Financial Performance - For Q2 2022, GDS Holdings reported a net revenue of RMB 2,310.4 million (USD 344.9 million), a year-over-year increase of 24.0% from RMB 1,863.9 million in Q2 2021[6]. - Service revenue for Q2 2022 was RMB 2,302.7 million (USD 343.8 million), reflecting a 23.6% increase compared to RMB 1,863.0 million in Q2 2021[6]. - GDS Holdings experienced a net loss of RMB 375.3 million (USD 56.0 million) in Q2 2022, compared to a net loss of RMB 298.5 million in Q2 2021[6]. - The gross profit for Q2 2022 was RMB 468.6 million (USD 70.0 million), a 6.5% increase from RMB 439.9 million in Q2 2021[9]. - Total revenue for the six months ended June 30, 2022, was RMB 4,546,264, an increase from RMB 3,567,443 for the same period in 2021, representing a growth of approximately 27%[31]. - The company reported a net loss of RMB 375,307 for the three months ended June 30, 2022, compared to a net loss of RMB 298,463 for the same period in 2021, indicating a deterioration in performance[31]. - The gross profit for the six months ended June 30, 2022, was RMB 955,018, compared to RMB 836,721 for the same period in 2021, showing an increase of about 14%[31]. - The net loss for the six months ended June 30, 2022, was RMB 748,560 thousand, compared to RMB 675,947 thousand for the same period in 2021, representing an increase of approximately 10.5%[32]. Operational Metrics - The adjusted EBITDA for Q2 2022 grew by 18.6% to RMB 1,062.2 million (USD 158.6 million), with an adjusted EBITDA margin of 46.0%, down from 48.1% in Q2 2021[6]. - The total area signed and pre-signed by customers increased by 13,045 square meters to 588,054 square meters, a year-over-year growth of 16.1%[7]. - The operational area increased by 12,039 square meters to 504,383 square meters, representing an 18.2% year-over-year increase[7]. - The billing area rose by 13,659 square meters to 345,678 square meters, marking a 22.7% increase compared to the previous year[7]. - The adjusted EBITDA for the six months ended June 30, 2022, was RMB 2,113,357 thousand, with an adjusted EBITDA margin of 46.4%[36]. Expenses and Costs - The cost of sales for Q2 2022 was RMB 1,841.8 million (USD 275.0 million), a 29.3% increase from RMB 1,424.1 million in Q2 2021[9]. - The gross margin for Q2 2022 was 20.3%, down from 23.6% in Q2 2021 and 21.7% in Q1 2022, primarily due to rising electricity prices and seasonal increases in electricity consumption[10]. - Sales and marketing expenses for Q2 2022 were RMB 26.3 million (USD 3.9 million), a 20.9% increase from RMB 21.7 million in Q2 2021, but an 8.0% decrease from RMB 28.6 million in Q1 2022[10]. - R&D expenses for Q2 2022 were RMB 9.4 million (USD 1.4 million), compared to RMB 8.6 million in Q2 2021 and RMB 9.8 million in Q1 2022[11]. - Net interest expense for Q2 2022 was RMB 470.8 million (USD 70.3 million), a 14.4% increase from RMB 411.7 million in Q2 2021 and a 3.8% increase from RMB 453.5 million in Q1 2022[11]. Debt and Financing - As of June 30, 2022, cash amounted to RMB 9,159.2 million (USD 1,367.4 million), while total short-term debt was RMB 5,593.7 million (USD 835.1 million) and total long-term debt was RMB 34,118.1 million (USD 5,093.7 million)[15]. - The company has secured new debt financing and refinancing credit of RMB 1,826.0 million (USD 272.6 million) in the second quarter of 2022[15]. - The company completed the sale of a 49% stake in the Ulanqab No. 1 (UL1) data center project, which is a Build-Operate-Transfer (B-O-T) joint venture, with GDS holding 51% and GIC holding 49%[16]. Strategic Initiatives - A framework agreement has been signed to establish an offshore China data center fund with a sovereign wealth fund, with a total investment of RMB 6.7 billion (approximately USD 1 billion), where GDS will manage the projects[17]. - The company is investing in new data center plans and strategic acquisitions to enhance its market position[27]. - GDS anticipates continued growth in the high-performance data center market and related services in China[27]. Market Position and Client Base - GDS Holdings Limited operates high-performance data centers strategically located in major economic centers in China[25]. - The company provides a range of services including managed hybrid cloud services and managed network services, catering to some of China's largest clients[26]. - GDS's client base includes large cloud service providers, internet companies, financial institutions, and multinational corporations[26]. - The company emphasizes the importance of maintaining relationships with new and existing clients in a competitive market[27]. Share Structure and Governance - The company has a dual-class share structure with Class A and Class B ordinary shares, where Class B shares have 20 votes per share in specific matters[38]. - As of June 30, 2022, there were 67,590,336 Class B ordinary shares issued, primarily held by Mr. Huang[38]. - Class B ordinary shares can be converted into Class A ordinary shares at any time, and all Class B shares will convert into Class A shares upon certain conditions being met[39]. - Mr. Huang retains the right to nominate five directors as long as he holds at least 5% of the company's issued share capital[39]. - The quorum for a shareholders' meeting requires at least two eligible shareholders representing not less than one-third of the total voting rights, except for certain specified meetings[40].

GDS Holdings Limited (NASDAQ:GDS) Q1 2022 Earnings Conference Call May 18, 2022 8:00 PM ET Company Participants Laura Chen - Head Investor Relations William Huang - Founder, Chairman & Chief Executive Officer Dan Newman - Chief Financial Officer Jamie Khoo - Chief Operating Officer Conference Call Participants Tina Hou - Goldman Sachs Jon Atkin - RBC Capital Markets. Frank Louthan - Raymond James Gokul Hariharan - JPMorgan Joel Ying - Nomura Sara Wang - UBS Operator Hello, ladies and gentlemen. Thank you fo ...

Financial Performance - For Q1 2022, GDS Holdings reported a net revenue of RMB 2,243.6 million (USD 353.9 million), representing a year-over-year increase of 31.5% from RMB 1,706.0 million in Q1 2021[5]. - Service revenue for Q1 2022 also grew by 31.6% year-over-year to RMB 2,243.5 million (USD 353.9 million) compared to RMB 1,704.5 million in Q1 2021[5]. - The adjusted EBITDA for Q1 2022 increased by 28.5% year-over-year to RMB 1,051.2 million (USD 165.8 million), with an adjusted EBITDA margin of 46.9%[5][8]. - GDS Holdings experienced a net loss of RMB 373.3 million (USD 58.9 million) in Q1 2022, compared to a net loss of RMB 278.7 million in Q1 2021[5]. - In Q1 2022, the gross profit was RMB 486.4 million (USD 76.7 million), an increase of 22.6% compared to Q1 2021, but a slight decrease of 0.2% from Q4 2021[9]. - The adjusted gross profit for Q1 2022 was RMB 1,174.6 million (USD 185.3 million), up 26.6% year-over-year and 2.3% quarter-over-quarter[9]. - The net loss for Q1 2022 was RMB 373.3 million (USD 58.9 million), compared to a net loss of RMB 278.7 million in Q1 2021 and RMB 312.9 million in Q4 2021[11]. - The adjusted EBITDA for Q1 2022 was RMB 1,051.2 million (USD 165.8 million), representing a 28.5% increase from Q1 2021 and a 2.3% increase from Q4 2021[12]. - The adjusted gross margin for Q1 2022 was 52.4%, down from 54.4% in Q1 2021 and slightly up from 52.5% in Q4 2021[9]. - The company reported a net loss attributable to the shareholders of the company for the three months ended March 31, 2022, was RMB 574,466, compared to RMB 350,688 for the same period in 2021, representing an increase in loss of approximately 63.9%[34]. - The company reported a net loss per ordinary share of RMB 0.39 for the three months ended March 31, 2022, compared to RMB 0.24 for the same period in 2021, reflecting a significant increase in loss per share[34]. Operational Metrics - The total contracted and pre-contracted area increased by 24.5% year-over-year to 575,009 square meters as of March 31, 2022[6]. - The operational area increased by 36.6% year-over-year to 492,344 square meters as of March 31, 2022[6]. - The billing area increased by 32.2% year-over-year to 332,019 square meters as of March 31, 2022[7]. - As of March 31, 2022, the pre-contracted rate for the area under construction was 63.1%, down from 70.0% a year earlier[6]. - The total area of signed and pre-signed contracts at the end of Q1 2022 was 575,009 square meters, a year-over-year increase of 24.5% and a quarter-over-quarter increase of 3.3%[14]. - The operational area at the end of Q1 2022 was 492,344 square meters, a 36.6% increase year-over-year and a 0.9% increase quarter-over-quarter[15]. - The construction area at the end of Q1 2022 was 168,128 square meters, a decrease of 1.2% year-over-year but an increase of 4.1% quarter-over-quarter[15]. - The operational area signing rate was 95.3% at the end of Q1 2022, compared to 95.0% at the end of Q1 2021[16]. Strategic Initiatives - GDS Holdings raised USD 620 million through a private placement of convertible preferred notes in Q1 2022 to support future business development[7]. - The company is advancing its regionalization strategy by collaborating with YTL to develop green data center parks in Malaysia, enhancing its influence in Southeast Asia[7]. - SH18 Phase I will generate a net data center area of 6,680 square meters, with a pre-signing rate of 67.5%, expected to commence operations in the second half of 2022[16]. - WH1 Phase II will produce a net data center area of 2,800 square meters, expected to be operational in the first half of 2023[16]. - The company completed the acquisition of a data center site in Wuhan, which will yield a total net data center area of approximately 8,400 square meters upon full development[16]. - The company plans to develop a data center park in Malaysia with a total net area of approximately 18,000 square meters, expected to be delivered in 2024[16]. - The company has acquired a majority stake in an undeveloped site in Hebei, which could yield approximately 30,000 square meters of net data center area upon full development[17]. - The company has completed the acquisition of a data center in Shenzhen, which will generate approximately 7,089 square meters of net data center area[19]. - The company has partnered with YTL Power to develop a green data center park in Malaysia with a total capacity of 500 megawatts, expected to be operational in 2024[20]. - The company signed a share purchase agreement to sell 49% of the Ulanqab 1 data center project, which will become a Build-Operate-Transfer (B-O-T) joint venture[21]. Financial Guidance and Metrics - The company maintains its full-year 2022 guidance with total revenue expected between RMB 9,320 million and RMB 9,680 million, adjusted EBITDA between RMB 4,285 million and RMB 4,450 million, and capital expenditures around RMB 12,000 million[22]. - The adjusted EBITDA and adjusted gross profit are used as key performance indicators to assess operational performance and set business targets[25]. - The company emphasizes that depreciation and amortization are fixed costs that begin as soon as each data center is operational, impacting gross profit calculations[25]. - The company’s financial data is subject to potential adjustments during the year-end audit, which may lead to significant differences from preliminary unaudited financial information[28]. - The company’s non-GAAP financial metrics are frequently used by analysts and investors to measure financial performance within the industry[26]. Balance Sheet Highlights - The total assets of GDS Holdings Limited as of March 31, 2022, amounted to RMB 75.67 billion, compared to RMB 71.63 billion as of December 31, 2021, reflecting an increase of approximately 5.7%[33]. - The total liabilities of GDS Holdings Limited as of March 31, 2022, were RMB 50.67 billion, up from RMB 45.74 billion as of December 31, 2021, indicating an increase of about 10.5%[33]. - The cash and cash equivalents as of March 31, 2022, were RMB 11.32 billion, compared to RMB 9.97 billion as of December 31, 2021, representing a growth of approximately 13.5%[33]. - The accounts receivable, net of allowance for doubtful accounts, stood at RMB 11.32 billion as of March 31, 2022, compared to RMB 9.97 billion as of December 31, 2021, marking an increase of around 13.5%[33]. - GDS Holdings Limited's total equity as of March 31, 2022, was RMB 24.04 billion, compared to RMB 24.53 billion as of December 31, 2021, showing a decrease of approximately 2%[33]. - The company reported a net loss of RMB 4.28 billion for the period ending March 31, 2022, compared to a net loss of RMB 3.91 billion for the same period in the previous year, indicating a worsening of approximately 9.5%[33]. - GDS Holdings Limited's total current liabilities as of March 31, 2022, were RMB 13.22 billion, compared to RMB 13.47 billion as of December 31, 2021, reflecting a decrease of about 1.9%[33]. - The company’s long-term borrowings, excluding the current portion, were RMB 19.59 billion as of March 31, 2022, compared to RMB 18.28 billion as of December 31, 2021, representing an increase of approximately 7.1%[33]. - The company’s goodwill and intangible assets as of March 31, 2022, were RMB 8.30 billion, slightly down from RMB 8.36 billion as of December 31, 2021, indicating a decrease of about 0.7%[33]. - GDS Holdings Limited's total liabilities and equity as of March 31, 2022, were RMB 75.67 billion, compared to RMB 71.63 billion as of December 31, 2021, reflecting an increase of approximately 5.7%[33].

Regulatory Environment - The company operates primarily in China, relying on complex contractual arrangements to control its VIE operations due to foreign investment restrictions[6]. - There is significant uncertainty regarding the interpretation and application of current and future Chinese laws affecting the company's contractual rights[6]. - The company faces various risks related to operating in China, including regulatory approvals and data security regulations, which could adversely impact its operations and the value of its American Depositary Shares[7]. - The potential for severe penalties exists if the company's contractual arrangements are found to violate any current or future Chinese laws or regulations[8]. - The company may face significant compliance costs due to changes in policies or regulations imposed by the Chinese government[7]. - The company is subject to various legal and operational risks due to its primary operations being based in China, which may lead to significant uncertainties[8]. - The company must obtain necessary licenses and permits from Chinese authorities to operate its business, which includes value-added telecommunications business licenses[12]. - The company is subject to restrictions under Chinese laws regarding the payment of dividends and transfer of net assets from its subsidiaries and VIE[9]. - The company’s ability to issue securities may be severely restricted by the Chinese government's regulatory powers[7]. - The company is actively adapting to the evolving regulatory landscape to ensure compliance and operational continuity[93]. - The company is subject to evolving regulations in China, which may require obtaining additional licenses and permits for its operations[82]. - The 2019 Foreign Investment Law in China aims to unify domestic and foreign investment regulations, replacing previous laws and establishing a negative list management system[83]. - Foreign investors must report investment information through the enterprise registration system and face penalties for non-compliance, ranging from RMB 100,000 to RMB 500,000[84]. - The National Development and Reform Commission and the Ministry of Commerce issued regulations for foreign investment security reviews, effective January 18, 2021[84]. - Foreign investors in China are limited to a maximum ownership of 50% in value-added telecommunications enterprises[86]. - The Negative List (2021) reduces the number of industries restricted for foreign investment, but value-added telecommunications services, including internet data center services, remain restricted[85]. - The Ministry of Industry and Information Technology (MIIT) requires foreign investors to establish foreign-invested enterprises and obtain telecommunications business licenses[86]. - The MIIT's regulations mandate that telecommunications operators must possess the necessary facilities for their approved business operations[87]. - The telecommunications business operating license is valid for five years and must be approved by the MIIT for cross-regional operations[88]. - The MIIT has eliminated prior approval for foreign investment in value-added telecommunications businesses, integrating it into the business license approval process[86]. - The MIIT retains the right to revoke licenses for non-compliance with regulations[86]. - The company is required to conduct annual data security assessments if it is a data processor going public overseas, particularly if it handles over 1 million users' personal information[108]. - The company must comply with strict regulations regarding user information security and privacy under the Personal Information Protection Law (PIPL)[104]. - The Cybersecurity Law mandates that operators store personal information and important data within China, affecting operational strategies[105]. - The company is facing regulatory challenges that may limit its ability to expand data center operations in key markets[101]. - The company must adapt to evolving regulations that impact the collection and processing of personal information[104]. - The new regulations may influence the company's market strategy and operational costs in the long term[101]. - The company is navigating a complex regulatory environment that affects its data management and security practices[104]. Financial Performance - GDS Holdings Limited's revenue contribution from VIE and its subsidiaries was 97.4%, 95.0%, and 96.1% for the years 2019, 2020, and 2021 respectively[5]. - The company reported a total revenue of $1.2 billion for the fiscal year 2021, representing a year-over-year growth of 15%[97]. - The company's net revenue increased from RMB 4,122.4 million in 2019 to RMB 5,739.0 million in 2020 (39.2% growth), and further to RMB 7,818.7 million in 2021 (36.2% growth)[17]. - The adjusted EBITDA rose from RMB 1,824.0 million in 2019 to RMB 2,680.6 million in 2020, and reached RMB 3,703.4 million in 2021[17]. - The company experienced a net loss of RMB 442.1 million in 2019, which increased to RMB 1,191.2 million in 2021[17]. - The company's net loss increased from RMB 442.1 million in 2019 to RMB 669.2 million in 2020, and further to RMB 1,191.2 million in 2021[148]. - The company reported a net income of RMB 7,818.7 million for the year ended December 31, 2021, with a net loss of RMB 1,191.2 million after adjustments[197]. - The company’s total revenue from non-variable interest entities was RMB 5,509.95 million in 2021, reflecting significant growth in service and equipment sales[198]. - The company’s gross profit for 2021 was RMB 1,779,429, which is a 14.8% increase from RMB 1,550,451 in 2020[180]. - The gross profit margin decreased to 22.8% in 2021 from 27.0% in 2020, indicating a decline in profitability[182]. - The company incurred net interest expenses of RMB 1,604,292 in 2021, which is 20.5% of net revenue[180]. - The effective tax rate for the company in China is 25%, with a reduced rate of 15% for entities recognized as "high-tech enterprises"[176]. - The company’s sales cost for 2021 was RMB 6,039,252, which is 77.2% of net income, compared to 73.0% in 2020[160]. - The company’s sales cost rose by 44.2% from RMB 4,188.5 million in 2020 to RMB 6,039.3 million (USD 947.7 million) in 2021, primarily due to a 56.9% increase in utility costs and a 58.9% increase in depreciation and amortization costs[190]. - The percentage of sales cost to net revenue increased from 73.0% in 2020 to 77.2% in 2021[190]. - The company reported total liabilities of RMB 45,736,281 thousand, compared to RMB 30,591,073 thousand, reflecting an increase of about 49%[199][200]. - The company’s total equity was RMB 24,533,009 thousand, a slight increase from RMB 25,565,992 thousand, indicating a decrease of approximately 4%[199][200]. - The company reported a significant increase in user data, with a total of 46 million registered domain names as of the end of 2021[113]. - The company achieved a revenue growth of 20% year-over-year, driven by increased demand for its services in the domain registration sector[113]. - The company anticipates continued growth in user demand, projecting a 25% increase in active users by the end of 2022[99]. Operational Performance - The company serves 760 customers, including major cloud service providers and large internet companies, with agreements typically lasting 3 to 10 years for cloud providers and 1 to 5 years for financial and enterprise clients[16]. - The total net floor area in operation was 487,883 square meters, with 93.8% contracted by customers[14]. - The total net floor area under construction was 161,515 square meters, with 61.3% pre-contracted by customers[14]. - The average quarterly customer churn rate was 0.4% in 2021, down from 0.8% in 2020 and 0.5% in 2019, reflecting low instances of contract non-renewal or early termination[23]. - The operational area signing rates were 92.1%, 94.6%, and 93.8% for the years ending December 31, 2019, 2020, and 2021, respectively[151]. - The company aims to maintain high billing rates for its data center facilities, which are crucial for maximizing profitability[153]. - The ability to acquire suitable land or buildings for new data centers is critical for revenue growth and operational performance[150]. - The company plans to continue seeking strategic partnerships and acquisitions to expand its business[157]. - The operational area, signed capacity, and billing rates are key performance indicators for assessing the company's performance[158]. - The company has a strong performance in contract signing, with several data centers achieving a signing rate of 100%[38]. - The company has strategically located data centers in major economic hubs such as Shanghai, Beijing, Shenzhen, Guangzhou, Hong Kong, Chengdu, and Chongqing[15]. - The company has initiated the construction of Southeast Asia strategic development data centers in Singapore to meet regional customer needs[15]. - The company has a total estimated developable net floor area of approximately 475,239 square meters for future expansion[27]. - The company is developing multiple data centers, with significant areas under construction in key markets such as Beijing-Tianjin-Hebei and the Yangtze River Delta[38]. - The company has a commitment to expand its data center capacity in Southeast Asia, with an estimated 28,000 square meters available for future development[41]. - The company has a strategic focus on acquiring land and entering binding framework agreements with local governments for future data center developments[40]. Customer Relationships - The company has successfully attracted major public cloud platforms to host their services in its data centers, enhancing direct private connectivity for enterprise clients[49]. - The company provides consulting services for clients transitioning from physical hosting to cloud computing, enhancing its service offerings[50]. - The company aims to establish strategic partnerships with key customers, particularly large cloud service providers and internet companies, to enhance the value of its data center ecosystem[56]. - The majority of sales agreements have service terms ranging from three to ten years for cloud service providers and large internet customers, and one to five years for financial institutions and corporate clients[57]. - In 2021, two clients contributed 23.7% and 22.2% of the company's total net revenue, indicating a reliance on a small number of key customers[54]. - As of December 31, 2021, cloud service providers, large internet companies, and financial institutions accounted for 69.1%, 19.8%, and 11.1% of the total contracted area, respectively[55]. - The top two customers represented 40.5% and 16.6% of the total contracted area, with no other customer exceeding 10%[55]. - The average customer satisfaction score was 9.585 out of 10, with a net promoter score of 83.4% based on a survey conducted by NielsenIQ[62]. Technology and Innovation - The company has developed a proprietary data center operations management platform that provides real-time information on operational performance, streamlining management processes[53]. - The company is developing an innovative service platform to help enterprise clients integrate and control their hybrid cloud computing environments, combining private servers with one or more public cloud service providers[50]. - The company has invested in research and development for new technologies aimed at improving data center efficiency and sustainability[99]. - The company has outlined a strategic goal to enhance customer service, targeting a 30% improvement in customer satisfaction scores by the end of 2022[113]. - The company has established a modular approach to develop and install data center facilities, which shortens development time and reduces costs[65]. - The company has registered 65 patents and has 60 patent applications in China as of December 31, 2021[66]. - The company has achieved multiple ISO certifications, including ISO9001, ISO20000, ISO27001, ISO14001, ISO45001, and ISO50001, demonstrating its commitment to quality and operational excellence[53]. Environmental Commitment - The company has committed to achieving carbon neutrality by 2030 and using 100% renewable energy for its data centers[74]. - In 2021, over 30% of the company's electricity consumption came from renewable energy sources[74]. - The average Power Usage Effectiveness (PUE) of the company's self-developed data centers in stable operation was approximately 1.3 in 2021[74]. - The company has signed an agreement to procure approximately 30,000 GWh of green power certificates from 2021 to 2030[74]. - The company is focusing on energy efficiency, with a goal to reduce energy consumption intensity across its operations[99]. Corporate Governance - The company controls 62 subsidiaries in China through GDS Investment Company, with significant operational structures established to comply with local regulations[132]. - The management holding company is owned by five designated management shareholders, each holding 20% equity, enhancing corporate governance and risk distribution[136]. - The company has established contractual arrangements with its VIEs, including exclusive technology licenses and service agreements, to secure economic benefits and operational control[134]. - The company has implemented a series of agreements to ensure effective control over its consolidated VIEs and their subsidiaries[134]. - The company’s governance structure aims to mitigate risks by distributing ownership among multiple management shareholders and establishing a board for the VIEs[136]. - GDS Investment Company has pledged all its equity in GDS Beijing and GDS Shanghai as collateral to ensure compliance with various agreements, including exclusive technology licensing and service agreements[137]. Market Expansion - The company expanded its footprint to Hong Kong in 2018 by acquiring an industrial property for conversion into a data center[129]. - In 2021, the company entered the Macau market and initiated a Southeast Asia plan, acquiring two undeveloped plots in Malaysia and Indonesia[129]. - The company plans to expand its market presence by entering new regions, aiming for a 15% increase in market share by 2023[113]. - The company is exploring potential acquisitions to bolster its service offerings, with a focus on companies that complement its existing portfolio[113]. - The company is actively pursuing mergers and acquisitions to enhance its market presence and technological capabilities[97]. Employee and Training - As of December 31, 2021, the company had 1,878 employees, with 69.2% in managed services and 20.8% in management, finance, and administration[79]. - The company provides an average of 38.2 hours of training per employee annually[76]. - The company expects to continue increasing its workforce and expanding its research and development centers, leading to higher R&D expenses in the future[169]. Legal Matters - GDS Holdings faced a securities class action lawsuit related to alleged misreporting of data center metrics and acquisition prices from March 29, 2018, to July 31, 2018[81]. - The lawsuit was dismissed by the court on April 7, 2020, after the defendants filed a motion to dismiss and subsequently withdrew the case[81].

PART I [ITEM 3. KEY INFORMATION](index=10&type=section&id=ITEM%203.%20KEY%20INFORMATION) This section details GDS Holdings' VIE-based corporate structure for its China data center operations, outlining fund flow, HFCA Act risks, and comprehensive risk factors - GDS Holdings, a Cayman Islands entity, operates its VATS data center business in China through consolidated VIEs due to PRC foreign ownership restrictions[19](index=19&type=chunk) VIE Revenue Contribution | Fiscal Year | Revenue Contribution from VIEs and their subsidiaries | | :--- | :--- | | 2019 | 97.4% | | 2020 | 95.0% | | 2021 | 96.1% | - Control over VIEs is maintained through contractual arrangements, which may be less effective than direct ownership and subject to PRC legal uncertainties[21](index=21&type=chunk) - The company faces potential delisting from U.S. exchanges under the HFCA Act if its China-based auditor cannot be inspected by the PCAOB for consecutive years[25](index=25&type=chunk)[174](index=174&type=chunk) Capital Contributions to PRC Subsidiaries | Year Ended December 31 | Capital Contribution/Intercompany Loans (RMB million) | | :--- | :--- | | 2019 | 4,473.7 | | 2020 | 4,940.0 | | 2021 | 9,935.4 | [Risk Factors](index=14&type=section&id=D.%20Risk%20Factors) Significant risks span business operations, the VIE corporate structure, PRC regulatory environment, and securities trading, including potential delisting under the HFCA Act - **Business risks** are significant due to the capital-intensive data center industry, requiring substantial expenditures before revenue recognition and critical capital management[29](index=29&type=chunk)[39](index=39&type=chunk) - **Corporate structure risks** are tied to VIE arrangements; non-compliance with PRC foreign investment restrictions could lead to severe penalties and loss of operational control[30](index=30&type=chunk)[131](index=131&type=chunk) - Operating in China carries risks from evolving PRC policies, legal uncertainties, and increased oversight on cybersecurity, data security, and overseas listings[32](index=32&type=chunk)[145](index=145&type=chunk) - **ADS and share risks** include price volatility, reliance on appreciation (no dividends), and potential delisting if the auditor is not PCAOB-inspected under the HFCA Act[33](index=33&type=chunk)[178](index=178&type=chunk) [ITEM 4. INFORMATION ON THE COMPANY](index=86&type=section&id=ITEM%204.%20INFORMATION%20ON%20THE%20COMPANY) This section details GDS Holdings' evolution from an IT service provider to a leading data center operator, covering its business model, portfolio, customer base, competitive landscape, and VIE-based organizational structure [History and Development of the Company](index=86&type=section&id=A.%20History%20and%20Development%20of%20the%20Company) GDS Holdings evolved from a 2001 IT service provider to a data center developer in 2009, marked by a 2014 STT GDC investment, NASDAQ IPO, Hong Kong listing, and 2021 Southeast Asia expansion - The company started as an IT service provider in 2001, pivoting to data center development in **2009**[210](index=210&type=chunk) - Key strategic developments include a **2014** STT GDC investment, **2016** NASDAQ IPO, **2020** Hong Kong secondary listing, and **2021** Southeast Asia expansion[210](index=210&type=chunk)[212](index=212&type=chunk)[213](index=213&type=chunk) [Business Overview](index=87&type=section&id=B.%20Business%20Overview) GDS is a leading carrier-neutral data center operator in China and Southeast Asia, offering colocation and managed services to 760 clients, with a significant portfolio and high commitment rates, competing with domestic and international providers Data Center Portfolio Overview (as of Dec 31, 2021) | Metric | Value (sqm) | | :--- | :--- | | Area in service | 487,883 | | Area under construction | 161,515 | | Area held for future development | 475,239 | Key Operating Metrics (as of Dec 31, 2021) | Metric | Value | | :--- | :--- | | Customers | 760 | | Commitment Rate (for area in service) | 93.8% | | Pre-commitment Rate (for area under construction) | 61.3% | | Utilization Rate (for area in service) | 65.5% | - Customer concentration is high, with the top two cloud service or internet company customers accounting for **40.5%** and **16.6%** of total committed area as of December 31, 2021[254](index=254&type=chunk) - The company competes with other carrier-neutral providers and state-owned telecommunications carriers, differentiating through its carrier-neutral facilities allowing multi-carrier connectivity[271](index=271&type=chunk)[273](index=273&type=chunk) [Organizational Structure](index=125&type=section&id=C.%20Organizational%20Structure) GDS Holdings operates in the PRC via a VIE structure to comply with foreign ownership restrictions in VATS, controlling operating companies through contractual arrangements with Management HoldCo for economic benefits and operational control - The company employs a VIE structure due to PRC regulations limiting foreign ownership in **Value-Added Telecommunications Services (VATS)** to less than **50%**[346](index=346&type=chunk) - Control over operating VIEs is achieved through contractual arrangements like equity pledges, voting rights proxies, exclusive service agreements, and call options, not direct equity ownership[347](index=347&type=chunk)[351](index=351&type=chunk)[354](index=354&type=chunk) - In December 2019, VIE ownership transferred to Management HoldCo, owned by five designated managers, to enhance corporate governance and stabilize the ownership structure[664](index=664&type=chunk) [ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS](index=132&type=section&id=ITEM%205.%20OPERATING%20AND%20FINANCIAL%20REVIEW%20AND%20PROSPECTS) This section analyzes GDS's financial performance, highlighting 2021 revenue growth to **RMB 7.82 billion**, a widened net loss to **RMB 1.19 billion**, increased Adjusted EBITDA, and liquidity supported by **RMB 9.97 billion** cash and debt for significant capital expenditures Key Financial Performance (2020 vs 2021) | Metric | 2020 (RMB million) | 2021 (RMB million) | Change | | :--- | :--- | :--- | :--- | | Net Revenue | 5,739.0 | 7,818.7 | +36.2% | | Gross Profit | 1,550.5 | 1,779.4 | +14.8% | | Net Loss | (669.2) | (1,191.2) | +78.0% | | Adjusted EBITDA | 2,680.6 | 3,703.4 | +38.1% | - **Revenue growth in 2021** was primarily driven by an increase in utilized area, growing from **234,731 sqm** at year-end 2020 to **319,475 sqm** at year-end 2021[409](index=409&type=chunk) - The increase in net loss was mainly due to a **44.2% rise in cost of revenue**, driven by higher utility costs (**+56.9%**) and depreciation (**+58.9%**) from new data centers[410](index=410&type=chunk) Liquidity and Capital Expenditures | Metric (as of Dec 31, 2021) | Amount (RMB million) | | :--- | :--- | | Cash | 9,968.1 | | Total Debt (Short & Long-term) | 35,761.1 | | Capital Expenditures (FY 2021) | 9,699.1 | [ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES](index=166&type=section&id=ITEM%206.%20DIRECTORS,%20SENIOR%20MANAGEMENT%20AND%20EMPLOYEES) This section details the company's leadership, board structure, and employee base, highlighting the **weighted voting rights (WVR)** structure granting significant control to founder William Wei Huang, and **US$8.0 million** in 2021 compensation for directors and executives - The company operates with a **Weighted Voting Rights (WVR)** structure, where founder William Wei Huang's Class B shares carry **20 votes per share** for electing a majority of directors[490](index=490&type=chunk) - As of April 15, 2022, STT GDC owned approximately **36.4% of Class A shares**, and Mr. Huang owned **100% of Class B shares**, granting them substantial influence[139](index=139&type=chunk)[529](index=529&type=chunk) - Aggregate compensation for directors and executive officers in fiscal year 2021 was approximately **US$8.0 million**, supported by two share incentive plans for equity awards[494](index=494&type=chunk)[495](index=495&type=chunk)[499](index=499&type=chunk) Employee Headcount by Function (as of Dec 31, 2021) | Function | Number of Employees | % of Total | | :--- | :--- | :--- | | Colocation services | 1,299 | 69.2% | | Managed services | 86 | 4.6% | | Sales and marketing | 103 | 5.5% | | Management, finance and administration | 390 | 20.8% | | **Total** | **1,878** | **100.0%** | [ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS](index=184&type=section&id=ITEM%207.%20MAJOR%20SHAREHOLDERS%20AND%20RELATED%20PARTY%20TRANSACTIONS) This section identifies major shareholders, details minimal related party transactions, and summarizes significant securities issuances since January 2019, including follow-on offerings, a Hong Kong listing, and private placements - Major shareholders, including STT GDC and founder William Wei Huang, hold significant voting power as detailed in Item 6.E[534](index=534&type=chunk) - Since January 2019, the company raised significant capital through multiple securities issuances, including follow-on offerings, a private placement, a Hong Kong secondary listing, and convertible preferred shares[535](index=535&type=chunk)[537](index=537&type=chunk)[538](index=538&type=chunk) - In March 2022, the company completed a private placement of **US$620 million** in **0.25% convertible senior notes due 2029** to Sequoia China, STT GDC, and an Asian sovereign wealth fund[539](index=539&type=chunk) [ITEM 8. FINANCIAL INFORMATION](index=187&type=section&id=ITEM%208.%20FINANCIAL%20INFORMATION) This section covers financial information, including the dismissal of a 2018 securities class action lawsuit and the company's policy of not paying ordinary share dividends while retaining earnings for expansion - A securities class action lawsuit filed in **2018** against the company and its officers was dismissed, with the appeal voluntarily withdrawn in **June 2020**[288](index=288&type=chunk) - The company has no current plans to pay dividends on ordinary shares or ADSs, intending to retain earnings for business operations and expansion[546](index=546&type=chunk) [ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK](index=196&type=section&id=ITEM%2011.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) This section outlines the company's exposure to market risks, primarily **interest rate risk** from substantial debt and **foreign exchange risk** due to RMB-denominated business and USD-traded ADSs - The company is exposed to **interest rate risk** due to significant bank borrowings and other financing obligations[576](index=576&type=chunk) - **Foreign exchange risk** is a key concern, as RMB-denominated revenues and USD-traded ADSs make investments sensitive to RMB/USD exchange rate fluctuations[577](index=577&type=chunk)[579](index=579&type=chunk) PART II [ITEM 15. CONTROLS AND PROCEDURES](index=204&type=section&id=ITEM%2015.%20CONTROLS%20AND%20PROCEDURES) This section confirms the effectiveness of the company's disclosure controls and internal control over financial reporting as of December 31, 2021, as concluded by management and audited by KPMG Huazhen LLP - Management concluded that the company's **disclosure controls and procedures were effective** as of December 31, 2021[605](index=605&type=chunk) - Management concluded that internal control over financial reporting was **effective** as of December 31, 2021, an assessment audited and concurred with by KPMG Huazhen LLP[606](index=606&type=chunk) [ITEM 16G. CORPORATE GOVERNANCE](index=206&type=section&id=ITEM%2016G.%20CORPORATE%20GOVERNANCE) This section outlines the company's corporate governance, noting its adherence to Cayman Islands practices as a foreign private issuer, exempting it from certain Nasdaq rules, and the Hong Kong SFC's ruling on Takeovers Code applicability - As a foreign private issuer, the company follows **Cayman Islands corporate governance practices**, exempting it from certain Nasdaq rules like majority-independent boards[612](index=612&type=chunk) - The Hong Kong SFC ruled the company is not a "public company in Hong Kong" for Takeovers Codes purposes, meaning the code does not apply unless trading bulk migrates to Hong Kong[613](index=613&type=chunk) PART III [ITEM 18. FINANCIAL STATEMENTS](index=208&type=section&id=ITEM%2018.%20FINANCIAL%20STATEMENTS) This section presents the audited consolidated financial statements for 2019-2021, prepared under U.S. GAAP, with KPMG Huazhen LLP providing an unqualified opinion on fair presentation and effective internal control over financial reporting - The independent auditor, KPMG Huazhen LLP, issued an **unqualified opinion** on the consolidated financial statements and the effectiveness of internal control over financial reporting as of December 31, 2021[644](index=644&type=chunk) - A critical audit matter involved the **realizability of deferred tax assets** from net operating loss carryforwards, requiring significant judgment based on projected data center utilization rates[648](index=648&type=chunk) Consolidated Balance Sheet Summary (in RMB thousands) | Account | Dec 31, 2020 | Dec 31, 2021 | | :--- | :--- | :--- | | **Total Assets** | **57,258,795** | **71,632,443** | | Total Current Assets | 18,318,806 | 14,463,875 | | Property and equipment, net | 29,596,061 | 40,623,503 | | Goodwill | 2,596,393 | 7,076,505 | | **Total Liabilities** | **30,591,073** | **45,736,281** | | **Total Equity** | **25,565,992** | **24,533,009** | Consolidated Statement of Operations Summary (in RMB thousands) | Account | 2019 | 2020 | 2021 | | :--- | :--- | :--- | :--- | | Net revenue | 4,122,405 | 5,738,972 | 7,818,681 | | Gross profit | 1,042,726 | 1,550,451 | 1,779,429 | | Net loss | (442,083) | (669,214) | (1,191,213) |

Financial Data and Key Metrics Changes - In 2021, the company achieved a revenue growth of 36% and adjusted EBITDA growth of 38% year-over-year [6] - For Q4 2021, service revenue grew by 6.1%, underlying adjusted gross profit grew by 6%, and underlying adjusted EBITDA grew by 6.7% quarter-on-quarter [13] - The underlying adjusted EBITDA margin was reported at 47.2% for Q4 2021 [13] - The company expects total revenue for 2022 to be in the range of RMB 9,320 million to RMB 9,680 million, with adjusted EBITDA in the range of RMB 4,285 million to RMB 4,450 million, implying a margin of around 46% at the midpoint [27] Business Line Data and Key Metrics Changes - In Q4 2021, the company booked 23,000 square meters of new commitments, with a total of 96,000 square meters of organic bookings for the full year [7][10] - The business mix in 2021 saw cloud accounting for 50%, large internet for 30%, and financial services and enterprise for 20% [8] - The company anticipates around 90,000 square meters of new organic commitments for 2022 [7] Market Data and Key Metrics Changes - The company added approximately 300,000 square meters of new capacity supply in Tier 1 markets in China through land purchases and project acquisitions [6][10] - The company has a pipeline of four purpose-built data centers in Hong Kong, set to enter service between 2022 and 2025 [11] Company Strategy and Development Direction - The company is focused on executing its business plan, improving efficiency, and seizing key opportunities despite a challenging operating environment [6] - The company is building its presence in Southeast Asia with projects in Malaysia and Indonesia, and plans to initiate construction in the coming months [11] - The company aims to achieve carbon neutrality by 2030 and has increased its renewable energy usage to over 30% [12] Management's Comments on Operating Environment and Future Outlook - Management noted that demand remains at a similar level to last year, although the demand profile has shifted towards internet and enterprise customers [21] - The company is optimistic about future growth, expecting to maintain a base growth rate of around 20% in the coming years [28] - Management expressed confidence in the company's ability to access capital for growth and acquisitions, indicating that capital will not be a constraint [40] Other Important Information - The company completed over US$2.6 billion of debt financing to ensure projects are fully financed [6] - The effective interest rate for 2021 was reported at 5.5%, down from 6.6% in 2020 [16] Q&A Session Summary Question: What is the latest observation on demand? - Management indicated that demand remains similar to last year, but the profile has shifted towards internet and enterprise customers due to macroeconomic factors [21] Question: What is the implication of the Eastern Data Western Computation initiative? - Management views the initiative positively, as it encourages new infrastructure and recognizes the necessity for low latency products in Tier 1 markets [24] Question: What is the growth rate expected from 2023 to 2025? - Management expects a stabilizing growth rate around 20%, with potential for acceleration if macroeconomic conditions improve [28] Question: What is the M&A strategy for this year? - Management emphasized the importance of M&A for acquiring valuable assets, particularly in Tier 1 markets, and indicated a focus on mature assets [29] Question: Have there been changes in the customer decision process for leasing? - Management noted that customer IT logic remains unchanged, but demand in Southeast Asia is expected to grow significantly [33] Question: What is the funding position for M&A? - Management stated that access to capital is not a concern, with various methods available for raising funds [40] Question: What are the inflationary pressures on margins? - Management indicated that power costs are the primary inflationary pressure affecting margins, which is expected to be temporary [57]

Financial Highlights - Total revenue grew by 36.2% year-over-year to RMB 7,818.7 million ($1,226.9 million)[6] - Adjusted EBITDA grew by 38.2% year-over-year to RMB 3,703.4 million ($581.1 million) with a margin of 47.4%[6] - Total revenue grew by 34.1% year-over-year to RMB 2,187.4 million ($343.2 million) in 4Q21[7] - Adjusted EBITDA grew by 35.5% year-over-year to RMB 1,027.4 million ($161.2 million) with a margin of 47.0% in 4Q21[7] Capacity and Commitment - Net additional total area committed was +118,722 sqm or +283 MW for FY21[6] - Total area committed by customers increased by 27.1% year-over-year to 556,822 sqm[6] - Total capacity increased by 157,510 sqm to 649,398 sqm, a 32.0% year-over-year increase[6] - Net additional total area committed was +23,538 sqm or +54 MW in 4Q21[7] - Total capacity increased by 37,818 sqm to 649,398 sqm, a 32.0% year-over-year increase in 4Q21[7] - Area Under Construction at YE21 was 161,515 sqm with a pre-commitment rate of 61.3%[15,23] Financing Activities - Obtained new project debt financing or refinancing facilities of RMB 16,596.6 million ($2,604.4 million)[6] - Obtained new project debt financing or refinancing facilities of RMB 6,881.6 million ($1,079.9 million) in 4Q21[7] - Raised a further $620 million through a private CB issuance in Feb 2022[6,7] FY22 Business Outlook - The company provided FY22 revenue guidance of RMB 9,320 - 9,680 million, implying a year-over-year growth of 19.2% - 23.8%[63] - The company provided FY22 Adjusted EBITDA guidance of RMB 4,285 - 4,450 million, implying a year-over-year growth of 15.7% - 20.2%[63] - The company expects FY22 Capex to be approximately RMB 12,000 million, a decrease of 12.4%[63]