AI Data Center Demand Will Drive Long Runway For Wholesale Capacity Utilization

Catalysts

About VNET Group

VNET Group operates carrier neutral, high performance data centers and AI infrastructure platforms serving hyperscale and enterprise customers in China.

What are the underlying business or industry changes driving this perspective?

• Accelerating AI adoption across China is driving structurally higher demand for high density, high performance data centers, supporting sustained double digit wholesale revenue growth and expanding adjusted EBITDA.
• Large, fully secured wholesale resource reserves of around 1.8 gigawatts, including substantial capacity under construction and held for future development, position VNET to capture a long runway of growth and compound top line revenues over multiple years.
• Rising inference and private AI deployment needs, which require low latency and distributed capacity near end users, favor VNET’s strategically located campuses in the Greater Beijing area and Yangtze River Delta, supporting higher utilization and stronger net margins.
• Ongoing mix shift toward higher value retail cabinets, driven by smart computing, GPU ready upgrades and value added network and storage services, is lifting MRR per cabinet and is expected to gradually enhance overall gross margin and earnings quality.
• Scaling use of private REITs, asset securitization and domestic bonds, supported by improving credit quality and strong operating cash flow, can recycle capital from mature assets into new campuses, which may accelerate capacity growth while supporting future EBITDA and earnings per share.

Assumptions

This narrative explores a more optimistic perspective on VNET Group compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming VNET Group's revenue will grow by 21.1% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -6.1% today to 7.7% in 3 years time.
• The bullish analysts expect earnings to reach CN¥1.3 billion (and earnings per share of CN¥2.86) by about December 2028, up from CN¥-582.8 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as CN¥486.4 million.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 51.6x on those 2028 earnings, up from -29.9x today. This future PE is greater than the current PE for the US IT industry at 29.9x.
• The bullish analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.76%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The company is pursuing an aggressive multi year build out of wholesale capacity with seven data centers under construction and plans to deliver around 306 megawatts over the next 12 months. If AI demand or customer tendering in 2026 proves merely stable rather than strongly expansionary, utilization could lag these additions for an extended period and weigh on revenue growth and adjusted EBITDA.
• Management highlights very high utilization in mature sites and customers pushing for faster move ins, which forces VNET to front load civil works, power connections and GPU ready investments. If hyperscaler CapEx cycles or AI related workloads normalize or rotate to lower cost regions or competitors, this elevated capital intensity could compress returns and pressure net margins and earnings.
• The business model increasingly depends on large wholesale AI customers clustered in a few regions such as Greater Beijing, Hebei and the Yangtze River Delta. A slowdown in domestic chip advances, policy changes on power allocation or a shift in customer preferences toward alternative locations and providers would undermine the long term growth thesis for these campuses and impede revenue expansion and margin improvement.
• VNET is relying on extensive asset securitization and sizeable private REIT programs alongside substantial corporate bond issuance to fund RMB 10 billion to RMB 12 billion in annual CapEx. If credit conditions tighten, REIT valuations fall or issuance is delayed, the firm could face a funding shortfall that slows capacity delivery, raises interest expense and constrains earnings and cash flow.
• While retail MRR per cabinet has risen for six consecutive quarters through higher density and value added services, retail utilization remains meaningfully below wholesale levels and competition is intense. If AI driven smart computing and networking demand in the retail segment fails to scale as expected, pricing power may weaken and limit improvements in overall gross margins and long term earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for VNET Group is $23.89, which represents up to two standard deviations above the consensus price target of $14.69. This valuation is based on what can be assumed as the expectations of VNET Group's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $27.39, and the most bearish reporting a price target of just $6.54.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be CN¥16.9 billion, earnings will come to CN¥1.3 billion, and it would be trading on a PE ratio of 51.6x, assuming you use a discount rate of 13.8%.
  
• Given the current share price of $9.18, the analyst price target of $23.89 is 61.6% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.