GDS - Q4 2022

Transcript

Operator (participant)

Hello, ladies and gentlemen. Thank you for standing by for GDS Holdings Limited's fourth quarter and full year 2022 earnings conference call. At this time, all participants are in listen-only mode. After management's prepared remarks, there will be a question and answer session. Today's conference call is being recorded. I'll now turn the call over to your host, Ms. Laura Chen, Head of Investor Relations for the company. Please go ahead, Laura.

Laura Chen (Head of Investor Relations)

Thank you. Hello, everyone. Welcome to the fourth quarter and full year 2022 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 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, 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. Despite the challenging environment, our business continues to deliver solid results. In 2022, we grew revenue by 19% and adjusted the EBITDA by 15% year-over-year. We won significant new business in China, while at the same time adjusting our development program to the current pace of growth. We accelerated our international expansion with notable success. On the funding side, we took steps to access new source of capital and strengthen our financial position. Entering 2023, we are looking forward to a recovery. Customers are more positive about their business outlook. When their business pick up, it will flow through to us quite quickly. We could see this happen over the next few quarters. Meanwhile, we are continuing to strengthen our operations and finances.

Looking further ahead, the fundamentals for our industry remain very strong. On the one hand, AI and other new technologies are driving waves of demand. On the other hand, data center supply in China's Tier 1 markets is gradually become more constrained due to the limitations on land and power. As market conditions improve, we are well-positioned to outperform with our customer relationships, contract backlog, and established asset bases. In 2022, we won 74,000 square meters or 178 megawatts of net new bookings, all of which was for our organic data center developments in Tier 1 markets. A big highlight was our 64 megawatt win in Johor, with significant contribution from the international. Our full-year bookings were up to the level of the past few years. This highlights the importance of our strategy to follow the customer.

For 2023, we are targeting a similar level of new bookings with, once again, a significant contribution from international. In full Q4 2022, we won 2 new large, hyperscale orders. LF15 is the first order for our new campus at Xianghe in Langfang, Hebei province. The order is from a large internet companies which is migrating from our downtown sites in Beijing. The customer is relocating to LF15 and to one of our other campus in Langfang. BJ14 phase II is the second phase of development at our greenfield site in the Tongzhou District of Beijing. The order is from a first time large internet customer in the recruitment sector. This win typify our strategy of matching resource inventory with high potential customers. The new commitments come with confirmed move-in schedules.

Over the past three years, we have made a significant progress with new customer wins and diversification. Large internet companies accounted for 63% of new bookings in 2022, as compared with 23% in 2020. Enterprise and financial customers averaged around 20% of new bookings. This show how we have been able to evolve our strategy to capturing growth from the different customer segments and the different locations. Customer moving in 2022 was affected by the lockdowns and other macro factors. Going forward, we are focusing on customers who can commit to faster move-in schedules. Typically, large internet customers move in faster than cloud customers. Some of the large internet orders, which we won in 2022, have related, relatively short move-in periods.

Hence, the move-in rates could pick up as these new contracts come in towards the end of this year. We have a large backlog totaling 260,000 square meters. Nearly half of it related to data center, which are move-in ready. This gives us high visibility for future growth with reduced CapEx. To adjust to the current environment, we have slowed down our capacity expansion. In 2022, we brought 28,000 square meters into service. In 2023, we plan to build, bring a few further 58,000 square meter in service. All of with 33,500 square meters in mainland China and 24,500 square meters in international. Going forward, we will target to reduce the lead time from investment to customer moving.

Looking beyond our current construction program, we have over 300,000 square meters of area held for future development in mainland China, which can support multiple years of future demands. The mainland consists of land and power for campus type developments at good locations in national hub markets. Our pipeline aligns with the government's Eastern Data and Western Computing policies. This is valuable resource, which will give us significant competitive advantages as supply becomes tighter in year ahead. All of these priorities are directed at further strengthening our strategic market position and improving our operating and financial efficiency. The initial phase of our international expansion is focused on Hong Kong as the regional hub for Greater China and Singapore, Johor, Batam as the regional hub for Southeast Asia.

These two hubs rank among the 10 data center, the 10 largest data centers market globally. By leveraging our home market customer relationships, cost advantages from our prefabbed product, and the proven execution capability in hyperscale development, we can accelerate delivery to our customers and rapidly establish the market-leading positions. Our first self-developed data center in Hong Kong will enter service in the next couple of months. We have secured anchor customer commitments from leading China and the global cloud service providers. Hong Kong one is the first in a multi-year development pipelines of full purpose-built data centers. In an ideal location for serving both hyperscale and enterprise customers. Hong Kong's position as the primary gateway for network and connectivity between China and the rest of the world assures its long-term positions as a data center hub.

We have put together a unique set of assets, ideally suited to meeting new waves of demand. We are making great progress with both land acquisitions and the customer commitments in Southeast Asia. In Johor, we are constructing three data centers for deliver later this year and early next year. We are going from breaking ground to deliver up to 64 megawatts over five quarters. We have acquired or secured options over the adjacent sites to enable us to scale up. In the next few months, we expect to receive an additional order, which would take us to nearly 100 megawatts of commitments in Johor alone. For existing projects, the priorities are to win further orders for Johor and Batam, build up our local management team, and deliver the initial capacity.

At the same time, we aim to establish new projects in Kuala Lumpur, Jakarta, and other new markets in Southeast Asia and beyond. While our position in mainland China is well-set for years to come, we believe that GDS International can become a significant second growth engine. I will now pass on to Dan for financial and operating review.

Dan Newman (CFO)

Thank you, William. Starting on slide 22, where we strip out the contribution from equipment sales and the effect of FX changes. In 4Q 2022, our service revenue grew by 1.5%, and underlying adjusted EBITDA was slightly down by 0.2% quarter-on-quarter. For FY 2022, our service revenue grew by 19.2%, and underlying adjusted EBITDA grew by 14.5% year-on-year. Turning to slides 23 and 24. Service revenue growth is driven mainly by delivery of the committed backlog. Net additional area utilized during 4Q 2022 was around 10,700 square meters. Around 7,950 square meters was in Tier 1 markets, and the remaining 2,700 square meters approximately was from BOT projects. Net additional area utilized for FY 2022 was around 51,000 square meters.

Around 29,000 square meters was in Tier 1 markets, and the remaining 22,000 square meters approximately was from BOT projects. For FY 2023, we expect additional area utilized, net of churn, to be similar to the levels seen in FY 2022, i.e., around 50,000 square meters of net add. We disclosed on our last earnings call that one large internet customer will move out of our downtown data centers in Beijing. As a result, we will record 17,000 square meters of churn spread across the first three quarters of 2023. We have already won back more than 17,000 square meters of new commitments from this customer for two sites in Langfang. They will start to move into these sites during 4Q 2023.

As William mentioned, towards the end of the year, we will also start to deliver some other new contracts with faster move-in schedules. Accordingly, the cadence of move-in in FY 2023 will be quite heavily weighted to the back end. The good news is that a pickup later this year will feed into FY 2024 growth. Monthly service revenue per square meter was RMB 2,194 in 4Q 2022, compared with RMB 2,237 for the previous quarter, a decline of 1.9% quarter-on-quarter. Over the course of FY 2023, we expect MSR per square meter to decline by around 4%, comparing 4Q 2023 with 4Q 2022. This forecast decline is mainly due to change in location mix, including further BOT move-in. Turning to slides 25 and 26.

For 4Q 2022, our underlying adjusted gross profit margin was slightly up on the prior quarter at 50.9%, while our underlying adjusted EBITDA margin was down at 44.4%. For FY 2022, our underlying adjusted gross profit margin was 51.2% compared to 53.3% in FY 2021, and our underlying adjusted EBITDA margin was 45.6% compared to 47.5% in FY 2021. The margin decrease was mainly due to elevated power tariffs throughout last year, which we estimate knocked 1.5 percentage points off our margin, and growth drag from international expansion of around a further 1 percentage point. The midpoint of our guidance for total revenue and adjusted EBITDA implies an adjusted EBITDA margin for FY 2023, which is similar to the level seen in 4Q 2022.

We have assumed no reduction in power tariffs through the course of this year and continuing growth drag from international expansion. Turning to slide 27. 2022 was a transition year in terms of bringing down our CapEx in Mainland China on the one hand and accelerating international investment on the other hand. Our organic CapEx in Mainland China was around RMB 5.8 billion for FY 2022. Which is a few billion lower than the past couple of years. International CapEx was RMB 2 billion, while acquisition CapEx was around RMB 3.5 billion. We are guiding the total CapEx in FY 2023 of around RMB 7.5 billion, comprising a further reduction to RMB 3.5 billion from Mainland China, and an increase to RMB 4 billion for international.

Replacement CapEx included in the Mainland China number is running at around RMB 200 million in 2023. On slide 28, we provide some further data points relating to CapEx, starting with Mainland China. At the end of 2022, we had around 152,000 square meters under construction. The total cost to complete this capacity is RMB 7.4 billion, which we expect to incur over the next three years. With this additional expenditure, our total capacity and service would increase to around 667,000 square meters, sufficient for us to grow our billable area by around 71%. As you can see, a relatively small amount of incremental investment is required to support a large amount of growth because much of the investment has already been incurred. Turning to international.

Our total cost to date for the five data centers under construction in Hong Kong and Johor, totaling over 100 megawatts, is RMB 4.1 billion, or $590 million. The total cost to complete is RMB 3.4 billion, or $490 million. Looking at our financing position on slide 29. At the end of 2022, our net debt to last quarter annualized adjusted EBITDA ratio was 8.0x on a consolidated basis. If we exclude the debt of the international business and add back the net assets to our cash, our net debt to last quarter annualized adjusted EBITDA ratio was 7.1x.

If we further exclude capital work in progress for our construction program in Mainland China, our net debt to last quarter annualized adjusted EBITDA ratio would have been 5.0x. Our effective interest rate for FY 2022 dropped to 4.7%. Over the course of 2022, we maintained our cash position and ended the year with RMB 8.6 billion or $1.2 billion of cash on our balance sheet. In accordance with our treasury policy, we put cash on deposit with banks, which are investment grade rated and pre-approved by our board. In addition, we hold cash in equity and debt service reserve accounts as required by our project financing facilities. We previously had a small amount of cash in accounts with SVB for short-term operational purposes.

As of today, this amounts to $2 million, which is in the process of withdrawal. Turning to slide 30. In January of this year, we raised $580 million gross proceeds from the issue a new CB with 7-year maturity. We have subsequently repaid $150 million of working capital loans. In June of this year, we expect to repurchase $300 million of an existing CB when it is put. As a result, we will have almost no debt repayable at GDS Holdings level until 2027. The debt, which is repayable over the next few years, is amortizing long-term project level loans, which we refinance on a regular basis. Slide 31, we provide some more color on current year funding requirements, starting with Mainland China.

We expect our operating cash flow to be around RMB 1.5 billion to FY 2023. As I mentioned, organic CapEx to be around RMB 3.5 billion, resulting in negative free cash flow before financing of around RMB 2.2 billion. We aim to fund this gap using a combination of project debt and asset monetization. At the end of 2022, we had RMB 8.5 billion of committed but undrawn project loan facilities in Mainland China. We have recently obtained regulatory clearance for our offshore China Data Center fund. We expect to sign the limited partnership agreement and the sale and purchase agreement for the first data center asset shortly. The net cash proceeds will be approximately RMB 1.45 billion after deducting our 30% capital commitment to the fund.

We will have the option to do more such transactions to release equity if we choose to do so. We are also in the process of signing a formal framework agreement with a leading Chinese insurance company for an onshore version of the China Data Center Fund. Over the next couple of years, we expect our operating cash flow for Mainland China to increase while CapEx remains at similar or lower levels to the guidance to FY 2023. Hence, we expect to become free cash flow positive for Mainland China within three years. Turning to international. As mentioned previously, we expect total CapEx for international of RMB 4 billion for FY 2023. We expect to finance 50% of this, say RMB 2 billion or $290 million with project debt.

For the balance, we are evaluating a number of options for raising equity at subsidiary level, including private equity at our international holdco level and/or by bringing in local partners at country holdco or project holdco level. Turning to slide 32. For the full year 2023, we expect total revenues to be between RMB 9.94 billion-RMB 10.32 billion, implying a year-over-year increase of between approximately 6.6%-10.7%. We expect adjusted EBITDA to be between RMB 4.43 billion-RMB 4.6 billion, implying a year-over-year increase of between approximately 4.2%-8.2%. In addition, as previously mentioned, we expect CapEx to be around RMB 7.5 billion for the full year. We'd now like to open the call to questions.

Operator?

Operator (participant)

Thank you. If you would like to ask a question over the phone, please press star one and one on your telephone and wait for your name to be announced. To withdraw your question, you can press star and one and one again. For the benefit of all participants on today's call, please do limit yourself to one question. If you do have more questions, then please reenter the queue. We'll now take our first question. Please stand by. The first question is from the line of Jonathan Atkin from RBC. Please go ahead.

Jonathan Atkin (Managing Director)

Thank you. My question was mainly around Southeast Asia, and wondered if you could maybe talk a little bit about where you see relatively greater challenges to developing capacity in Johor versus Batam. As well, commercially in those markets, setting aside kind of the initial customer discussions that you've had and the incorp commitment that you have in Johor, what are the prospects for those markets to serve, sort of Singaporean requirements or act as a greater kind of Singapore availability zone versus serving kind of domestic and kind of regional demand on a, on a standalone basis?

In other words, how tightly coupled do you see Asian demand and maybe perspectively Western demand in Johor and in Batam, with respect to kind of Singaporean, you know, how tightly coupled is that with Singapore versus acting on their own as hubs? Thank you.

Dan Newman (CFO)

Hi, John. Let me start with the second part of your question. The way we view the Singapore market and the surrounding areas is as a proxy for the Southeast Asian markets. You know, I think the majority of the data center capacity in Southeast Asia is concentrated in and around Singapore, and a large part of that is there to serve the region, not just to serve Singapore. When we look at the situation in Singapore, it's well known, because of the historic moratorium since 2019, that the developable capacity in Singapore has largely been built out.

What we've seen from third-party market research is that utilization rate for capacity in Singapore has gone to low to mid 90%, which is, you know, more than full in industry terms. The Singapore government is going through a process. They may allocate some additional quota to allow some growth in Singapore, but we think that's only gonna address a very small part of the incremental demand. Therefore, you know, as we've seen in other markets where we have a presence like Beijing, Shanghai, Shenzhen and so on, the excess demand will spill over. You know, we believe that it will spill over to Johor and Batam. We think they will both be vibrant and high growth, large scale data center markets.

We think that when you look at it from the perspective of how the hyperscale customers, particularly cloud service providers, deploy, they need the diversity of different locations. I think having options on both sides of Singapore is operationally very beneficial. In terms of the pace of development, you know, I think we went out on our own in terms of making commitments to both Johor and Batam. Yeah, frankly, I think we leapfrogged many other players in doing that. You know, I think that having that dual strategy will give us a marketing edge and a solution that others cannot offer. So far, what we've seen is that Johor has taken off a little faster, primarily because of the existing infrastructure there.

I'm talking about power infrastructure and the network connectivity. We are very confident that the time is coming, it may be one year or so behind. We've been talking to government in Singapore, government Indonesia, there's a very strong commitment to making Batam a successful location for data centers. You know, we, you know, we're happy to be a pioneer. In the next few quarters, we'll be able to, I think, make progress in solving some of the basic infrastructure challenges, even if it necessitates investing in submarine cable networks ourselves to kickstart that. Then I think the market will start to pick up momentum.

Jonathan Atkin (Managing Director)

Thank you. If I could just ask a brief follow-up. Inside of China, can you talk a little bit about customer availability for obtaining servers? Are there supply chain constraints that are affecting their ability to procure equipment and ultimately move in? With respect to central Beijing, what are your prospects for refilling that capacity with other demand?

William Huang (Founder, Chairman, and CEO)

I think, Hey, John, this is William. I think in China, we just mentioned this year is a transition for China whole business. Based on in last couple weeks, I came back to China and visited a lot of governments and our customer as well. I think I quite encouraged by our customer, especially the large internets and cloud service provider. Based on our current pipeline, I think the demand, we can see the leading indication is pipeline. I think it is very strong. For the cloud, when I visit the cloud service provider, they're all very ambitious still, and I think they are recovered maybe slightly a little bit later than all the internet company and financial institution.

If you come to China, I think I see the in the first two months, the leading, I mean, data, which I mean, the consumer data rebound very fast. This is a leading indication that all the supply chain in industry will catch up the recovery. It still needs time. I think the in terms of the current Tier 1 market or the resource, I think we are very confident. We have just a very limited inventory, right? I think this is very variable aspect. I believe and I'm very confident we will sell them easily in this year. This is the question, right?

Jonathan Atkin (Managing Director)

Thank you.

Operator (participant)

Thank you. We'll now take our next question. Please stand by. This is from the line of Yang Liu from Morgan Stanley. Please go ahead.

Yang Liu (Executive Director)

Thanks for the opportunity to ask questions. I have two questions here. The first one is regarding the demand. I think we believe one of the reason to see very divergent demand from cloud and internet companies, that a lot of big internet companies are moving away from public cloud. If we combine the cloud and the internet together, when do you expect to see the overall demand recovery? Or put it another way, in term of GDS full year guidance, what is the assumption of demand recovery behind it? My second question is, in term of the competition, are you seeing more or more competitive bidding or price from Chinese telcos in front of your big customers? Thank you.

William Huang (Founder, Chairman, and CEO)

Okay, Yang Liu. This is William. I answer your first question. We just mentioned our structure of the new booking is changed. If you look at the last year, last two years, right? We used to be leading by the 90%, almost 85% or 90% incremental demands from the cloud service provider. This year, last year, almost 0 from the cloud service provider. We still reached the 70,000 square meter, right? This is all from the structurally change to the internet plus enterprise. We still maintain this assumption for our this year's new booking. We just wait if the cloud recovered. That's all upside. That's the profile what we assumption what we make.

Dan Newman (CFO)

Yeah. You, you asked about, you know, what was the assumption in our guidance or in our business plan. I think the key driver of revenue and ultimately of EBITDA is the move-in. I mentioned that, you know, we're expecting over the full year, the move-in to be about 50,000 square meters. We had some exceptional churn. I will keep talking about it, but if you add that back, you'd see that the move-in this year will be over 60,000 square meters, which is, you know, around 15,000+ square meters per quarter.

Which is a little higher than the last two quarters, similar to what it's been over the last six or eight quarters. That doesn't really imply much of a recovery. One of the factors which is behind that number is that, as we mentioned, a few contracts which start delivery in around September, October, November, December, have faster than typical move-in schedules. Some of it could be quite front-ended, which means that we may see quite a bit of move-in towards the end of the year. If it's not this year, January of next year. As that boosts the full year number without really boosting the revenue much this year. It does set up, I think, for potentially a good rate of year-on-year growth in 2024.

William Huang (Founder, Chairman, and CEO)

Yang Liu, I wanna add on more point. I think the focus for the new booking, 75,000 square meter, right? In our new guidance. This is all organic. This is all organic. Historically, when we reached some 990,000 square meter, including a lot of acquisitions, right? This is still very high level compared with the all the global top player, still bigger than most of the data center player in the world.

Yang Liu (Executive Director)

Can you provide us some disclosure which?

William Huang (Founder, Chairman, and CEO)

Okay. I think in terms of the competition from the telco, you know, our strategy is Tier 1 market. We build all our asset in the Tier 1 market or edge of the town, but Tier 1 market. This is I think in the last, there's nothing changed in terms of supply. Telco still less investment in this region, right? I think we are not worried about it. On the other hand, we don't compete directly. They're also our customer. I think we have very good delivery relationship with the work with the three telco in the last 10 years.

Recently, a few, I mean, a few telcos came to us and tried to discuss some cooperation between us because they also deploy their own cloud service. Want to deploy their service in Tier 1 market. If someone want to deploy cloud in service in Tier 1 market, I think it definitely GDS will be the first choice for them to partner with. Otherwise, no possibility to provide their cloud service in this city, right?

Yang Liu (Executive Director)

Yes. Thanks a lot for the answer.

Operator (participant)

Thank you. We'll now take the next question. Please stand by. This is from the line of Gokul Hariharan from JPMorgan. Please go ahead.

Gokul Hariharan (Managing Director)

Yeah, hi. Thanks for taking my question. First, could you talk a little bit about what are you hearing in the last couple of months? William, I think you mentioned there is some excitement from the customers. Typically on the cloud side, which is still a significant part of your backlog, if you think about the next couple of years, are they starting to see utilization pick up in their existing infrastructure that they need to now start accelerating the movement? Or you think that the cloud acceleration is still going to take a little bit more time? Secondly, also, on the EBITDA front, we have seen some erosion in EBITDA because of power costs and some, I think, mix related challenges.

Do we see the guidance that we gave for FY 2023 as kind of like the sustainable level of EBITDA margin? Or we think there could be further pressure as more international business comes online in 2024 and beyond?

William Huang (Founder, Chairman, and CEO)

Hello, Gokul. This is William. I think in terms of the cloud service provider, I think number one, they're all making new business plan right now based on the current environment. Because this is, the assumption previously a lot of overhead is in China, like lockdown policy. Now it's gone, it's moved on. Another is the new government set up all the structure and all the platform. They made a couple of times statements to support the platform and the social media, private company support their growth, continue to growth in China, right? I think our customer also very encouraged by the current environment.

They made the, they are making a new business plan right now. In general, I think based on my conversation with our largest customer, one of top three customer, they're all very encouraged. I think in terms of business plan, it definitely will boost in the next few quarter. In terms of moving, there's a lot of effects to impact the moving in terms of the shipment, in terms of the previous, they still have the same inventory, right? That's why we still very conservative assume cloud service provider moving pace still maintain a solid level, neutral level, not aggressive. It's normal.

I think the, giving the whole environment looks like it will improve in the next few quarter.

Dan Newman (CFO)

With regard to adjusted EBITDA margin, I feel like this year's margin is probably the trough. It does depend on, you know, several different drivers. One, of course, is pricing. I, you know, it's another topic for discussion, but, you know, we feel like pricing is bottom. There's a setup which could see pricing recover in future years. Secondly, is power tariffs. That the input fuel costs have started to come down, but we haven't seen that reflected in power tariffs yet. Even if it is reflected, it wouldn't benefit us this year. It could benefit us in future years.

Chinese government policy may influence that if the government wishes to see power tariffs come down as was their inclination historically, as a tendency historically. Then the third part is international, where I believe we are creating significant value, or we will create significant value in future. At the moment, it's EBITDA negative. I think it will be EBITDA break even in the first half of next year, but that's still, you know, depressing on the margin. It will take until 2025 before the EBITDA margin of international sales in the 13%, right? That growth track will persist for some time.

I think for forecasting purposes, maybe you use this year as a trough and then see a slight step up over the next couple of years as a baseline.

Gokul Hariharan (Managing Director)

Got it. Thank you.

Operator (participant)

Thank you. We'll now take our next question. Please stand by. This is from the line of Frank Louthan from Raymond James. Please go ahead.

Frank Louthan (Managing Director)

Great. Thank you. Can you comment on the state of the market for the capital recycling and the appetite for those assets? Is it the same or better or worse than when you originally sort of put this plan together? I apologize if I missed this, but can you quantify the amount of capital recycling you expect to do in each of the next 2 years? Is CapEx, is this sort of the low for CapEx this year? Thank you.

Dan Newman (CFO)

Yeah. Let me start with the numbers. I mean, what I showed was that in 2023, our free cash flow before financing is negative by around just over RMB 2.5 billion. You know, some of that can be financed by drawing down on project finance facilities. The remainder needs to be financed with our capital. Having done that convertible bond in January, assuming, you know, we go ahead and repurchase the CB that is portable, you know, on a net basis, we increased our financial resources. I think pro forma, we had around RMB 9 billion of cash.

That is available to be allocated to China, to be allocated to international if we choose to do so. We try to prioritize, you know, raising additional capital, recycling capital at the country level before we allocate our cash. In China, if we assume that the target for this year is to recycle around, you know, RMB 1 billion-RMB 2 billion, you know, we are already 10 months down the road of working on our onshore, sorry, offshore China Data Center Fund. We had the regulatory approval. When we signed the limited partnership agreement, we also signed the sale and purchase agreement for the first asset to be transferred to that fund.

That will realize cash proceeds to us net of what we put into the fund for RMB 1.45 billion. That goes a substantial way to, you know, fulfilling whatever requirement we have this year. I think the chances are that next year the requirement will be similar, if not less, because operating cash flow will hopefully increase and CapEx I don't expect to be higher. It might be lower. That negative free cash flow before financing might be a smaller number. I don't think it's very challenging for us to do monetizations at this scale. You know, we have a substantial amount of capacity in this offshore China Data Center Fund to do more deals.

We've been working for some time on onshore equivalent and, you know, now in the process of signing a formal term sheet, a framework agreement. An asset has been identified and initial diligence done by the investor, which would, you know, also recycle at least a few hundred million RMB of additional capital. Just looking more broadly, you know, the REIT market in China is beginning to really take shape. There's a lot of interest. We're being approached continuously by investors and banks looking to structure something involving data center assets. You know, I think it's an asset class that attracts a lot of interest in China.

I think for the China REIT market regulations, it is really designed for stabilized assets. You know, with these funds, we made the decision because it suited our purposes to focus on pre-core projects that were still, you know, under development. De-risked to a degree, but under development. But, you know, that could be a stepping stone towards eventually being able to, you know, access the REIT market. I think we have I think we're very comfortable. I think we're probably a far better position than anyone in having potentially an offshore and onshore and a lot of banks chasing us for a data center REIT. That shouldn't be a problem.

Frank Louthan (Managing Director)

Okay, great. Thank you.

Operator (participant)

Thank you. We'll now take our next question. Please stand by. This is from the line of Joel Ying from Nomura. Please go ahead.

Joel Ying (China Telecom and Technology Research Analyst)

Hi. Thank you for taking my questions. I have just one quick one, questions about China market. We are seeing, you know, latest news about AI technology, ChatGPT. Do we actually see any potential, you know, demand rising from the market about the AI data centers? Do we expect the AI data centers will be, you know, could be the outsourcing by, like, companies like GDS third parties, or for some of the cloud companies, they will do the self-building things that will be outsourced, that will be self-built. Thank you.

Dan Newman (CFO)

AI driving demand. Are we gonna outsource the AI data centers?

William Huang (Founder, Chairman, and CEO)

Yeah, I think you're right. I think Now everybody focus on the ChatGPT, right? They forget that in China, this is already a lot of the big player already start to use the AI. AI is also very hot topic in China, we also believe this will drive the new wave of the demand. Definitely GDS, our product, our location all fits AI type demand in future, in terms of power density, in terms of total power capacity and the location where we are. I think we are very encouraged by the new wave of the demand. This will affect our business in next few years and just what happening in the last 8 years ago when the cloud starts, right?

I think we are very, very happy. Definitely, I think the, because the, it's, they AI type demands ask for more high power density. It's very difficult to build by themselves. Also it will be the trend, and that's what we believe.

Joel Ying (China Telecom and Technology Research Analyst)

Thank you very much.

Operator (participant)

Thank you. We'll now take our next question. Please stand by. This is from the line of Edison Lee from Jefferies. Please go ahead.

Edison Lee (Head of China and HK Technology, Telecom, and Software Research)

Hi. Thank you very much for taking my questions. My first question is about the your build-out schedule or your delivery schedule. I found that in 2023, 85% of your delivery is actually taking place in the second half, right? Only 15% in the first half. I wonder if that is driven by your demand assessment or driven by your construction schedule. Okay, that's number one. Number two is on your guidance for 2023, obviously the EBITDA growth lags behind the revenue growth. If you take out international business, what do you think the EBITDA growth can be in 2023? Lastly, one of your peers recently said that a major cloud service providers in China in fact stopped self-building.

I don't know how true that is, but what is your view on the cloud service providers self-building program, given the current state of the market? Thank you.

Dan Newman (CFO)

The first part about delivery schedule. We slow down pretty much our entire construction program. I think there's more than 20 projects in that program. As you know, all those projects have customer commitments, and those customer commitments have a delivery date. You know, ability to slow down depends on the customer agreeing to take delivery at a later date. Not all of them, you know, wish that to happen. Some of them, you know, would like us to keep to the original delivery schedule, which is of course, perfectly fine by us.

We're just trying to manage out the incurrence of our CapEx, you know, to shorten the lead time between when we spend money and when the customers move in and start to generate income. That's really what's behind the numbers. You know, we do have a substantial amount of capacity in service, which is not yet re-revenue generating. I mean, our utilization rate is 71%. When you have a portfolio in service as large as ours. The commitment rate is 95%, utilization rate is 71%. That means 24%, which is committed but not utilized. That's a big number. That's our backlog for air in service. It's 120,000 square meters. That could move in practically with no additional CapEx.

Yeah. You gotta take that into consideration, right? The completion of the projects under construction is not driving, not the only growth driver when you have so much move-in ready capacity. William, you have to answer the question about self-build. Last time you sort of.

What, look, what's the question?

Edison Lee (Head of China and HK Technology, Telecom, and Software Research)

The question is that one of your peers recently said that American cloud service providers, in fact, will stop self-build.

William Huang (Founder, Chairman, and CEO)

Yeah. I think this is the topic, I think, yeah. It's not only one cloud service provider internal discussion. I remember in the last couple of the earnings call. We are the largest builder in China. We have a scale advantage. Some of our customers still start to realize that, right? In terms of economics perspective, they realize it's not very efficient. This is the topic is discussion there internally. We are trying to encourage this for their future.

Some of them can also talk about they sell some asset to us. We are also consider about this option.

Dan Newman (CFO)

Let's ask about the EBITDA growth rate excluding international. We allocate SG&A to international, you know, using, you know, sound accounting principles. With that allocation, the EBITDA of international is negative about RMB 100 million in 2023. If you like, you can add that back and that's what GDS looks like without international.

Edison Lee (Head of China and HK Technology, Telecom, and Software Research)

Okay. On the revenue side, do you have anything projected for 2023 on the international?

Dan Newman (CFO)

Yeah, I think about, I was looking at 1.7% of our revenue comes from international in this current year.

Edison Lee (Head of China and HK Technology, Telecom, and Software Research)

Okay. Okay. Okay. Got it. Yeah. Thank you very much, Dan.

Dan Newman (CFO)

Yeah.

Operator (participant)

Thank you. I'd now like to turn the call back over to the company for closing remarks.

Laura Chen (Head of Investor Relations)

Thank you all 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. Next time, see you. Bye-bye.

Operator (participant)

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