VNET Group Earnings: AI Driving Demand for Chinese Data Centers

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.