May 20, 2021
Operator
Hello, ladies and gentlemen, thank you for standing by for GDS Holdings Limited's First Quarter 2021 Earnings Conference Call [Operator Instructions] 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
Thank you. Hello, everyone.
Welcome to 1Q 2021 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's Founder, Chairman and CEO, who will provide an overview of our business strategy and performance. Mr.
Dan Newman, GDS's 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 note that GDS's earnings press release and this conference call can include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. GDS's press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures.
I will now turn the call over to GDS Founder, Chairman and CEO, William. Please go ahead, William.
William Huang
Okay. Hello everyone.
This is William. Thank you for joining me on today's call.
I'm pleased to report another solid set of the results. Our performance year-to-date is in line with our expectations and we would remain on track to deliver our full-year sales target and financial guidance.
Our sales in 1Q 2021 was over 23,000 square meter. All organic, all Tier 1 markets, we have maintained the same sales run rate since the beginning of last year, and we are confidence of maintaining it, throughout 2021.
Despite that the noise of about the growth of the cloud market in China, new regulations and the increasing competition we are not slowing down. The reason why we can maintain sales commitment and momentum is because of our positioning.
In particular, our increasingly diversified customer relationships and our market presence which mirror the footprint of the cloud. The strength of our positioning is clearly illustrated by our sales achievements in the past few months.
In 1Q 2021, we won six hyperscale orders, two of these orders were in new markets. In Hong Kong we closed an anchor order for 45% of our Hong Kong 1 data center.
The customer is a leading cloud service provider from China. In addition to commitment for Hong Kong 1, which we will enter service in 2022, this customer has indicated strong interest in anchoring our Hong Kong 2 data center, which we will enter service one year later in 2023.
In Chongqing we closed an anchor order for 50% of our Chongqing 1 datacenter. This came from a large cloud customer in the financial service industry.
In the current quarter, we won our first time hyperscale order in Beijing from a new cloud service provider, which is folks that are serving government and SOE customers. These three notable orders highlight our ability to keep our winning as demand shifts between markets and customers.
A couple of quarters ago, we made an important to breakthrough with two new hyperscale internet customers. I'm pleased to report that we have now one follow-up order from one of them.
A leading e-commerce platform payor for capacity in one of our Shanghai datacenters. We also won the bid for a follow-on order from that other one, a leading content platform for capacity to invest in their secondary Tier 1 market.
Our sales and resource strategy is driven by architecture of the cloud. As shown on Slide 6, power platforms deployed multiple availability zone in each region.
Each AZ is independent. But all of the AZs in the same region interconnected with a minimal latency.
This architecture supports real-time and high redundant prices. Hyperscale customers look to land and expand which means they set up new AZs and then over time, increase the capacity.
We target the initial LAN. And as a result, we are well positioned for the expand.
Around 50% of our current sales pipeline expansion order from customers who have already landed at one of our location. These expansion orders will now go out to open tender.
For the remaining 50% of our pipeline, the situation varies from the highly competitive to limited competition, depending on the location and customer requirements. This means that we can be selective about what business we pursue.
We are not under pressure to chase highly competitive deals just to meet sales targets. A key to our success has been our ability to continuously scale up our supply.
As shown on Slide 7, we now have our highest ever area under construction that's over 160,000 square meter or 397 megawatts of IT power capacity. Meanwhile, we have sustained our pre-commitment rate at 68%.
As shown on Slide 9, in each Tier 1 market, we have established a cluster of datacenters in separates locations, which mirrors the footprint of the curve. This is what gives our platform a unique value proposition.
No other datacenter company is anywhere close to having this market presence. In fact, most of our competitors only have supply in a few places.
During 1Q 2021, we started the construction of five new data centers on land and buildings, which were previously held for future development. And at the same time, we tucked up our resource pipeline with greenfield land purchase at various locations on the edge of Shanghai and Beijing.
This shows how our capacity sourcing and the construction cycle is working. We currently have over 500,000 square meter capacity, held for future development.
Over 90% is greenfield, greenfield land, which we own and which comes with power cord. This resource pipeline derisks our growth and the visibility data streams.
Our sustainable competitive advantages in resource supply. We currently have about RMB3.3 billion, which means US$498 million of investment tied up is held for future projects.
There have been a number of recent developments in government policy, including specific policies related to resource allocation in Beijing, Shanghai, and Guangzhou. Some of the details are new, but in our view, the underlying policy directly is consistent.
On one hand, data centers are new infrastructure, which is important for China's digital transformation. On the other hand, the government is guided by carbon neutral objectives and the maintaining tight control over the allocation of land and the power for data center use.
We hear people talk about over supply, let's put this in the context. Across all of our tight Tier 1 market, supply is constrained and the bar is being raised by government policy.
The only exception is that area in Jiangsu Province to the immediate northwest of Shanghai, where there a number of players who have logic developable capacity. Competition in this one area is more intense and the pricing is more aggressive.
It will take some time to work through, but in the long-term we believe the supplier will be constrained there, just like everywhere else. We are taking a long-term view and are seeking to consolidate some of the supply.
During the current quarter, we closed the two previously announced acquisitions. BJ15 brings over 19,000 square meter of capacity.
It is 100% committed and 80% utilized. BJ15 was a highly competitive M&A deal.
Since closing, we have started converging of an existing building on the same site, which we call the BJ16. It is already almost 100% pre-committed, with this expansion that impacted acquisition multiple, costs down by about a one to two times.
TJ1 is our first data center in the Tianjin area with the added advantage that it is only 30 kilometers from the edge of Beijing. And it brings over 14,000 square meter of highly marketable capacity.
We pay that a relatively small premium to organic build cost. We are currently at an advanced stage for another data center acquisition, which would bring expansion capacity with some customer commitments.
Once again, we expect to pay a single digital acquisition multiple. We saw this quarter, how Chongqing and Hong Kong to new market for us in terms of self-developed data centers drove significant new business from established strategic customers.
By the end of this year, we expect in fact to enter one or two further new market in China, the same logic of the follow this customer is driving our Southeast Asia expansion plans. Our initial focus is on Singapore.
However, as the Singapore government is not approving new projects, we are looking for alternative ways of establishing our presence in the Singapore market. Give the constraints of supply in Singapore and the rising co-located prices.
We are also considering complimentary options in neighboring countries. We have identified some very promising investment opportunities and we aim to make at least one or two commitments within the next couple of quarters.
Now, I will hand over to Dan for the financial and operating review. Thank you.
Dan Newman
Thank you, William. Starting on Slide 15, where we strip out the contribution from equipment sales and the effects of FX changes.
In 1Q 2021, our service revenue grew by 4.7%, underlying adjusted gross profit grew by 6.2% and underlying adjusted EBITDA grew by 7.2% quarter-on-quarter. Our underlying adjusted EBITDA margin was 47.9%, a new high for us.
Turning to Slide 16, service revenue growth is driven mainly by delivery of the committed backlog and closing of acquisitions. Net additional area utilized during 1Q 2021 was 16,152 square meters, exceeding our expectations for the first quarter, which is normally a slower season in terms of moving.
In 2Q 2021, we expect organic move in to be slightly lower. As a result, at the mid-year point, we expect move in will be in line with our target.
MSR declined 2.6% quarter-on-quarter in 1Q 2021 to RMB2,425 per square meter per month. Where FY2021 as a whole, we expect MSR to decline by a low single digit percentage year-on-year.
To some extent, the MSR trend is a reflection of average selling prices in our backlog. However, there are many other factors which affect MSR, including the customer mix, data center location, redundancy level, development cost and contract structure.
We have said many times that we target to sustain investment returns. We've been largely successful with only a gradual small decline in IRRs over the years across our portfolio as a whole.
Turning to Slide 17, our underlying adjusted gross profit margin was 54.4% for 1Q 2021, an increase of 0.7 percentage points quarter-on-quarter. Due to the timing of data center completions, our utilization rate was at a slightly higher level of 72.9% compared with 71.1% at the end of 4Q 2020.
Our underlying adjusted EBITDA margin was 47.9% for 1Q 2021, an increase of 1.1 percentage points quarter-on-quarter. As you can see on Slide 18, we have a lot of data center capacity coming into service in 2Q 2021.
43,000 square meters compared with only 13,800 square meters in 1Q 2021. Despite the fixed costs associated with this additional capacity, we expect our 2Q 2021 margin to be only slightly lower than for 1Q, we’re continuing the upward trend from last year.
Turning to Slide 19, our CapEx for 1Q 2021 was RMB2.3 billion, consisting mainly of payments for organic CapEx. As we closed on Page 15 in 2Q 2021, we expect RMB2.68 billion of acquisition consideration to be paid in the current quarter.
Part of our organic CapEx in FY2020 and FY2021 relates to B-O-T contracts. We have nine such projects for one customer, which are designated for transfer to JVs with GIC.
And two such projects with two other customers, which are not part of our existing agreement with GIC. We’re currently in discussions with GIC about increasing our percentage ownership in the JVs and including 11 projects in our partnership.
We think that the combination of higher equity participation and management fees makes these projects more worthwhile for us. We will update you when ready.
As at the end of 1Q 2021, we had around RMB1 billion accumulated CapEx paid for these 11 projects. Looking at our financing position on Slide 20, we have RMB14.9 billion of cash on our balance sheet.
And our net debt to EBITDA ratio is 2.9 times. Given our ongoing levels of organic CapEx and the Beijing 15 acquisition consideration, this ratio will go back up to around 5 times at the middle of this year.
During 1Q 2021, we completed debt financings, so the total facility amount of RMB1.3 billion equivalent to US$191 million, including both new project financing and refinancing of existing facilities. The average interest rate for these completed facilities is 5% based on the pervading loan prime rate.
This compares with an effective interest rate of 6% all of our debts in 1Q 20.21. In the past four months, we’ve completed RMB0.9 billion of refinancing, and we expect to complete another RMB1.7 billion the refinancing by the end of the current quarter.
With that, we will have RMB2.1 billion of refinancing that to do as part of our plan for this year. Once completed, we expect our effective interest rate to come down.
Turning to Slide 21. You confirm that our previously provided guidance for total revenues, adjusted EBITDA and CapEx remain unchanged.
Before we finish, I would like to say a few words about ESG. We’re trying to publish out an overall ESG report in the next few months.
We appreciate that investors are keen to know our plans, particularly for renewable energy given its importance to all of our stakeholders. As market leader, we aim to take a leadership position in renewables.
We are operating in markets, which have their own challenges, which are also very dynamic. The supply renewables is increasing rapidly in China.
On a per kilowatt basis, the generation costs will soon reach parity with brown power. China leads the world that is investment in ultra high voltage long distance power transmission, which means that renewable energy is going to be more accessible in Tier 1 markets.
The power trading markets in China are also developing rapidly. All of this creates exciting possibilities, which we will reflect now targets, timeline, and how to get there.
We will not disappoint. We would now like to open the call to questions.
Operator?
Operator
[Operator Instructions] Our first question comes from the line of Yang Liu from Morgan Stanley. Please ask your question.
Yang Liu
Thanks for the opportunity. I have two questions here.
First, its related with the competition in Changshu, as William previously mentioned, you expect a normalization for the competition in future. What do we need to see before a real normalization?
Is it should be consolidation or is it should be policy turn around in approvals? What’s your expectation here?
And the second question is the related with consolidation, right, if GDS turned out to be the consolidator, what should be the multiple trend in the next few quarters or the next few years, because we see a lot of PEs and the infrastructure fund entering the market, they might push up acquisition multiple in private market. And what should be the – what is your expectation on the multiple here?
Thank you.
William Huang
Okay. The first question is amount of the competition right in this area, right.
I think in the moment was the capacity and the land of power is allocated to the different payer in the last couple of years. So this area, as I mentioned, the competition intense.
But GDS now in a very good position, is number one, we have some – we already – our capacity already to have the customer commitment since last year. So we are not a very – number one, we are not pursue some deal, which only wants fulfill our sales targets.
We are piped to relax, because we are well positioned there. So based on our national footprint GDS is had some – GDS already in a multi market.
We are not just focus on one market to maintain our try to get into every deal – win every deal, it depends on our intention. If some strategic deal with feel important, we will do it.
But if the deal is, our quality is not that good, we will walk away. This is our strategy in this area.
From lock-in point of view, I think the number one, the demand because we believe in this area – in a whole Shanghai area, ease of China I think the demand deal will continue grow. So we don’t worry about the future, this inventory will be the issue, but that would take time.
So we are relaxed. On the other hand, GDS has – as I used to mention, we have more than almost – more than 700 customer base.
So we are our customer quite a diversified 80% of our – 80%, 85% of our new incremental order is from our installed base. So we are not a desperate per year, so we are quite relaxing to look at this areas competition, this is the first question.
But once again, as I mentioned, I think the government’s policy is changing, because in general, I mean, the common nutrient policy will guide it, will raise the bar of the common quarter allocation. And the business, in my view, we’re slowly to try to update a quarter.
So I think the demand and the supply will more balance in a next few years. The second question is…
Yang Liu
Consolidation.
William Huang
Consolidation, I think, yes, we are in a multimarket, even in overseas market. So consolidation is – definitely is our future goal.
So we are open in terms of the apply the project, applied in it platform. So we are quite open.
So this is we keep open our eyes to what the opportunity. In terms of moldable, I think the – we always do the reasonable deal, right.
We don’t wanted to be a crazy buyer. So we will constituent to let’s say take care of all the investor benefits in our each acquisition view.
Yang Liu
Thank you.
Operator
Our next question comes from the line of Jon Atkin from RBC. Please ask your question.
Jon Atkin
Thank you very much. So I have an operational question and then a strategic question.
So on the operational topics, you have 43,000 square meters coming into service in 2Q. I wonder what’s the timing?
Is that weighted towards the beginning and/or middle of the quarter? And also on the renewal schedule that you shared a reasonable amount is coming due for the final three quarters of 2021.
And where do things stand with your renewal discussions with your customers?
Jamie Khoo
Jon, this is Jamie. Regarding the questions, regarding on the timing for the delivery of the 43,000 square meters, we are looking more closer to the June period on the delivery mostly.
And on the…
Jon Atkin
Can you beat that, sorry, I didn’t catch that.
Jamie Khoo
Yes. So we are looking more towards the end of the quarter, which is the more in the June period.
Jon Atkin
Got it.
Jamie Khoo
And what’s the second question that we need to answer.
Jon Atkin
Yes, the renewals – yes, in the in the back of your presentation, you give the amounts of renewals for the final three quarters of this year, next year, the following year. But for the near-term renewal between now and end of 2021, what is the discussions that you’re having with your customers?
Are you anticipating renewing the 100% it? What’s the turn of your discussions around that and the renewal rent and whether that stays the same or changes?
Dan Newman
Yes. Jon, I think we’ll renew almost all of it.
There’s one situation where we are going to pull out of – let me call it third-party data center, because it’s no longer up to an acceptable operating standards and there may be some churn, that’s an 1,000 square meters, which insignificant even by standards of data center industry. Other than that, we expect a very high renewal rates this year.
And I would say, overall assumption that pricing will be flat across all the contracts. We’ve discussed quite a few times before about our strategy.
At this point in the cycle, we’re still increasing our market share and deepening relationships with large customers. We don’t push too hard on the pricing because we’re getting benefit trade-offs in terms of new business at reasonable prices and returns in many other places in China.
So I think achieving overall flat pricing on renewals is quite satisfactory at this time.
Jon Atkin
Thank you. And then lastly, there was a press article in the last two days about partnering or acquiring the data center business of a logistics real estate company.
And I wondered if you can comment on what you would view as the strategic advantages of such a partnership inside of China or in other markets like Malaysia or Indonesia that you’re targeting brands?
Dan Newman
Well, we did not respond to the story that was put out by one news agency. And I’ll respond now, but as a general comment, our acquisitions to date have been in effect asset acquisitions.
We’ve acquired 80% facilities on – each acquisition has involved a single site somewhere between 4,000 to 20,000 square meters at their stages of development. We haven't done any acquisitions of what you might call platform acquisitions.
But in terms of strategy, I think it's all part of the same theme, which is that we seek ways to leverage how our market leadership position to establish even more competitive advantages, scale advantages, market presence, and so on. I think platform acquisitions probably have to look at the valuation in a different way.
We'd have to assess, what synergy is, what the strategic benefits are and so on, but very open-minded about that. So I think, we have a window of opportunity given the position that we've established to really try to do some more significant deals.
Jon Atkin
Thank you very much.
Operator
Our next question comes from the line of Colby Synesael from Cowen. Please ask your question.
Colby Synesael
Great. Thank you.
Maybe just following up on that last one as you start to potentially look at a platform type acquisitions, what's the capacity financially speaking that you think that you guys would might be comfortable doing the article that Jonathan's referencing suggested a pretty high price target or price tag, excuse me, which I'm just trying to get a sense of, what is the feasibility of giving such a large deal. And then secondly, even though the install number of the 16,000 plus was stronger than guided to, you missed service revenue expectations at least by a little bit largely as a result of the greater pressure on ARPU then I think was anticipated, it was down, as you mentioned 3.7% quarter-over-quarter.
I'm just wondering if that's timing related or what might be the behind the magnitude of that sell-off and then based on your guidance for still low single-digit declines, it would suggest then that ARPU is most likely flat for the remainder of the year off of that 1Q number. I'm just curious, if you would support that deal.
Thank you.
William Huang
Yes, on those parts about our financial capacity, I think it's relatively easy to calculate what it is today. We have just under RMB15 billion cash in our balance sheet at the end of the first quarter, because we have a big slug of acquisition consideration to pay during the second quarter.
And we gave guidance, annual CapEx of about RMB12 billion, which included the loan M&A, but not beyond the M&A. If we finance that CapEx 50-50 equity and debt, which is relatively conservative, because of course, we target a higher leverage in that.
That would involve RMB6 billion of equity and RMB6 billion of debt. For the RMB6 billion of equity that's versus maybe RMB15 billion of cash.
So there's a fair amount of capacity there, if something opportunity arises, which is not in the ordinary course of business. It's more generally I'd hope after the number of different financings we've done, the number of different markets and sources of capital that we tapped, whether it be stock markets in the U.S.
or in Hong Kong, strategic investors in Singapore and private placements with Chinese financial investors and financial institutions and joint ventures with sovereign wealth funds. And so I hope over the years, we proved that we have enough ingenuity to be able to find ways to finance, whatever we want to do.
I think, we’ve never considered ourselves a capital constraint, even when we built three data centers, we putting in dollars in 2010. I didn’t consider that we were capital constraint.
Comments about the MSR, it’s a fair comment. 2.6% quarter-on-quarter decline the first quarter it’s often just to do with mathematical timing.
That’s why I gave the assurance over the full year, still looking at low single-digit. So that means not much further decline in the subsequent quarters of this year, maybe 1% in the second quarter, not much in the second half of the year.
We don’t provide quarterly guidance. So, I checked your comment about revenue in the first quarter, but even that should provide revenue guidance.
On the other hand, I think probably our EBITDA exceeded most people’s expectations – our EBITDA margin exceeded most people’s expectations. So yes, it’s a current of balance there.
Colby Synesael
Okay. Thank you.
Operator
Our next question comes from the line of James Wang from UBS. Please ask your question.
James Wang
Hi, good morning management. Hi, it’s James Wang from UBS.
I got just quick questions. The first question on self-build.
So, can you maybe comment on the extent of the self-build by the large cloud customers, for example, have you seen any changes recently in the proportion of self-build by these customers, and as a hypothetical, how would you ensure your future growth if these customers were to increase their proportion of self-build? So that’s the first question.
And the second question is just on the current demand environment. It seems like another project put out for public tender this year has come down.
And also I think William mentioned that this year, you guys saw a bit of a slowdown in the cloud business in China. But do you see this weakness as a one-off thing, as you see it, or do you think this slowdown will be sustained?
Thank you.
William Huang
Okay. The first question is customer self-build, right?
I think this is something new, I mean, since a capital – full five years ago the self-build is a separate market in my view. So again, I should remind all investors, it has strategy that folks on the Tier 1 market, right?
So, I think the market is separate to the one in self-build market, which is in the most – almost 100% so far, it’s in a remote area. And what we can see is other Tier 1 market still very, very good demand from our customer.
So, I think it, in terms of the Tier 1 market, we didn’t see a lot of different compare with last couple of years. So this is chance still we maintain.
So, I will – so once again, this is a separate market. The second question, sorry – go ahead.
James Wang
My second question William, just on the demand environment, do you see the slowdown being sustained? Thank you.
William Huang
Demand. It’s depends on the different – which market we talk about.
In our view, in a Tier 1 market, outsourcing market, I didn't see a slowdown in the demand. So that's why we can still maintain the high growth in the first quarter, which we just have reported.
We think – we didn't see – we still see our momentum in the next quarter, but I don't know which other player what they will look at, right? In our view, I think we already lock up this quarter and we maintain the whole years’ sales commitment.
James Wang
Thank you.
Operator
Our next question comes from the line of Tina Hou from Goldman Sachs. Please ask your question.
Tina Hou
Hi management, thank you for your time. I am going to ask two questions.
The first one is regarding your B-O-T project and the JV with GIC. Wondering if you could share more colors with us in terms of how your thoughts are for the JV as well as for the B-O-T projects going forward?
And then the second question is regarding competition as William, you mentioned that the competition in Jiangsu province has been relatively intense recently. So I was just wondering, historically speaking, let's say maybe a few years ago was there any, like similar situation in any of the regions happening in China and then what was the process there and then how did – so how eventually did the competition intensity come back to normal, would be very helpful if we could have some like historical reference there.
Thank you.
Dan Newman
Hi, Tina, I'll answer the first question on B-O-T. We've always made clear, William just said it, that B-O-T opportunity is mostly a remote site opportunity and it is quite different from our core business in Tier 1 markets.
The situation is almost exactly the opposite of Tier 1 markets, when Tier 1 markets customers may have multiple availability zones, their capacity is spread out and they have a big challenge to expand their IT platforms in multiple locations in a synchronized way. Whereas in remote sites, they have very few notations, in fact, if you look at the early presentation where we showed the locations of the availability zones in China, you see just a few dots outside of the Tier 1 markets, those are the remote sites.
The remote sites, our customers can concentrate a lot of capacity in a very few place. There's no barrier to entry, so very practical for them to do that for themselves.
And yet most of them are looking to outsource that. But the terms of outsourcing are quite different.
So we established a partnership with GIC, it was just a really a long-term financial engineering to ensure that we have a competitive cost of capital, but we are selective about that business just as we have selection about the business that we do in Tier 1 markets. If that kind of business is put out to open tender, it's more competitive, it's more price orientated in business in tier-one markets.
All I can say is that if we don't win it without scale advantage and our cost of capital advantage, then whoever wins it probably is not getting a very good deal.
Tina Hou
Thank you, Dan. And just to follow up on that.
So you mentioned, I think you were interested in maybe increasing the shareholding in the GIC JV. I remember it was 10% for GDS if I'm not mistaken.
So if we increase, potentially increase that shareholding to over 50%, does that mean like, all of these projects should like get consolidated into our P&L right?
Dan Newman
That would be the case, but actually the driver here is what makes these projects worthwhile for us? If we, for example, have a 51% equity interest, and they will charge a management fee, which effectively means charging a management fee to our 49% partner.
And then we calculate the return on equity which is obviously the project return enhanced by the management fee at a 51% ownership level with project returns, project is attractive. It's not inferior.
It's not something that we are reluctant to do. So we feel that we can justify putting more equity in up to that kind of level.
There may be some situations where we put in even a higher level of equity. There might be some where we put in less.
That's what's driving it that calculation. Yes, if it means that the projects are consolidated and then yes, that's to ensure that the disclosures enable you to understand what contributions being made by these projects.
Tina Hou
Understand. Thank you very much.
And I have a second question in terms of the competition.
William Huang
Yes. I think, the Sichuan Province [ph] is a very special case in the current markets, whole environment.
I think in my view, this situation, because we – number one, we still believe the demand still grows in other tier-one market number one. So in terms of the competition right now, I think this capacity will be in a – will be – capacity a little bit over surprise will be solved in the next 24 months in my view.
Tina Hou
Okay. Thank you very much.
Operator
[Operator Instructions] Our next question comes from the line of Gokul Hariharan from JPMorgan. Please ask your question.
Gokul Hariharan
Yes. Hi.
Thanks for taking my question. My question is about some of these recent regulations we have seen in Beijing and Guangdong.
How does management fee the implications of this regulation looked like – there is some kind of a demand churn moving toward high-performance related projects, especially in Beijing. And also related to that; how do you think the industry meets the mouth carbon neutrality and carbon credit kind of requirements in some of these locations.
Do you have to purchase these credits from third party? Is that process something that can be passed on to customers through price increases or cost pass-through?
Thank you.
Jamie Khoo
Yes. I'll take the second part on the renewable.
I think in the long-term using renewable energy will not be any difference in terms of the economics from using ground power. It will be the norm.
The infrastructure will exist to transmit the power from the places where renewable is generated to the places where most power is consumed. The power trading markets will allow for cross-regional trading.
I think in the – during the transitional period, we may have to take some steps to establish some direct power purchase agreements. We may consider investing in directly in renewable power projects.
Ideally if such a situation is possible, projects which are located close to data centers so that it can be director of transmission connection without going through extensively through to the grid. And there's always the – ultimately the fallback of buying renewable energy certificates internationally, if not in China.
I know the fact that we operate in Tier 1 markets and data center business is a Tier 1 market business creates some challenge because of the geographical separation from where renewable power is generated. But that's a challenge that everybody is facing, and I think the dumb policy is addressing both the supply side and the market mechanisms on the consumer side to ensure that we can solve that problem.
And your question about the effect regulations, can Beijing, Shanghai, Guangzhou, do you want to address that, Will?
William Huang
Yeah. Okay.
I think Guangzhou, you talk about Guangzhou and Beijing governments new parties, right. I think in general, I mean they raise the bar to allocate top common quarter, and that is number one.
Number two, that means they want more lower POE in terms of the ACO the carbon-neutral policy. The second of all, I think the, they try to call some, small data centers, right?
An efficient data center, which means this impact is a positive, because a lot of the existing small data center will be a step-by-step cost is we'll move to the large, more power efficient data center, like what we built, right. So I think this is one impact.
That another impact is seems, they raised the bar. I think the government's real life; the premise carbon quota allocation is not efficiency.
So I would like to see this is a good for the leading company in the future to obtain more carbon quota. This is my view; in terms of the how we improve our operation to – carbon neutral new guidance.
I think that number one; we will give our ESG report, so, right. We will give a very clear, low map, right?
I think the most important way is that, why is it keep improve our PUE? Also we are the – we already in this area, we already a leader a company in the China data center.
Number two, I think the energy source it's very important, right, but it based on the current Tier 1 market. There has not that much renewable energy in this city.
So we have the difference of way to maintain, to improve the carbon-neutral. This is later we will give some of that detail.
I want to do Matt by the way; I would like to see in the last three years just – the central government issue at Green Data Center example, right? So [indiscernible] almost simple we’re in the 50% of the Green Data Center, which central governments let's say, just the certifications.
So, that means – a couple of we already in a leader position for the, in the China data center in this for the Green Data Center, for the carbon neutral effort right. So this is my answer.
Gokul Hariharan
Got it. Thank you very much.
Operator
Our next question comes from the line of Frank Louthan from Raymond James. Please ask your question.
Rob Palmisano
Hey guys, this is Rob on for Frank. Thanks for taking the question.
So my first question is, are there any markets where you're seeing pricing that's either better or worse than average, and then as a follow-up, what do you think some of the changes in government policies are going to begin to benefit you guys? Thank you.
William Huang
Well, apart from the one area that we talked about around here, more Northwest to Shanghai, I think the situation in other parts of – other Tier 1 markets with regards districts of Beijing – around the edge of Beijing, Shenzhen, Guangzhou the areas around them, open parts of Shanghai, the Southern part of Shanghai it's very consistent, the supply is constrained. And very often customers have very little choice.
The number one reason why we lose business is because we don't have supply and you’re surprised even without the resource pipeline and the scale of our construction activities, how often that arises? So it wouldn't happen, because we were not trying, so despite our very best efforts, we – news business continuously, because we are unable to generate supply in as many places as we want.
So that shows you that this is the way to talk about supply constraint, it's real. So that means the pricing is relatively stable in most of the places, is a really – and it's not that unstable in Northwest part of Shanghai either, it's just there is more competition there.
You talk about the benefits of government policies. I think that, well, fundamentally I've already said what it is, which is the government's disciplined approach to the allocation – whilst creating a challenge for us has ensured that this industry remains highly investible and attractive and has high barriers to entry.
That's been the case for years, and we have very high conviction is going to remain the case for the foreseeable future.
Rob Palmisano
Great. Thanks guys.
Operator
Due to time constraints, I'd like to now turn the call over back to the company for closing remarks.
Laura Chen
Okay, thank you everyone for joining us today. If you have further questions, please feel free to reach out to GDS investor relations, through our contact information on our websites and Piacente Group investor relations.
You may disconnect.
Operator
This concludes this conference call. You may now disconnect your line.
Thank you.