GDS Holdings Limited (NASDAQ: GDS) Q1 2020 Earnings Call Transcript

GDS Holdings Limited (GDS) Q1 2020 earnings call dated May. 14, 2020

Corporate Participants:

Laura Chen — Head of Investor Relations

William Wei Huang — Chief Executive Officer

Daniel Newman — Chief Financial Officer

Analysts:

Jonathan Atkin — RBC Capital Markets — Analyst

Yang Liu — Morgan Stanley — Analyst

Colby Synesael — Cowen — Analyst

Gokul Hariharan — J.P. Morgan — Analyst

Tina Hou — Goldman Sachs — Analyst

Frank Louthan — Raymond James — Analyst

Presentation:

Operator

Hello, ladies and gentlemen. Thank you for standing by for GDS Holdings Limited’s First Quarter 2020 Earnings Conference Call. [Operator Instructions]. After management’s prepared remarks, there will be a question-and-answer session. [Operator Instructions].

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 — Head of Investor Relations

Thank you. Hello everyone, welcome to 1Q ’20 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 also note that GDS earnings press release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. GDS press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures.

I will now turn the call over to GDS Founder, Chairman, and CEO, Mr. William Huang. Please go ahead, William.

William Wei Huang — Chief Executive Officer

Thank you, Laura. Hello, everyone. This is William. I’m here in Hong Kong with Dan and Jamie who is celebrating his first day of release from government quarantine. Thank you for joining us on today’s call.

I’m pleased to report that our performance in the first quarter of this year was highly resilient. Despite the challenging operating environment, we grew adjusted EBITDA by almost 50% year-over-year, and achieved our highest ever margin at just over 46%. Sales momentum was strong coming into the pandemic, and is even stronger now.

In 1Q ’20, we achieved a record level of organic sales with over 22,000 square meters or 46 megawatts of net add. In order to keep pace with sales, we scaled up our development program. We ended the quarter with over 110,000 square meters or 260 megawatt of capacity under construction, which was nearly 70% pre-committed. We also added over 100,000 square meters of developable capacity to our pipeline.

Last, but not least, we maintained our record of double zero with zero infections and zero service incidents. We have been through a lot of turbulence since our IPO. Trade wars, pandemics, short attacks, even all three at the same time. But our business has not been impacted. We have kept our focus and demonstrated our execution capability. The outlook for our industry is better than ever. Cloud is our main growth driver. Cloud aggregates demand from all types of customers and all types of new technology. You may have seen reports that Alibaba plans to spend another RMB200 billion or nearly US$30 billion on infrastructure in the next few years.

Other cloud service providers are also reporting accelerated adoption. Cloud in China is forecasted to grow at over 30% CAGR for the next five years. We estimated that this would require at least three times expansion of cloud datacenter capacity. The expansion will be balanced between Tier 1 markets and lower-tier markets. This is the opportunity which we are talking to our customers about. Their procurement is consistent. They have high visibility in their business, and they are planning multiple years ahead.

As cloud service providers grow, they set up of new availability zones each of which is centered around an on-ramp. We focus on hosting these on-ramps when they’re lower, and then on hosting the expansion capacity in the same location. The on-ramps also enable us to drive the enterprise business, increasingly enterprises recognize the multi-cloud ecosystem as a key advantage.

We have had a lot of success with this strategy. As a result, we are well-positioned for follow-on orders. To illustrate this point, our number one customer is now present in half of our datacenters, and our number two customer is now present in one-third. This is what we mean, when we say that we are the home of the cloud in China.

In 1Q ’20, we obtained three orders of almost 10 megawatts each, the first time this has happened. We have many more prospects like this in our sales pipeline. At the beginning of the year, we set ourselves a sales target of 80,000 square meters, organic net add, a step up from what we did last year. 2Q ’20 is going well. By the middle of this year, I’m confident that we will be more than halfway towards our target.

Turning to Slide 6, our data center development plan is entirely demand-driven. We can see the evidence in our consistently high pre-commitment rate. It starts with joint resource planning with our customers. They share with us their specific requirements. We then go out to secure the right kind of land, buildings, and power. Our objective is to keep our customers fulfilled on a continuous basis, both in Tier 1 markets and the lower-tier markets. In order to do this, we have evolved our resource strategy in a number of different ways. This is illustrated on Slide 7. First, we have increased our ownership of property, as this gives us more options, more flexibility, and more certainty. Across our whole portfolio, we are on track for a ratio of 60% owned, versus 40% leased.

Secondly, we have significantly increased the amount of capacity which we are holding for future development. This is very strategical, because it gives us the flexibility to respond to a higher level of demand. Our secured pipeline is enough to double our total capacity. And certainly, we have expanded our market presence in particular with our innovative asset-light approach to build-to-suit projects in the lower tier markets.

This expands our adjustable market, enhances our returns, and deepens our strategic customer relationships. It is still early days, but we see high volume growth potential with this product. Turning to Slide 9. In 1Q ’20 we closed the acquisition of a site in the Pujiang district of Shanghai. It is a good example of how we are solving the problem of resource supply. The site can support over 70,000 square meters net floor area, we have fully divested such a larger amount of capacity on a single site within a Tier 1 market is unique. It is very advantageous for hyperscale customers as it enable them to lay and expand in the same location.

In the current quarter, we have begun the conversion of two existing buildings which account for around 30% of the development. There is a lot of customer demand for this project. A couple of years ago, we started working with a strategic customer for build-to-suit data centers at one of their remote campus. As of today, we have completed six build-to-suit projects for them, four of these projects are consolidated. There is a photo on Slide 10, the remaining two are held pending sales to our joint venture partner, GIC in the very near future.

There is a photo on Slide 11, we have been pitching to other customers and just recently, we were selected by a second major customer for their remote projects. We hope to partner with GIC again using the asset-light model. Our customers needed to expand in low-tier markets in sync with their expansion in Tier 1 markets. We are uniquely well-positioned to adjust with both affinities.

With that, I will hand over to Dan for the financial and operating review.

Daniel Newman — Chief Financial Officer

Thank you, William. Starting on slide 14, where we strip out the contribution from equipment sales and the effect of FX changes. In 1Q ’20, our service revenue grew by 6.3%, underlying adjusted NOI grew by 8.5%, and underlying adjusted EBITDA grew by 10.5% quarter-over-quarter. Our underlying adjusted EBITDA margin was 47.4%, the highest level we’ve seen.

In 1Q ’20, we incurred a small FX translation loss. We target zero FX exposure. However, as we move cash into and out of China, it is unavoidable that we will recognize some FX gains and losses. Turning to Slide 15, service revenue growth is driven mainly by delivery of the committed backlog. Move-in during 1Q ’20 was 7,800 square meters in line with our expectations under the difficult circumstances.

Our MSR per square meter was down by 2.4% quarter-over-quarter. Most of this decline is mathematical, because move-in was back end loaded. In addition, there was a temporary reduction in some power tariffs that reduced revenue. If you look at MSR per square meter, net of utility cost, the decrease was less than 1% quarter-over-quarter.

We recognize revenue as capacity is utilized in accordance with the terms of customer agreements, then we bill customers and collect cash with about a 70-day time lag on average. Slide 16 shows that our cash collection over the past three years is almost exactly equal to the revenue recognized. So far, we’ve not experienced any payment or deferral problems in the current situation.

We have a very high-quality customer base. Apart from the cloud and large internet names, which you know, the rest of our customer base is predominantly financial institutions and multinational corporations. Slides 17 and 18 show the quarterly margin trends. A few things stand out. As a result of the reduction in some power tariffs, which I just mentioned, utility cost was more than one percentage point lower than normal. SG&A was also down due to a combination of working at home operating leverage and other government concessions.

Some of these cost-saving continued into April and May. Accordingly, we expect the underlying adjusted EBITDA margin to be in the 46% to 47% bracket in 2Q ’20. Turning to Slide 19, in 1Q ’20 capex was elevated mainly due to the payment for the Pujiang sites, which William highlighted. Our organic capex was just over $1 billion. As at the quarter-end, the cost to complete the entire 110,000 square meters of area under construction was RMB7.4 billion.

Activity on our construction sites is now back to normal. There are no supply chain issues to report. We’ve made minor revisions to the data center delivery schedule, which is shown on Slide 20. On Slide 22, we show our cumulative unit development cost for self-developed area in service. We define development cost as gross PP&E including assets held under finance leases.

As you can see, our unit cost is now just over RMB78,000 or $11,000 per square meter. This is for a data center portfolio which is almost entirely 2N [Phonetic] redundancy. Over the past three years, we’ve increased the overall average power density to over two kilowatts per square meter. The unit cost per megawatt is therefore around $5.6 million, which we believe is exceptionally low by any benchmark. We’ve achieved this as a result of the scale of our construction activities, the efforts of our in-house team, to standardize design, and improve management of the supply chain, and by working in close partnership with our major customers.

We also show the NOI yield progression. For 2019, we achieved a return of 15% on area in service with an average utilization rate of 69%. If we segregate out and stabilize data centers, as shown on Slide 21, the return was in the high teens, with an average utilization rate of over 90%. There are many moving parts to these calculations. But it all comes together in the returns, which you can see compared favorably with our global peers.

Turning to Slide 23, we had two pending acquisitions. For Beijing 9, all the installed customers have entered into new contracts with us, and we are managing the data center until the final CPs are satisfied. For Beijing 10, 11, 12 we expect to close by the end of the current quarter. When we announced the deal last December, two data centers were in service and one was under construction. The overall utilization rate was 50%. As of today, all three data centers are in service, and the utilization rate has increased to over 70%.

Our M&A pipeline is strong. We are pursuing projects at the development stage, and projects which we are already ramping up. Data centers in China are attracting a lot of interest, particularly from financial buyers. This opens up new possibilities including working with partners. We have many advantages in the M&A space [Phonetic] and I’m confident that we will be able to conclude some more highly accretive deals.

Looking at our financing position on Slide 24, we ended 1Q ’20 with cash of RMB3.6 billion. We are now in the process of refinancing several of our recent property acquisitions in Shanghai and Hong Kong. Pro forma for this refinancing, our cash balance is back up over RMB5 billion.

I mentioned earlier that the cost to complete our current area under construction is RMB7.4 billion. Assuming 40% of this is financed with equity, we will allocate RMB3 billion of our cash to capitalize these projects. On the debt side, we have onshore renminbi-denominated project finance in place or in process for most of the remaining requirements. We pioneered data center project financing in China and banks like the business. We have an excellent track record as a borrower, and the banking market is highly supportive.

Nonetheless, in order to give ourselves more flexibility over the timing of project finance, we are putting in place a large revolving credit facility at HoldCo level. Our policy is to maintain a fully-funded business plan. However, as is evident from our results, our growth is going to higher levels and the opportunity in front of us is expanding. From a strategic perspective, it is important for us to be in a position to respond to demand and keep our customers fulfilled. Therefore, we are always looking at ways of strengthening our capital base. We are well-positioned in terms of access to capital with some public and private sources, and we’ll continue to evaluate all of our options.

Finishing on Slide 25, our contract backlog now stands at 123,000 square meters, equivalent to 75% of our revenue-generating area, 75,000 square meters relates to data centers which are still under construction. Delivery of these contracts will commence over the next six quarters as and when the data centers come into service. 47,000 square meters relates to data centers which are already in service. In 2Q ’20 we are expecting additional area utilized to over 10,000 square meters. Based on the first six weeks of 2Q, we are well on track to meet this target. It is the gradual recovery, which all being well, we expect to accelerate later in the year.

Today, we are confirming the full-year guidance for revenue, adjusted EBITDA, and capex, which we gave on our last earnings call, seven weeks ago. With that, I will end the formal part of our presentation, and we’d now like to open the call to questions. Operator?

Questions and Answers:

Operator

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions]. Your first question comes from the line of Jonathan Atkin from RBC Capital Markets. Please ask your question.

Jonathan Atkin — RBC Capital Markets — Analyst

Thank you. So, I had a question about customer demand, and then a question about kind of the resource procurement and development. And with respect to customer demand, I just wondered if you can comment with respect to the overall market in China, any different trends that you’re seeing with respect to Tier 1 demand versus more remote locations? And then my question about development is just whether you have seen any changes with respect to challenges from other [Phonetic] resource procurements, the permitting environment for municipal projects or edge of town projects? Thank you.

Daniel Newman — Chief Financial Officer

Yeah, Jon, I’ll go first. Your first question about demand in Tier 1 markets and demand in lower-tier markets. First of all, I think as we made clear, the overall demand picture has strengthened and this is a result of a number of factors. Demand is present in both Tier 1 markets and in lower-tier markets and it grows in sync. The ratio for different customers is — differs, but on an overall average for the hyper-scale and large internet customers, it is roughly 50-50. So historically, our business has been focused on Tier 1 markets.

Last year through our partnership with GIC, we found a way of opening up the opportunity to work with our customers in low-tier markets, and I think that has proven to be very strategic in terms of enhancing our customer relationships, as well as potentially being a very material opportunity in its own right.

William Wei Huang — Chief Executive Officer

Yeah, I think that Jon, based on our bottleneck [Phonetic] conversation with our major customer, I think the number, they show us in the next three years and five years is a very big number than we have ever seen. And it’s reasonable, we think, if we get the cloud, their business plan, their visibility is very high. So I think that over time, I think the China data center market is very exciting in a three or five years view, it’s very exciting.

Daniel Newman — Chief Financial Officer

The second question was about the challenge of the resource.

William Wei Huang — Chief Executive Officer

From a resource point of view, I think GDS already took the action two or three years ago, because we started to seeking some larger land and capacity and a power capacity, because we believe this is a — will fit for our customer future demand. So we are the first-mover to folks on the edge of town to divest our resource. So in an — we can say we are the first mover, and we’ve got a lot of — we secured a lot of land banks and power, and it’s not an issue for us to fulfill our customer’s — to fulfill their next three years or five years business plan.

But let’s say in the urban part, it is still challenging for everybody, right? In terms of the power quota policy it is still not very clear, right now, although a lot of the people talk about it — the new infrastructure policy, will — if the new policy will release more power, so far we didn’t see that. But we’re willing to see that, right? If that’s the case, GDS can do more, but we are waiting.

But on the other hand, we are quite certain we already lock up a lot of the edge of town resources, which our customers like.

Jonathan Atkin — RBC Capital Markets — Analyst

Okay. Great. And then maybe to squeeze in a final question. On Slide 39, you give the contract renewal schedule. And if you could maybe just remind us, at what point do you start having those discussions around renewing contracts that expire during 2020, 2021, and so forth. How far in advance are you having that dialog?

Daniel Newman — Chief Financial Officer

Yes, Jon. Just looking at the slide here. It’s slide 38 in my copy, about contract renewal it shows 18,000 square meters of capacity for 6.3% of our total area committed comes up for renewal this year. We drill down into the composition of that. There is no concentration, the largest contracts that come up for renewal are single-digit percentages of that 18,000 square meters. There are a few which pertain to cloud and Internet customers, those are actually for our first-generation data centers, meaning Beijing 1, Shenzhen 1, Kunshan 1, and so on.

So those were the first deals, which we did back in 2015, 2016, or maybe 2017. As I may have mentioned on our previous earnings call, at times these were unprecedentedly large calls — large deals. And now you look at it — it’s a 1,000 square meters. It’s not even worth calling out in terms of our quarterly growth. We believe that those customers will stay put. These are equivalent of edge data centers and as they put on-ramps in some of these data centers, I don’t think they’re going anywhere.

And then price negotiations, I think we can say atleast will be flat, and also as [Phonetic] mentioned before, we have to look at this in the totality of our overall relationship with these customers, what we’re doing with them elsewhere, what returns we’re getting with them across the entire relationship. I don’t think we could just isolate out one particular data center and treat it as if it’s a completely standalone commercial negotiation.

Jonathan Atkin — RBC Capital Markets — Analyst

Thank you very much.

Operator

Your next question comes from the line of Yang Liu from Morgan Stanley. Please ask your question.

Yang Liu — Morgan Stanley — Analyst

Thank you. Could management share your thoughts on the public REIT policy issued by Chinese financial regulator? What did GDS plan on that, especially given the property ownership is increasing faster. My second question is, could you please update us on the customer move-in pace in second quarter? You mentioned that there is no power supply issue anymore. Have you observed a meaningful recovery of move-in pace so far? And what is the current average month from a customer — from a data center delivery to mature? Thank you.

Daniel Newman — Chief Financial Officer

Yes. Huang was referring to the pilot project announced by the National Development and Reform Commission and the China Securities Regulatory Commission to promote the creation of a market for publicly-traded REITs in China backed by profitable infrastructure. From our point of view, yes, it’s interesting. We have a growing portfolio of stabilized data centers, an increasing proportion of them are owned — wholly-owned properties. And we should always consider whether it’s beneficial for us to recycle capital out of such properties whilst maintaining management and operation control for the long-term. The creation of a publicly-traded REIT market might give us one option to do that, but there are many details still to be filled in terms of how this pilot scheme is going to work.

Meanwhile, we are already doing it in a way, we have mini-REITs through our partnership with GIC, and the largest financial institutions in China have approached us about the same kind of structure, and we can probably achieve the same result through privately negotiated deals. Ten years ago when we got into the data center business, we took the decision to structure each project where possible with a separate asset code for each data center. And then, how — and a separate entity have the customer contracts in the operations.

So we always had in mind that this would give us the flexibility to package assets or sets of assets in future if it gave us a better financing option. So we’ve always had this in mind. As I say, I think the REIT scheme as it comes into fruition may just give us one more option. The second question about customer move in pace. So it was just under 8,000 square meters in the first quarter. And right now, we are halfway through the second quarter, and I think we’re looking at about 10,000 square meters to 11,000 square meters in the second quarter. It’s already halfway to that level. So it’s going smoothly.

In the third quarter, and the fourth quarter, even in our original plan, we are expecting a step up. And to some degree it ties back to the completion of data centers, new data centers coming into service, and we put a page in the presentation showing you how much capacity comes into service in each quarter in the remainder of this year and in the first half of next year.

And if you look at the backlog, you see that at the end of the first quarter, we had about 47,000 square meters of backlog commitments, which relate to data centers already in service. Typically, we see that backlog be delivered at a rate of about 20% to 25%, third quarter. So, yeah, if we hit 10,000 square meters to 11,000 square meters in the second quarter, it will represent 20% to 25% of the backlog at the end of the first quarter.

And over many quarters, if you adjust for M&A and look purely at the organic business, you will see that, that kind of ratio holds consistently true. So I think if you use that methodology, it would lead you to forecast high level of movement in the third quarter and fourth quarter.

Yang Liu — Morgan Stanley — Analyst

Thank you.

Operator

Your next question comes from the line of Colby Synesael from Cowen, please ask your question.

Colby Synesael — Cowen — Analyst

Great, thank you. And nice job on the name. I guess, on your prepared remarks, you mentioned that a second major partner, you guys have recently partnered with a second major partner for a remote site. I’m curious, was any of that reflected in the bookings or leasing the 22,000 square meters that you guys reported and I’m just curious if that’s by chance since there’s obviously been a lot of focus on them explicitly in terms of what they may be doing.

And then secondly, you mentioned that due to COVID-19 that the government had changed some things around power, which impacted both revenue and cost. I was wondering if you could be more explicit and actually talk about what the impact was both to revenue and then the offsetting impact which ultimately gets us to the NOI. Thank you.

Daniel Newman — Chief Financial Officer

Sure, Colby. I’ll go first. To talk about the remote site business. We have one major customer that we’ve been working with initially on a consolidated basis. And then in the second iteration through our partnership with GIC. And now we have activity at three different sites. We completed four projects and one site, which is a consolidated project, and we had a commitment to do seven projects through the joint venture. That’s now increased to 12 projects, and with that customer, we are talking about a very significant increase in the volume of projects over the next couple of years.

And then, separate from that, a second major customer has now given us a purchase order for their remote projects. The first one is going to be a trial, we have to go through the commercial negotiation and the design phase, but potentially, the volume from that second customer could be as high as from the first customer.

It’s not ByteDance. ByteDance is one of the few very large data center used in China, which is not yet our customer. We are aware of the demand that they have been in Tier 1 markets and we’re trying very hard to fulfill that and to establish our relationship with them. That’s a high priority. William, do you want to add anything to that before I talk about power?

William Wei Huang — Chief Executive Officer

Yeah. I think, yeah, we are pretty focused on the our — we call it — there is three major [Indecipherable]. So as they mentioned that the next three years or five years is a very big number in terms of both balancing in the tier 1 market and in remote. We try to get both market share as much as possible. So, I think it is not including the ByteDance, and because ByteDance currently they are still in a — they are deploying their service in a remote area. It’s like we hope we can do the deal like a remote area like a JV with a GIC did it. But so far we still are working on a couple of projects which are tier 1 market. So this is our number, current number. Our focus does not include any ByteDance expectation.

Daniel Newman — Chief Financial Officer

So Colby, I’m trying not to mix up the numbers for the joint venture projects. So in our 20-F and in our earnings presentation and so on, keeping them quite separate, when you hear us talk about headline numbers like 22,000 square meters net adds. That’s all of our core business, it completely excludes the joint venture. The joint ventures we disclosed on Page 11, those numbers are not included aggregated without core KPIs anywhere.

And yeah, I’ll comment about power, because of the pandemic situation, the government in China has had a number of schemes to provide some support to economic activity. We benefited in three principal ways. First of all, there was a reduction in some power tariffs in some places, most of which we passed on to customers, and they did result in a slightly lower revenue and MSR, but also resulted in a lower cost of revenue.

And then secondly, and thirdly, there was a reduction in rent payable to our landlords, which is state owned enterprises, and also a reduction in contributions that we normally make to what they call a Social Fund. So overall, if you look at our margin improvements, and I think you have to look at the metric that we call underlying adjusted EBITDA, because that strips out the effect of FX changes.

Our margin went from 45.6% in the fourth quarter of ’19 to 47.4% in the first quarter of 2020. So that’s almost a two percentage points increase. I would say, half of it was due to the government concessions, the other half was due to some cost reduction from working at home, some operating leverage, but frankly, there was also some cost increases as we change the operating procedures in our datacenters.

So yeah, I think you can say half the margin improvement was due to concessions, and a half was due to more factors under our control. So those concessions were continued in April and they are continuing in May. So we expect margins in the second quarter to come out at a pretty similar level to first quarter.

Colby Synesael — Cowen — Analyst

And just one quick follow-up on that. So you said April and May, is the stop [Phonetic], and if that goes away in June or is that may continue, you just don’t know?

Daniel Newman — Chief Financial Officer

Actually, government policy is to continue, but we can’t be certain. So, if you recall, our guidance for 2020, the midpoint of revenue and the midpoint of adjusted EBITDA implied about 46.3% adjusted EBITDA margin for the full year.

So I think that still holds. So it’s hard to normalize, right, because we’d have to normalize the government — these concessions from the government, we’d have to normalize the cost savings, but also cost — some additional costs, and also for the fact that we lost some revenue, right. So it’s hard to normalize.

But I think 46% plus is most definitely still achievable for this year — for this full year.

Colby Synesael — Cowen — Analyst

Thank you.

Operator

[Operator Instructions]. Your next question comes from the line of Gokul Hariharan from JP Morgan. Please ask your question.

Gokul Hariharan — J.P. Morgan — Analyst

Hi, thanks for taking my questions, and congratulations on the continued good execution. First of all, on — just following up on the lower tier BTS projects. The total project size seems to be ramping up quite quickly, I think you talk about 48,000 square meters already with potentially more coming with the second customer. Could we have a little bit of understanding about how the economics will work for GDS when you start collecting the management fee, what would be typically the IRR from that?

Is that something given the area is also increasing quite a bit, even though you only own probably 10% of the equity, how should we think about earnings contribution or EBITDA contribution from this kind of business given it feels like this is expanding quite rapidly in the last, I think roughly a year, you’ve already added close to 50,000 square meter? That’s my first question.

And the second question, Dan just to check, could you talk a little bit about how should we think about the MSR trend through the rest of the year? Are we going to basically hold stable once some of these power subsidies, etc, kind of move way and could you — could we also maybe shed some light on our path to profitability as well as your stable data center percentage continues to rise pretty quickly?

Daniel Newman — Chief Financial Officer

Okay. First, on the lower tier data centers, I want to make something clear, which is, this is a completely different product from what we developed in Tier 1 markets. It’s not just different locations, it’s different products. Typically, it’s much lower redundancy and may deploy some technologies like high voltage, direct current, and so on, because it’s much more cost-orientated and less high availability orientated.

So for the metrics, which I hope you’d become familiar with for our data centers in Tier 1 markets they don’t apply. We did a completely separate set of metrics to understand the unit cost and revenue per square meter and the margin and so on. But as an off-balance sheet, I do think it’s worth going there. We shouldn’t over complicate.

We do have a 10% equity involvement, it’s literally only $1 million or $2 million or $3 million per data center. So relatively speaking immaterial. Our approach was to maximize management fees. It’s a little sensitive. I’d like to tell you what we’re going to make, but you can imagine it’s commercially sensitive. It approximates to, let’s say, mid-single-digit percentage of revenue of the datacenter as a clear management fee profit.

Once the data center comes into service just like in Tier 1 markets, the customer has a move-in period which is factored into the return calculations and the pricing. So we have new ramps up, and you can see it from the projects we did in Zhengbai [Phonetic] in ZB1, ZB2, ZB3, ZB4, actually, the projects ramped up quite quickly. As they ramp up, we will be earning that management fee and that kind of a revenue share profit, and that will come into our income statement as part of our service revenue.

When it starts to appear, I will call it out, but for now, it’s not there. And as I said, I don’t want to overcomplicate. I don’t think we should talk in terms of an IRR, it would be off the scale, even compared with what I showed in terms of the NOI yields, simply because we have such a small equity investment. It doesn’t really make — it not that meaningful to talk about return on equity when essentially it’s a managed project.

For MSR, I think the MSR in the second quarter will be quite similar to what it was in the first quarter and I don’t expect any — a much more decline over the remainder of the year. There will be some distortion depending on when acquisitions close, that can also be a matter of timing, but also now we have acquisitions that actually have lower MSR, but on an organic basis, we expect the MSR to be quite similar to where it was in the first quarter.

On the path to profitability, I always protest the — we have within our portfolio a large set of stabilized data centers. We don’t segregate them out, they are part of the platform, but they are highly profitable, highly cash generative, not highly leveraged, and so on.

If you look on a consolidated basis, I mean, in our 20-F, we disclosed the net profit or loss that so happens onshore in China and the net profit or loss offshore in China. What you’ll see is that the position in China is almost breakeven. So it’s the finance costs, which were booked at HoldCo level from Holdco level financing, and the stock-based compensation, which is also booked at HoldCo level which is a loss. But for the business in China, the data center business it’s already almost breakeven.

So I think if we go forward one year even on a consolidated basis, it will be close to breakeven.

Gokul Hariharan — J.P. Morgan — Analyst

Okay, thanks Dan.

Operator

Your next question comes from the line of Tina Hou from Goldman Sachs. Please ask your question.

Tina Hou — Goldman Sachs — Analyst

Hi, thank you management for your time and for taking my questions. Two questions from me. The first one is in terms of your electricity price for the data centers currently in service, what would the average price be? And also in terms of the government offered concession price due to COVID-19, what kind of discount did you get?

And the second question is that, I noticed that you have an acquisition in terms of land in Chongqing [Phonetic], so wondering if we have any pre-committed customers for the site. What is the rationale of acquiring the land in there? Also, I noticed that for the previously Chengdu site, the utilization rate is relatively lower versus the Company average. So how do we prevent this from happening again in the Chongqing site? Thank you.

Daniel Newman — Chief Financial Officer

Okay. So the first question is about utility cost. There are literally hundreds of power tariffs. So what we were talking about is an effective tariff rate. You know, tariffs are structured with a fixed component, which is like a commitment charge, because there is a very large amount of generating capacity, which is being reserved for the use of the data center. And you know, we have to pay that commitment charge whether or not we’re using it. That’s why when a data center comes into service, it’s part of the fixed cost for the data center, and it may lead to the data center being loss making until maybe it reaches 15% or 20% or higher utilization.

The government concessions were actually mainly to reduce those fixed power commitment charges. So that’s where we got the benefits, as I said in my prepared remarks, it was just in certain places. Our effective power tariff, input tariffs, and frankly also the outflow tariff because we pass it through is about RMB0.65 per kilowatt-hour to RMB0.7 per kilowatt-hour. We get the lowest rate, which is applicable to large scale industrial users. So your second question was about Pujiang?

William Wei Huang — Chief Executive Officer

Chongqing [Speech Overlap]

Daniel Newman — Chief Financial Officer

Oh, the third question was Chongqing [Indecipherable]. Or you answer the third question.

William Wei Huang — Chief Executive Officer

Chongqing, I think Chongqing is mainly driven by one of our major customers. So this is, we bought the land and we prepared to getting order in the second half of the year. I think it’s highly achievable.

Daniel Newman — Chief Financial Officer

Tina, your second question was about the site we acquired in the Pujiang district of Shanghai. As we’ve been saying for many quarters, I think this is very familiar now, and it’s very challenging to obtain the right kind of real estate and power capacity in the urban areas. Nonetheless, it’s absolutely clear there have been no doubt our customers still require us.

The edge of town capacity is a good substitute to enable them to scale up, but they still require the downtown data centers, which are connected to the edge of town site. So, and we have to work very hard to generate new projects in the urban areas and we’ve had to try a number of different approaches, including buying buildings, doing acquisitions and so on.

In the case of the Pujiang site, this is an unusually large industrial complex in a very good location, because it’s close to where the submarine cable landing stations are in Shanghai. And we were able to have an agreement with the landlord that we would proceed with the acquisition of the property if and when or as and when we obtained the power capacity approval from the government.

And then last year, we did obtain that capacity approval from the Shanghai municipal government, and it pertains to this site, to this project. So that’s why we went ahead. As William commented, hyperscale customers value a great deal, the ability to expand on the same site, to putting that on ramp and then to have visible expansion capacity on the same site.

So having a site as large as this, really has a very unique marketing angles. And yeah, we would regard it as a kind of crown jewel [Phonetic] project.

William Wei Huang — Chief Executive Officer

Yeah. Let me correct, I think in terms of the Chengdu, I think — and the whole portfolio looks like us moving a little bit lower than our other major data center, but what we can see is that the Chengdu’s data center move-in will catch up in the second half of the year.

Tina Hou — Goldman Sachs — Analyst

Okay, thank you very much. And maybe just a quick follow-up in terms of your capex guidance of RMB7.5 billion this year, I’m just wondering how much of that is like land purchase? And then the other, the rest I guess will be like the data center site construction.

Daniel Newman — Chief Financial Officer

Yes, the capex guidance was RMB7.5 billion, but in round numbers, RMB2.5 billion relates to acquisitions of data centers, as well as of property and land. Principally, it consists of the payment for the Pujiang site, and the payment for the Beijing 9 acquisition when it closes, and the payment for the Beijing 10, Beijing 11, Beijing 12 acquisition when it closes. So that accounts for most of that RMB2.5 billion number. The organic capex is around RMB5 billion. So it’s running at about RMB1 billion to RMB1.5 billion per quarter.

Operator

Your next question comes from the line of Frank Louthan from Raymond James. Please ask your question.

Frank Louthan — Raymond James — Analyst

Great, thank you. I wanted to touch on some new logos. What are you seeing from, in particular, what are you seeing from your customer base of non-domestic Chinese companies? How was the sell-through going to them, and currently during the crisis? And then secondly, what are you seeing from new logos in the quarter and quarter-to-date, how is that tracking? Thanks.

William Wei Huang — Chief Executive Officer

Yeah, actually in the first quarter, we win — we won a very, very — two new logo, one is the largest [Indecipherable] player in the world.

Daniel Newman — Chief Financial Officer

Not lucky.

William Wei Huang — Chief Executive Officer

Yeah, not lucky. So, another is — another very, very remarkable, I mean, logo, is one of the very critical, we call it foreign currency clearing [Phonetic] house, which is one of the branch of the Central Bank. That means, Central Bank keep giving GDS new order in terms of the except to China UnionPay, another clearing house. So we win a lot of the new meaningful new logo from them, and in a big way. So I think they’ve also contributed to our new order booking in a significant way in the first quarter.

We think this trend will maintain, because as I mentioned, now a lot of retail customers, quite recognize the value of our data center, multi-card access, and the data center platform, and the high quality of the operation. So we will attract more high-quality retail customers more and more in the next couple of quarters, which I believe.

Frank Louthan — Raymond James — Analyst

Okay, great, thank you very much.

Operator

Due to the limited time of the call, I’d like to turn — now to turn the call back over to the Company for closing remarks.

Laura Chen — Head of Investor Relations

Thank you everyone, once again for joining us today. If you have further questions, please feel free to contact GDS Investor Relations through the contact information on our website and The Piacente Group Investor Relations. Bye-bye.

Operator

[Operator Closing Remarks].