GDS Holdings Limited

Hello, ladies and gentlemen. Thank you for standing by for GDS Holdings Limited Third Quarter 2025 Earnings Conference Call. At this time, all participants are in listen-only mode. After management 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.

Thank you. Hello, everyone. Welcome to the third quarter 2025 earnings conference call of GDS Holdings Limited. The company's results were issued via Newswire services earlier today and are posted online. A pre-presentation of which you will be able to join this conference call can be viewed and downloaded from our IR website at investors.gdsservices.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. 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 the 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 this conference call include discussions of unaudited gap financial information as well as unaudited non-gap financial measures. GDS press release contains reconciliation of the unaudited non-gap measures to the unaudited most directly comparable gap measures. I will now turn over the call to GDS founder, chairman, and speaker. Go ahead, William.

Thank you. Hello everyone, this is William. Thank you for joining us on today's call. During the third quarter, our revenue increased by 10.2% and our adjusted EBITDA increased by 11.4% year on year, maintaining the healthy growth trend since our business began to recover last year. During 3Q25, our growth Additional area utilized was around 23,000 square meters. We are on track to achieve our highest every year of moving. We continue to deliver the long-term backlog. In addition, we are now delivering the 40,000 square meter or 152 megawatt order, which we won in the first quarter of this year. By being selective with new business, we have successfully shortened the book-to-build period and brought down our backlog. Nonetheless, we still have visibility for over 70,000 square meters of moving from the backlog next year. Our total new bookings for the first nine months in 75,000 square meters are all 240 megawatts. We expect to achieve nearly 300 megawatts for the full year, which is a big step up from the level of the past few years. Around 65% of our bookings in 2025 are AI-related. Nonetheless, AI demand in China is still at a very early stage. If we look at the big picture, the domestic tech industry has reached a critical juncture with major players making unprecedented financial commitment to AI infrastructure. This marks a definitive end to the previous a downturn and signals the beginning of a robust recovery for the data center sector. All of our major customers are committed to the massive scale of this new investment cycle, with CapEx plans of hundreds of billions, underscoring the intensity of the new AI arms race. leading local chip companies are making continuous development progress in terms of performance, efficiency, and capacity. The growth of the domestic chip segment will secure the long-term growth of the AI infrastructure industry. We have unwavering confidence in the AI demand to to come based on the development and the ramp up of domestic technologies. We believe that new bookings in the coming years could be better. And this is what we are preparing for in our strategic plan. There are two essential ingredients to win big in AI. Power the land and access to capital. We have already secured around 900 megawatts of powered land in and around Tier 1 markets, which is suitable for AI demand, particularly for AI inference. In addition, based on our communications with our customers, we are in the process of securing more powered land in complementary locations and we believe that 900 megawatts will not be enough. On the financing side, we recently completed the first IPO of a data center REIT in China. The transaction was a huge success. We intend to inject more assets in the REIT next year. and establishing a continuous pipeline of asset monetization. The REIT gives us a significant competitive advantage in terms of accessing capital from the domestic equity market. It enables us to monetize assets efficiently, repeatedly, and at the lowest possible cost. The China market is at an inflection point. The outlook for the data center industry is very exciting. Our market position is as strong as ever. Over the past few years, we have taken a conservative approach. We improved our asset utilization and significantly strengthened our balance sheet. Going forward, we will maintain our financial discipline while at the same time taking a more aggressive approach to new business. I will now pass on to Dan for the financial and operating review.

Thank you, William. Starting on slide 15, as William mentioned, in 3.2.25, our reported adjusted EBITDA grew by 11.4% year on year. At the end of 1Q25, we deconsolidated the data center project companies, which we sold to the ABS. And then during 3Q25, we deconsolidated the data center project companies, which we sold to the CREIT. In order to present a consistent trend, we have adjusted historic numbers to take out the EBITDA contribution of the deconsolidated companies for the first nine months of 2025 and for the comparative period. On this pro forma basis, our adjusted EBITDA for the first nine months grew by 15.4%. Turning to slide 16, our CRE started trading on the Shanghai Stock Exchange on the 8th of August. As of yesterday's close, the CREIT units were priced at 4.375 RMB, 45.8% up from the IPO price. At this level, the CREIT is trading on 24.6 times EV to the projected 2026 EBITDA as disclosed in the CREIT offering memorandum. The implied dividend yields is 3.6% based on the projected cash available for distribution, also as stated in the offering memorandum. It is our strategic objective to grow and diversify our CREIT so that it is a viable option for us to recycle capital on a repeated basis, thereby unlocking value for GDS shareholders and freeing up funds for new investment. Under current regulations, we are permitted to apply for approval for the first post-IPO asset injection six months after the IPO date, i.e. during 2Q26. Thereafter, it will take some time to complete the regulatory review process. For the first IPO, post-IPO asset injection, we are preparing assets with a target enterprise value of around 4 to 6 billion RMB. This compares with an enterprise value of 2.4 billion RMB for the assets which we injected into the CREIT at IPO. With the creation of the CREIT platform, we have the opportunity to invest in new data centers, ramp up, operate, and then once the track record qualifies to monetize over a five to six year investment cycle. Even if we take a very conservative view on potential future exit multiples into the CREIT, the return on new investment is still very compelling. This could not have happened at a better time as we address the upcoming AI demand wave. We think it's a game changer. Turning to slide 17, for the first nine months of 2025, our organic CapEx was 3.8 billion RMB. We still expect our organic CapEx for the full year to be around 4.8 billion RMB. However, Net of the cash proceeds of the asset monetization, our capex will be around 2.7 billion RMB. As shown on slide 18, our operating cash flow for the full year will be around 2.5 billion RMB. Therefore, after taking into account the asset monetization proceeds, our China business is almost self-funding. Turning to slides 19 and 20, our net debt to last quarter annualized adjusted EBITDA multiple decreased from 6.8 times at the end of 2024 to 6.0 times at the end of 3Q25. The decrease is mainly due to the cash proceeds of the asset monetization and the deconsolidation of debt of the project companies sold to the ABS and CREIT, as well as the offshore equity capital raise, which we did in 2025. We are benefiting from the favorable interest rate environment in China, with our effective interest rate dropping to 3.3%. Turning to slide 22, after nine months, we are on track to achieve the midpoint of our revenue guidance, and at or above the top end of our EBITDA guidance for the full year of 2025. Our growth rate during the current year has clearly benefited from the strong new bookings in 1Q25 and a short book-to-bill period. This gives a clear illustration of how our growth rate can accelerate with a pickup in demand. The relatively subdued new bookings since 2Q2 at 25 will affect our growth rate next year. However, in our internal projections, we foresee higher bookings next year, leading to growth acceleration thereafter. We'd now like to open the call to questions. Operator?

Thank you. We will now begin the question and answer session. To ask a question, please press star 11 on your telephone and wait for a name to be announced. For the benefit of all participants on today's call, please limit yourself to one or two questions. If you have more questions, please re-enter the queue. Our first question comes from the line of Yang Liu of Morgan Stanley. Please go ahead.

Thanks for the opportunity. I have two questions here. The first one is regarding the China market inflection. As William just mentioned, the The China market is approaching the inflection point. What do we need to see to see that really happen in the near future? And in terms of your strategy to go a little bit more aggressive in China, could you please elaborate more? For example, where is the location or what type of project, et cetera, are you planning? The second question is regarding the overall investment profile, because now we have a series platform, and it is a very effective way to recycle capital. And what is the new overall investment return with the series scheme? Thank you.

Okay, I think number one question is, yeah, I think how to... how to explain the aggressive approach. I think what we see in the market demand is very strong in China. I think our customer all announced their big investment in the next five years. I think now another signal is domestic chip is catching up. Just as what I mentioned, I think in terms of the efficiency, chip's efficiency, and the production capacity, I think they all improve a lot. That means the real data center opportunity is coming. So we will position, as I just mentioned, we still have the large, I think the largest land bank, power of the land bank around the tier one market. very good for the future inferencing another will another is i think the china mark china tech player they will continue to do a massive training so i think in order to catch up capture this opportunity we will we will acquire more land in some very cheap power location and more as much close to, let's say, tier one city. So I think this is our strategy, and a lot of the land acquisition is in process, and maybe something will happen we can announce in next earnings call. This is number one. Number two, I think Dan make an experience about the rates.

Sure. The unit economics of the data center investment in China is very solid. The selling price is stable. The unit development cost has come down to a level which is very efficient. And this allows us to generate typically 11% to 12% cash on cash yield on new investment. What has changed is the way that we can look at and evaluate investment. If we take the approach of investing, which maybe takes one year to construct, and then one year for the customer to move in fully, we have to hold the asset and operate for three years to establish the track record, which is required before assets can be injected into series. but then in the following year, which would be year five or six, we can consider an asset injection. But even if we use a exit multiple, a cap rate, which has been very conservative compared with even where we IPO'd our C REIT, but we look at the IRR over a five to six year period, then it is in the low to mid teens. And the levered IRR, the return on equity, is well into the 20s. I think fundamentally this is very attractive.

Yeah, I add one more point. I think we believe now is the right timing to step in the market. Because number one, I think the price is more stable Number two, I think the development cost is almost at the bottom in terms of history, right? So I think this is the right timing to maintain very good return. It's the right timing, yeah.

Thank you. Thank you for the questions. One moment for the next question. Our next question comes from Sarah Wang of UBS. Please go ahead.

Thank you and again, congratulations on the solid results. It's glad to hear that GDS is being more aggressive in acquiring new business opportunities. So I have actually one question, but two parts. So I think Ben just mentioned we're expecting higher booking next year. So regarding this booking, does that include our potentially new powered land acquired in relatively like regions with relatively lower power tariffs. And then second question is that if we are going into complementary markets on top of our 900 megawatts resources, then how shall we think about the, like, is there any difficulties in acquiring new power quota? Because this year we have heard, like NDRC, they're actually relatively rationalizing or controlling the new power quota release in China in general. Yeah, that's my question. Thank you.

Okay. The first question, I think that was new booking next year, right? We're not fully relying on the new acquisition of the land. we definitely will, if we can successfully secure the land, power the land, we can do more, right? So this is our focus base.

The second question, what's the second?

I think the power codes are always, I mean, in general, always not easy, right? But based on our track record and the repetition, I see a lot of governments willing to work with us. So for us, it's not that challenging for us. We have a lot of experience in the last 10 years to build up the right relationship with the government and the power company.

Got it. Thank you.

Thank you for the questions. One moment for the next question.

The next question comes from the line of Frank Luton from Raymond James and Associates. Please go ahead.

Great. Thank you. Can you give us an update on day one on private round funding and potential updates for a possible IPO? And then what is the outlook on your customers getting GPUs and be able to ramp their installs going forward? When do we expect that to crack open? Thanks.

Yeah, I think I answered a couple. Maybe Dan can add more. I think I have to say, I think after Series B, I think Day One is fully independent. So we cannot represent Day One anymore since that time, right? But we still can give some highlight information about Day One because we are quite enjoying the equity value increase for our clients. shareholder. I think all business in Asia Pacific and Europe, which we already announced the market, what we already stepped in, remain very, very good, very, very positive, and the demand still remains very, very strong. So I think Daewon's business is on the right track, and Could it be better? So that's all what I can tell you. Maybe if you are interested, maybe we can introduce to the day ones right people to explain more detail. Yeah.

Yeah. OK. And on potential for additional installs to RAMP.

The new business in day one, I think.

Yeah. What I can tell you is that remain very, very strong positive view for the future. Yeah. I cannot tell any detail more. I cannot represent. This is a GDS earnings call, right? Sorry about that. Thank you.

Thank you for the questions. The next questions will come from Michael Elias from PD Cohen. Please go ahead.

Great. Thanks for taking the questions. So in the US, when we think about the training workloads that we're seeing, we're seeing gigawatt-scale projects getting deployed. And I'm curious, when you think about what training will look like in China, are you seeing the opportunity deployed at that kind of a scale, i.e., in the gigawatt range? And then second question is, can you give us an update as you think about these AI data centers that you expect to build, what the time to build those data centers are and how that varies from traditional cloud data centers? And if I can squeeze it in, any notable constraints or long lead time items that we should be aware of?

Thank you. I think scale-wise, I think our client talk about it gigawatt level, I mean, new demand, right? So I think this is just like three years ago in what's happening in U.S. And the number-wise, we are talking, every big player talk about gigawatt size, new demand. So I think it's catching up. That's what we have been seeing. So in terms of Time to market, right? I think in China we can build very fast. I think normally nine months to 12 months is very normal. Yes, I started from the piling to deliver, right? The extreme case we can build, let's say even build within eight months. So that's our record in China.

Any bottlenecks?

No, I don't think in terms of development, yeah, supply chain in China is not an issue. Got it. Thanks for the call.

Really appreciate it.

Thank you for the questions. The next questions will come from the line of Daily Lee of Bank of America Securities. Please go ahead.

Hi, management. Thanks for taking my question. I have two questions here. First one is about we got new orders for the China market, like near 30 megawatts. Could you share what's the... Can you hear me?

Sorry. Go ahead. Go ahead. Sorry. Yeah.

Yeah. Yeah, could you give some color about the AI exposure? What's the percentage from AI, and is this about inferencing model training for the recent order? Number two, for the second one, is about the, we heard that the China government gave some window guidance in Tokyo this year to tighten the individual supply in China. And do you see any impact to us and to the market? Thank you.

Yeah, I think the... Yeah, new order from... Yeah.

Okay. In our prepared remarks, we commented that we... will probably reach nearly 300 megawatts in terms of new bookings for the whole of 2025. I think we had 240 megawatts up to the end of the first quarter. And there's some good new business in the fourth quarter. We also stated that, by our estimation, around 65% of the new bookings this year are AI-related. We only have a presence in Tier 1 markets. So that is AI in Tier 1 markets. So that's going to be mainly AI inferencing, or it can be a combination of AI inferencing and training, and it's being deployed within the established cloud regions and cloud availability zones.

The second question was... We know guidance about the carbon cost. I think this has always happened in the Tier 1 market, right? So... We are lucky. We are already prepared for that. And that's why I mentioned we still have almost 900 megawatts powered land. These powers all gathered carbon quota or near market. It's very difficult to apply new around the market. But in the remote area, I think I didn't hear heard any i didn't hear any about the uh window guidance because the power in those place it's uh it's a the the big problem is how to sell right it's it's not so the power is a capacity it's very large in the in a remote area so gather the power i think it's not very very difficult and i Local government very encouraged the data center. The operator built a data center in those places, locations.

Thank you.

Thank you. Thank you for the questions. Our next questions come from Timothy Chow of Goldman Sachs. Please go ahead.

Thank you, Major, for taking my question and congrats on the solid results. I have two questions. First is about the pricing trend. I was wondering if you can share some color on how you think about the MSR trend into fourth quarter and next year, especially given that probably the company is entering into a peak renewal period for the contract that was signed maybe five to seven years ago. Then how should we think about the MSR trend into next year? Second is about the overall market and competitive landscape. I think right now you have been emphasizing time to market quite a lot. If you remember, I think maybe five years ago when there was a wave about the cloud data centers and 5G network, there was also a wave of increased data center supply in China. Just wondering if you think from where we are right now, how do you think about the overall industry supply and demand dynamics? Thank you.

The first part of your question about the downward price reset when our install-based contracts come up for renewal. This has been going on for a few years and will continue for a few years more. The impact of that gets reflected in our MSR. I always give some comment on future expectations. Now I'd say that over the we expect the MSR to decrease by 3 to 4%. That's on average comparing 1Q versus 1Q, 2Q versus 2Q and so on. And that is not only a function of the downward price reset. We also have elevated higher levels of moving and that also has a dilutive effect on MSR, so that 3% to 4% reflects the combination of those factors.

Yeah, I think I had a little bit of my points. I think all the new-build data centers, the price is quite stable since two years ago. Nothing changed. I think this is very good. But in the meanwhile, I think the cost is more stable. So if you look at all the new building asset return, it's very decent. So I think this is a way to look at the MSR. Because the new campus, new building, in general, I think compared with the edge data center, the enterprise data center, even Cloud data center, the price definitely went down a lot. But if you look at the SM return since two years ago, it's very, very similar. And this price is very, very stable. Return is also very stable. It's 100% fit to the risk, to inject to the risk.

Tim also asked about the competitive landscape.

Competitive landscape, I think the new competition, I think, if you try to gather your customer trust and the reliable, you should show your financial capability. Now our customers more care about the financial capability, not just the capability you can build. Everybody can build easily, right? I think if you try to commit a customer 500 megawatt or 1 gigawatt campus in the future, I think our customer definitely will consider about it. Do you have the capability to access the capital market? What's the cash position you have right now? So this is a new competitive advantage. In terms of this, I think we are more, much more way ahead than any competitor else, right? So I think this is not just a land power competition, it's also the capability of the access to capital market. So in terms of this, if I look around, I think not that much company both have the land capability, power the land capability and position and let's say financing capability.

Thank you for the questions. Due to the time limits of today's call, I would like to now turn the call back over to the company for any closing remarks.

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

This concludes this conference call. You may now disconnect your line. Thank you.