GDS Holdings Limited (NASDAQ:GDS) Q4 2022 Earnings Conference Call March 15, 2023 8:00 AM ET

Company Participants

Laura Chen - Head of Investor Relations

William Huang - Founder, Chairman and Chief Executive Officer

Dan Newman - Chief Financial Officer

Conference Call Participants

Jonathan Atkin - RBC

Yang Liu - Morgan Stanley

Gokul Hariharan - J.P. Morgan

Frank Louthan - Raymond James

Joel Ying - Nomura

Edison Lee - Jefferies

Operator

Hello, ladies and gentlemen, thank you for standing by for GDS Holdings Limited's Fourth Quarter and Full Year 2022 Earnings 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

Thank you. Hello, everyone. Welcome to the fourth quarter and full year 2022 earnings conference call of GDS Holdings Limited.

The company's results were issued today via newswire services earlier today and are posted online. A summary presentation, which we will refer to during the 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 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.

I will now 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.

Despite the challenging environment, our business continues to deliver solid results. In 2022, we grew revenue by 19% and adjusted EBITDA by 15% year-on-year. We won significant new business in China, while at the same time adjusting our development program to the current pace of growth. We accelerated our international expansion with notable success. And on the funding side, we took steps to access new source of capital and strengthen our financial position.

Entering 2023, we are looking forward to a recovery. Customers are more positive about their business outlook. When their business pickup, it will flow through to us quite quickly. We could see this happen over the next few quarters. Meanwhile, we are continuing to strengthen our operations and finances.

Looking further ahead, the fundamentals for our industry remain very strong. On the one hand, AI and other new technologies are driving waves of demand. On the other hand, data center supply in China's Tier 1 markets has gradually become more constrained due to the limitations on land and power. As market conditions improve, we are well positioned to outperform with our customer relationships, contract backlog and established asset bases.

In 2022, we won 74,000 square meters, or 178 megawatts of net new bookings, all of which was for our organic data center development in Tier 1 markets. A big highlight was our 64-megawatt win in Johor with significant contribution from the international. Our full year bookings were up to the level of the past few years. This highlights the importance of our strategy to follow the customer. For 2023, we are targeting a similar level of new bookings, with once again a significant contribution from internationals.

In 4Q '22, we won two new large hyperscale orders. LF15 is the first order for our new campus at Xianghe, Langfang, Hebei Province. The order is from a large Internet company, which is migrating from our downtown sites in Beijing. The customer is relocating to LF15 and to one of our other campus in Langfang.

BJ14 Phase 2 is the second phase of development at our greenfield site in the Tongzhou District of Beijing. The order is from a first-time large Internet customer in their recruitment sector. This win typifies our strategy of matching resource inventory with high potential customers. The new commitments come with confirmed move-in schedules.

Over the past three years, we have made significant progress with new customer wins and diversification. Large Internet companies accounted for 63% of new bookings in 2022, as compared with 23% in 2020. Enterprise and financial customers averaged around 20% of new bookings. This show how we have been able to evolve our strategy to capturing growth from the different customer segments and the different locations.

Customer move-in in 2022 was affected by the lockdowns and other macro factors. Going forward, we are focusing on customers who can commit to fast move-in schedules. Typically, large Internet customers move-in faster than car customers. Some of the large Internet orders, which we won in 2022 have relatively short move-in periods. Hence, the move-in rates could pick up as these new contracts commence towards the end of this year. We have a large backlog totaling 260,000 square meters. Nearly half of it's related to data center, which are move-in ready. This gives us high visibility for future growth with reduced CapEx.

So, adjusted to the current environment, we have slowed down our capacity expansion. In 2022, we brought 28,000 square meters into service. In 2023, we plan to build -- bring a further 58,000 square meters in service. Out of which 33,500 square meters in Mainland China and 24,500 square meters in international. Going forward, we will target to reduce the lead time from investment to customer move-in.

Looking beyond our current construction program, we have over 300,000 square meters of area held for future development in Mainland China, which can support multiple years of future demand. Remaining consists of land and power for campus-type developments at global locations in national hub markets. Our pipeline aligns with the government's Eastern Data, Western Computing policy. This is a valuable resource, which will give us significant competitive advantages as supply becomes tighter in the year ahead.

All of these priorities are directed at further strengthening our strategic market position and improving our operating and financial efficiency. The initial phase of our international expansion is focused on Hong Kong as the regional hub for Greater China and the Singapore Johor, Batam as the regional hub for Southeast Asia. These two hubs rank among the 10 data center -- 10 largest data center market globally. By leveraging our whole market customer relationships, cost advantages from our pre-fab products and the proven execution capability in hyperscale development, we can accelerate delivery to our customers and rapidly establish the market-leading positions.

Our first self-developed data center in Hong Kong will enter service in the next couple of months. We have secured anchor customer commitments from leading China and global cloud service providers. Hong Kong 1 is the first in a multiyear development pipelines of four purpose-build data centers, plus in an ideal location for serving both hyperscale and enterprise customers. Hong Kong's position as the primary gateway for networking and connectivity between China and the rest of the world assures its long-term position as the data center hub. We have put together a unique set of assets ideally suited to meeting new waves of demand.

We are making great progress with both land acquisitions and customer commitments in Southeast Asia. In Johor, we are constructing three data centers for delivery later this year and early next year. We're going from breaking ground to deliver up 64 megawatt over five quarters. We have acquired or secured options over the adjacent sites to enable us to scale up. In the next few months, we expect to receive an additional order, which would take us to nearly 100 megawatt of commitments in Johor alone.

For existing projects, the priorities are to win further orders for Johor and Batam, build up our local management team and deliver the initial capacity. At the same time, we aim to establish new projects in Kuala Lumpur, Jakarta and other new markets in Southeast Asia and beyond. While we -- our position in Mainland China is well set for years to come, we believe that GDS International can become a significant second growth engine.

Now -- I will now pass on to Dan for financial and operating review.

Dan Newman

Thank you, William.

Starting on Slide 22, where we strip out contribution from equipment sales and the effect of FX changes. In 4Q '22, our service revenue grew by 1.5% and underlying adjusted EBITDA was slightly down by 0.2% quarter-on-quarter. For FY '22, our service revenue grew by 19.2% and underlying adjusted EBITDA grew by 14.5% year-on-year.

Turning to Slides 23 and 24. Service revenue growth is driven mainly by delivery of the committed backlog. Net additional area utilized during 4Q '22 was around 10,700 square meters. Around 7,950 square meters was in Tier 1 markets and the remaining 2,700 square meters approximately from B-O-T projects. Net additional area utilized for FY '22 was around 51,000 square meters. Around 29,000 square meters was in Tier 1 markets, and the remaining 22,000 square meters approximately was from B-O-T projects. For FY '23, we expect additional area utilized net of churn to be similar to the levels seen in FY '22, i.e., around 50,000 square meters of net add.

We disclosed on our last earnings call that one large Internet customer will move out of our downtown data centers in Beijing. As a result, we will record 17,000 square meter of churn spread across the first three quarters of 2023. We have already won back more than 17,000 square meters of new commitments from this customer for two sites in Langfang. They will start to move into these sites during 4Q '23.

As William mentioned, towards the end of the year, we will also start to deliver some other new contracts with fast moving schedules. Accordingly, the cadence of move-in in FY '23 will be quite heavily weighted to the back end. The good news is that the pick-up later this year will feed into FY '24 gross.

Monthly service revenue per square meter was RMB2,194 in 4Q '22 compared with RMB2,237 for the previous quarter, a decline of 1.9% quarter-on-quarter. Over the course of FY23, we expect MSR per square meter to decline by around 4% comparing 4Q '23 with 4Q '22. This forecast decline is mainly due to change in location mix, including further B-O-T move-in.

Turning to Slides 25 and 26. For 4Q '22, our underlying adjusted gross profit margin was slightly up from the prior quarter at 50.9%, while our underlying adjusted EBITDA margin was down at 44.4%. For FY '22, our underlying adjusted gross profit margin was 51.2% compared to 53.3% in FY '21, and our underlying adjusted EBITDA margin was 45.6% compared to 47.5% in FY '21. The margin decrease was mainly due to elevated power tariffs throughout last year, which we estimate [0] (ph) to 1.5 percentage points of our margin, and growth drag from international expansion of around a further 1 percentage point. The midpoint of our guidance for total revenue and adjusted EBITDA implies an adjusted EBITDA margin for FY '23, which is similar to the levels seen in 4Q '22. We have assumed no reduction in power tariffs through the course of this year and continuing growth drag from international expansion.

Turning to Slide 27. 2022 was a transition year in terms of bringing down our CapEx in Mainland China on the one hand, and accelerating international investments on the other hand. Our organic CapEx in Mainland China was around RMB5.8 billion for FY '22, which is a few billion lower than in the past couple of years. International CapEx was RMB2 billion, while acquisition CapEx was around RMB3.5 billion. We are guiding for total CapEx in FY '23 of around RMB7.5 billion, comprising a further reduction to RMB3.5 billion from Mainland China and an increase to RMB4 billion for international. Replacement CapEx included in the Mainland China number is running at around RMB200 million in 2023.

On Slide 28, we provide some further data points relating to CapEx. Starting with Mainland China, at the end of 2022, we had 152,000 square meters under construction. The total cost to complete this capacity is RMB7.4 billion, which we expect to incur over the next three years. With this additional expenditure, our total capacity in service will increase to around 667,000 square meters, sufficient for us to grow our billable area by around 71%. As you can see, a relatively small amount of incremental investment is required to support a large amount of growth, because much of the investment has already been incurred. Turning to international, our total cost to-date for the five data centers under construction in Hong Kong and Johor, totaling over 100 megawatts, is RMB4.1 billion or US$590 million. The total cost to complete is RMB3.4 billion or US$490 million.

Looking at our financing position on Slide 29. At the end of 2022, our net debt to last quarter annualized adjusted EBITDA ratio was 8.0 times on a consolidated basis. If we exclude the debt of the international business and add back net assets to our cash, our net debt to last quarter annualized adjusted EBITDA ratio was 7.1 times. If we further exclude capital work in progress for our construction program in Mainland China, our net debt to last quarter annualized adjusted EBITDA ratio would have been 5.0 times. Our effective interest rate for FY '22 dropped to 4.7%.

Over the course of 2022, we maintained our cash position and ended the year with RMB8.6 billion or US$1.2 billion of cash on our balance sheet. In accordance with our treasury policy, we put cash on deposit with banks, which are investment-grade rated and pre-approved by our Board. In addition, we hold cash in equity and debt service reserve accounts as required by our project financing facilities. We previously had a small amount of cash in accounts with SVB for short-term operational purposes. As of today, this amounts to US$2 million, which is in the process of withdrawal.

Turning to Slide 30, in January of this year, we raised US$580 million gross proceeds in [indiscernible] new CB with seven-year maturity. We have subsequently repaid US$150 million of working capital loans. In June of this year, we expect to repurchase US$300 million with an existing CB [when it is] (ph) put. As a result, we will have almost no debt repayable at GDS Holdings level until 2027. The debt which is repayable over the next few years is amortizing longer-term project level loans, which we refinance on a regular basis.

On Slide 31, we provide some more color on current year funding requirements. Starting with Mainland China. We expect our operating cash flow to be around RMB1.5 billion for FY '23 and, as I mentioned, organic CapEx to be around RMB3.5 billion, resulting in negative free cash flow before financing of around RMB2.2 billion. We aim to fund this gap using a combination of project debt and asset monetization.

At the end of 2022, we had RMB8.5 billion of committed but undrawn project level facilities in Mainland China. We have recently obtained regulatory clearance for our offshore China data center fund. We expect to sign the limited partnership agreements and the sale of purchase agreement for the first data center asset shortly. The net cash proceeds will be approximately RMB1.45 billion after deducting our 30% capital commitment to the fund. We will have the option to do more such transactions to release equity, if we choose to do so. We are also in the process of signing a formal framework agreement with a leading Chinese insurance company for an onshore version of the China data center fund.

Over the next couple of years, we expect our operating cash flow for Mainland China to increase, while CapEx remains at similar or lower levels to the guidance for FY '23. Hence, we expect to become free cash flow positive for Mainland China within three years.

Turning to international, as mentioned previously, we expect total CapEx for international of RMB4 billion for FY '23. We expect to finance 50% of this, say RMB2 billion or US$290 million, with project debt. For the balance, we are evaluating a number of options for raising equity at subsidiary level, including private equity at our International HoldCo level and/or by bringing in local partners at Country HoldCo or Project HoldCo level.

Turning to Slide 32. For the full year 2023, we expect total revenues to be between RMB9.94 billion to RMB10.32 billion, implying a year-on-year increase of between approximately 6.6% to 10.7%. We expect adjusted EBITDA to be between RMB4.43 billion to RMB4.6 billion, implying a year-on-year increase of between approximately 4.2% to 8.2%. In addition, as previously mentioned, we expect CapEx to be around RMB7.5 billion for the full year.

We would now like to open the call to questions. Operator?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And we'll now take our first question. Please standby. The first question is from the line of Jonathan Atkin from RBC. Please go ahead.

Jonathan Atkin

Thank you. So, my question was mainly around Southeast Asia. And wondered if you could maybe talk a little bit about where you see relatively greater challenges to developing capacity in Johor versus Batam? As well, commercially in those markets, setting aside kind of the initial customer discussions that you've had and the anchor commitment that you have in Johor, what are the prospects for those markets to serve sort of Singaporean requirements or act as a greater kind of Singapore availability zone versus serving kind of domestic and kind of regional demand on a standalone basis? In other words, how tightly coupled do you see Asian demand and maybe prospectively Western demand in Johor and Batam with respect to kind of Singaporean -- how tightly coupled is that with Singapore versus [indiscernible] on their own as hubs? Thank you.

Dan Newman

Hi, Jon. Let me start with the second part of your question. And the way we view the Singapore market and the surrounding areas is as a proxy for the Southeast Asian markets. I think the majority of the data center capacity in Southeast Asia is concentrated in and around Singapore. And a large part of that is there to serve the region, not just to serve Singapore.

When we look at the situation in Singapore, it's well known, because of the historic moratoriums since 2019, the developable capacity in Singapore is largely being built out. And what we've seen from third-party market research is that utilization rate for capacity in Singapore has gone to -- low to mid 90%, which is more than full in industry terms.

The Singapore government is going through the process. They may allocate some additional quota to allow some growth in Singapore. So, we think that's really going to address a very small part of the incremental demand. Therefore, as we've seen in other markets where we have a presence like Beijing, Shanghai, Shenzhen, and so on, the excess demand will spill over, and we believe that it will spill over to Johor and Batam. We think they will both be vibrant and high growth, large scale based central markets. We think that when you look at it from the perspective of how the hyperscale customers, particularly cloud service providers, deploy, they need the diversity of different locations. And I think having options on both sides of Singapore is operationally very beneficial.

In terms of the pace of development, I think we went out on our own in terms of making commitments to both Johor and Batam. Frankly, I think we leapfrogged many other players in doing that. And I think that -- having that dual strategy will give us a marketing edge and a solution that others cannot offer.

So far what we've seen is that Johor has taken off a little faster, primarily because of the existing infrastructure there, I'm talking about power infrastructure and the network connectivity. But we are very confident that Batam is coming in maybe one year or so behind. We've been talking to the government in Singapore and government in Indonesia. There is a very strong commitment to making Batam a successful location for data centers. And we happy to be a pioneer. In the next few quarters, we'll be able to, I think, make progress in solving some of the basic infrastructure challenges, even if it necessitates investing in submarine cable networks ourselves to kick start that and then I think the market will start [compliment then] (ph).

Jonathan Atkin

Thank you. If I could just ask a brief follow-up. Inside of China, can you talk a little bit about customer availability for obtaining servers? Are there supply chain constraints that are affecting their ability to procure equipment and ultimately move in? And with respect to Central Beijing, what are your prospects for refilling that capacity with other demand?

William Huang

I think -- hey, Jonathan, this is William. I think, in China, yeah, we just mentioned, this year is a transition for China whole business. But based on -- in last couple of weeks, I came back to China and visited lot of governments and our customers as well. I think, I am quite encouraged by our customers, especially the large Internet and cloud service providers.

Based on our current pipeline, I think the demand we can see the leading indication is pipeline. I think it's very strong. But for the cloud, the -- when I visited cloud service provider, they are very ambitious still. And I think they recover maybe slightly a little bit later than other Internet company and financial institution.

If you come to China, I think I see, in first two week -- first two months, the leading, I mean, data which are -- I mean, the consumer data rebound very fast. This is a leading indication, the order supply chain industry will catch up with the recovery, but it still need time.

I think from another -- so in terms of the current Tier 1 market order resource, I think we're very confident. We have just very limited inventory, right? So, I think this is variable aspect, I believe and very confident we will sell them easily in this year. So, this is the question, right?

Jonathan Atkin

Thank you.

Operator

Thank you. We'll now take the next question. Please standby. This is from the line of Yang Liu from Morgan Stanley. Please go ahead.

Yang Liu

Thanks for the opportunity to ask questions. I have two questions here. The first one is regarding demand. I think we believe one of the reason to see very divergent demand from cloud and Internet companies that lot of big Internet companies are moving away from public cloud. So, if we combine the cloud and Internet together, when do you expect to see that the overall demand recovery, has -- or put another way, in term of GDS' full year guidance, what is the assumption of demand recovery behind it?

And my second question is in terms of the competition. Are you seeing more competitive bidding or price from Chinese telcos in front of your big customer? Thank you.

William Huang

Okay, Yang Liu. This is William. I will answer your first question. I think the -- yeah, in general, I think -- we just mentioned, our structure of the new booking has changed if you look at the last year, last two years, right? We used to leading by the -- or 90% -- almost 85% or 90% incremental demand from the cloud service providers. This year, last year, almost zero from the cloud service providers. So, we still reached 70,000 square meters, right? This is all from the structurally changing to the Internet plus enterprise. So, we still maintain this assumption for our -- this year's new bookings. So, we just wait. If the cloud recovers, that's all upside. So that's the profile -- assumption what we make.

Dan Newman

Yeah. You asked about what was the assumption in our guidance or in our business plan. The key driver of revenue and ultimately of EBITDA is the move-in. I mentioned that we are assuming -- we're expecting over the full year, the move-in to be about 50,000 square meters. So, we have some exceptional churn. I don't keep talking about it, but if you add that back, you will see that the move-in this year will be over 60,000 square meters, which is around 15,000 square meters plus per quarter, which is a little higher than the last few quarters, but similar to what it's been over the last six or eight quarters. So that doesn't really imply much of a recovery.

But one of the factors which is behind that number is that, we mentioned a few contracts, which start delivery in around September, October, November, December, have faster than typical move-in schedule. Some of it could be quite front ended, which means that we may see quite a bit of move-in towards the end of the year. It's not yet this year, January of next year. So that is the full year number without really boosting the revenue much this year. But it does set up, I think, for potentially a good rate of year-on-year growth in 2024.

William Huang

Yeah. And Yang, I want to add one more point. I think the focus for the new booking 75,000 square meter, right, in our new guidance, this is all organic. This is all organic. Historically, when we reached some 90,000 square meter, including a lot of acquisitions, right? So, this is still very high level compared with all the global top players, still bigger than most of the data center players in the world.

[Multiple Speakers] Okay. I think in terms of the competition from the telco, I think the telco -- yes, our strategy is the Tier 1 market. We built out all our assets in the Tier 1 market or edge of the top of Tier 1 market. This is, I think, in the last -- this is -- nothing changed. In terms of supply, telco is still less investment in this region, right? So, I think we are not worried about it.

And on the other hand, we don't compete directly. They are also our customers. I think we have very good relationship with -- work with the three telcos in the last 10 years. So, recently, a lot -- a few -- I mean, a few telcos came to us and tried to discuss some cooperation between us, because they also deployed their cloud service -- wanted to deploy their service in Tier 1 market. And if we -- if someone wanted to deploy cloud service in Tier 1 market, I think definitely GDS will be the first choice for them to partner with. Otherwise, no possibility to provide their cloud service in this city, right?

Yang Liu

Thanks a lot for the answer.

Operator

Thank you. We'll now take the next question. Please standby. This is from the line of Gokul Hariharan from J.P. Morgan. Please go ahead.

Gokul Hariharan

Yes. Hi. Thanks for taking my question. First, could you talk a little bit about what are you hearing in the last couple of months? William, I think you mentioned there is some excitement from the customers, but typically, on the cloud side, which is still a significant part of your backlog, if you think about the next couple of years. Are they starting to see utilization pick up in their existing infrastructure that they need to now start accelerating the move-in, or you think that the cloud acceleration is still going to take a little bit more time?

And secondly, also on the EBITDA front, we have seen some erosion in EBITDA because of power costs and some, I think, mix related challenges. Do we see the guidance that we gave for FY '23 as kind of like the sustainable level of EBITDA margin, or we think it would be further pressure as more international business comes online in 2024 and beyond?

William Huang

Hello, Gokul. This is William. In terms of the cloud service provider, I think number one, they are all making a new business plan right now based on the current environment, because this is -- the assumption -- previously, a lot of overhead is in China, like lockdown policy. Now it's gone. It's no more. And another is new government [indiscernible] structure and all the platform, they made a couple of times statements to support the platform in the social media as a private company, support their growth, continue the growth in China, right?

So, I think our customers also very encouraged by the current environment. So, they made the -- they should have made a -- they are making the new business plan right now. In general, I think based on my conversation with our largest customer, one of -- top three customer, they are all very encouraged.

I think in terms of business plan, it definitely will boost in the next few quarters. But in terms of move-in, there's a lot of effects to impact the move-in in terms of the shipment, in terms of their previous -- they still have some inventory, right? So, I think, in general, I think the -- still -- that's why we're still very conservative to assume cloud service provider move-in pace still maintain a solid level, a neutral level, not aggressive. So, it's normal. So, I think the -- but given the whole environment looks like it will improve in the next few quarters.

Dan Newman

With regard to adjusted EBITDA margin, I feel like this year's margin is probably the trough, but it does depend on several different drivers. One, of course, is pricing. Yeah, it's another topic for discussion, but we feel like pricing is important. And there's a setup, which could see pricing recover in future years.

Secondly is power tariffs. The input fuel costs have started to come down, but we haven't seen that reflected in power tariffs yet. And even if it is reflected, it wouldn't benefit us this year. It could benefit us in future years. And Chinese government policy may influence that if the government wishes to see power tariffs come down as was their inclination historically, or the tendency historically.

And then the third part is international, where we are creating significant value or we will create significant value in future. But at the moment, it's EBITDA negative. I think it will be EBITDA breakeven in the first half of next year, but that's still depressing on the margin. So, it will take until 2025 before the EBITDA margin of international sale is in the [13%] (ph). So that growth drag will persist for some time. I think for forecasting purposes, maybe you use this year as a trough and then see a slight step up over the next couple of years as [pace comes off] (ph).

Gokul Hariharan

Got it. Thank you.

Operator

Thank you. We'll now take our next question. Please standby. It is from the line of Frank Louthan from Raymond James. Please go ahead.

Frank Louthan

Great. Thank you. Can you comment on the state of the market for the capital recycling and the appetite for those assets? Is it the same or better or worse than when you originally sort of put this plan together? And I apologize if I missed this, but can you quantify the amount of capital recycling you expect to do in each of the next two years? And is CapEx -- is it the sort of low for CapEx this year? Thank you.

Dan Newman

Let me start with the numbers. I mean, what I showed was that, in 2023, our free cash flow before financing is negative by around -- sorry, it's around -- just over RMB2.5 billion. And some of that can be financed by drawing down on project finance facilities. And then, the remainder needs to be financed with our capital.

Having done that convertible bond in January, assuming we go ahead and repurchase the CB if it is possible, on a net basis, we increased our financial resources. And so, I think pro forma, we had around RMB9 billion of cash. So that is available to be allocated to China, to be allocated to international, if we choose to do so. But we try to prioritize raising additional capital, recycling capital at the country level before we allocate our cash.

In China, if we assume that the target for this year is to recycle around RMB1 billion to RMB2 billion, we're already 10 months down the road of working on our onshore -- sorry, offshore China data center fund. We had the regulatory approval. When we signed the limited [launch] (ph) agreement, we also signed a sale and purchase agreement for the first asset to be transferred to that fund. And that will realize cash proceeds to us net of what we put into the funds of RMB1.5 billion -- RMB1.45 billion. So that goes a substantial way to fulfilling whatever requirement we have this year.

I think the chances are that next year the requirement will be similar, if not less, because operating cash flow will hopefully increase and CapEx, I don't expect to be higher, it might be lower. So that negative free cash flow before financing might be a small number. I don't think it's very challenging for us to do monetizations at this scale if we have a substantial amount of capacity in this offshore China data center fund to do more deals. We've been working for some time on onshore equivalent and now in the process of signing a formal term sheet, a framework agreement and asset has been identified and initial diligence done by the investor, which would also recycle at least a few hundred million RMB of additional capital.

And then, just looking more broadly, the REIT market in China is beginning to really take shape. There's a lot of interest. We're being approached continuously by investors and banks looking to structure something involving data center assets. I think it's an asset class that attracts a lot of interest in China, right? For the China REIT market regulations, it's really designed for stabilized assets. With these funds, we made the decision that has suited our purposes to focus on three core projects that were still under development, derisked to a degree, but under development. But that could be a stepping stone towards virtually being able to access the REIT market.

So, I think we have -- I think we're very comfortable. I think we probably are far better positioned than anyone in having potentially an offshore, an onshore and a lot of banks chasing us for a data center REIT. So that shouldn't be a problem.

Frank Louthan

Okay, great. Thank you.

Operator

Thank you. We'll now take our next question. Please standby. It is from the line of Joel Ying from Nomura. Please go ahead.

Joel Ying

Hi. Thank you for taking my questions. I have just one quick -- one question about China market. So, we are seeing latest news about AI technology ChatGPT. So, do we actually see any potential demand rising from the market about the AI data centers? And do we expect the AI data centers will be -- could be outsourcing by -- like companies like GDS, third parties or for some of the cloud companies who will do the self-building things that will be outsourced, that will be self-build? Thank you.

William Huang

Yeah. I think you're right. I think now everybody is focused on the ChatGPT. But forget it, in China, this is already -- a lot of the big players already started to use the AI. AI is also very hot topic in China. And we also believe this will be the new -- will drive the new wave of the demand. And definitely GDS, our product, our location, all fits the AI-type demand in future in terms of power density, in terms of total power capacity and the location where we are.

So, I think we are very, very encouraged by the new wave of the demand. This will affect our business in the next few years and just what happened in the last eight years ago when the cloud started. So, I think we are very happy. I think definitely, I think the -- because, the AI-type demands ask for more high-power density. It's very difficult to build by themselves. So, outsourcing will be the trend and that's what we believe.

Joel Ying

Thank you very much.

Operator

Thank you. We'll now take our next question. Please standby. It is from the line of Edison Lee from Jefferies. Please go ahead.

Edison Lee

Hi, thank you very much for taking my questions. My first question is about the -- your build-out schedule or your delivery schedule. And I found that in 2023, 85% of your delivery is actually taking place in the second half, right, only 15% in the first half. So, I wonder if that is driven by your demand assessment or driven by your construction schedule? Okay, that's number one.

Number two is, on your guidance for 2023, obviously, the EBITDA growth less behind the revenue growth. If you take our international business, what do you think the EBITDA growth can be in 2023?

And lastly, one of your peers recently said that a major cloud service providers in China in fact stopped self-building. And I don't know how true that is. But what is your view on the cloud service providers' sell-building program, given the current state of the market? Thank you.

Dan Newman

The first part about the delivery schedule, we slowed down pretty much our entire construction program. I think there's more than 20 projects in that program. But as you know, all those projects have customer commitments and those customer commitments have a delivery date. So, our ability to slow down depends on the customer agreeing to take delivery at a later date, not all of them, but we wish that's happened and some of them like us to keep to the original delivery schedule, which is, of course, perfectly fine by us. We're just trying to manage out the incurrence of that CapEx to shorten the lead time between when we spend money and when the customers move in and start to generate income. So that's really what's behind the numbers.

We do have a substantial amount of capacity in service, which is not yet revenue-generating. I mean, our utilization rate is 71%. When you have a portfolio in service as large as ours and the commitment rate of 95%, utilization rate 71%, so that means 24%, which is committed, but not utilized. That's a big number. That's our backlog for area in services, so 120,000 square meters. So that could move in practically with no additional CapEx. So, you've got to take that into consideration, right? The completion of the projects under construction is not driving -- it's not the only growth driver when we have so much move-in ready capacity.

William, do you like to answer the question about self-build whilst I...

William Huang

What's the question? [Multiple Speakers]

Edison Lee

The question is that, one of your peers recently said that a very big cloud service providers, in fact, will stop self-build. They have...

William Huang

Yeah. I think this is the topic I think it's not only one cloud service provider internally discussing. Yeah, I think I remember in the last couple of the earnings call, I think the -- we are the largest builder in China. We have a scale advantage. I think, finally, our -- some of our customers start to realize that, right? So, I think the -- in terms of economic perspective, they realize it's not very efficient. So, I think the -- this is the topic discussion there internally. So, we are willing to think -- we are trying to encourage this for their future. And some of them also talk about they sell some asset to us. We're also considered about this option.

Dan Newman

Answering also about the EBITDA growth rate, excluding international, we allocate SG&A to international using sound accounting principles. With that allocation, the EBITDA of international is negative about RMB100 million in 2023. So, if you like, you can add that back and that's what GDS looks like without international.

Edison Lee

Okay. So, on the revenue side, do you have anything projected for 2023 on your budget?

Dan Newman

Yeah, I think about -- I was looking at 1.7% of our revenue comes from international in this current year.

Edison Lee

Okay. Got it. Yeah. Thank you very much, Dan.

Operator

Thank you. I'd now like to turn the call back over to the company for closing remarks.

Laura Chen

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 website or the Piacente Group Investor Relations. Next time, see you, bye-bye.

Operator

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