GDS Holdings Ltd

HKEX:9698

Earnings Call Transcript 2021-Q1

[Operator]

Hello, ladies and gentlemen. Thank you for standing by for GDS Holdings Limited's First Quarter 2021 Earnings Conference Call. [Operator Instructions] 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, executive]

Thank you. Hello, everyone. Welcome to 1Q '21 Earnings Conference Call of GDS Holdings Limited. The company's results were issued via Newswire services earlier today and are posted online. A summary presentation, which we will refer to during this conference call, can be viewed and downloaded from our IR website at investors.gds-services.com.

Leading today's call is Mr. William Huang, GDS Founder, Chairman and CEO, who will provide an overview of our business strategy and performance. Mr. Dan Newman, GDS CFO, will then review the financial and operating results. Ms. Jamie Khoo, our COO, is also available to answer questions.

Before we continue, please note that today's discussion will contain forward-looking statements made under the safe harbor provisions of the 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, 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 note that GDS' earnings press release and this conference call can include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. GDS' press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures.

I will now turn the call over to GDS Founder, Chairman and CEO, William. Please go ahead, William.

[William Huang, executive]

Okay. Hello, everyone. This is William. Thank you for joining me on today's call. I'm pleased to report another solid set of results. Our performance year-to-date is in line with our expectations, and we will remain on track to deliver our full year sales target and financial guidance.

Our sales in 1Q '21 was over 23,000 square meters, all organic, all Tier 1 markets. We have maintained the same sales run rate since the beginning of last year, and we are confident of maintaining it throughout 2021.

Despite the noise of -- about the growth of the cloud market in China, new regulations and the increasing competition, we are not slowing down. The reason why we can maintain sales commitment and momentum is because of our positioning, in particular, our increasingly diversified customer relationships and our market presence, which mirrors the footprint of the cloud. The strength of our positioning is clearly illustrated by our sales achievements in the past few months.

In 1Q '21, we won 6 high-scale orders. Two of these orders were in new markets. In Hong Kong, we closed an anchor order for 45% of our Hong Kong 1 data center. The customer is a leading cloud service provider from China. In addition to commitment for Hong Kong 1, which will enter service in 2022, this customer has indicated strong interest in anchoring our Hong Kong 2 data center, which will enter service 1 year later in 2023.

In Chongqing, we closed an anchor order for 50% of our Chongqing 1 data center. This came from a large cloud customer in the financial service industry.

In the current quarter, we won our first-time hyperscale order in Beijing from a new cloud service provider, which is focused on serving government and SOE customers. These 3 notable order highlights our ability to keep on winning as demand shifts between markets and customers.

A couple of quarters ago, we made an important breakthrough with 2 new hyperscale Internet customers. I'm pleased to report that we have now won a follow-on order from one of them, a leading e-commerce platform player for capacity in one of our Shanghai data centers. We also won the bid for a follow-on order from the other one, a leading content platform for capacity in this -- in their second Tier 1 market.

Our sales and resource strategy is driven by architecture of the cloud. As shown on Slide 6, cloud platforms deploy multiple availability zone in each region. Each AZ is independent, but all of the AZs in the same region are interconnected with minimal latency. These architecture supports real-time and high redundant operations.

Hyperscale customers look to land and expand, which means they set up new AZs and then, over time, increase the capacity. We target initial land and as a result, we are well positioned for the expand. Around 50% of our current sales pipeline expansion order from customers who have already landed at one of our locations. These expansion orders will not go out to open tender.

For the remaining 50% of our pipeline, the situation varies from the highly competitive to limited competition depending on the location and customer requirements. This means that we can be selective about what business we pursue. We are not under pressure to chase highly competitive deals just to meet sales targets.

A key to our success has been our ability to continuously scale up our supply. As shown on Slide 7, we now have our highest ever area under construction at over 160,000 square meters or 397 megawatts of IT power capacity. Meanwhile, we have sustained our precommitment rate at 68%.

As shown on Slide 9, in each Tier 1 market, we have established a cluster of data centers in separate locations, which mirrors the footprint of the cloud. This is what gives our platform a unique value proposition. No other data center company is anywhere close to having this market presence. In fact, most of our competitors only have supplied in a few places.

During 1Q '21, we started construction of 5 new data centers on land and buildings, which were previously held for future development. And at the same time, we topped up our resource pipeline with greenfield land purchase at great locations on the edge of Shanghai and Beijing. This shows how our capacity sourcing and the construction cycle is working.

We currently have over 500,000 square meters of capacity held for future development. Over 90% is greenfield, greenfield land, which we own and which comes with power quota. This resource pipeline derisks our growth and [ visibilize ] balance sheets, our sustainable competitive advantage in resource supply. We currently have about RMB 3.3 billion, which means USD 498 million of investment tied up in held for future projects.

There have been number of recent developments in government policy, including specific policies related to resource allocation in Beijing, Shanghai and Guangdong. Some of the details are new, but in our view, the underlying policy direction is consistent.

On the one hand, data centers are new infrastructure, which is important for China's digital transformation. On the other hand, the government is guided by carbon neutral objectives and maintaining tight control over the allocation of land and power for data center use. We hear people talk about oversupply. Let's put this in context.

Across all of our Tier 1 markets, supply is constrained, and the bar is being raised by government policy. The only exception is the area in Jiangsu province to the immediate northwest of Shanghai, where there are a number of players who have largest developable capacity. Competition in this one area is more intense, and the pricing is more aggressive. It will take some time to work through; but in the long term, we believe the supply will be constrained there just like everywhere else. We are taking a long-term view and are seeking to consolidate -- consolidation of the supply.

During the current quarter, we closed 2 previous announced acquisitions. BJ15 brings over 19,000 square meters of capacity. It is 100% committed and 80% utilized. BJ15 was a highly competitive M&A deal. Since closing, we have started conversion of an existing building on the same site, which we call the BJ16. It is already almost 100% precommitted, which, with this expansion, the implied acquisition multiple comes down by about 1 to 2x.

TJ1 is our first data center in the Tianjin area. With the added advantage, what is -- that is only 30 kilometers from the edge of Beijing, it brings over 14,000 square meters of highly marketable capacity. We paid a relatively small premium to organic build costs.

We are currently at an advanced stage for another data center acquisition, which would bring expansion capacity with some customer commitments. Once again, we expect to pay a single digital acquisition multiple.

We saw the quarter -- we saw this quarter how Chongqing and Hong Kong, 2 to new markets for us in terms of self-developed data centers, drove significant new business from established strategic customers. By the end of this year, we expect to enter 1 of 2 further new market in China.

The same logic of the follow -- follow this customer is driving our Southeast Asia expansion plans. Our initial focus is what is one -- is on Singapore. However, as the Singapore government is not approving new projects, we are looking for alternative ways of establishing a presence in the Singapore market.

Given the constrained supply in Singapore and the rising colocation prices, we are also considering complementary options in neighboring countries. We have identified some very promising investment opportunities, and we aim to make at least 1 or 2 commitments within the next couple of quarters.

Now I will hand over to Dan for the financial and operating review. Thank you.

[Daniel Newman, executive]

Thank you, William. Starting on Slide 15, where we strip out the contribution from equipment sales and the effect of FX changes. In 1Q '21, our service revenue grew by 4.7%. Underlying adjusted gross profit grew by 6.2%, and underlying adjusted EBITDA grew by 7.2% quarter-on-quarter. Our underlying adjusted EBITDA margin was 47.9%, a new high for us by us.

Turning to Slide 16. Service revenue growth is driven mainly by delivery of the committed backlog and closing of acquisitions. Net additional area utilized during 1Q '21 was 16,152 square meters, exceeding our expectations for the first quarter, which is normally a slower season in terms of moving. In 2Q '21, we expect organic movement to be slightly lower. As a result, at the midyear point, we expect move-in will be in line with our target.

MSR declined 2.6% quarter-on-quarter in 1Q '21 to RMB 2,425 per square meter per month. For FY '21 as a whole, we expect MSR to decline by a low single-digit percentage year-on-year. To some extent, the MSR trend is a reflection of average selling prices in our backlog. However, there are many other factors which affect MSR, including the customer mix, data center location, [ dormancy ] level, development cost and contract structure.

We have said many times that we target to sustain investment returns. We've been largely successful with only a gradual small decline in IRRs over the years across our portfolio as a whole.

Turning to Slide 17. Our underlying adjusted gross profit margin was 54.4% for 1Q '21,, an increase of 0.7 percentage points quarter-on-quarter. Due to the timing of data center completions, our utilization rate was at a slightly higher level of 72.9% compared with 71.1% at the end of 4Q '20. Our underlying adjusted EBITDA margin was 47.9% for 1Q '21, an increase of 1.1 percentage points quarter on quarter-on-quarter.

As you can see on Slide 18, we have a lot of data center capacity coming into service in 2Q '21, 43,000 square meters compared with only 13,800 square meters in 1Q '21. Despite the fixed costs, associated with this additional capacity, we expect our 2Q '21 margin to be only slightly lower than for 1Q but continuing the upward trend from last year.

Turning to Slide 19. Our CapEx for 1Q '21 was RMB 2.3 billion, consisting mainly of payments for organic CapEx. As we closed on Beijing 15 in 2Q '21, we expect RMB 2.8 billion of acquisition consideration to be paid in the current quarter.

Part of our organic CapEx in FY '20 and FY '21 relates to B-O-T contracts. We have 9 such projects for 1 customer, which are designated for transfer to JVs with GIC; and 2 such projects for 2 other customers which are not part of our existing agreement with GIC. We're currently in discussions with GIC about increasing our percentage ownership in the JVs and including all 11 projects in our partnership. We think that the combination of higher equity participation and management fees makes these projects more worthwhile for us. We will update you when ready. As at the end of 1Q '21, we had around RMB 1 billion of accumulated CapEx paid for these 11 projects.

Looking at our financing position on Slide 20, we have RMB 14.9 billion of cash on our balance sheet, and our net-debt-to-EBITDA ratio is 2.9x. Given our ongoing levels of organic CapEx and the Beijing 15 acquisition consideration, this ratio will go back up to around 5x at middle of this year.

During 1Q '21, we completed debt financings with a total facility amount of RMB 1.3 billion equivalent to USD 191 million, including both new project financing and refinancing of existing facilities. The average interest rate for these completed facilities is 5% based on the prevailing loan prime rate. This compares with an effective interest rate of 6% for all of our debt in 1Q '21.

In the past 4 months, we've completed RMB 0.9 billion of refinancing, and we expect to complete another RMB 1.7 billion of refinancing by the end of the current quarter. With that, we will have RMB 2.1 billion of refinancing [ left ] to do as part of our plan for this year. Once completed, we expect our effective interest rate to come down.

Turning to Slide 21. We confirm that our previously provided guidance for total revenues, adjusted EBITDA and CapEx remain unchanged.

Before we finish, I would like to say a few words about ESG. We plan to publish our -- an overall ESG report in the next few months. We appreciate that investors are keen to know our plans, particularly for renewable energy given its importance to all of our stakeholders.

As market leader, we aim to take a leadership position in renewables. We are operating in markets which have their own challenges, which are also very dynamic. The supply of renewables is increasing rapidly in China. On a per kilowatt basis, the generation cost will soon reach parity with brown power. China leads the world with its investment in ultra-high-voltage, long-distance power transmission, which means that renewable energy is going to be more accessible in Tier 1 markets. The power trading markets in China are also developing rapidly. All of this creates exciting possibilities, which we will reflect in our targets, time line and how to get there. We will not disappoint.

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

[Operator]

[Operator Instructions] Our first questions comes from the line of Yang Liu from Morgan Stanley.

[Yang Liu, analyst]

I have 2 questions here. First, it related with the competition in Jiangsu, as William previously mentioned, you expect a normalization for the competition in future. What do we need to see before a real normalization? Is it -- should be consolidation? Or there should be policy turnaround in approvals? What's your expectation here?

And the second question is related with consolidation, right? If GDS turn out to be the consolidator, what should be the multiple trend in the next few quarters or the next few years? Because we see a lot of PEs and the infrastructure fund are entering the market, they might push up the acquisition multiple in private market. What should be the -- what is your expectation on the multiple here?

[William Huang, executive]

Okay. The first question is about the competition, right, in this area, right? I think in the moment, the capacity -- the land power is allocated to the different player in the last couple of years. So this area, as I mentioned, the competition is intense. But GDS now in a very good position is, number one, we have some -- we have -- we already -- our capacity already have the customer commitment since last year. So we are not very -- number one, we are not pursue some deal, which only wants fulfill our sales target. We are quite relaxed because we are well positioned there.

So based on our national footprint -- GDS is -- has -- GDS already in a multi-market. We are not just focus on one market to maintain our -- try to get every deal or win every deal. It depends on our intention. If some strategic deal, we feel important, we will do it. But if the deal is -- quality is not that good, we will walk away. This is our strategy in this area.

From long-term point of view, I think, number one, the demand -- because we believe in this -- in the whole Shanghai area, east of China, I think the demand still will continue to grow, so we don't worry about in the future this inventory will be the issue, but it will take time. So we are quite relaxed.

On the other hand, GDS has -- as I used to mention, we have more than almost 8 -- more than 700 customer base. So we are -- our customer quite diversified. 80% of our -- 80% -- 85% of our new incremental order is from our installed base. So we are not a desperate player. So we are quite reluctant to look at this area's competition. This is the first question.

But once again, as I mentioned, I think the government's policy is changing because, in general, I mean, the carbon neutral policy will guide -- will raise the bar of the carbon quota allocation. And this is -- in my view, will slowly to tighten up the quarter. So I think the demand and the supply will be more balanced in the next few years.

The second question is?

[Daniel Newman, executive]

Consolidation.

[William Huang, executive]

Consolidation, I think, yes, we're in a multi-market, even in the overseas market. So consolidation is definitely our future goal. So we are open in terms of the acquired project, acquired platform. So we are quite open. So this is -- we keep open our eyes to -- watching the opportunity.

In terms of multiple, I think the -- we always do the reasonable deal, right? We don't want to be a crazy buyer, right? So we will -- consistent to, let's say, take care of the investor benefit in our -- each acquisition deal.

[Operator]

Our next question comes from the line of Jon Atkin from RBC.

[Jonathan Atkin, analyst]

So I have an operational question and then a strategic question. So on the operational topics, you have 43,000 square meters coming into service in 2Q. I wondered what's the timing. Is that weighted towards the beginning or end or middle of the quarter? And also on the renewal schedule that you shared, a reasonable amount is coming due for the final 3 quarters of 2021. And where do things stand with your renewal discussions with your customers?

[Gee Choo Khoo, executive]

Jon, this is Jamie. Regarding the questions regarding on the timing for the delivery of the [ 43,000 ] square meters, we are looking more closer to the June period on the delivery mostly? Yes. And on...

[Jonathan Atkin, analyst]

Can you repeat that? I'm sorry, I didn't catch that.

[Gee Choo Khoo, executive]

Yes. So we are looking more towards the end of quarter, which is more in the June period in the [ second quarter ]. Yes.

[Jonathan Atkin, analyst]

[indiscernible] Got it.

[Gee Choo Khoo, executive]

And Dan, will you be -- what's the second question on renewable? Dan, would you want to answer?

[Jonathan Atkin, analyst]

Yes. Yes. So yes, the renewals, yes, in the back of your presentation, if you could give the amount of renewals to the final 3 quarters of this year, next year, the following year. But for the near-term renewals between now and end of '21, what is the discussions that you're having with your customers? Are you anticipating renewing 100% of it? What's the [ turnover ] of your discussions around that and the renewal rents and whether that stays the same or changes?

[Daniel Newman, executive]

Yes. Jon, I think we'll renew almost all of it. There's one situation where we are going to pull out of a, let me call it, third-party data center because it's no longer up to an acceptable operating standard, and there may be some churn, but there's less than 1,000 square meters, which insignificant even by standards of data center industry.

Other than that, in respect to very high renewal rate this year, and I would say is a kind of overall assumption that pricing will be flat across all the contracts. We've discussed quite a few times before about our strategy. At this point in the cycle, we're still increasing our market share and deepening relationships with large customers. We don't push too hard on the pricing because we're getting benefit trade-offs in terms of new business at reasonable prices and returns in many other places in China. So I think achieving overall flat pricing on renewals is quite satisfactory at this time.

[Jonathan Atkin, analyst]

And then lastly, there was a press article in the last 2 days about partnering or acquiring the data center business of a logistics real estate company. And I wondered if you can comment on what you would view as the strategic advantages of such a partnership inside of China or in other markets like Malaysia or Indonesia that you're targeting for entry.

[Daniel Newman, executive]

Well, we did not respond to the story that was put out by one news agency, and I won't respond now. But as a general comment on our acquisitions to date have been, in effect, asset acquisitions. We've acquired data center facilities on a -- Each acquisition has involved a single site somewhere between 4,000 to 20,000 square meters at their stages of development.

We haven't done any acquisitions of what you might call platform plays. But in terms of strategy, I think it's all part of the same theme, which is that we seek ways to leverage our market leadership position to establish even more competitive advantages, scale advantages, market presence and so on.

I think platform acquisitions probably have to look at the valuation in a different way. We'd have to assess what the synergy is, what the strategic benefits are and so on. But we're very open-minded about that, so I think we have a window opportunity given the position that we've established to really try to do some more significant deals.

[Operator]

Our next question comes from the line of Colby Synesael from Cowen.

[Colby Synesael, analyst]

Great. Maybe just following up on that last one. As you start to potentially look at platform type acquisitions, what's the capacity financially speaking that you think that you guys might be comfortable doing the article that Jonathan's referencing suggested a pretty high price target -- price tag, excuse me, which I'm just trying to get a sense of what is the feasibility of doing such a large deal?

And then secondly, even though the install number, the 16,000 plus was stronger than guided to, you missed service revenue expectations, at least by a little bit, largely as a result of the greater pressure on ARPU and I think was anticipated. It was down, as you mentioned, 3.7% quarter-over-quarter. Just wondering if that's timing related or what might be behind the magnitude of that sell-off. And then based on your guidance for still low single-digit declines, it would suggest then that ARPU is most likely flat for the remainder of the year off of that 1Q number. I'm just curious if you would support that view.

[Daniel Newman, executive]

On the first part about our financial capacity, I think it's relatively easy to kind of calculate what it is today. We have just under RMB 15 billion of cash on our balance sheet or have had at the end of the first quarter. Of course, we have a big slug of acquisition consideration to pay during the second quarter. And we gave guidance for annual CapEx of about RMB 12 billion, which included the kind of known M&A but not the unknown M&A.

If we finance that CapEx, 50-50 equity and debt, which is relatively conservative because, of course, we target higher leverage than that, that would involve 6 billion of equity and 6 billion of debt. For the 6 billion of equity, that's versus nearly 15 billion of cash. So there's a fair amount of capacity there if something -- opportunity arises, which is not in the ordinary course of business.

Just more generally, I'd hope after the number of different financings we've done, the number of different markets and sources of capital that we've tapped, whether it be stock markets in U.S. or in Hong Kong, strategic investors in Singapore and private placements through Chinese financial investors and financial institutions, joint ventures with sovereign wealth funds and so on. I hope, over the years, we proved that we have enough ingenuity to be able to find ways to finance whatever we want to do. I think we've never considered ourselves capital constrained even when we built 3 data centers with $20 million in 2010. I didn't consider that we were capital constrained.

Your comments about the MSR, it's a fair comment. 2.6% quarter-on-quarter decline in the first quarter, it's often just to do with mathematical timing. That's why I gave the assurance that, over the full year, it's still looking at low single digits. So that means not much further decline in the subsequent quarters of this year, maybe 1% in the second quarter. Not much in the second half of the year.

We don't provide quarterly guidance, so I'd set your comment about revenue in the first quarter, but we don't actually provide revenue guidance. On the other hand, I think probably our EBITDA exceeded most people's expectations. Our EBITDA margin exceeded most people's expectations. So there's a kind of balance there.

[Operator]

Our next question comes from the line of James Wang from UBS.

[James Wang, analyst]

It's James Wang from UBS. I've got just 2 questions. The first question is on self-build. So can you maybe comment on the extent of the self-build by the large cloud customers? For example, have you seen any change recently in the proportion of self-build by these customers? And as a hypothetical, how would you ensure your future growth if these customers were to increase their proportion of self-build? So that's the first question.

And the second question is just on the current demand environment. It seems like a number of projects put out for public tender this year has come down. And also, I think William mentioned that, this year, you guys saw a bit of a slowdown in the cloud business in China. But do you see this weakness as a one-off thing as just this year? Or do you think this slowdown will be sustained?

[William Huang, executive]

Okay. The first question is the customer self-build, right? I think this is not something new. I mean since a couple -- 4 -- 5 years ago, the self-build market is a separate market in my view. So again, I should remind the -- all investors, GDS strategy is focused on the Tier 1 market, right?

So I think the market is separate. One is the self-build market, which is in the most -- almost 100% so far it's in the remote area. And what we can see is other Tier 1 market, still very, very good demand from our customers. So I think in terms of the Tier 1 market, we didn't see a lot of difference compared with the last couple of years. So this is the trend still we maintain. So once again, this is a separate market.

[Daniel Newman, executive]

The second question?

[James Wang, analyst]

[ The second ] question...

[William Huang, executive]

Yes. Demand -- sorry? Go ahead.

[James Wang, analyst]

Second question, William, just on the demand environment. Do you see the slowdown being sustained?

[William Huang, executive]

Demand. It depends on the different -- which market we talk about. In our view, in the Tier 1 market or the market -- outsourcing market, I didn't see a slowdown, the demand. So that's why we can still maintain their high growth in the first quarter, which we just reported. We didn't see -- we still see our momentum in the next quarter, but I mean I don't see -- I don't know which other player, what they are looking at, right? In our view, I think that we already lock up this quarter, and we maintained the whole year's sales commitment.

[Operator]

Our next question comes from the line of Tina Hou from Goldman Sachs.

[Tina Hou, analyst]

I have 2 questions. The first one is regarding your B-O-T project and the JV with GIC. Wondering if you could share more colors with us in terms of how your thoughts are for the JV as well as for the B-O-T projects going forward.

And then the second question is regarding competition. As William, you mentioned that the competition in Jiangsu province has been relatively intense recently. So I was just wondering, historically speaking, let's say, maybe a few years ago, was there any like similar situation in any of the regions happening in China? And then what was the process there? And then how did -- so how eventually did the competition intensity come back to normal? Would be very helpful if we could have some like historical reference there.

[Daniel Newman, executive]

I'll answer the first question on B-O-T. We always made clear, in fact, William just said it, that the B-O-T opportunity is mostly it's a remote site opportunity, and it's quite different from our core business in Tier 1 markets. The situation is almost exactly the opposite of Tier 1 markets. When Tier 1 markets customers may have multiple availability zones, their capacity is spread out. And we have a big challenge to expand their IT platforms in multiple locations in a synchronized way. Whereas in the remote sites, they have very few locations. In fact, if you look at the earnings presentation where we showed -- I showed the locations of the availability zones in China, you see just a few dots outside of the Tier 1 markets. Those are the remote sites.

The remote sites, our customers can concentrate a lot of capacity in a very few place. There's no barrier to entry. So it's very practical for them to do that themselves. And yet, most of them are looking to outsource that, but the terms of outsourcing are quite different.

So we established a partnership with GIC. It was just really a -- more of a financial engineering to ensure that we had a competitive cost of capital. But we are selective about that business just as we are selective about the business that we do in Tier 1 markets. If that kind of business is put out to open tender, it's more competitive. It's more price orientated than business in Tier 1 markets. All I can say is that if we don't win it with our scale advantage and our cost of capital advantage, then whoever wins it, probably is not getting a very good deal.

[Tina Hou, analyst]

And just a quick follow-up on that. So you mentioned -- I think you were interested in maybe increasing the shareholding in the GIC JV. I remember it was 10% for GDS, if I'm not mistaken. So if we increase -- potentially increase that shareholding to over 50%, does that mean like all of these projects should like get consolidated into your P&L, right?

[Daniel Newman, executive]

That would be the case. But actually, the driver here is what makes these projects worthwhile for us. If we, for example, have a 51% equity interest and are able to charge a management fee, which effectively means charging a management fee to our 49% partner. And then we calculate the return on equity, which is obviously the project return enhanced by the management fee. That -- at a 51% ownership level, I mean, project returns from these projects is attractive. It's not inferior. It's not something that we are reluctant to do. So we feel that we can justify putting more equity in up to that kind of level. There may be some situations where we put in even a higher level of equity. There might be some where we put in less. But that's what's driving it, that calculation.

Yes. If it means that the projects are consolidated, then, yes, that's -- we'll ensure that the disclosures enable you to understand what contribution is being made by those projects.

[Tina Hou, analyst]

Understand. And yes, I have a second question in terms of the competition.

[William Huang, executive]

Yes. I think the Jiangsu province is a very special case in the current market's whole environment. I think the -- in my view, this situation -- because we -- number one, we still believe the demand still will grow in all the Tier 1 market, number one. So in terms of the competition right now, I think this capacity will be in a -- will be capacity -- a little bit oversupply will be solved in the next 24 months, in my view.

[Operator]

[Operator Instructions] Our next question comes from the line of Gokul Hariharan from JPMorgan.

[Gokul Hariharan, analyst]

My question is about some of these recent regulations that we have seen in Beijing and Guangdong. How does management see the implications of this regulation looks like -- there is some kind of demand churn moving towards higher performance-related projects, especially in Beijing? And also, related to that, how do you think the industry meets some of the carbon neutrality and green carbon credit kind of requirements in some of these locations? Do you have to purchase these credits from third party? Is that process something that can be passed on to customers through price increases or cost pass-throughs?

[Daniel Newman, executive]

Yes. I'll take the second part first, Gokul, on the renewables. I think, in the long term, using renewable energy will not be any different in terms of the economics from using, we call, brown power. It will be the norm. The infrastructure will exist to transmit the power from the places where renewable is generated to the places where most power is consumed. The power trading markets will allow for cross-regional trading.

I think in the -- during the transitional period, we may have to take some steps to establish some direct power purchase agreements. We may consider investing in -- directly in renewable power projects. Ideally, if such a situation is possible, projects which are located close to data centers so that can be direct transmission connection without going through -- essentially through the grid. And there's always ultimately the fallback of buying renewable energy certificates internationally if not in China.

I think the fact that we operate in Tier 1 markets and the data center business is a Tier 1 market business creates some challenge because of the geographical separation from where renewable power is generated. But that's a challenge that everybody is facing, and I think the government policy is addressing both the supply side and the market mechanisms on the consumer side to ensure that we can solve that problem.

Your question about the effect of regulations in Beijing, Shanghai, Guangdong, do you want to address that, William?

[William Huang, executive]

Yes. Okay. I think Guangdong, you talk about Guangdong and Beijing governments' new policy, right? I think in general, I mean, they raise the bar to allocate a carbon quota. And this is number one. Number two, that means they want more lower PUE in terms of the [ echoed ] carbon neutral policy.

The second of all, I think they try to close some small data center, right, inefficient data center, which means this impact is positive because a lot of the existing small data center will be step by step closed. This will move to the large, more power-efficient data center like what we build, right? So I think this is one impact.

Another impact is since they raised the bar, I think the government realized the previous carbon quota allocation is not efficiency. So I would like to see this is good for the leading company in the future to obtain more carbon quota. This is my view.

In terms of the -- how we improve our operation to echo the carbon neutral new guidance, I think, number one, we will give our ESG report soon, right? We will give a very clear road map, right? I think the most important way is one is keep improve our PUE, although we are -- we're already, in this area, we're already the leader company in the China data center.

Number two, I think the energy source is very important, right? But depends -- based on the current Tier 1 market, there's not that much renewable energy in this city. So we have the different way to maintain the -- to improve the carbon neutral. This is -- later, we will give some detail our road map.

By the way, I would like to say, in the last 3 years, the central government issued a green data center example, right? So GDS gained almost -- win 50% of the green data center, which the central government, let's say, just...

[Gee Choo Khoo, executive]

Certification.

[William Huang, executive]

Give the certifications. So that means GDS, a couple -- we're already in a leader position for the -- in the China data center industry for the green data centers, for the renewable -- for the carbon neutral effort, right? So this is my answer.

[Operator]

Our next question comes from the line of Frank Louthan from Raymond James.

[Robert Palmisano, analyst]

This is Rob on for Frank. So my first question is are there any markets where you're seeing pricing that's either better or worse than average? And then as a follow-up, when do you think some of the changes in government policies are going to begin to benefit you guys?

[Daniel Newman, executive]

Well, apart from the one area that we talked about northwest of Shanghai, I think the situation in all parts of other Tier 1 markets, which we are -- districts of Beijing, the area around the edge of Beijing, Shenzhen, Guangzhou, the areas around them, urban part of Shanghai, southern part of Shanghai, it's very consistent that supply is constrained. And very often, customers have very little choice.

The #1 reason why we lose business is because we don't have supply, and you're surprised even with our resource pipeline and the scale of our construction activities how often that arises. So we wouldn't -- it wouldn't happen because we were not trying. So despite our very best efforts, we lose business continuously because we are unable to generate supply in as many places as we want. So that shows you that this is -- that when you talk about supply constraint, it's real.

So that means that the pricing is relatively stable in most of those places. It's really -- and it's not that unstable in northwest part of Shanghai either. It's just that there is more competition there.

You talk about the benefits of government policies. I think that, well, fundamentally, I've already said what it is, which is that government's disciplined approach to the allocation land power whilst creating a challenge for us has ensured that this industry remains highly investable and attractive and has high barriers to entry. And that's been the case for years. And we have very high conviction that's going to remain the case for the foreseeable future.

[Operator]

Due to time constraint, I'd like to now turn the call over back to the company for closing remarks.

[Laura Chen, executive]

Okay. Thank you all once again for joining us today. If you have further questions, please feel free to reach out to GDS Investor Relations through our contact information on our website and Piacente Group Investor Relations. You may disconnect.

[Operator]

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