Hello, ladies and gentlemen. Thank you for standing by for the GDS Holdings Limited third quarter 2019 earnings conference call. At this time, all participants are in a listen-only mode. After management's prepared remarks, there will be a question and answer session. Today's conference call is being recorded. I will now turn the call over to your host, Ms. Laura Chen , Head of Investor Relations for the company. Please go ahead, Laura.
Thank you. Hello, everyone. Welcome to the 3Q19 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 review the financial and operating results. 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 risk 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 will now turn the call over to GDS Founder, Chairman, and CEO, Mr. William Huang. Please go ahead, William.
Thank you. Hello, everyone. This is William. Thank you for joining us on today's call. A couple of weeks ago, we passed three years anniversary of our IPO. Life as a listed company has been exciting. Sometimes it's too exciting, but it has made us considerably stronger. Today, we are reporting revenue and adjusted EBITDA, which is three times and six times what we reported for 3Q16. Our total area committed is almost double what we forecast at IPO. It's been an outstanding three years in terms of growth. However, we firmly believe that the best is yet to come. As I go through our results, I will highlight our strategic progress in key areas.
During the third quarter, we signed up customers for over 21,000 sq m of net additional area committed or over 57 MW of IT power, which should generate over RMB 90 million of annual recurring revenue when fully delivered. We have three orders for over 10 MW from existing customers, a sign that order size is getting bigger. We also won a nine MW order from a new internet customer, a market leader in short video streaming. At the end of three quarter, 3Q, we reached 58,000 sq m net add for year-to-date. As of today, we are done in terms of meeting our full-year sales target of 80,000 sq m. In the past few months, customer sentiment has become a lot more positive. Cloud adoption continues on a steep upward path, with market leaders reporting 65%-100% growth.
5G deployment is starting to drive another wave of demand. All of our focus is on next year, and the 2020 sales pipeline looks very promising. We have talked on prior calls about the diversification of our customer base. At the end of 2016, we had three hyperscale customers. Now we have 13. In the current quarter, we signed a new hyperscale customer, a prestigious global technology company with a consumer focus. The combination of sustained demand from established customers plus new high-growth accounts has enabled us to deliver 20,000 sq m net add per quarter. There are still new customers and markets for us to penetrate. We are well-positioned for higher level of sales over the next few years. 20,000 sq m of sales means starting three to four new data center projects each quarter. For us to do this, we need a large development pipeline.
As you know, it is difficult these days to get approval for new data centers in downtown areas. We continue to have some success organically and supplement our capacity with acquisitions. It is not nearly enough to satisfy our customer demand. We have therefore evolved our strategy to include larger edge-of-town sites. Our first major move was in Langfang, on the edge of Beijing. This is already proving a great success. Within a couple of quarters, we have commitments from three different hyperscale customers for 100% of three data centers, Langfang 1, 2, and 3. While we still have inventory of land and power in Langfang, we are moving rapidly to secure even more resource. We aim to repeat this success in other Tier 1 markets. In Shanghai, we got approval today for new downtown capacity.
In addition, we are purchasing more land near our established edge-of-town site in Kunshan. We have also obtained substantial power capacity for another edge of town site in Changshu. The power plus land at these locations will support around 90,000 sq m of new capacity. In the Greater Bay Area, we have power plus land at a location near Guangzhou. We have leased shell buildings at two other locations near to our existing data centers, and we also have the Hong Kong 2 acquisition, which I will talk about next. Altogether, we have around 230,000 sq m of developable capacity in these key Tier 1 markets, and we are not stopping. It is very strategic resource and positions us to respond to higher level of demand.
We established operations in Hong Kong over five years ago, relying on third-party data centers to serve just a few of our many Chinese financial institution customers. We took the first step to upgrade our presence with the purchase of the Hong Kong 1 property in 3Q18. The site is now cleaned, and we will start construction of the new building. The redevelopment timeframe is three years. Hong Kong is the gateway for the most of the international bandwidth connecting China. Our hyperscale and high-growth customers use Hong Kong as a launchpad for their international service. They are pushing us to further increase our presence in the market. Our strategy is to always go where our customers have critical mass of demand. We have therefore taken a significant step with the purchase of a second building for redevelopment.
Hong Kong 2 is located only 150 meters from Hong Kong 1, enabling us to realize investment and operational synergies. We view Hong Kong as integral to our Tier 1 market platform. With proven demand from our China hyperscale customers and the presence of more than 200 of our Chinese financial institution customers in Hong Kong, we believe that the success of our project is assured. We announced the last quarter the formation of a partnership with GIC for remote build-to-suit projects for hyperscale customers. The initial focus is on seven projects which we have committed to develop and operate for one customer at three of their campuses. We have almost completed the first project and expect to sell a 90% equity interest to GIC early next year. We have started to work on two more projects.
The beauty of this partnership is that it enables us to fulfill the broader requirements of our strategic customer outside of Tier 1 markets. We see this as a real opportunity to strengthen our franchise, gain scale, and create additional value. We have therefore formed a group within GDS to focus on remote build-to-suit projects as a distinct product. The several projects committed to date will require around $150 million of equity. It's relatively small by GIC standards. They have given us their backing to scale up this partnership in a material way. We are already in discussion with a couple of other customers. It's going to take time, as these deals are complex. I'm hopeful that over the next few quarters, we will have some more wins. With that, I will hand over to Dan for the financial and operating review.
Thank you, William. Starting on slide 13, where we strip out the contribution from equipment sales and the effect of FX changes. In 3Q 2019, our service revenue grew by 7.5% . Underlying adjusted NOI grew by 9.2%, and underlying adjusted EBITDA grew by 11.4% in consecutive quarters. Our underlying adjusted NOI margin reached 53.8%, and our underlying adjusted EBITDA margin hit 45.9%, which is 7.9 percentage points higher than a year ago and 1.6 percentage points higher than the prior quarter. Turning to slide 14. Service revenue growth is driven mainly by customers moving into space which they previously committed. Move-in during Q19 was over 10,000 sq m. We're expecting a similar level of move-in during Q19, on top of which we will have around 7,000 sq m of additional revenue-generating space from Beijing 9 when the acquisition closes at the end of the year.
Our MSR has been pretty much flat over the past several quarters. However, we're expecting a small drop in Q19. Slide 15 shows the quarterly trend in margins. 2019 has been a great year for margin improvement, but with over 17,000 sq m coming into service in Q19, plus another 13,000 sq m in Q19, including the GZ6 acquisition, which just closed. We expect to end the year with margins at a similar level. Turning to slide 18. Our CapEx picked up in Q19 due to a higher level of ongoing construction. In Q19, the initial consideration is due for the GZ6 and BJ9 acquisitions and for the purchase of the Hong Kong Two property, bringing total CapEx for 2019 to the level of our original full year guidance, namely RMB 4.5 billion-RMB 5 billion.
At the end of the year, we will have around RMB 1 billion of remaining balance of purchase consideration for our acquisitions to date. Up to the end of Q19, we had incurred over RMB 300 million and paid RMB 170 million for CapEx related to remote build-to-suit projects. We've included a page in the appendix showing how we account for GIC joint venture projects pre and post-sale. On slide 19, currently the debt capital market environment in China remains supportive for us and we're taking advantage to get longer tenure and cheaper facilities. In Q19, we completed financing across four new projects and refinancing of three existing projects, totaling RMB 1.4 billion. We're considering a number of options for financing our Hong Kong projects, including a sale and leaseback of the redeveloped properties or a joint venture.
We have had a number of approaches from existing and new partners and are keeping an open mind. Turning to slide 20. Our backlog consists of binding commitments from customers. It has increased to over 104,000 square meters, representing 76% of our current utilized capacity. It provides high visibility to our future growth. Our backlog is almost entirely made up of large orders from hyperscale customers. They are all high-quality counterparties and household names. 58% of the backlog or 60,000 square meters relates to data centers which are currently under construction. The remaining 42% or 44,000 square meters relates to data centers which are already in service. This part is moving in at the rate of about 10,000 square meters per quarter. To finish on slide 21. After nine months, our revenue is tracking towards the top end of the revised guidance range, which we provided last quarter.
For adjusted EBITDA, we are tracking above the top end of the revised guidance range. We are therefore once again raising the EBITDA guidance range to RMB 1.8 billion-RMB 1.82 billion. With regard to CapEx, we'll keep the original range unchanged. With that, I will end the formal part of our presentation. We would now like to open the call to questions. Operator?
Thank you, sir.
Thank you, sir.
Ladies and gentlemen, we will now begin the question and answer session. If you'd like to ask a question, please press star one on your telephone keypad and wait for your name to be announced. We have the first question from Jonathan Atkin from RBC Capital Markets. Please ask your question.
Thanks very much. I was wondering, I see that the pre-commitment rate has been steadily increasing despite the fact that your business continues to scale at a higher rate. I wondered what that says about the competitive environment. You mentioned deals are getting bigger. Any comments from your perspective about competitive supply in general? Second question I had relates to Shanghai. I think you said you did get some approval just today about downtown development, and how many sq m or MW or cabinets are we talking about in terms of the ability to develop in municipal Shanghai? Thank you.
Jonathan, answering the first question, this is William. From the competitive perspective, I think our resource inventory, let's say reserved for development. If compared with this market share, our percentage, I think it's very significant, more than our current revenue share. That means in the future, our supply is much higher number than our competitor. The second question is, Dan?
About the recent allocation for our capacity in Shanghai. Yeah.
Yeah. Actually, we got the approval for 5,000 racks. Let's calculate a 2.5 sq m per rack.
13,000 sq m, roughly.
Yeah, roughly. Right. In Shanghai, this approval quite diversified. All the local player gather some small piece of that. We are one of the largest one to gather approval. This definitely cannot satisfy our customer's future demand profile. They want a larger scale, much more larger scale than what we get in the Tier 1 market. This is number one. Number two, they want a campus type, which high visibility for future expansion. That's why we will continue to develop the edge town site, to make sure satisfy our customer future demand. What we can tell is our strategic customer future demand looks like the number will be accelerate in the next few years. Yeah, that's all.
Thank you. Maybe just lastly on the new hyperscale logo, the nine megawatt order. Is that at a single location or is it across multiple metros?
Yeah, it's a single location, John.
Great. Thank you very much.
Thank you.
We have the next question from the line of Colby Synesael from Cowen and Company. Please ask your question.
Great. Thank you. Two questions, if I may. The first one, just given all the organic builds that you're doing and intend to do as we go into 2020, plus what sounds like some interest in some bigger M&A to help satisfy the demand, just can you remind us what you're thinking in terms of potential equity raises, or how you plan to finance these various projects? It'd be good to get some color on that. I guess secondly, you noted that you're already at 80,000 square meters for 2019. Just initial thoughts on 2020 to the extent you can share as it relates to revenue, EBITDA, bookings, et cetera. Thank you.
Colby, I'll go first. Let me comment first of all on the kind of M&A environment, because although we're very busy with a lot of organic builds, we're still very focused on strategic M&A opportunities. There aren't platforms out there for us to acquire. There aren't mini GDSs. There are single sites. To date, we've done seven acquisitions, one to close. Each acquisition has been one data center on a site. There are some opportunities where there are several data centers on a site and maybe some expansion capacity. That's what constitutes bigger opportunities. The last three and a half years we've done seven acquisitions. It's run rate of about two per annum. That's been part of the 80,000 sq m net add. It's provided us mainly with the capacity to support the sales. That's been part of that kind of base case.
You can call it organic and semi-organic. If we were to do one of what I've just referred to as those larger acquisitions, then that's going to be additive. It's going to be on top of, in addition to that. To bring it back to your question about capital raise, we raised $600 million earlier this year in March. If we leverage that 60/40 debt to equity, it means that we will have $1.5 billion of financial resources to invest. In RMB, that's RMB 10 billion. Our top end of our CapEx guidance range this year is RMB 5 billion. You can say in a simple way that we raised enough equity capital earlier this year to support two years of investment at RMB 5 billion per annum, which corresponds to an 80,000 sq m net add business plan.
I did note when we did that capital raise that it was not sufficient if we were growing at a faster rate, and it was not sufficient if we were to do out of the ordinary M&A. Whilst, neither of those is certain, I think William will make a comment about growing at a faster rate. Neither of those is certain, it's clear that if we were to do something, then we would need to consider financing, whether it be from the capital markets or whether it be through one of our partnerships. It would be linked to a transaction or linked to demonstrated level of sales. Yeah. William, do you want to comment on the possibility of potentially [inaudible] for a higher level of sales? Colby was asking for your early thoughts about next year.
It looks like, frankly speaking, that we are more confident, maintain the 80,000 square meter. That's for sure. I think, no doubt about that. During recent couple of months, we talked to our customer, a couple times. It looks like their next few years plan looks like it will accelerate. As I just talked, in a very early this year, the sentiment is not good, and now it's totally shifted. Everybody very, very positive. A lot of these start to execute their original plan, and even based on the 5G coming, sounds looks like they will more aggressive. We will see. We hope we can do more, right. It's not right timing to commit more.
Yeah, it seems like your biggest issue is not the demand, it's simply finding the space, and then ultimately financing it. It sounds like other than Beijing, you still in Shanghai and Shenzhen are looking for those bigger edge of city type developments. It seems like, to the extent you're able to get those, we could see greater than those 80,000 sq m in some of those outer years. Does that sound right?
It is right, Colby. Obviously, there's always going to be a lot of things going on which have not yet reached the stage where it can be disclosed. What we're showing, I think for the first time in our earnings presentation is effectively the developable area, or area held for future development. Very roughly, it corresponds to three years sales growth at the current run rate. We would like to have considerably more than that. We'd like to have double. In fact, we have no upper limit in our minds. The amount that we've had to invest to secure this resource is really quite small. Our budget for land bank in China this year was RMB 500 million, less than $100 million. We have not spent all of that by any means. It's very valuable. We're going to keep on going.
We are very well positioned in Shanghai. You said we still had a lot to do. The site that William referred to in Changshu, we've been allocated several hundred MW of the power capacity. Once again, we're still looking to add more.
Great. Thank you.
We have the next question from the line of Frank Louthan from Raymond James. Please ask your question.
Great. Thank you. Can you comment on the situation in Hong Kong, with the unrest there, is that impacting your business? Any thoughts on how it might impact your ability to develop a new site? How many sites do you think that you will develop with the JV, through the course of the next 12 months? Thanks.
Hong Kong?
Yeah. Hong Kong?
Well, Frank's asking whether there's been any short-term impact in Hong Kong or maybe impact our view of Hong Kong.
Yeah. I think our logic is follow up our customer. That's our strategy to do the location expansion. Hong Kong has become a very important portal for all our install base to expand into the international market. That's always their first step. As I mentioned just now, there are a lot of our hyperscale customer, plus more than 200 financial institution, mainly China based. They have the very clear demand in the next few years in Hong Kong. Our view is, the certainty was given by our customer, not any situation. We are very confident, the demand is very strong in Hong Kong from all the install base customers.
Frank, the second part of your question, I can't give a precise answer too, because we're not far enough along for me to be able to quantify how many new remote build-to-suit projects we'll take on. With regard to the customer who we're developing these seven projects for, definitely there will be more projects awarded by them. For now, we've just identified a couple of other customers, who could be interested in working with us in a similar way. I'd say from seven today, let's take a two-year view. It could be double or treble.
Yeah.
Okay, great. Thank you very much.
We have the next question from the line of Robert Gutman from Guggenheim Partners. Please ask your question.
Yeah. Thanks for taking the question. Just a couple things. Just a little bit about changes in the expansion table. It looks like Beijing was pushed out to next year from the second half of this year. I was just wondering the color on that. The move in pace that you mentioned, you said it's looking like about 10,000 a quarter. I just want to verify. That looks like a little acceleration from the past couple of quarters. Just want to verify that. Just more broadly, there's a lot of talk about, on a macroeconomic level, about China's GDP growth. I was wondering if you could just tailor that a little more specifically to the digital economy in China rather than expectations for the overall economy, whether that's accelerating compared to the rest of the economy.
Yeah. Rob, the first question, you picked up that there's sometimes we revise the ready for service periods for particular projects. Remarkably, we're up to 45 projects now, and I've been here from number 1. Almost all are complete on time and within budget. Inevitably, there's going to be sometimes a delay a few months or acceleration a few months. Normally, it's got nothing to do with us. It's out of our control. It may be to do with when the power infrastructure is installed or activated. That's all. It's really nothing to make a fuss about. The move-in pace. The move-in pace, this year has been slightly slower than last year. Last year was slightly faster than normal. I know given the macro, that people are going to associate slightly slower with some slowdown in terms of our customers' business.
We have to be careful about how we analyze this, because there's many factors that can affect the move-in rate. M&A can affect that statistic. How early customers commit, the development timeframe, and also, within the flexibility which our contracts give the customer, whether they choose to deploy a little bit faster or a little bit slower. When we review the contracts which are actually in delivery right now, and I pointed out there's 44,000 square meters of commitments which relate to data centers already in service. When we review where those contracts are at in terms of move-in relative to the minimum commitment in the contract, they're almost all far ahead of the minimum commitment. That indicates it's a healthy situation. There's some specific reasons sometimes why a particular customer may move in a little faster or a little slower, but nothing we can generalize.
I can't generalize and say there was a slowdown or there was an acceleration.
GDP?
Yeah, the second question was it? The last question was about the macro situation.
Okay. I think everybody talk about China GDP. It goes to 6%, although the 6% is still a very big number. What I try to say, recently I just read a report, an analyst report, is that China new economy, that's meaning say the digital economy, represent 16% of the China GDP. This growth rate is around 8.5%-9%. That means new economy very clearly is already being a new engine or driver in China economy. We're lucky we are in this space, not in the traditional space. I think this is good for us to get confidence to grow our business in next few years.
Great. Thank you.
We have the next question from the line of Gokul Hariharan from JPMorgan. Please ask your question.
Yeah. Hi, great results and thanks for taking my question. My first question is, I think you illustrated that the number of hyperscale labels have gone up significantly over the last two, three years. The top two customers are still roughly about 50% of area committed, and occupy multiple data centers, probably about high teens number of data centers each. As we add a lot of these new labels, especially in the last couple of years, could we have a bit of a view two to three years out? Is that top two customer number of 50%-plus area committed going to come down meaningfully, when you think about the next two, three years of area committed or revenues? That's my first question.
Gokul, your observation's correct. The top two customers, if you aggregate them and you look over several quarters, you'll see that for two to three years, the absolute amount of new business that we have won from them has been very well sustained. There's been no sense of any lessening from them, and we believe it will be sustained, if not higher, going forward. In terms of the overall mix, we don't have any quotas. We don't set any limits. We do target to add more, we call them high growth accounts, and the progress in that respect has far exceeded our own expectations. Those high growth accounts, they may not be the kind of companies who place an order every quarter. They may place an order once every 12 months or once every 18 months.
If you look at the growth rates of their businesses, they're capable of doubling or trebling the size of their commitment with us. I would just have to hazard a guess about what the top two would represent in two or three years' time. I'd say 40%-50%, so not far below where it is now. That's good. It means that we have a very solid underpinning for our business.
Understood. Thank you. Second, could you talk a little bit about, I think you mentioned setting up a separate team to look at the remote site projects, and as you mentioned, the seven projects could go to 2x or 3x of that. Could you talk a little bit about how much resources this kind of projects take in the form of sourcing, people, SCM etc.? And given that now you have growth on both these tracks, do you feel that there is some degree of bottleneck from a resourcing perspective as we look at the next 12-18 months, and how do we think about smoothing that out?
Yes. Gokul's asking how we execute on remote build-to-suit projects, how much resource it takes, whether we have the capacity to do that.
Number 1, I think not every remote project we will pick up. I think we are quite picky, right? Number 1, fulfill our delivery capability, because we are still focused on the Tier 1 market. We always say we focus on our Tier 1 market. Number 2, I think since the design is very simple, remote project is standard, and the operation effort is much less than the multi-tenant data center in Tier 1 market. We invest a lot of tools to support our operation. I think from the delivery point of view, it's more simple than a Tier 1 market. We still believe we can take more project so far.
Okay. Got it. If I could ask a very quick question to Dan. Dan, could you talk a little bit about what are you expecting on EBITDA margins in the next couple of quarters? We have seen a pretty strong increase in the last few quarters. I think you talked about Q4 being in the same range, given a lot of new capacity and new move-in. Could you talk a little bit about are we going to be in the same range over the next two, three quarters, given that we have a lot of new capacity coming on?
Yes, Gokul. I've been on the low side in terms of my own forecasts for margin over this year, which is a pleasant surprise. Looking at next year, very roughly, I think we still realize operating leverage at the data center level, we call the adjusted NOI margin, maybe 1 percentage point, that order of magnitude. Then at the SG&A level, I think it would also be about 1%. It could be more, but we ask ourselves whether we are actually underspending on SG&A, whether that's a bad thing. Given the way the company has grown, we need to scale up and raise standards and so on. We are doing so in terms of people we're hiring and focus on product and-
R&D.
Yeah. I think 1 percentage point on SG&A and 1 percentage point at the data center level would be 2 percentage points over next year. This is just a very rough indication.
Got it. Thank you.
We have the next question from the line of Colin McCallum from Credit Suisse. Please ask your question.
Yeah, thanks, and congrats on the strong numbers. I just had one question. You've alluded a couple of times earlier to power quotas and power commitments. I just want to check, sometimes we hear market noises about limits on power constraining growth. I just would be very surprised if GDS would commit to building a data center in an area where you didn't already have the full commitment to the power you would need in that data center. I imagine it's an integral part of the design, isn't it? Could you just touch on this a little bit? Is this one of those things that the market talks about, but in the way that you manage your business, in reality, it's not actually a constraint for your business?
Is it something that you just have to do the hard work getting the arrangement with the relevant scaled enterprises in advance before you sign up to the commitments and do the construction? Any color on that would be helpful. Thank you.
Yes, Colin, I'll go first. Finding the right kind of real estate, industrial property in downtown area or land zoned for industrial use edge of town, which qualifies for data center and is in a location which is going to work for our customers, that's difficult. It's not as difficult as then getting sufficient power to be able to operate a data center, utilize the full plot ratio, and so on. When I talk about getting power, there's really two parts to it. One part is having agreement with the power supplier, we'll call it the grid, for the supply of the power capacity. That is relatively straightforward, but there can be significant economic issues because we have to bear the cost of power infrastructure.
The distance from the site to substation or the number of available substations and so on can affect the economics of the project quite materially. The second part of, call it, obtaining power is the really critical and difficult part, which is obtaining approval from the government for the use of that power. You can call it carbon quota or some other terminology. In the downtown areas of Beijing, Shenzhen, Shanghai, it has become very restrictive. Projects are still being approved. We've had some success. William mentioned just recently we received an allocation in downtown Shanghai. We, and now I think other data center service providers, realized that in order to obtain power, we needed to go outside, further out, find locations where power is available, where the government is willing to allocate it. That's why we put so much emphasis in today's presentation on the pipeline.
You can call this land with power, or this developable capacity means it's land, real estate, and power. That's what makes it very valuable. William, do you want to add anything to that? What I said? Do you want to add anything?
No, that's okay.
Okay. William's satisfied with my answer.
Satisfied. I'm satisfied as well.
Good.
In terms of just the way you do things, effectively you're saying only would become real pipeline land if you have both, right? You're not going to put yourself in a situation where you buy land and construct RMB 100 million projects and not have the power, right? It's just not something you're going to do, is it?
No. Actually, Colin, it's the other way around. Most of the land is being purchased from the government. It starts with an agreement from the government to allocate the power. The last thing is actually the purchase of the land.
Yes.
Maybe we chose our words a little carefully, and perhaps no one would pick up the nuance, but we mentioned in Changshu that we've been allocated power capacity.
Right.
We now have to go to the final step of actually purchasing the land. That's a standard process, but the critical part was to obtain the power capacity.
Gokul, I think I add one comment. We realize in the Tier 1 market, downtown Tier 1 market, it's very difficult to get the power quota. Even you get one, as I mentioned, it's not significant, cannot satisfy our customer. That's why we evolved our resource strategy from the focus on the downtown city to the edge town of the city. We are the first mover to develop this resource in the edge town of the Tier 1 market. We will maintain this advantage compared with our competitor.
Got it. Thank you.
We have the next question from the line of Jonathan Atkin from RBC Capital Markets. Please ask your question.
Thanks. I had just a quick follow-up on contract renewals, slide 33. I think that's a new slide for you. Given the % of commitment that's up for renewal over the next two years, I just wanted to get your assessment of the likelihood of this revenue renewing, or whether there would be any kind of pricing adjustments. Thank you.
Jon, I included that page for the first time because investors often asked, and I think it shows that over the next five years, we have relatively a small part of our total contract portfolio, which is coming up for renewal. The denominator is our current area committed. When you consider that that is growing at such a high rate, these percentages will be smaller as the denominator grows. I think a lot of this contract renewal is enterprise-related business, where our churn rate, as I like to say, has been statistically insignificant. Within these numbers, there are a few contracts which relate to our large internet and cloud customers, the business that we did at the end of 2015 or in early 2016. Those are not very large deployments, certainly not by today's standards. They were very big deals at the time.
Now they've just got to be so-so deals. They're in data centers which are very centrally located, like in Shenzhen and Beijing. I think that kind of facility is very scarce. I very much doubt that those large internet or cloud customers are going to pull back, but frankly, if they did, it'd probably be an upside opportunity in terms of being able to release.
As we used to mention, all our Tier 1 market tenants, our strategic customer, they plug their on-ramp already in our data center. It's quite a stickiness for all our customer. We are confident the renewal will be not an issue.
Great. Thank you very much.
As there are no further questions, I would like to turn the call back over to the company for closing remarks.
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 the website of The Piacente Group Investor Relations. Thank you all.
Thank you. This concludes this conference call. You may now disconnect your line. Thank you.