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 listen only mode. After management 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 2021 Earnings Conference Call of GDS Holdings Limited. The company's results were issued via Newswire Services earlier today, and are posted online. A summary presentation, which we will refer to during this conference call, can be viewed and downloaded from our IR website at investors.gds-services.com. Leading today's call is Mr. William Huang, GDS Founder, Chairman, and CEO, who will provide an overview of our business strategy and performance.
Mr. Dan Newman, GDS CFO, will then review the financial and operating results. Ms. Jamie Khoo, our COO, is also available to answer questions. Before we continue, please note that today's discussion will contain forward-looking statements made under the Safe Harbor Provisions of the US 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 US SEC. The company does not assume any obligation to update any forward-looking statements except as required under applicable law. Please note that GDS earnings press release and this conference call can 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, 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 the results. Our performance year to date is in line with our expectations. We would remain on track to deliver our full year sales target and financial guidance. Our sales in 1Q 2021 was over 23,000 sq m. All organic. All Tier 1 Markets. We have maintained the same sales run rate since the beginning of last year. 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 commitment and 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 six hyperscale orders.
Two of these orders were in new markets. In Hong Kong, we closed an anchor order for 45% of our Hong Kong 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 Two data center, which will enter service one 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 three 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 two new hyperscale internet customers. I'm pleased to report that we have now won a follow-on order from one 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 secondary and Tier 1 Market.
Our sales and resource strategy is driven by architecture of the cloud. As shown on slide six, cloud platforms deploy multiple availability zone in each region. Each AZ is independent, but all of the AZs in the same region are interconnected with a minimal latency. This architecture supports real-time and highly 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 expand. Around 50% of our current sales pipeline is expansion orders 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 seven, we now have our highest ever area under construction at over 160,000 sq m or 397 MW of IT power capacity. Meanwhile, we have sustained our pre-commitment rate at 68%. As shown on slide nine, in each Tier 1 Market, we have established the 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 presence. In fact, most of our competitors only have supply in a few places. During 1Q 2021, we started the construction of five new data centers on land and buildings which were previously held for future development. At the same time, we topped up our resource pipeline with greenfield land purchased at great 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 sq m of capacity held for future development. Over 90% is greenfield land, which we own and which comes with power quota. This resource pipeline de-risk our growth and visibly advantages our sustainable competitive advantage in resource supply. We currently have about RMB 3.3 billion, which means $498 million of investment tied up in held for future projects.
There have been a number of recent developments in government policy, including specific policies related to resource allocation in Beijing, Shanghai, and Guangdong. Some of the details are new, but in our view, the underlying policy direction is consistent. Data centers are new infrastructure, which is important for China's digital transformation. The government is guided by carbon-neutral objectives and maintaining tight control over the allocation of land and power for data center use.
We hear people talking about oversupply. Let's put this into 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 large developable capacity. Competition in this one area is more intense, and pricing is more aggressive. It will take some time to work through, 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 two previous announced acquisitions. BJ15 brings over 19,000 sq m of capacity. It is 100% committed and 80% utilized. BJ15 was a highly competitive M&A deal. Since closing, we have started the conversion of an existing building on the same site, which we call the BJ16. It is already almost 100% pre-committed. With this expansion, the implied acquisition multiple comes down by about 1x- 2x.
TJ1 is our first data center in the Tianjin area, with the added advantage that it is only 30 km from the edge of Beijing. It brings over 14,000 sq m 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-digit acquisition multiple.
We saw this quarter how Chongqing and Hong Kong, two new markets for us in terms of self-developed data centers, drove significant new business from established strategic customers. By the end of this year, we expect in effect to enter one or two further new markets in China. The same logic of the follow-the-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 constrained supply in Singapore and the rising colocation prices, we are also considering complementary options in neighboring countries.
We have identified some very promising investment opportunities, and we aim to make at least one or two commitments within the next couple of quarters. Now I will hand over to Dan Newman for the financial and operating review. Thank you.
Thank you, William. Starting on slide 15, where we strip out the contribution from equipment sales and the effects of FX changes. In 1Q 2021, our service revenue grew by 4.7%. Underlying adjusted gross profit grew by 6.2%, and underlying Adjusted EBITDA grew by 7.2% quarter-on-quarter. Our underlying Adjusted EBITDA margin was 47.9%, a new high for us. Turning to slide 16. Service revenue growth is driven mainly by delivery of the committed backlog and closing of acquisitions.
Net additional area utilized during 1Q 2021 was 16,152 sq m, exceeding our expectations for the first quarter, 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% quarter-on-quarter in 1Q 2021 to RMB 2,425 per sq m per month.
For FY 2021 as a whole, we expect MSR to decline by a low single-digit year-over-year. To some extent, the MSR trend is a reflection of average selling prices in our backlog. There are many other factors which affect MSR, including the customer mix, data center location, redundancy level, development cost, and contract structure. We have said many times that we target to sustain investment returns. We've been largely successful with only a gradual small decline in IRRs over the years across our portfolio as a whole.
Turning to slide 17. Our underlying adjusted gross profit margin was 54.4% for 1Q 2021, an increase of 0.7 percentage points quarter-over-quarter. Due to the timing of data center completions, our utilization rate was at a slightly higher level of 72.9%, compared with 71.1% at the end of 4Q 2020. Our underlying Adjusted EBITDA margin was 47.9% for 1Q 2021, an increase of 1.1 percentage points quarter on quarter. As you can see on slide 18, we have a lot of data center capacity coming into service in 2Q21.
43,000 sq m compared with only 13,800 sq m in 1Q 2021. Despite the fixed costs associated with this additional capacity, we expect our 2Q 2021 margin to be only slightly lower than for 1Q, but continuing the upward trend from last year. Turning to slide 19. Our CapEx for 1Q 2021 was RMB 2.3 billion, consisting mainly of payments for organic CapEx. As we closed on Beijing 15 in 2Q 2021, we expect RMB 2.8 billion of acquisition consideration to be paid in the current quarter. Part of our organic CapEx in FY 2020 and FY 2021 relates to BOT contracts.
We have nine such projects for one customer which are designated for transfer to JVs with GIC, and two such projects for two other customers, which are not part of our existing agreement with GIC. We are currently in discussions with GIC about increasing our percentage ownership in the JVs and including all 11 projects in our partnership. We think that the combination of higher equity participation and management fees makes these projects more worthwhile for us.
We will update you when ready. As at the end of 1Q 2021, we had around RMB 1 billion of accumulated CapEx paid for these 11 projects. Looking at our financing position on Slide 20, we have RMB 14.9 billion of cash on our balance sheet, and our net debt to EBITDA ratio is 2.9x . Given our ongoing levels of organic CapEx and the Beijing 15 acquisition consideration, this ratio will go back up to around five times at the middle of this year.
During 1Q 2021, we completed debt financings with a total facility amount of RMB 1.3 billion, equivalent to $191 million, including both new project financing and refinancing of existing facilities. The average interest rate for these completed facilities is 5%, based on the prevailing Loan Prime Rate. This compares with an effective interest rate of 6% for all of our debt in 1Q 2021. In the past four months, we've completed RMB 0.9 billion of refinancing, and we expect to complete another RMB 1.7 billion of refinancing by the end of the current quarter.
With that, we will have RMB 2.1 billion 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, but 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 brown 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?
As a reminder to ask a question you will need to press star one in your telephone. To withdraw you question please press the pound or hash key. Please stand by while we compile the Q&A roster. For the benefit of all participants on today's call, please limit yourself to two questions. Our first question comes from the line of Yang 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 see before a real normalization? Is it should be consolidation, or it should be policy turnaround in approvals? What's your expectation here? The second question is related with consolidation. If GDS turned out to be the consolidator, what should be the multiple trend in the next few quarters or next few years?
We see a lot of PEs and infrastructure fund are entering the market. They might push up the acquisition multiple in private market. What is your expectation on the multiple here? Thank you.
Okay. The first question is about the competition in this area. I think number one, the capacity and the land or power is allocated to the different player in the last couple of years. This area, as I mentioned, the competition is intense. GDS now in a very good position is, number one, our capacity already have the customer commitment since last year. Number one, we are not pursue some deal which only wants fulfill our sales target. We are quite relaxed because we are well-positioned there.
Based on our national footprint, GDS already in a multi-market. We are not just focused on one market to try to win every deal. It depends on our intention. If some strategic deal we feel important, we will do it. If the deal quality is not that good, we will walk away. This is our strategy in this area. From long-term point of view, I think number one, the demand, because we believe in the whole Shanghai area, East of China, I think the demand still will continue grow.
We do not worry about in the future, this inventory will be the issue, but it will take time. We are quite relaxed. On the other hand, GDS has, as I used to mention, we have more than 700 customer base. Our customer quite diversified. 85% of our new incremental order is from our install base. We are not a desperate player, so we are quite relaxed to look at this area's competition.
This is the first question. Once again, as I mentioned, I think the government's policy is changing because in general, the carbon-neutral policy will raise the bar of the carbon quota allocation. This is, in my view, will slowly to tighten up the quota. I think the demand and the supply will more balance in the next few years. The second question is?
Consolidation.
Consolidation. I think, we are in a multi-market, even in the overseas market. Consolidation definitely is our future goal. We are open in terms of the acquire the project, acquire the platform. We are quite open. We keep open our eyes to watching the opportunity. In terms of multiple, I think we always do the reasonable deal. We don't want to be a crazy buyer. We will consistent to, let's say, take care all the investor benefit in our each acquisition deal.
Thank you.
Our next question comes from the line of Jon Atkin from RBC. Please ask your question.
Thank you very much. I have an operational question and then a strategic question. On the operational topics, you have 43,000 sq m coming into service in 2Q. I wondered what the timing, is that weighted towards the beginning or end or middle of the quarter? Also on the renewal schedule that you shared, a reasonable amount is coming due for the final three quarters of 2021. Where do things stand with your renewal discussions with your customers?
Jon, this is Jamie. Regarding the questions regarding on the timing for the delivery of the first 43,000 sq m, we are looking more closer to June period on the delivery, mostly. Yeah.
Can you repeat that? I'm sorry. I didn't catch that.
Yeah. We are looking more towards the end of quarter, which is more in the June period. In the June period. Yeah.
Got it.
What's the second question on renewables, Dan, would you like to answer?
Yeah. The renewals, in the back of your presentation, Dan, you give the amount of renewals for the final three quarters of this year, next year, the following year. But for the near-term renewals between now and end of 2021, what is the discussions that you're having with your customers? Are you anticipating renewing 100% of it? What's the flow of your discussions around that and renewal rents and whether that stays the same or changes?
Jon, I think we'll renew almost all of it. There's one situation where we are going to pull out of a third-party data center because it's no longer up to an exceptional operating standard. There may be some churn, but less than 1,000 sq m, which is insignificant even by standards of data center industry. Other than that, I think we expect a very high renewal rate this year. I would say as an overall assumption that pricing will be flat across all the contracts.
We 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. I think achieving overall flat pricing on renewals is quite satisfactory at this time.
Thank you. Then lastly, there was a press article in the last two days about partnering or acquiring the data center business of a logistics real estate company. I wondered if you can comment on what you would view as the strategic advantages of such a partnership inside of China or in other markets like Malaysia or Indonesia that you're targeting for entry.
Well, we did not respond to the story that was put out by one news agency. I won't respond now, but as a general comment, our acquisitions to date have been, in effect, asset acquisitions. We've acquired data center facilities. Each acquisition has involved a single site, somewhere between 4,000 sq m- 20,000 sq m at various stages of development. We haven't done any acquisitions of what you might call platform players.
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. We're very open-minded about that. I think we have a window of opportunity given the position that we've established to really try to do some more significant deals.
Thank you very much.
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 tag, which I'm just trying to get a sense of what is the feasibility of doing such a large deal.
Then secondly, even though the install number, the 16,000+, 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.
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 1 Q 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 calculate what it is today. We have just under RMB 15 billion of cash on our balance sheet, or had at the end of the first quarter, because we have a big slug of acquisition consideration to pay during the second quarter. We gave guidance for annual CapEx of about RMB 12 billion, which included the kind of known M&A, but not the unknown M&A.
If we finance that CapEx 50/50 equity and debt, which is relatively conservative because of course we target a higher leverage than that would involve RMB 6 billion of equity and RMB 6 billion of debt. For the RMB 6 billion of equity, that's versus maybe RMB 15 billion of cash. There's a fair amount of capacity there if an 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've tapped, whether it be stock markets in the U.S. or in Hong Kong, strategic investors in Singapore and private placements with Chinese financial investors and financial institutions, and joint ventures with sovereign wealth funds and so on. I hope over the years we've proved that we have enough ingenuity to be able to find ways to finance whatever we want to do.
I think we've never considered ourselves capital constrained, even when we built three data centers with RMB 20 million in 2010. I didn't consider that we were capital constrained. Your comments about the MSR, it's a fair comment. 2.6% quarter-on-quarter decline in the first quarter. 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. That means not much further decline in the subsequent quarters of this year, maybe 1% in the second quarter, but not much in the second half of the year. We don't provide quarterly guidance.
I accept your comment about revenue in the first quarter, 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. Yeah, there's a kind of balance there.
Okay. Thank you.
Our next question comes from the line of James Wang from UBS. Please ask your question.
Good morning, management. It's James Wang from UBS. I've got just two questions. The first question is on self-build. Can you maybe comment on the extent of the self-build by the large cloud customers? For example, have you seen any change recently in the proportion of self-build by these customers? As a hypothetical, how would you ensure your future growth if these customers were to increase their proportion of self-build? That's the first question.
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. Also I think William mentioned that this year you guys saw a bit of a slowdown in the cloud business in China. Do you see this weakness as a one-off thing just this year, or do you think this slowdown will be the same? Thank you.
Okay. The first question is the customer self-build, right? I think this is not something new. Since four or five years ago, the self-build market is a separate market in my view. Again, I should remind all investors, GDS strategy is focused on the Tier 1 Market, right? I think the market is separate to the one in the self-build market, which is almost 100% so far is in a remote area. What we can see is all the Tier 1 Market still very good demand from our customer.
I think in terms of the Tier 1 Market, we didn't see a lot of difference compared with last couple of years. This is a trend still we maintain. Once again, this is a separate market. The second question?
Sorry?
Go ahead.
The second question was just on the demand environment. Do you see the slowdown being sustained? Thank you.
Sorry. Slow down. Demand. It depends on which market we talk about. In our view, in the Tier 1 Market, all hosting market, I didn't see a slowdown their demand. That's why we can still maintain the high growth in the first quarter, which we just reported. We still see our momentum in the next quarter. I don't know which other player, what they look at, right? In our view, I think we already lock up this quarter, and we maintain the whole year's sales commitment.
Thank you.
Thank you.
Our next question comes from the line of Tina Hou 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 going forward. The second question is regarding competition.
As William, you mentioned that the competition in Jiangsu province has been relatively intense recently. I was just wondering, historically speaking, say maybe a few years ago, was there any similar situation in any of the regions happening in China? What was the process there, how eventually did the competition intensity come back to normal? It would be very helpful if we could have some historical reference there. Thank you.
Hi, Tina. I'll answer the first question on BOT. We've always made clear, in fact, William just said it, that the BOT opportunity is mostly it's a remote site opportunity, and it's quite different from our core business in Tier 1 Markets. The situation is almost exactly the opposite of tier-one markets. When Tier 1 Markets customers may have multiple availability zones, their capacity is spread out, and they have a big challenge to expand their IT platforms in multiple locations in a synchronized way.
In remote sites, they have very few locations. In fact, if you look at the earnings presentation where we showed the locations of the availability zones in China, you see just a few dots outside of the Tier 1 Markets. Those are the remote sites. The remote sites, our customers can concentrate a lot of capacity in a very few places. There's no barrier to entry.
It's very practical for them to do that themselves. Yet, most of them are looking to outsource that. The terms of outsourcing are quite different. We established a partnership with GIC. It was just really more from a financial engineering to ensure that we had a competitive cost of capital. 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-oriented than business in tier-one markets. All I can say is that if we don't win it with our scale advantage and our cost of capital advantage, then whoever wins it probably is not getting a very good deal.
Thank you, Dan. Just to follow up on that. 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. If we potentially increase that shareholding to over 50%, does that mean all of these projects should get consolidated into our P&L, right?
That would be the case, but actually the driver here is. What makes these projects worthwhile for us? If we, for example, had a 51% equity interest and are able to charge a management fee, which effectively means charging a management fee to our 49% partner, and then we calculate the return on equity, which is obviously the project return enhanced by the management fee. At a 51% ownership level, the project returns from these projects is attractive. It's not inferior.
It's not something that we are reluctant to do. We feel that we can justify putting more equity in up to that kind of level. There may be some situations where we put in even a higher level of equity. There might be some where we put in less. That's what's driving it, that calculation. If it means that the projects are consolidated, then we'll ensure that the disclosures enable you to understand what contribution has been made by those projects.
I understand. Thank you very much. I have a second question in terms of the competition.
I think the Jiangsu province is a very special case in the current market whole environment. I think in my view, this situation, because number one, we still believe the demand still will grow in all the shareable market. In terms of the competition right now, I think this capacity a little bit oversupply will be solved in the next 24 months, in my view.
Okay. Thank you very much. Due to time constraints, please limit yourself to one question. Our next question comes from the line of Gokul Hariharan from JP Morgan. Please ask your question.
Yeah. 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 look like? There is some kind of demand churn moving towards high-performance related projects, especially in Beijing.
Also related to that, how do you think the industry meets some of the carbon neutrality and green carbon credit requirements in some of these locations? Do you have to purchase these credits from third party? Is that process something that can be passed on to customers through price increases or cost pass-throughs? Thank you.
Yeah. 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 what 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 directly in renewable power projects. Ideally, if such a situation is possible projects which are located close to data centers, so there can be direct transmission connection without going extensively through the grid. There's always ultimately the fallback of buying renewable energy certificates internationally if not in China.
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. That's a challenge that everybody is facing. 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?
Yeah. Okay. You talk about the Guangdong and Beijing government's new policy, right? I think, in general, they raised the bar to allocate the carbon quota. This is number one. Number two, that means they want a more lower PUE in terms of the echo the carbon-neutral policy. The second of all, I think they try 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? I think this is one impact. Another impact is, since they raised the bar, I think the government realized the previous carbon quota allocation is not efficient. I would like to see this is good for the leading company in the future to obtain more carbon quota. This is my view. In terms of how we improve our operation to echo the carbon-neutral new guidance. I think that number one, we will give our ESG report soon, right?
We will give a very clear roadmap. Right? I think the most important way is, one is keep improve our PUE. Although, we are already in this area, we are already the leader company in the China data center. Number two, I think the energy source is very important, right? Based on the current Tier 1 Market, there's not that much renewable energy in this city. We have the different way to improve the carbon-neutral. Later we will give some detail, our roadmap.
By the way, I would like to say, in the last two years, the central government issued the green data center example, right? GDS can almost win the 50% of the green data center, which central governments, let's say
Certification.
Give the certifications. That means GDS, we are already in a leader position in the China data center industry for the green data center, for the carbon-neutral effort, right? 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. My first question is, are there any markets where you're seeing pricing that's either better or worse than average? 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 Northwestern Shanghai. I think the situation in all parts of other Tier 1 Markets, we're talking about districts of Beijing, the area 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 lose business is because we don't have supply.
You'd be surprised, even with our resource pipeline and the scale of our construction activities how often that arises. It wouldn't happen because we were not trying. Despite our very best efforts, we lose business continuously because we are unable to generate supply in as many places as we want. That shows you that when you talk about supply constraint, it's real. That means that the pricing is relatively stable in most of those places. It's not that unstable in northwest part of Shanghai either.
It's just that there is more competition there. You talk about the benefit of government policies. I think that, well, fundamentally, I've already said what it is, which is that government's disciplined approach to 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 high conviction it's going to remain the case for the foreseeable future.
Great. Thanks, guys.
Due to time constraints, I'd like to now turn the call over back to the 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 through our contact information on our website and The Piacente Group Investor Relations. You may disconnect.
This concludes this conference call. You may now disconnect your line. Thank you.