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 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 and welcome to 4Q and full 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.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 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’s earnings press release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. GDS’s 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 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. 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 a multiple times bigger than our closer competitors. We have the best customer relationships, the most compete market presence, by far the largest development pipeline, the strongest the balance sheet, the lowest cost of capital and most important of all, an unmatched reputation, which reflects many years of consistent delivery and a high operating standards. As we look forward from today, we see wave after wave incremental demand driven by new technologies such as 5G, AI, cloud and IoT supported by a highly favorable government's policies. The market opportunity in front of us is inconceivable. While others 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 resources in killer markets, enhancing our platform by entering new markets in China and overseas, seizing opportunities to further consolidate the market and ground breaking green initiatives. We have only just the beginning to reap the rewards of our past efforts. 2021 will mark our 20th anniversary. For me 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. First…

Thank you, William. Starting on Slide 18 where we strip out the contribution from equipment sales and the effect of FX changes. In 4Q '20, 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 4Q '20 was 16,461 square meters, consistent with the previous two quarters. The first quarter of each year is usually slower due to Chinese New Year. Nonetheless, we expect move-in in 1Q '21 to be only a couple of thousand square meters down on the prior quarters level. Given the timing of capacity increases, as shown on Slide 23, we are forecasting 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 RMB 2,489 per square meters per month. As shown on the next slide, MSR for the whole of FY '20 was down 3.4% compared with FY '19. In FY '21, 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 move-in 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. Turning to Slide 21, our underlying adjusted gross profit margin was 53.7% for 4Q '20 and the same number for the full year, a near 1 percentage point improvement versus FY '19. We…

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Yang Liu at Morgan Stanley. Please go ahead.

Thanks for the opportunity to ask questions. I have one question on the competition. Could management update 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 with the pricing return pressure or what does GDS do to defend what is our key customers, when the peers are chasing them aggressively? Thank you.

Okay, good morning Yang Liu. First of all, I think the answer is, in general, I think that nothing changed in terms of – 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 their earnings call does not change. And the competitor in a – or the regional player are project player, so platform is very valuable for our key customers is number one. Number two, I think our position in our customer is very different then other follower. Our position is very solid, and in our customers eyes GDS 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 see here is, of course, a lot of the – because the market is booming a lot of the new player in the market, even a lot of the data center – established data center player. The competition between them looks like more stronger than before, but not reflected to us. So in terms of the price and return, I would like to say the price is – it's very difficult to talk about the price as we mentioned last a couple of times. We have pursued the project return. I would like to say in our future project return where we maintain what we talked about before. So in general would not impact our project return.

Thank you. If I may have another question, so that we have a new financial metric underlying adjusted GP. Should I assume that it is almost the same with – or why we have been using for past three years?

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.

Thanks very much. 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 that similarly balanced between what appear to be immediate needs and then needs that are kind of cloud? 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 – construction cost per megawatts of IT capacity? Is that trended differently recently? Or is there any chance that that could decline over time? Thank you.

Yeah, Jon I answered 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 independent developer. And after we acquired it, we were able to move forward with the customer contracts. So that's why there appears to be a short time lag. The second one, which also appears short is Beijing 7, but in this case, is an existing data center, it was already roughly speaking half committed to customers, and this was a – not the first order for the data center. This was the – an order that took up most of the remaining capacity. Once again, that's why there seems to be a relatively short time period, because it was an order for an existing data center. The other two hyperscale orders in Langfang and Huizhou, yes, they both involve, in one case, greenfield assets, in other cases, so conversion, but it's an early pre-commitment, right at the very beginning of the project. Sorry Jon, can you repeat the second question?

Planning 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, I couldn't hear it clearly.

Construction cost per megawatt.

Construct?

Yeah. So construction cost per megawatts of IP capacity. Has that trended differently?

Yeah. Sorry, I couldn't hear it clear. The trend construction cost has been that we are we able to keep achieving cost reductions through 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 modularity and off site prefab and so on. And some of the practice is by setting up projects which had the most optimal cost due to location, due to the proximity of power infrastructure, due to the ability to leverage existing substations and so on. The gains year-on-year are small percentage gains, but they are continuous. And looking forward, we continue to see opportunities to continue that. So we expect actually for quite a few years to come to be able to lower our unit development costs by small increments year-on-year.

Thank you.

Thank you. [Operator Instructions] Thank you. Our next question comes from Colby Synesael at Cowen and Company. Please go ahead.

Hi, this is Michael on for Colby. 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 B-O-T data centers. Just to be clear, this is because you intend to retain 100% ownership of those assets? 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, 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? Thank you.

Mike 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 related 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 this 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 moved them from the category of what we call managed BTS data centers, and then included them in our KPIs, just as we would with any other self developed data center, but we do identify in the detail breakdown in the appendix to our presentation, which are the B-O-T projects so that it's clear for all to see. More generally, with regard to B-O-T projects, it is becoming quite popular or quite – we've seen more of the large cloud and internet companies in China experimenting with this approach for development on their campuses in remote areas. There is 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. From our perspective it's not the core strategic focus, but it is 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. And I think going forward we will do some that way. We'll do some where we have 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 as regards these projects outside of the core markets we will be – adopt a variety of different approaches. William do you want answer the second part of the question.

Yeah, I think the overseas strategy, as I just mentioned, the first appointment is a start point in the Hong Kong, right. We are really developed Hong Kong, the two projects in the development. So the next step obviously is the Southeast Asia. In Southeast Asia, the top three countries in our radar screen is Singapore, Malaysia and Indonesia. This three markets is in our view, in the next five years, the demand from China will be a few 100 megawatts. So we have tried to catch up this wave, but potentially, I think in Southeast Asia is a high potential market where we go to – our current strategies that we had to set up our presence there, but it's for the simplistic reason. But if you look at the current Southeast Asia market is very – looks like, very similar like eight years and 10 years ago, the market in China. So we are willing to step in and build our data center position – our position there and to catch up in the future high growth. This is our current goal. So we will – maybe we'll open up with – maybe the first project will be in simple, maybe in Malaysia or Indonesia. So we will give you the clear answer in the near future.

Thank you. Our next question comes from Tina Hou at Goldman Sachs. Please go ahead.

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 P&L in the future? And when do you see the first project to start contributing our revenue to our P&L as well? Thank you.

I think it's too early – it's too early to talk about the revenue because what we – in the next five years, I don't think it will impact a lot in our revenue because our presence or the guidance or the development is still – we are still in China because China is still big market. So as I just mentioned, Southeast Asia in our view is a strategic, but have we not calculated 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. Please go ahead.

Thank you. So could you talk a little bit about what are we seeing from a national government policy in China regarding energy efficiency, pollution control, et cetera, given some of the bigger commitments on climate change? Could you – 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. Seems like M&A is now becoming a much bigger part of pipeline as evidenced by last year. If we think about the next two to three years, should we assume that M&A becomes probably 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 over the next two to three years?

William do you want to address the question about government policy?

I think the ESG is a – it's a very hot topic right now in Greater China, including Hong Kong or Mainland China. I think this is definitely the trend that the government encourages the green power right and also we call it having carbon neutral, right. So GDS already start to prepare for this for about a couple of years. So as I just mentioned 20% of our data center already green, right, green energy. So we will – government policy – from the policy point of view I think in general still under development right now, we didn't see any official enforcement policy right now. But of course, the immediate impact is as I mentioned, in the carbon corridor in the civil market, especially also in some cable market will be getting. It's easy to see it will control more tight in the future. This is what we can see what's the impact. Yeah.

I'll answer the question about M&A. The main driver of our business for the foreseeable future is going to be organic development in Tier 1 markets. But having said that, I mean, we clearly see an opportunity right now and the next few years to consolidate the market. There's been a lot of new entrance, a lot of development by independent developers. And that's what creates the pipeline and the opportunity to consolidate. We believe that we have significant competitive advantage in terms of M&A and in terms of the capability and experience of our team, the methodology that we developed, the deals we've done since 2016, 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, right? I think buyers – sorry, sellers have a lot of confidence when they engage with GDS, because of our track record. 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 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 perhaps single data center on its site. It could be purely capacity, like the two deals we announced today Shenzhen 8 and Shenzhen 1 or it could be…

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

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

Yeah, Rob, we always tried to be – we have been fully financed, fully capitalized for a 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 the expected level of organic net add of 90,000 to 100,000 square meters. The fact we've got 120,000 square meter data center – acquisition already in the pipeline and potentially closing shortly, and hopefully other acquisitions that will close this year. IK mean that's the business plan, which I think everyone can see. And we're well capitalized for that release for the next couple of years. We haven't factored in regionalization. We haven't factored in M&A beyond the flow deals, as I've 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 forwarded CapEx if we see opportunities to acquire land or buildings, which are kind of going to be opportunities that are kind of one time opportunities that you have to you have to grab when they're there otherwise they've gone forever. So if any of that materializes it's upside to our business base case and I believe it will be positive for our for our shareholders. So the need for capital arises it will – it should be seen something – it'll be because of greater success. William, do you want to comment about the relationship with CyrusOne?

Okay. I think in terms of the sales cooperation, we two maintain the sales cooperation relationship. Because historically, they refer some deal and we are follow the deal. And they help us cover a couple of deal. But since now, Chinese customer go to US, it's a slowdown. So they get a little limited benefit from us. But I think the way I was relating still there, but today's current – our international team worked very closely with a different department. And to get – for example, last year, we got a larger deal from US – US based customer, let's say in China, so independently. So we are not relying on them. Of course, I think they – but in some way work together with some deals still right.

Our next question comes from James Wang at UBS. Please go ahead.

Good morning management. This is James Wang from UBS. I've just got a few questions. First one is the follow up on the ESG report, so I'm just wondering, since Chinese government announced the carbon neutrality goal, whether your conversations with your largest cloud customers have changed and related to that, how does 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 of projects? That's the first question. And the second question is on you expanding into really mentioned 10 different regions in China. If I remember – for example, I also saw that you've recently got into Shenzhen and Chongqing. And if I remember correctly, in the past, for example, in the West, the utilization rate increase has been rubbed slow. So I'm just wondering what you're seeing in terms of demand in these new regions, whether it's just – whether the situation's changed versus the past? Thank you.

Dan, for the first question?

Yeah, sorry, I'm in a different place. And William, I can't hear everything clearly. But James, what I heard was you are asking about the development, what proportion of the power that includes that?

Yeah. So for the – on the ESG front. So conversations with a lot of our customers, whether it's changed, whether they're taking a more focused on renewable energy usage, and also on your land held for feature development, how much of these renewable energy and whether that percentage will increase? Thank you.

Yeah. Sure. Well, I mean, I think the first part of the questions everyone in China take more notice and start from the central government downwards, right. And our largest customers look to us and expect us to help them solve the problem, the challenge of how to reduce their carbon footprint. Probably the biggest component of it is where does the power come from meaning what is the – what fuel is used in the power generation? It doesn't necessarily go with individual projects. So for example, in a region, right, 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 green power, because for example, the location may be on the same grid, as there is a large amount of wind power generation even though there could be quite a few 100 kilometers apart, it could just be that they are on the same power grid. So, we will come out with targets I think, rather than talk specifically about which project has worked. 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. And whatever targets we set will be very serious ones not – it's not – we take this very seriously. It's absolutely critical trial business. William, do you want to answer the second part of James' question?

Yeah. Yeah, the second question. Yeah. Sure. I think first of all, I think we are – in China the Tier 1 market, is very obviously Shanghai, Beijing, Shenzhen, Guangzhou, right and the western side – if you look at the last three years, actually the growth – the data center may invest in the Guangzhou and Chongqing in last three years growth very fast. So this is a trend. So given the current utilization, what we can tell is that the growth trend is very obvious. So we are very confident to increase the utilization in our current data center in western part of China. But another – in our radar screen, there's another city like the 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 customer – current customer, cloud prayer and a lot 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. So I think as I mentioned that China is – 5G in China is very advanced than the other country. So 5G, what's the impact is when the 5G have completed deployment, it will produce more data from the city because those cities all economic center in all the province and the population is – most of them is around more than eight million or even the 10 million right. So I think this is a potential market in – nowadays just a start. So we are – we treat them like new emerging market right. But in order to make investment more efficiently we will – we always will follow up our customer demand to get into this market. Yeah, 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.

Thanks everyone, for joining us today. If you have further questions, please feel free to contact GDS Investor Relations through the contact information on the website or The Piacente Group Investor Relations. Thanks all, see you next time.

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