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GDS Holdings Limited (GDS 5.94%)
Q3 2019 Earnings Call
Nov 14, 2019, 8:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Hello, ladies and gentlemen. Thank you for standing by for the GDS Holdings Limited Third Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management's prepared remarks, there will be a question-and-answer session. Today's conference call is being recorded.
I will now turn the call over to your host, Ms. Laura Chen, Head of Investor Relations for the Company. Please go ahead, Laura.
Laura Chen -- Head of Investor Relations
Thank you. Hello, everyone. Welcome to the 3Q19 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.
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 over the call to GDS Founder, Chairman and CEO, Mr. William Huang. Please go ahead, William.
William Wei Huang -- Chief Executive Officer
Thank you. Hello, everyone. This is William. Thank you for joining us on today's call. A couple of weeks ago, we passed the three years anniversary of our IPO. Life as a listed company has been exciting, sometimes its too exciting, but it has made us considerably stronger. Today, we are reporting revenue and adjusted EBITDA, which is a three times and a six times what we reported for 3Q '16. Our total area committed is almost double what we forecasted at IPO. It's being an outstanding three year in terms of growth. However, we firmly believe some of the best is yet to come.
As I go through our results, I will highlight our strategic progress in key areas. During the third quarter, we signed up customers for over 21,000 square meter of net additional area committed or over 57 megawatts of IT power, which should generate over $90 million of annual recurring revenue, when fully delivered. We had three [Phonetic] orders for over 10 megawatt from existing customers, a sign that's order size getting bigger. We also won a 9-megawatt order from a new Internet customer, a market leader in short video streaming. And at the end of the three quarter, 3Q we reached 58,000 square meter net added for year-to-date.
As of today, we are down in terms of meeting our full-year sales target of 80,000 square meter. In the past few months, customer sentiment has become a lot more positive. Cloud adoption continues on a steep upward path, with market leaders reporting 65% to 100% growth. 5G deployment is starting to drive another wave of demand. All of our focus is on next year and the 2020 sales pipeline looks very promising. We have reported on prior calls about the diversification of our customer base. At the end of 2016, we had three hyperscale customers. Now we have 13. And in the current quarter, we signed a new hyperscale customer, a prestigious global technology company with a consumer focus. The combination of sustained demand from established customers, plus new high growth accounts has enabled us to deliver 20,000 square meters net added per quarter. There are still new customers and the markets for us to penetrate. With all, we are well positioned for higher level of sales over the next few years.
20,000 square meter of sales means starting three to four new data center projects each quarter. For us to do this, we need a larger development pipeline. As you know, it is difficult these days to get approval for new data centers in downtown areas. We continue to have some success organically and the settlements, our capacity with acquisitions. However, it is not nearly enough to satisfy our customer demand. We have therefore evolved our strategy to include large upfront [Phonetic] sites.
Our first move -- first major move was in Langfang on the edge of Beijing. This is already proving a great success. Within a couple of quarters, we have commitments from three different hyperscale customers for 100% of three data centers, Langfang 1, 2 and 3. While we still have inventory of land and power in Langfang, we are moving rapidly to secure even more resource. We aim to repeat this success in other Tier 1 markets. In Shanghai, we got approval today for new downtown capacity. In addition, we are purchasing more land near our established edge of townsite in consent. We have also obtained substantial power capacity for another edge of town site in Jiangsu. The power plus land at these locations will support around a 90,000 square meter of new capacity. In the Greater Bay, we have power plus land at a location near Guangzhou. We have leased shell building at two of the locations near to our existing data centers. And we also have the Hong Kong 2 acquisition, which I will talk about next.
Altogether, we have around a 230,000 square meter of developable available capacity in these key Tier 1 markets and we are not stopping. It is very strategic resource and positions us to respond to higher level of demand. We established operations in Hong Kong over five years ago, relying on third-party data centers to serve just a few of our many Chinese financial institution customers. We took the first step to upgrade our presence with the purchase of the Hong Kong 1 property in 3Q18. The site is now cleaned and we will start construction of the new building. The redevelopment timeframe is three years. Hong Kong is the gateway for the most of the international bandwidth connecting China. Our hyperscale and high growth customers use Hong Kong as a launch pad for their international service. They are pushing us to further increase our presence in the market.
Our strategy is to always go where our customers have critical mass of demand. We have therefore taken a significant step with the purchase of a second building for redevelopment. Hong Kong 2 is located only 115 meters from Hong Kong 1, enabling us to realize investment and operational synergies. We view Hong Kong as integral to our Tier 1 market platform with proven demand from our China hyperscale customers and the presence of more than 200 of our Chinese financial institution customers in Hong Kong. We believe better success of our projects is assured.
We announced in last quarter, the formation of our partnership with GIC for remote, built-to-suit projects for hyperscale customers. The initial focus is on seven projects, which we have committed to develop and operate for one customer at three of their campuses. We have almost completed the first project and expect to sell a 19% [Phonetic] equity interest to GIC early next year. We have started to work on two more projects.
The beauty of this partnership is that, it enable us to fulfill the broader requirements of our strategic customer all side of Tier 1 markets. We see this as real opportunities to strengthen our franchise, gain scale and create additional value. We have therefore, formed a group within GDS to focus on remote build-to-suit projects as a distinct product.
The seven projects committed to date, will require around $150 million of equity. It's relatively small by GIC standards and they have given us their backing to scale up this partnership in a material way. We are already in discussion with a couple of the other customers. It's going to take time as these deals are complex, but I'm hopeful that over the next few quarters, we will have some more wins.
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 13, where we strip out the contribution from equipment sales and the effect of FX changes. In 3Q '19, our service revenue grew by 7.5%. Underlying adjusted NOI grew by 9.2% and underlying adjusted EBITDA grew by a 11.4% in consecutive quarters. Our underlying adjusted NOI margin reached 53.8% and our underlying adjusted EBITDA margin hit 45.9%, which is 7.9 percentage points higher than the year ago and 1.6 percentage points higher than the prior quarter.
Turning to Slide 14, service revenue growth is driven mainly by customers moving into space which they previously committed. Move-in during 3Q '19 was over 10,000 square meters. We're expecting a similar level of move-in during 4Q '19, on top of which we will have around 7,000 square meters of additional revenue generating space from Beijing 9, when the acquisition closes at the end of the year. Our MSR has been pretty much flat over the past few quarters. However, we are expecting a small drop in 4Q '19.
Slide 15 shows the quarterly trend in margins. 2019 has been a great year for margin improvement, but with over 17,000 square meters coming into service in 3Q '19, plus another 13,000 square meters in 4Q '19, including the GZ6 acquisition which just closed, we expect to end the year with margins at a similar level.
Turning to Slide 18. Our capex picked up in 3Q '19, due to a higher level of ongoing construction. In 4Q '19, the initial consideration is due for the GZ6 and BJ9 acquisitions, and for the purchase of the Hong Kong 2 property, bringing total capex for 2019 to the level of our original full-year guidance, namely RMB4.5 billion to RMB5 billion. At the end of the year, we will have around RMB1 billion of remaining balance of purchase consideration for our acquisitions to date.
Up to the end of 3Q '19, we have incurred over RMB300 million and paid RMB170 million for capex related to remote build-to-suit projects. We've included a page in the appendix, showing how we account for the GIC joint venture projects, pre and post sale.
On Slide 19, currently the debt capital market environment in China remains supportive for us and we're taking advantage to get longer tenor and cheaper facilities. In 3Q '19, we completed financing across four new projects and refinancing of three existing projects totaling RMB1.4 billion. We're considering a number of options for financing our Hong Kong projects, including a sale leaseback of the redeveloped properties or a joint venture. We have had a number of approaches from existing and new partners and they're keeping an open mind.
Turning to Slide 20, our backlog consists of binding commitments from customers. It has increased over 104,000 square meters representing 76% of our current utilized capacity. It provides high visibility to our future growth. Our backlog is almost entirely made up of large orders from hyperscale customers. They are all high quality counterparties and household names. 58% of the backlog or 60,000 square meters relates to data centers, which are currently under construction. The remaining 42% or 44,000 square meters relates to data centers, which are already in service. This part is moving in at the rate of about 10,000 square meters per quarter.
To finish on Slide 21, after nine months, our revenue is tracking toward the top end of the revised guidance range, which we'v provided last quarter. For adjusted EBITDA, we are tracking above the top end of the revised guidance range where we are therefore once again raising the EBITDA guidance range to RMB1.8 billion to RMB1.82 billion. With regard to capex, we will keep the original range unchanged.
With that, I will end the formal part of our presentation, and we would now like to open the call to questions. Operator?
Questions and Answers:
Operator
Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] We have the first question from Jonathan Atkin from RBC Capital Markets. Please ask your question.
Jonathan Atkin -- RBC Capital Markets -- Analyst
Thanks very much. I was wondering, I see the pre-commitment rate has been -- the pre-commitment rate has been steadily increasing, despite the fact that your business continues to scale at a higher rate. And I wondered, what that says about the competitive environment? You mentioned deals are getting bigger, but any comments from your perspective about competitive supply in general?
And then second question I had relates to Shanghai. I think you said you did get some approval just today about downtown development and how many square meters or megawatts or cabinets are we talking about in terms of the ability to develop in municipal Shanghai? Thank you.
William Wei Huang -- Chief Executive Officer
So, John. I'll take the first question. It's William. I think from the competitive point of perspective, I think, our resource inventory, let's say, resource held for development. If compared with this market share, our percentage, I think, is very significant, more than our current revenue share share. So that means in the future, our [Indecipherable] is much higher number than our competitors.
The second question is, Dan, about the recent allocation for our capacity in Shanghai. Yeah, we got the -- actually we got the approval for 55,000 racks. It's, let's say -- let's calculate it at 2.5 square meter per rack, that means more than....
Daniel Newman -- Chief Financial Officer
13,000 square meters roughly.
William Wei Huang -- Chief Executive Officer
Yeah, roughly, right? So for Shanghai, there is a -- this approval is quite diversified. All those local player get some small piece of that. We are the one of the largest one to get a approval. So, but this is not -- definitely cannot satisfy our customers' future demand profile. They want a larger scale, much more larger scale than what we get in the Tier 1 market, is number one. Number two, they want a campus type with high visibility for future expansion. So that's why we will continue to get back to edge of townsite to make sure to satisfy our customers' future demand. But what we can tell is our future, our strategic customers' future demand looks like the number will be accelerated in the next few years. Yeah. That's all.
Jonathan Atkin -- RBC Capital Markets -- Analyst
Yeah. Thank you. And then maybe just lastly on the new hyperscale logo, the 9-megawatt order, is that at a single location or is it across multiple metros?
Daniel Newman -- Chief Financial Officer
Yeah, it's a single location, John.
Jonathan Atkin -- RBC Capital Markets -- Analyst
Great, thank you very much.
Operator
We have the next question from the line of Colby Synesael from Cowen and Company. Please ask your question.
Colby Synesael -- Cowen and Company -- Analyst
Hi, great, thank you. Two questions if I may. The first one, just given all the organic build that you're doing and intend to do as we've gone to 2020, plus what sounds like some interest in some bigger M&A to help satisfy the demand, just can you remind us what you're thinking in terms of potential equity raises? Or how you plan to finance these various projects. It would be good to get some color on that. And then I guess secondly, you noted that you're already at 80,000 square meters for 2019. Just initial thoughts on 2020 to the extent you can share as it relates to revenue, EBITDA, bookings et cetera. Thank you.
Daniel Newman -- Chief Financial Officer
Colby , I'll go first. Let me comment first of all on the current M&A environment, because while we're very busy with lot of organic build, we are still very focused on strategic M&A opportunities. There aren't platforms out there for us to acquire. There aren't many GDSs. There are single sites. To date, we've done seven acquisitions, one to close. Each acquisition has been one data center on a site, but there are some opportunities, where there are several data centers on a site and maybe some expansion capacity. So that's what constitutes bigger opportunities.
The last 3.5 years, we've done seven acquisitions. So it's a run rate of about two per annum and that's been part of the 80,000 square meters net adds. It's provided us mainly with the capacity to support the sales. So that's been part of that kind of base case [Indecipherable] organic and semi-organic, but if we were to do what I'd just refer to as those larger acquisitions and that's going to be additive. It's going to be on top of -- in addition to that.
To bring it back to your question about capital raise, we raised $600 million earlier this year in March. And if we leverage that 60-40 debt-to-equity, it means that we will have $1.5 billion of financial resources to invest, in RMB that's RMB10 billion. Our -- top end of our capex guidance range this year is RMB5 billion. So you can say in a simple way that we raised enough equity capital sort of this year to support two years of investment at RMB5 billion per annum which corresponds to an 80,000 square meters net add business plan. I did note when we did that capital raise that it was not sufficient if we were growing at a faster rate and it was not sufficient, if we were to do out of the ordinary M&A. So, while needs of those is certain. I think, William will make a comment about growing at a fast rate, but these are -- those are certain, but it's clear that if we were to do something, then we would need to consider a financing whether it be from the capital markets or whether it be through one of our partnerships, but it would be linked to a transaction or linked to demonstrated level of sales.
William Wei Huang -- Chief Executive Officer
Yeah.
Daniel Newman -- Chief Financial Officer
William do you want to comment on the possibility or potentiality for higher level of sales? Colby is asking for your early thoughts about next year.
William Wei Huang -- Chief Executive Officer
Yeah. It looks like, frankly speaking, we are more confident, maintained a 80,000 square meter, that's for sure. I think, no doubt about that, but a lot about -- given recent in a couple of months, we are -- talked to our customers a couple of times. It looks like the next few years plan is looks like will accelerate. So as I just talked in a very--- early this year, the sentiment is not good, but now it's totally shift. Everybody very, very positive. So a lot of the -- they start to execute their original plan. And even based on the 5G coming, the -- the sounds looks like, they will more aggressive, but we will see -- we hope we can do more, right, but it's not right timing to commit more.
Colby Synesael -- Cowen and Company -- Analyst
Yeah. I mean it seems like your biggest issue is not the demand. It's simply finding the space and then ultimately financing it. And it sounds like other than Beijing, you still like in Shanghai and Shenzhen are looking for those bigger edge of city-type developments in and it seems like to the extent you're able to get those, we could see greater than those 80,000 square meters in some of those outer years. Is that sound right?
Daniel Newman -- Chief Financial Officer
It is right, Colby. Obviously, there's always going to be a lot of things going on, which has not yet reached a stage where it can be disclosed. What we're showing, I think, for the first time in our earnings presentation is -- yeah -- actually the developable area held for future development. And very roughly, it corresponds to three years sales growth at the current run rate, but we would like to have considerably more than that. We would like to have double -- In fact, we have no upper limit in our minds. The amount that we've had to invest to secure this resource is really quite small. Our budget for land bank in China this year was RMB500 million, that's not [Phonetic] $100 million. We have not spent all of that by any means and it's very valuable. So, we're going to keep on going. We are very well positioned in Shanghai. You said, we still had a lot to do. The site that William referred to in Jiangsu, we've been allocating several hundred megawatts of the power capacity, but once again, we are still looking to add more.
Colby Synesael -- Cowen and Company -- Analyst
Great, thank you.
Operator
We have the next question from the line of Frank Louthan from Raymond James. Please ask your question.
Frank Louthan -- Raymond James -- Analyst
Great, thank you. Can you comment on the situation in Hong Kong. The unrest there, is that impacting your business and any thoughts on how that might impact your ability to develop in these sites? And then, how many sites do you think that you will develop with the JV during the course of the next 12 months. Thanks.
Daniel Newman -- Chief Financial Officer
What Frank's asking whether there has been any short-term impact in Hong Kong or maybe impact our view of Hong Kong?
William Wei Huang -- Chief Executive Officer
Yeah, I think we'll -- our logic is follow up on customer. That's our strategy to do location expansion. So, Hong Kong has become the -- a very important part for all our installed base. So expand into that to international market. That's always the adverse effect. As I mentioned just now, I mean they have -- all of the -- a lot of the -- our Hyperscale customer plus more than 200 financial institutions, mainly in China base, they have very, very clear demand in the next few years in Hong Kong. So, our view is that the certainty was given by our customer, not us, any situation. So we are very confident the demand is very, very strong in Hong Kong from all the installed base of customer.
Daniel Newman -- Chief Financial Officer
Frank, the second part of your question, I can't give a precise answer to, because we're not far enough along for me to be able to quantify how many new remote build-to-suit projects we'll take on. With regard to the customers who we're developing these seven projects for, definitely there will be more projects awarded by them. And then, so now we just identified a couple of other customers, who could be interested in working with us in a similar way. I'd say from seven today, let's take a two-year view, it could be double or triple.
William Wei Huang -- Chief Executive Officer
Yeah.
Frank Louthan -- Raymond James -- Analyst
Okay, great. Thank you very much.
Operator
We have the next question from the line of Robert Gutman from Guggenheim Partners. Please ask your question.
Robert Gutman -- Guggenheim Partners -- Analyst
Yeah, thanks for taking the question. Just a couple of things -- just a little bit about changes in the expansion table. It looks like Beijing was pushed out to next year from the second half of this year. I was just wondering the color on that. Also, the move-in pace that you mentioned, you said it's looking like about 10,000 square meters a quarter. I just want to verify. That looks like a little acceleration from the past couple of quarters. Just wanted to verify that. And just more broadly, there's a lot of talk about -- on a macroeconomic level about China's GDP growth. And I was wondering if we could just tailor that a little more specifically to the digital economy in China rather than expectations for the overall economy whether that's accelerating compared to the rest of the economy?
Daniel Newman -- Chief Financial Officer
Yeah. We're -- so the first question, yeah, you picked up. There's -- sometimes we revise the ready-for-service period for a -- particular projects. Remarkably, I mean, we are up to like 45 projects now. I have been here from number one. And all these are complete on time and within budget, but inevitably, there's going to be sometimes a delay a few months or acceleration a few months. Normally it has got nothing to do with us. It's out of our control. It may be to do with when the power infrastructure is installed or activated. So that's all. It's really nothing to make a fuss about.
Then the move-in pace -- yeah, the move-in pace this year has been slightly slower than last year. Last year it was slightly faster than normal. I know, given the macro, the people are going to associate slightly slower with some slowdown in terms of our customers' business, but we have to be careful about how we analyze this, because there's many factors that can affect the the move-in rates. It can be M&A. It can affect that statistic. How early customers commit, the development timeframe and also within the flexibility which our customer -- which our contracts give to customer, whether they choose to deploy a little bit faster, a little bit slower.
When we review the contracts which are actually in delivery right now. I pointed out there's like 44,000 square meters of commitments, which relate to data centers already in service. So when we reviewed where those contracts are at, in terms of move-in, relative to the minimum commitment in the contract, they're almost all far ahead of the minimum commitment.
That indicates it's a healthy situation. There are some specific reasons sometime why particularly a customer may move in a little faster, a little slower, but nothing we can generalize. I can't generalize and say there was a slowdown or there was an acceleration.
Robert Gutman -- Guggenheim Partners -- Analyst
Thank you. GDP?
Daniel Newman -- Chief Financial Officer
Yeah, the last -- yeah, the second question? [Speech Overlap] Yeah, the last question was about the macro situation.
William Wei Huang -- Chief Executive Officer
Okay. I think everybody talk about China GDP, it goes to 6%. Although the 6% is still very big number, but what I try say -- recently I just read a report, I mean, the NS [Phonetic] report is that, China new economy. That's meaning -- say the digital economy, represent 15% -- a 16% of the China GDP and this growth rate is around the 8.5% to 9%. That means new economy, very clearly, is already being a new engine or driver in China economy.
So we are lucky. We are in this space, not in the traditional space. So, I think this is good for us to get confidence to grow our business in next few years.
Robert Gutman -- Guggenheim Partners -- Analyst
Great, thank you.
Operator
We have the next question from the line of Gokul Hariharan from JP Morgan. Please ask your question.
Gokul Hariharan -- JP Morgan -- Analyst
Yeah, hi. Great results and thanks for taking my questions. My first question is, I think you illustrated that the number of hyperscale labels have gone up significantly over the last two, three years. Now, the top two customers are still roughly about 50% of area committed and occupy multiple data centers, probably about high teens number of data centers each. As we add a lot of these new labels, especially in the last couple of years, could we have a bit of a view two years to three years out? Is that top two customer number of 50% plus area committed going to come down meaningfully when you think about the next two, three years of area committed or revenues? That's my first question.
Daniel Newman -- Chief Financial Officer
Yeah, your observation is correct. The top two customers, if you aggregate them and you look over several quarters, you'll see that -- two years to three years, the absolute amount of new business that we have won from them, has been very well sustained. So there has been no sense of any lessening from them. And we believe it will be sustained, if not higher, going forward. In terms of the overall mix, we don't have any quotas. We don't set any limits, but we do target to add more. We call it high growth accounts. And the progress in that respect has far exceeded our own expectations. Those high-growth accounts, they may not be the kind of companies who place an order every quarter. They may place an order once every 12 months. So once in 18 months.
But if you look at the growth rates of their business, they are capable of doubling or tripling the size of their commitment with us. I would just have to hazard a guess about what the top two would represent in two years or three years timeline. I'd say 40% to 50%, so not far below where it is now, but that's good. It means that we have a very solid underpinning for our business.
Gokul Hariharan -- JP Morgan -- Analyst
Understood. Thank you. Second, could you talk a little bit about, I think you mentioned setting up a separate team to look at the remote site projects and as you mentioned, the seven projects could go to 2X or 3X of that. Could you talk a little bit about how much resources these kind of projects take in form of sourcing, people, SG&A, et cetera? And given that now you have growth on both these tracks, do you feel that there is some degree of bottleneck from a resourcing perspective as we look at the next 12 months to 18 months and how do we think about moving that out?
Daniel Newman -- Chief Financial Officer
Yes. Gokul is asking how we execute in remote build-to-suit projects whether -- how much resource it takes, whether we have the capacity to do that.
William Wei Huang -- Chief Executive Officer
Yeah. Number one, I think in -- not every remote project we'll pick up. I think that we are quite picky, right? Number one fulfill our deliver capabilities, because we are still focused on the Tier 1 market. We always say we focus on our Tier 1 market. Number two I think the -- since the design is very simple, remote project is standard and the operation effort is much less than a multi-tenant data center in Tier 1 market.
So we suggest a lot of the tools to support our operation. So I think it's from the deliberate point of view, it's more simple then a Tier 1 market. So we still believe we can take more project so far.
Gokul Hariharan -- JP Morgan -- Analyst
Okay, got it. If I could ask a very quick question to Dan. Dan, could you talk a little bit about what are you expecting on EBITDA margins in the next couple of quarters. We have seen a pretty strong increase in the last two [Phonetic] quarters. I think you talked about Q4 being in the same range given a lot of new capacity and new move-in, but could you talk a little bit about, are we going to be in the same range over the next two, three quarters, given that we have a lot of new capacity coming on?
Daniel Newman -- Chief Financial Officer
Yes, Gokul. I've been on the low side in terms of my own forecast for margin over this year which is a pleasant surprise. Looking at next year, very roughly, I think we can still realize operating leverage at the data center that will be fully adjusted NOI margin, maybe 1 percentage point, that order of magnitude.
And then at the SG&A level, I think it would also could be about 1%. I mean, it could be more, but we ask ourselves whether we are actually underspending on SG&A, whether that's a bad thing given the way the company has grown. We need to scale up and raise standards and so on and we're doing so. In terms of people, we're hiring and focus on product and...
William Wei Huang -- Chief Executive Officer
And R&D.
Unidentified Speaker
Yeah. So I think one percentage point on SG&A and one percentage point on the data center level would be 2 percentage points over the next year. This is just a very rough indication.
Gokul Hariharan -- JP Morgan -- Analyst
Got it. Thank you.
Operator
We have the next question from the line of Colin McCallum from Credit Suisse. Please ask your question.
Colin McCallum -- Credit Suisse -- Analyst
Yeah. Thanks, and congrats on the strong numbers. I just had one question. You've alluded a couple of times earlier to power quotas and power commitments. I just wanted to check, sometimes we hear market noises about limits on power, constraining growth. And I just would be very surprised if GDS would commit to building a data center in an area, where you tend to already have the full commitment to the power you would need in that data center. I imagine it's an integral part of the design business. So could you just touch on this a little bit. Is this one of those things that the market talks, but in the way that you manage your business in reality, it's not at all a constraint for your business. Or is it something that you just have to do the hard work, getting the arrangement with the relevant scale and enterprises in advance before you sign up the commitments and do the construction? Any color on that would be helpful. Thank you.
Daniel Newman -- Chief Financial Officer
Yes, Colin. I'll go first. Finding the right kind of real estate industrial property in downtown area or land for -- zone for industrial use edge of town which qualifies for data center and is in a location, which is going to work for our customers, that's difficult. But it's not as difficult as then getting sufficient power to be able to operate a data center, utilize the full plot ratio and so on. And to us getting power, there's really two parts to it. One part is having agreement with the power supplier, call it the grid for the supply of the power capacity. That is relatively straightforward, but there can be significant economic issues because we have to bear the cost of power infrastructure and the distance from the site to substation or the number of available substations and so on, kind of fit the economics of the project quite materially.
The second part of, call it obtaining power, is the really critical and difficult part, which is obtaining approval from the government for the use of that power. You can call it carbon project or some other terminology.
In the downtown areas of Beijing, Shenzhen, Shanghai, it's become very restrictive. Projects are still being approved. We've had some success. We've mentioned just recently we received an allocation in downtown Shanghai, but we -- and now I think the other data center service providers realized that in order to obtain power, we needed to go outside further out, find locations where power is available, where the government is willing to allocate it.
And that's why we put so much emphasis in today's presentation on the pipeline and call this, land with power or just developable capacity means, it's land -- real estate and power. That's what makes it very valuable. William do you want to add anything to that?
William Wei Huang -- Chief Executive Officer
What's that?
Daniel Newman -- Chief Financial Officer
Do you want to add anything?
William Wei Huang -- Chief Executive Officer
No, no.
Daniel Newman -- Chief Financial Officer
Okay. William's satisfied with my answer.
Colin McCallum -- Credit Suisse -- Analyst
That's fine. I'm satisfied as well. In terms of just the way you do things and effectively you're saying only we've become real pipeline and land, if you have both, right. And you're not going to put yourself in a situation where you buy land and construct [Indecipherable] is just not something you could do, is it?
Daniel Newman -- Chief Financial Officer
No. Actually, call it as the other way around. When you -- most of the land -- most of the land is being purchased from the government. It starts with an agreement from the government allocate the power. The last thing is the -- actually the purchase of the land. I mean we may be -- we chose our words a little carefully and perhaps they want to pick up the new ones but we mentioned in Jiangsu that we've been allocated power capacity.
We now have to go to the final step of actually purchasing the land and that's a standard process, but the critical part was to obtain the power capacity.
William Wei Huang -- Chief Executive Officer
So, Gokul. I think, I'll add one comment. I mean, we will realize the -- in the Tier 1 market, downtown Tier 1 market, it's very difficult to get the power quota. Even if you get one, as I mentioned, it's not significant, cannot satisfy our customer. So that's why we introduced that we evolved our resource strategy from the focus on the downtown city to the edge of town of the city. So, we are the first mover to get back to this resource in the edge town of the Tier 1 market. So we will maintain this advantage compared with our competitor.
Colin McCallum -- Credit Suisse -- Analyst
Got it. Thank you.
Operator
We have the next question from the line of Jonathan Atkin from RBC Capital Markets. Please ask your question.
Jonathan Atkin -- RBC Capital Markets -- Analyst
Thanks. I had just a quick follow-up on contract renewals, Slide 33. I think that's a new slide for you and given the percentage of commitment that's up for renewal over the next two years. I just wanted to get your assessment of the likelihood of this revenue renewing or whether there would be any kind of pricing adjustments. Thank you.
Daniel Newman -- Chief Financial Officer
John, I included that page for the first time because investors often asked and I think it shows that we have, over the next five years -- we have a relatively small part of our total contract portfolio, which is coming up for renewal. The denominator is our current area committed. We can consider that that is growing at such a high rate. These percentages will actually be -- will be smaller. So, no major growth. I think a lot of these contract renewal is enterprise-related business where now turn rates, as I like to say, have been statistically insignificant. Within these numbers, there are a few contracts which relate to our large Internet and cloud customers, the business that we did at the end of 2015 or in early 2016.
There is a -- not very large deployment, certainly not by today's standards. They were very big deals at the time, but now it's just going to be so-so deals, but they are in data centers, which are very centrally located like in Shenzhen and Beijing, and -- yeah, I think the -- this -- that kind of facility is very scarce. I very much doubt that those large Internet or cloud customers are going to pull back, but frankly if they did it, it would probably be an upside opportunity in terms of being able to release.
William Wei Huang -- Chief Executive Officer
Yeah. As we used to mention, all our current market [Indecipherable] our strategic platform [Indecipherable] are really in our data centers. So it's quite a stickiness for all our customers. So we are confident that renewal, it will be not a issue.
Jonathan Atkin -- RBC Capital Markets -- Analyst
Great. Thank you very much.
Operator
As there are no further questions, I would like to turn the call back over to the Company for closing remarks.
Laura Chen -- Head of Investor Relations
Thank you 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 or the Piacente Group Investor Relations. Thank you all.
Operator
[Operator Closing Remarks]
Duration: 54 minutes
Call participants:
Laura Chen -- Head of Investor Relations
William Wei Huang -- Chief Executive Officer
Daniel Newman -- Chief Financial Officer
Unidentified Speaker
Jonathan Atkin -- RBC Capital Markets -- Analyst
Colby Synesael -- Cowen and Company -- Analyst
Frank Louthan -- Raymond James -- Analyst
Robert Gutman -- Guggenheim Partners -- Analyst
Gokul Hariharan -- JP Morgan -- Analyst
Colin McCallum -- Credit Suisse -- Analyst
