Hello, ladies and gentlemen. Thank you for standing by for GDS Holdings Limited's First Quarter 2021 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 1Q 'twenty one earnings conference 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 download this from our IR website at investorsgdsservices.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. Ben Newman, GBS' CFO, will then review the financial and operating results. Ms. Jamie Ku, 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 perspective 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 Horrible Debt Measures. I will now turn the call over to GDS's Founder, Chairman and CEO, William. Please go ahead, William.
Okay. Hello, everyone. This is William. Thank you for joining me On today's call, I'm pleased to report another solid set of 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 confident of maintaining it throughout 2021. Despite the noise about the growth of the cloud market in China, new regulations and increasing competition, we are not slowing down. The reason why we can maintain sales momentum is because of our positioning, in particular, our increasingly diversified customer relationships and our market presence, which mirrors 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 6 hyperscale orders.
2 of these orders were in new markets. In Hong Kong, we closed an anchor order For 45% of our Hong Kong One data center, the customer is a leading cloud service provider from China. In addition to commitment for Hong Kong One, which will enter service in 2022, This customer has indicated strong interest in anchoring our Hong Kong 2 data center, which will enter Service 1 year later in 2023. In Chongqing, we closed an Anchor order for 50% of our Chongqing-one data center. This came from a large cloud customer in the Financial Service Industry.
In the current quarter, we won a first time hyperscale order in Beijing from a new cloud service provider, which is focused on serving government and SOE customers. These 3 notable orders highlight our ability to keep on winning as demand Shifts between markets and customers. A couple of quarters ago, we made an important breakthrough with 2 new hyperscale Internet customers. I'm pleased to report that we have now We won a follow on order from 1 of them, a leading e commerce platform player for capacity in one of our Shanghai data centers. We also won the bid for a follow on order from the other one, A leading content platform for capacity in their 2nd tier 1 market.
Our sales and resource strategy is driven by architecture of the cloud. As shown on Slide 6, Cloud platforms deploy multiple availability zones in each region. Each AZ is independent, But all of the AZs in the same region are interconnected with minimal latency. This architecture supports real time and high redundant operations. 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 land and as a result, We are well positioned for the expense. Another 50% of our current sales pipeline It's an expansion order from customers who have already landed at one of our locations. These expansion orders will not 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 at over 160,000 square meter or 3 97 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 data centers in separate locations, which mirrors the footprint of the cloud.
This is what give our platform a unique Value proposition. No other data center company is anywhere close to having this market present. In fact, Most of our competitors only have supply in a few places. During 1Q 2021, we started construction of 5 new data centers, online and buildings, which were previously held for future development. At the same time, we topped up our resource pipeline with Greenfield Land Purchase at greater 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 of capacity Held for future development, over 90% is Greenfield Land, which we own and which comes with power potent. This result pipeline derisk our growth and Our sustainable competitive advantage In resource supply, we currently have about RMB3.3 billion, which means RMB498 1,000,000 of investment tied up in held for future projects. There have been number of recent developments in government policy, including Specific policies related to resource allocation in Beijing, Shanghai and Guangdong. Some of the details are new, but in our view, the underlying policy direction is consistent.
On the 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 maintaining Tight control over the allocation of land and the power for data center use. We hear people talk about oversupply. Let's put this in the context. Across all of our Tier 1 market, Supply is constrained and the bar is being raised by government policy.
The only Exception is the area in Jiangsu province to the immediate northwest of Shanghai, Where there are a number of players who have largest 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 supply 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 2 previous announced acquisitions. BG15 brings over 19,000 square meter of capacity.
It is 100% committed and 80% utilized. BGA15 was a highly competitive M and A deal. Since closing, we have started Converging of an existing building on the same sites, which we call the BGA 16, It is already almost 100% pre committed, which with this expansion, the implied Acquisition notable comes down by about 1 to 2 times. TJ1 It's our 1st data center in Tianjin area. With the added advantage, what is that It is only 30 kilobits from the edge of Beijing.
It brings over 14,000 square meter of highly Marketable capacity. We paid 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 the quarter we saw this quarter Hao Chongqing and Hong Kong, to new market for us in terms of self development developed data centers Joss drove significant new business from established strategic customers.
By the end of this year, We expect to enter 1 of 2 further new markets 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 a presence in the Singapore market. Given the constraints Our supply in Singapore and the rising co location prices, We are also considering complementary options in neighboring countries.
We have identified some very promising investment opportunities and we aim to and make at least 1 or 2 commitments within the next couple of quarters. Now, I will hand over to Dan
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 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 Q1, which is normally a slower season in terms of move in. 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 percent quarter on quarter in 1Q 2021 to RMB 2,425 per square meter per month.
For FY 2021 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, customer data center location, 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 percent for 1Q 'twenty one, 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 'twenty. Our underlying adjusted EBITDA margin was 47.9% for 1Q 'twenty one, 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 'twenty one, 43,000 square meters compared with only 13,800 square meters in 1Q 'twenty one. Despite the fixed costs Associated with this additional capacity, we expect our 2Q 2021 margin to be only slightly lower than for 1Q 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 Beijing 15 in 2Q 2021, we expect RMB2.68 billion Of acquisition consideration that may be paid in the current quarter. Part of our organic CapEx in FY 2020 and FY 2021 relates to BOT contracts. We have 9 such projects for 1 customer, which are designated for transfer to JVs with GIC and 2 such projects The 2 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 all 11 projects 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 RMB 1,000,000,000 of accumulated CapEx paid for these 11 projects. Looking at our financing position on Slide 20, We have RMB14,900,000,000 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 5x at the middle of this year. During 1Q 2021, we completed debt financings with a total facility amount of RMB1.3 billion, equivalent to US191 million dollars including both new project financing and refinancing of existing facilities.
The average interest rate for these completed facilities is 5%, based on the prevailing loan prime rate. This compares with an effective interest rate of 6% for all of our debt in 1Q 2021. In the past 4 months, we've completed RMB0.9 billion of refinancing and we expect to complete another RMB1.7 billion of refinancing by the end of the current quarter. With that, we will have RMB 2,100,000,000 of refinancing left 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. We 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 plan to publish Our inaugural 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 of renewables is increasing rapidly in China. On a per kilowatt basis, the generation cost will soon reach parity with ground power. China leads the world with its 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 in our targets, timeline and how to get there. We will not disappoint. We would now like to open the call to questions. Operator?
Please stand by while we compile the Q and A roster. For the benefit of all participants on today's call, please limit yourself to 2 questions. Our first question comes from the line of Jiang Liu from Morgan Stanley. Please ask your question.
Thanks for the opportunity. I have two questions here. First, it is related with the competition in Jiangsu. As William previously mentioned, you expect a normalization for the competition in future. What do we need to Before a real normalization, is it should be consolidation or is it should be policy turnaround in approvals?
What's your expectation here? And the second question is related with consolidation, right? If GDF turned out to be the consolidator, what should be the multiple trend in the next Few quarters or next few years because we see a lot of PEs and the infrastructure fund entering the market, they
Okay. The first question is About the competition, right, in this area, right? I think number 1, The capacity the land of power is allocated to the different payer in the last Couple of years. So this area, as I mentioned, the competition is intense. But KBS now in a very good position is number 1, we have some We already our capacity already have the customer commitment since last year.
So we are not very Number 1, we are not pursue some deal, which only wants fulfill our sales target. We are quite relaxed because we are well positioned there. So based on our National footprint, GDS is already in the multi market. We are not just focused on one market to maintain our to If some strategic deal would feel important, we will do it. But if the Deal is quality is not that good.
We will walk away. This is our strategy in this area. From Lawson point of view, I think number 1, the demand because we believe in this area in the whole Shanghai East of China, I think the demand still will continue to grow. So we don't worry about in the future, this inventory will be the issue, But it would take time. So we are quite relaxed.
On the other hand, GDS has, as I used to mention, We have more than almost 700 customer base. So we are our customer quite diversified. 80% of our 80% 85% of our new incremental order is from our install base. So we are not a desperate payer. So we are quite relaxed to look at this Ares Competition is the first question.
But once again, as I mentioned, I think the government's policy is changing because In general, I mean, the carbon neutral policy will guide We will raise the bar of the carbon coated allocation. And this is in my view, We're slowly to tied up the quarter. So I think The demand and the supply will more balance in the next few years. The second question is Consolidation, I think, yes, we are in a multi market even in the overseas market. So consolidation Our future goal.
So we are open in terms of the acquired project, Acquired platform, so we are quite open. So this is we keep open our eyes So what's the opportunity? In terms of multiple, I think we always do the reasonable deal, right. We don't want to be a crazy buyer, right. So we will Consistent to, let's say, take care of the invest or the investor benefit
Our next question comes from the line of John Atkins from RBC. Please ask your question.
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 wondered what's the timing? Is that weighted towards the beginning or end 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?
John, this is Jamie. Regarding the questions regarding On the timing for the delivery of the first 3,000 square meters, we are looking more closer to the June period on the delivery mostly. Yes. So we are looking more towards the end of quarter, which is more in the June period.
Got it. And
that
will you
be what's the second question on renewable? Doug, do you want to answer?
Yes. So the renewals in the back of your presentation, Daki, you would give the amount 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 'twenty
What is the discussions that you're having with your customers? Are you anticipating renewing 100% of it? What's the tone of your discussions around that and renewal rent and whether that stays the same or changes?
Yes, John, I think we'll renew almost all of it. There's one A situation where we are going to pull out of a, let me call it, 3rd party data center, because it's no longer Up to an acceptable operating standard and there may be some churn, but less than 1,000 square meters, which Insignificantly even by standards of data center industry. Other than that, I think with respect to a Very high renewal rate this year. And I would say is a 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 It's quite satisfactory at this time.
Thank you. And then lastly, there was a press article in the last 2 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 markets like Malaysia or Indonesia that you're targeting for entry?
Well, we did not respond to the story that was put out by 1 News Agency, and I won't respond now, but as a general comment, our Acquisitions to date have been, in effect, asset acquisitions. We've Acquired beta percent center facilities on each acquisition It has involved a single site, somewhere between 4000 to 20000 square meters at various stages of Development. We haven't done any acquisitions of what you might call platform players. But in terms of strategy, I think it's all part of the Same theme, which is that we seek ways to leverage 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 the synergy is, what the strategic benefits are and so on. But Yes. We're very open minded about that. I think we have a window of opportunity given the position that we've established
Our next question comes from the line of Colby Synesael from Cowen. Please ask your question.
Great. Thank you. Maybe just following up on that last one. As you start to potentially look at Platform type acquisitions, what's the capacity financially speaking That you think that you guys might be comfortable doing the article that Jonathan's referencing suggested a pretty high price target or price Excuse me. Which I'm just trying to get a sense of what is the feasibility of doing such a large deal?
And then secondly, even though the install number, 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 than I think was anticipated. It was down, as you mentioned, 3.7% Quarter over quarter. Just wondering if that's timing related or what might be 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 view. Thank you.
On the first part about our financial capacity, I think it's relatively easy to To calculate what it is today, we have just under RMB 15,000,000,000 Cash on our balance sheet had at the end of the Q1 because we have a big slug of Acquisition consideration to pay during the Q2. And we gave guidance for annual CapEx of about RMB 12,000,000,000 which included the kind of known M and A, but not the unknown M and A. If we finance that CapEx fifty-fifty equity and debt, which is relatively conservative because, of course, we target Higher leverage than that. That would involve $6,000,000,000 of equity and $6,000,000,000 of debt. For the $6,000,000,000 of equity, that's versus maybe $15,000,000,000 of cash.
So there's a fair amount of capacity there if something opportunity arises, which is Not in the ordinary course of business. Just 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 U. S. Or in Hong Kong, strategic investors in Singapore and private placements with Chinese financial investors and financial institutions Joint ventures with Sovereign Wealth Lines. And so I hope over the years we prove that Yes.
We have enough ingenuity to be able to find ways to finance whatever we want to do. I think we've Never considered ourselves capital constrained even when we built 3 data centers with $20,000,000 in 2010. I didn't consider that we were Capital constraint. Your comments about the MSR, it's a fair comment, 2.6% quarter on quarter decline in the Q1. It's often just to do with Mathematical timing, that's why I gave the assurance that over the full year, it's still looking at low single Digits, 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've checked your comment about revenue in the Q1, but we didn't actually 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, there's a kind of balance there's a balance there.
Okay. Thank
you.
Our next question comes from the line of James Wong from UBS. Please ask your question.
Good morning, management. It's James Wong from UBS. I've got just two questions. First question is on self build. So can you maybe comment on the extent of the self build by the large power customers?
For example, have you seen any change recently in the proportion of sell field 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 a number of projects 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 just this year or do you think this slowdown will be sustained? Thank you.
Okay. The first question is the customer self view, right. I think this is not new, I mean, since a couple 4 or 5 years ago, the self view market is a separate market in my view. So again, I should remind all investors, GDSS strategy is focused on the Tier one market, right. So I think the market is definitely one is the self built market, which is in the most almost 100% so far It's in a remote area.
And what we can see is all the Tier 1 market still very, very Good demand from our customer. So I think in terms of the cable market, we didn't see a lot of that difference compared with last couple of years. So this is a chance that we maintain. So once again, this is a separate market. The second question?
Sorry? Go ahead. All right.
Take the question, Wennen, just on the demand environment, do you see the slowdown being sustained? Thank you.
Sorry. Demand, it depends on the different which market we talk about. In our view, in the Tier 1 market, allsourcing market, I didn't see a slowdown in the demand. So that's why we can still maintain the high growth in the Q1, which we just reported. We think we didn't see we still see our momentum in the next quarter, but I don't know which other payer what they look at, right.
In our view, I think that we already lock up This quarter and we maintained the whole year's sales commitment.
Our next question comes from the line of Tina Ho from Goldman Sachs. Please ask your question.
Hi, management. Thank you for your time. I have two questions. The first one is regarding your BOT 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 BOT projects And then the second question is regarding competition.
As William, you mentioned that the competition in Jiangsu 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? It would be very helpful if we could have some
Hi, Timna. I'll answer the first question on EOT. We've always made clear, in fact, William just said it that the BOT opportunity is mostly it's a remote Opportunity and it's 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 You spread out and you have a big challenge to Expand their IT platforms in multiple locations in a synchronized way, Whereas in remote sites, they have very few locations.
In fact, you can look at the earnings presentation where we I 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 it's very practical for them to do that 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 really a more Financial engineering, to ensure that we have a competitive cost of capital. But we are selective about that business just as we are selective 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 than business In Tier 1 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.
Thank you, Dan. And just a quick 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 and L, right?
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 were to charge a management fee, which 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, the project returns from these projects 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. But that's what's driving it, that calculation. Yes. If it means that the projects are consolidated, then yes, that We'll ensure that the disclosures enable you to understand what contribution is being made by these projects.
Understand. Thank you very much. And yes, I have a second question in terms of the competition.
Yes. Tina, I think the Jiangsu province is a very special case in the current market's whole environment. I think in my view, this Situation because we number 1, we still believe the demand still will grow In all the Tier one market, number 1. So in terms of the competition right now, I think this Capacity a little bit over Supply will be solved in the next 24 months in my view.
Due to time constraints, please limit yourself to one question. Our next question comes from the line of Gokul Hariharan from JPMorgan. Please
Yes, hi. Thanks for taking my question. My question is about some of these recent Regulations that we have seen in Beijing and Guangdong, how does management see The implications of this regulation looks like there is some kind of demand turn moving towards higher performance related projects, especially in Beijing. And also related to that, How do you think the industry meets some of the carbon neutrality and green Credit kind of requirements in some of these locations. Do you have to purchase these credits from 3rd party?
Is that process something that can be passed on to customers through price increases or cost pass throughs? Thank you.
Yes. I'll take the second part first, Gokul, on renewables. I think In the long term, using renewable energy will not be any different in terms of the economics From using, we call, brown 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 during the transitional period, we may have to take some steps To establish some direct power purchase agreements, we may consider investing In renewable power projects, ideally, if such a situation is possible, Projects which are located close to data centers, so that can be direct transmission connection Without going through extensively through the grid. And there's always the ultimately the fallback of buying Renewable Energy Certificates internationally, if not in China. I don't the fact that we operate in Tier 1 markets and that 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 government policy is addressing both the supply side And the market mechanisms on the consumer side to ensure that we can solve that problem.
Your question about the effect of regulations in Beijing, Shanghai Guangdong, do you want to address that, William?
Yes. Okay. I think Guangdong you talk about Guangdong and Beijing developments new policy, right? I think in general, I mean, They raised the bar to allocate a common quarter. And this is number 1.
Number 2, that means they want a more lower POE in terms of the carbon neutral policy. The second of all, I think they tried to close some small data center, right, inefficient data center, which means This impact is positive because a lot of the existing Small data center will be step by step closed. This will move to the large More power efficient data center like what we built, right? So I think this is one impact. Another impact is Since they raised the bar, I think the government realized the previous carbon quota allocation It's not efficiency.
So, I would like See, this is good for the leading company in the future to obtain more Carbon quarter, this is my view. In terms of the how we improve our Operation to echo the Carbon Neutral new guidance. I think that number 1, we will give our ESG report soon, right. We will give a very clear roadmap, right. I think the most important way is 1 is keep improve our PUE.
Although we are the We're already in this area. We're already the leader company in the China data center. Number 2, I think the energy source It's very important, right? But based on the current Tier 1 market, there's not that much Renewable Energy in this city, so we have the different way to Maintain the to improve the carbon neutral. This is later we will give some detail Our roadmap, by the way, I would like to say, in the last 2 years, The central government issued a green data center Example, right.
So GDS gained almost win 50% of the Green Data Center, Which central governments, let's say, Jasmine
Certifications.
Give the certifications. So that means GDS, we're already in the leader position For the in the China data center industry, for the green data center, for the renewable for the carbon neutral Right. So this is my answer.
Got it. Thank you very much.
Our next question comes from the line of Frank Louthan from Raymond James. Please ask your question.
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.
Robert, apart from The one area that we talked about around Northwest and Shanghai, I think the situation in all parts of Other Tier 1 Markets, we're talking about districts of Beijing, around the edge of Beijing, Shenzhen, Guangzhou, the areas around them, urban part of Shanghai, Southern part of Shanghai, it's very consistent that Supply is constrained. And very often, customers have very little choice. The number one reason why we use business is because we don't have supply. And You'd be surprised even without resource pipeline and the scale of our construction activities, Yes, how often that arises. So we wouldn't they wouldn't happen Yes, because we were not trying.
So despite our very best efforts, we lose business Continuously because we are unable to generate supply in as many places as we want. So that shows you that this is when you talk about supply constraint, it's real. So that means that the pricing is relatively stable in most of those places. It's relatively stable in most of those places. It's really and it's not that unstable in The Northwest part of Shanghai either, it's just that 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 that The government's disciplined approach So the allocation of land and power, whilst creating a challenge for us, has ensured that this industry remains highly investable and attractive and has high barriers to entry. That's been the case for years, and we have very My conviction is going to remain the case for the foreseeable future.
Due to time constraint, I'd like to now turn the call over back to company for closing remarks.
Okay. Thank you all once again for joining us today. If you have further questions, Please feel free to reach out to GDS Investor Relations for our contact information on our website and Piacente Group Investor Relations. You may disconnect.
This concludes this conference call. You may now disconnect your line. Thank you.