2022-04-27 16:00PART I ITEM 3. KEY INFORMATION 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 restrictions19 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 uncertainties21 - 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 years25174 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 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 management2939 - Corporate structure risks are tied to VIE arrangements; non-compliance with PRC foreign investment restrictions could lead to severe penalties and loss of operational control30131 - Operating in China carries risks from evolving PRC policies, legal uncertainties, and increased oversight on cybersecurity, data security, and overseas listings32145 - 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 Act33178 ITEM 4. INFORMATION ON THE COMPANY 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 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 2009210 - Key strategic developments include a 2014 STT GDC investment, 2016 NASDAQ IPO, 2020 Hong Kong secondary listing, and 2021 Southeast Asia expansion210212213 Business Overview 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, 2021254 - The company competes with other carrier-neutral providers and state-owned telecommunications carriers, differentiating through its carrier-neutral facilities allowing multi-carrier connectivity271273 Organizational Structure 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 - Control over operating VIEs is achieved through contractual arrangements like equity pledges, voting rights proxies, exclusive service agreements, and call options, not direct equity ownership347351354 - In December 2019, VIE ownership transferred to Management HoldCo, owned by five designated managers, to enhance corporate governance and stabilize the ownership structure664 ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS 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 2021409 - 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 centers410 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 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 directors490 - 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 influence139529 - 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 awards494495499 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 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.E534 - 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 shares535537538 - 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 fund539 ITEM 8. FINANCIAL INFORMATION 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 2020288 - The company has no current plans to pay dividends on ordinary shares or ADSs, intending to retain earnings for business operations and expansion546 ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 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 obligations576 - Foreign exchange risk is a key concern, as RMB-denominated revenues and USD-traded ADSs make investments sensitive to RMB/USD exchange rate fluctuations577579 PART II ITEM 15. CONTROLS AND PROCEDURES 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, 2021605 - Management concluded that internal control over financial reporting was effective as of December 31, 2021, an assessment audited and concurred with by KPMG Huazhen LLP606 ITEM 16G. CORPORATE GOVERNANCE 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 boards612 - 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 Kong613 PART III ITEM 18. FINANCIAL STATEMENTS 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, 2021644 - 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 rates648 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) |