GDS - Q2 2023

Transcript

Operator (participant)

Hello, ladies and gentlemen. Thank you for standing by for the GDS Holdings Limited's second quarter 2023 earnings conference call. At this time, all participants are in listen only mode. After management prepared remarks, there will be a question and answer session. Today's conference call is being recorded. I would now like to turn the call over to your host, Ms. Laura Chen, Head of Investor Relations for the company. Please go ahead, Laura.

Laura Chen (Head of Investor Relations)

Hello, everyone. Welcome to the 2Q 2023 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 the Safe Harbor Provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's results may be materially different from the views expressed today.

Further information regarding these and other risks and uncertainties is included in the company's prospectus as filed with the U.S. SEC. The company does not assume any obligation to update any forward-looking statements except as required under applicable law.

Please also note that GDS earnings press release and this conference call include discussions of unaudited GAAP financial information, as well as unaudited non-GAAP financial measures. GDS press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures. I'll now turn the call over to GDS Founder, Chairman, and CEO, Mr. William Huang. Please go ahead, William.

William Huang (Founder, Chairman, and CEO)

Thank you. Hello, everyone. This is William. Thank you for joining us on today's call. During the second quarter, we continued to focus on our strategic business objectives. In China, we are selectively targeting new business to give us a shorter book-to-bill cycle. We are prioritizing delivery of the backlog to grow revenue with less CapEx.

We are increasing utilization rates to drive up return on invested capital. We're only initiating new projects based on firmly committed orders, and we are, monetizing assets to achieve positive free cash flow as soon as possible. For international, we are developing a second growth engine. We are winning new business from reference China and the global customers. We are leveraging our competitive advantage in cost and speed of execution.

We are financing expansion without relying on GDS balance sheet. We will benchmark variation creation through external funding, funding rounds. By pursuing these objectives, we will strengthen our financial position and unlock value for GDS shareholders. As we review our performance quarterly, quarter by quarter, we will measure our progress against these targets.

Turning to Slide 5. In the first half of 2023, our gross additional area committed was around 28,000 sq m, 55% from China and 45% international. In China, new business volumes are down, as customers need more time to ramp up. This give us breathing space to focus on our other priorities, while our market leadership position remains as strong as ever. In Southeast Asia, demand is very strong. We have won great new business, which lifts us our growth.

For the second half of 2023, we expect gross new booking at a similar level to the first half. Looking further ahead, there's no doubt that demand will rebound in China. Data center supply in Tier One markets has been restricted for several years. As demand strengthens, we will be well-positioned with our secured pipeline. Turning to slide seven. In 2Q 2023, we won three notable orders. In Beijing, we won a 3,200 sq m or 6.1 MW order from a major Chinese financial institution. This used up some of our inventory and comes with a confirmed moving schedule. Outside of Beijing, in Langfang, we won a 3,600 sq m or 8.3 MW order from a large internet customer. This is for expansion at a site where the customer has already deployed.

In Southeast Asia, we were able to increase power capacity for our Johor data centers, which results in upsizing of an existing order. Turning to slide 8. Our gross move-in for the second quarter was around 15,000 sq m. This is consistent with the quarterly run rate for the past two years. In the second half of 2023, we will start to see significant move-in from international. As a result, our quarterly growth added will be higher than in prior quarters. Turning to slide 13. We are bringing new capacity into service when customers are ready to move in. In the first half of 2023, we brought 15,000 sq m into service, almost all in China.

In the second half of 2023, we will bring another 50,000 sq m into service, 30,000 sq m in China, and 20,000 sq m international. All of this capacity has confirmed moving schedules. Turning to slide 16. We recently held an opening ceremony to deliver, to deliver our first data center at the Nusajaya Tech Park, Johor. 14 months ago, this was an empty piece of land. Today, you can see three large data centers, one of which is for AI computing, which with 70 MW of IT power capacity in total. Our ability to deliver so quickly, in a new overseas markets says a lot about our execution capabilities. For this project, we use our proprietary prefabricated liquid cooling and power modules. It'll give us time to market and the development cost advantage, which are critical success factors in today's market.

When we set up in Johor, our vision was to establish the SIJORI data center hub to serve the region by integrating Johor, Batam, and Singapore. We are therefore delighted to be selected by the Singapore government along with three other data center operators, for a total of about 80 MW new data center capacity in Singapore. Through the pilot data center call for application DCCFA exercise, we are finalizing our development plans and will provide update, updates in due course. In Batam, we continue to make progress with establishing the essential infrastructure for our proposed developments. Our international expansion is gaining momentum. I will now pass on to Dan for financial and operating review.

Dan Newman (CFO)

Thank you, William. Starting on slide 18. In conjunction with our strategic business objectives, we've adopted the following key financial targets. For the China segment, we aim to grow adjusted EBITDA at a mid-teens % CAGR. We, we are reducing organic CapEx to an annual level of RMB 2 billion-3 billion from next year onwards. We will be free cash flow positive within three years or sooner, with the benefits of asset monetization. We, and we will bring down net debt to adjusted EBITDA to below 5x. For the international segment, we will be EBITDA positive next year. Based on our current business plan, international will generate over 15% of consolidated adjusted EBITDA after three years. We are taking a low-risk approach, only investing with the backing of firm customer orders and achieving similar returns to China.

We will raise equity capital directly at the international level and project finance on a non-recourse basis. Turning to slide 19. In 2Q 2023, we grew revenue by 2.6% quarter-on-quarter and adjusted EBITDA by 9.3% quarter-on-quarter. During 2Q 2023, we recognized one-time service revenue of RMB 17.7 million, arising from early termination of 3,000 sq m from the backlog, and cash reimbursement of RMB 22.1 million from our depositary bank. Excluding these two items, revenue was flat, and adjusted EBITDA was up 1.1% quarter-on-quarter. Turning to slide 20. During 1H 2023, we achieved net additional area utilized of 12,000 sq m. While gross add was sustained at historic levels, net add was impacted by a single customer redeploying between our data centers as previously disclosed.

This redeployment will continue into the second half of 2023. However, with contribution from international, we expect net additional area utilized to step up significantly. Multi-service revenue per square meter was RMB 2,170 in 2Q 2023. Excluding the one-time service revenue arising from early termination, MSR was RMB 2,108 per square meter, a decrease of 1.9% versus the previous quarter. Comparing 4Q 2023 to 4Q 2022, we still expect an MSR decrease of around 4% over the course of this year. Turning to slide 21. For 2Q 2023, our adjusted EBITDA margin was exactly 50%. Excluding the one-time service revenue arising from early termination and cash reimbursement, the adjusted EBITDA margin was 47.6%, a small increase from the previous quarter.

In 3Q 2023, we are seeing higher power tariffs and higher power usage in the peak summer months. As a result, our margins will be seasonally impacted in the current quarter before recovering in the fourth quarter. Turning to slide 22. In 1H 2023, our organic CapEx in China was RMB 2.2 billion. We expect the full year to be in line with our guidance for RMB 3.5 billion. In 1H 2023, our international CapEx was RMB 1.2 billion. In 2H 2023, our international CapEx will increase to around RMB 2.8 billion, as we deliver 70 MW in Johor by January of next year. All of this capacity is billable within a few months of delivery. Looking at our financing position on slide 23.

At the end of 2Q 2023, our net debt to last quarter annualized adjusted EBITDA was 7.7x. Excluding the debt and negative EBITDA of the international, the multiple was 6.7x. During 2Q 2023, we repaid $300 million when a CB was put. As a result, our cash position decreased to RMB 8.2 billion, or $1.1 billion at mid-year. We are still working on the debt refinancing, which is required for the data center fund. When this is finalized, it will raise our cash balance by RMB 1.5 billion. Up to the end of 2Q 2023, we've provided around $400 million of funding to our international group by way of paid up share capital and shareholder loans.

In addition, international had incurred around $400 million of external debt. We now intend moving ahead with the first round private equity capital raise. Turning to slide 24. We confirm that our guidance for FY 2023 revenue, adjusted EBITDA and CapEx remain unchanged. We'd now like to open the call to questions. Operator, please.

Operator (participant)

Thank you, sir. To ask a question, you will need to press star one and one on your telephone and wait for your name to be announced. To withdraw your question, please press star one and one again. Once again, to ask a question, please press star one and one on your telephone and wait for your name to be announced. To withdraw your question, please press star one and one again. For the benefit of all participants on today's call, please limit yourself to one question. If you have more questions, please reenter the queue. Thank you. We are now going to proceed with our first question. The question comes from the line of Yang Liu from Morgan Stanley. Please ask your question.

Yang Liu (Technology, IT Services, and Software Analyst)

Thanks for the opportunity to ask a question. I have a question related with the international business. Previously, I think, you talk a lot in term of the strategy going the surrounding area of Singapore. Now you have a power quota or the permit to build a data center inside of Singapore. What could be the updated strategy? For the whole Southeast Asia str development plan, especially, what will be the business model for the Singapore data center? Of course, whether you have a plan to spin off the whole international business.

William Huang (Founder, Chairman, and CEO)

Okay. Thank you, Yang Li. I think the, the strategy for Southeast Asia, from day one, we are really firm, very, very clear view to build a data center in three major place. One is Singapore, one is Johor, one is Batam. This is, in our view, is perfect structure for serve the current requirement, even for the future requirement. Because Singapore, as everybody knows, Singapore is a network hub, and a lot of our customers who want to deploy the data center in this region, try to get their network, network in Singapore. Network, pop, pop, whatever call.

This three, we have also plan to link these three data center area together as to serve to our customer as a platform. I think the business will give us a lot of advantage to, in the future, compare with the other competitor. We are the first one who own the three, own the data center in three area. This is, this is perfect for our future, let's say, marketing, right? This is our major focus. It's our Core asset to get better in the next five years.

On the other hand, we're also looking for very proactive to looking for some opportunity in Jakarta, KL, and also other countries opportunity. Again, I say this is a we call it a Core area, will be our focus in the next five years. We believe the demand is getting more stronger and stronger, so the future visibility is very, very high. The second question, the spin off. I think definitely, Dan, already, last quarter, we already introduced it. We will focus we will split the business to look at our business. One is China portion, one is international. The two, market actually is in a different situation.

In China, everybody may know that demand, in the last two years is slowed down. We should echo this situation. We, we firm our new strategy to try to push China business moving towards the cash flow positive and strengthen our financial capability. We already introduced to the market, and that's our business plan in next three years. On the other hand, since the AI coming in a very big way, I think we have the, we can leverage our 20 years experience and capability to catch up, well catch up this opportunity. In international business, we will aim to grow more fast than in China business.

We need more capital, but we don't want use more our holding capital to get back the business. In the next few months, we already start to working on that, to raise external funds to support our international business. We got a lot of the interest from the different private equity so far. Yeah.

Yang Liu (Technology, IT Services, and Software Analyst)

Thank you.

Operator (participant)

We are now going to proceed with our next question. The question comes from the line of Jonathan Atkin from RBC. Please ask your question.

Jonathan Atkin (Managiong Director and Global Head of Communications Infrastructure)

Thank you. I have a financial question, and that is just, anything to call out, in terms of one-time impacts through the rest of the year? You know, you had kind of the early termination that we talked about on the script, but anything else that that maybe you could elaborate on between now and year-end that would affect 3Q, 4Q, or even next year? Secondly, related to your Southeast Asia footprint, I wonder if you could maybe provide us an update on the demand trends that you're seeing in Hong Kong. In Johor, are you seeing continued potential for upsizing of your footprint based on the existing customer relationship, or could the demand there potentially diversify? Thank you.

Dan Newman (CFO)

Thank you, John. I'll start with the financial question. Yeah.

We, we don't expect more one-time items like, like we experienced in the second quarter, in the second half of this year or, or, or beyond, so far as we can foresee. If these one-time items are material, we, we will disclose them to try to establish a, a normalized number so that we can continue to track a, a quarter-on-quarter trend as we have done, you know, ever since we, we went public, in 2016. William, would you like to talk about?

William Huang (Founder, Chairman, and CEO)

Yeah.

Dan Newman (CFO)

Demand, demand in Hong Kong.

William Huang (Founder, Chairman, and CEO)

Yeah.

Dan Newman (CFO)

The next wave in Johor?

William Huang (Founder, Chairman, and CEO)

I think the demand in Hong Kong still maintain the normal, right. I think the every year's growth is around 70 MW. This is, this demands from the different region, like from China, also from U.S,, from the other domestic customer as well. This is nothing changed so far. We are still on track. The market demand. Supply also no significant, significant change. Still in terms of supply, also very balanced. I think the Hong Kong market is still on the very stable growth period.

In Johor, if we talk about Johor, what we see is that Johor now is a more hot for the all the data center play, all the data center player, also for the all the customer. What we can see is a lot of the international player, international cloud player, also internet giants, they all show more high interest level in Johor. This has changed a lot, very encouraging us. Our target is definitely not just follow up our customer, existing customer. We're definitely very interested to gather some new customer name from the different region to diversify our portfolio as just like what we did in China.

Diversification is very important for us, and we are good at that.

Jonathan Atkin (Managiong Director and Global Head of Communications Infrastructure)

Then lastly, on Singapore, given the tightness of supply and the fact that you were one of only a small number of companies to get the permission to proceed with new data center development, do you think that you're inclined to do more of a, kind of a wholesale hyperscale approach with a smaller number of tenants in order to stabilize the asset quickly once it's developed? Would you pursue more of a, kind of a retail-oriented approach? Do you have any thoughts on that?

William Huang (Founder, Chairman, and CEO)

Yeah, so far we are, I think there, there's two kinds of customer we are interested. One is who will deploy their IT in three regions, including Batam, Singapore, and Johor. This is our first priority to support, which means support our strategy, right? Which I think we already show this plan to some of our customers. They are very interested. Second priority, definitely in Singapore, is a financial center, which is our, we are very familiar with the financial institutions demand and requirement. We also aim to sell some to retail customers, for example, like a financial institution, right?

We can get a more high margin and a very stable commitment. That's our custom go-to-market strategy.

Jonathan Atkin (Managiong Director and Global Head of Communications Infrastructure)

Thank you.

Operator (participant)

We are now going to proceed with our next question. The question comes from the line of Frank Louthan from Raymond James. Please ask your question.

Frank Louthan (Telecommunications Services and Infrastructure Analyst)

Great, thank you. Looking out to your guidance, kind of what, what does it take to hit the higher end of the range of your guidance? What are sort of assumptions are built in there? If you can kind of break that out between the, you know, the impact from China and also from the out-of-region business as well. Thanks.

Dan Newman (CFO)

Thank you. Thank you, Frank. You know, our, our, our, our track record with guidance has been fair- fairly good. Normally, the full year outcome is not deviated far from the midpoint of our guidance range in prior years. It's a recurring revenue business, and the move-in rate is what dictates the most of the growth year on year. As we're already halfway through the year, I think the path that we're on within that guidance is already quite well set. Having said that, in the second half of this year, particularly in the fourth quarter, we're going to have our Johor data centers come into service.

Also in China, some of the data centers, which are the destination for the customer who is, you know, re-redeploying between our data centers. The move-in rate for those contracts is, is quite fast. In one case, a few months, in another case, perhaps one year. Even if we assume that the run rate in China remains, you know, as, as it has been, at least, you know, the growth, the growth, additional area utilized has, has been quite consistent, I think, for about the past 10 quarters. Even if we assume that that remains at the current run rate, and there is no recovery because, you know, we can't predict that yet, our growth will pick up because of the additional contribution from these contracts, particularly, particularly Johor.

That will happen too late this year to make much difference to our financial results this year. You know, clearly it will contribute to higher year-on-year growth next year. We look forward, we look forward to that, and obviously, we'll reflect that in our, in our guidance for next year when we come out with that.

Frank Louthan (Telecommunications Services and Infrastructure Analyst)

Okay, great. Thank you very much.

Operator (participant)

We are now going to proceed with our next question. The question comes from the line of Sara Wang from UBS. Please ask your question.

Sara Wang (Greater China Software and Data Centers Analyst)

Hi, thank you for the opportunity to ask questions. I have two questions. The first one is on the potential target of Southeast Asia business. I, I see that we are now targeting the overseas business to contribute more than 15% of EBITDA within three years. I recall December was around 10% during last earnings release. Just wondering if there's any-

Dan Newman (CFO)

I lost. Did we lose him?

William Huang (Founder, Chairman, and CEO)

What's the question?

Dan Newman (CFO)

Sorry, we lost the.

William Huang (Founder, Chairman, and CEO)

Hello?

Dan Newman (CFO)

Did we lose the connection? She dropped.

Sara Wang (Greater China Software and Data Centers Analyst)

Can you say, is this, is this, is this only a update, better visibility? We are being open. Hello?

William Huang (Founder, Chairman, and CEO)

Hello? We missed the-

Sara Wang (Greater China Software and Data Centers Analyst)

Hello, can you hear me?

Frank Louthan (Telecommunications Services and Infrastructure Analyst)

Yes, we can now.

William Huang (Founder, Chairman, and CEO)

Now, can you repeat your question? We just missed it. Sorry.

Sara Wang (Greater China Software and Data Centers Analyst)

Yeah, sure. I, I see the target for the overseas business to contribute 15% of EBITDA within three years. I recall the number was around 10% during our last earnings call. I'm just wondering, is this just a simple update because of, because of better visibility, or actually we are being more optimistic? What's the, like, key, like, key points for us to be more optimistic? This is my first question.

Dan Newman (CFO)

Yeah. Thank, thank you. We, your, your, your observation is correct. We did, we did revise up that, that number. Moving from 10%-15% is significant, but in, in absolute terms, we're not talking about, you know, hundreds of millions of dollars. We're talking about tens of millions of dollars, higher forecast. You know, you would have noticed that, in the second quarter, we did upsize an existing order in, in Johor. That was part of the, part of the reason for, for doing that. Frankly, I, I, I also noticed that some analysts and leading analysts begin to put more focus on international business and try to quantify, how significant it can be within the context of the GDS Holdings, as a whole.

you know, we're responding to that, try to provide some, some more disclosure.

Sara Wang (Greater China Software and Data Centers Analyst)

Got it. Thank you. My second question is about William. During last earnings call, I think William had shared his intention to increase the shareholding in GDS. I'm just wondering if there's any update on this. Thank you.

William Huang (Founder, Chairman, and CEO)

Yeah, I already, I already bought the, 50% of which I commit, right? I still will continue to execute that.

Sara Wang (Greater China Software and Data Centers Analyst)

Got it. Thank you.

Operator (participant)

We are now going to proceed with our next question. The question comes from the line of Timothy Zhao from Goldman Sachs. Please ask your question.

Timothy Zhao (China Internet and Technology Analyst)

Sure. Thank you, management, for taking my question. My question is regarding the AI demand. Since last time that we spoke, I remember last quarter you mentioned that the AI driven demand was still in the early stage. Just wondering, given we have passed a quarter, three months or maybe longer, just wondering if management have seen any updates regarding the moving pace from the generative AI demand, is from the cloud service provider to China. When we think about the CapEx going forward, could management share any color on what percentage of CapEx will be likely spent on the high-power density cabinets or transforming the existing cabinets into the high-power density ones?

Thank you.

William Huang (Founder, Chairman, and CEO)

Okay. Yeah, in terms of AI demand, I think the very, very clear that the, in the international market, now the currently, globally, I mean, data center demand major driven, mainly driven by the AI type of application, right? This is a very, very clear trend, which, which already happening in the U.S., in Asia right now. We are, this is one part. If we talk about AI demand in China, I think the China, the, the, in terms of the model, AI model is a little bit behind the U.S., so I think it's still in a very early stage. Of course, in the media, everybody talk about AI.

That's is a indication that everybody try to step in. I think the, in terms of the, how impacted to the data center industry, I think they may be up to 12 or 18 months, it will start to impact China data center demand, so in a significant way, in my view. Yeah.

Dan Newman (CFO)

For the second part of your question on, on CapEx, where I, I think we, we talk about AI-related CapEx or, very high power density, capacity, I think that goes with liquid cooling. Really it comes down to, you know, what percentage of our, of our CapEx or what percentage of the capacity that we're developing will we deploy, liquid cooling? As a matter of fact, we, we have deployed liquid cooling, going back more than two years in, in China. We've done projects both with, what's, what's called cold plate, cooling and also, full immersion cooling. It, it's been a, a relatively small part of what we've done so far in China.

For, for in the international expansion, you know, William mentioned that, you know, I think in the international market, maybe we're seeing the flow-through from AI demand come quicker. A significant part of what we developed in Johor is, is using cold plate liquid cooling, and we developed a prefabricated cold plate liquid cooling module, which we manufactured in China and shipped, shipped to, shipped to Johor. We've talked maybe a bit more generally about the economics. Deploying liquid cooling, the overall unit development cost is slightly higher than if we use, you know, traditional, more traditional, air cooling. Because liquid cooling delivers a lower PUE, and a higher power density, it also means that there's more IT power capacity available to sell to the customer and to generate revenue.

You have to take into account these different components, and, you know, overall, in terms of total cost of ownership or, you know, economic returns to, to us as the data center operator, we think that liquid cooling will create some cost efficiency where, where it can be deployed. So far, we don't think it's gonna be a very material change. I think the last part of your question talk about, I think you, you referred to installing it in existing data centers.

William Huang (Founder, Chairman, and CEO)

Yeah.

Dan Newman (CFO)

That's an interesting one, because if you look at all the plant and equipment in a data center, some of it is used intensively, like cooling, and some of it is on standby, like power generation. There's already a replacement cycle for cooling, which typically is every five years. That gives us a, an inbuilt opportunity, as when we change out the cooling plant and equipment, we can always consider to, to change the, to change the technology as, as well.

William Huang (Founder, Chairman, and CEO)

Yeah, I add on a little bit. I think in the last two years, our new design, data center design, is all very high power density. That means we already assess the trend in China. Our edge of the town campus design all can fulfill the future AI demand already. Yeah, this is all the campus which we developed in the last two years, whatever in Shanghai, surrounding Shanghai or Beijing or Shenzhen, Guangzhou, all very high power density and a high, high power capacity. That means we are well positioned to catch up the AI era.

Timothy Zhao (China Internet and Technology Analyst)

Great. Thank you for the color. It's very helpful. Thank you.

Operator (participant)

As a reminder, to ask a question, please press star one and one on your telephone and wait for your name to be announced. To withdraw your question, please press star one and one again. Once again, please press star one and one if you have any questions, and wait for your name to be announced. For the benefit of all participants on today's call, please limit yourself to one question. If you have more questions, please reenter the queue. Thank you. We are now going to proceed with our next question. The question comes from the line of Mingxuan Li from CICC. Please ask your question.

Mingxuan Li (Chinese Technology and Infrastructure Analyst)

Hi, management. Thanks for taking my questions. I have questions about the EBITDA margin. The first one is, why your one-time service revenue has nearly 100% EBITDA margin? Because, this $70 million revenue were fully included in EBITDA. Also, excluding the one-time impact, the second quarter EBITDA margin was still better than the first quarter and the same quarter last year. What's the drivers behind this?

Dan Newman (CFO)

Thank, thanks for the question. I, I, I couldn't hear so, so clearly, so let me try to answer based on what I, what I could make out. I think you, you asked to begin with, why that one-time service revenue contribute to such a, a significant improvement in the, in the EBITDA? The reason for that is because it's, it's associated with a termination, which means that there, there is not a lot of operating cost that goes with that revenue. There is not power consumption and so on, which goes with that, that revenue. So that, that revenue has a, has a very high profit margin, you know, at, on an incremental basis.

Excluding that revenue as, as, as we did in our, in our disclosures to, to normalize the numbers, set, set a, set a base for the following quarters. I think the EBITDA margin has, has fluctuates as, as, as always, but it's been in a similar range for a number of quarters. There is more pronounced seasonality now in our business, since power tariffs went up, and as we've seen some exceptionally hot summers in China, it has, it has resulted in at least a a couple of %, if not more, percentage point difference between our EBITDA margins in in in winter and and summer. That, that, that was, that's visible in our number.

Overall, we, we, if we take a trend over a number of quarters, I think EBITDA margins are gonna remain at quite a similar level to where they are today. I think the most significant negative impact has been the increase in power tariffs in China. It's possible that that will reverse at some point in the future. We don't have any, you know, knowledge about that. But, yeah, we're looking at EBITDA margins which already reflect that impact, and we expect the margin to improve, but only slightly from current levels over, you know, the following couple of years.

Mingxuan Li (Chinese Technology and Infrastructure Analyst)

Thanks. Very clear.

Operator (participant)

We're now going to proceed with our next question. The question comes from the line of Michael Elias from TD Cowen. Please ask your question.

Cooper Belanger (Equity Research Analyst)

Hi, everyone. This is Cooper Belanger on for Michael Elias. Thanks for taking my question. I kind of wanted to follow up on the AI discussion earlier. You know, given that what we're seeing in the U.S. right now with the incremental AI demand wave and kind of the subsequent shrinking of power supply, I just wanted to hear your thoughts on the upcoming power supply situation and I guess current, as well as it relates to both mainland China and international. Thanks.

Dan Newman (CFO)

I think in an area like Johor, is, they have the, the, the advantage in Johor is, they have a rich, very rich power capacity. I think the, in the short term or midterm, the power supply will not be the issue, I think, the, in the midterm. In China, I think what we can, we know is, the Tier One market, of course, is challenging in the future. Fortunately, for us, as I mentioned, in the last two years, we lock up a lot of the, the, power capacity and, and, build a very high, design, a very high power density, data center. I think the, in-

What I say, try to say, in short, short term, midterm in China, if the wave coming for everybody is a challenge, but in midterm, short term for us, is more relaxed for that. In a, in a, in a Johor site, I think the, we're, we got the, almost 50% of the power allocation in Johor so far. I think the, we are, more, more ahead than any, player in the, in Johor area.

Cooper Belanger (Equity Research Analyst)

Okay, great. Thank you.

Operator (participant)

There are no further questions, I'd like to turn the call back over to the company for closing.

Laura Chen (Head of Investor Relations)

Thank you once again for joining us today. If you have further questions, please feel free to contact GDS Investor Relations through the contact information on our website or The Piacente Group Investor Relations. See you next time. Bye-bye.

Operator (participant)

Please click, and disconnect this call.