GDS(GDS) - 2022 Q4 - Annual Report

PART I Key Information This section details GDS Holdings' corporate structure, its reliance on a Variable Interest Entity (VIE) model for operations in China, and associated regulatory and operational risks, including implications of the HFCA Act - GDS Holdings is a Cayman Islands holding company, not a direct operator in China, operating its core data center business (Value-Added Telecommunications Services) through contractual arrangements with consolidated Variable Interest Entities (VIEs)[17] - Revenues from VIEs and their subsidiaries constituted 96.1% of total revenues in 2022, highlighting the critical dependence on the VIE structure[17] - The company was identified as an SEC-identified issuer in May 2022 under the HFCA Act; however, in December 2022, the PCAOB vacated its determination that it was unable to inspect the company's auditor (KPMG Huazhen LLP), mitigating the immediate risk of delisting[23][194] - As of the report date, the company believes it has obtained all material licenses and permits required for its operations in China and is not required to obtain permissions from the CSRC or undergo a cybersecurity review for its past securities issuances[24][26] Risk Factors This section details significant operational, structural, and geopolitical risks faced by the company, including customer concentration and regulatory uncertainties - The company faces significant risks including dependency on a limited number of major customers, high capital expenditure requirements for data center expansion, and potential adverse effects from a slowdown in data center demand[27] - The VIE structure carries inherent risks; if PRC authorities deem contractual arrangements non-compliant, the company could face severe penalties, including forced relinquishment of VIE interests[29] - Operating primarily in China exposes the company to risks from changes in PRC political and economic policies, a complex and evolving legal system, and geopolitical tensions, particularly between the U.S. and China[30][91] - The trading prices of the company's ADSs and ordinary shares are subject to volatility, and the dual-class share structure gives principal shareholders substantial control over corporate actions[30][151] Information on the Company GDS is a leading developer and operator of high-performance, carrier-neutral data centers in China, Hong Kong, and Southeast Asia, serving top-tier cloud, internet, and financial customers through a complex VIE structure | Metric | As of Dec 31, 2020 | As of Dec 31, 2021 | As of Dec 31, 2022 | | :--- | :--- | :--- | :--- | | Area in service (sqm) | 333,853 | 487,883 | 515,787 | | Area under construction (sqm) | 158,035 | 161,515 | 192,713 | | Commitment rate (in service) | 94.6% | 93.8% | 95.5% | | Utilization rate (in service) | 70.3% | 65.5% | 71.8% | | Pre-commitment rate (under construction) | 77.4% | 61.3% | 71.5% | - The company has expanded its presence to Southeast Asia, acquiring land in Johor, Malaysia, and Batam, Indonesia, as part of its Singapore-Johor-Batam strategy to serve regional demand[234][238] - Customer concentration is high, with the top two customers accounting for 25.1% and 19.9% of total net revenue in 2022; by area committed, the top two customers represented 37.7% and 14.6% as of year-end 2022[282][284] - The company operates through a VIE structure to comply with PRC regulations restricting foreign ownership in Value-Added Telecommunications Services (VATS), controlling VIEs via contractual arrangements[417][419] Operating and Financial Review and Prospects The company's financial performance shows continued revenue growth driven by increased data center capacity, though it remains in a net loss position due to high capital expenditures and operating costs, relying heavily on debt and equity financing | Financial Metric (RMB in millions) | 2020 | 2021 | 2022 | | :--- | :--- | :--- | :--- | | Net Revenue | 5,739.0 | 7,818.7 | 9,325.6 | | Gross Profit | 1,550.5 | 1,779.4 | 1,935.9 | | Net Loss | (669.2) | (1,191.2) | (1,266.1) | | Adjusted EBITDA | 2,680.6 | 3,703.4 | 4,251.4 | - Net revenue increased by 19.3% to RMB 9,325.6 million in 2022, primarily due to an increase in area utilized from 319,475 sqm to 370,547 sqm and the commencement of operations at new data centers[477] - Cost of revenue rose 22.4% in 2022, driven by higher utility costs (up 31.4% due to increased power tariffs and new facilities) and depreciation (up 20.2% from new data centers coming online)[478] - As of December 31, 2022, the company had cash of RMB 8,608.1 million and total debt of RMB 42,891.0 million (including short-term and long-term borrowings, convertible bonds, and finance lease obligations)[41][493] - Capital expenditures were RMB 7,803.7 million in 2022, primarily for the development of data centers, funded mainly by financing activities[503] Directors, Senior Management and Employees This section details the board and senior management, led by CEO William Wei Huang, highlighting the dual-class share structure where Class B shares grant substantial voting control, and outlines executive compensation and board committee oversight - The company operates under a Weighted Voting Rights (WVR) structure, where Class B ordinary shares, beneficially owned by founder and CEO William Wei Huang, carry 20 votes per share for key matters like director elections[558] - Major shareholder STT GDC has the right to appoint up to three directors to the board, depending on its ownership percentage[574] - For the year ended December 31, 2022, aggregate compensation paid to directors and executive officers was approximately US$8.1 million, comprising US$6.1 million in cash and US$2.0 million in restricted shares[562] | Shareholder | Class A Shares Beneficially Owned | % of Class A | Class B Shares Beneficially Owned | % of Class B | Aggregate Voting Power (1:20 Basis) | | :--- | :--- | :--- | :--- | :--- | :--- | | William Wei Huang | 30,337,504 | 2.1% | 85,927,840 | 100.0% | 44.6% | | STT GDC | 493,288,484 | 34.6% | — | — | 18.7% | | GIC | 202,939,884 | 13.0% | — | — | 2.1% | Major Shareholders and Related Party Transactions This section details related party transactions, including a master service agreement with STT GDC affiliates, and summarizes significant securities issuances since January 2020, such as the Hong Kong secondary listing and multiple convertible senior note offerings - In November 2020, the company completed its secondary listing on the Hong Kong Stock Exchange, raising approximately US$1.9 billion in net proceeds[606] - In March 2022, the company issued US$620 million of convertible senior notes due 2029 to investors including Sequoia China, STT GDC, and a sovereign wealth fund[608] - In January 2023, the company issued an additional US$580 million of convertible senior notes due 2030 to various private equity and institutional investors[608] Financial Information This section confirms the inclusion of consolidated financial statements in Item 18 and reiterates the company's dividend policy of retaining earnings for business expansion, while convertible preferred shares accrue cumulative preferred dividends - The company has no present plan to pay any dividends on its Class A ordinary shares or ADSs, intending to retain earnings for business expansion[615] - Holders of the company's convertible preferred shares are entitled to receive cumulative preferred dividends, which accrue at a minimum rate of 5% per annum for the first eight years[617] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are interest rate risk from substantial debt and foreign exchange risk, particularly between Renminbi and U.S. dollar, directly impacting ADS value, with no derivative hedging employed - The company's main market risk exposures are to interest rate fluctuations on its significant debt and foreign currency exchange risk, particularly between the Renminbi and the U.S. dollar[664][665] - The value of an investment in the company's ADSs is directly affected by the RMB/USD exchange rate, as the business is effectively denominated in RMB while ADSs trade in USD[665] PART II Material Modifications to the Rights of Security Holders and Use of Proceeds This section outlines modifications to security holder rights, primarily through investor rights agreements granting registration and preemptive rights to major investors, and details the full utilization of US$1.9 billion net proceeds from the November 2020 Hong Kong secondary listing for data center development and corporate purposes - The company granted significant investors, including Hillhouse Capital and STT GDC, registration rights and preemptive rights for future equity issuances[685] - The US$1.9 billion in net proceeds from the November 2020 Hong Kong public offering was fully used by December 31, 2022, for the development and acquisition of new data centers and general corporate purposes[686] Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures and internal control over financial reporting were effective as of December 31, 2022, a conclusion concurred with by the independent auditor - Management concluded that the company's disclosure controls and procedures were effective as of the end of the fiscal year 2022[688] - Based on the COSO framework, management assessed internal control over financial reporting to be effective as of December 31, 2022, with the independent auditor's report concurring with this assessment[689] Corporate Governance As a foreign private issuer, GDS follows Cayman Islands corporate governance practices, differing from Nasdaq standards, and is exempt from certain Hong Kong listing rules and the Hong Kong Takeovers Code, with a partial SFC disclosure exemption - The company is a foreign private issuer and follows Cayman Islands corporate governance practices, exempting it from certain Nasdaq requirements like having a majority-independent board[696] - The Hong Kong Takeovers Code does not apply to the company due to its secondary listing status and a specific ruling from the SFC[697] PART III Financial Statements This section includes the audited consolidated financial statements for GDS Holdings Limited for fiscal years 2020-2022, with KPMG Huazhen LLP providing an unqualified opinion on both financial statements and internal control, highlighting the realizability of deferred tax assets as a critical audit matter - 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, 2022[720] - The critical audit matter identified was the realizability of deferred tax assets associated with net operating losses, which depended on subjective management estimates of future taxable income and data center utilization rates[724]