GDS Holdings Limited misses on earnings expectations. Reported EPS is $-0.62 EPS, expectations were $-0.39. GDS isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Transcript provided to Seeking Alpha by the Company:

Operator: Hello ladies and gentlemen. Thank you for standing by for the GDS Holdings Limited fourth quarter and full year 2023 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: Thank you. Ladies and gentlemen, thanks for standing by. Welcome to the fourth quarter and full year earnings conference call for 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 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 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’ 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.

Now I’ll turn the call over to GDS Founder, Chairman and CEO, William Huang. Please go ahead, William.

William Huang: Thank you. Hello everyone. This is William. Thank you for joining us on today’s call. The number one priority of GDS management is to create value for our shareholders and drive share price and recovery. Today, we are delighted to announce the landmark US $587 million equity raise for our international business. This is a big step forward in our strategy to develop and finance GDS International on a standalone basis. The equity raise also highlights how much value we have already created for our shareholders through international expansion. We have been developing our business in China for many years. We are a market leader with over 1.5 gigawatts of capacity in service and under construction. We are confident that we will maintain our competitive position and enjoy further growth, particularly when AI demand takes off.

We initiated our international business in the past couple of years. Within a short period of time. It has become a second growth engine with over 330 megawatts in service and under construction, equivalent to 20% of what we have in China. GDS China and GDS International are obviously at very different stages of development. We are therefore pursuing distinct strategies for each part of our business. For China, we have two major financial objectives. Objective number one is to grow EBITDA at a steady rate. In 2023, our adjusted EBITDA grew by 9% year-on-year, all of which was from China. Objective number two is to deleverage our balance sheet. Our target is to get to below five times within three years. In order to achieve these objectives for China, we are targeting new business which fits our capacity, we are increasing asset utilization by delivering the backlog, we are spending capex only where it is needed for customer move-in, and we are preparing for asset monetization when the market allows.

For international, our ambition is to create an exceptional data center platform which emulates our success in China by leveraging our industry-leading capability, strategic business relationships and the scale economics. In 2022, we set up a new international holding company headquartered in Singapore. It acts as the vehicle for all our assets and operations outside of mainland China. We have assembled a standalone management team and today we announced that Jamie Khoo, our very capable COO, will transfer to become the CEO of GDS International. As we started to expand overseas, we focused initially on two region hub markets: Hong Kong and Singapore-Johor-Batam, which is the hub for Southeast Asia. These two markets rank in the top 10 data center markets globally.

We correctly anticipated where demand will flow. We secured the right resources and executed it well. As a result, we quickly established a market-leading presence in both places. We have secured over 200 megawatts of commitments and reservations from global as well as China customers, and as of today, we already have over 70 megawatts in service and are revenue generating. We see tremendous opportunities for growth in these markets. We are very well placed with our proven track record, development pipeline and time to market to build on this success. We are actively evaluating several new markets and expect to make further commitments in the near future. Now let’s review our performance in more detail. In 2023, we won 68,000 square meters of new customer commitments, 50,000 square meters came from China, which was similar to the prior year, and then nearly 20,000 square meters or 30% of total bookings came from international.

During 4Q23, we won two large orders in China and one for international. Both of the China orders fit our strategy of matching commitments with the capacity and have move-in periods of less than two years. The international order was from a global cloud service provider for the whole of our Hong Kong II project. As a result, our first two projects in Hong Kong are effectively sold out with long term binding commitments. Looking forward, the demand outlook in China has not yet picked up noticeably. AI demand is coming, but it will take more time; meanwhile, our sales pipeline in Southeast Asia is very strong. We expect significant new bookings for both of our campuses in Johor in the near future. AI is undoubtedly a big factor driving demand in this market.

In 2023, the gross move-in was around 69,000 square meters, 20% higher than in 2022. China move-in was around 56,000 square meters, which once again was similar to the prior year. On top of this, there was the first-time contribution from international of 12,000 square meters as one data center in Hong Kong and three data centers in Johor came into service and starting ramping up. In 2023, we brought around 57,000 square meters of new capacity into service across seven data centers, four in China and three international. By the end of the year, these seven data centers had an overall utilization rate of 77%, which is consistent with our target for fast move-in and higher utilization. During 2024, we expect to bring about 81,000 square meters into service, driven by delivery commitments to customers.

The overall commitment rate for this capacity is 92% and the move-in schedule is confirmed. I will now pass onto Dan for the financial and operating review.

Daniel Newman: Thank you William. Turning to Slide 17, we just announced today that our wholly owned subsidiary, Digital Land Holdings, which we refer to for now as GDS International or GDSI, has entered into definitive agreements with certain institutional private equity investors for the new issues of $587 million of Series A convertible preferred shares. This first external equity capital raise for GDS International demonstrates our ability to access dedicated financing for our international business without further funding from GDS Holdings. The Series A subscription price implies a pre-money equity valuation for GDS International of $750 million. In terms of our share price, this is equivalent to approximately $3.92 per GDS Holdings ADS.

The implied post-money enterprise valuation of GDSI, including forecast net debt of around $935 million as at the end of 2024, is around US $2.3 billion. This is equivalent to around 24 times GDSI’s forecast adjusted EBITDA for the full year 2025. As mentioned by William, GDS International currently has over 330 megawatts of data center capacity in service or under construction across strategic locations in Hong Kong, Singapore, Johor, Malaysia and Batam, Indonesia. The total development cost for this portfolio is around $2.5 billion, out of which approximately 40% has been incurred up to the end of 2023. As of the end of last year, GDSH had provided a total of around $595 million of inter-company funding to GDSI, comprising $411 million of paid-up share capital and $184 million of shareholder loans and other payables, which will be repaid immediately out of the proceeds of the Series A new issue.

This will benefit GDSH in terms of higher liquidity. On a pro forma basis, including $411 million of permanent equity from GDSH and $587 million from the Series A, GDSI will have total paid-up share capital of approximately US $1 billion. As a result, GDSI will be sufficiently well capitalized with equity to complete the development of its current 330 megawatt portfolio. Post-closing, GDSH will own approximately 56.1% of GDSI in the form of ordinary shares and the remaining 43.9% equity will be held in the form of Series A shares by investors including Hillhouse, Rava Partners, Boyu, Princeville Capital and Tekne Capital. GDSH and certain investors will have the right to appoint directors to the board of GDSI proportionate with their ownership.

William will continue in his role as Chairman of the Board of GDSI, as well as Chairman and CEO of GDSH. Other key deal terms, including lock-up, QIPO and liquidation preference, amongst others, can be found in the transaction documents which we will file with the SEC. With this capital raising, it starts to make sense for us to look at GDS business in two parts. As we go through the financials, I will highlight selected numbers for international on a standalone basis and for GDS Holdings excluding international. Turning to Slide 18, for 2023 revenue increased by 6.8% and adjusted EBITDA increased by 8.8% year-on-year. In 4Q23, revenue increased by 6.3% and adjusted EBITDA increased by 5.7% year-on-year. For the full year 2023, international had negative adjusted EBITDA of around RMB 100 million.

The year-on-year growth rate for GDS Holdings excluding international would have been two percentage points higher than the consolidated number. International recorded positive adjusted EBITDA for the first time in 4Q23. Turning to Slide 19, I will discuss the two main drivers of revenue growth, namely area utilized and MSR. For 2023, net additional area utilized was 48,000 square meters. The annual net add was slightly less than 2022 as a result of higher churn; nonetheless, total area utilized at year end was 13% higher than at the end of the prior year. During 4Q23, we achieved net additional area utilized of 20,000 square meters, which is the highest level for many quarters. This was mainly due to ramp-up of our first two data centers in Johor and a minimal level of churn.

For 2024, we expect net additional area utilized to be higher than last year’s 48,000 with steady growth in China and increased contribution from international. Turning to the MSR metric, over the course of 2023 comparing 4Q to 4Q, MSR decreased by 5%. For 2024, we expect MSR in China to decrease by around 3%, which shows it is bottoming out. The MSR for international is currently higher than for China, hence on a consolidated basis we expect MSR to remain at around current levels. Turning to Slides 22 and 23, for 2023 our consolidated adjusted EBITDA margin was 46.4%, which was slightly higher than for 2022 despite the fact that power tariffs in China increased again during last year. For 2024, the midpoint of our guidance range implies a consolidated adjusted EBITDA margin of 43.7%, which is a more than two percentage point drop compared with 2023.

The margin for GDS Holdings excluding international should be similar to 2023. The expected drop in the coming year is therefore mainly due to international growth drag. Turning to Slide 24, in 2023 our China capex totaled RMB 3.5 billion. We have brought China capex down significantly from historic levels and we are only spending where it necessary to generate growth. In 2024, as William mentioned, we plan to bring a further 58,000 square meters of new capacity into service in China, most of which is committed to customers with firm move-in schedules. Meanwhile, our capex guidance for China in 2024 is only RMB 2.5 billion. The very low implied capex per square meter is because we have already incurred a substantial part of the development cost.

What is left is cost to complete. This pattern will continue over the next few years, giving us the ability to grow in China with relatively low incremental capex. In 2023, our international capex was around RMB 2.8 billion. Our current backlog for international stands at over 130 megawatts of committed and reserve capacity, a large part of which is yet to be built. Our capex guidance for international in 2024 is RMB 4 billion, which is largely driven by fixed delivery commitments to customers. On Slide 25, in 2023 GDS Holdings excluding international had negative cash flow before financing of just over RMB 1 billion. Our objective is to maintain positive cash flow before financing on an organic basis. We have already been positive in some quarters, and for 2024 as a whole, we expect to be close to breakeven.

In 2023, international on a standalone basis had negative cash flow before financing of over RMB 3 billion. In 2024, we forecast negative RMB 4 billion which can be fully financed by the equity raise and project debt. Looking at our leverage on Slides 26 and 27, at the end of 2023, our consolidated net debt to last quarter annualized adjusted EBITDA multiple was 8.5 times. Excluding international and pro forma for the repayment of shareholder loans, the multiple was 7.5 times. Turning to Slide 28, during 2024 we have RMB 2.3 billion of project loan amortization for China. We expect to generate an equivalent amount of new financing cash flow as a result of the repayment of shareholder loans from GDSI to GDSH and draw down under existing facilities to finance around 50% of China incremental capex.

Turning to Slide 29, before I talk about guidance, I would like to flag the impairment loss of long-lived assets of around RMB 3 billion, which we reported during 4Q23. We are required to test for impairment whenever events or changes in circumstances indicate that the carrying amount of long-lived assets may not be recoverable. The impairment loss was mainly associated with data centers located in properties which we lease for a fixed term and a few data centers which we plan to consolidate. Turning now to guidance for the full year 2024, we expect total revenues to be between RMB 11.34 billion to RMB 11.76 billion, implying a year-on-year increase of between approximately 13.9% to 18.1%. We expect adjusted EBITDA to be between RMB 4.95 billion to RMB 5.15 billion, implying a year-on-year increase of between approximately 7% to 11.4%.

On a standalone basis, we expect international to contribute around RMB 100 million to RMB 150 million of adjusted EBITDA in 2024. As I mentioned earlier, we expect total capex of around RMB 6.5 billion for the full year, comprising RMB 2.5 billion for China and RMB 4 billion for international. We’d now like to open the call to questions. Operator, please?

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