VNET Group Earnings: Fair Value Estimate Down, Mainly on Capital Raise

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.