Hello, ladies and gentlemen. Thank you for standing by for GDS Host Limited Second Quarter 2018 Conference Call. At this time 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, and welcome to 2Q 2018 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. Gdservices com.
Leading today's call is with Mr. William Huang, GDS 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. Before we continue, please note that today's discussion will contain forward looking statements made under the Safe Harbor provisions of the U S.
Private Securities Litigation Reform Act of 1995. Forward looking statements involve inherent risks and uncertainties As such, the company's results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in the company's prospectus as filed with the U. S. SEC.
The company does not assume any obligation to update any forward looking statements, except as required under applicable law. Please also note that GDS earnings press release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non GAAP financial measures. GDS press release contains a reconciliation of the unaudited non GAAP measures to the unaudited most directly comparable GAAP measures. I will now turn the call over to GDS founder, Chairman and CEO, Mr. William Huang.
Go ahead, William.
Thank you, Laura. Hello everyone. This is William. Thank you for joining us on today's call. 2Q 2018 was a record quarter for GDS in terms of customer commitments, moving new projects and capital raising.
Unfortunately, our outstanding performance has been overshadowed by the misinformed. If not invented allegations published by a short seller who made no effort to come to us. Let me say again, these allocations are completely forced. During our call, in addition to working through through our 2Q performance, we will respond to these false allegations throw out our commentary and put an end to this once and for all. Now let's focus on our 2Q highlights.
We achieved our highest ever level of new customer commitments at over 20,000 square meters. We achieved our highest ever level of customer moving adding nearly 20,000 square meters to our revenue generating area. Our total revenue grew by 89% and our adjusted EBITDA grew by 132% year on year. To keep up with demand, we initiated over 24,000 square meters of new projects, the largest ever in a single quarter, We successfully completed our largest ever capital raising, the 300,000,000 convertible bond In addition to what we achieved in China, it's great to see our strategy partners cybers 1 and the FTT, winning significant new business from China's hyperscale customers in the U. S.
And Singapore, while it benefits for them, it also benefits for benefits us in terms of strengthening our customer relationships. Taking all of this together, our stronger revenue and EBITDA growth have put us ahead of expectations, leading to today's upward revisions in our annual guidance. Let me start with sales momentum on Slide 4. 2018 was the 3rd quarter in a row when our new commitments hit the 20,000 square meter level. In the first half of twenty eighteen, we have done almost as much as we did in the whole of last year.
Furthermore, as we look forward, our sales momentum is continuing and target a similar level of new commitments in the second half of this year. How we achieve this to begin with We are fortunate to operate in a market where the digital economy is booming. Demand for high performance data center capacity is accelerating and it's challenging to generate new supply. It's obvious now that cloud adoption in China is taking off. The market leaders we reported their result in the next few days and we expect to see another quarter of high risk growth The upside is huge.
The cloud market in China is still only 10% of the U. S. And less than 2% of total IT spending. China is at the forefront of AI Technology. It's a major focus area for our largest customers and it's already being deployed across their platforms.
AI requires vast amounts of data to be collected, retained and processed AR enabled applications are mission critical and latency sensitive. Driving demand for our high performance data centers in Tier One market and close to users. China will be the forefront of China will be at the forefront of 5G deployment next year. Our customers are gearing we are resolving a constant increase in the amount of data created by device. And transmitted to data centers to feed real time applications.
AI plus 5G is a powerful combination. The key to capture this demand is to serve the right customers. Today, we have we have a long and eightytwenty spread between cloud and the large internet customers on the one hand. And financial services and other large enterprise customers on the other. We believe that our cloud and the large internet customers accounts for a very large part of total market demand.
That's why 80 to 90 of our new business is coming from existing customers. We are getting follow on orders from them quarter after quarter. During this recent period, They have reached out to us to show their support and the trust and also to give indication for new business going forward. Today, our top 2 customers are roughly equal in size, each according to each accounting for around 30% of our total area committed. They have a presence in around 15 different GDS data centers.
Beyond our top 2, we have significant sales pipeline from our other hyperscale customers with a great potential from the player such as Huawei and other global cloud players. We target adding to our base of highlight highly strategic cloud and the large internet customers. In 2q 'eighteen, we had a major breakthrough within our first order from the NetEase. The 5th largest Chinese internet company by market capitalization. In the second half of twenty eighteen, we expect to make Our strategy is to build the home of the cloud.
We believe that cloud pops in our data centers will attract new enterprise customers and increase customer stickiness In 2018, we again added about 25 year on year to our large enterprise customer comps. We now have nearly 100 enterprise customers using our software defined network. Or SDN hub to connect to major cloud platforms inside our data centers. Our customers remain firmly committed to datacenter outsourcing in Tier One markets, and we are very confident that this trend will continue. Technology Development are making our data centers more and more valuable.
Our largest customers have high visibility for their future requirements. They are looking to us to fulfill them whenever and whenever We realized some time ago that the resource supply is a critical success fact. We stepped in step it up our outsourcing efforts. And despite the challenges, I'm pleased to report significant progress in sourcing new projects. Let's turn it to slide 5.
We started this quarter with 40,000 square meters under construction. In 2Q, 2018, we initiated 24,000 square meters of new projects. Just, importantly, we brought the same amount of capacity into service on time and within budget. Since the end of 2018, we have initiated another 16,000 square meters of new projects. As of today, we have about 56 56,000 square meters under construction.
It's by far the largest development pipeline in the market and underpins our confidence in maintaining sales momentum. Outside of Tier One market, our largest customer located part of their capacity in the low cost area for data storage, machine learning and other applications, which are non real time or latency sensitive. This capacity complements the capacity we provided in Tier 1 market. Historically, our customers have developed this kind of the remote data center themselves. However, we are starting to see a trend towards outsourcing.
Last year, we committed to build 3 data centers on our campus in herpet province for one of our largest customers. We completed these projects in less than 9 months and they are now all in service. You can see a photo on Slide 7. We gained a lot of the experience from doing these projects and the outcome has been very successful for us. There are a lot of a lot of more opportunities like this, but they require a different approach to project management and financing.
We are in we are in ongoing discussions with various various partners about innovations way of addressing these opportunities. Turning to Slide 7. We entered the Hong Kong market over 3 years ago, replying on capacity relying on capacity in 3rd party data centers to provide a service to a few of our largest Chinese financial institution customers. As you know, we have over 300 financial institutions customers in China and most of them have a presence in Hong Kong. Our China cloud and the larger internet customers also use Hong Kong as a lot launch points for their international services.
It has long been our ambition to upgrade our presence in Hong Kong. But it's very difficult to secure truthful building and power supply. And therefore, very excited to report that we have taken a significant first step to solving this problem with the acquisition of a perfect site for risk investments in BaiChong, Hong Kong's premier data center hub. Based on the price ratio and our initial plan, we aim for around 7000 square meters of high quality resource. We are very confident of the demand which we can attract in Hong Kong and this project opens up a new avenue of growth.
The site acquisition will close in a couple of months and we will share more details with you in due course. Beyond Hong Kong, we also see increasing demand in another emerging Tier 1 market in China. We expect That would that by the end of 2018, we will answer at least 1 more new market. As our business has scaled up rapidly, we have successfully maintained a balance between customer commitments and capacity. Our commitments rate for area in service is now at a record high level of 95.76% and despite the significant new projects initiated in the past few months, our pre committed rate is over 50%.
We ended the second half of the year with strong forward momentum, which reflects the company's unmatched ability divest and operate the high performance data centers on behalf of the most demanding cloud. Internet and enterprise customers in China. We have such an exciting opportunity in front of us and are so well positioned. We look forward to giving With that, I will hand over to Dan for the financial and operating review. Thank you.
Thank you, William. Before I get into the numbers, I'd like to make some comments about our business model and how we add value. GDS develops and operates high performance data centers. We begin by securing long term tenure of entire buildings in Shell State, We either build these shelves ourselves, work with property partners who build for us, or convert existing buildings. We invested in structural works and all the critical systems needed to turn the building into a data center.
To give some idea in proportion, Our investment is typically multiples of what the real estate alone would cost. We provide move in ready data center capacity configured to suit the needs of individual customers. Essentially, we have 2 types of customers: cloud and large Internet, who are ordering high volume and high power density and large enterprises with small to medium order size lower power density, but high redundancy. We operate the whole of every one of our self developed data centers, as a service for our customers. Our customer contracts always specify numerous service level parameters which we commit to deliver.
Our operating track record is as important to our customers as the quality of our facilities. Our customers install their IT equipment in our data centers, deal directly with the telecom carriers for connectivity, and manage their own IT operations or if they wish outsourced to us. For the avoidance of doubt, Our customers do not operate any part and our service contracts are not leases. Getting back to our 2Q 2018 results, starting on Slide 12, where we strip out the contribution from equipment sales and the effect of foreign exchange changes. On a quarter on quarter basis, our service revenue grew by 13.6%.
Our underlying adjusted NOI grew by 15.9%. And our underlying adjusted EBITDA grew by 21.3%. Our underlying adjusted EBITDA margin increased by 2.3 percentage points to 35.3 percent. Turning to Slide 13. The main driver of revenue growth in 2Q 2018 was the 20,000 square meter increase in area utilized.
We define area utilized as the net floor area of data centers in service, which is revenue generating pursuant to customer agreements in effect. Area utilized is usually occupied by customers, but our ability to recognize revenue, bill and collect is not dependent, legal occupancy. There have been some reports recently about a short term slowdown in server demand. I cannot comment on the validity of those reports. All I can say is that what we are seeing in terms of move in by custom by hyperscale customers is acceleration across data centers in all our markets.
Monthly service revenue or MSR per square meter in 2Q 2018 was within the range, which we have seen over multiple quarters. On a per square meter basis, selling prices are stable and as a backlog is delivered, we expect MSR per square meter to stay within the established range. As shown on Slide 14, profit margins are on an upward trend. The growth drag at the adjusted NOI level, which we saw in the past few quarters, has now reversed. And we continue to realize operating leverage on the corporate cost base.
As shown on Slide 15, data center area and service is now 48% stabilized, 52% ramping up. The proportion which is stabilized is actually lower than in 1Q 2018, mainly due to 3 new projects or phases of projects coming into service. However, the utilization rate of the ramping up portion is much higher and nearly 45% compared with 31% last quarter. The commitment rate is 98% to stabilized and 93% for ramping up. These are truly remarkable commitment rates by anyone's standards.
As an aside, please note that our Guangzhou 1 GZH1 data center is now 100% committed and 100% utilized. Almost 80% is taken by one of our largest customers. At the corporate level, on Slide 16, SG And A is now down to 11.2% of service revenue. If we factor in full delivery of the backlog, the current level of SG and A represents around 6% to 7% of service revenue. Turning to our CapEx on Slide 17.
In 2Q 2018, our CapEx paid increased to RMB1.2 billion, including payment of $231,000,000 as front end consideration for the equity of the Guangzhou III and Shanghai 11, acquired entities. The table of data centers under construction shows that we have around 36,000 square meters of capacity not yet committed. And our current sales run rate is equivalent to around 2 quarters new customer commitments. Turning to Slide 18. After completion of the convertible bond offering in June, our cash position has risen to nearly $4,500,000,000 or $673,000,000.
When we raise capital out of GDS Holdings, we receive proceeds in U. S. Dollars offshore. We use these proceeds mainly to capitalize our data center projects companies onshore with equity. At the initiation of each new project, our internal records, we allocate cash as the project equity.
This ensures that we always have enough funds to capitalize our committed projects through to completion. Depending on the progress of projects and the requirement to fund CapEx, We inject cash into the project company's onshore and spend it. Cross border cash transfers require various Chinese regulatory approvals and must have a specific qualifying purpose. We cannot transfer cash onshore for general purposes and leave it idle. We cannot convert it into renminbi without producing CapEx contracts and supplier invoices.
Furthermore, once cash has been injected into a project company, It is not easy to move to our other onshore subsidiaries. As a result of restrictions in our financing agreements, and regulatory prohibitions on intergroup cash transfers. Our effective interest cost on borrowings for 2Q 2018 was 6.2% excluding the CB. Our interest coverage based on adjusted EBITDA over reported interest was 1.7x excluding capitalized interest cost, or one point four times, including it. During 2Q 2018, our net debt increased by 4,600,000,000 to 7,200,000,000 RMB 1,300,000,000.
The increase was due to capital leases associated with the GZ3 acquisition and additional resources we've secured in Beijing, some of which are categorized as held for future development. Mainly as a result of these capital leases, Our net debt to last quarter adjusted EBITDA ratio increased to 7.8 times. Over time, we aim to bring our net debt to EBITDA ratio down to conventional levels. However, given our current rate of growth and scale of development, we feel that this metric does not give a good sense of our balance sheet strength. On the one hand, we have stabilized projects, which are leveraged at less than three times, On the other hand, we have incurred debt to finance projects, which are ramping up or under construction with little or no EBITDA.
Yet this debt is to a large degree covered by customer contracts, a substantial majority with investment grade counterparties. Such customer contract tenders are longer than most of our loans, and the total contract value is far in excess of the amount of outstanding loans. I'm often asked how much capacity we can develop with our existing financial resources. On Slide 19, we show an illustrative indication. Assuming that we are able to leverage capital injected its projects 1 to 1 with project debt, we currently have sufficient capital to finance around RMB9 billion that's $1,400,000,000 of new investment.
On the commitment side, the cost to complete all data centers currently in service and under construction is RMB $2,533,000,000. Adding to this, the cost to complete projects initiated during the current quarter, The remaining amounts payable for acquisitions, including the maximum amount payable under contingent performance obligations and the cost of the Hong Kong site, we would require a brand total of RMB5.5 1,000,000,000, to complete every data center in service or under construction as of today. The total capacity of such data center portfolio would be around 192,000 square meters. Based on this illustrative indication, we have potentially RMB3.5 billion available for further new commitment. Turning to Slide 20.
We have an excellent track record in managing receivables. Days sales outstanding at 70 days is well up to the highest industry standards. We have not had a bad debt since 2015. In other words, we have collected 100 percent of what we have recognized as revenue in the past 3 years. Any company which recognizes revenue as services rendered and builds in arrears which is standard operating practice in ours and many sectors will have unbilled receivables.
Prime examples a company such as AT And T And PG And E. Unbuild receivables is not a mandatory disclosure under U. S. GAAP. But we have chosen to disclose it because it provides transparency to the length of our billing cycle.
In the past few years, the proportion of our revenues coming from cloud and large internet customers has increased significantly. We build these customers quarterly in arrears. Nonetheless, we have managed to maintain an acceptable DSO. Over 80% of our unbilled receivables at the end of 2Q 2018 relate to revenue recognized during the quarter. Unbuild receivables are easy to audit as they are tied to contracts in force and are part of a repeating quarterly billing cycle.
Today's payable outstanding We look at the OpEx cycle and the CapEx cycle. Those are reasonable. You can look at them on a combined basis if you prefer, But to exclude total CapEx purchases from the denominator, as some have done, yields are completing meaningless ratio. During the past quarter, we had 2 acquisitions which closed, 1 go 3 in Shanghai level. I'd like to take faced with strong demand from our customers, we started a few years ago to look for data centers, which we could acquire to enhance our resource supply.
As shown on Slide 21, between May 2016 the present, we have completed 7 acquisitions. 2 of them, Beijing 4 and Beijing 5 are categorized as acquisitions but we're really just a mechanism for acquiring new project companies with agreements in place relating to property and power capacity. Net of those 2, its 5 acquisitions in the usual sense of the word. We've been highly selective in the data centers which we have acquired. They must fit our profile in terms of asset quality and suitability for serving our target customer segments.
We have also been very careful in the way that we structured the acquisitions. Deferring as much consideration as possible and linking it to the achievement of project milestones. This is referred to as contingent performance obligations. Out of the total equity consideration for the 5 real acquisitions, of RMB 1,300,000,000. RMB 752,000,000 has been paid and RMB506,000,000 is contingent.
We have involved legal advisors and financial advisors in due diligence. We've always bought 100 percent paid in cash and done so at single digit multiples of projected stabilized cash EBITDA. The outcome has been highly successful, every required data center has met or exceeded our expectations. For example, we were able to obtain additional power capacity and upsides the area of Shenzhen V by 53% post acquisition. Over 96% of the committed area of the acquired data centers is taken by our top 10 customers.
Our first acquisition was offered GuangzhouONE GZ1 data center. As you can see on Slide 22, It is 1 of 3 data centers, which we now own in the same location. We inquired GZ1, GZ2 and GZ3 in 3 separate transactions, only moving forward when our acquisition criteria could be satisfied. It should not surprise you given the integrated nature of the Guangzhou development that, while each data center was owned by a different set of selling shareholders, the lead investor was the same. Based on our satisfactory experience of GZ1, we also acquired Shenzhen5, asset5, from a different set of selling shareholders, with the same lead investor from the Guangzhou cluster.
If you examine the corporate records of the acquired companies, the GZ1, GZ2 GZ3 and Shenzhen V, you will find that prior to our acquisition, they share some directors contact details, etcetera, for the simple and obvious reason that they have the same lead investor. You will also find that at the time when we acquired these companies, we replaced the seller appointed directors and other personnel with our appointees at our earliest opportunity. I will illustrate this by going through the example of the Shenzhen Five acquisition on Slide 23. Data Center Services is a restricted industry in China. It requires a value added telecom service license.
There is a foreign ownership restriction for licensees In order to comply with this regulation, We have set up a group of PRC Companies, which hold the relevant licenses, and over which we have total control by contractual relationships known as variable interest entity or VIE. The structure has been very common in China for the past 20 years and moreover, companies with several $1,000,000,000,000 worth of market cap listed in the U. S, utilize this structure. Optimally, for each data center project, we put the provision of services and commercial contract into a license code, which is part of our VIE Group, and the data center operating assets into an asset code that is under an intermediate holding company in Hong Kong. This ensures regulatory compliance and facilitates financing.
It is not always possible, sometimes the operating assets are in the license goal. But wherever it is possible, this is the most efficient model and the one we use. When we acquire projects, we sometimes find that they are already structured in this This was the case with the S851-two and 1two-three acquisitions. In order to implement the acquisitions, we first took over the respective holding company in Hong Kong. In the case of Shenzhen Veng Five, is called RDTJ.
RDTJ had a wholly owned PRC subsidiary, in essence, the asset code for Shenzhen Faive. I will refer to this subsidiary as WGYL. The acquisition of RDTJ was completed on 24th May 2017, as evidenced by the publicly available annual return filed with the company's registry, Hong Kong. Which shows that we also replaced the fellow appointed director on the same date. At that point in time we had effective control over the entire S.
A. 5 target group by virtue of ownership and contractual relationships. The second step in the transaction is the acquisition In the case of asset 5, it is called Shenzhen Yauta. The Aflara, Beijing 1 war, is not a sub of GDS, it is part of our VIE group. Due to the longer time required to complete change of company ownership in China, the Shenzhen Yalda acquisition completed on 29th June 2017.
We replaced its seller appointed directors and other representatives of the same date. On the prior day, we replaced the seller appointed directors and other representatives of WGYL. In China, it is a requirement to file with the state administration to Industry And Commerce or SAIC for change of ownership, change of directors, etcetera. Accordingly, we filed with SAIC for the change of ownership and directors of Shenzhen Ylda and for the change of directors of WGYL. However, the change of ownership of WGYL was indirect and did not require an SAIC filing at that time.
In our 2016 20 F, we refer to the pending acquisition of a data center in Shenzhen, I. E. Chenzhen V, and specifically state that it involves agreements for the simultaneous acquisition of a Hong Kong company and a PRC company. In our 2017 20 F, we refer to the acquisition of Shenzhen V as the acquisition of a target group, in other words, a group of companies plural. In describing the financing arrangements in the 20 F, we disclosed the names of the 3 companies at the heart of the Shenzhen V transaction, RDTJ, WGYL, and Shenzhen Youda.
Allocations have been made stating that the Scheindling Five-one hundred and two and one hundred and three acquisitions were undisclosed related party transaction. Given the fact that the acquired data centers has the same lead investor, The acquisitions involved a target group as disclosed in our SEC filings. WGYL was a central part of the Shenzhen 5 acquisition. SAIC filings for WGYL show its owner to be RDTJ. Annual returns for RDTJ are publicly available in Hong Kong showing its change By failing to accurately describe these facts, the short seller made in our opinion an egregious error.
To compound this failing by making defamatory allegations of fraud and self dealing is in our view totally unacceptable. We encourage our investors and the legitimate analysts who cover us to base their conclusions on objective facts and not on what we view to be obvious and self interested distortions or misstatements of those facts. Because we have always been 100 percent committed to transparency, I also want to address the transaction structures for the Guangzhou II and Guangzhou III transactions, which are shown on Slide 24. Once again, each acquisition involves a Target group, 2 transactions, 1 onshore, 1 offshore, and the filings show that the seller appointed directors, etcetera, were replaced by our representatives when the acquisition is completed. The composition of the Gisse II target group is disclosed in our 2017 20 F.
GSN3 was completed this year, and we've not yet filed our 2018 20 F. If you go back to Slide 21, where we show the equity consideration, it should be obvious by now, The disclosure in an SAIC filing of consideration paid for the Onshore acquisition does not include the consideration paid for the Offshore acquisition. There is one more point which I need to address. 1 of the prior shareholders of Guangzhou II made a disclosure required by domestic stock market regulations in China. Which included references to the The disclosed revenue under PRC GAAP did not include power income, which we are required to book as revenue under U.
S. GAAP in our financial statements. The disclosed property and equipment under PRC gap did not include leases, which under U. S. GAAP we are required to capitalize in our financial statements.
Once again, We believe that the mischaracterization of these facts reflects at a minimum obvious and elementary errors. Turning to Slide 25. At the end of 2Q 2018, our backlog had increased again. Slightly to nearly 57,000 square meters, which is equivalent to 65% of our area utilized at the same date. Finally, on Page 26, our 2Q 2018 results clearly show that we are tracking ahead of expectations.
In terms of revenue and adjusted EBITDA growth. The accelerated move in has brought forward new service revenue that we expected to commence later in the year. Given where we are today, we are raising our original guidance ranges to revenue and adjusted EBITDA by approximately 3%. This means that the bottom end of the new range is nearly in line with the
high
in order to keep up with the sales demand. Accordingly, we are raising our CapEx guidance for the full year to around RMB4 billion as just over $600,000,000. This includes R662 1,000,000 or USD 100,000,000, which we expect to pay for the Hong Kong site acquisition. In the future, With that, I will end the formal
and wait for name to be We thank you for your patience. Our first question comes from the line of Fred Gluthen from Raymond James. Please ask your question.
Great. Thank you very much. I appreciate all the additional disclosure. One quick question on the on sort of the quarter and the outlook and then a follow-up. Can you talk about the pricing with the new projects?
What are we seeing there? Is there anything to do with the mix of hyperscale there? And then One other issue that's come up with some investors is some of the common phone numbers and so forth and some of the filings. I assume that just related to the related parties, but are the, the various sharing the directors and so forth and just timing when you made the acquisitions. Can you walk through why those show up in the filings?
And that would be great.
The couple I'll address. Thank you for thanking us for the additional disclosures, but I'd actually point out the almost my entire explanation was based on what is already publicly available, either in our SEC filings, SAIC filings, or of how Hong Kong County's registry is just a question of looking at it carefully and coming to the correct conclusions. As regards to the common phone numbers, what I was saying is that in effect, we did 2 acquisitions. One was of a cluster of 3 data centers in Guangzhou and the other one was of a very large data center in Shenzhen V. So those 2 acquisitions had the same lead investor.
In fact, each one the other shareholders were a different group. So the presence of the lead investor, who in effect is the lead developer promoter. Of those projects meant that the directors and other representatives of those companies were the same because they are all part of the lead investors team. What I hope I made clear in my explanation is that if you look at those filings, you will find that in every single case, as soon as we completed the acquisition of these target companies, we replaced all of the lead investors appointed directors and other personnel with our own appointees. It's simple.
William Duo took up pricing.
Yes, I mean, to talk about the pricing, I mean, we didn't see any change compared with the last couple of quarters because of the, as we mentioned again and again, I mean, the Tier 1 market, what we are in, I mean, it's a demand and the supplies that they are still a gap. So the dynamic still doesn't change a lot. So I think we can keep this pricing level in the next couple of quarters.
Okay, great. Thank you. And if we look out a year, what will what do you expect the customer concentration to look like based on your current backlog? And can you comment on any successes you've had with the partnership with CyrusOne as far as being able to get some new logos?
Okay, Frank. On the customer concentration, we don't set any limits. We don't have any quota. For customers, we have established a group of very strategic customers we think having the relations we have is absolutely key. I don't know how you can build a successful franchise in this business without those relationships.
But we started off with the very top 3, 4, 5, 6 names. We identify at least another 10 or even 20 names, who we consider to be highly strategic, either because of their their scale or because of the kind of data which they have and the ecosystems which revolve around that. It takes time to break through to these accounts, but we're doing it gradually. Last year, we added Ctrip first half of this year, we've added NetEase. I think it's kind of fairly obvious to people who know the China cloud and internet landscape who is the next set of targets
that we add that we target are.
I think, if we're successful in doing that, the customer concentration will diminish, but that's not to say that we have any issue with it. Okay. Tariswani asked about.
Oh, Tariswani, I mean, what we've benefited, I think. Yes, Frank, you mean, what business we did? First of all, we take the revenue from the, take the margin from the smartphone refer the deal from the China to U. S. And also to our Singapore business partner STT.
So this is number 1. Number 2 is I think the Sorry for that. We are working on a couple of deal. I think it is very close to close the deal in a soon. I mean, it's which is based on the U.
S. So our current, the momentum is happening right now. So I think this is a long term relationship and we will we just start and we think it's a great accomplishing and a team up to working with the 2 to come to both from the two sided, the big larger customer, yeah,
Okay, great. Thank you very much.
Our next question comes from the line of Robert Gutman from Guggenheim Partners. Please ask your question.
Hi, thanks for taking the question. And again, thank you for the thoughtful. Updates and information addressing all those accusations. Could you tell us the SQM and use added of almost 20,000 order was a big number. Can you just review the composition of that by facility?
And secondly, in the context of accelerating pace of CapEx and demand. Can you just talk about your forward views on the balance sheet and on net leverage?
Yes. Hi, Robert. It's Dan here. First of all, let me say I'm sorry that you got dragged into this this short attack. I guess you know more about Chinese regulators than you probably wanted to now.
Well, I think he's saying no more than somebody. The 20,000 square meter net add was tremendous. And it's something that started in the first quarter and I commented on before, and it's carried on. And it is actually across multiple facilities. You can look at the individual data center disclosures and you'll see this everywhere.
We've bought a lot of capacity into service in the fourth quarter of last year and in the first quarter of this year. And so the momentum of moving that capacity has really started to accelerate. In addition, those 3 data centers, which we built in Her Bay, built a suit for a particular customer, that customer has started to deploy very rapidly in those data centers. So I think it's really a combination of those factors. On the balance sheet, I think, you want me to add my, I gave that I gave that, illustration, at least in terms first of all, I've got to look at it in terms of what is our capacity what financial resources do we have, that we to invest.
I gave those numbers during the prepared remarks. You're asking specifically about the net debt to EBITDA multiple. I think around the current level is more or less sort of as high as it will go. I'd say more or less. But with the caveat, what I said on in the prepared remarks, which is the comment The multiple the metric only has limited meaning.
We have a lot of data centers, which are under construction and ramping up, which are 100% or near 100% contracted to investment grade customers quite often 8 to 10 year contracts. Quite often with no right of early termination. The cash flow from those contracts, net of the CapEx and OpEx is still far in excess of the amount of debt.
Well, that's great. Thank you.
Our next question comes from the line of Jonathan Atkin from RBC. Please ask your question.
Thanks. So I was interested in the Hong Kong acquisition and the expectation that you would have is to when power might be available to that site?
Jon, I think we've just entered into a, what they call, provisional sale and purchase agreement for the site. And we would we make a disclosure today because it's material. But we would prefer to wait until probably late September, early October when the acquisition closes. And then we will make more detailed disclosure about the project. Do you have another question?
So I was interested also in just the level of you talked about William talked about supply and demand, there's still a gap And as you look at the data center development going on in China, obviously by yourself, you CapEx guidance, but I'm just interested in, is most of the other developments happening from independent developers other public companies. Can you maybe talk a little bit about, who else is developing capacity to meet that need?
Yes, John. And I think it's as we always talk, first of all, I mean, in a different market with have a different competitor. And then some new things the data center is hot right now in China. I love the new project prayer and a new capital jump in the market. But I think in terms of the competition for GDS already in a very, very good position whatever from the repetition point of view on our customer let's say, the stickiness point of view and also our operation excellence point view.
And so we don't afraid of any competition. But on that hand, we are targeting the Tier 1 market now we are sitting on around a 35% to 40% market share. We are not saying we want to have the 100% market. So there's a lot of market space to live to the other
players. It's Sorry, John. Something just occurred to me about the question you asked before. One of the reasons why power is difficult to obtain in Hong Kong is because most of the substations are at capacity or near to full capacity. And one solution to that is to build your own substation.
The problem is there are very few existing buildings you can find which is suitable for putting a power substation inside. But the site that we are acquiring is a site where there's an existing fifty year old building we will pull down. And so we will build a new building on that site and, incorporate into our plan a substation in that building. That will be something which is not available, it's not an option, I think, in 99.9% of existing industrial buildings.
That's a good point. And then lastly, in terms of expansions, are there anything are there any thoughts being given to additional remote hub markets besides the 1 in Abe province. And then you mentioned in the script that you would be entering 1 additional tier 1 market. What are the types of criteria that you've looked at when you evaluate opening up a new a new Tier 1 presence? Thank you.
Yes, for the remote projects, when you say evaluate, so it's really build a suit. So it's all about the counterparty. It's all about how the contract is structured. And the economics. Yes, we are talking to 3 big customers about remote projects, if we can get the project management and the financing right, it is potentially a large opportunity.
It's there for the taking. That's why we investing quite a lot of time and effort to try to get these, to get the approach right.
Yes, Raja, I want to see, add on some of my opinion mean, we are still will stay on our strategy. So talking for the Tier 1 market, we try to focus on to solve the supply issue in the future because we see the next couple of years the growth, the demand is tremendous. So we are still working on how to solve the types demand in the table market. But in the meanwhile, I mean, obviously, I mean, the remote market is a new market. So we are we already have the had a gutted experience to working on that And I think it is for us, it's nice to have not as much to have, but we are we will try to find some smart way in a very innovation way in a way to solve the capital together and achieve capital.
To solve this kind of the demand.
Thanks very much.
Thank you.
Our next question comes from the line of Colby Synesael from Cowen. Please ask your question.
Great. Thank you. Just to follow-up on that last question, regarding expansion in new markets. You mentioned on your prepared remarks that you're expecting to add or enter at least one new market, I think, by year end. How many markets, do you think that you could enter over time within China just to kind of give us a sense?
And what is the velocity you would intend to expand the markets perhaps over the next few years. 2nd question, there's obviously a lot of talk in the news about trade wars, particularly between China and the U. S, does that, you think, create risk that some of the U. S.-based cloud companies may not deploy in China as quickly as what we've seen maybe in the last year. And then I guess vice versa, perhaps more from the CyrusOne perspective, is there more of a is there a risk there that some of these domestic Chinese cloud companies don't actually deploy in the U.
S. As quickly as perhaps we're all thinking right now? Thank you.
Okay. There's a couple of questions. First of all, it's the new market, right? We mentioned that we are we found that our philosophy is our strategies follow our custom. That's our strategy.
Once customer requires to go to some new market, we will see the market is this a sizable and it's a strategic for GDS. So now we are we what we are seeing is there's There's a couple of the new market. It's getting more mature and it's qualified for GDS to get into I think that's why I say in our pipeline, we are keep watching on a couple of cities, which maybe including the Chongqing, including the Wuhan, including the other city. But I think that's why we see we are seriously seeking some opportunity to get into at least one more market in China. This is the first question.
Yes. Covios, how many Yes, of course. How many at the ballpark? I think this year, we will target at least 1. Yes, maybe next year, let's see.
We will add 1 more, maybe. But I would emphasize, see, our strategy is get more keep our leading position in our existing market and get more market share in our existing market. On the other hand, we are very seriously in the cap rate to watch what's the next one in China. So after a couple of years, a variation, I mean, we will make some decisions. So
And then the other question with the trade wars?
Carol, yes, I think the first of all, I mean, GDS is focused on the domestic customer. This is number 1. Our in our total area commitment, I think our backlog, I think, in 90% is generated by their local domestic customer. Only 10% is multinational. And there's a There's another 100% from U.
S. And we have the customer from Japan. We have the customer from Europe. So it's quite a diversified. This is number 1.
The second one is, I mean, the trade war is more affected to the traditional industry. Like a manufacturing and like other export and imports, this kind of business. So it's not affected the high-tech internet and the car business in China. On the other hand, I think the What we see is, recently, it's very active topic is Facebook and Google will get into China. So in China, the Central Media, a couple of last week, just in their China type of trade, let's say, welcome Facebook and Google This looks like it's quite open for the U.
S.-based club player in China, getting to China. And what we see, the results, China government's already announced to open the market for the financial institution Please remember, GDS has almost 300, around 300% or 300 financial institution. So this is where very, very good news for us and more and more foreign financial career get into China. I think it's GDS operators will be the number one choice for them. So in this review, I think it's trade will then impact all our business.
So in some way, maybe it's good for us.
Our next question comes from the line of Gokul Hariharan from JP Morgan. Please ask your question.
Thanks, William. I think one question, first of all, thanks for a lot of putting all the data together and the clarifications. First question, could you talk a little bit about, excuse me, when the Hebei project for one of your largest customers comes online. It looks like it's coming online quite quickly. Could you talk a little bit about how it affects the average selling price and how does it affect your EBITDA conversion, etcetera, given that seems to be something that will be ramping up in a very quick fashion over the next 12 to 18 months.
That's first question. 2nd, Could you talk a little bit about, what has been the kind of, you did talk about some market share dynamics of 35% to 40% in Tier 1 markets. Could you talk a little bit about for your biggest two customers? How has been the decision points in terms of self built versus outsourced. As well as I think, traditionally, they've also used a fair number of Telco Carriers data centers also.
How has that dynamic been changing over the last year or so? Now that you're signing even bigger size deals with your top 2 customers?
Okay. Gokhar, I'll answer the question about her Bay. Whenever you answer about decision making and relationship with the top to top to customers. So yes, Focal, the first, the 3 data centers in Her Bay came into service in April. And then the second and third came into service just at the beginning of July.
So that's why we said they're all in service now. And then you're asking about how it impacts our financial metrics. It does have it does have an impact, but because it's just, 15,000 square meters. It's just over 10% of our total capacity. And unless we do a lot more of these projects, and my approach was just to let it be part of the blended average.
It does have a slightly, drag effect on our revenue per square meter. On the other hand, it's quite high margin. So, I didn't want to get into disclosing remote projects as a separate kind of data center category. It was I think overcomplicate things for now.
Yes, about customer relationship, number 1, I think the GDS strategy has built a whole model crop. That's our strategy because we believe the cloud is a leading driver to drive the next 5 or even 10 years growth. So we already start to build a bit relation with our customer for a year for a couple of years. So now I think as everybody know, we announced, we are the preferred vendor data center vendor to our largest 2 largest customer already. So we will keep very close with their tech team, network team and procurement team and even business team.
So we every we are shared our resource plan, they also share their 3 years rolling forecast, their demand So we are working very closely with all the their demands forecast. So this is our advantage. And on the other hand, I say, we are very close our tech team very close with their design and architecture team as well. So we also take another advantage to know their technology trend So this is our big advantage compared with other competitors.
Okay. And, William, could you talk a little bit about, I think, you mentioned that even some of the remote projects are moving from self built to outsourced. Could you talk about, what you're seeing in terms of visibility, especially for the larger customers who used to be a lot more self built in some of these remote locations as well. Is that something that is consistent across most of the customers that you talk to?
Yes, I think we are our target, our strategy is a Tier 1 market, right? Tier 1 market, I can confidently say the 100% also no any change. And we're this is number 1. Remote side, it's more, I mean, let's say, original debut by themselves, but what we see in the last 2 years, they try to 100% also. But we can I cannot tell what's the trend after the next couple of years, but I still believe their major business is growing their main business?
Data center is not their core competence. So in this way, I think that all those things still will be their key strategy.
Got it. Thank you very
As there are no further questions, I'd like to now turn the call back over to the company for closing remarks.
Thank you all once again for joining us today. If you have further questions, please feel free to contact GDS Investor Relations through the company information. Our website also to Assante Group's Investor Relations. Thank you.
This concludes today's conference call. You may now disconnect your line. Thank you.