Hello ladies and gentlemen. Thank you for standing by for GDS Holdings Limited's First 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 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 1Q20 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 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's Founder, Chairman, and CEO, who will provide an overview of our business strategy and performance. Mr. Dan Newman, GDS's CFO, will then review the financial and operating results. Ms. Jamie Khoo, 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 US Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the Company's results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in the Company's prospectus as filed with the US SEC. The Company does not assume any obligation to update any forward-looking statements except as required under applicable law. Please also note that GDS earnings press release and this conference call include discussions of unaudited 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 will now turn the call over to GDS's Founder, Chairman, and CEO, Mr. William Huang. Please go ahead, William.

Thank you, Laura. Hello, everyone. This is William. I am here in Hong Kong with Dan and Jamie who is celebrating her first day of release from government quarantine. Thank you for joining us on today’s call. I’m pleased to report that our performance in the first quarter of this year was highly resilient. Despite the challenging operating environment, we grew adjusted EBITDA by almost 50% year-over-year and achieved our highest ever margin at just over 46%. Sales momentum was strong coming into the pandemic and is even stronger now. In 1Q20 we achieved a record level of organic sales, with over 22,000 square meter or 46 megawatt of net add. In order to keep pace with sales, we scaled up our development program. We ended the quarter with over 110,000 square meter or 260 megawatt of capacity under construction, which was nearly 70% pre-committed. We also added over 100,000 square meter of developable capacity to our pipeline Last but not least, we maintained our record of “double zero”, with zero infections and zero service incidents. We have been through a lot turbulence since our IPO. Trade wars. Pandemics. Short attacks. Even all three at the same time. But our business has not been impacted. We have kept our focus and demonstrated our execution capability. The outlook for our industry is better than ever. Cloud is our main growth driver. Cloud aggregates demand from all types of customers and all types of new technologies. You may have seen reports that Alibaba plans to spend another RMB200 billion, or nearly US$30 billion, on infrastructure in the next few years. Other Cloud service providers are also reporting accelerated adoption. Cloud in China is forecast to grow at over 30% CAGR for the next 5 years. We estimate that this would require at…

Thank you, William. Starting on Slide 14, where we strip out the contribution from equipment sales and the effect of FX changes. In 1Q20, our service revenue grew by 6.3%, Underlying Adjusted NOI grew by 8.5%, and Underlying Adjusted EBITDA grew by 10.5% quarter over quarter. Our Underlying Adjusted EBITDA margin was 47.4%, the highest level we have seen. In 1Q20, we incurred a small FX translation loss. We target zero FX exposure. However, as we move cash into and out of China, it is unavoidable that we will recognize some FX gains and losses. Turning to Slide 15. Service revenue growth is driven mainly by delivery of the committed backlog. Move-in during 1Q20 was 7,800 square meter, in line with our expectations under the difficult circumstances. Our MSR per square meter was down by 2.4% quarter over quarter. Most of this is mathematical because move-in was back-end loaded. In addition, there was a temporary reduction in some power tariffs that reduced revenue. If you look at MSR per square meter net of utility cost, the decrease was less than 1.0% quarter over quarter. We recognize revenue as capacity is utilized in accordance with the terms of customer agreements. Then we bill customers and collect cash with about a 70-day time lag on average. Slide 16 shows that our cash collection over the past three years is almost exactly equal to the revenue recognized. So far, we have not experienced any payment or deferral problems in the current situation. We have a very high-quality customer base. Apart from the cloud and large internet names which you know, the rest of our customer base is predominantly financial institutions and multinational corporations. Slide 17 and 18 show the quarterly margin trends. A few things stand out. As a result of the reduction…

[Operator Instructions] Your first question comes from the line of Jonathan Atkin from RBC Capital Markets. Please ask your question.

Thank you. So I had a question about customer demand and then a question about kind of the resource procurements and development. And with respect to customer demand, I just wondered if you can comment with respect to the overall markets in China. Any different trends that you're seeing with respect to Tier 1 demand versus more remote locations? And then my question about development is just whether you have seen any changes with respect to challenges around resource procurement, the permitting environment for municipal projects or edge of town projects. Thank you.

Yes, John, I'll go first. First question about demand in Tier 1 markets and demand in lower tier markets. First of all, I think as we made clear, the overall demand picture has strengthened and this is a result to a number of factors. Demand is present in both Tier 1 markets and in lower tier markets and it grows in sync. The ratio for different customers is different. But overall average for the hyperscale large Internet customers is roughly 50-50. So historically, our business has been focused on Tier 1 markets. And last year through our partnership with GIC, we found a way of opening up the opportunity to work with our customers in lower tier markets. And I think that has proven to be very strategic in terms of enhancing our customer relationships, as well as potentially being a very material opportunity in its own right.

Yes, I think, Jonathan, based on our bottom up conversation with our major customers, I think the number they show us in the next 3 to 5 years, is a very, very big number that we’ve seen. It's reasonable, we think because the Cloud their business plan, their visibility is very high. So I think over time, I think the China data center market is very exciting in a 3 or 5 years view, it's very exciting.

The second question was about the challenges in resource [indiscernible].

From a resource point of view, I think that GDS already took the action 2 or 3 years ago, because we started seeking some larger land capacity and power capacity because we believe this will fit for our customer future demand. So we had a first mover to focus on the edge of town to get develop our resource. So we can say we are the first mover and we secured a lot of the land bank and power and it's not an issue for us to fulfill our customers’ next 3 or 5 years business plan. But, let's say in urban town, it's still challenging for everybody in terms of the power quota policy, is still not very clear right now. Although a lot of the people talk about the new infrastructure policy, well, if the new policy will release the more power. So far, we didn't see that. But we are willing to see that. If that's the case, GDS can do more, but we are waiting. But on the other hand, we are quite certain we have locked up a lot of the edge of town resource which our customer like.

Great. And then maybe just squeeze in a final question. On Slide 39, you give the contract renewal schedule. And if you could maybe just remind us, at what point do you start having those discussions around renewing contracts that expired during 2020, 2021 and so forth. How far in advance are you having that dialogue?

Yes. John, just looking at the slide, yes, Slide 38 in my copy. That contract renewal shows 18,000 square meters of capacity or 6.3% of our total area committed comes up for renewal this year. We drill down into the composition of that. There's no concentration. The largest contracts that come up for renewal are single-digit percentages of that 18,000. There are a few, which pertain to cloud and Internet customers, those are actually for our first generation data centers, meaning Beijing 1, Shenzhen 1, Kunshan 1 and so on. So those were the first deals which we did back in 2015, 2016, or maybe 2017. As I may mentioned on a previous earnings call, at time these were unprecedentedly large deals. And now you look at it 1,000 square meters, it's not even worth calling out in terms of our quarterly growth. We believe that those customers will stay put. These are equivalent of edge data centers. They put on ramps on some of these data centers. I don't think they're going anywhere. The price negotiations, I think we can say at least will be flat. As I’ve also mentioned before, we have to look at this in the totality of our overall relationship with these customers. What we're doing with them elsewhere, what returns we're getting with them across the entire relationship? I don't think we could just isolate out one particular data center and treat it as if it's a completely standalone commercial negotiation.

Thank you very much.

Your next question comes from the line of Yang Liu from Morgan Stanley. Please ask your question.

Thank you. Could management share your thoughts on the public REITs policy issued by Chinese financial regulator. What is GDS plan on that, especially given the property ownership is increasing faster? My second question is, could you please update us on the customer move-in pace in the second quarter? You mentioned that there is no server supply issue anymore. Have you observed the meaningful recovery of move-in pace so far and what is the current average a month from a data center delivery to mature? Thank you.

Yes. Yang was referring to a pilot project announced by National Development Reform Commission and the China Securities Regulatory Commission to promote the creation of a market for publicly traded REITs in China backed by profitable infrastructure. From our point of view, yes, it's interesting. We have a growing portfolio of stabilized data centers, an increasing proportion of them are wholly owned properties. And we should always consider whether it's is beneficial for us to recycle capital out of such properties whilst maintaining management and operation controlled for the long-term. The creation of a public traded REIT market might give us one option to do that. But there are many details still to be filled in, in terms of how this pilot scheme is going to work. Meanwhile, we are already doing it in a way, we have mini REITs through our partnership with GIC and the largest financial institutions in China have approached us about the same kind of structure, and we can probably achieve the same result through privately negotiated fields. 10 years ago, when we got into the data center business, we took the decision to structure each project where possible with a separate active code for each data center and then held in a separate entity, have the customer contracts and the operations. We always have in mind, that this would give us the flexibility to package assets or sets of assets in future if it gave us a better financing option. So, we've always had this in mind. As I say, I think the REIT scheme as it comes into fruition, may just give us one more option. The second question about the customer move-in pace. So it was just under 8,000 square meters in the first quarter. And right now, we are halfway through…

Okay. Thank you.

Your next question comes from the line of Colby Synesael from Cowen. Please ask your question.

Great. Thank you. Nice job on the name. I guess, on your prepared remarks, you mentioned that a second major partner you guys have recently partnered with a second major partner, excuse me, for a remote site. I'm curious, was any of that reflected in the bookings or leasing the 22,000 square meters that you guys reported, and I'm just curious if that's ByteDance, because obviously we've put a lot of focus on them explicitly in terms of what they may be doing. And then secondly, you mentioned that due to COVID-19, that the government had changed some things around power, which impacted both revenue and cost. I was wondering if you could be more explicit and actually talk about what the impact was, both for revenue and then the offsetting impact, which ultimately gets us to the NOI. Thank you.

Sure. Colby, I'll go first. To talk about the remote site business, we have one major customer that we've been working with initially on a consolidated basis. And then in the second iteration through our partnership with GIC and now we have activity at three different sites. We've completed four projects in one site, which was a consolidated projects, and we had a commitment to do seven projects through the joint venture that's now increased to 12 projects. And with that customer, we're talking about a very significant increase in the volume of projects over the next couple of years. And separate from that, a second major customer has now given us a purchase order for their remote projects. The first one is going to be a trial. We have to go through the commercial negotiation and the design phase, but potentially the volume from that second customer could be as high as the first customer. It's not ByteDance. ByteDance is one of the few very large data center used in China, which is not yet our customer. We are aware of the demand that they have in Tier 1 markets, and we're trying very hard to fulfill that and to establish a relationship with them. That's a high priority. William, do you want to add anything to that before I talk about power.

Yes, we are pretty focused on what we call it the three major Cloud players. So as they mentioned, that their next three or five years, it's a very big number in terms of both in the balance in the Tier 1 market and remote. We tried to get their both market share as much as possible. So I think it's not including the ByteDance , because ByteDance currently they’re still deploy their servers in a remote area. We hope we can do the deal, like a remote area, like a JV with GIC did it. But so far we do working on a couple projects, which are in the Tier 1 markets. So this is our current number, our focus is not including any ByteDance expectations.

Yes. So, Colby, I’m trying not to mix up the numbers for the joint venture projects. So in our 20-F and in our earnings presentation and so on, I’m keeping them quite separate. When you hear us talk about headline numbers by 22,000 square meters net add, that’s all our core business. It completely excludes the joint ventures. The joint ventures is disclosed on Page 11. Those numbers are not included, aggregated with our core KPIs anywhere. The other comment about power, because of the pandemic situation the government in China has had a number of schemes to provide some support to economic activity. We benefited in three principal ways. First of all, there was a reduction in some power tariffs in some places, most of which we’ve passed on to customers. They did result in a slightly lower revenue and MSR, but also resulted in a lower cost of revenue. And then secondly and thirdly, there was a reduction in rent payable to our landlords, which is state owned enterprises, and also the reduction in contributions that we normally make to what they call the social fund. Overall, if you look at our margin improvement, and I think you have to look at the metric that we call underlying adjusted EBITDA because that strips out the effects of FX changes, our margin went from 45.6% in the fourth quarter of 2019 to 47.4% in the first quarter of 2020. So that's almost a 2 percentage point increase. I'd say half of it was due to the government concessions. The other half was due to some cost reduction from working at home, some operating leverage. But frankly, there was also some cost increases as we changed the operating procedures in our data centers. So, yes, I think you could say that half the margin improvement was due to concessions and half was due to more factors under our control. So those concessions were continued in April and they continue in May. We expect margins in the second quarter to come out at a pretty similar level to first quarter.

And just one quick follow-up on that. So you said April and May is the stop, then if that goes away in June or is that may continue, you just don't know?

Actually, the government policy is to continue, but I can't be certain. If you recall, our guidance for 2020, the midpoint of revenue and the midpoint of adjusted EBITDA implied about 46.3% adjusted EBITDA margin for the full year. So I think that still holds. It's hard to normalize, right, because we'd have to normalize these concessions from the government would have to normalize the cost savings, but also for additional costs and also for the fact that we lost the revenue. So it's hard to normalize. But I think 46% plus is most definitely still achievable for this full year.

Thank you.

[Operator Instructions] Your next question comes from the line of Gokul Hariharan from JPMorgan. Please ask your question.

Hi. Thanks for taking my question and congratulations on the continued good execution. First of all, just following up on the lower tier BTS projects, the total project size seems to be ramping up quite quickly. I think you talk about 48,000 square meters already and potentially more coming with a second customer. Could we have a little bit of understanding about how the economics will work for GDS when you start collecting the management fee? What would be typically the IRR from that? Is that something, given the area is also increasing quite a bit, even though you only own roughly 10% of the equity -- how should we think about earnings contribution or EBITDA contribution from this kind of business, given it feels like this is declining quite rapidly in the last - I think, roughly in the year you've already added close to 50,000 square meters, that's my first question. And second question, Dan, just to check, could you talk a little bit about how should we think about the MSR trend through the rest of the year. Are we going to basically hold stable once some of these power subsidies to kind of move away? And could you also maybe shed some light on path to profitability as your stable data center percentage continues to rise pretty quickly?

Okay. First on the low tier data center. I want to make something clear, which is this is a completely different product from what we develop in Tier 1 markets. It's not just a different location, it's a different product. Typically, it's much lower redundancy and may deploy some technologies like high voltage direct currents and so on, because it's much more cost orientated and less high visibility orientated. So for the metrics, which I hope you become familiar with throughout our data centers in Tier 1 markets, they don’t apply. We needa completely separate set of metrics to understand the unit cost and the revenue per square meter in the margin and so on. But as they’re off balance sheet I think it's worth going there, we shouldn’t overcomplicate. We do have a 10% equity involvement, it's literally only US$1 million or US$2 million or US$3 million per data center. So relatively speaking, immaterial. Our approach was to maximize management fees. It's little sensitive. I'd like to tell you what we're going to make. But you can imagine it's commercially sensitive. It approximates to, let's say, mid single digits percentage of revenue of the data center as clear management fee profit. Once the data center come into service, just like in Tier 1 markets, the customer has a move-in period, which is factored into the return calculations and the pricing. So the revenue ramps up. You can see from the projects we did in Zhangbei in ZB1, ZB2, ZB3, ZB4 that actually the projects ramped up quite quickly. As they ramp up, we will be earning that. That's management fee and that kind of revenue share profit and that will come into our income statement as part of our service revenue. When it starts to appear, I will call…

Okay. Thanks, Dan.

Your next question comes from the line of Tina Hou from Goldman Sachs. Please ask your question.

Hi. Thank you, management, for your time in taking my question. Two questions from me. The first one is in terms of your electricity price for the data centers currently in service, what would the average price be? And also, in terms of the government offered concession price due to COVID-19, what kind of discount did you get? And the second question is I notice that you have an acquisition in terms of land in Chengdu. So wondering if we’ve any pre-committed customers for the site, what is the rationale of acquiring the land in there? Also I notice that for the previously Chengdu site, the utilization rate is relatively lower versus the Company average, so how do we prevent this from happening again in the Chongqing site? Thank you.

Okay. The first question about utility cost, there are literally hundreds of power tariffs, so what we're talking about is an effective tariff rate. Tariffs are structured with a fixed component, which is like a commitment charge, because there's a very large amount of generating capacity which is being reserved for the use of the data center. And we have to pay that commitment charge whether or not we're using it, that's why when a data center comes into service, it's part of the fixed cost of the data center and may lead to the data center being loss making into or maybe it reaches 15%, 20% or higher utilization. The government concessions were actually mainly to reduce those fixed power commitment charges. So that's where we got the benefits. As I said in my prepared remarks, it was just in certain places. Our effective power tariff, input tariff, and frankly also the output tariff, because we pass it through is about RMB0.65 to RMB0.7 per kilowatt hour. We get the lowest rate, which is applicable to large scale industrial users. So your second question was about Pujiang? Oh, the third question was Chongqing. William [indiscernible] you answer the third question.

Chongqing. I think Chongqing is mainly driven by one of our major customers. So this is we bought the land and we prepared to get an order in the second half year. I think it's a highly achievable.

Yes, Tina, your second question was about the site we acquired in Pujiang district of Shanghai. As we've been saying for many quarters, I think this is very familiar now and it's very challenging to obtain the right kind of real estate and power capacity in the urban areas. Nonetheless, it's absolutely clear. There has been no doubt, our customers still require it. The edge of town capacity is a good substitute, enable them to scale up. But they still require the downtown data centers, which are connected to the edge of town site. So we have to work very hard to generate new projects in the urban areas. And we have to try a number of different approaches, including buying buildings, doing acquisitions and so on. In the case of the Pujiang site, this is unusually large industrial complex and a very good location because it's close to where the submarine cable landing stations are in Shanghai. And we were able to have an agreement with the landlord that we would proceed with the acquisition of the property, if and when or as and when, we obtained the power capacity approved from the government. Then last year we did obtain that power capacity approval from the Shanghai municipal government and it pertains to this site, to this project. So that's why we went ahead. As William commented, hyperscale customers value a great deal the ability to expand on the same site, to put in an on ramp and then have visible expansion capacity on the same site. So having a site as large as this really has very unique marketing angles. And yes, we would regard it as a kind of crown jewel project.

Yes. Let me add. I think in terms of Chengdu, I think, yes, and the whole portfolio looks like moving a little bit lower than our other major data centers. But what we can see is that Chengdu's data center move-in will catch up in the second half of the year.

Okay. Thank you very much. And maybe just a quick follow-up, in terms of your CapEx guidance of RMB7.5 billion this year, I'm just wondering how much of that is land purchase and then the rest, I guess, will be the data center site construction.

Yes, the CapEx guidance was RMB7.5 billion. In round numbers, RMB2.5 billion relates to acquisitions of data centers as well as some of the property and land. Principally, it consists of the payment for the Pujiang site and the payment for the Beijing 9 acquisition when it closes and the payment for the Beijing 10, 11, 12 acquisition when it closes. So that accounts for most of that RMB2.5 billion number. The organic CapEx is around RMB5 billion. So it's running at about RMB1 billion to RMB1.5 billion per quarter.

Your next question comes from the line of Frank Louthan from Raymond James Please ask your question.

Great. Thank you. Wanted to touch on some new logos. What are you seeing from, in particular, what are you seeing from your customer base of nondomestic Chinese companies? How is the sell-through going to them currently during the crisis? And then secondly, what are you seeing from new logos in the quarter and quarter to date? How is that tracking? Thanks.

Yes, actually, in the first quarter, we won a very, very new logo. One is the largest coffee player in the world. Not Luckin. So another very remarkable logo is one of the very critical we call it foreign currency clearance house, which is one of the branches of the Central Bank. That means Central Bank keep giving GDS new orders in terms of the accepted China Union pay and other clearance houses. And so we win a lot of meaningful new logos from it and in a big wave. So I think they’ve also contributed our new order booking in a significant way in the first quarter. We think this trend will maintain, because as I mentioned, now that a lot of retail customers quite recognize the value of our data center, multi-cloud access and a data center platform and the high quality of the operation. So we will attract more high quality retail customers, more and more in the next couple of quarters, which I believe.

Okay, great. Thank you very much.

Due to the limited time of the call, I'd like to turn -- now to turn the call back over to the company for closing remarks.

Thank you, everyone, 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 and the Piacente Group Investor Relations. Bye-bye.

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