Hello, ladies and gentlemen. Thank you for standing by for GDS Holdings Limited Third Quarter 2022 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 [technical difficulty]. I will now turn the call over to your host, Ms. Laura Chen, Head of Investor Relations for the company. Please go ahead, Laura.

Hello, everyone. Welcome to the third quarter 2022 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 Web site at investorsgdsservices.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 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 perspective 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, includes discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. GDS press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures. I will now turn the call over to GDS Founder, Chairman and CEO, William Huang. Please go ahead, William.

Thank you. Hello, everyone. This is William. Thank you for joining us on today's call. I'm pleased to report another quarter of solid result. We grew revenue by 15% and adjusted EBITDA by 11%, demonstrating that our business is resilient and defensive. In a current uncertain environment, we are managing GDS with the following priorities. In China, we are focused on delivering the backlog, keeping CapEx down to what is essential and being selective about new business. Outside of China, we are stepping up our international expansion and it has been proven to be a winning strategy with the groundbreaking order secured during the quarter. While we are holding tight in China, and waiting for recovery, we have created a second growth engine. At the same time, we are [indiscernible] our financial position by monetizing assets in China and raising private equity for our international business. Overall, we remain very confident of our strategic position. We are on the right path to achieve our goals. While demand in China is slowing slower during the current period, there are still significant new business opportunities. Large internet companies are growing. They are building out their own IT platforms and deploying in new locations. They often favored large sites around the Tier 1 markets. If the customer is strategic and their demand matched our resource inventory, we will go after the new business. A good example is the 9-megawatt order, which we won in the third quarter from a tax driven retail platform. It is for our Tianjin [ph] data center, which is partly in service and partly under construction. We won another 20-megawatt order from a different customer in the current quarter, which fits the same pattern. Outside of China, we are building up our market presence during the quarter. We received…

Thank you, William. Following on Slide 17, where we strip out the contribution from equipment sales and the effect of FX changes. In 3Q '22, our service revenue grew by 2.8%, and underlying adjusted EBITDA grew by 1% quarter-on-quarter. Our underlying adjusted EBITDA margin was 45.1% compared to 46% in the previous quarter. Turning to Slide 18, service revenue growth is driven mainly by delivery of the committed backlog. Net additional area utilized during 3Q '22 was 14,184 square meters, around 5,300 square meters was in Tier 1 markets, and the remaining 8,800 square meters was from BOT projects. In the fourth quarter of 2022, we expect move-in to be a few thousand square meters lower as a result of the first part of the churn which William mentioned. Monthly service revenue per square meter was RMB2,237 compared to RMB2,265 the previous quarter. The decrease is mainly due to dilution from move-in at BOT projects. For FY '22 as a whole, we still expect MSR to decline by around 5% year-on-year. Turning to Slide 19, our underlying adjusted gross profit margin was slightly down on the prior quarter at 50.7%. And our adjusted EBITDA margin was just under 1 percentage point lower at 45.1%. In 3Q '22, utility cost was 31.6% of service revenue, compared with 30% in 2Q '22 and 28.8% in 3Q '21. Turning to Slide 20. 2022 is a transition year in terms of bringing down our CapEx in mainland China on the one hand, and increasing investment overseas on the other hand. Our organic CapEx in mainland China will be around RMB6 billion for FY '22, which is a few billion lower than in the past couple of years. We expect a further significant drop in mainland China organic CapEx next year. To 4Q '22, we…

[Operator Instructions] And our first question comes from the line of Yang Liu with Morgan Stanley.

Thanks for the opportunity to ask question. My question is related with sales. I think third quarter GDS delivered very strong sales with almost 30,000 square meter new booking. Do management think that is a sustainable level or we should combine 2Q or 3Q together? And do you think that the previous target of 80,000 square meter is achievable? Actually, William, mentioned that the 70,000 square meter target is revised down after 2Q, the company will definitely exceed that whether the company can go back to previous pattern like 20,000 square meter per quarter and 80 per year, do you think that is achievable target? Thank you.

I think, yes. We revised guidance -- [indiscernible] guidance in Q2, right. We adjusted to the 70,000 square meter. But now we are very confident to achieve above this number in total year's level. I think the -- it looks like in next couple of Qs [ph], we still can maintain this momentum so far.7

Thank you.

Okay, thank you.

And our next question comes from the line of Tina Hou with Goldman Sachs.

Hi, management. Thank you very much for the detailed presentation. So, I have a question on the customer churn front. Wondering because now we're talking about potential reopening of China in the second quarter of 2023. So have we seen any early signs of like customers demand start to recover. And on the other hand, any potential further, like customer churn, may be on the horizon that we should be watching out for.

I think, Tina, number one, I think this year actually did. It's very clear, there's [indiscernible] slow down their CapEx, whole year. And we see what we can say -- tell is that anyone recover, definitely but still need time because of the COVID policy in China didn't change a lot. It's all -- but on the other hand, I think we -- what are we seeing is that the internet player is very active this year. It is much more active than before. I think due to their IT structure changing or their business still growing in China and outside of China. So, in our view, maybe next year the cloud will slightly recover, but the internet -- larger internet companies still maintain a very active demand in next year. That's our view -- current view.

Yes -- sorry for that.

Yes, the churn, yes, Dan will answer that.

Tina [indiscernible].

Sure, sure.

Yes, the churn.

Yes. Okay. From the fourth quarter this year to the fourth quarter of next year, which is five quarters, and we have a total of 80,000 square meters of area utilize which comes up for renewal. And out of that, we mentioned today one China event holding 17,000 square meters. Other than that, there's no other significant churn that we aware of or we expect. Nor is there any other early termination of contracts that we're aware of, or expect. With regard to the one churn event that William spoke about is actually a result of the companies or the customers success because of their extraordinary growth, and therefore the evolution of their IT architecture. So, it's in no way a negative or even a systemic issue. And fortunately, we competed for the new deployment and we won the majority of it. And so really, there's only a timing difference between churning in one place and moving in another place. And as William mentioned, I think, eventually that will be …

Yes, we can see that it’s a new migration.

Yes.

It's a [indiscernible] churn type.

Yes, right.

Okay. Sorry, Tina, your last question.

[Indiscernible] thank you. Yes.

Thank you. And our next question comes [technical difficulty] with RBC Capital Markets.

Thank you. I wondered, for Dan, if you could maybe talk a little bit about the sources of funds you've talked about inside of China debt financing. And what are we looking at in terms of current debt financing conditions, what cost of debts? And on the equity side for outside of China, maybe a little bit of color around the types of parties that you foresee doing business with and that have shown interest so far?

Yes, you asked the sources of funds, you're talking about the project, that component in China. So, you know our approach has been to project finance each data center development and to put that project finance into place at the inception of the project, so that between the capital which we allocate to the project and the project -- committed project f1inance facility, the project is fully financed. The situation we find ourselves in is based on expected level of CapEx next year in China, which I mentioned was around 3.5 billion, and out of which we expect to debt finance 60%, which is just over 2 billion. So that would be the total amount of new project debt drawdown. But it's already -- the facility is already in place. There's not over RMB9 billion of committed undrawn available for drawdown project finance facilities. So, there's practically no new financing we need to do in order to be able to achieve that drawdown. It's just a fraction of what is available to us. But more generally speaking, the budget finance market in China for data centers and particularly for us is as supportive, as other data centers are a priority area of infrastructure frequently and repeatedly emphasized by the government in various policy statements. And therefore, the financial sector is very, very supportive in terms of allocating, allocating credit and so on to data centers. Most of our debt, most of our project debt is technically is floating rate. But it's floating rate against a benchmark, which we call the over 5-year loan prime rate, which doesn't change very much. It's not a fully market rate, therefore, it's not volatile. Over the course of this year, I think it has come down by 35 basis points. So, it's exactly the opposite experience of the U.S and most of the rest of the world. Our pricing benchmark for debt is actually lower this year. And I think our effective interest rate which we just reported, a 4.4% is the lowest in our history. For the international capital raise, you asked me what kind of investors we're talking to. So, there's a spread. We've been approached by a variety of investors and initiate a process to explore more thoroughly the potential sources of capital. I think one point I would make about this is that when we've raised capital, we've always tried to do it in a value-added way. That’s not just about money, but it's also about what the financial or the capital provider brings to us in terms of added value to the business. So, I think that's really what we're looking for. We're looking for an investor who can be a partner, and also add value to the business.

Thank you.

Thank you. And our next question comes from Gokul Hariharan with J.P. Morgan.

Yes. Hi, good morning. Thanks for taking my question. So, my question was on the Nusajaya and Southeast Asia expansion general. I think congrats on this win. [Technical difficulty] about what is the delivery schedule for this project going to be looking like? How do the economics for MSR look like compared to what we have in China? And lastly, for the GDS International …

Sorry, Gokul, your line is not very clear. Can you repeat your question please? Thank you.

… raising capital. What will be the kind of [technical difficulty]. [Indiscernible] eventually that you are comfortable with for the international [indiscernible].

Hey, Gokul, we can't hear you. Hello. Hey, Gokul, we can't hear you. Can you repeat your question.

Okay. Our next question will be coming from the line of Michael Elias with Cowen.

Well, hopefully I come through clearly. I just had a question for you related to the churn. Could you guys give a little bit of color of when you expect that churn? Is it in one tranche, or is it in multiple tranches? And then also, is that in just one -- Tier 1 market? Or is that in some edge of town or even remote sites? Any color there would be helpful. Thanks.

Yes. Hi, Michael. The 17,000 square meter churn, there will be around 3,000 square meters in the fourth quarter of this year. And I think the balance will be spread across the first two quarters of next year. And it's all in one -- Tier 1 market. The -- it involves several different sites and several different data centers. I think it's highly marketable capacity. And given time, we won't have any problem reselling that capacity to other data -- to other customers.

Thank you. I appreciate that color. And just as a follow-up question, as we think of the cadence of net installs moving forward and I feel like one overhang was the elections. Just as you look to next year, are you seeing any indications from customers that they get pick up the pace of their installs into your facilities? Thank you.

Mike was asking about the monthly move -- the quarterly move-in rate, whether we see any potential pickup.

Yes, as I just mentioned, I think that if you have a view for next year, I think [indiscernible] we'll slightly recover. But it's -- it will cost a much longer time, but they start to recover. That’s my view in next year. And -- but what do we see is that the new order from the internet giants, they are moving speed at much higher than what we expect? So, it's a combination.

Thank you.

Thank you. And our next question comes from the line of Frank Louthan with Raymond James.

Great. Thank you. So, tell us a bit more about the international expansion. I mean, where -- what are you finding that more attractive? Is it just the certainty of the business environment or is it better growth and will the customers be new to you or will you be sort of following some of your current Mainland China customers there? Thank you.

May I start, Frank, and then William will add in. I mean, the logic of our international expansion was the same with the logic of our business in China, right? The proposition to our customers is to be a solution to how they deploy their IT. And we tried to integrate our data centers into a platform to be present in all the Tier 1 markets wherever our customers have critical mass of demand. So that takes us into Hong Kong, that takes us into Singapore and the adjacent areas and beyond. I would say that the growth rates in Southeast Asia are currently higher than in China. I think there's a huge hinterland in Southeast Asia, where many, many aspects of digital economy are taking off. And the opportunity over the next 10 years is probably as good as anywhere in the entire world. And to begin with, it's very concentrated in around Singapore, but we think it will spread out from there. So that's the attraction. In terms of the customers, I think it's very valuable that we have the insight and cooperation and demand from our home market customers as we go into these areas. That's clearly a big advantage. But we will definitely win significant business from non-Chinese customers. And I can say that with total confidence. And in Hong Kong, for our Hong Kong 1 data center, we have order from one of the largest cloud players in China and one of the largest cloud players globally. And I think, given -- it gives us a little bit of time, and you'll see that we have a mix of China and global customers in our Southeast Asia data centers. They're not necessarily new customers, because we may serve some of those global customers in China. But I just think they're non-Chinese customers that we will serve outside of China.

Yes, I think in fact the Southeast Asian markets represent almost a 50% of the China market. It's already a very sizable market. And the grocery itself, I believe the grocery in this region, the demand grocery is much high than other region globally. So, this is a -- totally the market profile totally fit GDS to generate more big scale new order in this region. So, I think this is a -- we are very excited about the opportunity. And we also believe we have a very, very strong competitive edge to win the future market in this region.

Okay, great. Thank you.

Thank you. And your next question comes from the line of Sara Wang.

Hello.

thank you for the opportunity to ask -- Hello, hello. Can you hear me?

Yes, we can. Thank you. Yes.

Thank you. Just one quick question on the delivery schedule. So, I noticed the number square meter to deliver for 2022 this year is revised down by, say, roughly 20,000 square meter and then the delivery square meter for next year remains largely unchanged. So is it because most of the projects in China somehow is delayed into 2024 or beyond.

Yes. So, we still have a lot of flexibility. Data center development has very distinct phases and is very modular. We incurred a certain amount of cost for the projects which are under construction and we can time and phase out. The -- how we incur additional cost is really tied to when the customer needs take delivery. I think for the area under construction, it's over 60% pre-committed. So those sales agreements have a start date, delivery date in them. That's when the customer is entitled to begin to move in. If the customer agrees to delay or defer that start date then we can delay or defer the CapEx. So, I think we can actually continue to push back the completion of the project. [Indiscernible] takes the opportunity to repeat a number I mentioned during the prepared remarks. If you look at the area which we have under construction, it's well over 100,000 square meters. But the cost to complete, all of it is just over RMB7 billion. We talked about Mainland China organic CapEx next year being around 3.5 billion. So that's approximately 50% of the cost to complete all the remaining capacities that gives you some idea of what our run rate CapEx is versus the capacity that we can bring into service.

Got it. Just one quick follow-up. So, given the flexibility in our delivery schedule, do we see any risks to our, say, committed square meter?

You mean, the backlog? No, I mean, we have a 240,000 something square meter backlog. And we mentioned that it was one, call it, early termination from that backlog, which is actually a partial early termination, it's not a early termination of the entire commitment from that customer, and it's 3,000 square meters. That's 1% of the backlog. And in that case, because it's early termination, there's a substantial I'd say very substantial termination fee that we will receive either this quarter or next quarter. That's a very immaterial amount of churn from the backlog and we have the financial protection of the termination fee.

Got it. Thank you.

Thank you. [Technical difficulty] from the line of Alex Wayne [ph] with Daiwa.

Okay. Thanks [indiscernible]

Alex, we can't hear you.

Hello. Hi.

Yes [indiscernible].

It's finer.

Okay. So, regarding our customer service expectation strategy, so the [indiscernible] customer base raised roughly 820 this quarter. So, [indiscernible] more color about the incremental customers [indiscernible] quarters regarding the customer mix. And about longer term picture regarding customers, we have initial landscape around 20% from [indiscernible] in the next several quarters about [indiscernible] lowering. Do we expect the mix to be further recover in '23, '24? And the second question is regarding customer move-in progress. We mentioned some customer delays [indiscernible]. Is the feedback more from the customer, help customers manage [indiscernible] of some initial spend coming from international customers? Thank you.

The first question was about increasing the number of customers. So, regarding -- about new enterprise customers. So that's where that number comes from. I think the second question was, which type of customers were requesting the extended move-in period from 2 to 3 years? Maybe I can answer that one. So, as William mentioned, if you look at that total backlog, most of it, almost all of it actually pertains to around 10 customers. I think 9 out of the 10 are Chinese cloud and internet companies and maybe [indiscernible] to the non-Chinese cloud internet company. There's only a couple who have requested that extended move-in periods, they're both Chinese cloud or internet companies. William, what about the enterprise business opportunities?

Yes, I think if you look at our first two quarter, our new order mainly driven by the enterprise customers, especially financials at [indiscernible]. That’s our very solid customer base. And we also added more new industry, new customer in this year or made a very, very significant progress to acquire new custom to strengthen our customer base in this year. This is our strategy. We always did like, again in the last few years. So, I think we're -- so that's why we are our orders still maintain very stable situation. So even in this year, we still can get a rich, very high-level new booking, if compared with our peers or global peers, right. So, our new order booking still maintain very high-level. So, I think the -- that's -- based on we have very strong customer base, and we continue to [indiscernible] the customer base. So that's -- so this year, I think in the next year, we still will focus on the hyperscale plus a very good high-quality enterprise customer.

Thank you. And our next question comes from the line of Mingran Li with CICC.

Hi, management. Thanks for taking my question. Just a small one regarding overseas business. I think [indiscernible] construction data centers in Malaysia have been fully pre-committed and ready for service next year. How do we expect overseas move-in wage revenue growth rate and margins? Thanks.

So, overseas in our definition includes Hong Kong, where we were the first data center Hong Kong 1 will come into service in the next couple of months. And that is fully committed mainly to China and global cloud. And the move-in rate there will be over 2 years, which is standard and typical for cloud players. For the commitment that we've announced, the letter of award 64 megawatts for Nusajaya, it's actually three data center buildings, that it's the entire Phase 1 of our development on that site. And the delivery will be the second half of next year. And we expect the move-in to be very fast for the entire capacity. And that illustrative of what William was mentioning that some internet companies have placed orders a shorter period of time ahead of when they require delivery and then commit to a faster move-in than we typically see with cloud customers. You've mentioned revenue and EBITDA, I think the international business will be mildly EBITDA negative next year, be around breakeven the year after, it could be better, but that's the base case.

Thank you.

Thank you. And we have a follow-up question from the line of Yang Liu with Morgan Stanley. Pardon me Yang, please check your mute button.

Thank you for another opportunity to ask a question. I take a look at your CapEx plan and operating cash flow and also the debt. Do you think -- actually, if we look a little bit forward going into 2024 with a little bit higher operating cash flow and also similar or even a little bit down CapEx, do you think a free cash flow positive is achievable for the China business in 2024? Thank you.

I think it's close, Yang. We would expect or hope that operating cash flow will grow and organic CapEx may be lower. The gap to being self-financing will narrow down. We may pursue asset monetization, not just upon that gap, but we may pursue it to deleverage as well. Asset monetization generates cash proceeds, but it may also lead to some debt deconsolidation. So, I think the strategy is not purely or simply driven by uses of funds. The liquidity, but also by leverage. I think that's -- at this point, we put in considerable amount of work on developing the structures that we've already talked about, the sale and leaseback and the data center funds and, frankly the international capital raised and we're working on other structures which we haven't yet disclosed yet. The objective is to have optionality. We're working with different partners with different structures. Even in this difficult time, there's very strong interest and commitment from these partners to getting these deals done. I think it gives us optionality as to how much capital we want to recycle or raise regardless of whether the mainland China business is cash flow positive, we might still be doing it.

[Indiscernible]. Thank you.

Thank you. As [technical difficulty] there are no [technical difficulty]. I would like to now turn the call back over to the company for closing remarks.

Thank you all once again for joining us today. If you have further questions, please feel free to contact GDS Investor Relations through the contact information on our Web site or The Piacente Group Investor Relations. See you next time. Bye, bye.

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