GDS Holdings Ltd

HKEX:9698

Earnings Call Transcript 2019-Q3

[Operator]

Hello, ladies and gentlemen, thank you for standing by for the GDS Holdings Limited Third Quarter 2019 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 the 3Q '19 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.

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 certainties is included in the company's perspective 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, Mr. William Huang. Please go ahead, William.

[William Huang, executive]

Thank you. Hello, everyone. This is William. Thank you for joining us on today's call. A couples of weeks ago, we passed the 3 years anniversary of our IPO. Life as a listed company has been exciting. Sometimes it's too exciting, but it has made us considerably stronger.

Today, we are reporting revenue and adjusted EBITDA which is a 3x and 6x what we reported for 3Q '16. Our total area committed is almost a double what we forecasted at IPO. It's been an outstanding 3 years in terms of growth. However, we firmly believe that the best is yet to come.

As I go through our results, I will highlight our strategic progress in key areas. During the third quarter, we signed up customers for over 21,000 square meters of net additional area committed or over 57 megawatts of IT power, which should generate over $90 million of annual recurring revenue when fully delivered.

We have net preorders for over 10 megawatts from existing customers, a sign that's order size is getting bigger. We also won a 9 megawatts order from a new Internet customer, a market leader in short video streaming. At the end of 3 quarter -- 3Q, we reached 58,000 square meter net add for year-to-date. As of today, we've done in terms of meeting our full year sales target of 18,000 square meters.

In the past few months, customer sentiment has become a lot more positive. Cloud adoption continues on a steep upward path, with market leaders reporting 65% to 100% growth. 5G deployment is starting to drive another wave of demand. All of our focus is on next year, and the 2020 sales pipeline looks very promising.

We have talked on prior calls about the diversification of our customer base. At the end of 2016, we had 3 hyperscale customers. Now we have 13. And in the current quarter, we signed a new hyperscale customer, a prestigious global technology company with a consumer focus. The combination of sustained demand from established customers, plus new high-growth accounts, has enabled us to deliver 20,000 square meters net added per quarter. There are still new customers and markets for us to penetrate. With all, we're well positioned for higher level of sales over the next few years.

20,000 square meters of sales means starting 3 to 4 new data center projects each quarter. For us to do this, we need a larger development pipeline.

As you know, it is difficult these days to get approval for new data centers in downtown areas. We continued to have some success organically and supplement our capacity with acquisitions. However, it is not nearly enough to satisfy our customer demand. We have, therefore, evolved our strategy to include large uptown sites. Our first major move was in Langfang on the edge of Beijing.

This is already proving a great success. Within a couple of quarters, we have commitments from 3 different hyperscale customers for 100% of 3 data centers, Langfang 1, 2 and 3. While we still have inventory of land and power in Langfang, we are moving rapidly to secure even more resources.

We aim to repeat this success in other Tier 1 markets. In Shanghai, we got approval today for new downtown capacity. In addition, we are purchasing more land near our established edge of town site in Tonsan. We have also obtained substantial power capacity for another edge of town site in Chang Sun.

The power plus land at these locations will support around 90,000 square meters of new capacity.

In Greater Bay Area, we have power plus land at a location near Guangzhou. We have leased shell buildings at 2 other locations near to our existing data centers. And we also have the Hong Kong 2 acquisition, which I will talk about next.

Altogether, we have around 230,000 square meters of developable capacity in these key Tier 1 markets, and we're not stopping. It is very strategic resource and positions us to respond to higher level of demand.

We established operations in Hong Kong over 5 years ago, relying on third-party data centers to serve just a few of our many Chinese financial institution customers. We took the first step to upgrade our presence with the purchase of the Hong Kong 1 property in 3Q '18.

The site is now cleaned, and we will start construction of the new building.

The redevelopment time frame is 3 years. Hong Kong is the gateway for the most of the international bandwidth connecting China. Our hyperscale and high-growth customers use Hong Kong as a launchpad for their international service. They're pushing us to further increase our presence in the market.

Our strategy is to always go where our customers have critical mass of demand. We have, therefore, taken a significant step with the purchase of a second building for redevelopment. Hong Kong 2 is located only 150 meters from Hong Kong 1, enabling us to realize investment and operational synergies. We view Hong Kong as integral to our Tier 1 market platform. With proven demand from our China hyperscale customers and the presence of more than 200 of our Chinese financial institution customers in Hong Kong, we believe that the success of our project is assured.

We announced in the last quarter the formation of a partnership with GIC for remote build-to-suit projects for hyperscale customers. The initial focus is on 7 projects, which we have committed to develop and operate for 1 customer at 3 of their campuses.

We have almost completed the first project and expect to sell a 9% equity interested to GIC early next year. We have started to work on 2 more projects. The beauty of this partnership is that it enables us to fulfill the broader requirements of our strategic customers outside of Tier 1 markets. We see this as real opportunities to strengthen our franchise, gain scale, and create additional value.

We have, therefore, formed a group within GDS to focus on remote build-to-suit projects as a distinctive product. The 7 projects committed to date will require around $150 million of equity. It's relatively small by GIC standards, and they have given us their backing to scale up this partnership in a material way. We're already in discussion with a couple of other customers. It's going to take time as these deals are complex, but I'm hopeful that over the next few quarters we will have some more wins.

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

[Daniel Newman, executive]

Thank you, William. Starting on Slide 13, where we strip out the contribution from equipment sales and the effect of FX changes. In 3Q '19, our service revenue grew by 7.5%. Underlying adjusted NOI grew by 9.2%, and underlying adjusted EBITDA grew by 11.4% in consecutive quarters.

Our underlying adjusted NOI margin reached 53.8%, and our underlying adjusted EBITDA margin hit 45.9%, which is 7.9 percentage points higher than the year ago and 1.6 percentage points higher than the prior quarter.

Turning to Slide 14. Service revenue growth is driven mainly by customers moving into space which they previously committed. Move-in during 3Q '19 was over 10,000 square meters. We're expecting a similar level of move-in during 4Q '19, on top of which we will have around 7,000 square meters of additional revenue-generating space from Beijing 9 when the acquisition closes at the end of the year.

Our MSR has been pretty much flat over the past few quarters. However, we're expecting a small drop in 4Q '19.

Slide 15 shows the quarterly trend in margins. 2019 has been a great year for margin improvement. But with over 17,000 square meters coming into service in 3Q '19, plus another 13,000 square meters in 4Q '19, including the GZ6 acquisition which just closed, we expect to end the year with margins at a similar level.

Turning to Slide 18. Now CapEx picked up in 3Q '19 due to a higher level of ongoing construction. In 4Q '19, the initial consideration is due for the GZ6 and BJ9 acquisitions and for the purchase of the Hong Kong 2 property, bringing total CapEx for 2019 to the level of our original full year guidance, namely RMB 4.5 billion to RMB 5 billion.

At the end of the year, we will have around RMB 1 billion of remaining balance of purchase consideration for our acquisitions to date.

After the end of 3Q '19, we have incurred over RMB 300 million and paid RMB 170 million for CapEx related to remote build-to-suit projects. We've included a page in the appendix showing how we account for the GIC joint venture projects, pre- and post-sale.

On Slide 19. Currently, the debt capital market environment in China remains supportive for us, and we're taking advantage to get longer tenor and cheaper facilities. In 3Q '19, we completed financing across 4 new projects and refinancing of 3 existing projects totaling RMB 1.4 billion.

We're considering a number of options for financing our Hong Kong projects, including a sale and leaseback of the redeveloped properties or a joint venture. We have had a number of approaches from existing and new partners and are keeping an open mind.

Turning to Slide 20. Our backlog consists of binding commitments from customers. It has increased to over 104,000 square meters, representing 76% of our currently utilized capacity.

It provides high visibility to our future growth. Our backlog is almost entirely made up of large orders from hyperscale customers. They're all high-quality counterparties and household names. 58% of the backlog or 60,000 square meters relates to data centers which are currently under construction. The remaining 42% or 44,000 square meters relates to data centers which are already in service. This part is moving in at the rate of about 10,000 square meters per quarter.

To finish on Slide 21. After 9 months, our revenue is tracking towards the top end of the revised guidance range, which we provided last quarter. For adjusted EBITDA, we're tracking above the top end of the revised guidance range. We're, therefore, once again raising the EBITDA guidance range to RMB 1.8 billion to RMB 1.82 billion. With regard to CapEx, we'll keep the original range unchanged.

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

[Operator]

[Operator Instructions] We have the first question from Jonathan Atkin from RBC Capital Markets.

[Jonathan Atkin, analyst]

I was wondering -- I see that the precommitment rate has been steadily increasing despite the fact that your business continues to scale at a higher rate, and I wondered what that says about the competitive environment. You mentioned deals are getting bigger, but any comments from your perspective about competitive supply in general?

And then second question I had relates to Shanghai. I think you said you did get some approval just today about downtown development, and how many square meters or megawatts or cabinets are we talking about in terms of the ability to develop in municipal Shanghai?

[William Huang, executive]

So Jon, asking the first question, this is William. I think from the competitive point -- perspective I think our resource inventory, let's say, result for -- helped for development. If compared with this market share, our percentage, I think, is very significant, more than our current revenue share. So that means in the future our supply is much higher number than our competitor. The second question is, Dan?

[Daniel Newman, executive]

About the recent allocation for our capacity in Shanghai.

[William Huang, executive]

Yes. We've got -- actually, we've gotten the approval for 50 -- 5,000 racks. It's, let's say -- let's calculate at 2.5 square meter per racks that means more than...

[Daniel Newman, executive]

13,000 square meters roughly.

[William Huang, executive]

Yes, roughly, right? So in Shanghai, this approval is quite diversified or a local player get some small piece of that. We're one of the largest one to get approval. So this is -- not can -- definitely cannot satisfy our customers' future demand profile. They want a larger scale, much more larger scale than what we get in the Tier 1 market. This is number one.

Number two, they want a campus type with high visibility for future expansion. So that's why we will continue to get back to edge-of-town site to make sure to satisfy our customers future demand. But what we can tell is our future -- our strategic customers' future demand looks like the number will be accelerated in the next few years. Yes, that's all.

[Jonathan Atkin, analyst]

And then maybe just lastly on the new hyperscale logo, the 9-megawatt order. Is that at a single location or is it across multiple metros?

[Daniel Newman, executive]

Yes, it's a single location, Jon.

[Operator]

We have the next question from the line of Colby Synesael from Cowen and Company.

[Colby Synesael, analyst]

Two questions, if I may. The first one, just given all the organic build that you're doing and intend to do as you go into 2020 plus what sounds like some interest in some bigger M&A to help satisfy the demand, just can you remind us what you're thinking in terms of potential equity raises or how you plan to finance these various projects? It would be good to get some color on that.

And then I guess, secondly, you noted that you're already at 80,000 square meters for 2019. Just initial thoughts on 2020 to the extent you can share as it relates to revenue, EBITDA, bookings, et cetera.

[Daniel Newman, executive]

Colby, I'll go first. Let me comment, first of all, on the kind of M&A environment. Because although we are very busy with a lot of organic builds, we're still very focused on strategic M&A opportunities. There aren't platforms out there for us to acquire. There aren't many GDSs. There are single sites. To date, we've done 7 acquisitions, 1 to close. Each acquisition has been 1 data center on a site. But there are some opportunities where there are several data centers on a site and maybe some expansion capacity. So that's what constitutes bigger opportunities.

The last 3.5 years we've done 7 acquisitions. So it's run rate of about 2 per annum. And that's been part of the 80,000 square meters net adds. It provided us mainly with the capacity to support the sales. So that's been part of that kind of base case. You can call it organic and semi-organic, but if we were to do what I've just referred to as those larger acquisitions, I mean, that's going to be additive. It's going to be on top of in addition to that.

To bring it back to your question about capital raise, we raised $600 million earlier this year in March. And if we leverage that 60-40 debt to equity, it means that we will have USD 1.5 billion of financial resources to invest. In RMB, that's RMB 10 billion. Our top end of our CapEx guidance range this year is RMB 5 billion. So you can say in a simple way that we raised enough equity capital earlier this year to support 2 years of investment at RMB 5 billion per annum, which corresponds to an 80,000 square meters net-add business plan.

I did note when we did that capital raise that it was not sufficient if we were growing at a faster rate and it was not sufficient if we were to do out-of-the-ordinary M&A.

So whilst neither of those is certain, I think William will make a comment about growing at a faster rate. Neither of those is certain, but it's clear that if we were to do something then we would need to consider financing, whether it would be on the capital market or whether it would be through one of our partnerships.

But it would be linked to a transaction or linked to demonstrated level of sales. William, do you want to comment on the possibility or potentiality how cheaper higher level of sales? Colby is asking for your early thoughts about next year.

[William Huang, executive]

Yes. It looks like -- frankly speaking, we are more confident maintaining 80,000 square meters. That's for sure, I think, no doubt about that. But a lot about -- during recent couple of months, we have talked to our customers a couple of times. It looks like their next few years plan is -- looks like will accelerate.

So their -- as I just have talked in a very -- early this year, the sentiment is not good. And now it's totally shifted. Everybody very, very positive. So a lot of the -- they start to execute their original plan. And even based on the 5G coming, they are -- sounds, looks like they will more aggressive. But we will see. We hope we can do more, right? But it's not the right timing to commit more.

[Colby Synesael, analyst]

Yes. I mean, it seems like your biggest issue is not the demand, it's simply finding the space and then ultimately financing it. And it sounds like other than Beijing, you still like in Shanghai and Shenzhen are looking for those bigger edge-of-city type developments. And it seems like to the extent you're able to get those, we could see greater than those 80,000 square meters in some of those outer years, does that sound right?

[Daniel Newman, executive]

It is right, Colby. Obviously, there's always going to be a lot of things going on which have not yet reached the stage where it can be disclosed. What we're showing, I think, for the first time in our earnings presentation is effectively the developable area, area held for future development. And very roughly, it corresponds to 3 years' sales growth at the kind of current run rate. But we would like to have considerably more than that. We'd like to have double. In fact, we have no upper limit in our minds.

The amount that we've had to invest to secure this resource is really quite small. Our budget for land bank in China this year was to RMB 500 million [ that's ] USD 100 million, and we have not spent all of that by any means. And it's very valuable. So we're going to keep on going. We are very well positioned in Shanghai. You said we still had a lot to do. The site that William referred to in Chang Sun we've been allocated several hundred megawatts of the power capacity. But once again, we're still looking to add more.

[Operator]

We have the next question from the line of Frank Louthan from Raymond James.

[Frank Louthan, analyst]

Great. Can you comment on the situation in Hong Kong, the unrest there, is that impacting your business? And any thoughts on how it might impact your ability to develop the new site? And then how many sites do you think that you will develop with the JV through the course of the next 12 months?

[Daniel Newman, executive]

Well, Frank is asking whether there's been any short-term impact in Hong Kong or maybe impact our view on Hong Kong?

[William Huang, executive]

Yes. I think we'll -- our logic is follow-up of our customers. That's our strategy to do the location expansion. So Hong Kong has become a very important part for all our installed base to expanding to international markets. That's always their first step, as I mentioned just now, I mean, they're -- a lot of our hyperscale customers, plus more than 200 financial institutions Mainland China based they have very, very clear demand in the next few years in Hong Kong.

So we got -- we -- our view is the certainty is given by the -- was given by our customers, not any situation. So we're very confident the demand is very, very strong in Hong Kong from our order installed base customers.

[Daniel Newman, executive]

Frank, the second part of your question I can't give a precise answer to because we're not far enough along for me need to be able to quantify how many new remote build-to-suit projects we'll take on. In regard to the customers who were developing these 7 projects for, definitely there will be more projects awarded by them. And then for now we just identified a couple of other customers who could be interested in working with us in a similar way. I'd say from 7 today, let's take a 2-year view, it could be double or treble.

[Operator]

We have the next question from the line of Robert Gutman from Guggenheim Partners.

[Robert Gutman, analyst]

Just a couple of things. Just a little bit about changes in the expansion table. It looks like Beijing was pushed out to next year from the second half of this year.

I was just wondering the color on that. Also, the move-in piece that you mentioned -- you said it's looking like about 10,000 a quarter. I just want to verify. That looks like a little acceleration from the past couple of quarters. Just want to verify that. And just more broadly, there's a lot of talk about on a macroeconomic level about China's GDP growth. And I was wondering if you could just tailor that a little more specifically to the digital economy in China rather than expectations for the overall economy, whether that's accelerating compared to the rest of the economy.

[Daniel Newman, executive]

Yes, Rob. So the first question, yes, you picked up sometimes we revise the ready-for-service period for particular projects. Remarkably, I mean, we're up to like 45 projects now. I've been here from number one, and almost all are completed on time and within budget. But inevitably, there's going to be sometimes a delay a few months or acceleration of a few months. Normally, it's got nothing to do with us. It's out of our control.

It may be to do with when power infrastructure is installed or activated. So that's all. There's really nothing to make a fuss about. The move-in pace -- yes, the move-in pace has -- yes, this year has been slightly slower than last year. But last year was slightly faster than normal. I know given the macro that people are going to associate slightly slower with some slowdown in terms of our customers' business. But we have to be careful about how we analyze this because there's many factors that can affect the move-in rate.

It can be -- M&A can affect that statistic, how early customers commit, development time frame and also within the flexibility which our customer -- which our contracts give the customer whether they choose to deploy a little bit faster or a little bit slower.

When we review the contracts which are actually in delivery right now, and I pointed out there's like 44,000 square meters of commitments which relate to data centers already in service. So when we review where those contracts are at in terms of move-in relative to the minimum commitment in the contract, they're almost all far ahead of the minimum commitment. That indicates it's a healthy situation. There are some specific reasons sometimes why a particular customer may move in a little faster, a little slower, but nothing we can generalize. I can't generalize and say there was a slowdown or there was an acceleration.

Yes. The last question was about the macro situation.

[William Huang, executive]

Okay. I think everybody talk about China GDP it goes to 6%, although the 6% is still a very big number. But what I try to say recently, I just read a report, I mean, an analyst report that China new economy, that's meaning, say, the digital economy represents 15% -- 16% of the China GDP. And this growth rate is around 8.5% to 9%. That means new economy very clearly is already being a new engine or driver in China economy. So we're lucky we are in this space, not in the traditional space.

So I think this is good for us to get confidence to grow our business in the next few years.

[Operator]

We have the next question from the line of Gokul Hariharan from JPMorgan.

[Gokul Hariharan, analyst]

Great results. My first question is, I think you [ mentioned ] that the number of hyperscale labels gone up significantly over the last 2, 3 years. Now the top 2 customers are still roughly about 50% of area committed and occupy multiple data centers, probably about high-teens number of data centers each.

As we add a lot of these new labels, especially in the last couple of years, could we have a bit of a view 2 to 3 years out is that top 2 customer number of 50-plus percent area committed going to come down meaningfully when you think about the next 2, 3 years of area committed or revenues? That's my first question.

[Daniel Newman, executive]

Yes. Your observation is correct. The top 2 customers if you aggregate them and you look over several quarters you'll see that 2 to 3 years the absolute amount of new business that we have won from them has been very well sustained. So there's been no sense of any lessening from them, and we believe it will be sustained if not higher going forward.

In terms of the overall mix, we don't have any quotas. We don't set any limits, but we do target to add more, we call them, high-growth accounts. And the progress in that respect has far exceeded our own expectations.

Those high-growth accounts they may not be the kind of companies who place an order every quarter. They may place an order once every 12 months or once every 18 months. So if you look at the growth rates of their businesses, they are capable of doubling or trebling in size of their commitment with us.

I would just have to hazard a guess about what the top 2 would represent in 2 or 3 years' time. I'd say 40% to 50%, so it's not far below where it is now. Well, that's good. It means that we have a very solid underpinning for our business.

[Gokul Hariharan, analyst]

Understood. Second, could you talk a little bit about -- I think you mentioned setting up a separate team to look at the remote site projects. And as you mentioned, the 7 projects could go to 2x or 3x of that. Could you talk a little bit about how much resources this kind of projects take in the form of sourcing people, SG&A, et cetera? And given that now you have growth on both these tracks, do you feel that there is some degree of bottleneck from a resourcing perspective as we look at the next 12 to 18 months? And how do we think about smoothing that out?

[Daniel Newman, executive]

Yes. Gokul is asking how we execute in remote build-to-suit projects where -- how much resource it takes, whether we have the capacity to do that.

[William Huang, executive]

Yes, number one, I think, not every remote project we will pick up. I think we're quite picky, right? Number one, too few of our delivery capability because we're still focused on the Tier 1 market. We always say we're focused on our Tier 1 market. Number two, I think since the designs are very simple, remote project is standard and the operation effort is much less than the multi-tenant data center in Tier 1 market. So we invest a lot of the tools to support our operation. So I think it's from the delivery point of view, it's more simple than Tier 1 market. So we still believe we can take more project so far.

[Gokul Hariharan, analyst]

Okay, got it. If I could ask a very quick question, Dan. Dan, could you talk a little bit about what are you expecting on EBITDA margins in the next couple of quarters? We have seen a pretty strong increase in the last few quarters.

I think you talked about Q4 being in the same range given a lot of new capacity and new move-ins. But could you talk a little bit about are we going to be in the same range over the next 2, 3 quarters given that we have a lot of new capacity coming on?

[Daniel Newman, executive]

Yes, Gokul. I've been on the low side in terms of my own forecast for margin over this year, which is a pleasant surprise. Looking at next year, very roughly. I think we still realize operating leverage at the data center level, what we call the adjusted NOI margin, maybe 1 percentage point, that order of magnitude.

And then at the SG&A level, I think it would also -- could be about 1%. I mean it could be more, but we ask ourselves whether we are actually underspending on SG&A, whether that's a bad thing. But given the way the company has grown, we need to scale up and raise standards and so on.

And we are doing so. In terms of people, we're hiring and focused on product and R&D. So I think 1 percentage point on SG&A and 1 percentage point in the data center level will be 2 percentage points over the next year. This is just a very rough indication.

[Operator]

We have the next question from the line of Colin McCallum from Crédit Suisse.

[Colin McCallum, analyst]

Congrats on the strong numbers. I just had one question. You've alluded a couple of times earlier to power quarters and power commitments. And I just want to check, sometimes we hear market noises about limits on power constraining growth. And I just would be very surprised if GDS would commit to building a data center in an area where you didn't already have the full commitment to the power you would need in that data center, imagine it's an integral part of the design in that.

So could you just touch on this a little bit. Is this one of those things that the market talks about in the way that you manage your business, in reality it's not actually a constrained for your business? Or is it something that you just have to do the hard work of getting the arrangement with the relevant scale enterprises in advance before you sign up for the commitments and do the construction? Any color on that would be helpful.

[Daniel Newman, executive]

Yes. Colin, I'll go first. Finding the right kind of real estate, industrial property in downtown area or land for -- zone for industrial use edge of town which qualifies for data center and is in location which is going to work for our customers, that's difficult. But it's not as difficult as then getting sufficient power to be able to operate a data center, utilize the full plot ratio and so on. Then toward getting power, there's really 2 parts to it. One part is having an agreement with the power supplier, we'll call it the grid, for the supply of the power capacity. That is relatively straightforward, but there can be significant economic issues because we have to bear the cost of power infrastructure.

And the distance from the site to a substation or the number of available substations and so on can affect the economics of the project quite materially. The second part of, call it, obtaining power is the really critical and difficult part, which is obtaining approval from the government for the use of that power. You can call it carbon quota or some other some other terminology. In the downtown areas of Beijing, Shenzhen, Shanghai, it has become very restrictive. Projects are still being approved.

We've had some success. William mentioned just recently we received an allocation in downtown Shanghai, but we -- and now I think other data center service providers realize that in order to obtain power we needed to go outside -- further out, find locations where power is available, where the government is willing to allocate it. And that's why we put so much emphasis in today's presentation on the pipeline.

You can call this land with power or -- this developable capacity means it's land, real estate and power. That's what makes it very valuable.

William, do you want to add anything to it?

Do you want to add anything?

[William Huang, executive]

That's it. No, no.

[Daniel Newman, executive]

William is satisfied with my answer.

[Colin McCallum, analyst]

I'm satisfied as well. I mean -- the way you do things effectively you're saying only would become real pipeline land if you have both, right? And you're not going to put yourself in a situation where you buy land and construct $100 million project and not have power, right? It's just not something you're going to deal with.

[Daniel Newman, executive]

Actually, Colin, it's the other way around. When you -- most of the land -- the land -- most of the land is being purchased from the government. It starts with an agreement from the government to allocate the power. The last thing is actually the purchase of the land. I mean we maybe -- we chose our words a little carefully and perhaps no one would pick up the nuance. But we mentioned in Chang Sun that we've been allocated power capacity. We now have to go to the final step of actually purchasing the land. I mean that's a standard process, but the critical part was to obtain the power capacity.

[William Huang, executive]

So good -- I can add 1 comment. I mean we realize in the Tier 1 market -- downtown Tier 1 market it's very difficult to get a power quota. Even you get one, as I mentioned, it's not significant, cannot satisfy our customer. So that's why we introduced -- we evolved our resource strategy from the focus on the downtown city to the edge-of-town for city. So we are the first mover to develop this resource in the edge of town of the Tier 1 market.

So we will maintain this advantage compared with our competitors.

[Operator]

We have the next question from the line of Jonathan Atkin from RBC Capital Markets.

[Jonathan Atkin, analyst]

I had just a quick follow-up on contract renewals, Slide 33. I think that's a new slide for you. And given the percentage of commitment that's up for renewal over the next 2 years, I just wanted to get your assessment of the likelihood of this revenue renewing or whether there would be any kind of pricing adjustments?

[Daniel Newman, executive]

Jon, I included that page for the first time because investors often asked. And I think it shows that we have -- over the next 5 years, we have relatively a small part of our total contract portfolio which is coming up for renewal.

The denominator is our current area committed. We consider that is growing at such a high rate these percentages will actually be -- will be smaller as the denominator grows. I think -- a lot of these contract renewal is enterprise-related business where our turn rate, as I like to say, has been statistically insignificant. Within these numbers, there are a few contracts which relate to our large Internet and cloud customers, the business that we did at the end of 2015 or in early 2016. Those are not very large deployment, certainly not by today's standards. They were very big deals at the time. But now it's just going to be a so-so deals. But they're in data centers which are very centrally located, like in Shenzhen and Beijing. And I think that kind of facility is very scarce. I very much doubt that those large incentive cloud customers are going to pull back. But frankly, if they did, it would probably be an upside opportunity in terms of being able to release.

[William Huang, executive]

Yes. As we used to mention that all our Tier 1 market [ current ] our strategic customer they -- probably their on-ramp already in our data center. So it's quite a stickiness for our -- for all our customers. So we are confident that we do -- it will be not an issue.

[Operator]

As there are no further questions, I would like to turn the call back over to the company for closing remarks.

[Laura Chen, executive]

Thank you, 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. Thank you, all.

[Operator]

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