quite meaningful progress so that the supply chain and certainly going forward should be mitigated? Thank you.

Customer profile. Customer profile in the workloads.

Yeah, I think the first question about the customer profile, as I just mentioned, there's traditional internet company plus a cloud service provider. And also, so this is some new order which we get this year, right? And in terms of workload, there's both, I think, GPU type and traditional CPU cloud growth as well. So I think this is quite a hybrid, right?

I see. Maybe a quick follow-up on the demand side. Do we see any signs of price increase or MSR increase in the industry? The reason I'm asking is because I saw in second quarter the MSR decline continued to narrow year on year and then even like increase quarter on quarter. But if we assume the contract length is maybe five years on average, So meaning the contracts renewed this year were mostly signed five years ago. That was when the industry MSR or industry rental price was peaked in 2020 or 21. But as we renew the contracts this year, we still maintain a stable MSR. So what's the key reason behind? Thank you.

Okay. First of all, let's talk about the market price. It's been stable since, say, the middle of last year, which is quite satisfactory. As I mentioned to you, my prepared remarks, if we evaluate new investment using a five-year cycle from inception to exit, and even if we use exit cap rates, which are you know, aiming quite a bit off from where, you know, our ABS and CRE transactions were done, you know, we can generate a very acceptable return. I think that's important because, you know, there's many industries in China, which are suffering and inflationary environment. The economics of our business remains very solid. Um, the, uh, MSRs, I know Sarah, because you asked quite a few times in previous earnings calls, the MSR reduction is partly a reflection of the reduction in the market price that we're talking about on a light-for-light basis, but it's also due to a change in the mix. If you go back five years, at that point, most of our new business was coming from edge of town sites. um langfang now beijing and changshu tai chi chang around shanghai and you know those were those were the early years for that kind of uh large edutown campus and there was a significant price differential as there was a significant development cost differential as compared with our sort of downtown you know co-location uh data centers So the MSR is not purely an indication of the reduction in market prices. It also reflects the change in the location mix. Over the next couple of years, we'll continue to see our MSR decline. Most of it is due to the price reset Contracts like that you say you gave an example five years ago five years ago 2020 2021 The market price has already come down I think in 2021 and 22 it came down further So we can calculate bottom up on our own contract portfolio. We know a pretty good idea of what the dilution is going to be from price reset over the next couple of years and And then that will get reflected in our MSR. So the MSR will continue to decline by a few percent if we take a quarter compared with the same quarter the prior year. It will continue to decline by no single digits percent for the next couple of years. Beyond that, I think we'll start to see much reduced drag And our growth rate will then reflect quite purely the volume growth in our business.

Got it. Thank you.

Thank you. Now we're going to take our next question. Just give us a moment. And the question comes from from Raymond James and Associates. Your line is open. Please ask a question.

Great, thank you. With the series C round that you're looking at, are you still considering a broader public offering for day one in 2026, which I think you've talked about in the past? And then can you break out some of the growth in day one between Southeast Asia and then Finland or any other EU sites that you're considering? Thanks.

Yeah, frankly, it's It's the shareholder's plan to have an IPO of day one from GDS perspective in particular is because we would like to be able to have the opportunity to distribute the shares to our shareholders. That remains the case that we target have an IPO within 18 months. Series C, we didn't anticipate that there would be another um equity round pre-ipo but the performance of day one has far exceeded our expectations and it's been phenomenal um and uh you know that's what's driving the series c i mean if i can't rule out there'll be other capital raises before before the ipo um day one yeah yeah has a plan to use mezzanine debt as well that's still that's still the case um So these pre-IPO rounds are a function of the success the business is having. Second question. I can answer that. You asked us to break out Europe. So far, our European presence is in Finland. in the Helsinki area and you know we have a first campus for which we obtained an anchor customer commitment and if I don't want to be too precise but it's well over 100 megawatt commitment and expect that we will build on that quite quickly in terms of getting follow-on commitments The strategy of day one is to be a pioneer in creating new markets. It's not easy to do that. Day one has done it multiple times now, working with different customers in close collaboration to de-risk our market entry. And then that gives us the opportunity to build on that base. We think that Finland is a very attractive location for data center operations. because of the access to renewable energy, the competitive power tariff, ways of supporting operating environments. So what you see is just the foundations now, the de-risk market entry, secured resources for expansion, and the opportunity to add significantly to that.

OK, great. Thank you.

Thank you. Now we're going to take our next question. And the question comes from the line of Edison Lee from Jefferies. Your line is open. Please ask your question.

Thank you for taking my question. My first question is, on day one, you have roughly 780 megawatt committed power. Would you be able to give us some color as to the split between Chinese customers and U.S. customers on that 783 megawatt. I think your long-term objective previously mentioned was 50-50, right? So I just want to know the progress of that.

I think, frankly speaking, the current, I think it's percentage-wise not a significant improvement, but it's because it's a very early stage, right? Last couple of quarter we experienced this situation because every time we will write some key customer, their demand and to try to build our business. And sooner or later, we say that this is always our direction, right? And so I think this will change maybe in the next, two or three years, right? We'll we change it the whole profile. I think currently currently like a percentage wise, I think they I don't remember that exact what the exact number made 3070 right. So 30 from the international customer 17 from let's say, kept telling his customer, but they are they are overseas business.

Yeah. I see. Okay. Thank you. Quick follow-up here on your guidance. You haven't changed your revenue and EBITDA guidance this year. And the first half is very strong, right? So I'm just wondering how we should think about the second half growth based on guidance not being changed.

For the second half, we have the the impact of deconsolidation of the sea reed. That wasn't factored into our guidance, our original guidance at all. And we will be deconsolidating the revenue in EBITDA from late July. That will have a material impact in terms of the EBITDA for those five months post deconsolidation. I'm aware that the implied growth rate for the second half is lower than the actual growth rate for the first half, but we didn't feel that we should adjust our revenue and adjusted EBITDA guidance at this point in time.

Does it mean that it's going to be impacted more by moving in the second half and also maybe higher depreciation as you deliver more projects into the second half?

Well, I think let's see what the growth rates actually are. And so there's a lot of moving parts, right? Right.

Okay, no problem.

Thank you. Now we're going to take our last question for today, and it comes to the line of Gokul Hariharan from JPMorgan. Your line is open. Please ask your question.

Hi, William, Dan, and Laura. Thanks for taking my question. First of all, it looks like you have a fairly back-end loaded delivery schedule this year. Dan, could you outline how that will influence growth probably into next year, given most of this is likely not captured in this year or even early next year? So should we expect that there should be a reacceleration in revenue and EBITDA growth sometime maybe Q2, Q3 next year, given you're delivering a lot of capacity in second half of this year? That's my first question.

We are delivering a lot of capacity in the third and fourth quarter of this year. The incremental revenue per square meter for that capacity is below our MSR. It's edge of town capacity. These are a couple of large sites which are being developed specifically for you know, AI inferencing with a very high power density. And, you know, maybe the impact of that is not as great as it would be if this was more traditional cloud business. I think we stick by our quit high level, you know, direction, you know, that we're targeting you know, high single digit EBITDA growth year on year. We have a backlog that will drive some of that. But we also need to have new bookings to drive that. And for now, I think the new bookings are at a healthy level. It's higher than it was in the last few years. But it's not reflecting mega orders like we saw in the first quarter this year. So until that happens, I think our growth rate won't really accelerate.

Understood. And how are the conversations going with customers regarding some of these AI orders? Given the supply situation, I think definitely seems a little bit more optimistic in Q3 compared to what it was in Q2. Are you seeing a lot more interest from customers and the sticking point is still like your certainty of availability of chips or is there any other factors like the inferential debt demand is going to come a little bit later within this AI cycle compared to a lot of the remote site training demand that has already happened in the last couple of years?

Now, we saw in the first quarter, there's no chip supply issue. We would see much stronger bookings. And that gives us a lot of confidence about the future. So it really is an issue around chip supply. And that's not an issue that gets resolved very quickly. There have been policy changes. And I think right now, yeah, there's, yeah, I think customers are waiting for the new technology, in terms of the next generation of Nvidia chip. So it may not just be all about, you know, h 2828 20. It could be about the next, the next big thing. And I think we'll have a clear view on that in the next couple of months, then we can talk more precisely about, you know, the timing of when we'll start to see those, those large orders. In the meantime, all we can do is get prepared. And I think we're very well prepared. Yeah, we've had the powered land, we've incurred some capex to prepare that too, which shortens the lead time. And we know from our previous experience in China and also from observing the experience of day one that when customers are deploying AI, they're usually in RE. So I think we're very well prepared in terms of the development of all that. And we're well prepared in terms of our access to capital, both the capital we've raised and our ability and confidence in being able to to recycle more. I don't think there's any other data center companies in China which are as well prepared in both those respects.

Thank you, Gokul. Dear participants, thank you very much for your time. Due to time limit of today's call, we will not be addressing any further questions. And at this moment, I would like to turn the call back over to the company for any closing remarks.

Thank you very much once again for joining us today and see you next time. Bye.

This concludes today's conference call. Thank you for participating. You may now disconnect. Have a nice day.