With the booming development of generative artificial intelligence technology, the data center industry has ushered in unprecedented growth opportunities. Especially under the promotion of the "East West Calculation" project, the regional layout of computing power has been optimized, and the concepts of green, low-carbon, and cost control have been further promoted. The data center market has shown a prosperous scene. Against this backdrop, Century Internet (VNET. O) has not only successfully lifted the historical burden of development, but also ushered in new development opportunities.
Since the end of 2023, Century Internet has been actively seeking a new stage of development while shedding historical burdens and embarking on a lighter journey, expanding investment to seek greater growth. The financial report for the third quarter of 2024 shows a significant improvement in the company's profitability, with performance significantly exceeding market expectations. Institutional investors are beginning to reassess its investment value.
More than 10 securities firms, including JPMorgan Chase, Morgan Stanley, Goldman Sachs, CICC, HSBC, Nomura, Citigroup, and Bank of America, have released performance reviews for Century Internet, providing coverage or rating upgrades. Among them, Jefferies has raised its target price for Century Internet to $10.73, showing significant upward potential compared to the current stock price of $3.94.
The excellent financial performance of Century Internet is mainly due to the continuous improvement of its wholesale business (base type IDC), which is mainly driven by the rapid growth of demand for AIDC (intelligent computing center). HSBC pointed out that with the growing demand of Chinese Internet enterprises for AIDC, the base business of 21Vianet is expected to continue to benefit.
The rapid expansion of AIDC demand promotes the development of industry supply and demand towards a more balanced direction, and the price trend gradually stabilizes. CICC further pointed out that benefiting from the strong wholesale business driving demand, Century Internet's revenue growth rate is faster than its shelf capacity growth rate, reflecting the optimization of the price side; And a high pre signing rate means strong demand from downstream customers. Goldman Sachs predicts that from 2024 to 2026, the company's wholesale business operating capacity will increase by 117/260/220 MW respectively, reaching a total of 449/709/929MW. This means that the company's wholesale business will achieve exponential growth two years later.
To meet the new demands of the artificial intelligence market, whether it is building new computing power or renovating existing projects, significant capital expenditures are required. According to the plan of Century Internet, the capital expenditure for the whole year of 2024 will reach the upper limit of the guidance of RMB 5-5.5 billion, around RMB 5.5 billion. Compared with the guidance formulated at the beginning of the year, it more clearly demonstrates the company's confidence in the market and positive response to market demand. Institutions also generally predict that the company's high capital expenditures are expected to continue in the next two years. Goldman Sachs predicts that capital expenditures will remain at 5.5/44 billion yuan in 2025/26, while HSBC predicts that the company's capital expenditures will reach 6 billion yuan in 2025.
The rapid expansion of the business cannot be separated from the support of diversified financing strategies. Century Internet has taken various measures such as introducing strategic investor Shangao Holdings and implementing Pre REITs cooperation, greatly enriching the company's financing channels and providing solid financial support for the company's sustained growth and market competitiveness.
Shangao Holdings not only provides important financial support to Century Internet, but also deserves attention to the business synergy between the two. The improvement of computing power has put forward higher requirements for the energy consumption of data centers. In the pursuit of rapid development of artificial intelligence technology, the demand for electricity has become particularly prominent, especially for clean and cost-effective power resources.
In December 2023, Century Internet signed a strategic cooperation agreement with Shangao Holdings and the Ulanqab Municipal Government. In October 2024, the company's Ulanqab base source grid load storage integration project was approved, including 200000 kW wind power generation and 100000 kW photovoltaic power generation, as well as a supporting 45000 kW energy storage facility, providing long-term and stable support for the green power demand of its Ulanqab base. The cooperation between Century Internet and Shangao Holdings has formed a rare "green electricity+computing power" industrial ecosystem combination in China. From the current dynamics, this cooperation is also continuing to deepen, and we will work together in the future to achieve mutual benefit and win-win results.
On the basis of the entry of new strategic shareholders, in addition to traditional bank credit financing channels, Century Internet has creatively expanded financing channels and successfully launched the first domestic data center Pre REITs fund project by the end of November 2024. The company has jointly established a fund with Dahua Investment Holdings, a subsidiary of Dahua Insurance Group, to invest in base type data center assets. This not only marks the integration and upgrading of industries and finance in the era of high-quality productivity development, but also successfully realizes the capital cycle of data center investment, operation, exit, and reinvestment. In addition, the successful issuance of the Pre REITs fund project will have a positive effect on the transformation of the domestic data center industry towards a REITs based operating model.
Regarding this, analysts from Bank of America predict that Century Internet will conduct Pre REITs in the early stages of the project to recover cash flow more quickly, and predict that the company will complete the Pre REITs for the first phase of the Ulanqab project by 2025. HSBC is also optimistic about the ways in which the company is promoting Pre REITs and C-REITs to help reduce leverage. Overall, through a multi-level REITs model, Century Internet has successfully introduced incremental cash flow, built a healthy and sustainable capital structure and asset operation cycle. This forward-looking capital operation helps Century Internet maintain its competitive advantage in the data center industry and achieve long-term stable growth.
In addition to capital expenditures, the responsiveness and service capabilities to the demand for AI computing power are also the focus of the company's attention. 21Vianet has established long-term cooperative relationships with high-quality customers in the fields of Internet, finance, short video, cloud services, etc., which makes it possible to tap their needs and enhance their competitiveness.
The accumulation of fundamental factors in the company's basic area also relies on the strong execution ability of the core team. Excellent performance has always been the core that has been truly recognized by the market. This is also the reason why many institutions have given positive evaluations to Century Internet after it announced its unexpected third quarter performance.
Currently, the US stock market and the Chinese concept stock market are experiencing volatility. Despite the complex market sentiment, the development strategy and valuation level of Century Internet make it a target worth paying attention to for investors. At present, the EV/EBITDA multiplier of Century Internet is only about 7x, while that of its peers Wanguo Data is 12x. American peers Equinix, Digital Realty, and Keppel DC REIT are as high as 25x/26x/22x respectively. From this, it can be seen that the current valuation of Century Internet is significantly lower than the industry average and is in a severely undervalued state. Therefore, analysts from Citigroup also pointed out in their report that Century Internet's valuation is 30% lower than its domestic peers, emphasizing the company's investment value. With the easing of unfavorable factors and the company's return to a stable growth track, the undervaluation of the investment value of Next Century Internet will be further reflected.
Overall, in this wave of AI technology innovation driven transformation, Century Internet has achieved a magnificent "butterfly transformation" in performance with its forward-looking strategic layout and efficient execution. The company focuses on deeply cultivating the domestic data center market, not only having a stable urban business base, but also achieving impressive results in base based business. Driven by the dual engines of base based and city based business, the company has not only consolidated its leading position in the industry, but also demonstrated strong certainty in improving its fundamentals. In the future, through Pre REITs, the company will achieve business expansion in a lighter asset model, and work together with Shangao Holdings to deepen the construction of the "green electricity+computing power" industrial ecosystem combination. Under the catalysis of these favorable factors, the development prospects and investment value of the company's base based business are undoubtedly worth investors' attention.