VNET Building a Valuable Data Center Portfolio in China

We expect VNET Group to continue to purchase and build data centers in and around its focus Tier 1 Chinese cities of Shanghai, Beijing, Shenzhen, and Guangzhou. As its network of interconnected data centers grows it can more easily cater to the demand from its key cloud service provider customers allowing them to expand in a flexible way in their key markets. This also enables key enterprise customers to deploy their hybrid clouds in close proximity to the networked nodes of leading public clouds. We also expect VNET to compliment its basic data center offerings with value added services such as managed hosting, cloud, and VPN services. In the near term, demand for its services may be somewhat affected by increased cost focus from large internet company customers, macro conditions, chip shortages, and covid-19 shutdowns. However, we remain confident on the longer-term demand for data centers in China as the country continues to revolutionize its operations in a digital fashion across government and private sectors. 

Despite share price weakness in 2022 and 2023, VNET continues to grow by accessing project debt and using external private equity to fund a large portion of the equity component of new data centers. It has also had some success in attracting customers to its wholesale data center offerings. In late 2023 it issued new shares to Shandong Hi-Speed Holdings that enabled it to repurchase the $600 million of convertible senior notes in February 2024 leaving it withll less than CNY 1 billion per year in loans that mature over 2024, 2025, and 2026.

Business Strategy & Outlook

We give VNET Group a no-moat rating as we believe the bargaining power that its large hyperscale customers will have will offset the switching costs normally associated with the data center industry. We also believe that new capacity that is being deployed in outer suburbs will not enjoy the scarcity of data center space that its data centers near CBDs in large Chinese cities do. Overall, we see little differentiation between data centers except for location. 

Moats in data center businesses under Morningstar’s coverage can be derived from network effect, customer switching costs and cost advantages. We generally rate hyperscale data network businesses (those that lease large spaces to hyperscale tenants on lengthier contracts) as less moaty than retail co-location businesses. This is mainly because wholesale customers have more bargaining power given their size and higher potential to build their own data centers. Most data center companies do both hyperscale and retail, with VNET still likely to have a greater percentage of its revenue from retail customers given its wholesale business is only two to three years old, but its hyperscale business is growing more quickly. The other China-focused data center operator under our coverage, GDS Holdings, is rated no moat but it generates around 85% of its revenue from hyperscale customers, with the remainder from retail. 

Like GDS, VNET's current capacity is focused in or near the CBDs of large cities such as Shanghai and Beijing. It is very hard to get suitable new data center sites in these locations so it will be hard for customers in data centers in these areas in particular, to switch to other providers. However, our moat ratings are forward looking and we see the bulk of VNET’s new data center capacity being deployed in areas at the fringes of the major cities where large customers will likely have more options to switch to other data center suppliers when their contracts expire, or use the threat of moving to keep a lid on returns for VNET. 

We typically see switching costs as competitive advantages for data centers. If data center tenants leave they need to take significant risks to move critical servers and networking equipment and incur expenses, which according to Align Communications, could cost tens of millions of dollars for multimegawatt customers (generally the hyperscalers that use massive amounts of power) or at least $10,000 per rack for smaller customers. Moving also generally takes more than six months and can take more than one year, including planning and execution for larger moves. VNET reports average yearly churn of 3.6%, 5.0% and 3.6% for 2018, 2019 and 2020 for its retail managed service product, respectively, which implies that the average customer stays with VNET for at least 20 years. The data center market has been growing strongly and we believe most of the recontracted data centers have been in inner city areas where, as previously discussed, demand has been high and supply has been low. We expect that customers will likely hold better bargaining power in future contracts that expire in outer city data centers and that churn could therefore increase.

VNET is transparent with its large hyperscale customers with its costs, pricing on a “cost plus reasonable return” basis. Its returns for the hyperscale customers are therefore slightly lower than for the retail component of its business, but still above cost of capital, according to the company. The reason we believe hyperscale data centers are less moaty than retail is that given the longer contracts wholesale customers sign, we believe they are far more discerning and more likely able to justify the costs of moving. We are also aware that hyperscale customers have the ability to replace a presence at VNET for one in a self-owned data center. We also believe VNET is helped in the tenders by its experience and reputation for building quality data centers and its growing network of data centers but do not see this as strong enough to warrant an intangible asset moat. 

The network effect for data centers is generated in major internet exchanges where key internet service providers are connected, particularly for applications where latency is important. In this situation, service providers attract customers to a data center, who then attract more service providers. In China the key areas where network effect is likely present are in the CBD areas of Tier 1 cities where new data center capacity is difficult to build, such as in Shanghai and Beijing. VNET has a significant capacity in service in these areas. It has 25,000 cabinets in service in downtown Beijing and 5,500 cabinets in service in downtown Shanghai, which represents 58% of existing data center capacity in service. However, most of its area under construction and land held for future expansion is at the edge of cities where suitable sites are more plentiful, so we would expect the amount of capacity in prime downtown areas to fall below 50% within the next two to three years. In our view, networks are crucial to establishing a network effect because they make data centers more valuable both to each other and to cloud providers, which then draw their own customers. 

Digital Realty Trust is the only data center company we cover that we think has a cost advantage, and it is mostly due to its scale, which we think gives it negotiating leverage with suppliers and economies of scale. Digital Realty has almost 300 data centers and 27 million net rentable square feet under lease. It claims its scale enables it to get discounts on major expenses such as cooling equipment and power. However, Digital Realty Trust’s data centers are located mostly in the US and Europe. VNET has a similar number of racks in 

service as GDS and both have more racks under service than smaller independent operators such as Chindata and Sinnet. However, the three Chinese telecom companies have much bigger data center networks than VNET. We note that the Chinese telecom companies have a much greater percentage of their data centers located outside the main Tier 1 markets and in many cases are the main data center providers in Tier 2 and Tier 3 cities. To the extent that any scale-based cost advantages are available in this industry, we would expect the Chinese telecom operators to be the main beneficiaries. Note, in addition to the listed data center operators, there are numerous smaller date center owners who own only one or two data centers.

None

Economic Moat

21Vianet Group

VNET Group, Inc. is a holding company, which engages in the provision of carrier-neutral internet data center services. Its services include interconnectivity, colocation or data center managed hosting services, and cloud services. The company was founded by Sheng Chen and Jun Zhang on October 16, 1999 and is headquartered in Beijing, China.

Earnings data Q1 2024

VNET Group reports solid Q3 performance and outlines growth opportunities

VNET Group's Q3 performance showed positive revenue and EBITDA growth, along with a significant reduction in net loss. The company's focus on high-profit business segments and proactive financial strategies position it well for future opportunities. However, challenges related to managing net loss and providing transparency on financial plans need to be addressed to maintain investor confidence.

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BEIJING , April 22, 2024 /PRNewswire/ -- VNET Group, Inc. (Nasdaq: VNET) ("VNET" or the "Company"), a leading carrier- and cloud-neutral internet data center services provider in China, today announced that Mr. Jeff Dong has resigned from his position as the Company's Chief Executive Officer due to personal reasons.

VNET Announces Changes to Leadership Team

VNET Group, Inc. (VNET) Q4 2023 Earnings Call Transcript

BEIJING , March 27, 2024 /PRNewswire/ -- VNET Group, Inc. (Nasdaq: VNET) ("VNET" or the "Company"), a leading carrier- and cloud-neutral internet data center services provider in China, today announced its unaudited financial results for the fourth quarter and full year ended December 31, 2023. "Throughout 2023, we strongly executed our effective dual-core strategy amid the steady economic recovery, ending the year on a solid note," said Jeff Dong, Chief Executive Officer of VNET.

VNET Reports Unaudited Fourth Quarter and Full Year 2023 Financial Results

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BEIJING , March 14, 2024 /PRNewswire/ -- VNET Group, Inc. (Nasdaq: VNET) ("VNET" or the "Company"), a leading carrier- and cloud-neutral internet data center services provider in China, today announced that it will report its unaudited fourth quarter and full year 2023 financial results on Wednesday, March 27, 2024, after the close of U.S. markets. The Company's management will host an earnings conference call at 9:00 PM U.S. Eastern Time on Wednesday, March 27, 2024, or 9:00 AM Beijing Time on Thursday, March 28, 2024.

VNET to Announce Unaudited Fourth Quarter and Full Year 2023 Financial Results on March 27, 2024

NEW YORK, NY / ACCESSWIRE / February 26, 2024 / If you suffered a loss on your VNET Group, Inc. (NASDAQ:VNET) investment and want to learn about a potential recovery under the federal securities laws, follow the link below for more information: https://zlk.com/pslra-1/vnet-group-inc-lawsuit-submission-form?prid=68204&wire=1 or contact Joseph E. Levi, Esq.

VNET LAWSUIT ALERT: Levi & Korsinsky Notifies VNET Group, Inc. Investors of a Class Action Lawsuit and Upcoming Deadline

NEW YORK, NY / ACCESSWIRE / February 26, 2024 / If you suffered a loss on your VNET Group, Inc. (NASDAQ:VNET) investment and want to learn about a potential recovery under the federal securities laws, follow the link below for more information: https://zlk.com/pslra-1/vnet-group-inc-lawsuit-submission-form?prid=68168&wire=1 or contact Joseph E. Levi, Esq.

Levi & Korsinsky Notifies Shareholders of VNET Group, Inc.(VNET) of a Class Action Lawsuit and an Upcoming Deadline

NEW YORK, NY / ACCESSWIRE / February 26, 2024 / If you suffered a loss on your VNET Group, Inc. (NASDAQ:VNET) investment and want to learn about a potential recovery under the federal securities laws, follow the link below for more information: https://zlk.com/pslra-1/vnet-group-inc-lawsuit-submission-form?prid=68145&wire=1 or contact Joseph E. Levi, Esq.

Shareholders that lost money on VNET Group, Inc. (VNET) should contact Levi & Korsinsky about pending Class Action - VNET

NEW YORK, NY / ACCESSWIRE / February 26, 2024 / If you suffered a loss on your VNET Group, Inc. (NASDAQ:VNET) investment and want to learn about a potential recovery under the federal securities laws, follow the link below for more information: https://zlk.com/pslra-1/vnet-group-inc-lawsuit-submission-form?prid=68130&wire=1 or contact Joseph E. Levi, Esq.

Class Action Filed Against VNET Group, Inc. (VNET) Seeking Recovery for Investors - Contact Levi & Korsinsky

NEW YORK--(BUSINESS WIRE)--WHY: Rosen Law Firm, a global investor rights law firm, reminds purchasers of securities of VNET Group, Inc. (NASDAQ: VNET) between April 8, 2022 and February 15, 2023, both dates inclusive (the “Class Period”), of the important February 26, 2024 lead plaintiff deadline. SO WHAT: If you purchased VNET securities during the Class Period you may be entitled to compensation without payment of any out of pocket fees or costs through a contingency fee arrangement. WHAT TO.

VNET DEADLINE TODAY: ROSEN, A LEADING LAW FIRM, Encourages VNET Group, Inc. Investors to Secure Counsel Before Important February 26 Deadline in Securities Class Action – VNET

NEW YORK, NY / ACCESSWIRE / February 24, 2024 / If you suffered a loss on your VNET Group, Inc. (NASDAQ:VNET) investment and want to learn about a potential recovery under the federal securities laws, follow the link below for more information: https://zlk.com/pslra-1/vnet-group-inc-lawsuit-submission-form?prid=68005&wire=1 or contact Joseph E. Levi, Esq.

Levi & Korsinsky Reminds VNET Group, Inc. Investors of the Pending Class Action Lawsuit with a Lead Plaintiff Deadline of February 26, 2024 - VNET

NEW YORK , Feb. 24, 2024 /PRNewswire/ --  WHY: Rosen Law Firm, a global investor rights law firm, reminds purchasers of securities of VNET Group, Inc. (NASDAQ: VNET) between April 8, 2022 and February 15, 2023, both dates inclusive (the "Class Period"), of the important February 26, 2024 lead plaintiff deadline. SO WHAT: If you purchased VNET securities during the Class Period you may be entitled to compensation without payment of any out of pocket fees or costs through a contingency fee arrangement.

VNET DEADLINE NOTICE: ROSEN, TRUSTED INVESTOR COUNSEL, Encourages VNET Group, Inc. Investors with Losses to Secure Counsel Before Important February 26 Deadline in Securities Class Action - VNET

NEW YORK, NY / ACCESSWIRE / February 23, 2024 / If you suffered a loss on your VNET Group, Inc. (NASDAQ:VNET) investment and want to learn about a potential recovery under the federal securities laws, follow the link below for more information: https://zlk.com/pslra-1/vnet-group-inc-lawsuit-submission-form?prid=67943&wire=1 or contact Joseph E. Levi, Esq.

Levi & Korsinsky Reminds Shareholders of a Lead Plaintiff Deadline of February 26, 2024 in VNET Lawsuit - VNET

LOS ANGELES--(BUSINESS WIRE)--The Law Offices of Frank R. Cruz reminds investors of the upcoming February 26, 2024 deadline to file a lead plaintiff motion in the class action filed on behalf of investors who acquired VNET Group, Inc. (“VNET” or the “Company”) (NASDAQ: VNET) securities between April 8, 2022 and February 15, 2023, inclusive (the “Class Period”). If you are a shareholder who suffered a loss, click here to participate. In August 2021, VNET's co-founder, Josh Sheng Chen, and his co.

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NEW YORK, NY / ACCESSWIRE / February 23, 2024 / If you suffered a loss on your VNET Group, Inc. (NASDAQ:VNET) investment and want to learn about a potential recovery under the federal securities laws, follow the link below for more information: https://zlk.com/pslra-1/vnet-group-inc-lawsuit-submission-form?prid=67923&wire=1 or contact Joseph E. Levi, Esq.

Contact Levi & Korsinsky by February 26, 2024 Deadline to Join Class Action Against VNET Group, Inc. (VNET)

PHILADELPHIA , Feb. 23, 2024 /PRNewswire/ -- Berger Montague advises investors that a securities fraud class action lawsuit has been filed against VNET Group, Inc. ("VNET") (NASDAQ: VNET) on behalf of purchasers of VNET securities between April 8, 2022 and February 15, 2023, inclusive (the "Class Period") . CLICK HERE  TO LEARN MORE ABOUT THIS LAWSUIT.

MONDAY DEADLINE: Berger Montague Advises VNET Group, Inc. (NASDAQ: VNET) Investors to Inquire About a Securities Fraud Class Action by February 26, 2024

NEW YORK, NY / ACCESSWIRE / February 22, 2024 / If you suffered a loss on your VNET Group, Inc. (NASDAQ:VNET) investment and want to learn about a potential recovery under the federal securities laws, follow the link below for more information: https://zlk.com/pslra-1/vnet-group-inc-lawsuit-submission-form?prid=67809&wire=1 or contact Joseph E. Levi, Esq.

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NEW YORK, NY / ACCESSWIRE / February 22, 2024 / If you suffered a loss on your VNET Group, Inc. (NASDAQ:VNET) investment and want to learn about a potential recovery under the federal securities laws, follow the link below for more information: https://zlk.com/pslra-1/vnet-group-inc-lawsuit-submission-form?prid=67798&wire=1 or contact Joseph E. Levi, Esq.

Lost Money on VNET Group, Inc. (VNET)? Join Class Action Suit Seeking Recovery - Contact Levi & Korsinsky

NEW YORK, NY / ACCESSWIRE / February 21, 2024 / If you suffered a loss on your VNET Group, Inc. (NASDAQ:VNET) investment and want to learn about a potential recovery under the federal securities laws, follow the link below for more information: https://zlk.com/pslra-1/vnet-group-inc-lawsuit-submission-form?prid=67698&wire=1 or contact Joseph E. Levi, Esq.

Levi & Korsinsky Notifies VNET Group, Inc. Investors of a Class Action Lawsuit and Upcoming Deadline - VNET

If you suffered losses exceeding $50,000 investing in VNET stock or options between April 8, 2022 and February 15, 2023 and would like to discuss your legal rights, call Faruqi & Faruqi partner Josh Wilson directly at 877-247-4292 or 212-983-9330  (Ext. 1310). You may also click here for additional information: www.faruqilaw.com/VNET.

VNET INVESTOR ALERT: Securities Litigation Partner James (Josh) Wilson Encourages Investors Who Suffered Losses Exceeding $50,000 In VNET To Contact Him Directly To Discuss Their Options

BENSALEM, Pa. , Feb. 21, 2024 /PRNewswire/ -- Law Offices of Howard G.

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NEW YORK, NY / ACCESSWIRE / February 21, 2024 / If you suffered a loss on your VNET Group, Inc. (NASDAQ:VNET) investment and want to learn about a potential recovery under the federal securities laws, follow the link below for more information: https://zlk.com/pslra-1/vnet-group-inc-lawsuit-submission-form?prid=67619&wire=1 or contact Joseph E. Levi, Esq.

Lost Money on VNET Group, Inc.(VNET)? Join Class Action Suit Seeking Recovery - Contact Levi & Korsinsky

NEW YORK, NY / ACCESSWIRE / February 20, 2024 / If you suffered a loss on your VNET Group, Inc. (NASDAQ:VNET) investment and want to learn about a potential recovery under the federal securities laws, follow the link below for more information: https://zlk.com/pslra-1/vnet-group-inc-lawsuit-submission-form?prid=67563&wire=1 or contact Joseph E. Levi, Esq.

February 26, 2024 Deadline: Contact Levi & Korsinsky to Join Class Action Suit Against VNET

NEW YORK, NY / ACCESSWIRE / February 20, 2024 / If you suffered a loss on your VNET Group, Inc. (NASDAQ:VNET) investment and want to learn about a potential recovery under the federal securities laws, follow the link below for more information: https://zlk.com/pslra-1/vnet-group-inc-lawsuit-submission-form?prid=67543&wire=1 or contact Joseph E. Levi, Esq.

Shareholders That Lost Money on VNET Group, Inc.(VNET) Should Contact Levi & Korsinsky About Pending Class Action - VNET

NEW YORK, NY / ACCESSWIRE / February 20, 2024 / If you suffered a loss on your VNET Group, Inc. (NASDAQ:VNET) investment and want to learn about a potential recovery under the federal securities laws, follow the link below for more information: https://zlk.com/pslra-1/vnet-group-inc-lawsuit-submission-form?prid=67504&wire=1 or contact Joseph E. Levi, Esq.

VNET Group, Inc. Class Action: Levi & Korsinsky Reminds VNET Investors of the Pending Class Action Lawsuit with a Lead Plaintiff Deadline of February 26, 2024 - VNET

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