Operator: Hello, ladies and gentlemen, thank you for standing by for GDS Holdings Limited's Fourth Quarter and Full Year 2022 Earnings Conference Call. At this time, all participants are in 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.
Laura Chen: Thank you. Hello, everyone. Welcome to the fourth quarter and full year 2022 earnings conference call of GDS Holdings Limited. The company's results were issued today via newswire services earlier today and are posted online. A summary presentation, which we will refer to during the 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 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, William Huang.
Please go ahead, William.
William Huang: Thank you. Hello, everyone. This is William. Thank you for joining us on today's call. Despite the challenging environment, our business continues to deliver solid results. In 2022, we grew revenue by 19% and adjusted EBITDA by 15% year-on-year. We won significant new business in China, while at the same time adjusting our development program to the current pace of growth. We accelerated our international expansion with notable success. And on the funding side, we took steps to access new source of capital and strengthen our financial position. Entering 2023, we are looking forward to a recovery. Customers are more positive about their business outlook. When their business pickup, it will flow through to us quite quickly.
We could see this happen over the next few quarters. Meanwhile, we are continuing to strengthen our operations and finances. Looking further ahead, the fundamentals for our industry remain very strong. On the one hand, AI and other new technologies are driving waves of demand. On the other hand, data center supply in China's Tier 1 markets has gradually become more constrained due to the limitations on land and power. As market conditions improve, we are well positioned to outperform with our customer relationships, contract backlog and established asset bases. In 2022, we won 74,000 square meters, or 178 megawatts of net new bookings, all of which was for our organic data center development in Tier 1 markets. A big highlight was our 64-megawatt win in Johor with significant contribution from the international.
Our full year bookings were up to the level of the past few years. This highlights the importance of our strategy to follow the customer. For 2023, we are targeting a similar level of new bookings, with once again a significant contribution from internationals. In 4Q '22, we won two new large hyperscale orders. LF15 is the first order for our new campus at Xianghe, Langfang, Hebei Province. The order is from a large Internet company, which is migrating from our downtown sites in Beijing. The customer is relocating to LF15 and to one of our other campus in Langfang. BJ14 Phase 2 is the second phase of development at our greenfield site in the Tongzhou District of Beijing. The order is from a first-time large Internet customer in their recruitment sector.
This win typifies our strategy of matching resource inventory with high potential customers. The new commitments come with confirmed move-in schedules. Over the past three years, we have made significant progress with new customer wins and diversification. Large Internet companies accounted for 63% of new bookings in 2022, as compared with 23% in 2020. Enterprise and financial customers averaged around 20% of new bookings. This show how we have been able to evolve our strategy to capturing growth from the different customer segments and the different locations. Customer move-in in 2022 was affected by the lockdowns and other macro factors. Going forward, we are focusing on customers who can commit to fast move-in schedules. Typically, large Internet customers move-in faster than car customers.
Some of the large Internet orders, which we won in 2022 have relatively short move-in periods. Hence, the move-in rates could pick up as these new contracts commence towards the end of this year. We have a large backlog totaling 260,000 square meters. Nearly half of it's related to data center, which are move-in ready. This gives us high visibility for future growth with reduced CapEx. So, adjusted to the current environment, we have slowed down our capacity expansion. In 2022, we brought 28,000 square meters into service. In 2023, we plan to build -- bring a further 58,000 square meters in service. Out of which 33,500 square meters in Mainland China and 24,500 square meters in international. Going forward, we will target to reduce the lead time from investment to customer move-in.
Looking beyond our current construction program, we have over 300,000 square meters of area held for future development in Mainland China, which can support multiple years of future demand. Remaining consists of land and power for campus-type developments at global locations in national hub markets. Our pipeline aligns with the government's Eastern Data, Western Computing policy. This is a valuable resource, which will give us significant competitive advantages as supply becomes tighter in the year ahead. All of these priorities are directed at further strengthening our strategic market position and improving our operating and financial efficiency. The initial phase of our international expansion is focused on Hong Kong as the regional hub for Greater China and the Singapore Johor, Batam as the regional hub for Southeast Asia.
These two hubs rank among the 10 data center -- 10 largest data center market globally. By leveraging our whole market customer relationships, cost advantages from our pre-fab products and the proven execution capability in hyperscale development, we can accelerate delivery to our customers and rapidly establish the market-leading positions. Our first self-developed data center in Hong Kong will enter service in the next couple of months. We have secured anchor customer commitments from leading China and global cloud service providers. Hong Kong 1 is the first in a multiyear development pipelines of four purpose-build data centers, plus in an ideal location for serving both hyperscale and enterprise customers. Hong Kong's position as the primary gateway for networking and connectivity between China and the rest of the world assures its long-term position as the data center hub.
We have put together a unique set of assets ideally suited to meeting new waves of demand. We are making great progress with both land acquisitions and customer commitments in Southeast Asia. In Johor, we are constructing three data centers for delivery later this year and early next year. We're going from breaking ground to deliver up 64 megawatt over five quarters. We have acquired or secured options over the adjacent sites to enable us to scale up. In the next few months, we expect to receive an additional order, which would take us to nearly 100 megawatt of commitments in Johor alone. For existing projects, the priorities are to win further orders for Johor and Batam, build up our local management team and deliver the initial capacity. At the same time, we aim to establish new projects in Kuala Lumpur, Jakarta and other new markets in Southeast Asia and beyond.
While we -- our position in Mainland China is well set for years to come, we believe that GDS International can become a significant second growth engine. Now -- I will now pass on to Dan for financial and operating review.
Dan Newman: Thank you, William. Starting on Slide 22, where we strip out contribution from equipment sales and the effect of FX changes. In 4Q '22, our service revenue grew by 1.5% and underlying adjusted EBITDA was slightly down by 0.2% quarter-on-quarter. For FY '22, our service revenue grew by 19.2% and underlying adjusted EBITDA grew by 14.5% year-on-year. Turning to Slides 23 and 24. Service revenue growth is driven mainly by delivery of the committed backlog. Net additional area utilized during 4Q '22 was around 10,700 square meters. Around 7,950 square meters was in Tier 1 markets and the remaining 2,700 square meters approximately from B-O-T projects. Net additional area utilized for FY '22 was around 51,000 square meters.
Around 29,000 square meters was in Tier 1 markets, and the remaining 22,000 square meters approximately was from B-O-T projects. For FY '23, we expect additional area utilized net of churn to be similar to the levels seen in FY '22, i.e., around 50,000 square meters of net add. We disclosed on our last earnings call that one large Internet customer will move out of our downtown data centers in Beijing. As a result, we will record 17,000 square meter of churn spread across the first three quarters of 2023. We have already won back more than 17,000 square meters of new commitments from this customer for two sites in Langfang. They will start to move into these sites during 4Q '23. As William mentioned, towards the end of the year, we will also start to deliver some other new contracts with fast moving schedules.
Accordingly, the cadence of move-in in FY '23 will be quite heavily weighted to the back end. The good news is that the pick-up later this year will feed into FY '24 gross. Monthly service revenue per square meter was RMB2,194 in 4Q '22 compared with RMB2,237 for the previous quarter, a decline of 1.9% quarter-on-quarter. Over the course of FY23, we expect MSR per square meter to decline by around 4% comparing 4Q '23 with 4Q '22. This forecast decline is mainly due to change in location mix, including further B-O-T move-in. Turning to Slides 25 and 26. For 4Q '22, our underlying adjusted gross profit margin was slightly up from the prior quarter at 50.9%, while our underlying adjusted EBITDA margin was down at 44.4%. For FY '22, our underlying adjusted gross profit margin was 51.2% compared to 53.3% in FY '21, and our underlying adjusted EBITDA margin was 45.6% compared to 47.5% in FY '21.
The margin decrease was mainly due to elevated power tariffs throughout last year, which we estimate (ph) to 1.5 percentage points of our margin, and growth drag from international expansion of around a further 1 percentage point. The midpoint of our guidance for total revenue and adjusted EBITDA implies an adjusted EBITDA margin for FY '23, which is similar to the levels seen in 4Q '22. We have assumed no reduction in power tariffs through the course of this year and continuing growth drag from international expansion. Turning to Slide 27. 2022 was a transition year in terms of bringing down our CapEx in Mainland China on the one hand, and accelerating international investments on the other hand. Our organic CapEx in Mainland China was around RMB5.8 billion for FY '22, which is a few billion lower than in the past couple of years.
International CapEx was RMB2 billion, while acquisition CapEx was around RMB3.5 billion. We are guiding for total CapEx in FY '23 of around RMB7.5 billion, comprising a further reduction to RMB3.5 billion from Mainland China and an increase to RMB4 billion for international. Replacement CapEx included in the Mainland China number is running at around RMB200 million in 2023. On Slide 28, we provide some further data points relating to CapEx. Starting with Mainland China, at the end of 2022, we had 152,000 square meters under construction. The total cost to complete this capacity is RMB7.4 billion, which we expect to incur over the next three years. With this additional expenditure, our total capacity in service will increase to around 667,000 square meters, sufficient for us to grow our billable area by around 71%.
As you can see, a relatively small amount of incremental investment is required to support a large amount of growth, because much of the investment has already been incurred. Turning to international, our total cost to-date for the five data centers under construction in Hong Kong and Johor, totaling over 100 megawatts, is RMB4.1 billion or US$590 million. The total cost to complete is RMB3.4 billion or US$490 million. Looking at our financing position on Slide 29. At the end of 2022, our net debt to last quarter annualized adjusted EBITDA ratio was 8.0 times on a consolidated basis. If we exclude the debt of the international business and add back net assets to our cash, our net debt to last quarter annualized adjusted EBITDA ratio was 7.1 times.
If we further exclude capital work in progress for our construction program in Mainland China, our net debt to last quarter annualized adjusted EBITDA ratio would have been 5.0 times. Our effective interest rate for FY '22 dropped to 4.7%. Over the course of 2022, we maintained our cash position and ended the year with RMB8.6 billion or US$1.2 billion of cash on our balance sheet. In accordance with our treasury policy, we put cash on deposit with banks, which are investment-grade rated and pre-approved by our Board. In addition, we hold cash in equity and debt service reserve accounts as required by our project financing facilities. We previously had a small amount of cash in accounts with SVB for short-term operational purposes. As of today, this amounts to US$2 million, which is in the process of withdrawal.
Turning to Slide 30, in January of this year, we raised US$580 million gross proceeds in new CB with seven-year maturity. We have subsequently repaid US$150 million of working capital loans. In June of this year, we expect to repurchase US$300 million with an existing CB (ph) put. As a result, we will have almost no debt repayable at GDS Holdings level until 2027. The debt which is repayable over the next few years is amortizing longer-term project level loans, which we refinance on a regular basis. On Slide 31, we provide some more color on current year funding requirements. Starting with Mainland China. We expect our operating cash flow to be around RMB1.5 billion for FY '23 and, as I mentioned, organic CapEx to be around RMB3.5 billion, resulting in negative free cash flow before financing of around RMB2.2 billion.
We aim to fund this gap using a combination of project debt and asset monetization. At the end of 2022, we had RMB8.5 billion of committed but undrawn project level facilities in Mainland China. We have recently obtained regulatory clearance for our offshore China data center fund. We expect to sign the limited partnership agreements and the sale of purchase agreement for the first data center asset shortly. The net cash proceeds will be approximately RMB1.45 billion after deducting our 30% capital commitment to the fund. We will have the option to do more such transactions to release equity, if we choose to do so. We are also in the process of signing a formal framework agreement with a leading Chinese insurance company for an onshore version of the China data center fund.
Over the next couple of years, we expect our operating cash flow for Mainland China to increase, while CapEx remains at similar or lower levels to the guidance for FY '23. Hence, we expect to become free cash flow positive for Mainland China within three years. Turning to international, as mentioned previously, we expect total CapEx for international of RMB4 billion for FY '23. We expect to finance 50% of this, say RMB2 billion or US$290 million, with project debt. For the balance, we are evaluating a number of options for raising equity at subsidiary level, including private equity at our International HoldCo level and/or by bringing in local partners at Country HoldCo or Project HoldCo level. Turning to Slide 32. For the full year 2023, we expect total revenues to be between RMB9.94 billion to RMB10.32 billion, implying a year-on-year increase of between approximately 6.6% to 10.7%.
We expect adjusted EBITDA to be between RMB4.43 billion to RMB4.6 billion, implying a year-on-year increase of between approximately 4.2% to 8.2%. In addition, as previously mentioned, we expect CapEx to be around RMB7.5 billion for the full year. We would now like to open the call to questions. Operator?
