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Elevator Pitch
I rate VNET Group, Inc.’s (NASDAQ:VNET) shares as a Hold. In the company’s November 2022 investor presentation, VNET Group refers to itself as a “data center services provider” boasting an “11% market share of China’s carrier-neutral data center services market.” VNET’s shares have been listed on Nasdaq since April 2021.
I am of the opinion that investors should pay close attention to VNET Group’s joint venture with Chinese state-owned enterprise Changzhou Hi-tech and the stock’s current valuations. A review of peer valuations and privatization offers for VNET imply that the company’s shares are inexpensive. Separately, while the Chinese data center market is in a state of oversupply, VNET is well-positioned to capitalize on new growth opportunities in the industry thanks to its alliance with an SOE.
My analysis leads me to the conclusion that the current risk-reward for VNET is sufficiently appealing to justify a Buy rating for the stock.
VNET’s Partnership With State-Owned Enterprise In The Limelight
VNET Group specifically mentioned about the creation of a new joint venture or JV with Changzhou Hi-tech Jinlong Holdings at its most recent Q3 2022 earnings briefing on November 23, 2022. Changzhou Hi-tech Jinlong Holdings’ parent is a Chinese state-owned enterprise (or SOE) known as Changzhou Hi-tech Group Co Ltd which operates as a conglomerate with business interests in multiple industries. VNET owns a 35% equity interest in the JV, which is created with the purpose of buying internet data centers in China.
There are two reasons why I have a favorable view of VNET Group’s recent alliance with Changzhou Hi-tech Jinlong.
The first reason is that the JV offers VNET Group another means of financing and supporting its future expansion plans. VNET had stressed at its third quarter results call that it “will try to leverage the Changzhou platform (JV with Changzhou Hi-tech Jinlong) and to expand our AUM (Assets Under Management) and our exposures going forward.” As it stands now, VNET Group has committed RMB700 million (35% stake) to establish this RMB2 billion JV. VNET’s gross debt-to-EBITDA as of end-Q3 2022 is reasonably high at 5.4 times. Also, there is a limit on the number of acquisitions that VNET can undertake on its own. This explains why VNET’s partnership and JV with Changzhou Hi-tech Jinlong is such an important growth driver for the company.
The second reason is that VNET’s partnership with an SOE like Changzhou Hi-tech Group puts the company in a much better position to secure new business deals with other SOEs. All else equal, if SOEs had to choose between VNET Group and another competitor that isn’t affiliated with other SOEs in any way for cloud services, it is very likely that VNET will have a significant edge over its rivals. This is because data security is a key consideration for SOEs when they seek cloud services providers, and SOEs will naturally prefer to do business with companies (like VNET) which are “trusted” by their other SOE peers.
VNET’s Valuation Are Undemanding Considering Peer Valuations And Buyout Offers
VNET currently trades at a discount to its Chinese and international data center peers based on the forward EV/EBITDA valuation metric as seen in the peer valuation comparison table below.
VNET Group’s Peer Valuation Comparison
| Stock | Consensus Forward Next Twelve Months’ EV/EBITDA Valuation Multiple |
| VNET Group | 8.5 |
| Chindata Group Holdings Limited (CD) | 8.7 |
| GDS Holdings Limited (GDS) | 14.6 |
| Sunevision Holdings Ltd. (OTC:SVNHF) [1686:HK] | 16.9 |
| Digital Realty Trust, Inc.(DLR) | 19.5 |
| Equinix, Inc.(EQIX) | 22.5 |
Source: S&P Capital IQ
Also, two privatization offers are effectively placing a floor on VNET Group’s stock price and valuations.
Earlier on September 13, 2022, VNET published a press release disclosing that it “received a preliminary non-binding proposal” from its executive chairman to buy out the company at a consideration of “$8.20 in cash per American depositary share” or ADS.
VNET confirmed in a subsequent announcement on October 14, 2022 that “no decisions have been made” relating to the privatization offer yet. Notably, an October 18, 2022 Seeking Alpha News article cited a Bloomberg report which claimed that certain “private equity firms are evaluating making offers for” VNET either “on their own” or as part of “a consortium with other potential bidders.”
Prior to that, a consortium comprising of “The Hina Group and Industrial Bank Co., Ltd., Shanghai Branch” made an offer to take over VNET Group at a price of $8.00 per ADS in April last year.
It is worthy of note that VNET’s last traded stock price of $6.16 as of January 12, 2023 is -25% below the executive chairman’s privatization offer price ($8.20).
In my January 9, 2023 write-up for GDS, VNET’s peer, I highlighted relevant industry data and news reports which indicate that China’s internet data center market is suffering from oversupply. This might explain why VNET is currently trading at a price that is lower than what insiders (the executive chairman) and astute buyers (other corporates and private equity firms) are willing to pay for.
But I think that VNET’s valuations won’t be depressed indefinitely. One catalyst is a successful privatization. The other catalyst will be a faster pace of growth for the company supported by its alliance with the Chinese SOE Changzhou Hi-tech.
Bottom Line
My investment rating for VNET Group’s stock is a Buy. Upside for the company’s shares can be realized either via a successful privatization, or a narrowing of the gap in valuations between the stock and its peers over time.
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