VNET Slashes Expansion Plans as Private Equity Buyout Remains in Play

VNET Slashes Expansion Plans as Private Equity Buyout Remains in Play

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. 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.

Whatever Shen meant, he certainly wasn’t referring to his company’s latest performance, which once again was the worst of China’s three independent data center operators, the other two being GDS GDS and Chindata CD. There’s really nothing too surprising in the latest results, which continue to show why VNET is investors’ least favorite among the three private data center operators.

The lone exception to that lack of interest is coming from a consortium led by Hina Group, a Chinese private equity company that in April made an unsolicited offer to buy all of VNET’s American depositary shares (ADSs) for $8 apiece. VNET gave a brief update on that offer in its latest results, indicating the deal is still alive, saying it has hired Citigroup to advise it on the offer as well as “any alternative strategic option that the company may pursue.”

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.

VNET’s revenue grew 15.2% in the second quarter to 1.72 billion yuan, which was well behind the 24% and 51% revenue growth reported by GDS and Chindata, respectively. Its cabinet utilization rate, another important industry metric, also fell to 55.1% during the quarter from an already-low 58.2% a year earlier. That means that roughly half of VNET’s data center capacity is currently sitting idle, presumably due to lack of customers. By comparison, the two rivals both reported rises in their utilization rates, with GDS’ now at 68.5% and Chindata at 78%.

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.

On the bottom line, VNET reported a net loss of 377.2 million yuan, though much of that appears related to 319.9 million yuan in foreign exchange losses, most likely due to the weakening yuan. The company is still quite cash rich with 3.6 billion yuan in its coffers, which may be a key attraction for Hina. After all, Hina’s original $8 per share price translates to a total purchase price of about $1.2 billion, meaning the cash in VNET’s coffers is equal to roughly half of the purchase price.

We previously said that VNET may be looking for other buyers to take over the company, and Bloomberg reported in late July that South Korea’s MBK Partners was also considering a bid. But if any bidding war is shaping up, it certainly isn’t reflected in the stock price. Accordingly, we suspect that Hina is still probably the only bidder, and that shareholders could pressure VNET to accept the offer due to lack of better alternatives for improving the company’s performance anytime soon.

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