GDS Holdings (HKEX:9698) Q4 2020 Earnings Call

0:00 Hello ladies and gentlemen, thank you for standing by for GDS Holdings Limited's fourth quarter and full year 2020 earnings conference call. At this time, all participants are in a listen-only mode. After management's prepared remarks, there will be a question and answer session. Today's conference call is being recorded. I'll now turn the call over to your host, Ms. Laura Chen, Head of Investor Relations for the company. Please go ahead, Laura.

0:33 Thank you. Hello, everyone. Welcome to 4Q and 4 Year 20 Earnings Conference Call of GDS Holdings Limited. The company's results were issued via Newswire Services earlier today and are posted online. A summary presentation, which we will refer to during this conference call, can be viewed and downloaded from our IR website at investors.gdservices.com. Leading today's call is Mr. William Huang, GDS founder, chairman, and CEO, who will provide an overview of our business strategy and performance. Mr. Dan Newman, GDS CFO, will then review the financial and operating results. Ms. Jamie Koo, our COO, is also available to answer questions.

1:21 Before we continue, please note that today's discussion will contain forward-looking statements made under the same type of 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 risks and certainties is included in a company's perspective as filed with 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 this conference call includes discussions of unaudited gap financial information as well as unaudited non-gap financial measures.

2:14 GDS press release contains a reconciliation of the unaudited non-gap 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.

2:30 Thank you, Laura. Hello, everyone. This is William. Thank you for joining us on today's call. GDS has been on an extraordinary journey for the past five years. The data center market in China has grown beyond imagination. As digitalization took off, Our growth trajectory has been unprecedented in the data center world. We have become the clear market leader, reaching a scale which is multiple times bigger than our closest competitors.

3:16 We have the best customer relationships, the most complete market presence, by far the largest development pipeline, the strongest balance sheet, the lowest cost of capital, and most important of all, an unmatched reputation which reflects many years of consistent delivery and high operating standards. As we look forward from today, we see wave after wave of incremental demand driven by new technologies such as 5G, AI, cloud, and IoT, supported by highly favorable government policies.

4:12 The market opportunities in front of us is inconceivable. are just waking up. We are moving rapidly ahead to reinforce our market position by innovating with products and business models, deepening our strategic customer relationships, adding substantially to our pipeline of scarce resource in tier one markets, enhancing our platform by entering new markets in China and overseas, seizing opportunities to further consolidate the market, and groundbreaking green initiatives.

5:10 We have only just begun to reap the rewards of our past efforts 2021 will mark our 20th anniversary. For me personally, GDS is still at an early stage of development and over the next few years, we will take the business to another level. Despite the difficult operating environment last year, We made a tremendous progress over the past year across every aspect of our business and have met or exceeded our expectations.

6:00 First of all, we beat our sales target, adding over 136,000 square meters or 271 megawatts of new customer commitments. We expanded our data center capacity in line with sales, adding nearly 140,000 square meters in service and under construction. We added significantly to our development pipeline, ending the year with 480,000 square meters secured for future development. We stepped up our M&A activities, closing four deals with over 50,000 square meters of capacity.

6:55 We grew revenue by 39.2% and adjusted EBITDA by 47.0% year over year. Our adjusted EBITDA margin came out nearly 2.5 percentage points higher at 46.7%. We raised US dollars 2.4 billion of equity and successfully completed our Hong Kong IPO. Turning to our sales achievement on slide six, At the beginning of the year, we targeted 80,000 square meters of organic nets added, plus 20,000 square meters from acquisitions pending closing.

7:52 We over-delivered by a big margin, achieving 108,000 square meters of organic nets added, including 14,000 square meters from BOT projects. and nearly 28,000 square meters from M&A. Looking forward to 2021, we believe that the current level of organic booking is sustainable at around 90,000 square meters to 100,000 square meters of net app, excluding BOT data centers. For the M&A part, We already have over 19,000 square meters net added in progress from the Beijing 15 acquisition, which is pending closing. And we aim to close more deals this year.

8:50 Turning to slide seven. Every quarter, a handful of high-scale orders account for a large part of our sales. These must-win deals are typically major deployments at our edge-of-town campuses. High-scale customers look to land and expand in key locations. For cloud service providers, these locations are often configured as discrete availability zones, which are critical to their IT architecture. We are very strategic in targeting the first piece of business when customers deploy to a new area. We have succeeded many times in attracting high-scale customers to establish an initiative presence on our site.

9:53 It requires close collaboration with customers. The right resource wherever they are going, and an undoubted reputation for delivery and operations. As a result of winning the first deployment, we have high visibility for a substantial amount of new business in 2021 and beyond. As customers deploy additional phase on our sites. Turning to slide eight. While we maintain great relationships with our top customers, our customer base now extended to almost all of the high-growth, high-scale names in China.

10:50 We had an exciting breakthrough last year, and we are working on more. The growth potential of some of our newer customers is extraordinary. We are highly focused on deepening these relationships, and there are significantly new business opportunities in the pipeline. We have established a high level of trust with our customers. Provided we have the right resource, we have an edge in winning new business. In the eyes of our customers, GDS is not just an asset player, but a total solution provider.

11:38 We have built our platform to mirror our customers' requirements and market presence. This fundamentally differentiates us from other players. Turning to the slide 12. It is clear that customers must continue to locate their mission-critical latency-sensitive data centers in tier-one markets. Customers target less than five-mile-seconds latency to core network nodes and between AZs, which impose a distance limited of up to 100 km around the urban center.

12:30 It is also clear from years of government policy that the supply of suitable land and power in Taiwan markets will remain limited, not just in the urban areas but also in the surrounding edge of town locations. We recognize this year, this year ago, years ago, and made a huge effort to secure sufficient resource to underpin our growth in all tier one markets. And at the end of the 2020, we had secured 480,000 square meters of developable next floor area distributed across the key markets.

13:20 Most of its land we have purchased from the local government together with an allocation of power. This is a very valuable asset and another fact which sets GDS apart. We are not stopping at the current level. We have some big land deals in the pipeline and we'll further strengthen our position. Sustainability is an integral part of our resource strategy. The whole of China is grappling with this and it is not an easy problem to solve.

14:10 We are working on a range of innovative solutions to source as much green power as we can. We are doing green power trading wherever possible and purchasing green certificates. We are also working with partners to evaluate co-investing in green power projects directly in the future. In 2020, over 20% of our total power consumption was green. In 2021, This ratio will go materially higher. We aim to publish our first ESG report later this year. We will set up targets and the roadmap which are realistic and achievable based on deep analysis.

15:12 In addition to the existing tier one markets, we believe that some new tier one markets will emerge in the next few years, particularly as a result of 5G and the need to push computing closer to the edge. Chongqing is an example. It has been on our radar for a while. We bought land there early last year. We are now building our first data center on the site, backed up with an anchor order in 1Q21.

16:02 We are looking at another emerging trade market driven by customer demand. Over the next five years, we could enter 10 new markets in China. Turning to the slide 14, over the past few years, an increasing number of data center projects have been started by independent developers whose objective is to sell. As a result, we see a window of opportunity to consolidate the market. We have an M&A track record like no other, having done 10 deals in the past five years.

16:53 In 2020, we stepped up our efforts. We previously announced the Shanghai SF19 and BJ15 acquisitions. Today, we are announcing two new deals. Both of them are data centers under construction, but not yet committed by customers. They will give us highly marketable resource in their respective markets. We are paying a relatively small premium to organic build cost. We have a variety of M&A opportunities on our radar screen, some of which are sizable.

17:43 Turning to slide 50, a foundation of our strategy is to be a total solution provider to the leading Chinese customers wherever they have critical mass of demand. Our customers see a lot of value in working with partners who understand their ecosystem. The same logic which takes us to the new markets in China leads us to look at expanding overseas. Hong Kong is the start point outside mainland China. We currently have two major projects. The first of which is expected to come into service in 2022.

18:36 We have recently secured an anchor cost order from Hong Kong One, which we will announce in the next few months. The China cloud and the internet giant have big ambitions in Southeast Asia. both directly through their core platforms and indirectly through their strategic investments. Take AliCloud as an example. They already have three AZ in Singapore, two in Malaysia, and two in Indonesia. Singapore is a well-established hub for Southeast Asia and a global tier one data center market. In recent years, We believe that a large part of incremental demand in Singapore has come from our whole market customers.

19:32 For the time being, the Singapore government has suspended data center project approvals, while new policies are developed around land and power allocation. It is uncertain whether whether Singapore, given its resource constraints, will choose to open the door wide for extensive hyperscale deployment. The adjacent markets in Malaysia and Indonesia are less developed than Singapore.

20:23 but have high growth potential. We believe that Chinese customer demand will be a critical success fact in these countries as well. We have established a picture of demand from our home market customers. They have repeatedly requested us to establish a present. We are actively pursuing opportunities with existing assets in Singapore, as well as getting positions for when approvals result. We have also entered into discussion with a number of potential local partners who have projects at various stages of development in Malaysia and Indonesia.

21:21 We believe that expansion into Southeast Asia is strategically important and that we can capture several hundred megawatts of new business over the next five years. We are moving ahead in a very carefully and deliberate way. We aim to announce several new commitments in Southeast Asia over the course of this year. To conclude my session, GDS is head and shoulders above everyone else in the China market. This is a matter of fact. With what I told you today about the market opportunities in front of us, our strategic positioning, and our competitive advantages, we believe that the gap is only going to get bigger.

22:25 Now, I will hand over to Dan for the financial and operating review.

22:35 Thank you, William. Starting on slide 18, where we strip out the contribution from equipment sales and the effect of FX changes, in 4Q20, our service revenue grew by 6.9%. Underlying adjusted gross profit grew by 7.5%, and underlying adjusted EBITDA grew by 6.2%, quarter on quarter. Our underlying adjusted EBITDA margin was 46.8%. Turning to slide 19, service revenue growth is driven mainly by delivery of the committed backlog and closing of acquisitions. Net additional area utilized during 4Q20 was 16,461 square meters, consistent with the previous two quarters.

23:33 The first quarter of each year is usually slower due to Chinese New Year. Nonetheless, we expect move-in in 1Q21 to be only a couple thousand square meters down on the prior quarters level. Given the timing of capacity increases, as shown on slide 23, we are forecasting that move-in over the course of 2021 will be heavily weighted to the second half. Monthly service revenue, MSR, declined 1.2% quarter on quarter in 4Q20 to 2,489 RMB for square meter per month.

24:20 As shown on the next slide, MSR for the whole of FY20 was down 3.4% compared with FY19. In FY21, we expect a further low single digit decline. To some extent, MSR is a reflection of average selling prices. However, there are many other factors which affect MSR, including the customer mix, data center location, redundancy level, development cost, and contract structure. For example, the moving flexibility and who pays for the power. Rather than talk about MSR on a standalone basis, I would prefer to focus on margins and returns.

25:13 Turning to slide 21, Our underlying adjusted gross profit margin was 53.7% for 4Q20 and the same number for the full year, a near one percentage point improvement versus FY19. We calculate adjusted gross profit yield to enable investors to keep track of our returns in a simple way. It is a proxy for cash on cash returns. We divide adjusted gross profit for the year by the average gross amount invested, excluding assets or land under construction or held for future development.

25:59 Gross amount invested includes the goodwill for all of our acquisitions. For FY20, the adjusted gross profit yield was 13.3%. which compares with 13.6% for the previous year. This was achieved with an average utilization rate of 70.1%, not materially different from FY19. Our commitment rate for area and service is 94.3%. When utilization rates catch up to the commitment level, yields can climb to the high teens. As you can see, we have sustained returns across our portfolio.

26:50 Turning to slide 22, our adjusted EBITDA margin had a slight dip in 4Q21, mainly due to one-off expenses related to Hong Kong IPO events. For the full year, the adjusted EBITDA margin was up 2.5 percentage points. Very approximately, we estimate that a half percentage point improvement was due to net positive impact on costs of COVID. For FY21, we aim for about one percentage point of further margin expansion. Turning to slide 24, our capex for FY20 was 9.4 billion RMB, a little bit less than what we guided due to timing of capex payments.

27:45 9.4 billion RMB includes 6 billion of organic capex, 1.5 billion of land and property purchases, and 1.4 billion of acquisition consideration. In 4Q20, we paid 413 billion RMB of acquisition consideration, mainly related to the Beijing 9 and Shanghai 19 deals. We expect our capex for FY21 to be around 12 billion RMB, including an estimated 3.7 billion of consideration for the Beijing 15 acquisition and the two acquisitions announced today, assuming that they all close this year.

28:31 With respect to CapEx guidance, we can only include acquisitions to the extent that we have bottom-up knowledge. However, it is quite possible that there could be more M&A deals this year which are not reflected in our guidance. Part of the capex in FY20 and FY21 relates to organic projects which we build to suit for customers under build, operate, transfer, or BOT contracts. There are different financial approaches to undertaking these projects. Previously, we sought to minimize our equity investments and maximize management fees. Now our preference is to invest more of our own capital, but to leverage it with lower-cost debt.

29:22 This approach gives us a reasonable risk-adjusted return on equity. We therefore decided to keep on our balance sheet two BOT projects, which we began constructing in 3Q20. Accordingly, we made some minor revisions to include these projects in our core KPIs starting from 3Q20. We still have a further nine BOT projects which we may partner with GIC, but retaining a higher percentage of equity ownership. We will update you about these nine projects in the next one or two quarters. Looking at our financing position on slide 25, we had 16.3 billion RMB of cash on our balance sheet, and our net debt to EBITDA ratio is 2.2 times.

30:13 Given our ongoing levels of organic capex, and assuming the Beijing 15 acquisition closes shortly, this ratio will go back up to four to five times over the next few quarters. Turning to slide 26. During FY20, we completed debt financings with a total facility amount of 16 billion RMB, equivalent to 2.4 billion US dollars. including both new project financing and refinancing of existing facilities. We made significant progress increasing the tenor of our facilities and lowering the interest rate margin. This is best illustrated by comparing the terms for four facilities which we refinanced in FY20 versus the original terms.

31:07 The new facilities have tenors of eight to 15 years compared with five to seven years for the previous facilities. Similarly, the new facilities have interest margins of minus 15 to plus 50 basis points compared with plus 120 to plus 270 basis points for the previous facilities. These improvements reflect the strength and track record of GDS as well as increased appetite for data center exposure from the banking sector. In FY21, we anticipate doing about 15 billion RMB equivalent to 2.3 billion US dollars of debt financing, including an aggressive refinancing plan.

31:55 Refi involves some one-time costs, which will impact our effective interest rate in the first two or three quarters of this year. We should then see a drop. Most of our RMB denominated debt is floating rate are priced relative to the over five-year loan prime rate, or LPR. This reference rate currently stands at 4.65%. It is very stable. In fact, it has hardly changed in the past five years. What tends to happen when there is a tightening in the credit markets in China is that banks prioritize lending to favored areas of which new infrastructure such as data centers is definitely one. We're therefore confident of achieving all of our debt financing goals this year.

32:52 Finishing on slide 28 with our guidance. For the full year of 2021, we expect total revenues to be between 7.7 billion RMB and 8 billion RMB, implying a year-on-year increase of between approximately 34.2% to 39.4%. And adjusted EBITDA to be between 3.66 billion RMB to 3.8 billion RMB, implying a year-on-year increase of between approximately 36.5% to 41.8%. In addition, we expect FY21 CapEx to be around 12 billion RMB. We'd now like to open the call to questions.

33:41 Operator? Thank you. 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 and wait for your name to be announced. For the benefit of all participants on today's call, please do limit your questions. Our first question comes from Yang Liu at Morgan Stanley. Please go ahead.

34:12 Thanks for the opportunity to ask questions. I have one question on the competition. Could management update us in terms of the competitive dynamic in China market? Do you feel that the competition is getting more intensified compared with three or four months ago? Do we see pricing return pressure or or how does GDS do to defend the wallet share in our key customers when the peers are chasing them aggressively? Thank you.

34:50 Okay. Good morning, Yangli. First of all, I think the answer is in general I think that nothing changed compared with the last couple of years. We didn't see GDS position in the market will be changed. So our position is very solid in terms of our platform. We are the only platform player in the market still. There's no platform player in the market. As we mentioned in the last couple of the earnings call, this is not a change. and the competitor in all the regional player or project player. So platform is very valuable for all our key customer.

35:39 This is number one. Number two, I think our position in our customer is very different than all the follower. Our position is very solid and in our customer's eyes, GDS is a very, very reliable platform. So this will empower their business in the past, even in the future. We are the only reliable platform in our key customer eyes. So what I can tell is, of course, because the market is booming, a lot of the new players in the market, even a lot of the... established a data center program. The competition between them looks like more stronger than before, but not reflected to us.

36:38 So in terms of the price and return, I would like to say the price is very difficult to talk about the price, as we mentioned last couple of times. We are pursuing the project return. I would like to say in our future project return, we will maintain what we talked about before. So in general, we will not impact our project return.

37:12 Thank you. If I may have another question, I saw that we have a new financial metric underlying adjusted GP. Should I assume that it is almost the same with NOI we have been using for past years?

37:34 Yeah, the short answer is it is exactly the same. It is a different name and maybe it's a little bit simpler because Gross profit is a standard accounting line item and adjusted gross profit just needs to be reconciled to gross profit. So presentationally, I think it's a little simpler, but the number itself is exactly the same, yes. Thank you. Our next question comes from Jonathan Atkin at RBC Capital Markets. Please go ahead.

38:11 Thanks very much.

38:12 So I was interested in the slide that talks about your largest orders in Q4. And two of those contracts commenced already, essentially. So that was a very fast turnaround between contract signing and contract commencement. And then the other two are fairly far out. They appear to be built-to-suits. But can you talk a little bit about the nature of the customer demand that you're seeing? similarly balanced between what appear to be immediate needs and then needs that are kind of throughout. My second question relates to CapEx, and I wondered if there's any trend that you're seeing in your business around the build cost, the construction cost per megawatt of IT capacity. Has that trended differently recently, or is there any chance that that could decline over time?

39:02 Thank you.

39:07 Yeah, John, I'll answer the first question. We highlighted four hyperscale deals. The first one, we acquired a data center in Shanghai as one of those projects that was undertaken by an independent developer. And after we acquired it, we were able to move forward with the customer contract. So that's why it appears to be a the short time lag. The second one, which also appears short, is Beijing 7. But in this case, it's an existing data center. It was already, roughly speaking, half committed to customers. And this was not the first order for the data center. This was an order that took up most of the remaining have all the capacity. So once again, that's why there seems to be a relatively short time period, because it was an order for an existing data center.

40:16 The other two hyperscale orders in Lang Klang and Huizhou, yes, they both involve, in one case, Greenfield assets. In the other case, it's a conversion. But it's an early pre-commitment right at the very beginning of the project. Sorry, John, can you repeat the second question?

40:46 In China, I wondered if you're seeing that, what the reasons might be, or if you're not seeing that at all. I'm sorry.

40:54 On my line, I couldn't hear it clearly.

40:58 Construction costs for megawatts. Oh, yeah.

41:01 Yeah.

41:06 Construction costs per megawatt of IT capacity, has that trended differently?

41:15 Yeah. Sorry, I couldn't hear. The trend in construction costs has been that we're able to keep achieving cost reductions to a variety of ways. Some of it is simply scale and procurement. Some of it is through supply chain management. Some of it is through the way in which we approach the construction in terms of the phasing and the modularity and offsite prefab and so on. And some of it, frankly, is by setting up projects which have the most optimal cost due to location, due to the proximity of power infrastructure, you know due to the ability to leverage you know existing substations and so on.

42:10 You know the gains year on year are small percentage gains but they are continuous and you know looking forward we continue to see opportunities to continue this so we expect actually for quite a few years to come to be able to lower our unit development costs by by small increments year on year.

42:38 Thank you. Thank you. Just a reminder for all participants, for the benefit of all, please limit your questions to one at a time. Thank you. Our next question comes from Colby Siniseo at Cohen and Company. Please go ahead.

42:59 Hi, this is Michael on for Colby.

43:01 Two questions if I may. First, it appears you restated your area under construction and a few other KPIs in the third quarter to include the DOT data centers. Just to be clear, this is because you intend to retain 100% ownership of those assets?

43:18 And if so, what drove the change versus your prior view? And then my second question is, based on the conversations you're having in the markets outside of China to which you intend to expand, which market would you expect to have a footprint in first, and what would you consider to be a reasonable timeline for having a data center up and running there?

43:38 Thank you.

43:42 Michael, on the first part of your question, we did previously disclose the existence of these projects. We had a category we called Manage BTS, data centers in that category. We grouped them for projects relating to customer one, projects relating to customer two, projects relating to customer three. There was one project relating to customer two and one project relating to customer three. So they were just single data centers on a site. And we decided because of the situation that it would be more optimal for us to undertake those ourselves in the usual way and therefore we move them from the category of what we call managed BTS data centers and then include them in our KPIs just as we would with any other self-developed data center but we do identify in the detailed breakdown in the appendix to our presentation, which are the BOT projects, so that it's clear for all to see.

45:01 More generally, with regard to these BOT projects, it is becoming quite popular. We see more of the large cloud and internet companies in China experimenting with this approach for development on their campuses in remote areas. It's a situation where they clearly have the option to self-build, right, because typically it's their campus and there's no barrier in terms of land and power, but they still see advantage in outsourcing, but the terms of outsourcing are quite different.

45:48 For our perspective, it's not the core strategic focus, but it is an adjacent part of our business. And I think we will be flexible about how we approach it. In the past, we have done some on balance sheet, and we put about 80% leverage on the projects. And the return on equity to us was quite acceptable.

46:12 And

46:13 I think going forward we will do some that way, we'll do some where we have a majority and maybe we'll do some where we have a minority or even just purely a management fee. I think the market will call for a wider variety of business models and certainly in regards to these projects outside of the core markets, we will be adopting a variety of different approaches. William, do you want to answer the second part? William, do you want to answer the second part? William, do you want to answer the second part? William, do you want to answer the second part?

46:50 William, do you want to answer the second part? William, do you want to answer the second part? William, do you want to answer the second part? William, do you want to answer the second part? William, do you want to answer the second part? William, do you want to answer the second part? William, do you want to answer the second part? So the next step, obviously, is Southeast Asia. In Southeast Asia, the top three countries in our radar screen is Singapore, Malaysia, and Indonesia. These three markets, in our view, in the next five years, the demand from China will be a few hundred megawatts. So we are trying to catch up with this wave. But potentially, I think Southeast Asia is a high potential market.

47:41 Our current strategy is that we have to set up our presence there, but it's for a strategic reason. but if you look at the current Southeast Asia market it's very looks like a very similar like eight years and ten years ago the market in China so we are we are willing to step in and build our data center position our position there and to catch up with the future high growth this is our current and others. So maybe the first project will be in Singapore, maybe in Malaysia or Indonesia. So we will give you the clear answer in the near future.

48:39 Thank you. Our next question comes from Tina Hao at Goldman Sachs. Please go ahead.

48:47 Hi, thank you very much for your time management. So yeah, my question is also related to the Southeast Asia expansion strategy. Wondering what kind of differences in terms of revenue as well as return in these potential Southeast Asia projects and how that may impact our will be our P&L in the future. And when do you see the first project to start contributing revenue to our P&L as well? Thank you.

49:20 I think it's too early to talk about the revenue because in the next five years, I don't think it will impact a lot in our revenue because our current, all the guidance, all the developments, we are still in China because China is still a big market. So as I just mentioned, Southeast Asia, in our view, is a strategic, but we're not calculating any number in our P&L right now. I think maybe when the project's coming, we will talk about that. Our next question comes from Gokul Hariharan at JP Morgan.

50:09 Please go ahead. Thank you. So could you talk a little bit about what are we seeing from national policy in China regarding energy efficiency, pollution control, et cetera, given some of the bigger commitments on climate change? I know that GDS would be publishing the ESG report this year, but could we start talking a little bit about what are we seeing from a PUE perspective, especially for some of the newer Edge of Town projects and what GDS has been able to do along with customers on this front? Second question is on M&A.

50:58 seems like M&A is now becoming a much bigger part of pipeline as evidenced by last year. If you think about the next two to three years, should we assume that M&A becomes probably a much bigger part than even last year? Last year I think it was about 20% of the total pipeline build. Should we think that M&A would be a much bigger part of the pipeline if we think about the next two to three years?

51:33 William, do you want to address the question about government policy?

52:02 I think the ESG is a very hot topic right now in a great China, including Hong Kong or mainland China. I think this is definitely a trend. The government encourages the green power, right? And also, we call it negative carbon neutral, right? So GDS already starts to prepare for this for a couple of years. So as I just mentioned, 20% of our data center are really green, right, green energy. So we will, government's policy, from the policy point of view, I think in general still under development right now. We didn't see any...

52:56 are all in the official enforcement policy right now. But of course, the immediate impact is, as I mentioned, will be getting, it's easy to see if it will control more pipes in the future. This is what we can see, what's the impact, yeah. I also have a question about M&A.

53:41 I mean the main drive of our business for the foreseeable future is going to be organic development in tier one markets but having said that I mean we you know we clearly see an opportunity right now over the next few years to consolidate the market there's been a lot of new entrants a lot of development by independent developers and you know that's what creates the and the opportunity to consolidate. We believe that we have significant competitive advantage in terms of M&A, in terms of the capability and experience of our team, the methodology that we developed, the deals we've done since 2016, our financing capacity, the ability to conduct technical due diligence and we find that Sellers, when you engage with sellers, always top of their mind is if they engage with a potential buyer, they want to know, is that buyer going to get to the finishing line? I think buyers, sorry, sellers have a lot of confidence when they engage with GDS because of our track record.

55:03 People ask about data center M&A in China, but I think most of it is being done by us. I'm not aware of how many M&A deals are being done by others. So we are the major force in data center M&A in China. Question about how much of this could there be? And frankly, we don't have a quota. We don't look at it like that. There's really two different types of deals. One type, which I call kind of flow deal, is the kind of 5,000 to 10,000 square meter data center, typically that kind of single data center on a site.

55:52 It could be purely capacity, like the two deals we announced today, Shenzhen 8 and Tianjin 1, or it could be capacity with some customer commitment either there or coming with our acquisition like in the case of Shanghai 19. There's a steady pipeline of those kind of deals and the acquisition multiples have not increased. We can still do these deals paying are relatively small premium to organic cost.

56:40 We count in terms of our metrics based on when deals close. So if we do two of those, it comes to maybe 15,000 square meters. If we do three, it comes to something over 20,000 square meters. The other kind of deal, which is harder to predict, is the more sizable one. let's say 20,000 square meters and upwards. We've done two or three depending on how you categorize. There was the Beijing 10-11-12 deal, that was 20,000 square meters. There was the Beijing 15 deal, that was 20,000 square meters. If you call it M&A, there's the deal where we're partnering with CITIC, which by the way is now upgraded to 28,000 square meters.

57:34 These opportunities are scarce and hard to predict when they're going to come onto the market. If they are at a more advanced stage, have customer commitments, then there's likely to be more competition for those kind of opportunities, and that's where multiples have probably gone up, but still, I think, reasonable and justifiable. We have some opportunities like that in our pipeline, and they can be quite a big swing factor if they crystallize. But I don't want to set any expectation on that. But that could make quite a big difference. That's where we could go from having 20,000 or 30,000 square meters of acquisition that add a year to having something quite a bit more.

58:33 Our next question comes from Rob Palmisano at Raymond James. Please go ahead.

58:43 Hey guys, it's Rob on for Frank. I just wanted to follow up. You sort of spoke to this earlier. Can you talk about likely sources of capital for next year? And also, can you speak to your strategic relationship with Cyrus One going forward after they just recently monetized their investment in you guys.

59:10 Yeah, Rob, we always try to be, we have been fully financed, fully capitalized for our business plan. I think we're quite open about sharing what our business plan is. So I think based on the comments William made about and the expected level of organic net ads at 90,000 to 100,000 square meters. In fact, we've got one 20,000 square meter data acquisition already in the pipeline and potentially closing shortly. And hopefully other acquisitions that will close this year. I mean, that's the business plan which I think everyone can see.

59:58 were well capitalized for that, at least for the next couple of years. But we haven't factored in regionalization. We haven't factored in M&A beyond the flow deals as I just described them. We haven't factored in a higher level of organic growth. And to some degree, we haven't factored in potentially bringing forward a CapEx if we see opportunities to acquired land or buildings, which are going to be one-time opportunities that you have to grab when they're there, otherwise they're gone forever. If any of that materializes, it's upside to our business-based case, and I believe it will be positive for our shareholders.

1:00:53 The need for capital arises. It should be seen as something, it'll be because of greater success. William, do you want to comment about the relationship with Saraswan?

1:01:10 Okay. I think in terms of the... and others, we still maintain the self-cooperation relationship. Historically, they referred some deals and we followed the deal and they helped us cut that couple of deals. Chinese customers go to the US, it's a slowdown. So they get limited benefit from us. But I think our relationship is still there. But today, our international team works very closely with different partners.

1:02:02 For example, last year, we got a lot of deals from US-based customers, let's say. in China independently. So we are not relying on them, of course. But in some way we work together with some deals still. Our next question comes from James Wang at UBS. Please go ahead.

1:02:36 Good morning, management. This is James Wong from UBS. I've just got two questions. The first one is a follow-up on the ESG issue. So I'm just wondering, since the Chinese government has announced the carbon neutrality goal, whether your conversations with your largest cloud customers have changed? And related to that, out of your current land held for development, future development, how much of that is renewable energy and whether you'll be able to increase The percentage of renewable energy usage for your pipeline project? That's the first question. And the second question is on you expanding into, as I mentioned, 10 different regions in China.

1:03:22 If I remember, for example, I also saw that you've recently got into Tianjin and Chongqing. And if I remember correctly, in the past, for example, in the West, the utilization rate increase has been rather slow. So I'm just wondering what you're seeing in terms of demand in these new regions, whether it's just where the situation's changed versus the past. Thank you.

1:03:51 Can you answer this first question?

1:03:57 Yeah, sorry, I'm a different place from William. I can't hear everything clearly, but James, what I heard was you asking about for the area health future development. What proportion of the power is with that? Yeah, so I'm asking about, yeah, so on the ESG front, so conversations with our customers, whether that's changed, whether they're taking a more focused on renewable energy usage, and also on your land health or future development, how much of it is renewable energy and whether that percentage can increase. Thank you.

1:04:33 Yeah, yeah, sure. Well, I mean, I think the first part of the question is that, you know, everyone in China is take more notice, you know, start from the central government downwards, right? And our largest customers, you know, look to us and expect us to help them solve the problem, the challenge, how to reduce their carbon footprint. You know, probably the biggest component of it is where does the power come from, meaning what fuel is used in the power generation.

1:05:19 It doesn't necessarily go with individual projects. So, for example, in a region like within Shanghai, for example, we can purchase green power through the power trading market. That's one of the ways in which we reach the level of green power that we mentioned, over 20% of our total consumption. So that's not location specific. On the other hand, there are some locations where specifically there is and Yixin Qian.

1:06:05 We will come out with with targets. I think rather than talk specifically about which project has what, I think the way to look at it is in the aggregate. We will have to be innovative and take a number of different approaches, which we're working on all now at the same time.

1:07:01 whatever targets we set will be very serious ones. We take this very seriously. It's absolutely critical to our business. William, you want to answer the second part of James' question?

1:07:19 Yeah, yeah. Sure. First of all, I think we are, in China, the keyword market is very obvious. It's Shanghai, Beijing, Shenzhen, Guangzhou, right? The Western side, if you look at the last three years, actually the growth, the data center demand in Chengdu and Chongqing in the last three years grows very fast. So this is the trend. So given the current utilization, what we can tell is that the growth trend is very obvious.

1:08:04 So we are very confident to increase the utilization in our current data center in western parts of China. But in our radar screen, there's another 10 cities like Chongqing, right? We pay more attention on that. This is a new trend. In the last couple of years, what we can tell is a lot of our customers, current customers, cloud players, and a lot of the internet giants, they start to deploy their server in this city. We are very confident These 10 new markets will drive another growth in the future.

1:09:06 As I mentioned, 5G in China is very advanced than other countries. So 5G, what's the impact is that when the 5G completed deployment, it will produce more data from those cities. Because those cities are all economic centers in all the provinces. And the population is most of them is around more than 8 million or even 10 million, right? So I think this potential market now is just a start. So we treat them like a new emerging market, right?

1:09:55 But in order to make the investment more efficient, We always will follow up our customer demand to get into this market. This is our view. Thank you. Ladies and gentlemen, due to time constraints, we have no further time for questions. I will hand over to GDS for closing remarks.

1:10:32 Thanks everyone for joining us today. If you have further questions, please feel free to contact GBS Investor Relations through the contact information on our website or the Piacente Group Investor Relations. Thanks all. Bye next time. Thank you. This concludes our conference call. You may now disconnect your line. Thank you.