Company Reports

VNET’s second-quarter results were slightly ahead of our expectations with revenue increasing 9.4% and very strong orders booked for the wholesale internet data center, or IDC, business. As also seen in the result from competitor GDS, the Chinese IDC industry seems to be recovering from low demand over the previous few years with most of the demand recovery attributed to artificial intelligence. VNET’s IDC revenue increased by 12.1% in the second quarter following a 5.2% increase in the first quarter. Non-IDC revenue, mainly generated by cloud and VPN services, increased by 4%. IDC growth was again driven by the newer wholesale business with wholesale revenue increasing by 81% to CNY 402 million, while retail IDC revenue decreased by 3.2% to CNY 965 million. Second-quarter adjusted EBITDA increased by 7.3% following only 2.5% growth in the first quarter with that first-quarter growth rate negatively impacted by agency service fees related to debt repayment and also stock expenses for employees. Guidance for 2024 is midpoint revenue growth of 6.6% and adjusted EBITDA growth of 10.4%, which remain unchanged. However, due to very strong orders and new projects under construction, the 2024 capital expenditure guidance has increased from a midpoint of CNY 3.95 billion to a midpoint of CNY 5.25 billion. We retain our fair value estimate for VNET at USD 3.50.

We expect VNET Group to continue to purchase and build data centers in and around its focus Tier 1 Chinese cities of Shanghai, Beijing, Shenzhen, and Guangzhou. As its network of interconnected data centers grows it can more easily cater to the demand from its key cloud service provider customers allowing them to expand in a flexible way in their key markets. This also enables key enterprise customers to deploy their hybrid clouds in close proximity to the networked nodes of leading public clouds. We also expect VNET to compliment its basic data center offerings with value added services such as managed hosting, cloud, and VPN services. In the near term, demand for its services may be somewhat affected by increased cost focus from large internet company customers, macro conditions, chip shortages, and covid-19 shutdowns. However, we remain confident on the longer-term demand for data centers in China as the country continues to revolutionize its operations in a digital fashion across government and private sectors.

VNET’s first-quarter results were in line with our expectations and management’s unchanged full-year guidance. First-quarter revenue increased 5.1% year on year, with adjusted EBITDA up 2.5%. Guidance for 2024 is midpoint revenue growth of 6.6% and adjusted EBITDA growth of 10.4%. First-quarter EBITDA was negatively affected by agency service fees related to debt repayment and also stock expenses for employees. We retain our forecasts, which are in line with management guidance for 2024 and our fair value estimate for VNET at $3.50. Management provided a breakdown of the three main revenue streams for the first time, with the retail internet data center business contributing 49% of the total revenue; the non-IDC business, including cloud services and virtual private networks, contributing 32%; and the wholesale IDC business contributing 19% of revenue. While it is the smallest, the wholesale business dominates the growth, with its revenue increasing 59% year on year to CNY 361 million, non-IDC revenue rising by 5% to CNY 995 million, and retail IDC revenue declining 7% year on year to CNY 924 million. With the company expecting to expand its wholesale capacity by 30%-40% in 2024, we would expect wholesale IDC to remain the main growth driver in the near term.

We expect VNET Group to continue to purchase and build data centers in and around its focus Tier 1 Chinese cities of Shanghai, Beijing, Shenzhen, and Guangzhou. As its network of interconnected data centers grows it can more easily cater to the demand from its key cloud service provider customers allowing them to expand in a flexible way in their key markets. This also enables key enterprise customers to deploy their hybrid clouds in close proximity to the networked nodes of leading public clouds. We also expect VNET to compliment its basic data center offerings with value added services such as managed hosting, cloud, and VPN services. In the near term, demand for its services may be somewhat affected by increased cost focus from large internet company customers, macro conditions, chip shortages, and covid-19 shutdowns. However, we remain confident on the longer-term demand for data centers in China as the country continues to revolutionize its operations in a digital fashion across government and private sectors.

VNET’s fourth-quarter results were again below our expectations, with revenue increasing only 0.9% and adjusted EBITDA up only 3.8% from the previous year. Guidance for 2024 is more positive, with the company expecting midpoint revenue growth of 6.6% and adjusted EBITDA growth of 10.4%. The company highlighted a 15 MW new wholesale contract signed in first-quarter 2024 with a cloud service provider in the Yangtze River Delta and indicated that it is seeing increasing demand from customers using data center capacity for artificial intelligence. We reduced our fair value estimate for VNET to $3.50 from $4.00 due mainly to the $299 million capital raised from Shandong Hi-Speed Holdings Group at a price of $2.75 at the end of 2023. Despite reducing our fair value estimate, we note that this capital raise allowed the company to repurchase the $600 million of convertible senior notes in February this year. This left it with less than CNY 1 billion per year in loans that mature over 2024, 2025, and 2026. There is also the possibility of synergies between Shandong Hi-Speed Holdings and VNET in developing renewable energy projects in northern China and in accessing domestic funding for VNET’s future expansion. VNET is guiding 2024 capital expenditures of between CNY 3.7 billion and CNY 4.2 billion, which is an increase in the CNY 3.6 billion spent in 2023, as it plans to deliver between 100 MW and 120 MW of capacity, with around 70% of that being wholesale.

We expect VNET Group to continue to purchase and build data centers in and around its focus Tier 1 Chinese cities of Shanghai, Beijing, Shenzhen, and Guangzhou. As its network of interconnected data centers grows it can more easily cater to the demand from its key cloud service provider customers allowing them to expand in a flexible way in their key markets. This also enables key enterprise customers to deploy their hybrid clouds in close proximity to the networked nodes of leading public clouds. We also expect VNET to compliment its basic data center offerings with value added services such as managed hosting, cloud, and VPN services. In the near term, demand for its services may be somewhat affected by increased cost focus from large internet company customers, macro conditions, chip shortages, and covid-19 shutdowns. However, we remain confident on the longer-term demand for data centers in China as the country continues to revolutionize its operations in a digital fashion across government and private sectors.

We expect VNET Group to continue to purchase and build data centers in and around its focus Tier 1 Chinese cities of Shanghai, Beijing, Shenzhen, and Guangzhou. As its network of interconnected data centers grows it can more easily cater to the demand from its key cloud service provider customers allowing them to expand in a flexible way in their key markets. This also enables key enterprise customers to deploy their hybrid clouds in close proximity to the networked nodes of leading public clouds. We also expect VNET to compliment its basic data center offerings with value added services such as managed hosting, cloud, and VPN services. In the near term, demand for its services may be somewhat affected by increased cost focus from large internet company customers, macro conditions, chip shortages, and COVID-19 shutdowns. However, we remain confident on the longer-term demand for data centers in China as the country continues to revolutionize its operations in a digital fashion across government and private sectors.

VNET’s third-quarter results were below our expectations and it reduced its full-year guidance to midpoint revenue growth of 6.1% and adjusted EBITDA growth of 8.4%, from previous midpoint growth of 9.6% and 11%, respectively, due to slower demand and some customer mix reshuffling. Third-quarter revenue for VNET was up 4.0%, with adjusted EBITDA up 11.6%, both year on year. There didn't appear to be any new large contracts given the highlighted expansion of the 115-megawatt wholesale contract in the Yangtze River Delta by a further 45 MW, which was signed in August and mentioned during second-quarter results. Our fair value estimate for VNET is reduced to USD 4.08 from USD 8.40 due to reduced forecasts, which lower our operating profit forecasts by around 30% per year, an increase in the company's weighted average cost of capital to 8.7% from 7.1% previously to take into account credit risks around a USD 600 million payment that may be required in February 2024 related to a convertible bond, and an increase in expected capital expenditure this year to CNY 3.8 billion from our previous estimate of CNY 3.4 billion. We also increase our Morningstar Uncertainty Rating for VNET to Very High, from High previously, given the funding uncertainty over the convertible bond.

VNET’s second-quarter results were broadly in line with our expectations and it retained its full-year guidance, implying midpoint revenue growth of 9.6% and adjusted EBITDA growth of 11%. Second-quarter revenue for VNET was up 5.6%, with adjusted EBITDA up 9.9%, both year on year, better than listed competitor GDS, which reported underlying revenue growth of 3.9% and adjusted EBITDA growth of 7.5% on the same basis. The biggest news was the expansion of the previously announced 115 MW wholesale contract in the Yangtze River Delta by a further 45 MW. The project is to be delivered over the next three years, with first capacity to be delivered in late 2023. Our fair value estimate is reduced to $8.40 from $8.50 due to Chinese yuan weakness. Given the share price fall since early February, we have a 5-star recommendation on VNET, with the stock now trading on a price/book ratio of around 0.5 times. Despite its no-moat rating, we believe a P/B of over 1 time is justified, given the company does not revalue its portfolio and many of its data centers have likely increased in value since they were built, particularly those in downtown areas of major cities. Although VNET shares have traded below P/B of 0.4 for brief periods in 2023, they traded at over 7 times P/B at the peak and traded at over 1 time from 2018 until early February 2022.

We expect VNET to continue to purchase and build data centers in and around its focus Tier 1 Chinese cities of Shanghai, Beijing, Shenzhen, and Guangzhou. As its network of interconnected data centers grows it can more easily cater to the demand from its key cloud service provider customers allowing them to expand in a flexible way in their key markets. This also enables key enterprise customers to deploy their hybrid clouds in close proximity to the networked nodes of leading public clouds. We also expect VNET to compliment its basic data center offerings with value added services such as managed hosting, cloud, and VPN services. In the near term, demand for its services may be somewhat affected by increased cost focus from large internet company customers, macro conditions, chip shortages, and COVID-19 shutdowns. However, we remain confident on the longer-term demand for data centers in China as the country continues to revolutionize its operations in a digital fashion across government and private sectors.

While no-moat VNET Group’s first-quarter results were slightly better than expected, management explained that there were several seasonal and one-off factors in the first quarter and it retained its full-year guidance implying midpoint revenue growth of 9.6% and adjusted EBITDA growth of 11%. First-quarter revenue for VNET of CNY 1.8 billion was up 9.7% with adjusted EBITDA up 9.9%, which was an improvement on fourth-quarter 2022, growing 7.7% year on year with adjusted fourth-quarter 2022 EBITDA declining by 8.3%. The wholesale order with a new wholesale customer outlined at the full-year result was confirmed at 115 megawatts to be delivered over the next three years with capacity to be first delivered in late 2023. We reduce our fair value estimate to USD 8.50 from USD 8.60 per share previously due to currency movements. Given the share price fall since early February, we have a 5-star recommendation for VNET with the stock now trading on a price/book ratio of less than 0.5 times. We believe a price/book of over 1 times is justified given the company does not revalue its portfolio and many of its data centres have likely increased in value since they were built, particularly those in downtown areas of major cities. VNET shares traded at over 7 times price/book at the peak and traded at over 1 times from mid-2018 until early February 2022.

We expect VNET to continue to purchase and build data centers in and around its focus Tier 1 Chinese cities of Shanghai, Beijing, Shenzhen, and Guangzhou. As its network of interconnected data centers grows it can more easily cater to the demand from its key cloud service provider customers allowing them to expand in a flexible way in their key markets. This also enables key enterprise customers to deploy their hybrid clouds in close proximity to the networked nodes of leading public clouds. We also expect VNET to compliment its basic data center offerings with value added services such as managed hosting, cloud, and VPN services. In the near term, demand for its services may be somewhat affected by increased cost focus from large internet company customers, macro conditions, chip shortages, and COVID-19 shutdowns. However, we remain confident on the longer-term demand for data centers in China as the country continues to revolutionize its operations in a digital fashion across government and private sectors.

We expect VNET to continue to purchase and build data centers in and around its focus Tier 1 Chinese cities of Shanghai, Beijing, Shenzhen, and Guangzhou. As its network of interconnected data centers grows it can more easily cater to the demand from its key cloud service provider customers allowing them to expand in a flexible way in their key markets. This also enables key enterprise customers to deploy their hybrid clouds in close proximity to the networked nodes of leading public clouds. We also expect VNET to compliment its basic data center offerings with value added services such as managed hosting, cloud, and VPN services. In the near term, demand for its services may be somewhat affected by increased cost focus from large internet company customers, macro conditions, chip shortages, and COVID-19 shutdowns. However, we remain confident on the longer-term demand for data centers in China as the country continues to revolutionize its operations in a digital fashion across government and private sectors.

No-moat VNET’s 2023 guidance was slightly below our expectations with implied midpoint revenue growth of 9.6% and adjusted EBITDA growth of 11%. Despite this, VNET’s guidance is slightly better than competitor, GDS with midpoint 2023 revenue growth of 8.7% and adjusted EBITDA growth of 6.2%. 2022 revenue for VNET of CNY 7.07 billion was up 14.1%, with adjusted EBITDA up 6.8%. Fourth-quarter revenue was up 7.7% year on year with adjusted EBITDA declining by 8.3%. Note, the company did announce some large customer order wins with a 33 megawatt, or MW, wholesale contract with an existing customer signed in the fourth quarter bringing total wholesale capacity in service and under memorandum of understanding, or MOU, to 316 MW by the end of 2022. More impressively, a further wholesale MOU order of over 100 MW with a new wholesale customer was signed in first quarter 2023, to be delivered over the next three years. This contract is expected to begin contributing to revenue in late 2023 or early 2024. We keep our fair value estimate at USD 8.60 with a slight downgrade in 2023 forecasts offset by the new contract’s positive impact on financials from 2024 onward.

No-moat VNET’s third-quarter 2022 result was respectable and management maintained its 2022 financial guidance, but slightly lowered its cabinet delivery guidance for the retail business. Third-quarter revenue increased 16.3% year on year with adjusted EBITDA up 1.1% year on year. Revenue growth was slightly higher than GDS’ 14.9%, but GDS’ adjusted EBITDA growth was higher at 10.9%.

We expect VNET to continue to purchase and build data centers in and around its focus Tier 1 Chinese cities of Shanghai, Beijing, Shenzhen, and Guangzhou. As its network of interconnected data centers grows it can more easily cater to the demand from its key cloud service provider customers allowing them to expand in a flexible way in their key markets. This also enables key enterprise customers to deploy their hybrid clouds in close proximity to the networked nodes of leading public clouds. We also expect VNET to compliment its basic data center offerings with value added services such as managed hosting, cloud and VPN services. In the near term, demand for its services may be somewhat affected by increased cost focus from large internet company customers, macro conditions, chip shortages, and COVID-19 shutdowns. However, we remain confident on the longer-term demand for data centers in China as the country continues to revolutionize its operations in a digital fashion across government and private sectors.

We expect VNET to continue to purchase and build data centers in and around its focus Tier 1 Chinese cities of Shanghai, Beijing, Shenzhen, and Guangzhou. As its network of interconnected data centers grows it can more easily cater to the demand from its key cloud service provider customers allowing them to expand in a flexible way in their key markets. This also enables key enterprise customers to deploy their hybrid clouds in close proximity to the networked nodes of leading public clouds. We also expect VNET to compliment its basic data center offerings with value added services such as managed hosting, cloud and VPN services. In the near term, demand for its services may be somewhat affected by increased cost focus from large internet company customers, macro conditions, chip shortages, and COVID-19 shutdowns. However, we remain confident on the longer-term demand for data centers in China as the country continues to revolutionize its operations in a digital fashion across government and private sectors.

No-moat VNET Group’s second-quarter 2022 result was respectable, but management lowered 2022 guidance given the impact of coronavirus lockdowns on data center buildouts and customer move-in rates, and economic uncertainty. Second-quarter revenue increased 15.2% year on year with adjusted EBITDA up 14.5% year on year. However, management reduced its full-year 2022 guidance to a midpoint of 19.5% revenue growth and 6.9% adjusted EBITDA growth from 22.8% revenue growth and adjusted EBITDA growth of 16.9% previously. This new guidance implies second-half midpoint year-on-year revenue growth of 21.9%, but EBITDA decline of 3.5% with second-half adjusted EBITDA margin expected to decline to 21.9%—well below the 28.3% reported in 2021 and 29.5% reported in first-half 2022. We lower our fair value estimate to USD 8.80 per share from USD 9.55 per share previously. In our view the stock is undervalued, trading at a price/book value of around 0.7 times with shares having traded at over 7 times price/book at the peak and having traded at over 1 times from mid-2018 until early February 2022. We believe a price/book of over 1 times is justified given the company does not revalue its portfolio and many of its data centers have likely increased in value since they were built, particularly those in downtown areas of major cities.

No-moat VNET’s first-quarter 2022 result was broadly in line with its unchanged 2022 guidance. First-quarter revenue increased 18.6% year on year with adjusted EBITDA up 21.9% year on year. Second-quarter guidance of midteens revenue growth and adjusted EBITDA growth of low-single digits was weaker. However, management stuck with its full-year 2022 guidance of around 22.8% revenue growth and the adjusted EBITDA growth of 16.9%. Hitting the full-year target would require around 20% year-on-year growth in adjusted EBITDA in the second half of 2022 which seems reasonable to us given management’s expectations of a rebound in demand after lockdown restrictions expire. No comments were provided on the unsolicited preliminary nonbinding proposal letter received from the Hina Group and Industrial Bank in April 2022 proposing to acquire all outstanding ordinary shares for USD 8 per share.

We expect VNET to continue to purchase and build data centers in and around its focus Tier 1 Chinese cities of Shanghai, Beijing, Shenzhen and Guangzhou. As its network of interconnected data centers grows it can more easily cater to the demand from its key cloud service provider customers allowing them to expand in a flexible way in their key markets. This also enables key enterprise customers to deploy their hybrid clouds in close proximity to the networked nodes of leading public clouds. We also expect VNET to compliment its basic data center offerings with value added services such as managed hosting, cloud and VPN services. In the near term, demand for its services may be somewhat affected by increased cost focus from large internet company customers, macro conditions, chip shortages, and COVID-19 shutdowns. However, we remain confident on the longer-term demand for data centers in China as the country continues to revolutionize its operations in a digital fashion across both government and private sectors.