VNET Group Earnings: Data Center Utilization Is Rising

VNET’s VNET 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.