On Wednesday, VNET Group Inc (NASDAQ: VNET) received an upgrade from HSBC, shifting the stock's rating from Hold to Buy. The firm also increased its price target for the company's shares to $5.20. The upgrade comes as VNET is seen to benefit from a consolidating supply in mainland China, where two of its key competitors, Chindata and GDS, are changing their strategic focus. This shift allows VNET to primarily compete with regional companies such as Centrin Data and ZDATA.
The analyst from HSBC points out that the entry barriers for AI-driven data centers (DCs) are substantial, mainly due to the need for significant IT capacity and the ability to deliver services rapidly, within a timeframe of 6 to 12 months. It is estimated that an equity capital of approximately 500-600 million Chinese renminbi is necessary to support a data center with a capacity of over 100 megawatts, assuming that 70-80% of the financing comes from debt.
VNET's valuation approach has also been revised by HSBC. The company is now valued at a 46% discount to the target enterprise value to adjusted EBITDA (EV/adjusted EBITDA) multiple of GDS, which has been averaged over the past six months. This results in a 7.7x target EV/adjusted EBITDA multiple for the year 2025, reflecting expectations for improving demand for VNET's services.
Previously, VNET was valued by HSBC using a 29% discount to its estimated 2024 book value (BV). The new price target of $5.20 marks a significant increase from the prior target of $2.09, signaling a more optimistic outlook for the company's financial performance going forward.
In other recent news, VNET Group Inc. has reported robust second-quarter results for 2024, with a 9% year-over-year revenue increase to RMB 1.99 billion, surpassing both consensus and BofA estimates. The company's adjusted EBITDA also rose by 7% year-over-year to RMB 574 million, exceeding expectations. VNET Group's wholesale business revenues saw a significant surge of 81% year-over-year to RMB 402 million, fueled by strong demand, particularly from the artificial intelligence sector.
Citi and BofA Securities have both expressed positive outlooks for the company, with Citi initiating a Buy rating and a price target of $4.00, and BofA Securities increasing its price target to $3.30 from the previous $2.80 while maintaining a Buy rating on the stock. These positive assessments are based on the company's promising growth and expansion plans, including the recent securing of a 235MW order in Ulanqab and plans for an additional 1.2GW capacity in the same region.
These developments come alongside VNET Group's raised full-year CapEx guidance to between RMB 5 billion and RMB 5.5 billion, and projections of delivering between 100-140MW of wholesale capacity in the second half of 2024, and 110-150MW for the first half of 2025.
InvestingPro Insights
VNET Group Inc's recent upgrade by HSBC aligns with several key insights from InvestingPro. The company's stock has shown remarkable strength recently, with InvestingPro data revealing a 60.58% price return over the last three months and an impressive 108.06% return over the past six months. This upward trajectory supports HSBC's more bullish stance on the stock.
InvestingPro Tips highlight that VNET is a "Prominent player in the IT Services industry," which is particularly relevant given the analyst's comments on the high entry barriers for AI-driven data centers. The tip suggesting that "Analysts predict the company will be profitable this year" aligns with HSBC's positive outlook and increased price target.
However, investors should note that VNET "Operates with a significant debt burden" according to another InvestingPro Tip. This could be a factor to watch, especially considering the capital-intensive nature of the data center industry mentioned in the article.
For a more comprehensive analysis, InvestingPro offers 14 additional tips for VNET, providing investors with a deeper understanding of the company's financial health and market position.
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