GDS : 2Q22 Earnings Transcript

REFINITIV STREETEVENTS

EDITED TRANSCRIPT

Q2 2022 GDS Holdings Ltd Earnings Call

EVENT DATE/TIME: AUGUST 23, 2022 / 12:00PM GMT

REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us

1

©2022 Refinitiv. All rights reserved. Republication or redistribution of Refinitiv content, including by framing or similar means, is prohibited without the prior written consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

AUGUST 23, 2022 / 12:00PM GMT, Q2 2022 GDS Holdings Ltd Earnings Call

CORPORATE PARTICIPANTS

Laura Chen GDS Holdings - Head of Investor Relations

William Huang GDS Holdings - Founder, Chairman & CEO

Dan Newman GDS Holdings - CFO

CONFERENCE CALL PARTICIPANTS

Michael Elias Cowen - Analyst

Tina Hou Goldman Sachs - Analyst

Yang Liu Morgan Stanley - Analyst

Frank Louthan Raymond James - Analyst

Sara Wang UBS - Analyst

Bora Lee RBC Capital Markets

PRESENTATION

Operator

Hello, ladies and gentlemen. Thank you for standing by for the GDS Holdings Limited Second 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 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.

Laura Chen GDS Holdings - Head of Investor Relations

Thank you. Hello, everyone. Welcome to the Second 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 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. 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 result 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 the 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 Founder, Chairman and CEO, William. Please go ahead, William.

William Huang GDS Holdings - Founder, Chairman & CEO

Thank you. Hello, everyone. This is William. Thank you for joining us on today's call. The world is undergoing a lot of uncertainties and is very unpredictable right now. For the companies in China, it's an extremely challenging year, especially the tech sector.

Our customers are impacted by the economic slowdown, the COVID lockdown and the supply chain shortage. This is reflected in their weaker than normal business performance and the result.

However, GDS business is resilient and defensive. Despite the challenges, we are still delivering solid results, growing revenue by 24% and adjusted EBITDA by 18% in the second quarter. At the same time, we continue to make significant progress in the execution our

REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us

2

©2022 Refinitiv. All rights reserved. Republication or redistribution of Refinitiv content, including by framing or similar means, is prohibited without the prior written consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

AUGUST 23, 2022 / 12:00PM GMT, Q2 2022 GDS Holdings Ltd Earnings Call

growth strategy by further developing our customer franchise as demand diversified across the cloud, internet and enterprise verticals, stepping up our international expansion and establishing a new data center fund as the channel to access private capital. We have strengthened our position in absolute and in relative terms for future recovery and value creation.

Even in a softer demand environment, there are still significant new business opportunities. As a result of our customer targeting and market presence, we are well placed to compete. In the second quarter, we won three new hyperscale orders.

The first came from a global cloud customer who we are already serving in mainland China, but this latest order was for our Hong Kong 1 data center. As a result of this deal, we now have the largest global cloud and the largest China cloud as our anchor customers in Hong Kong 1, which is quite an achievement.

The second was from a China cloud customer for capacity at a location near Beijing, where they already have significant presence. This is a typical land and expand order. The third was from a major Chinese bank for capacity in Shanghai.

Continuing the trend which we highlighted for the last few quarters, financial institutions and the large enterprises once again accounted for around 40% of new bookings in 2Q22. During the first half of this year, our new bookings was 31,000 square meters. For the full year, we are confident of achieving 70,000 square meters of net additional area committed. We may be able to do more but it depends on deal timing.

This is a transitional year. Going forward, we still target 80,000 square meters and then up to 90,000 square meters of annual new bookings. However, within this number, we expect a change in the mix, with perhaps 15% to 20% coming from our regional business.

GDS business is focused on tier 1 markets, which were the worst affected by lockdowns. Nonetheless, we still achieved over 13,000 square meters of net additional area utilized in the second quarter. Based on feedback from our customers, we expect move-in to continue at a similar level for the next few quarters. However, in the medium term we believe that move-in will return to historic levels.

We have a large backlog totaling 242,000 square meters which underpins our multiyear growth. Our backlog is solid. Our data centers are concentrated in tier 1 markets where future supply is limited. Customers have secured this resource because it is very strategic for them. We will continue to deliver the backlog; it is just a matter of time.

To adjust to the current slower environment, we have scaled down our capacity delivery schedule. In the first half of 2022, we brought 16,500 square meters of capacity into service. In the second half, we plan to bring another 31,000 square meters into service. As compared with our original plan for FY22, we have pushed back nearly 39,000 square meters of completions into next year and beyond.

Our home market customers are putting increased emphasis on international expansion, particularly in Southeast Asia. We're also putting a lot of time and effort into scaling up and accelerating our regionalization strategy. In Hong Kong, we have accomplished the difficult task of establishing a 5-year pipeline of purpose-built data center capacity, clustered in a prime location.

Our first data center, Hong Kong 1, will come into service in the next few months. It is almost sold out with leading Chinese and global customers. We are now working on anchor customer orders for Hong Kong 2.

In Southeast Asia, we have secured a hyperscale capacity at campuses in Johor, Malaysia, and Batam, Indonesia. All of our campuses are now under construction. The sales pipeline for this capacity is even stronger than what we expected. The customer profile is varied across verticals and included both Chinese and global names.

There are a few deals which we are confident of winning this year which will demonstrate strong proof of concept. With demand from Chinese and the global customers, Southeast Asia is one of the fastest growing data center markets in the world. We believe that our regional business, including Hong Kong, will become a second growth engine for GDS, alongside mainland China.

As part of today's earnings release, we announced the formation of an RMB6.7 billion, equivalent to US$1 billion, mainland China data

REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us

3

©2022 Refinitiv. All rights reserved. Republication or redistribution of Refinitiv content, including by framing or similar means, is prohibited without the prior written consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

AUGUST 23, 2022 / 12:00PM GMT, Q2 2022 GDS Holdings Ltd Earnings Call

center fund. It is important for us to have access to capital from a variety of sources, public and private, onshore and offshore. This data center fund will significantly enhance our financing strategy and benefit all of our shareholders.

To finish up, we have been through difficult times and cycles in the past. The challenges that we are experiencing now are for short-term, while data center industry is for long-term. During this time of uncertainty, we continue to build up our position by expanding our customer base and enhancing our market presence, both in and outside China.

We believe we will be well prepared both in terms of business operations and the financial capability when the recovery happens. We remain very confident about our future. I will now pass down to Dan for financial and operating reviews, as well as to expand in more detail about the fund.

Dan Newman GDS Holdings - CFO

Thank you, William. Starting on slide 14, where we strip out the contribution from equipment sales and the effect of FX changes. In 2Q22, our service revenue grew by 2.6% and underlying adjusted EBITDA grew by 0.2% quarter on quarter. Our underlying adjusted EBITDA margin was 46% compared to 47.1% in the previous quarter.

Turning to slide 15. Service revenue growth is driven mainly by delivery of the committed backlog and closing of acquisitions. Net additional area utilized during 2Q22 was 13,659 square meters. Around 8300 square meters was in tier 1 markets affected by lockdowns and the remaining 5300 square meters was from BOT projects in unaffected remote areas.

In the second half of 2022, we expect a similar level of move-in as we saw during the first half. Monthly service revenue per square meter was RMB2265, down by 1.4% compared to the previous quarter. The decrease is mainly due to dilution from move-in at BOT projects. This dilution effect will continue in the second half as we deliver most of the remaining BOT backlog, however for FY22 as a whole, we still expect MSR to decline by around 4% to 5% year on year in line with our original expectations.

Turning to slide 16. Our underlying adjusted gross profit margin was 50.9% for 2Q22 compared to 52.4% in the previous quarter. The extreme hot weather this summer has resulted in a higher seasonal PUE than we normally see in the second and third quarter.

Furthermore, power tariffs are now up the maximum permitted 20% across our tier 1 markets. In 2Q22, utility cost was 30% of service revenue compared with 28.3% in 1Q22 and 26.9% in 2Q21.

There's no sign yet that tariffs will come down in the near term, therefore we expect the combined effect of higher power consumption and higher power tariffs to continue being a drag on our margins in the second half of the year.

Turning to slide 17. We think about our CapEx in three parts: mainland China organic, acquisitions and regional expansion. For mainland China organic, we spent RMB2.7 billion in the first half of 2022 out of our full-year budget of RMB6 billion.

As William mentioned, we've scaled back our project delivery, however, while CapEx is generally linked to capacity expansion, there is a significant portion that has to be front ended for installation of power infrastructure at new campuses.

Accordingly, it will take time for our mainland China organic CapEx to come down. We expect mainland China organic CapEx to be several billion lower next year.

For acquisitions, in the first half of 2022 we paid just over RMB3 billion of consideration. We will pay another RMB1 billion by the end of the year. As of now, there's no material acquisition consideration that will be payable next year.

For regional expansion, which includes Hong Kong and Macau, as well as Southeast Asia, we spent just over RMB1 billion in the first half out of our original full-year budget of RMB2 billion. Regional CapEx is likely to step up by several billion next year, given the expected new business wins. For the whole of 2022, we will most likely still hit our original CapEx guidance of RMB12 billion before taking account of any potential capital recycling through the data center fund.

REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us

4

©2022 Refinitiv. All rights reserved. Republication or redistribution of Refinitiv content, including by framing or similar means, is prohibited without the prior written consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

AUGUST 23, 2022 / 12:00PM GMT, Q2 2022 GDS Holdings Ltd Earnings Call

Turning to how we fund this CapEx. We think it makes sense to take a different approach for our regional business and our mainland China business, given the differences in the capital markets, investor base and valuations. There's a lot of money chasing digital infrastructure in the region and GDS regional is a very attractive investment opportunity. We believe that we have already created significant value from our initiatives in Hong Kong and Southeast Asia.

Accordingly, we have set up an international holding company under GDS Holdings to hold all of our projects outside of mainland China. We will use this international hold co as the equity capital raising vehicle for our regional business. As a first step, we intend offering a small minority stake to private equity investors who we believe can add value. We've started work on the process and aim to get this done in the next couple of quarters.

For our business in mainland China, excluding acquisitions, our objective is to become self-financing within a few years. With buildup in operating cash flow, as more data centers reach stabilization and substantial front-end CapEx already incurred, the gap to free cash flow breakeven is narrowing down.

Turning to slide 18 in order to enhance our access to capital, which is a competitive advantage in uncertain times, we've been considering structures which enable us to bring in outside equity investors at a project level in Mainland China. We find that there is strong interest, particularly among real estate investors in this kind of participation.

Further to this strategy, we recently entered into a framework agreement with an investor which is a Sovereign Wealth Fund, for the formation of our first offshore Mainland China Data Center Fund. As envisaged by the framework agreement, the fund will have RMB6.7 billion, equivalent to US$1 billion, of committed capital, with 70% coming from the investor and 30% from GDS.

The investment objective of the fund is to acquire data centers in Mainland China, either from our own portfolio or from third parties through M&A transactions. GDS will manage these data centers under long-term contracts. We are looking to seed the fund with a few projects in which we have invested significant capital but which are still several years away from stabilization.

This will allow us to recycle capital and accelerate monetization while maintaining our recurring income model with management fees. Our target is to complete the formation of the fund and inject at least one project by the end of this year. Meanwhile we are also in discussions with some domestic financial institutions about an onshore version of this fund structure, although these discussions are currently at an earlier stage.

Looking at our financing position on slide 19. At the end of 2Q22 we had RMB9.2 billion or US$1.4 billion of cash on our balance sheet. Our net debt to LQA adjusted EBITDA ratio was 7.2x on a consolidated basis.

However, as shown on slide 20, we should really look at our leverage in two different categories. Our in-service portfolio which is 96% committed and 68% utilized. Has a net debt to LQA adjusted gross profit ratio of 4.2x. As these data centers reach full utilization, the leverage ratio will come down closer to 3x.

We have another portfolio which includes area under construction and area held for future development. For this part of the portfolio we believe that it makes more sense to look at the ratio of net debt to fixed assets. Which is a reasonable 53%. Once we have completed the regional equity capital raise and some capital recycling through the fund, we expect our consolidated leverage to come down.

Turning to slide 21. As at the end of 2Q, we had total capacity in service and under construction of 667,000 square meters. Against this, we had total area committed by customers of 588,000 square meters. Assuming that we deliver all the backlog and sell out the remaining inventory, our area utilized or revenue generating capacity would increase by around 90%.

The total cost to complete all existing projects is around RMB9.8billion or US$1.5 billion. It is a relatively small amount of CapEx to generate a large amount of growth. Because we have already made most of the investment.

REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us

5

©2022 Refinitiv. All rights reserved. Republication or redistribution of Refinitiv content, including by framing or similar means, is prohibited without the prior written consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.