GDS Holdings Limited (GDS) Earnings Call Transcript & Summary

Hello, ladies and gentlemen. Thank you for standing by for the GDS Holdings Limited's Fourth Quarter And Full Year 2024 Earnings Conference Call. [Operator Instructions]. Today's conference call is being recorded. I will now turn the call over to your host, Ms. Laura Chen, Head of Investor Relations for the company. Please go ahead, Laura.

Thank you. Hello, everyone. Welcome to the Fourth Quarter and Full Year 2024 Earnings Conference Call of GDS Holdings Limited. The company's results were issued via Newswire services today and are posted online. A summary presentation, which we'll refer to during this conference call can be viewed and downloaded from our IR website at investors.gds-services.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 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 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 release and this conference call include 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 GAAP measures. I'll now turn the call over to GDS Founder, Chairman and CEO, William Huang. Please go ahead, William.

Thank you, Laura. Hello, everyone. This is William. Thank you for joining us on today's call. The race is on for AI in China. We saw the beginnings of it last year when cloud and Internet companies increased their CapEx. This led to an initial wave of demand for AI training in remote locations. Now the race has gone to another level with demand for AI inferencing in Tier 1 markets. Based on our dialogue with our customers, this type of demand could run into multiples of gigawatts over the next few years. Looking at the opportunity for -- from GDS perspective, it is exciting times to be a data center company again. The opportunity in Tier 1 markets plays to our strengths. We are by far the best positioned in terms of land and power to fulfill this kind of the demand. And the largest cloud and Internet companies in China are all our largest customers. A key factor affecting the timing of customer deployments is the availability of chips. For deployments over the next few quarters, we do not see any significant risk, and we are willing to commit to new business. However, for deployments further into the future, we think the right approach for us is to wait and see. The demand supply situations in Tier 1 markets continues to improve, and we have the flexibility to decide when to move forward. We just executed our first asset monetization transaction. From a financial perspective, this enables us to address immediate opportunities without deviating from our current path and strict discipline. As our asset monetization program become fully established, we will have flexibility to do more while delivering on our commitments to shareholders. Several years ago, we laid out a strategy to get GDS back on track with steady growth and a strong financial position. We remain firmly committed to this strategy. We focus on Tier 1 markets where we can add most value. We prioritize delivering the backlog. We remain highly selective about new business, pursuing orders which match our inventory and which have fast-move-in schedule. We incur CapEx when needed with short lead time ahead of our customer move-in. We recycle capital through asset monetization, which is repeatable and scalable. And we create additional value through our equity stake in DayOne, which is now a stand-alone business. Let's review our progress in implementing this strategy. Our gross move-in during 2024 was 79,000 square meters, all organic and all in Tier 1 markets. This is the highest in our history. The move-in rate picked up in 1Q 2024 and has stayed at a consistently high level into the current year. The pickup was due to a combination of backlog delivery and new orders with fast move-in. As shown on Slide 7, we started 2025 with 110,000 square meters of backlog for area in service. We expect to deliver over half of this during the current year. We ended 2024 with a utilization rate of 74%. We expect utilization to increase to high 70% by end of 2025. Our gross additional area committed during 2024 was 49,000 square meters, similar to the past 2 years, in line with our strategy. We targeted new business to absorb inventory. A good illustration is the 3 new order, which we won in 4Q '24, all related in capacity in service or under construction. During 1Q '25, we won a massive new order with a existing hyperscale customer for around 40,000 square meters or 152 megawatts, split across 2 sites in Langfang and Changshu. It is the largest single order in our history in China. This new order requires us to deliver data center within 6 months. The customer committed to move-in fully within the following six months. The whole cycle from obtaining the new order to full utilization is about 1 year. This is a high-quality AI-driven new business with no chip supply risk. It fully satisfies all of our criteria for CapEx with a short lead time, fast move-in and long counter tenant. Furthermore, the sites are existing campuses where we already invested in past years. As a result, we only need to incur the cost to complete, and we are able to meet the deadline for rapid delivery. For AI inferencing in Tier 1 markets, hyperscale customers typically require sites with at least 15 megawatts of available capacity deliverable within a short period of time. Fortunately, we are very well paced in this regard. We have multiple sites suitable for AI inferencing around Beijing, Shenzhen and -- Beijing, Shanghai and Shenzhen, Guangzhou. After completing the 152-megawatt new order, we will still have around 900 megawatts of developable capacity. As demand continues to grows, thereafter few -- in the fewer sites in Tier 1 markets with the necessary scale and time to market. This should benefit us. Turning to Slide 13. I would like to share some operating updates for DayOne, which became our equity investee upon closing of its Series B equity raise. In 2024, DayOne accomplished a historical 340 megawatts of new commitments. DayOne ended 2024 with 467 megawatts of total IT power committed, most of which will be available within the next 2 years. DayOne sales pipeline is highly visible and strong. DayOne is confident of doing over 250 megawatts of new commitments during 2025 and remains on track to hit 1 gigawatt of total IT power committed in less than 3 years. I will now pass on to Dan for financial and operating review.

Thank you, William. DayOne data centers, previously known as GDS International or GDSI, completed and closed its Series B equity raise on December 31, 2024. At closing, GDS' equity interest in DayOne was diluted from 52.7% to 35.6%. Accordingly, GDS deconsolidated DayOne as a subsidiary and recognized DayOne as an equity investee. In the consolidated financial statements for the quarter and year-ended December 31, 2024, DayOne's operational results and cash flows have been excluded from the company's financial results from continuing operations and have been separately itemized under discontinued operations. Retrospective adjustments to the historical statement of operations and cash flows have also been made to provide a consistent basis of comparison for the financial results. Furthermore, retrospective adjustments were also made to categorize DayOne's assets and liabilities as assets and liabilities of discontinued operations on balance sheets for the comparative periods. From the first quarter of 2025 onwards, DayOne will appear in our financials as a single line in our income statement and a single line in our balance sheet. However, in our earnings presentations going forward, we intend to continue disclosing key financial and operating information for DayOne, similar to what we disclosed when DayOne was the segment of GDS, so that investors can keep track of DayOne's performance and the value of our equity investment. Although we will no longer present GDS and DayOne on a consolidated basis, we did provide guidance on a consolidated basis for 2024. I would highlight that our pro forma consolidated adjusted EBITDA for 2024 was above the top end of our guidance range. From now on, I'm talking about GDS continuing operations. Starting on Slide 17. In 4Q '24, revenue increased by 9.1% and adjusted EBITDA increased by 13.9% year-on-year. In 2024, revenue increased by 5.5% and adjusted EBITDA increased by 3% year-on-year. If we normalize the numbers by excluding onetime items in 2023 and reversing the BO projects transfer in 2024, our revenue and adjusted EBITDA would have grown by 7.9% and 7.7%, respectively. MSR per square meter declined 2.3% in 4Q '24 compared with 4Q '23, in line with our expectations. Looking forward, we expect MSR to decline slightly over the next year, and we assume that power tariffs remain at current levels. Adjusted EBITDA margin for 2024 was 47.2% compared with 48.4% in 2023 or compared with 47.8% in 2023, excluding the onetime items. This implies that on a normalized basis, EBITDA margins were flat. For 2024, our CapEx totaled RMB 3 billion, in line with our revised guidance. Our base case CapEx for 2025 was RMB 2.5 billion. However, we will incur an additional RMB 2.3 billion as the cost to complete and deliver the 152-megawatt new order. Offsetting this increase, we expect to receive RMB 500 million first installment of cash proceeds from the ABS transaction. In sum, we are giving guidance for around RMB 4.3 billion of CapEx in 2025. Please note that this does not take account of the balance of proceeds from the ABS, further mega new orders or the proceeds of further asset monetization transactions in the current year. For the full year of 2024, our cash flow before financing is positive RMB 379 million. Once again, this is in line with our financial target. In 2025, with additional CapEx for the 152-megawatt new order, cash flow before financing will be negative. However, if we factor in debt deconsolidation and the deferred cash proceeds from the ABS transaction, we would still see no increase in our net debt. I'll come back to this point in a minute. As shown on Slide 24, at year-end 2024, the cash balance was RMB 7.9 billion, and the net debt to last quarter annualized adjusted EBITDA multiple was 6.8x. Turning to Slide 26. We recently announced our first asset monetization transaction. This involves selling 100% of the equity of certain data center project companies to an SPV managed by a major Chinese securities company with back-to-back issuance of ABS. For the avoidance of doubt, the ABS represents the equity of these projects, and it is not a liability of GDS. The ABS is 70% subscribed by top-tier institutional investors in China, led by China Life, while GDS subscribes for the remaining 30% and retains the rights for ongoing operation of the underlying data centers. The ABS will be listed on the Shanghai Stock Exchange as a standardized security product. The total enterprise value, or EV, for the transaction is up to approximately RMB 2.9 billion, implying an EV to EBITDA of around 13x. The total equity consideration is up to approximately RMB 1.7 billion or RMB 1.2 billion, net of the 30% reinvestment by GDS in the ABS. The upfront cash proceeds are around RMB 500 million and the deferred net cash proceeds are around RMB 700 million. The reason why there are deferred proceeds is because the underlying data centers are still ramping up. Upon closing, we will deconsolidate existing debt of around RMB 1.2 billion. We are making good progress with our public REIT or C-REIT application. It is move-in forward faster than expected. C-REITs are not permitted to invest in the equity of unlisted companies. However, they can invest through ABS. As shown on Slide 28, with the ABS transaction expected to close in the next couple of months, we can cover our 2025 CapEx at RMB 4.3 billion without increasing our net debt. We expect our net debt to last quarter annualized adjusted EBITDA multiple to come down to just over 6x at the end of the current year. With the recovery in our share price, our 2030 CB is now deeply in the money. If we treat this CB as converted, our year-end net debt to last quarter annualized adjusted EBITDA multiple will be around 5.5x. Turning to Slide 29. For the full year of 2025, we expect our total revenues to be between RMB 11.29 billion to RMB 11.59 billion, implying a year-on-year increase of between approximately 9.4% to 12.3% and adjusted EBITDA to be between RMB 5.19 billion and RMB 5.39 billion, implying a year-on-year increase of between approximately 6.4% to 10.5%. In addition, as I already mentioned, we expect CapEx to be around RMB 4.3 billion. On Slide 30, we look at our guidance a few different ways. Our official guidance takes into account deconsolidation of the data center projects underlying the ABS. On a normalized basis, if we assume the ABS did not happen, our adjusted EBITDA growth for 2025 at the midpoint would have been around 10.7%. This is consistent with the objective we set of getting back to double-digit growth. Alternatively, if we take our official guidance and then add on the gain on the sale of the data center projects, the adjusted EBITDA growth for 2025 at the midpoint is around 16.7%. Lastly, the additional CapEx, which we will incur for the 152-megawatt new order in 2025, will lead to higher growth in 2026. Our current and very preliminary view is that adjusted EBITDA growth could be in the low teens for 2026 before taking out the further mega new orders monetization. Finishing on Slide 31, we are not providing guidance for DayOne. However, we note that DayOne ended 2024 with run rate adjusted EBITDA of around $60 million. Based on the expected ramp-up will increase by multiples over the next 2 years. We'd now like to open the call to questions. Operator?

[Operator Instructions] We will take our first question. And your first question comes from the line of Yang Liu from Morgan Stanley.

I would like to have some visibility in terms of your plan to spin off DayOne and let it go public. Could management update us in terms of the current plan and the schedule? Yes, that is my question.

Thank you, Yang Liu. I think -- yes, I think like last quarter, some investors asked the same question but we don't have a clear view, right? Now I would like to say we do have the plan. We -- the IPO plan is more visible, and we plan to list the company within 18 months. So I think this is achievable, and we are very confident based on the current international business, DayOne's business grow so fast, and we are very confident it will be a very successful IPO in next 18 month and bring -- create more high value for our current shareholders.

Thank you. May I follow up in term of the series progress that Dan just mentioned, you see faster-than-expected growth progress here. What is the status now? Is it on the NDRC or under CSRC or stock exchange? And should we expect it to come out in the next 1 or 2 or 3 quarters? What's your expectation now? Thank you.

Yes. I think we say we made significant progress. That -- but we cannot disclose -- we don't allow to disclose so far, right? So I think maybe once we get the allowed to disclose, we will announce this progress update immediately. And I think I remember we -- last quarter, when we talk about the C-REITs progress, we aim to the end of this year. But I think the progress may be 4 or 6 months ahead than what we expect.

Thank you. We will take our next question. Your next question comes from the line of Sara Wang from UBS.

I have 2 questions, mainly on the China business. So first of all, may I ask whether the current CapEx is based on existing orders on hand? As management just mentioned, that includes the more than 150-megawatt order win in first quarter? And how should we think about new order wins throughout 2025? The second question is regarding the existing vacant capacities. William just mentioned the AI inference demand from hyperscalers now, they require more than 50-megawatt project size. In the existing capacity utilization ramp-up is mainly driven by non-AI demand?

Yes. The first question is, I think the -- yes, this is the first quarter we are -- we have won the deal, which we announced, right? But of course, I think we see a lot of pipeline. But as I just mentioned that we are -- we will wait and see what's the chip supply situation, right? This is a key driver to drive the AI deployment in China data center. So I think there's something not very clear so far about -- in terms of the chip supply. Everybody know that, right? So we are very cautious on that. We are watching this situation very, very closely. So this is the key, let's say, criteria to let us decide and go for some deal. So I think, number one, the demand from all the hyperscaler is very strong. This is everybody can see from the all the CapEx guidance. This is for sure. But second, this is -- this trend -- this demand will maintain, not just today and this year, it will maintain 3 and 5 years. So this we are very super confident for the current year's demand and the next few years demand. But we are more patient because of some potential supply uncertainty chips. So we are very, very cautious to monitor all the supply chain in the future, and then we can decide. On the other hand, we are ready to do anything anytime, any quarter if we wish. So we are ready for that. So just our current status -- strategy is wait and see and very selective to choose the new order. This is first question. The second question is, I think the -- of course, in the AI world, the first wave all invested in AI training. Now because the DeepSeek is -- has triggered all the China inference coming more early than everyone -- everybody expects. So they bring DeepSeek -- we love DeepSeek. It bring the order inferencing coming more early. It definitely fits our resource where we -- where we are located. So I think the inference requirement, it's different -- totally different than the training requirement. Number one, it should stay close to cloud -- traditional cloud to collaborate to support enterprise. Number 2, it will lead more new application come to more early, and this is also required a very, very short latency. So this is all fit our resource, which we are located. So we can see in the next wave, the current wave, coming wave is inference is a huge benefit -- positive for GDS resource what we have.

We will take our next question. Your next question comes from the line of Frank Louthan from Raymond James & Associates.

Can you characterize the types of customers and workloads that you're getting? So what percentage of that is AI versus more traditional cloud enterprise type business that you're seeing come in, in China today? And then what is the current book-to-bill rate, meaning how long are you -- is it taking you when you sign a contract when you're fully billing at the contracted terms? Historically, that was fairly lengthy. What does that current rate look like today?

Yes. Very -- currently, I think the workload in the Tier 1 market, which we are seeing -- we have seen is mainly driven by the inference, not training, right? Training wave, as I just mentioned, it's happening in the last 2 years. So we -- it's not in our strategy. So we are focused on the Tier 1 market, our resource or in the Tier 1 market is in line with our resource business strategy as well. So I think what we are very clear, the currently in Tier 1 market, demand mainly driven by the AI inference. And of course, in the meanwhile, it's also lead traditional cloud deployment more faster than before. Yes. This is what we see. This is number one. Number 2, yes, I just mentioned that we choose our criteria is -- if we -- we use the current -- our capacity and the CapEx -- capacity in the data center under construction to fit our customer demand, short-term demand. I think this is lead times from obtaining the order to fully utilize is 12 months. It's much better than previous last couple of years' order. Typically, last couple of years, typically 2 years, even longer, right? Now it's we, let's say, improved the lead time for us, yes.

Are those lead times contractually obligated? Or is that just how quickly the customers want to move?

Yes, absolutely. Yes, absolutely. And as I mentioned, the deal which we select, the contract length is much longer than before. Based on our current position, we are sitting in a very good position to negotiate new terms compared with the last couple of years. We are well positioned.

Your next question comes from the line of Timothy Zhao from Goldman Sachs.

I think the first one is regarding the supply dynamic that you see in the Tier 1 markets. As you mentioned that I think by end of this year, I think the addition rate of GDS is, I think, approaching like high 70s. Just wondering if you have any sense on the industry-wide utilization rate? And also, how do you think about the pricing environment in the Tier 1 cities? And secondly is regarding like DayOne. I think you mentioned that I think you foresee around 250-megawatts new commitment for DayOne in this year. Just wondering if you can provide some color on the orders or the demand and kind of what type of customers that you are seeing that contributing this new commitment? And what are the underlying demand like AI versus non-AI and if there's any like risks regarding like chip availability in this region?

Okay. The number one question in China, I think the Tier 1 market just start. Yes. As I said, all the AI giants, they just give the official guidance start from this year, right? Last couple of years, it is mainly driven by the training. This year, the guidance is of course, it's the demand in the next 3 years, the demand will be shifted from the training -- pure training to training to inferencing. So as I said, this is start to benefit us. But now the situation in the last couple of -- in the past in the Tier 1 market -- even in the Tier 1 market, the supply and demand balance, not balanced yet. It's a start. From my personal view, I would like to say after 6 or 12 months, this will rebalance. And the demand and the supply maybe after 12 months will turn around. So this is my view. And the current -- in Tier 1 market, there's a lot of individual data center player, they used to have a lot of resource, but most of them are very fragment. So not fit current AI demand. On the other hand, but there's still a few individual player that still have the large-scale around the Tier 1 market. But I think given the time, I think this will definitely will digest for the AI demand. But our strategy is very, very selectively to choose, to pursue the order and the best order -- the best deal for us is to fit our criteria. This is number one. Number 2, so I think we -- another waiting for -- another way to see is we were willing to see the price getting improved. If that's the case, I think it's good market. It's turned on to the good market and a healthy market. This is more fit for us.

DayOne, what kind of customers?

In terms of the DayOne customer, I think the number one, the new order is from the very, very different cloud and video company. So I think it's from different countries, different application, different workload. So very diversified in the last year's order, which we got from the international market. So this is number one. Number 2, I think in general, in Southeast Asia, the main deployment is not AI, is high-performance GPU and cloud. So the main workload from whatever Chinese customer or U.S. customer is cloud growth and also the video application, Internet. High-performance CPU sorry, high-performance CPU, not a GPU in terms in the whole market percentage, still a small number, right? So I think the new chips policy will not impact the whole Southeast Asia demand profile.

Your next question comes from the line of Jonathan Atkin from RBC Capital Markets.

One, China and then one, I guess, DayOne. So what's the use of the ABS proceeds? And can you give us a little bit of a flavor for the customer profile, margin profile, weighted average lease expiration? Just any color about those stabilized assets that you're issuing capital off of? And then the DayOne question is maybe a little broader. You broke ground in Chonburi, I think, just a couple of days ago. What's the use case you see for Thailand? And then any kind of update on maybe Batam, what's going well? What are some of the challenges that you're seeing relative to your last conference call?

Yes. The ABS proceeds can be used either to pay down debt and delever or to reinvest if the right opportunity is there. And we look at new investment opportunities as being 1 part of the equation and asset monetization being the other part of the equation. So this -- ABS issue has been achieved at a good time because we also presented with a very good new investment opportunity at around the same time. And when you put it all together, we are able to increase our CapEx, but keep our debt at the same level or lower and be able to achieve at the end of this year, lower net debt to EBITDA. We have a lot of assets that are suitable for asset monetization treatment. We selected assets for the first transactions that we thought would be highly acceptable to investors. The asset we chose for the ABS happens to be one that we acquired a few years ago, and it has mostly financial institution customers, which obviously, financial investors have high recognition for those kinds of customers. But of course, it doesn't have to be this way. For the C-REIT, we chose a different seed asset with quite a different profile. It's more of a cloud Internet customer.

Yes, Jonathan, let's talk about a little bit the ground break in Thailand. I think we just announced the day before yesterday. I think this is as usual we are -- when we start to build the new data center, building new CapEx in Thailand, that means we have a very, very strong customer demand back to us. So that's why we are start -- we are start to build a new campus in Thailand. And the customer is mixed, both from the demand in Thailand, the demand is very mixed, both from U.S. and China. It's Chinese customers. It's quite a mix here. So I think we can see this -- this is a -- we are -- we building a -- this campus is the largest campus in Thailand so far. So I think we are very confident the demand will continue in Thailand. Thailand will be the new hub in Asia Pacific, in Southeast Asia, even in Asia Pacific. So in terms of Batam we are -- I think we are very happy to talk about that. We delivered the first 2 phase, which we are committed to our customers. And this is a -- we are continuing to build the remaining phase for our customers as well. So I think the Batam project is going well. And we see that based on this customer -- this very good customer successful delivery. And I think more demand is coming to Batam as well. So this is what's happening in Batam island, yes.

If I could speak 1 on China domestic. You highlighted big Internet demand, but then you also mentioned DeepSeek -- and there's a deep ecosystem of AI start-ups in China. And how do you see the sales funnel and kind of prospects in terms of square meters or megawatts sold from the kind of AI start-ups within China versus established Internet companies that are also increasing their CapEx?

Established company. [indiscernible]

Yes. I think the demand, right, is mostly driven by the established company. And we do see a lot of enterprise-type demand is coming because this is just a start, a lot of the small -- enterprises, the first phase is to try their AI first. And also internally I think the -- now I think the sentiment is very good for all the Chinese enterprises inside China because everybody is trying to leverage AI to improve their efficiency or increase their revenue. I think all this -- this is very popular right now. So I think given the time, the demand will mainly will be driven by the multi-industry, yes. That's easy to see. I believe it will happen in the next few years. It's already -- it started.

Your next question comes from the line of Daly Lee from Bank of America Securities.

I have 2 questions. One is regarding our future series issuance. How do you anticipate the valuation range for the series? Because if we look at other series in Asia and Chinese market, warehouse valuation is pretty high, 20x your EBITDA. So what's our expected valuation range for this and yield? My second question is regarding the move-in pace for the China market. If we look at the next like a few quarter-by-quarter move-in pace by the client, and as we have seen more rush orders for AI chips in 1Q. So would we -- could we expect maybe more faster ramp-up in like 2Q or going forward?

Yes, Daly, thanks for your question. There are around 50 C-REITs listed in China. And we categorize them by the nature of the underlying assets. There's around 25 where the underlying assets are commercial real estate, industrial, business park, logistics, and so on. And we think that subset is the best benchmark for a potential data center C-REIT. Of those 25 companies, there are 2 or 3 outliers. But if we exclude them, what remains is trading in a very well-defined range in terms of dividend yield. I believe that dividend yield is the driver of their valuation, and then the multiple is derived from that. The dividend yield is quite concentrated around 5%. And if we take that as a reference and assume conservatively that we'd offer a data center C-REIT at a yield premium, we can derive what the implied multiple would be for us in terms of our asset monetization. And it's quite attractive. We set a benchmark of 13x with the ABS. And we stated that the investors in the ABS had the explicit intention when the time is right, when all the qualification criteria could be met. to inject that ABS into a C-REIT. So clearly, they expect it to be able to do that at some kind of valuation multiple pick-ups.

Yes. In terms of the move-in pace, right, as I just mentioned, the new order is a 6-month move-in pace. I think that means, yes, start from this year, I think this is a very big change compared with the last couple of years, yes.

As there are no further questions, I'd like to now turn the call back over to the company for closing remarks.

Thank you all for joining us today, and we'll see you next time. Bye.

Thank you.

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