IR_Stone
Elevator Pitch
I rate VNET Group, Inc. (NASDAQ:VNET) shares as a Hold. My prior article written on November 16, 2023 reviewed VNET’s results for the third quarter of the previous year.
This update evaluates the company’s Q4 2023 financial performance, its refinancing risk, and fiscal 2024 guidance. VNET’s EBITDA grew at a slower pace in the fourth quarter as compared to prior quarters, but this was not unexpected as the company’s full-year EBITDA was in line with its earlier guidance.
VNET currently has limited risks associated with debt maturity, but its FY 2024 outlook provided by management didn’t throw up any positive surprises. Therefore, I have chosen to stick with a Hold rating for VNET.
VNET Reported Slower Growth For The Fourth Quarter Which Was Expected
On March 27, 2024 after trading hours, VNET published an announcement disclosing its latest quarterly financial metrics.
Top line for VNET rose modestly by +1% YoY from RMB1,881 million in the fourth quarter of 2022 to RMB1,899 million for the most recent quarter. In contrast, the company’s revenue expanded by +8% YoY and +4% YoY in Q4 2022 and Q3 2023, respectively.
VNET’s normalized EBITDA grew by +4% YoY to RMB440 million in Q4 2023. This represented a meaningful slowdown as compared to the company’s Q3 2023 non-GAAP adjusted EBITDA growth of +12% YoY.
In its Q4 2023 results announcement, VNET specifically mentioned about the company’s “strategic focus on high-quality revenues” which might provide an explanation for the moderation in top line and EBITDA recent quarter. This implies that the company is in the midst of optimizing its sales mix, and that could have affected its short term financial performance in a negative way.
In my mid-November 2023 write-up, I cited VNET’s Q3 briefing management commentary indicating that VNET pivoted away from data centers catering to the needs of “traditional retail customers” to concentrate a greater deal on data centers associated with “wholesale and AI-driven demand.” It is reasonable to think that VNET’s efforts to change its revenue mix might have resulted in slower revenue and operating profit growth for the company in the near term during the transition period.
But it is important to highlight that the market should have anticipated that VNET will register a more moderate pace of growth in the latest quarter. This is because VNET’s actual full-year fiscal 2023 EBITDA of RMB2,039 million was largely consistent with the mid-point of its prior FY 2023 EBITDA guidance at RMB2.03 billion.
Refinancing Risk Is No Longer A Concern
I noted in my November 2023 update that “until VNET formally discloses that it has successfully raised sufficient funds to meet the repurchase of its $0.6 billion convertible bond, there will still likely be a valuation discount assigned to VNET’s shares.”
On February 5, 2024, VNET published a press release revealing the “successful completion of the convertible senior notes repurchase.” Earlier on December 28 last year, the company revealed that it received a $299 million “equity investment” from companies “beneficially owned by Shandong Hi-Speed Holdings Group Limited, a Hong Kong Stock Exchange listed company.” This fresh capital inclusion has given VNET the financial capacity to fund the repurchase of its $600 million convertible notes. VNET stressed at its most recent Q4 2023 results briefing that its new shareholder “Speed Holdings has the rich financial resources to bring valuable support to our onshore financing efforts.”
In a nutshell, VNET’s credit profile has become healthier with the removal of the overhang pertaining to the convertible bond buyback. With the $600 million or RMB4,250 million convertible notes successfully bought back, VNET only has a reasonably modest amount of debt due for refinancing in the coming years. Specifically, the company has RMB799 million (15% of the company’s end-2023 cash position), RMB817 million, and RMB751 million of borrowings it needs to refinance by the end of 2024, 2025, and 2026, respectively.
But There Were No Surprises With 2024 EBITDA Guidance
VNET guided for a normalized EBITDA of between RMB2,220 million and RMB2,280 million or a mid-point of RMB2,250 million (implying +10% growth) for full-year fiscal 2024. According to data taken from S&P Capital IQ, the sell side analysts’ consensus FY 2024 non-GAAP adjusted EBITDA projection was RMB2,242 million before the company released its Q4 2023 results.
In other words, VNET’s FY 2024 EBITDA guidance was consistent with what the market had predicted.
At the company’s Q4 2023 earnings call, VNET noted that the company has set its guidance for the current year taking into account its “stable retail IDC (Internet Data Center) business.” The company’s Monthly Recurring Revenues or MRR on a per-cabinet basis for its retail IDC business were largely unchanged for Q4 2023 (RMB9,495) as compared to Q3 2023 (RMB9,477). This particular data point provides support for VNET’s assertion that its retail IDC business is “stable” and indicates that it is more likely that the company can meet its FY 2024 EBITDA guidance.
However, it might be tough for VNET to deliver a better than expected EBITDA this year that can surprise investors. According to a February 2024 Cushman & Wakefield (CWK) research report titled “Data Centers In Greater China: 3 Points To Process In 2024”, the Greater China data center market’s Q4 2023 vacancy rate was a significant 14%. It is realistic to assume that the Chinese data center industry’s demand-supply dynamics are not particularly favorable taking into consideration the elevated vacancy rate.
Final Thoughts
I see no compelling reasons to revise my existing rating for VNET. The stock’s refinancing overhang has been removed, which is a positive development. But the company’s FY 2024 EBITDA is less likely to surprise on the upside considering the reasonably high vacancy rate for the Chinese data center industry as a whole.
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