GDS Holdings (HKEX:9698) Q2 2020 Earnings Call

0:00 Hello, ladies and gentlemen. Thank you for standing by for GDS Holdings Limited second quarter 2020 earnings conference call. At this time, all participants are in listen-only mode. After management's prepared remarks, there will be a question and answer session. Today's conference call has been recorded. I will now turn the call over to your host, Ms. Laura Chen, head of investor relations for the company. Please go ahead, Laura. Thank you. Thank you. Hello, everyone. Welcome to the 2Q20 earnings conference call of GDS Holdings Limited. The company's results were issued via Newswire Services earlier today and are posted online. A summary presentation, which we'll refer to during this conference call, can be viewed and downloaded from our IR website at investorsgdsservices.com.

0:52 Leading today's call is Mr. William Huang, GDS founder, chairman, and CEO, who will provide an overview of our business strategy and performance. Mr. Dan Newman, GSGFO, will then review the financial and operating results. Ms. Jamie Koo, our COO, is also available to answer questions. Before we continue, please note that today's discussion will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Security Delegation Reform Act of 1995. Forward-looking statements involve interior risks and uncertainties. As such, the company's results may be materially a bit different from the views expressed today. Further information regarding these and other risks and certainties is included in a company's prospectus as filed with the U.S.

1:45 SEC. The company does not assume any obligation to update any forward-looking statements except as required under applicable law. Please also note that GDS earnings press release and this conference call includes discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. GDS press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable gap measures. I will now turn the call over to GDS founder, chairman, and CEO, William Huang. Please go ahead, William. Thank you. Hello, everyone. This is William. Thank you for joining us on today's call.

2:34 I'm pleased to report that we had another very strong quarter. We achieved record organic sales with over 26,000 square meter or 60 megawatt of new customer commitments. We stepped up our development activities. We now have 17 data centers under construction, our largest ever. Area utilized increased by over 14,000 square meter, nearly double the moving for the prior quarter. We grew just EBITDA by 48% year-on-year, and our EBITDA margin crossed 47% for the first time.

3:30 The operating environment in China is now almost back to normal. And despite the escalating tensions between China and the U.S., we see no have all had adverse impacts on our business. Turning to our sales achievement on slide four. In the first half of 2020, our organic sales totaled over 48,000 square meters. Our original target for the full year was 80,000 square meters organic, but we are clearly are on track for a higher number.

4:16 And since then, I'm confident that we can deliver over 90,000 square meters organic in FY20, which is a big step up from last year. Demand has clearly gone to a higher level. This is not a temporary break. is the continuation of a stronger digitalization trend. China is already far advanced in some area of the digital economy. But there are many other areas which are just getting started. New technologies such as 5G, AI, blockchain, IOT, and digital currency can be demand multiplayer.

5:08 Chinese government policy is giving a strong push, leading Chinese companies and increasing their focus on the domestic market. For all of these reasons, we believe that demand will be sustained long into the future. Let's turn to slide five. In 2020, we obtained four organic high-scale orders each of which highlights the competitive advantage of our platform. Turning to slide six. Earlier this year, we acquired a large site in Shanghai, which we felt was particularly well suited to hyperscale development.

6:02 We have now obtained an anchor order from the leading CSP customer who was attracted by the location and the ability to expand on the same site. 22, slide 7. In 4Q19, we signed a framework agreement with the government to set up a new data center campus in Changshu, serving the Shanghai market. The campus has a developable net floor area of around 65,000 square meters. In 2Q20, we entered into a sales MOU with a leading CSP customer for around 30,000 square meters on nearly half the entire campus.

6:55 6,000 square meters is already committed and the balance of 24,000 square meters will be committed over the next two years. By enabling high-scale customers to learn and expand in this way, we get high visibility into future year sales. Let's turn to slide eight. We established our first data center project in Langfang near Beijing in 2019. Within a short period of time, we have gone from one data center in Langfang to eight data centers in service or under construction, for which we have obtained over 48,000 square meters of commitments from several of our top 10 customers.

7:54 We have secured a lot of land and power for expansion in Longfeng and have more coming in our pipeline. This will enable our customers to expand within our Longfeng cluster. Turning to slide nine, our top two customers continue to grow with us, both in tier one markets and remote locations. We fulfill about 30% of their incremental requirement. It's a great foundation for our business. And at the same time, we see a lot of growth potential. More than we realized from the next wave of high-scale customers. The demand from some of them could be almost as big as the top two.

8:44 It's a strategic priority. for us to expand this part of our franchise, further develop our ecosystem, and diversify our customers' relationships. We already have significant relationship with almost all of the hyperscale cloud and internet companies in China. However, until recently, we were missing a few desirable names. I'm therefore very pleased to report that in 2Q20, we obtained our first order from ByteDance. And in the current quarter, we obtained our first order from the PDD.

9:31 ByteDance is one of the high-scale orders shown on slide five. On the enterprise side, we have recently signed up a number of notable notable new customers, including Tesla, Starbucks, YamChina, BlackRock, and Dajia, a world leader in commercial drones. We won these customers because of the unique ability to set up a hybrid cloud architecture and access multi-cloud resources across our platform. We are also starting to see innovative industry cloud development.

10:19 For example, we are working together with a technology company and one of our major cloud customers to set up a dedicated cloud for the auto insurance sector. We believe that hybrid cloud on our platform could drive significant enterprise growth. Turning to slide 10, one of the keys to achieve higher sales is to have the right kind of data center capacity in the right place and the right time. Over the past five quarters, we have stepped up our construction program from 78,000 square meters to 133,000 square meters, and at the same time, Our pre-commitment rates have remained over 60%.

11:18 This demonstrates how our business is demand-driven. In order to manage this level of construction, shorten lead times, and lower cost, we have made significant progress in off-site prefabrication and modular construction. We are also working closely with strategic customers on joint procurement and the supply chain management. We believe that our unit's CapEx is the lowest in the market. Turning to slide 11. In order to maintain continuous supply, we have built up our pipeline in all tier one markets.

12:07 Currently, we have nearly 350,000 square meters of highly marketable capacity held for future development, and we are still adding to it. We believe that this is far more than any other company, and it gives us a significant competitive advantage. Following the government's new infrastructure policy, we have not seen any change in the allocations of resource in urban Beijing. Shanghai is continuing with its quarter system, which is calibrated to demand. Shenzhen may open up to a small extent.

12:55 In the edge of town areas, more land and power will be allocated for data centers, but the entry barrier is still high. because the government is very selective and maintains strong controls. We have to be creative in order to generate a new supply, particularly in the urban areas of tier one markets. This is the story behind the Beijing 13 project, which we recently announced. The opportunity was brought to us by a private equity fund. We will work with them and with the original project and the land owners during the development phase and then buy them all of it.

13:52 The deal looks a bit complicated, but we have total control. This is a highly marketable capacity for which we will obtain 100% pre-commitment in the near future. We are working on several other opportunities in urban Shanghai and Shenzhen that will also give us highly marketable capacity. Turning to slide 12, we continue to ramp up the development program for our JV with GIC. We expect to transfer the first project during the current quarter. We have also won our first order for a remote site from a second customer.

14:42 These remote sites are a totally different proposition from our core business. Our customers set up these remote sites themselves. and then look to all sorts of data center development and operation. It could be a high volume opportunity and we want to pursue it for strategic reasons. But in terms of returns, it's not the best use of our capital. We think the asset-light approach is the way to do it and we are working on further innovative Innovations to optimize our cost of capital.

15:27 Lastly, on slide 15, I would like to say a few words about what makes GDS fundamentally different from the other players in China. As of today, GDS has nearly 60 connected Excuse me, presenters, the line for our speaker is disconnected. Please take over, Daniel. Excuse me, presenters, the line for Mr. William has disconnected.

16:22 The other presenter can please take over. Meanwhile, I will connect them. Thank you. Okay.

17:11 Okay, sorry. The line is just... I come back again. Yeah, okay. Sorry. It's okay? Okay. Okay. Okay, sorry. So let's turn to slide 15. Lastly, on slide 15, I would like to say a few words about what makes GDS fundamentally different from other players in China.

18:01 As of today, GDS has nearly 60 interconnected data centers. clustered in strategic locations in all of China's major economic, financial, and network harbors. Within these data centers, we host all the major public clouds which are accessible over all the major telecom networks. The scale of our facilities, expansion capacity, and market presence together with software-defined connectivity and a multi-cloud ecosystem add up to a platform which is unique and far ahead of the pack.

18:49 This is obviously heightened interest in the data center opportunities in China. But from a competitive perspective, nothing has changed for us. Our customers are looking for a total solution provider to address all their needs in an integrated way. This is exactly what we offer. We have established our market position over many years and are clearly differentiated by our value proposition. We are confident that we will continue to build on our competitive advantage and further extend our leadership.

19:42 With that, I will hand over to Dan for the financial and operating review. Thank you, William. Starting on slide 18, where we strip out the contribution from equipment sales and the effect of FX changes. In 2Q20, our service revenue grew by 8.3%. Underlying adjusted NOI grew by 8.5% and underlying adjusted EBITDA grew by 9.1% quarter over quarter. Our underlying adjusted EBITDA margin was 47.8%. Turning to slide 19, Service revenue growth is driven mainly by delivery of the permitted backlog.

20:38 Net additional area utilized during QQ20 was 29,324 square meters, including organic move-in of 14,336 square meters. On the last earnings call, I said that we expected organic move-in during QQ20 of 10,000 to 11,000 square meters. The recovery in 2Q exceeded our expectations. We are now at a level of moving which we expect to sustain over the next two quarters. Our MSR per square meter was down by 3% quarter over quarter. But if we exclude the revenue and area utilized for BJ 10, 11, 12, which closed 25 days before the quarter end, the MSR per square meter was down by 1%.

21:37 We expect the MSR per square meter to remain at a similar level in the second half of the year. Size 20 and 21 show the quarterly margin trends. Due to seasonally high power consumption, utility cost was 1.8 percentage points higher Daniel Newman, Kejing Zhang, Wei Huang, Laura Chen, Yan Liang, Yixin Qian and with the recovery, we expect a step up in our corporate activities.

22:34 Taking all of this into account, we expect our adjusted EBITDA margin to remain around 47% in the second half of the year. Turning to slide 23, 1H20 CapEx paid was around 3.9 billion RMB. 1.3 billion related to the purchase of the Pujian land and buildings. 337 million related to acquisitions, mostly the initial equity consideration for BJ 10, 11, 12. And a further 215 million arose from the joint venture data centers.

23:20 Up until June 30th, 2020, We spent 485 million RMB cumulatively on the joint venture data centers, most of which will be recovered as and when we transfer the equity interests in the project companies to GIC. In 2.820, we expect organic capex to be more than double what we spent in the first half of the year, reflecting the higher level of sales and construction. We also anticipate spending around another 600 million RMB on land bank and 1.3 billion on acquisitions, most of which is deferred consideration for Beijing 10, 11, 12 and consideration due on the closing of BJ9.

24:10 Turning to slide 24, our construction program has been growing fast and around half of our projects are now greenfield. which means longer construction timelines. Although work on our construction sites is back to normal, in a couple of locations we're experiencing some short delays in activation of power supply. The delivery schedule at those locations has been pushed back by a couple of months. We have a lot of capacity scheduled to enter service in 2H20, particularly in the last few months of the year. Turning to slide 25, when we announced the BJ-1011-12 acquisition last December, two data centers were in service and one was under construction.

25:05 The overall utilization rate was 50%. As of today, all three data centers are in service and the overall utilization rate has increased to 75%. BJ-1011-12 have contributed around 29 million RMB in revenue and around 15 million in NOI during the 25 days post the acquisition closing in 2020. Looking forward, we have a number of potential M&A deals on our radar screen. There's one at quite an advanced stage, which involves taking over a project under construction at a very reasonable premium.

25:52 There's more competition for M&A opportunities these days, and multiples have gone up. Nonetheless, I'm confident that we can continue doing highly accretive deals. Looking at our financing position on slide 26, we raised $505 million from Hill House and SCT GDC through an equity private placement in June. We felt that this capital raising was necessary given where sales and construction are heading. We also put in place a $300 million revolving credit facility at Holco level to give us more flexibility in how we fund our investments.

26:38 All told, we completed 6.7 million RMB or the equivalent of $940 million of new debt financing and refinancing facilities during QQ20. For the onshore portion, the weighted average tenor was eight years and the weighted average all-in cost was 6.1% based on the current LPR reference rate. This continues the trend of extending the tenor and lowering the all-in cost of our onshore debt. Next on slide 27, our contract backlog now stands at 140,000 square meters. equivalent to 72% of our revenue generating area.

27:25 Our backlog for area under construction has gone up from 51,000 square meters to 82,000 square meters over the past five quarters, which reflects increased area under construction, sustained high pre-commitment rates, and longer construction period for greenfields. Our backlog for area and service now stands at 57,000 square meters. It's trending up. We typically deliver 20% to 25% of the backlog for area and service in each quarter. However, in 2Q20, it was 30%.

28:11 Finishing on slide 28, today we are confirming the full year guidance for revenue and adjusted EBITDA However, as I've already indicated, we are raising our CapEx guidance from 7.5 billion to 10 billion RMB. With that, I'll end the formal part of my presentation, and we'd now like to open the call to questions. AJ, please. Certainly. Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, Please press star 1 on your telephone keypad and wait for your name to be announced. If you wish to cancel your request, please press bound or hash key. For the benefit of all participants on today's call, please limit yourself to two questions. Thank you.

29:07 We have the first question from the line of John Atkin. Please go ahead. Thanks very much. I wanted to ask first about the slide that shows a lot of your hyperscale orders, slide five, and it would appear that a lot of the demand is in north China, and I wondered if you would have any kind of comments about where you expect most of the demand in the market to come from. Is it a lot of it also happening elsewhere, but it just happens to be that the winds that you and Scott were kind of weighted towards the north. And then maybe related to that is the overall pace of demand, notably difference now, market demands, not just your share compared to say six or 12 months ago. Thanks.

30:07 Hi, John. It's Dan here. I'll take the first question. I think third-party market research is some very different indications, but by our estimates, I think Beijing and Shanghai together account for around 60% of the market opportunity in Tier 1 markets. And if you look at the websites of the leading cloud players in China, you'll see that they have most of their availability zones and most of their cloud pots in both of those two places. So I don't think it's that surprising given that we try to be strategically positioned across where the market opportunity is, that Beijing should be such a significant part of our new business.

31:09 It also so happens that the Beijing market is probably the most constrained in China, and our early move, our first move to Lantang, the scale that we've set up there has been very instrumental in enabling us to win so much business. We've significantly increased our market share in Beijing. To be clear, when I talk about Beijing and Shanghai, that will include the surrounding areas. Once again, if you look at the cloud websites, you'll see that there are regions to find around Beijing and Shanghai, which include availability zones which could be on the outskirts of those cities. So places like Langfang, Kunshan, Changshu, in relation to Beijing and Shanghai, are within that same low latency to qualify as being within the same region. A place like Zhangbei or Huailai, further away from Beijing.

32:08 They are in a different region. John, can you please repeat the second part of your question? Yeah, I mean, I was just interested that the pace of demand or the volume of demand in the market, is that similar to what it was six or 12 months ago or has that picked up market demand for data center space? William, would you like to answer that? Unfortunately, today William is in Shanghai. I'm in Hong Kong. It's a little more difficult to coordinate. In general, I cannot describe the exact number of the market size right now because it's always changed. But the change is big. The change is a good thing because what we can see, the trend, compared with last year, 12 months ago, it's obviously in the next three or five years, the demand is definitely accelerate.

33:19 So that's why I think it's very nature we still catch up this trend, right? Compared with last year, we set up the new normal, it's 700 square meter per year by organic So this year, looks like we can get it, definitely, not look like, definitely we can deliver over 90,000 square meter new cells. That's bi-organic. So it's... Great. Yeah, it's obviously, right. And then my last question, just any update on Hong Kong construction market demands and kind of what you're expecting there from that project?

34:09 Yeah, I think we bought two pieces of land in the last 12 months. And we already started to construct. And we hope everything is on schedule right now. And the first data center, we we plan to launch by the middle of 2022. And another one maybe eight months later, right? This is our current schedule. Looks like the demand is very active in Hong Kong market, especially from the mainland China, from our customer in-store base.

34:54 So I think we are not expecting any other new customer in Hong Kong. We definitely will get the anchor customer from our existing customer right now. And we hope and we're confident to get the most of the commitment before our first data center officially launch. Thank you very much. Thank you. We have our next question from the line of Yang Liu from Morgan Stanley. Please go ahead. I have two questions here. The first one is we saw a pretty big upward revision in terms of full-year capex, which is even bigger than the sales upward revision.

35:53 Could management elaborate more about where the biggest delta is coming from? especially given the capacity increase pretty big. The second question is could management update us in terms of the investment return profile in places like Langfang and Changshu, etc. especially given the demand supplies there are growing very fast and could management update us in terms of the Thank you. Yes, Yang, it's Dan here.

36:42 Increasing capex, I itemized it in terms of land and building acquisitions and organic growth. The land and buildings, to some extent, that is pulling forward CapEx because we're paying for large sites, you see in the case of Pujian, Changshu, and so on, where development is scheduled to take place over two or three years, but we incurred the cost of acquiring those sites up front. The same also applies to some extent to the acquisitions. So, for example, Beijing 13 is We bought out a shareholder from a project and injected capital to take a controlling interest in the land. But that will be a 2021 or even 2022 project in terms of when it comes into service.

37:51 So I don't think you can look at our capex exactly in relation to the current run rate of sales. What you can look at is the pre-commitment rate for the projects that we're initiating, which is consistently in that 60% to 70% range. And you can also look at the pipeline that we've built up, which is now 350,000 square meters, equal to more than three years' new business at the current run rate. So I think we're very happy to allocate capital for that purpose. Your question about customer return profile, this is key because this is what we target.

38:36 It's not the selling price, it's the return on investment. What we've seen so far, we've done a lot of business in Lantang, we've got a large order in Changshu. The return on those edgy town sites is well up to the level of return in the downtown or urban areas. The development cost for unit CAPEX is lower. Hard to be precise, but let's say maybe around 10% lower. Not due to the cost of real estate, but more due to the efficiency of building greenfields, building large scale on a single site, and spreading Thank you Thank you We have our next question from the line of Colby Central.

39:55 Please go ahead. Oh, great. Thank you. Dan, I think in your comments you said that net install should be similar in the third and fourth quarter to what we just saw in the second quarter. I think that was around 14,000 organic. Just curious why it wouldn't actually even be higher, particularly in the fourth quarter, given the amount of capacity you have coming online. I guess could you just remind us how much capacity you have coming online maybe in the third and the fourth quarter just to help us there. And then also I think in William's comments he mentioned that you guys got 30% of the incremental demand from your top two customers in the quarter. I was just wondering if you could unpack it a little bit.

40:40 I don't know if I exactly understand what that meant. and maybe just giving a sense of market share because I think one of the questions I always get from investors who might not be as familiar with the Chinese market is what is the market share of somebody like GDS and maybe of just third-party data centers, et cetera. But anything on that could be helpful too. Thank you. Sure. So on the median stalls, we were expecting this year to be a series of step-ups. and one factor behind that was having new data center capacity come into service in each quarter.

41:26 That was according to the original development timelines. What has happened is that the first quarter was around 2,000 or 3,000 square meters lower move-in than we had in our and our budget. In the second quarter, I said we're expecting 10,000 to 11,000. It came out at 14,000. And now I'm indicating that around 14,000 or 15,000 should be the case in the third and fourth quarter. One methodology that you can use to predict this, although it's not totally reliable, is to look at the backlog for area and service at the beginning of the quarter.

42:13 So at the beginning of the third quarter, it was 57,000 square meters. And typically, we deliver 20% to 25% of that number in a particular quarter. So 25% of that number would be around 14,000. So that's the logic there. If you go back to the second quarter and look to that metric, you'll see that we delivered 30% of the backlog for air and service that was existing at the beginning of the second quarter. In terms of the timing of new data centers coming into service, there's 49,000 square meters of new capacity scheduled to come into service during the second half of the year.

43:07 I didn't break it down by quarter, but I can tell you that a significant majority of that is going to be in the fourth quarter. And normally, we don't see much moving in the same quarter as when a data center comes into service. So that's arising too late to really drive increase in installs this year. But it's a very good base for when we start to look at next year. The question about market share, we have our own internal market research. I believe it's a lot more reliable than what we see from third parties. There's issues with market research about whether it actually maps the data center business or whether it includes a lot of other telecom value added services.

44:00 We think there's a lot of double counting because some carrier neutrals are reselling carrier data centers and some carriers are reselling carrier neutral data centers. And also I think the data which comes from the telecom carriers typically they would include a lot of network revenue, the connectivity revenue to data centers in their numbers. We will endeavor in the near future to publish some market research. I think it will show that our market share on the carrier neutral side is in, sorry, our market share and Karen Neutral's side is in the 20s.

44:45 Maybe in the Tier 1 markets, it's a little higher than that. And as we indicated, with the very largest hyperscale customers, it's more like 30%. Thank you. Thank you. We have our next question. Please go ahead. Thanks for taking my question. First question, could you talk a little bit about the engagements that you're having with some of the new customers that you've added, especially ByteDance and Pinduoduo, obviously ByteDance, the size of their business, data center needs, compute needs, et cetera, are quite sizable, comparable to your two biggest customers. So how do you see that relationship progress over the next couple of years?

45:50 Second, and maybe a related question as well, I think, William, you mentioned that we have stepped up from that 70K sales or area-committed organic basis over the last couple of years to definitely 90k this year over and above that you're also making some acquisitions. So if you think about some of these new customers that you've added plus growth from your existing customers as well is that 90k number per year the new normal or we should actually think that it could be higher than that number as well from an organic sale. Acquisition obviously is or if you can talk about maybe What could the fully added number, including acquisitions, be as we look into the next couple of years, given some of these new customers and growth in your existing customer base?

46:50 So, Google, and then William, I think I take your first question, how we engage the new customer. I think we are working very hard on two things. It's our key strategy, I mean our things, our IPO, how to diversify our customer. But in the last couple of years, the leading demand is from a couple of big cloud. So that's what we already catch up. But what we realized is currently in the last couple of years, the new internet giants grow so fast. and we started to engage them at least two years ago. But unfortunately, we didn't get any opportunity in the past two years.

47:40 But we still keep engaged our customers. and now I think our customers start to set up their new criteria. When it was a baby company, they maybe had a different criteria to select a vendor, but now I think their criteria is more close to the standard of the giant standards. So I think that we have the ability, we have the opportunity, chance to to gather this deal. And so far, I think our customers still focus on to deploy their data center needs, requirement in the market plus remote.

48:29 But everybody know GDS, our core asset, our core, our focus is the market. So I think this is the time, this is the first time our customer deployed their server in the Taiwan market, which we think is our strength and our capability. So that's why we can gather the deal. And looking forward, I think those customers will, in the future, we believe, will grow very fast, and they will be our let's say next generation of the high-scale contributor.

49:16 And as I just mentioned, their number, if you look at what the server, what the server, total server they procured in this year and the next couple of years, the level of the server procurement is more close to the, is such close to the traditional cloud player. So we are happy to see that. That means GDS anchor customer, in the future the anchor customer will be more diversified. And this is our key strategy, and we will continue on that. This is the first question? What's this again?

50:04 Okay, $90,000. Yeah, I think we are happy we can catch up. We continue to catch up the acceleration of the market demand. So we don't want to put a big number right now. I think this year, obviously, we can achieve. But I think next year... In terms of 90, I think we are confident, but maybe we can do more, but we are not just pursuing the number. We are pursuing the gross quality. So we will see. I think next year, 90,000 square meters, I believe we can continue, right?

50:54 But we don't want to put a big number right now for the next couple of years. Okay, got it. Just one follow-up on this. Are you seeing some of these customers, you mentioned that they are building Tier 1 data centers for the first time. Do you feel that strategy for some of these customers is still to keep their existing data center providers in place? remote sites and kind of embrace some of the newer data center providers like you or established in Tier 1 data center providers like you in Tier 1 cities? Or do you feel like they are also changing the strategy in terms of pulling demand from public cloud and kind of starting to move towards their own compute and other services hosted on their own data centers?

51:54 I'd say it's not complicated. I don't know what kind of application they deploy directly to our data center. But we still see the trend that they still use the cloud in a significant way. And they also have another purpose. I believe they have a different purpose to deploy some dedicated IT infrastructure by themselves. I think this is also the trend. In my view, they use the public cloud, still growth, and they also start to use their, build their own hybrid cloud strategy right now. So we have benefits on both.

52:41 In terms of remote, I think the remote, everybody know remote site is one of our new product. Just what we did with GIC. It's not our core business, but for some strategic reason, we still keep doing it. But it's not our core business. But I would like to say we are ready to do more, and what we can tell is our customer will give us more business. We have more opportunity on this part. Understood. Thank you. Thank you. We have the next question from the line of Tina Hao from Goldman Sachs.

53:28 Please go ahead. Hi. Thank you very much, management, for taking our questions. I have two. The first one is that could you help me understand, because we're raising our guidance in terms of our floor area sales in terms of organic from 80,000 to 9,000 square meters. However, we're keeping our annual revenue guidance unchanged. So is this because the acquisition side of things is lower than what we were expecting previously, or are we just being more conservative on this side? And then the second question is, we wanted to understand in terms of the big cloud customers, Data Center Vendor Strategy, do you see any difference between, say, AliCloud or Tencent Cloud?

54:28 Like normally, how many data center vendors do they usually pick? Thank you. Tina, it's Dan here. On your first question, there's a cycle from sales, most of which is pre-commitment during the time the data center is under construction and when the data center comes into service and then over maybe 18 months or even 24 months, there's a move-in. So our sales is a great lead indicator for revenue growth in the future, but it wouldn't affect revenue in the current year. In fact, when we give guidance Well, if we look forward 12 months at any time, pretty much all the revenue growth looking 12 months forward would come from contracts which were already signed prior to the beginning of the year. So, I mean, if I was, yeah, we were talking about raising revenue guidance, and if I was giving revenue guidance for 2022, Maybe I'd be raising that on account of the higher sales. That's how it works.

55:54 William, would you like to answer the question about different strategies of the big cloud customers? Yeah, I think that we have to, as we talked about, we already built our platform in all the key markets, which we have the opportunity very significant advantage compared with others. So I think this is very important for our customers. So I think our customers, the criteria for them is continued high visibility of the resource in each region in your platform, in all core locations. This is very important. and of course the operation skill is also very important for them and the cost is also one of the key criteria.

56:49 And typically I think historically the top customer they use a lot of the different data center service provided historically. But in the recent couple of years they shrink the name and they narrowed the vendor list after many years of business relationship. So I think typically the major customer, they will have three or four service vendors. So this is the current situation, what we face. And as we used to talk about it, we signed a strategic vendor agreement with our top three customers so far. So I think we believe that GDS is the major vendor, in terms of the top three key vendors, right?

58:19 Is that your question? Yes, thank you very much. Thank you. Once again, if you wish to ask a question, please press star 1 on your telephone keypad and wait for your name to be announced. If you wish to cancel a request, please respond or hash key. For the benefit of all participants on today's call, please limit yourself to one question at a time. Thank you. We have the next question from the line of Frank Wouten from Raymond James. Please go ahead. Great, thank you very much. Can you comment on the trends in MRR per square meter? It's been declined a little bit more this quarter than we'd modeled.

59:06 What are the thoughts and the trends on that for the rest of the year? And my second question, can you give us an idea, just for those of us not in the region as often, about Some of the current steps that the government's taken with regards to any future outbreaks with COVID-19 and how that policy has evolved, how do you think going forward reactions to the virus could impact your business, either ability to construct or get labor employees at different locations and so forth? Just talk to us a little bit about what the current policies are and are they better or worse than they've been over the last six months or so. Thanks. Yeah, hi Frank, it's Dan here. The MSR for square meter for the second quarter, it was down by 3%.

1:00:01 The way we calculate is we take the average of the opening and closing area utilized. So the Beijing 10, 11, 12 acquisition closed on June the 5th. So we had 25 days revenue contribution but we include the whole of the area utilized in the quarter end number. So if we strip that out, then the MSR decline was just about 1%, which is more or less what I indicated is kind of a long-term trend line. In the third quarter, we will have a full quarters contribution from Beijing 10, 11, 12 and I think as some analyst investors calculated when we announced the deal, the MSR of that data center is, for those three data centers, is lower than our average. So there will be some dilutive effects in the third quarter and going forward.

1:01:14 I think the MSR will be around that level of, around the level that it was have four adjustments in the second quarter. I talked earlier about the economics of the Edgertown sites. The MSR there is lower. The unit capex is lower. I said the returns were very acceptable. So there will be continuing gradual decline and the MSR. And from time to time, we will try to highlight what's happening with our internal investment, which is really what we target to sustain. And I think we are indeed doing that.

1:02:06 William, you'll talk about the operating environment in China and what happens if there's a resurgence of the virus? Yeah. Fortunately, I'm in Shanghai after 14 days quarantine. I feel everything is going back to the normal. So it looks like in terms of the daily life, retail, restaurant, cinema, entertainment, everything is going to the normal. So almost 95%, I think, yeah, it's going to the normal. So I think from the supply chain point of view and the working permission point of view, everything has gone back.

1:02:54 So I think it's come to normal, and we didn't see any impact in the next few months, few quarters. Okay, great. Thank you. Thank you. The next question comes from the line of James Huang from UBS. Please go ahead. Good evening, management. I've got two questions. First question is on supply. So we're hearing that, for example, steel mills in China, which have very cheap access to electricity, are being converted into data centers. So I just want to get your thoughts on how do you assess the risk of potential capacity oversupply and how would you cope with an oversupply situation should occur?

1:03:42 And the next question is just in terms of contracting renewed so far this year. What are you seeing in terms of pricing? Is it broadly similar or lower versus prior terms? Thank you. Okay, I take this first question. I think data center is actually, if you look at it, data center is actually, it's a very, very, in my view, it's a high barrier industry. Of course, in recent, we see a lot of the new player jump to the market.

1:04:30 But in terms of our customer profile, our customer needs a reliable vendor. So I think a lot of the new players cannot catch up in a short-term time. So I think they're way behind us. It's not directly impacting us. On the other hand, GDS used 19 years to build up our value proposition and our position. It's not easy to change our position. So I think, in my view, we are already there, and obviously, we are in the best position. And our customer is smart, very sophisticated.

1:05:22 So it will not change our position in our customer. But of course, in terms of the competition is more concentrated on the tier 2 player, even tier 3, right? So it will not change any of our position, in my view. James, your question about pricing on contract renewals. Let me answer it in a bigger picture way. We did our first business with our top two customers in 2014 and 2015. So those contracts have come up for renewal.

1:06:13 And we'll start to see in the next second half of this year and the next few years more of the kind of cloud and large internets Business come up for renewal. If you look at the contract renewal schedule, which is on page 42 of our earnings presentation, roughly, say, in the second half of 2020, 21, 22, it's somewhere around 50, 60% plus of that area relates to cloud and large inset customers. We've already had quite a number of conversations.

1:06:58 We think overall the outcome is going to be flat relative to the pricing, the existing contracts. There may be some isolated cases where it comes down, and there may be some where it goes up. But overall, I think it's flat. I've commented before This is not actually a reflection of the market, particularly not for these first few contracts, because those early orders were for kind of downtown data centers close to CBD, where the current market price is definitely higher than what it was. So we can't reset these to market. We have to reset it to where we're doing business with those customers.

1:07:52 and the overall relationship. We don't have a standard price for our larger customers. It does change from deal to deal, from place to place, data center to data center, time to time. When we do these contract renewals, we have to take cognizance of what is the price that we are agreeing with those customers. for similar kind of data centers in similar areas if it's a completely new piece of business today. So, yeah, I think flat overall, and we leave something on the table in terms of not extracting the full market price. Thank you very much.

1:08:44 Thank you. If there are no further questions, I would like to hand the call back over to the company for any closing remarks. 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 P.S. Ante Group Investor Relations. Bye for now. Thank you. This concludes this conference call. You may disconnect your line. Thank you. Goodbye.