Key Takeaways:

• VNET has slashed its plans for new cabinet installations this year by 30% and lowered its revenue outlook by a more modest 2.6%
• The company has hired Citigroup to advise it on a buyout offer led by Hina Group from April this year

By Doug Young

One has to wonder what Samuel Shen, CEO of data center operator VNET Group Inc. (NASDAQ:VNET), was thinking exactly when he called his company “the industry frontrunner” on his latest earnings call last week.

Perhaps he used the characterization because VNET is the most likely to be acquired in the near-term of China’s three major independent data center operators. Or perhaps he was referring to his company’s huge downgrade to its plans for new cabinet installations this year, which the company announced on the earnings call following the release of its latest quarterly results last Tuesday.

There was no mention of whether Hina is still willing to pay the $8 price, since VNET’s shares have moved steadily downward since the announcement and last closed at $4.97 – nearly 40% below the offer price. Whatever happens, VNET certainly seems like the kind of company that could use this kind of buyout, which would typically see the acquirer take major steps to improve the company’s performance before reselling it for a big profit.

The one-day jump in VNET’s shares right after the Hina offer only briefly interrupted a much longer-term decline that has seen the company’s shares lose 45% of their value so far this year. The money-losing company now trades at a lowly price-to-sales (P/S) ratio of 0.8, putting it well behind the 1.35 times for GDS and much higher 5.65 times for Chindata.

That big discount looks quite justified, since VNET trails its two domestic rivals in just about every metric, from revenue growth to cabinet utilization rate. As a result, VNET’s current market cap stands at just $734 million, about a quarter of Chindata’s $2.8 billion, even though VNET’s total revenue is about 70% higher than Chindata’s.

We’ll begin our more detailed look at VNET’s latest report with the downgrade we mentioned earlier, which saw the company lower its planned new cabinet installations by about 30% to between 9,400 and 12,400 cabinets for this year. Earlier in the year it had said it expected to install 14,400 to 17,400 new cabinets in 2022, a reference to the standard unit of cabinets filled with computer servers used in the industry.

“There’s some related to construction slowdowns and then others related to customer demand being pushed back,” CFO Tim Chen said on the earnings call, explaining the sharp scale-back.

Revenue trim

VNET also lowered its revenue guidance for the year, though by a much lower amount of about 2.6%. It said it now expects to generate revenue of about 7.25 billion yuan ($1 billion) to 7.55 billion yuan for the whole year, compared with previous guidance for 7.45 billion yuan to 7.75 billion yuan.

All of this might normally be understandable, since many of VNET’s customers have suffered under China’s strict Covid control measures and are thus putting off investment and expansion plans. The only problem is that neither GDS nor Chindata seem to be giving off similar signals.

Despite VNET’s relatively slow revenue growth and low utilization rate, its operating expenses rose at a faster clip of 22.5% to 321.7 million yuan. As a result, the company’s EBITDA margin fell to a multi-year low of about 22%, as one analyst pointed out on the earnings call and the company confirmed.

Despite its laggard performance, VNET somewhat surprisingly managed to continue attracting a relative A-list of analysts to its investor call, with representatives from Nomura, UBS, JPMorgan, and Credit Suisse all asking questions. Perhaps they’re interested due to the relative lack of choices for foreign investors who want to buy China telecoms infrastructure stocks.