GDS Holdings Ltd

HKEX:9698

Earnings Call Transcript 2020-Q4

[Operator]

Hello, ladies and gentlemen, thank you for standing by for GDS Holdings Limited's Fourth Quarter and Full Year 2020 Earnings conference call. [Operator Instructions] Today's conference call is being recorded.

I'll 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 4Q and Full Year '20 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 safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks, 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 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 includes 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, executive]

Thank you, Laura. Hello, everyone. This is William. Thank you for joining us on today's call.

GDS has been on an extraordinary journey for the past 5 years. The data center market in China has grown beyond imagination. As digitalization took off, our growth trajectory has been unprecedented in the data center world. We have become the clear market leader, reaching a scale which is multiple times bigger than our closest competitors.

We have the best customer relationships. The most complete market presence, by far, the largest development pipeline, the strongest balance sheet, the lowest cost of capital and, most important of all, an unmatched reputation which reflects many years of consistent delivery and high operating standards.

As we look forward from today, we see wave after wave of incremental demand driven by new technologies such as 5G, AI, cloud and IoT, supported by highly favorable government policies. The market opportunities in front of us is inconceivable. While others are just waking up, we are moving rapidly ahead to reinforce our market position by innovating with products and business models, deepening our strategic customer relationships, adding substantially to our pipeline of scarce resources in Tier 1 markets, enhancing our platform by entering new markets in China and overseas, seizing opportunities to further consolidate the market and the groundbreaking green initiatives.

We have only just begun to reap the rewards of our past efforts. 2021 will mark our 20th anniversary for -- anniversary. For me personally, GDS is still at an early stage of development. And over the next few years, we will take the business to another level.

Despite the difficult operating environment last year, we made a tremendous progress over the past year across every aspect of our business and have met or exceeded our expectations.

First of all, we beat our sales target, adding over 136,000 square meters or 271 megawatts of new customer commitments. We expanded our data center capacity in line with sales, adding nearly 140,000 square meters in service and under construction. We added significantly to our development pipeline, ending the year with 480,000 square meters secured for future development.

We stepped up our M&A activities, closing 4 deals with over 50,000 square meters of capacity. We grew revenue by 39.2% and adjusted EBITDA by 47.0% year-over-year. Our adjusted EBITDA margin came out nearly 2.5 percentage points higher at 46.7%. We raised USD 2.4 billion of equity and successfully completed our Hong Kong IPO.

Turning to our sales achievement on Slide 6. At the beginning of the year, we targeted 80,000 square meter of organic net add plus 20,000 square meters from acquisitions pending closing. We overdelivered this by a big margin, achieving 108,000 square meters of organic net add, including 14,000 square meters from BOT projects and nearly 28,000 square meters from M&A.

Looking forward to 2021, we believe that the current level of organic booking is sustainable at around 90,000 square meter to 100,000 square meters of net add. Excluding BOT data centers, for the M&A part, we already have over 19,000 square meter net add in progress from the Beijing 15 acquisition, which is pending closing. And we aim to close more deals this year.

Turning to Slide 7. Every quarter, a handful of hyperscale orders account for a large part of our sales. These must-win deals are typically major deployments at our edge of town campuses. Hyperscale customers look to land and expand in key locations. For cloud service providers, these locations are often configured as discrete availability soon, which are critical to their IT architecture.

We are very strategic in targeting the first piece of business when customers deploy to a new area. We have succeeded many times in attracting hyperscale customers to establish an initial presence on our sites.

It required close collaboration with customers, the right resource, wherever they are going, and an undoubted reputation for delivery and operations. As a result of winning the first deployment, we have high visibility for a substantial amount of new business in 2021 and beyond as customers deploy additional face on our sites.

Turning to Slide 8. While we maintain great relationships with our top customers, our customer base now extended to almost all of the high-growth hyperscale names in China. We had exciting breakthrough last year, and we are working on more. The growth potential of some of our newer customers is extraordinary. We are highly focused on deepening these relationships, and there are significantly new business opportunities in the pipeline.

We have established a high level of trust with our customers. Provided we have the right resource, we have an edge in winning new business. In the eyes of our customers, GDS is not just an asset player but a total solution provider. We have built our platform to mirror our customers' requirements and market presence. This fundamentally differentiated us from other players.

Turning to the Slide 12. It is clear that customers must continue to locate their mission-critical latency sensitive data center in Tier 1 markets. Customers target less than 5 miles [ segments ] latency to core network nodes and it became [ AZ ], which imposed a defense limit of up to 100 kilometers around the urban center. It is also clear from years of government policy that the supply of suitable land and power in Tier 1 markets will remain limited not just in the urban areas but also in the surrounding edge of town locations.

We recognized this years ago and made huge efforts to secure sufficient resource to underpin our growth in all Tier 1 markets. As at the end of 2020, we have secured 480,000 square meters of debatable next 4 area, distributed across the key markets.

Most of it is land we have purchased from the local government, together with an allocation of power. This is a very valuable assets and another fact which sets GDS apart. We are not stopping at the current level. We have some big land deals in the pipeline and we'll further strengthen our position. Sustainability is an integral part of our resource strategy. The whole of China is grappling with this, and it is not an easy problem to solve.

We are working on a range of innovative solutions to source as much green power as we can. We are doing green power trading whenever possible and purchasing green certificates. We are also working on -- working with partners to evaluate co-investing in green power projects directly in the future. In 2020, over 20% of our total power consumption was green. In 2021, this ratio will go materially higher.

We aim to publish our first ESG report later this year. We will set up targets and the road map, which are realistic and achievable based on deep analysis. In addition to the existing Tier 1 markets, we believe that some new Tier 1 markets will emerge in a new -- in the next few years, particularly as a result of 5G and the need to push computing closer to the edge.

Chongqing is an example. It has been on our radar for a while. We bought land there early last year. We are now building our first data center on the site, backed up with an anchor order in 1Q '21. We are looking at another emerging Tier 1 market driven by customer demand. Over the next 5 years, we could enter 10 new markets in China.

Turning to the Slide 14. Over the past few years, an increasing number of data center projects have been started by independent developers whose objective is to sell. As a result, we see a window of opportunity to consolidate the market. We have M&A track record like no other, having done 10 big deals in the past 5 years.

In 2020, we stepped up our efforts. We previously announced the Shanghai 9 -- SH19 and BJ15 acquisitions. Today, we are announcing 2 new deals, both of them are data centers under construction but not yet committed by customers. They will give us highly marketable resource in their respective market. We are paying a relatively small premium to organic build cost. We have a variety of M&A opportunities on our radar screen some of which are sizable.

Turning to Slide 15. A foundation of our strategy is to be a total solution provider to the leading Chinese customers wherever they have critical mass of demand. Our customers see a lot of value in working with partners who understand their ecosystem. The same logic, which takes us to the new markets in China, leads us to look at expanding overseas.

Hong Kong is the start point all sites Mainland China. We currently have 2 major projects. The first of which is expected to come into service in 2022. We have recently secured another -- we recently secured anchor cost order from Hong Kong 1, which we will announce in the next few months.

The China cloud and the Internet giants have big ambitions in Southeast Asia, both directly through their core platforms and indirectly through their strategic investments.

Take Ali Cloud as an example. They already have 3 [ AZ ] in Singapore, 2 in Malaysia and 2 in Indonesia. Singapore is a well-established hub for Southeast Asia and a global Tier 1 data center market. In recent years, we believe that a large part of incremental demand in Singapore has come from our core market customers. For the time being, the Singapore government has suspended data center project approvals while new policies are developed around the land and power allocation. It is uncertain whether Singapore, given its resource constraints, will choose to open the door wide for extensive hyperscale deployment.

The adjacent markets in Malaysia and Indonesia are less directed than Singapore but have high growth potential. We believe that Chinese customer demand will be a critical success [ fact ] in these countries as well. We have established a picture of demand from our home market customers. They have repeatedly requested us to establish a presence.

We are actively pursuing opportunities with existing assets in Singapore as well as getting positions for when approvals restart. We have also entered into discussion with a number of potential local partners who have projects at various stages of development in Malaysia and Indonesia. We believe that expansion into Southeast Asia is strategically important and that we can capture several hundred megawatts of new business over the next 5 years.

We are moving ahead in a very carefree and a deliberate way. We aim to announce several new commitments in Southeast Asia over the quarters of this year.

To conclude my section. GDS is head and shoulders above everyone else in the China market. This is a matter of fact with what I told you today about the market opportunity in front of us, our strategic position -- positioning and our competitive advantages. We believe that the gap is only going to get bigger.

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

[Daniel Newman, executive]

Thank you, William. Starting on Slide 18, where we strip out the contribution from equipment sales and the effect of FX changes. In 4Q '20, our service revenue grew by 6.9%. Underlying adjusted gross profit grew by 7.5%, and underlying adjusted EBITDA grew by 6.2% quarter-on-quarter. Our underlying adjusted EBITDA margin was 46.8%.

Turning to Slide 19. Service revenue growth is driven mainly by delivery of the committed backlog and closing of acquisitions. Net additional area utilized during 4Q '20 was 16,461 square meters, consistent with the previous 2 quarters. The first quarter of each year is usually slower due to Chinese New Year. Nonetheless, we expect move in, in 1Q '21 to be only a couple thousand square meters, down on the prior quarter's level.

Given the timing of capacity increases, as shown on Slide 23, we are forecasting that move in over the course of 2021 will be heavily weighted to the second half. Monthly service revenue, MSR, declined 1.2% quarter-on-quarter in 4Q '20 to RMB 2,489 per square meter per month. As shown on the next slide, MSR for the whole of FY '20 was down 3.4% compared with FY '19. In FY '21, we expect a further low single-digit decline.

To some extent, MSR is a reflection of average selling prices. However, there are many other factors which affect MSR, including the customer mix, data center location, redundancy level, development costs and contract structure, for example, the move in flexibility and who pays for the power. Rather than talk about MSR on a stand-alone basis, I would prefer to focus on margins and returns.

Turning to Slide 21. Our underlying adjusted gross profit margin was 53.7% for 4Q '20 and the same number for the full year, a near 1 percentage point improvement versus FY '19. We calculate adjusted gross profit yield to enable investors to keep track of our returns in a simple way. It is a proxy for cash-on-cash returns. We divide adjusted gross profit for the year by the average gross amount invested excluding assets or land under construction or held for future development. Gross amount invested includes the goodwill for all of our acquisitions.

For FY '20 the adjusted gross profit yield was 13.3%, which compares with 13.6% for the previous year. This was achieved with an average utilization rate of 70.1%, not materially different from FY '19.

Our commitment rate for area in service is 94.3%. When utilization rates catch up to the commitment level, yields can climb to the high teens. As you can see, we have sustained returns across our portfolio.

Turning to Slide 22. Our adjusted EBITDA margin had a slight dip in 4Q '21 mainly due to one-off expenses related to Hong Kong IPO events. For the full year, adjusted EBITDA margin was up 2.5 percentage points. Very approximately, we estimate that 0.5 percentage point improvement was due to net positive impact on costs of COVID. For FY '21, we aim for about 1 percentage point of further margin expansion.

Turning to Slide 24. Our CapEx for FY '20 was RMB 9.4 billion, a little bit less than what we guided due to timing of CapEx payments. RMB 9.4 billion includes RMB 6 billion of organic CapEx, RMB 1.5 billion of land and property purchases, and RMB 1.4 billion of acquisition consideration. In 4Q '20, we paid RMB 413 million of acquisition consideration, mainly related to the [ Beijing 9 ] and Shanghai 19 deals.

We expect our CapEx for FY '21 to be around RMB 12 billion, including an estimated RMB 3.7 billion of consideration for the Beijing 15 acquisition and the 2 acquisitions announced today, assuming that they all close this year.

With respect to CapEx guidance, we can only include acquisitions to the extent that we have bottom up knowledge. However, it is quite possible that there could be more M&A deals this year which are not reflected in our guidance.

Part of the CapEx in FY '20 and FY '21 relates to organic projects which we built to suit for customers under build-operate-transfer or BOT contracts. There are different financial approaches to undertaking these projects.

Previously, we sought to minimize our equity investment and maximize management fees. Now our preference is to invest more of our own capital but to leverage it with lower cost debt. This approach gives us a reasonable risk-adjusted return on equity. We, therefore, decided to keep on our balance sheet 2 BOT projects, which we began constructing in 3Q '20. Accordingly, we made some minor revisions to include these projects in our core KPIs, starting from 3Q '20.

We still have a further 9 BOT projects, which we may partner with GIC but retaining a higher percentage of equity ownership. We will update you about these 9 projects in the next 1 or 2 quarters.

Looking at our financing position on Slide 25. We had RMB 16.3 billion of cash on our balance sheet, and our net debt-to-EBITDA ratio is 2.2x. Given our ongoing levels of organic CapEx and assuming the Beijing 15 acquisition closes shortly, this ratio will go back up to 4 to 5x over the next few quarters.

Turning to Slide 26. During FY '20, we completed debt financings with a total facility amount of RMB 16 billion, equivalent to USD 2.4 billion, including both new project financing and refinancing of existing facilities. We made significant progress, increasing the tenor of our facilities and lowering the interest rate margin. This is best illustrated by comparing the terms for 4 facilities, which we refinanced in FY '20 versus the original terms. The new facilities have tenors of 8 to 15 years compared with 5 to 7 years for the previous facilities.

Similarly, the new facilities have interest margins of minus 15 to plus 50 basis points compared with plus 120 to plus 270 basis points for the previous facilities. These improvements reflect the strength and track record of GDS as well as increased appetite for data center exposure from the banking sector.

In FY '21, we anticipate doing about RMB 15 billion, equivalent to USD 2.3 billion of debt financing, including an aggressive refinancing plan. Refi involves some onetime costs, which will impact our effective interest rate in the first 2 or 3 quarters of this year. We should then see a drop.

Most of our renminbi denominated debt is floating rate, priced relative to the over 5-year loan prime rate or LPR. This reference rate currently stands at 4.65%. It is very stable. In fact, it has hardly changed in the past 5 years. What tends to happen when there was a tightening in the credit markets in China is that banks prioritize lending to favored areas, of which new infrastructure such as data centers, is definitely one. We're, therefore, confident of achieving all of our debt financing goals this year.

Finishing on Slide 28 with our guidance. For the full year of 2021, we expect total revenues to be between RMB 7.7 billion and RMB 8 billion, implying a year-on-year increase of between approximately 34.2% to 39.4% and adjusted EBITDA to be between RMB 3.66 billion to RMB 3.8 billion, implying a year-on-year increase of between approximately 36.5% to 41.8%. In addition, we expect FY '21 CapEx to be around RMB 12 billion.

We'd now like to open the call to questions. Operator?

[Operator]

[Operator Instructions] Our first question comes from Yang Liu at Morgan Stanley.

[Yang Liu, analyst]

I have one question on the competition. Could management update us in terms of the competitive dynamic in China market? Do you feel that the competition is getting more intensified compared with 3 or 4 months ago? Do we see pricing return pressure? Or how does GDS do to defend the wallet share in our key customers when the peers are chasing them aggressively?

[William Huang, executive]

Okay. First of all, I think the answer is, in general, I think that nothing changed. In terms of -- compared with the last couple of years, we didn't see GDS position in the market will be changed. So our position is very solid in terms of our platform. We are the only platform player in the market still. There is no platform player in the market. As we mentioned in the last couple of the earnings call, this is not a change.

And the competitor all the regional players or project player. So platform is very valuable for our key customers, this is number one. Number two, I think the -- our position in our customer is very different than all the follower. Our position is very solid. And in our customers' eyes, GDS is very, very reliable platform. So this will empower their business in the past even in the future. We are the only reliable platform in our key customer eyes.

So what I can see here is, of course, a lot of the -- because the market is booming, a lot of the new players in the market, even a lot of the data center -- established data center player. The competition between them looks like a more -- stronger than before, but not reflected to us. So in terms of the price and return, I would like to say the price is -- it's very difficult to talk about the price as we mentioned last couple of times.

It's -- we are pursuing a pricing return. I would like to say in our future pricing return, we will maintain what we talked about before. So in general, will not impact our pricing return.

[Yang Liu, analyst]

If I may have another question. Saw that we have a new financial metric, underlying adjusted GP. Should I assume that it is almost the same with NOI we have been using for past years.

[Daniel Newman, executive]

Yes. The short answer is it is exactly the same. It is a different name. And maybe it's a little bit simpler because gross profit is a standard accounting line item and adjusted gross profit just needs to be reconciled to gross profit. So presentationally, I think it's a little simpler, but the number itself is exactly the same, yes.

[Operator]

Our next question comes from Jonathan Atkin at RBC Capital Markets.

[Jonathan Atkin, analyst]

So I was interested in the slide that talks about your largest orders in Q4. And 2 of those contracts commenced already essentially. So that was a very fast turnaround between contract signing and contract commencement. And then the other 2 are fairly far out, they appear to be build-to-suits. But can you talk a little bit about the nature of the customer demand that you're seeing that similarly balanced between what appear to be immediate needs and then needs that are kind of [ sprout ].

My second question relates to CapEx. And I wondered if there's any trend that you're seeing in your business around the build cost, the construction cost per megawatt of IT capacity. Has that trended differently recently? Or is there any chance that, that could decline over time?

[Daniel Newman, executive]

Yes, Jon, I'll answer the first question. We highlighted 4 hyperscale deals. The first one, we acquired a data center in Shanghai, is one of those projects that was undertaken by independent developer. And after we acquired it, we were able to move forward with the customer contracts. So that's why there appears to be a short time lag. The second one, which also appears short is Beijing 7. But in this case, it's an existing data center, it was already, roughly speaking, half committed customers. And this was a -- not the first order for the data center. This was an order that took up most of the remaining capacity. So once again, that's why there seems to be a short -- relatively short time period because it was a order for an existing data center.

The other 2 hyperscale orders and land claim and we chose -- we have. So they both involve in one case, greenfield assets, in the other cases, conversion, but it's a -- it's an early pre commitment right at the very beginning of the project. Sorry, Jon, can you repeat the second question?

[Jonathan Atkin, analyst]

Decline in China. I wondered if you're seeing that, what the reasons might be? Or if you're not seeing that at all.

[Daniel Newman, executive]

I'm sorry, in my line, I couldn't hear it clearly.

[Jonathan Atkin, analyst]

Construction cost per megawatt? Yes. Construction cost per megawatt of IT capacity, has that trended differently?

[Daniel Newman, executive]

Yes. The -- sorry, I couldn't hear clearly. The trend in construction cost has been that we are able to keep achieving cost reductions through a variety of ways. Some of it is simply scale and procurement. Some of it is through supply chain management. Some of it is through the way in which we approach the construction in terms of the phasing, the modularity and off-site, prefab and so on. And some of it, frankly, is by setting up projects which had the most optimal cost due to location, due to the proximity of power infrastructure, due to ability to leverage existing substations and so on.

The gains year-on-year are small percentage gains, but they are continuous. And looking forward, we continue to see opportunities to continue this. So we expect actually for quite a few years to come to be able to lower our unit development cost by small increments year-on-year.

[Operator]

[Operator Instructions] Our next question comes from Colby Synesael at Cowen & Company.

[Michael Elias, analyst]

This is Michael on for Colby. Two questions, if I may. First, it appears you restated your area under construction and a few other KPIs in the third quarter to include the BOT data centers. Just to be clear, this is because you intend to retain 100% ownership of those assets. And if so, what drove the change versus your prior view? And then my second question is, based on the conversations you're having in the markets outside of China to which you intend to expand, which market would you expect to have a footprint in first?

And what would you consider to be a reasonable time line for having a data center up and running there?

[Daniel Newman, executive]

Okay. Mike, on the first part of your question, we did previously disclose the existence of these projects. We had a category we called managed BTS data centers. In that category, we group them for projects relating to customer 1, projects relating to customer 2, projects relating to customer 3. There was 1 project relating to customer 2 and 1 project relating to customer 3. So they were just single data centers on a site.

And we decided because of the situation that it would be more optimal for us to undertake those ourselves in the usual way. And therefore, we moved them from the category of what we call managed BTS data centers and then include them in our KPIs, just as we would with any other self-developed data center, but we do identify in the detailed breakdown in the kind of appendix to our presentation which are the BOT projects so that it's clear for all to see.

More generally, as regards to these BOT projects, it is becoming quite popular or we see more of the large cloud and Internet companies in China experimenting with this approach for development on their campuses in remote areas. It's a situation where they clearly have the option to self-build, right? Because typically, it's their campus, and there's no barrier in terms of land and power, but they still see advantage in outsourcing, but the terms of outsourcing are quite different. But from our perspective, it's not the core strategic focus, but it is adjacent part of our business.

And I think we will be flexible about how we approach it. In the past, we have done some on balance sheet, and we put about 80% leverage on the projects and the return on equity to us was quite acceptable. And I think going forward, we will do some that way. We'll do some where we have a majority, and maybe we'll do some where we have a minority or even just purely a management fee.

I think the market will call for a wider variety of business models. And certainly, with regards to these, call them, projects outside of core markets, we will be -- adopt a variety of different approaches.

William, do you want to answer the second part? [indiscernible]

[William Huang, executive]

Yes. I think the overseas strategy, actually, I just mentioned the first point, start point is Hong Kong, right? We already developed in Hong Kong 2 project under development. So the next step is, obviously, Southeast Asia. In Southeast Asia, the top 3 countries in our radar screen is Singapore, Malaysia and Indonesia. This 3 market is, in our view, in the next 5 years, the demand from China will be a few hundred megawatts.

So we have tried to catch up this wave. But potentially, I think the Southeast Asia is a high potential market. We go to -- our current strategy is that we have to set up our presence there, but for the strategic reason. But if you look at the current Southeast Asia market, it very -- looks like very similar like 8 years and 10 years ago, the market in China. So we are willing to step in and build our data center position, our position there and to catch up the future high growth. This is our current goal. So we will -- maybe we'll open up -- maybe the first project will be in Singapore, maybe in Malaysia or Indonesia. So we will give you the clear answer in the near future.

[Operator]

Our next question comes from Tina Hou at Goldman Sachs.

[Tina Hou, analyst]

So yes, my question is also related to the Southeast Asia expansion strategy. Wondering what kind of differences in terms of revenue as well as return in these potential Southeast Asia projects? And how that may impact our P&L in the future? And when do you see the first project to start contributing revenue to our P&L as well?

[William Huang, executive]

I think it's early -- it's too early to talk about the revenue because what we -- in the next 5 years, I don't think it will impact a lot in our revenue or -- because our current order guidance or the development still -- we are still in China because China is a still big market. So as I just mentioned, Southeast Asia, in our view, is a strategic, but we not calculate any number in our P&L right now. I think maybe when the project is coming, we will talk about that.

[Operator]

Our next question comes from Gokul Hariharan at JPMorgan.

[Gokul Hariharan, analyst]

So could you talk a little bit about what are we seeing from national policy in China regarding energy efficiency, pollution control, et cetera, given some of the bigger commitments on climate change. Could you -- I know that GDS would be publishing the ESG report this year. But could we start talking a little bit about what are we seeing from a BOE perspective, especially for some of the newer and edge front projects and what GDS has been able to do along with customers on this front.

Second question is on M&A. Seems like M&A is now becoming a much bigger part of pipeline as evidenced by last year. If we think about the next 2 to 3 years, should we assume that M&A becomes probably much bigger part than even last year. Last year, I think it was about 20% of the total pipeline build. Should we think that M&A would be a much bigger part of the pipeline, if you think about the next 2 to 3 years?

[Daniel Newman, executive]

William, you want to address the question about government policy?

[William Huang, executive]

[indiscernible] I think the ESG is a very hot topic right now in Greater China, including Hong Kong or Mainland China. I think this is -- definitely is a trend. The government encourage the green power, right? And also we call it [indiscernible]...

[Laura Chen, executive]

Carbon neutral.

[William Huang, executive]

Carbon neutral, right? So GDS already start to prepare for this for about a couple of years. So as I just mentioned, 20% of our data center really green, right, green energy. So we will -- government policy -- from the policy point of view, I think, in general, still under development right now. We didn't see any official enforcement the policy right now. But of course, the immediate impact is as I mentioned in the coming quarter in the Tier 1 market, especially also in some time the Tier 1 market will be getting -- it's easy to see if it will continue more tight in the future. This is what we can see, what's the impact, yes.

[Gokul Hariharan, analyst]

Also a question about M&A. I mean the main driver of our business for the foreseeable future is going to be organic development in Tier 1 markets. But having said that, I mean, we clearly see an opportunity right now in the next few years to consolidate the market. There's been a lot of new entrants, a lot of development by independent developers. And that's what creates the pipeline and the opportunity to consolidate. We believe that we have significant competitive advantage in terms of M&A, in terms of the capability and experience of our team, the methodology that we developed, the deals we've done since 2016 and our financing capacity, the ability to conduct technical due diligence. And we find that sellers, when you engage with sellers, always top of their mind is if they engage with a potential buyer, they want to know, is that buyer going to get to the finishing line, right?

And I think buyers -- sorry, sellers have a lot of confidence when they engage with GDS because our track record -- people asked about data center M&A in China, but I think most of it is being done by us. I'm not aware of very many M&A deals are being done by others. So we are the major force in data center M&A in China.

Question about how much of this could there be. And frankly, we don't have a quota. We don't look at it like that. There's really 2 different types of deals, one type, which I call kind of flow deal. There's the kind of 5,000 to 10,000 square meter data center were up typically that kind of perhaps single data center on a site.

It could be purely capacity like the 2 deals we announced today Shenzhen 8 and Tianjin 1 or it could be capacity with some customer commitment, either there or coming with our acquisition, like in the case of Shanghai 19. There's a -- say, there's a steady pipeline of those kind of deals. And the acquisition multiples have not increased. We can still do these deals paying a relatively small premium to organic cost.

So we look at -- we count in terms of our metrics based on when deals close. So we do 2 of those, it comes to maybe 15,000 square meters. We did 3, it comes to something over 20,000 square meters. The other kind of deal, which is harder to predict is a more sizable one. Let's say, 20,000 square meters and upwards. We've done 2 or 3 depending on how you categorize.

There was the Beijing 10,11,12 deal, it was 20,000 square meters. There's a Beijing 15 deal, 20,000 square meters. There's the if you call it M&A, there's the deal where we're partnering with CITIC, which, by the way, is now upgraded to 28,000 square meters. These opportunities are scarce and hard to predict when they're going to come on to the market. Yes, we -- if they are at a more advanced stage, have customer commitments, then there's likely to be more competition for those kind of opportunities. And that's where multiples have probably gone up but still, I think, reasonable and justifiable.

We have some opportunities like that in our pipeline, and it can be quite a big swing factor if they crystallize. But I don't want to set any expectation on that. But that's where they could -- that could make quite a big difference. That's where we could go from having 20,000 or 30,000 square meters of acquisition that add a year to having something quite a bit more.

[Operator]

Our next question comes from Rob Palmisano at Raymond James.

[Robert Palmisano, analyst]

It's Rob on for Frank. I just wanted to follow up. You sort of spoke to this earlier. Can you talk about likely sources of capital for next year? And also, can you speak to your strategic relationship with CyrusOne going forward after they just recently monetized their investment in you guys?

[Daniel Newman, executive]

Yes, Rob, we always try to be -- we have been fully financed, fully capitalized for our business plan. I think we're quite open about sharing what our business plan is. So I think based on the comments William made about the expected level of organic net add, 90,000 to 100,000 square meters. In fact, we've got 120,000 square meter data center acquisition already in the pipeline and potentially closing shortly and hopefully, other acquisitions that will close this year. I mean that's the business plan, which I think everyone can see. And we're well capitalized for that, at least for the next couple of years.

Look, we haven't factored in regionalization. We haven't factored in M&A beyond the flow deals as I just described them. We haven't factored in a higher level of organic growth. And to some degree, we haven't factored in potentially bringing forward a CapEx if we see opportunities to acquire land or buildings, which are kind of going to be opportunities that are kind of onetime opportunities that you have to grab when they're there, otherwise, they've gone forever.

So if any of that materializes, it's upside. It's upside to our business base case, and I believe it will be positive for our shareholders. So the need for capital raise is it should be seen as something -- it will be because of greater success.

William, do you want to comment about the relationship with CyrusOne?

[William Huang, executive]

Okay. I think the -- in terms of the sales cooperation, we still maintain the sales cooperation relationship because historically, they referred some deal, and we follow the deal and they help us cut a cup of deal. But since now Chinese customer go to U.S., it's a slowdown. So they get a limited benefit from us.

But I think in a way our relationship is still there. But today's current -- our international team work very closely with a different partner and to get -- for example, last year, we got a lot of the deal from U.S., U.S.-based customer, let's say, in China so independently, so we are not relying them, of course. I think -- but in some way, we work together with some deals still, right?

[Operator]

Our next question comes from James Wang at UBS.

[James Wang, analyst]

This is James Wang from UBS. I've just got 2 questions. First one is the follow-up on the ESG issue. So I'm just wondering, since the Chinese government has announced the carbon neutrality goal, whether your conversations with your largest cloud customers have changed? And related to that, out of your current land held for development, future development, how much of that is renewable energy and whether you'll be able to increase the percentage of renewable energy usage for your pipeline of projects? That's the first question.

And the second question is on you expanding into, I mentioned 10 different regions in China. If I remember, for example, I also saw that you've recently got into Tianjin and Chongqing. And if I remember correctly, in the past, for example, in the West, the utilization rate increase has been rather slow. So I'm just wondering what you're seeing in terms of demand in these new regions, whether it's -- just where the situation has changed versus the past?

[William Huang, executive]

Dan, answer this first question?

[Daniel Newman, executive]

Yes. Sorry, I'm a different place to William. I can't hear everything clearly. But James, what I heard was you asking about the -- how it helps you to -- what proportion of the power goes with that?

[James Wang, analyst]

Yes, so I'm asking about -- yes, sorry. So for the -- on the ESG front, so conversations with your largest cloud customers whether these changed, whether they're taking a more focus on renewable energy usage? And also on your land held for future development, how much of it is renewable energy and whether that percentage could increase?

[Daniel Newman, executive]

Yes. Yes. Sure. Well, I mean, I think the first part of the question is, everyone in China is -- take more notice, start from the central government downwards, right? And our largest customers look to us and expect us to help them solve the problem, the challenge of how to reduce their carbon footprint. Probably the biggest component of it is where does the power come from? Meaning, what is the -- what fuel is used in the power generation. It doesn't necessarily go with individual projects. So for example, in a region like, within Shanghai, for example, we can purchase green power through the power trading market.

That's one of the ways in which we reach the level of green power that we mentioned, over 20% of our total consumption. So that's not location specific. On the other hand, there are some locations where, specifically, there is green power because, for example, the location may be on the same grid as where there is a large amount of wind power generation, even though there could be quite a few hundred kilometers apart. It could just be that they are on the same power grid.

So we will come out with targets. I think rather than talk specifically about which project has what? I think the way to look at it is in the aggregate. We will have to be innovative and take a number of different approaches, which we're working on all now at the same time. And whatever targets we set will be very serious ones, not -- it's not -- we take this very seriously. It's absolutely critical to our business. William do you want to answer the second part of James question?

[William Huang, executive]

Yes. Yes. Sure. I think, first of all, I think we are -- in China, the Tier 1 market is very obviously, Shanghai, Beijing, Shenzhen, Hangzhou, right? And the western side, if you look at like last 3 years, actually, the growth -- the data center demand in last in Chengdu and Chongqing. In last 3 years, grows very fast. So this is the trend.

So given the current utilization, what we can tell is the growth trend is very obvious. So we are very confident to increase the utilization in our current data center in western parts of China.

But another in our radar screen, there's another 10 cities like Chongqing, right? We are -- we pay more attention on that. This is a new trend.

In the last couple of years, what we can tell is a lot of our customer, current customer, cloud player and a lot of the Internet giants, they start to deploy their server in this city.

Looks -- we are very confident this 3 -- 10 new markets will drive another growth in the future. So I think the -- as I mentioned, China is -- 5G in China is very advanced than in other country. So 5G, what's the impact is when the 5G completed deployment, it will produce more data from their own city because those cities all economic center in all the provinces. And the population is most of them is around more than 8 million or even the 10 million, right? So I think is a potential market, now they just a start. So we are -- we keep them like a new emerging market, right? So -- but in order to make it investment more efficiency, we will -- we always will follow our customer demand to get into this market. Yes, this is our view.

[Operator]

Ladies and gentlemen, due to time constraints, we have no further time for questions. I will hand over to GDS for closing remarks.

[Laura Chen, executive]

Thanks, everyone, 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. Thanks, all. Bye, next time.

[Operator]

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