Release Date: August 21, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- GDS Holdings Ltd (GDS, Financial) achieved a revenue growth of 18% and adjusted EBITDA growth of 15% in Q2 2024.
- The company has seen significant progress in stabilizing its China business and executing its international strategy.
- GDS Holdings Ltd (GDS) signed a master sales agreement with a global technology company for capacity at its new campus in Batam, indicating strong international demand.
- The company brought 45,000 square meters into service in the first half of 2024, with over 20% already utilized.
- GDS Holdings Ltd (GDS) has a strong market position in emerging data center markets like Singapore, Johor, and Batam, with 388 megawatts of total customer commitments.
Negative Points
- EBITDA margin for the China segment decreased by 2.1 percentage points year-on-year due to increased power tariffs.
- The company expects lower CapEx in the second half of the year for its China segment but anticipates exceeding its CapEx guidance for the International segment.
- GDS Holdings Ltd (GDS) faces challenges in securing regulatory approvals for its REIT plan in China, which has been in progress for over a year.
- The company has a significant amount of contract renewals in the second half of the year, which could impact churn rates.
- The increase in capacity and service for the International segment is expected to be relatively small in the next two quarters, with substantial growth anticipated only in 2025.
Q & A Highlights
Q: Could management elaborate more on the timing and potential valuation of the infrastructure REITs in China?
A: Daniel Newman, CFO: We have selected a single site with two data centers as the seed asset for the REIT, targeting around RMB2 billion per transaction. We have been working on regulatory approvals for over a year and hope to reach a milestone next year. The REIT will be publicly listed, and we expect a substantial percentage of the offering to be taken up by strategic or anchor-type investors. The REIT sector in China trades at higher EBITDA multiples, which we hope to capture.
Q: How much of the business in Mainland China is AI-driven, and what is the impact of the Chinese economy on demand?
A: Wei Huang, CEO: Currently, 70% of new demand in China is AI-driven, with the remaining 30% from Internet companies and traditional cloud business. The AI demand is not directly impacted by the current macro environment in China, as it is driven by significant investments from large companies and startups.
Q: What is the future financing plan for the International business, especially regarding potential spin-offs or IPOs?
A: Daniel Newman, CFO: We have started the process for a Series B round, aiming to raise $600 million to $800 million from global investors. After this, we may explore mezzanine debt to optimize the overall cost of capital. We are also putting in place senior debt at the project level and undertaking a large syndicated term loan for our Malaysian business.
Q: How do you see the trend in area in service for the International business in Q3 and Q4?
A: Wei Huang, CEO: We expect a relatively small increase in capacity and service in the next two quarters. However, over the course of 2025, the increase will be very substantial, with most of the 280 megawatts of committed but not yet delivered capacity expected to be utilized within 24 months.
Q: Can you discuss your customers in Malaysia and the recent big International technology customer win in Batam?
A: Wei Huang, CEO: We have five customers in Southeast Asia, including both Chinese and International companies. In Malaysia, we have three Chinese customers and one International customer. In Indonesia, we have one International customer. We aim to diversify our customer base further, targeting a 50-50 mix between Chinese and International customers in the region.
Q: How should we think about the pace of move-in and MSR recovery in China?
A: Daniel Newman, CFO: We expect the current level of move-in to continue through next year. The MSR has been decreasing by a little over 2% on average over the past few quarters, but we expect this decrease to be less significant in 2024 compared to 2023, indicating a bottoming out of the MSR.
Q: What is your strategy in Johor, given the increasing data center supply from regional and global peers?
A: Wei Huang, CEO: We are the first-mover in Johor and will continue to enjoy this advantage for the next three years. We are also exploring other markets in the region to maintain our market-leading position. We do not foresee supply issues in the short term, and we aim to deliver another surprise in the next three years.
Q: Could you please update us on the IRR trend for the big new orders in the International business?
A: Daniel Newman, CFO: The development yield for new orders is in the low-teens, which is consistent and acceptable in terms of return on invested capital. These are high-quality customer contracts, often priced in US dollars with escalators, and have terms of 10 to 15 years.
Q: What is the outlook for contract renewals and churn in China for the remainder of this year?
A: Daniel Newman, CFO: We expect churn to continue at an annualized rate of about 5%, which is relatively low by international standards. In absolute terms, this averages about 5,000 square meters per quarter. We do not currently foresee any exceptional churn beyond this rate.
Q: What is the timeline for the CFA project in Singapore?
A: Wei Huang, CEO: We are in the process of acquiring land and aim to complete this within the next couple of months. We plan to deliver the project and launch services to the market by the end of 2026.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
