GDS Holdings Ltd. (NASDAQ:GDS) Q4 2019 Earnings Conference Call March 19, 2020 8:00 AM ET

Company Participants

Laura Chen - Head, IR
William Huang - Founder, Chairman & CEO
Dan Newman - CFO
Jamie Khoo - COO

Conference Call Participants

Yang Liu - Morgan Stanley
Jonathan Atkin - RBC
Gokul Hariharan - JPMorgan
John Wang - Macquarie
Arthur Lai - Citi
Frank Louthan - Raymond James

Operator

Hello ladies and gentlemen. Thank you for standing by for GDS Holdings Limited's Fourth Quarter and Full Year 2019 conference call. At this time, all participants are in 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

Hello everyone and welcome to the 4Q19 and Full Year 2019 earnings conference call of GDS Holdings Limited. We are deeply sorry to keep you guys waiting for so long but we just had some technical issues last minute to file our release with the SEC. So we're sure everything is fine.

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, probably soon, 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. Securities and Exchange Commission. 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's Founder, Chairman, and CEO, William Huang. Please go ahead, William.

William Huang

Hello everyone. This is William. I am here in Hong Kong with Dan and Jamie. Thank you for joining us on today's call.

With all the recent developments, 2019 feels like a long time ago. But please allow me to begin by talking about our great achievements last year.

First of all, we hit our sales target, adding over 81,000 square meter or 174 megawatts of new customer commitments. When fully delivered, this will add RMB2.4 billion or US$345 million of annual recurring revenue.

We expanded data center capacity in line with sales, adding over 90,000 square meter in service and under construction. In addition, we expanded our development pipeline. We currently have over 320,000 square meters secured for future development which is far more than anybody else in the market. It's very valuable and key to our continuing success. All of our sales and all of our capacity additions were in Tier 1 markets.

Our financial results were impressive. We grew revenue by 47.6% and adjusted EBITDA by 74.3% year-over-year. We beat guidance on both metrics. Our adjusted EBITDA margin came out nearly 7 percentage points higher.

We raised US$900 million of equity to ensure that we can keep on growing at the current pace or faster. Furthermore, we established an innovative strategic partnership with GIC which expands our addressable market and gives us access to an alternative source of equity.

Let's turning to Slide 5. Demand was consistently strong throughout 2019. What is driving this? First and foremost, is cloud adoption. AliCloud, the market leader, reported over 60% revenue growth for the last quarter. Tencent Cloud just reported nearly 90% growth. The Cloud in China is still at an early stage in terms of penetrating large enterprises. In addition to Cloud, we have recently started to see our customer gearing up in anticipation of 5G take-off.

Let's turning to our customer franchise on Slide 6. The major highlight is the expansion of our hyperscale customer base. On the one hand, demand from our top two customers was very well sustained and continues to drive around 50% of our sales.

On the other hand, we made breakthroughs with several key accounts, as a result of which we are now a significant service provider to almost all of the hyperscale customers in China. The winning factors are our multi-market platform, continuous supply, long-term track record, reputation for operational excellence, transparency, and financial capability. These are differentiators which have taken years to develop and are not easily matched.

We believe that our market share has increased in Tier 1 markets. With our current customer mix, we are plugged in to growth across the digital economy.

In addition to hyperscale, we added some highly prestigious new logos. In the last quarter, we signed a master sales agreement with Apple and won our first business from PayPal. We entered this year with great sales momentum. As a result, we have raised our sales target for 2020 to 100,000 square meter net add, made up of 80,000 square meter organic growth and 20,000 square meter from the pending acquisition in Beijing. This target does not reflect any flow through from increased usage of digital services in the current period.

In 1Q20, we are on track to achieve comfortably over 20,000 square meters net add and next quarter also looks strong. This demonstrates that customers are not holding back. We expect to make a lot of progress towards the 100K target by the middle of the year.

Turning to Slide 7. Not only is demand strong, it is also very noticeable that customers have changed their approach. They are pre-committing earlier to secure their supply. This is reflected in the upward trend in our pre-commitment rate. In reality, almost everything that we do is driven by specific customer requirements.

On Slide 9. As we have been saying for a while, the biggest challenge is keeping up with demand in Tier 1 markets. To deal with this challenge, we have evolved our approach to project sourcing in three major ways.

First, because of the restrictions on data center development in urban areas, we have established a supplementary presence at the edge of town, such as Langfang to serve Beijing and Kunshan and Changshu to serve Shanghai.

Second, we have increased our property ownership, existing buildings in urban areas and Greenfield land at the edge of town. We now own over 50% of our entire capacity, including the development pipeline, as compared with around 20% at the end of 2018. Increased ownership gives us much more flexibility and certainty of supply.

And third, we have put tremendous effort in to building up our pipeline of future projects. We aim to have at least three year's supply in each market and have made great progress towards this goal. The change of approach is already yielding great results.

Let's move to page 10. Take Langfang as an example on Slide 10. Its 50 kilometers from Beijing and a viable edge of town location due to the existing concentration of carrier data centers. We selected Langfang, with the endorsement of our top customers, and spent a long time working with the local government on a framework agreement for power, land, and investment.

One year ago, we had nothing in Langfang. As of today, we have 30,000 square meter of capacity, in service and under construction, across five data centers, all of which are 100% committed by our top customers. And we have secured another 83,000 square meter of developable capacity. We aim to repeat this success in other Tier 1 markets.

Another way in which we have evolved our approach is with regard to acquisitions. We started off a few years ago viewing M&A as a means of adding to our supply. Now we also view it as a way of increasing our presence in key locations, expanding our relationship with strategic customers, and accelerating our growth on value-accretive terms. We have stepped up our M&A efforts and, if the opportunity allows, we aim to do more deals. We are actively pursuing several deal targets.

Before I hand over to Dan, I would like to say a few words about the current situation. From the outset of the coronavirus epidemic, our top priorities have been to ensure: Number one, the safety and well-being of our employees and of the people we interact with; and, the second, incident free operations. So far, I am pleased to say, we have achieved both of our goals, with zero infections and zero SLA breach. It has not been easy. We made many change to our policies, procedures, and communications. But business continuity is where we come from. It's part of our DNA. The steps that we have taken have been very much appreciated by our customers. We received a lot of positive feedback. It's at a time like this that you get tested, that the quality of our operations sets us apart, that customers remember why they do business with us. Our reputation has been enhanced.

Coming in to 2020, we felt that our market position and capabilities had got a lot stronger over the past year, while the opportunity in front of us keeps getting bigger. The virus epidemic is a tragedy and our thoughts and prayers are with all those who have been affected. During this tough time, digital service has played a critical role. We have all had to change our behavior and this may result in a structural shift in how we live and work. The importance of the underlying infrastructure has been recognized at the highest level of the Chinese government and may result in favorable new policies. We are waiting to see the specifics. However long it takes to get through this period, we believe that the fundamental of our market position and opportunity will remain intact, if not stronger.

With that, I will hand over to Dan for the financial and operating review. Thank you.

Dan Newman

Thank you, William.

Starting on Slide 15, where we strip out the contribution from equipment sales and the effect of FX changes. FY19 finished strongly and I am pleased to say that we beat our guidance for revenue and adjusted EBITDA.

In 4Q19, our service revenue grew by 9.5%, underlying adjusted NOI grew by 7.4%, and underlying adjusted EBITDA grew by 8.8% in consecutive quarters.

Our underlying adjusted EBITDA margin was fractionally down in the last quarter at 45.6%. However, for the full-year, our underlying adjusted EBITDA margin was substantially higher at 44.7% compared with 37.0% in FY18.

Turning to Slide 16. Service revenue growth is driven mainly by customers moving into the space which they previously committed. Move-in during 4Q19 was 18,000 square meters including 7,800 square meters from BJ9. BJ9 is an acquisition which we entered into last year. It has not closed yet, pending a final CP. As an intermediate step, the existing customers have entered into new contracts directly with us and we have taken over operation of the data center under a management contract.

Our MSR was quite stable over the course of 2019. However, we expect a slight drop in 2020, mainly due to customer and location mix, acquisitions, and timing of move-in.

Slide 17 shows the quarterly trend in margins. In 4Q19, underlying adjusted NOI margin decreased by 1 percentage point, mainly due to 45,000 square meters of new capacity coming into service in the last two quarters. In addition, under the BJ9 arrangement, we are getting a low double-digit profit margin until the deal closes, which is a slight drag. The decrease was partially offset by leverage on SG&A which went down to 7.8% of service revenue compared with 8.4% in the prior quarter.

Adding it all up, our 4Q underlying adjusted EBITDA margin was just 0.3 percentage points lower.

For FY20, we expect around a 1 percentage point improvement at the NOI level and a further 1 percent from leverage on SG&A, but the quarterly trend could be a bit up and down.

Turning to Slide 20. Our total CapEx in FY19 was RMB5.3 billion, including RMB1.5 billion related to acquisitions of data centers, property, and land. In 4Q19, we paid for the Hong Kong 2 site, the Shanghai 14 building, and most of the consideration for the Guangzhou 6 acquisition. Up to the end of last year, we had also paid out RMB270 million for build-to-suit JV projects which will be reversed when we sell a 90% equity interest to GIC.

The majority of our CapEx consists of plant and equipment which is essentially the same in each data center and the cost is easily benchmarkable. We have been able to reduce our unit CapEx for P&E by 3% to 4% per annum over the last few years and expect to continue doing so. The remainder of the CapEx relates to the building, which can be leased or owned, and to the external power infrastructure. The unit CapEx for this part can vary depending on the specifics of each project, but on average has stayed at around the same level.

On Slide 22, we ended 2019 with gross debt of RMB16.2 billion or US$2.3 billion, around 80% of which was in the form of mostly local currency-denominated project term loans and finance leases. This debt is structured to fit around the project cash flows and is substantially covered by our multi-year contracts with investment grade customers. The term loans are covenant light or have no covenants at all. The remaining 20% of our debt is made up of the CB at HoldCo level, which is unsecured and has a remaining term of over five years, and of working capital facilities which we have rolled over numerous times.

In 2020, we are guiding for RMB7.5 billion of CapEx, which is elevated due to payments for pending data center and property acquisitions. Assuming a conservative financing ratio of 40:60 equity to debt, we will need RMB3 billion of equity and RMB 4.5 billion of debt to finance our CapEx. For the equity part, we are sitting on RMB5.8 billion of cash, plus we expect positive operating cash flow this year. For the debt part, most of the facilities are already in place. We have RMB2.5 billion committed but undrawn, leaving about RMB2 billion which we are working right now across seven facilities with local and foreign banks.

To put this remaining requirement into perspective, last year we secured nearly RMB6.5 billion of new debt facilities. The banking market in China is very supportive. We have a great track record as a borrower and have developed great banking relationships. I foresee no reason at all why this should not continue.

Finally, we established partnerships with Ping An and GIC to ensure that we have access to diverse funding sources and are not reliant on the public markets. Regardless of the current situation, we are always considering alternative funding options with these and other potential partners to optimize our capital structure and cost.

Turning to Slide 23, our contract backlog has been increasing each quarter. We ended FY19 with 108,000 square meters, equivalent to 70% of our revenue-generating area. Part of the backlog relates to data centers in service. The amount has remained in the 40,000 to 50,000 square meter range over the past five quarters, driving organic move-in of around 10,000 square meters per quarter, which implies about a four to five quarter move-in period.

The remaining part of the backlog relates to data centers under construction. The amount has increased significantly from just over 31,000 square meters at the end of 2018 to just over 57,000 square meters at the end of last year. There are two reasons for this . One, as William mentioned, customers are pre-committing earlier and to a much greater extent. Two, as you can see from the table on Page 21, we are undertaking more Greenfield projects where the construction period is around six months longer.

As the backlog related to data centers in service increase, we would expect the quarterly move-in to increase. However, this is subject to the timing of project completion and other factors in the current uncertain operating environment.

To finish on Slide 24 with our guidance, we are nearly at the end of the first quarter of 2020, so before I talk about our outlook, I should mention what we have already seen in the year-to-date. The COVID-19 epidemic is affecting us in two main ways: construction and move-in.

At the end of January, construction across our 16 self-developed and build-to-suit projects came to halt for Chinese New Year and did not resume until recently due to Government restrictions. We are not experiencing significant problems with our supply chain as we had placed orders well in advance. Nonetheless, we have lost a couple of months, which we will try to make up. The kind of delay which we have experienced will not materially impact our financial results in the current year.

Move-in is a more material issue in the short-term as it's the primary driver of our revenue and profit growth. The first quarter is usually a seasonal low for our business, and this was reflected in our original forecast assumptions for the current year. As of today, it looks like our 1Q20 move-in will end up a few or several thousand square meters short of our original target. Nonetheless, we should still be able to achieve 1Q20 revenue and EBITDA growth in the mid to high single-digits, quarter on quarter.

Looking forward, the situation is that we have a large amount of capacity in service ready and waiting for our customers to move-in. Our customers want to move-in. But there are still many operational limitations and uncertainties in their supply chains, particularly with regard to IT hardware. China appears to be on a path to recovery, but this will be affected by what is happening with supplies from inside and outside the country.

Given the lack of visibility about the pace of recovery, we took the view that we should revise down our move-in assumption by several thousand square meters incrementally per quarter. We have not changed any other assumptions in our forecast. Putting this into our model, we are guiding for revenue of RMB5.63 billion at the mid-point, implying 36.6% growth year on year, and adjusted EBITDA of RMB2.61 billion at the mid-point, implying 43.1% growth year on year. These growth rates are around 5 percentage points lower than what we originally intended to guide. Our sense is that this guidance is conservative, but appropriate in the circumstances. We believe that the risk to the upside is greater than the risk to the downside.

I mentioned already our CapEx guidance of around RMB7.5 billion, of which RMB2.5 billion mainly relates to the pending acquisitions of BJ9, BJ10/11/12, and the building in Minhang District, Shanghai.

I would like to reiterate that all our fundamentals remain intact. Customers have not changed their plans. And despite the tough conditions, we expect our business performance to be highly resilient and we are as confident as ever about our medium and long-term growth prospects.

With that I will end the formal part of my presentation. And we would now like to open the call to questions. Operator?

Question-and-Answer Session

Operator

Certainly, sir. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions].

Your first question comes from the line of Yang Liu from Morgan Stanley. Please ask your question.

Yang Liu

Hello, good evening. This is Yang from Morgan Stanley. I have two questions. The first one is for William on government policy. Do you notice that recently central government in China encourage the data center as a new infrastructure for the first time? And whether you're expecting in term of the future policy support, can we see more power quota or more funding support and whether this kind of policy will change the investment return profile this industry? And the second question is for the new booking target? I'm not sure if the acquisition announced in December last year was this split to 2019 and 2020? Or is all of the around 20,000 square meter will fall to 2020 new booking? Thank you.

William Huang

I answer the first question. I mean, yes, you're right. The first data center was categorized by the central government as a new strategic infrastructure in China right now. It's mainly driven by the 5G strategy, right? So I think the effect to us is now it's still early to say what happened. What the new policy will launch specifically, but we were invited by the central government to discuss how to help you guys, how to give them more advice, how to get better the growth in this industry? So what I can tell you is that it is a broad topic that we have discussed with the central government, I have to say we are the only data center vendor being invited.

So, number one I think what we talk about is how to release some carbon quota in Tier 1 market to release this supply little bit, but government still have the concern about the total carbon quota deployment. So we have discussed how to appropriately to release some carbon quota to data center industry. Number two, is I mean, we talk about some topics around how to reduce the power costs in the future and how to reduce the loan interest rate. This is all discussed. So, in general, I think it's positive for us and I think the government wants to help to develop this industry. But so far I should say now it's the stage is too early to say something right now, that's my view. Yes.

Dan Newman

The second question is, yes, last year we entered into three acquisitions. Two were included as part of last year's new business, Guangzhou 6 closed, Beijing 9, we took over the way I described. The third acquisition, if you call Beijing 10/11/12 announced in December, we are working hard to close that hopefully by the middle of this year. So when we talk about our 100,000 square meter sales target for this year, it will be 80,000 square meters organic and 20,000 square meters through that specific M&A deal. 80,000 square meters organic is significantly more than we've done before organic and we believe 80,000 square meters organic is sustainable, so that's the new normal. Beyond 80,000 square meters is either M&A or maybe some upside.

William Huang

Yes, I will add one point. We also talk about to the central government how to release, how to close some inefficiency, small data center and in house data center. So to force them to use the professional data center like us.

Operator

Your next question comes from the line of Jonathan Atkin from RBC. Please ask your question.

Jonathan Atkin

Thank you. So Dan, you just sort of answered one of my questions, which is about the 100,000 being the new norm and I wondered, do you think you could potentially do more than that given the boost in demand that you're seeing from the current environment, either organically or through M&A? And then I wondered if we could also pivot a little bit to the changes that have been taking place at CyrusOne and any impacts on board membership and just the overall relationship? I do know that that Tesh, their new CEO had spent a lot of time in China but if you could maybe comment on CyrusOne that would be interesting. Thank you.

Dan Newman

Two questions. Can we do more, first question.

William Huang

Yes, I think we didn't change our view. Actually last quarter when we talked about the market demand, we still sit on that view that China data center market accelerate. It's not; it was not impacted by the virus because we believe that virus stuff is a short-term impact. So from the mid-term and long-term, we still think the total market will accelerate. It is number one. That means we have the chance to do more in the future. But this first half year, maybe a little bit tough, but it will not change our view for the future market because we believe the digitalization is an overwhelming trend in China, even in global markets, right.

Dan Newman

Second, about CyrusOne?

William Huang

The CyrusOne, I think number one, we still maintain the relationship with the CyrusOne, we still have some deals, talk about together. It will not change that Gary step-down or anyone, we deal with the institution not deal with the individual, right. So I think it will not change our relationship with CyrusOne. We still help each other, Tesh, and Jonathan called me after the announcement, and Gary also, we have the conversation with Gary. So I think number one, we will not change Board seat right now. And Gary is a respected professional in the industry; always bring up valuable opinion for GDS. So we appreciate that. And on the other hand, as I said we deal with the institution, not with the person. So I think CyrusOne and GDS relationship will be not changed.

Jonathan Atkin

Thank you. And then I wanted to maybe talk about any or ask you, have you seen any differences in the pace of deliveries and construction by the rest of the industry? You talked about how the virus has affected you from essentially a labor standpoint and slowdowns related to that, but has that been affecting the competitors equally or more so, I'd be interested in your perspective on that. And then you also mentioned again the increase in demand and how does that influence your thinking about entering new markets in the past, you've sort of alluded to a couple of new municipal metros in China that you would think about investing in, is the appetite for that equally as strong now or has customer demand trends change your thinking on that? Thank you.

Dan Newman

Just to explain to William. The first question is whether competitor is being affected like us or to a lesser or greater extent.

William Huang

I mean our competitors affected.

Dan Newman

Are they affected by the current situation, have they've been affected in terms of their construction timelines, their move-in rate.

William Huang

I think in general, the current situation is equal for all of our competitors, right. And I think this is the number one. So the advantage for GDS is we have the scale, we are more easy, more well managed internally in my view, right. So in terms of other construction point of view, I believe we managed better than other competitors, this is my view.

Dan Newman

Yes, the second question, Jon, is whether we see increasing demand in other markets, new markets and whether we have appetite to go to those places.

William Huang

Yes, I think we would tend to go, we are ready to go any new Tier 1 market, right. So we didn't change our view, we would go to some new market, as we mentioned last couple of quarters, Hong Kong market, Chongqing market, and something new like Nanjing and Hangzhou is our target in the future. And on the other hand, we also think about based on our current installed base customer requirement we are serious talk about, think about how to go to the Southeast Asia.

Operator

[Operator Instructions]. Thank you. Your next question comes from the line of Colby Synesael from Cowen. Please ask your question.

ColbySynesael

Great, thank you. Two, if I may. Number one I think you guys said in your prepared remarks, you gave some color on what leasing was looking like I couldn't tell if you're talking specific to the first quarter or the second quarter or both, I was hoping you could kind of just dig a little bit deeper into what you're currently seeing? And then secondly as it relates to the move-in rate and I appreciate that you're being more conservative in that number right now, but would you expect at some future point and I appreciate you're not going to tell us what quarter that is or you might not know what quarter this is, but would you expect for all this to kind of catch up? In other words, would you expect at some point, we're going to see a very sizable quarter or two to kind of makeup, if you will, for the lost ground considering these developments are actually still going on and at some point, everything is going to get completed and ultimately get to a point where all the installs are kind of back on track. And if so, if that's the case, would you expect them to see a notable impact on outer year expectations? Or is this really kind of focused on a slower 2020, but by 2021 we are back on the trajectory that we may have previously been assuming?

Dan Newman

Yes, good. Good, thanks, Colby. The first one, yes, as we near the end of the first quarter, we already know what we've done from a sales point of view in the first quarter and it's, we just sit comfortably over 20,000 square meters organic. And we already have a -- I will say very good idea of what we're going to be able to in the second quarter, on top of which hopefully the BJ 10/11/12 acquisition will close in the second quarter, that's 20,000 square meters there as well. So if you add all that up versus a full-year target of 100,000 we said we're going to be a long way, which is, yes, it's certainly more than halfway, maybe quite a bit more than halfway towards that target. I just mentioned that because we know that as a fact and give some confidence in what we're saying in terms of our sales targets.

The second part what you said is quite possibly be the case. We looked at different scenarios. We spoke to our customers; I listen to other earnings calls, people not predicting what the shape of the recovery is. We could have assumed there'd be very little movement in the second quarter and an enormous ramp-up in the third and fourth quarter. We just -- we decided in the end just to take a haircut to the numbers for each quarter, it's only a few thousand square meters. And the reduction -- the resulting reduction in revenue and EBITDA is kind of the same whether you're looking at it V-shaped, U-shaped, or whatever.

Interesting statistics, I'll throw out. The last, I guess like five or six weeks from just before Chinese New Year until a few weeks ago, there was no move-in. So the amount of capacity that was being utilized in our data centers was static. During that time period, customers power usage went up by nearly four percentage points, which means in simple terms, they are running their servers at higher utilization rate, higher than normal and higher than they would normally do given that the operational parameters and that's indicative of requirements to deploy more capacity. That's why we said customers want to move-in.

So it's really, it's really a question of whether they can; I believe that most of the current inventory of servers has already been deployed. So the next wave of move-in is dependent on the production and the supply. If that comes through quite quickly, or in size, then, yes, I would actually expect quite a sharp ramp-up in move-in. Yes, and that might be what we describe as risk to the upside.

Operator

Your next question comes from the line of Gokul Hariharan from JP Morgan. Your line is open. Please ask your question.

Gokul Hariharan

Thanks for taking my question. Hope everybody is safe. Just first question on, could you talk a little bit about William on how you're seeing the dynamic of better than expected demand due to work from home and more digital consumption, et cetera versus the relative lack of ability to execute on move-in or not having enough components like Tencent also indicated yesterday that they're facing some degree of tightness in terms of some capacity, some hardware or the other. Could you talk about how your customers and you are dealing with this and what are they doing to kind of mitigate that? Are there any kind of near-term measures that they are able to mitigate that. And how does it, what are you expecting this -- how is it going to manifest over the next couple of months, are we kind of past the peak of that or are we still going to be in that kind of phase in the next couple of months as well. The second question I had was on some of your remote sites, I think if you can take Langfang as a case study. If you only have one leaders under the service. Can you talk a little bit about how the dynamics are shaping up in terms of operating a data center in remote locations and how you're able to manage capacity ramp-up and how the dynamics for the center for data center compared to city center kind of data center? And one last question if I can if I may on the financing side, I think you clearly explained where you stand in terms of availability of financing both equity and debt. This is an industry which saw a lot of financing come in over the last couple of years for your competitors as well as you issue private equity as well as other sources of financing. Can you talk a little bit about industry-wide in terms of what you're seeing on financing pipelines, are they still intact? Do we see some degree of compression on financing on industry-wide basis? Thanks.

Dan Newman

William. First question, sorry Gokul, first question was what can be done about the issues in the supply chain, have customers got any solutions? Have we got any solutions to --

William Huang

Yes, [indiscernible]. What's the question?

Dan Newman

Gokul was asking, is there anything -- any solution to that problem, is there anything that we can do?

William Huang

Yes, we can do nothing; frankly speaking we are not in this industry, right, server industry. I think what I heard about our customer is try to get more server, as much as possible even in a current market right. So I think they pushed a lot of the supplier to get some inventory in other country or other market to try to mitigate the impacts on the supply. That's what they are doing.

But so far we don't know what's the percentage of the target they can achieve, right. So in general, they are doing their best right now, what our customer have told us. So looks like Q2 maybe we will catch-up the revenue a little bit, that's my current view.

Dan Newman

Okay. Second question is about operating Langfang, maybe I will go first; you can supplement. So Gokul, the Beijing municipal government started to introduce restrictions on new data center approval in the end of 2016. And it became apparent in 2017 that would not be possible to maintain sufficient supplies to fill demand within the urban area. And we started then to work on the backup plan.

I'd say it took about two years of discussion, interaction, and so on with Langfang government resulting in a framework agreement which addresses the allocation of substantial amount of power in fact, substantial amount of power which is available in that area, and the sale of Greenfield land and investment. We chose Langfang because the telecom carriers had already established major data center hubs in that market. Therefore, the connectivity at least from that part of Langfang not the whole of Langfang, but that part into Beijing is very good.

So, in terms of latency it’s only a small drop-off versus the latencies within Beijing. But in order to proceed, we really have to cover two bases. One was the government and one was our customers. We had to convince our largest customers because in a place like this you're not looking for just one order from a customer; you're looking for a customer to deploy a major amount of their own capacity. So at the end of the framework agreement, we're in a position to acquire the Greenfield land and start the development. But we already got our customers wound up. So, we found that we needed to accelerate our time to market.

So in actual fact, the first thing we did was acquire the land which is for Langfang 3, 4 and 5, it should have been 1, 2, and 3. But because of the types of market requirements, we leased a number of buildings, we leased Langfang 1, we leased Langfang 2, we leased Langfang 6, we leased Langfang 7 and that's why we have five data centers in that area, all 100% committed. I mean, going forward, the intention and the better approach would be to have all of our development on the Greenfield sites on the campuses. So here was just out of necessity.

Your third question about financing. Yes, I’m clear about our own positions. I mean, we have access to the public markets from time-to-time. But we also have access to partners and some very significant institutions, PRC institutions who have also expressed an interest in working with us. So I think there's a lot of scope in that approach to sourcing equity and other value add.

As far as the competition is concerned, I mean no one is anywhere remotely close to our scale. I think there has been limited amount of private equity participation by foreign PE and domestic PE. From the case histories of our acquisitions, there's quite a few projects being undertaken with no equity and frankly no formal debt either just reliance on credit from suppliers. So I don't think that on the whole competition is particularly well capitalized or financed but I didn't mean to doubt them all. I'm sure that there are good companies amongst them.

William Huang

And Gokul, I added more color to your second question. I mean original our plan is to supplement supplies to the Beijing supply. I think the people, because we realized a couple of years ago we realized the carbon quota is getting more tight in the Tier 1 market in the urban city. And the demand is huge, right. So in the first original plans, we try to convince our customers to move a little bit, shifts a little bit of the demand to the edge of town. But now customer and us realize those products are different. They have the same latency sensitive criteria from our customer, but our customer want need a more big scale and a more big power capacity. They want to deploy more big power density.

Now we realize this type of the campus and hyperscale campus is independent product, it fulfill our customer latency sensitive but a high visibility for the future supply and a hyperscale development and a hyperscale power capacity, this cannot be replaced in the urban town, that's my view. It instead now it become a new product in our view, right.

Operator

Your next question comes from the line of John Wang from Macquarie. Please ask your question.

John Wang

Hi, management. Congratulations to the strong results, so I guess my first question is in the past GDS is doing a very excellent job in managing the financial leverages. I do see you guys are guiding a very strong CapEx spending in 2020. I guess I want to follow-up on the previous question on do we funding this CapEx purely from the loans, bank loan side or we need additional equity raising this year. And my second question is, so can management share some colors on whether the pandemic is actually helping more or slowing down the utilization ramp-up in the first quarter? Thanks.

Dan Newman

On the first question, our approach is to raise equity capital ahead of requirement, so that as we initiate new projects, we can allocate from the capital we have in hand to capitalize new projects on an individual basis and we try to maintain around sufficient capital to capitalize around two years' worth of new projects. We ended last year with $5.8 billion of cash and most of that effectively is the equity for future projects. I said that we would need about $3 billion of equity for new projects in 2020. So that means, we need to use about half of that. But then there's also operating cash flow coming through.

So yes, it would look like we have sufficient equity to get us through two years. The debt side in normal circumstances is just about execution, it's about having relationships and a track record and sound project fundamentals and so on. Yes, the situation we're in actually is that we require about RMB4.5 billion of additional debt to finance our CapEx this year. We already have RMB2.5 billion of it in committed undrawn facilities. And the remaining RMB2 billion, actually we're working on RMB3 billion in debt facilities right now, some of which are almost done. So there really isn't any financial risk to what we're planning to do at least for the next one to two years.

So the second question is whether the virus impact is actually slowing things down or speeding things up. I suppose. I think probably you could say there's a difference between slowing things down in terms of move-in, but maybe speeding things up in terms of demand.

William Huang

Right, I think it's neutral. I mean move-in a little bit and see on the current point what we can say is the servers supply chains looks like uncertain, right. So it will impact our move-in, our customer move-in this quarter or maybe a little bit next quarter. But what we can tell is in China, inside of China, the manufacturers recovered right now. So I think they are little bit positive for the Q2 as I mentioned just before.

But for the demand side, I think everybody know this current situation will lead a lot of the internet SaaS player, a lot of Internet player, a lot of e-commerce player, a lot of the application introduced to the market. So I think in the long, in the mid-term, long-term maybe it will drive more demand in the future.

Operator

Your next question comes from Arthur Lai from Citi. Please ask your question.

Arthur Lai

Hi, good morning. Good evening and this is Arthur Lai from Citi. I had two quick question maybe to Dan. So the first question is can you talk about the contract renewal schedule. The reason we ask this question is we recall on IPO stage you talked about contracts sometimes go with four years or even longer, are we in the middle of the negotiation with the clients. And diving to the detail, in the Tier 1 city or in a retailer client, was the pricing trending up or can we say that data EBITDA margin for the new contract? That was my question. Thank you.

Dan Newman

Thanks Arthur. In Page 36 of our earnings presentation is a summary of the amount of capacity which we have coming up for renewal in each year, in the current year is 23,000 square meters of capacity is 8.9% of our total committed area and around the same similar level in each of the next few years. If you delve into the individual contracts and who are the customers, there's very little cloud or Internet business coming up for renewal. It's mostly enterprise business and there's contracts one, three, five years. So they renew more often and they renew automatically, quite typically.

So I think, yes, this question, yes, arises from analysts and investors, I know what you'd like to get at which is to see some benchmarks for what the pricing will be when we do get to renewal, significant renewals with the large Cloud and Internet customers but that's not going to happen this year. So I won't be able to give you any empirical evidence on that.

But going back to what William said about kind of layout now or configuration in terms of downtown and edge of town. If customers don't want to pay the price for downtown, we have an alternative option, the edge of town. Certainly we believe the downtown capacity has increased in value a lot, and maybe our ability to achieve higher selling prices there. So that is something which we can certainly offer to customers.

And the second question was, if you talk about the price actually, you mentioned EBITDA margin, actually we have to talk about the price together with the unit CapEx and then in terms of return in investment. I mean for us we look at it in a very fundamental way. So we talk about IRR, we can't really talk about it in terms of EBITDA margin because that doesn't really tell you what's happening in terms of the project returns. So the unit CapEx has been coming down, I said the majority of it the P&E has been coming down by about 3% to 4% per annum. The MSR revenue per square meter, if you take like two or three years, has come down, I think by about 5% per annum. So you can see that the degree of decline is quite close.

And what that tells you is that actually our returns must be pretty well sustained if the yield and the investment costs are moving in line with each other, and that is indeed the case. For IRR, from an NOI yield point of view here we're still achieving the same kind of returns over the last two to three years, which is exactly what we target to do.

William Huang

Yes, Arthur, I can answer your question; I will add more color on that. I mean number one, our customer now they are -- how they look at the data center right now, it's the same view with us. Number one, what they need is a urban town data center, because in the future anywhere adopted to the edge data center, it would benefit for the edge data center demand. On other hand edge can't always fulfill their mission critical system, as we mentioned before. So I think in the future edge of town data center are more valuable, if our customer can tolerate a little bit latency issue and they want to have big scale close to the Tier 1 market. We can offer the edge of town product to them, if they want to just pursue the cost effective, I think they already, we already set the model to build-to-suit for that -- for our customers in that remote area, right. This is three different products which we structured it, well-structured to our customer.

Operator

Your next question comes from Frank Louthan from Raymond James. Please ask your question.

Frank Louthan

Great, thank you very much. Can you looking back to your comments earlier on the Government's position on data centers is critical in infrastructure, do you think will that new position make the industry more competitive? Is it going to encourage new entrants or relax foreign companies' ability to own and operate data centers? And then to your comment you just made sort of on pricing and your cost inputs. Do you think your costs go up in the short-term, if labor is in short supply? Thank you.

Dan Newman

The first one is whether government policies could lead to greater more competition.

William Huang

I think our view is that if government are more flexible to release carbon quota in a Tier 1 market, we believe if we look at GDS in the Beijing market, for example in Beijing, we lost a lot of the deal last couple of years because we are constrained in carbon quota. So if the government release more carbon quota and we believe we will do more business, we get a more market share in the Tier 1 market. Because if the carbon quota barrier is equal, that means customer will more focused, they are more focused on the value of the service provider. So, our customer, our major customer, they are now look at it as a service vendor, and not just a capacity, they all -- they have a lot of the different criteria. So that means if the carbon quota barrier, getting lower that means that other criteria will be more focused on from our customer. So we are well positioned in our other value right, Dan you want to add more?

Dan Newman

Yes, Frank on the labor costs, I’m not sure if you are talking about the cost of revenue, how it affected construction costs. On the cost of revenue side, most of our staff headcount by number is in data center operations. It's a mid to high single-digit percentage of our revenue. So it's not the biggest cost item. And it is one of the parts of our cost structure in which we get -- getting quite a bit of operating leverage, because plus a certain number of people who have to be dedicated to each individual data center, there's also quite an amount that can be centralized. So we don't see anything out of the ordinary in terms of inflation there. Most of our people are back at work actually. I think our data centers are pretty start.

On the construction side, the initial delays were caused by government restricting activities. And then once construction resumed, construction workers who came from other parts of the country had to go through quarantine. So it took some time for the number of workers on site to reach the full complement. It's still not there. I think there's probably like 5,000 to 6,000 construction workers employed by our contractors across our 16 sites; maybe 75% are back in place. So I just think this is a fundamental shortage is just a translation thing as people come back to their place of work.

Operator

As there are no further questions, I'd like to now turn the call back over to Laura for closing remarks.

Laura Chen

Thank you once again for joining us today. If you have further questions, please feel free to contact GDS's investor relations through the contact information on our website or The Piacente Group Investor Relations. Thanks all. Bye-bye.

Operator

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