Elevator Pitch
I have a Hold rating for VNET Group, Inc. (NASDAQ:VNET) shares. I have outlined the read-throughs from the privatization of VNET’s peer Chindata Group Holdings Limited (CD) with my earlier update published on June 12, 2023.
The focus of my current write-up is VNET”s recently announced Q2 2023 financial results and the recent developments pertaining to the company. I am unimpressed with VNET’s recent quarterly performance and FY 2023 guidance. But I am positive on the founder’s intention to buy shares in VNET, and the latest changes to the company’s management team. As such, I have a Neutral opinion of VNET and that translates into a Hold rating.
Unimpressive 2023 Guidance
VNET stuck to its prior fiscal 2023 guidance after reporting a mixed bag of results for the second quarter of this year.
Revenue for VNET increased by +6% YoY from RMB1,725 million for Q2 2022 to RMB1,822 million in Q2 2023, and this represented a slower pace of top line expansion for the company as compared to its Q1 2023 sales growth of +10% YoY. To make things worse, VNET’s actual Q2 2023 top line fell short of analysts’ consensus forecast of RMB1,880 million by -3% as per S&P Capital IQ data.
On the flip side, VNET’s second quarter normalized EBITDA of RMB556 million turned out to be +8% higher than the market’s consensus estimate of RMB494 million (source: S&P Capital IQ). Moreover, VNET achieved a +10% YoY EBITDA growth for both the first and second quarters of the current fiscal year.
Taking into account the company’s mixed financial performance for Q2 2023, it isn’t a surprise that VNET has chosen to leave its existing full-year guidance unchanged. Notably, VNET emphasized at its Q2 2023 results call on August 24 that the company benefited from “one-offs on the positive side” for 1H 2023, which “will not be repeated” in 2H 2023. At the company’s first quarter earnings briefing in late May, VNET highlighted that these “one-offs” included positive “seasonality” effects and “certain nonrecurring revenues.”
Based on the mid-point of its guidance, VNET sees its top line and non-GAAP adjusted EBITDA increasing by +10% and +11% to RMB7.75 billion and RMB2,075 million, respectively for FY 2023 in YoY terms. As per data obtained from S&P Capital IQ, VNET used to achieve much better revenue and EBITDA CAGRs of +20% and +19%, respectively for the FY 2018-2022 time frame. Therefore, VNET’s current fiscal 2023 guidance is unimpressive in my opinion. This also explains why VNET’s share price declined by roughly -2% on August 24, a day after the company announced its quarterly results and full-year guidance.
Positive Corporate Developments
While VNET’s results and outlook weren’t as good as what I hoped for, I have a positive view of recent developments relating to the company.
On August 1, 2023, VNET issued a filing disclosing that the company’s founder Mr. Sheng Chen “intends to make further equity investment” in the stock.
Details regarding the quantum and pricing of the founder’s proposed investment have yet to be revealed. Sheng Chen currently has a 3.4% stake in the company, so his plans to have more “skin in the game” should be perceived as a positive signal reflecting his optimism regarding VNET’s prospects.
Earlier on July 28, 2023, the company announced changes to its management team. Specifically, Mr. Tim Chen has been redesignated from CFO to Chief Strategy Officer, and Mr. Qiyu Wang, who was formerly Vice President of Finance, became the new CFO.
In VNET’s July 28 announcement, it is mentioned that one of the Chief Strategy Officer’s key priorities will be the “exploration of hyperscale data center opportunities in the Asia Pacific region, to help drive the company’s growth.” Separately, VNET also noted in the July 28 announcement that the new CFO has “extensive knowledge of onshore markets, including RMB funds.”
VNET’s recent management changes appear to be targeted at tackling two major challenges for the company.
One key challenge is the need to expand outside of China in view of the slower growth for the domestic data center business. Tim Chen will most probably be working hard at growing VNET’s revenue and earnings contribution from foreign or non-China Asian markets in his new role as Chief Strategy Officer.
On the other hand, the CFO, Qiyu Wang, has to prepare for the potential refinancing of the company’s $600 million convertible bond by leveraging on his expertise relating to the onshore financing market as mentioned above. In the company’s FY 2022 20-F filing, VNET highlighted that “holders of the 2026 Convertible Notes (with a principal amount of US$600 million) have the right to require the Company to repurchase for cash all (or part) of the 2026 Convertible Notes” after February next year.
Closing Thoughts
There is a mix of positives and negatives for VNET which points to a Hold rating for the stock. The company’s founder is interested in increasing his stake in VNET, and VNET has made changes to its management team to deal with specific challenges for the company. However, VNET’s Q2 2023 financial results and its full-year financial outlook aren’t encouraging.
Read the full article here