My rating is hold Internet Star Group Co., Ltd. (NASDAQ: VNET) share.I have outlined my read-through on the privatization of VNET’s peer Chindata Group Holdings Co., Ltd. (CD), as well as an update I posted earlier June 12, 2023.
My current article focuses on VNET’s recently announced second quarter 2023 financial results and recent developments related to the company. I was unimpressed with VNET’s recent quarterly results and fiscal 2023 guidance. But I’m positive about the founder’s acquisition intentions, the Internet’s stake situation, and the latest changes in the company’s management team. As such, I have a Neutral view on Internet, a Hold rating.
2023 guidance underwhelming
VNET stuck to its previous fiscal 2023 guidance after reporting mixed results for the second quarter of the year.
internet revenue +6% YoY growth from RMB 1.725 billion in Q2 2022 to RMB 1.822 billion in Q2 2023, compared to 10% YoY sales growth in Q1 2023, indicating the company’s Revenue expansion is slower. To make matters worse, VNET’s actual Q2 2023 revenue was -3% below analyst consensus forecast of RMB 1.88 billion. S&P Capital IQ data.
On the other hand, Unistar’s normalized EBITDA was RMB 556 million in Q2, 8% higher than consensus estimate of RMB 494 million (source: S&P Capital IQ). Additionally, VNET’s EBITDA grew 10% year-over-year in the first and second quarters of the fiscal year.
Given the company’s mixed financial results for the second quarter of 2023, it’s no surprise that VNET chose to keep its existing full-year guidance unchanged. Notably, VNET highlighted in its second-quarter 2023 earnings call on August 24 that the company benefited from a “one-time positive” in the first half of 2023, and that this would not happen in the second half of 2023. “Will not repeat”. At the end of May, VNET highlighted that these “one-offs” included positive “seasonal” effects and “certain non-recurring revenue.”
Based on the midpoint of its guidance, USTAR expects its revenue and non-GAAP adjusted EBITDA to increase by +10% and +11% YoY to RMB 7.75 billion and RMB 2.075 billion in FY2023, respectively.According to the data obtained S&P Capital IQ, VNET achieved better revenue and EBITDA CAGRs of +20% and +19% during the fiscal year 2018-2022. As such, I don’t think VNET’s current fiscal 2023 guidance is impressive. This also explains why VNET’s stock price fell by roughly -2% on Aug. 24, the day after the company reported its quarterly results and full-year guidance.
active business development
While VNET’s results and outlook aren’t as good as I’d like them to be, I’m positive about the company’s recent developments.
On August 1, 2023, VNET issued a filing document, disclosing that the company’s founder, Mr. Chen Sheng, “plans to make further equity investment in the stock.”
Details about the amount and pricing of the founders’ proposed investment have not been disclosed. Chen Sheng currently holds a 3.4% stake in the company, so his plan to be more “involved” should be seen as a positive sign reflecting his optimism about VNET’s prospects.
Previously, on July 28, 2023, the company announced a management team change. Specifically, Mr. Chen Yongzheng was transferred from the chief financial officer to the chief strategy officer, and Mr. Wang Qiyu, the former vice president of finance, was appointed as the new chief financial officer.
In a July 28 announcement, VNET mentioned that one of the chief strategy officer’s key priorities will be to “explore hyperscale data center opportunities in the Asia-Pacific region to help drive the company’s growth.” Separately, VNET noted in its July 28 announcement that the new chief financial officer “has extensive knowledge of the onshore market, including RMB funds.”
VNET’s recent management changes appear aimed at addressing two of the company’s biggest challenges.
A key challenge is the need to expand outside of China, given the slowdown in domestic data center business growth. In his new role as chief strategy officer, Chen Yongzheng will likely work to increase VNET’s revenue and earnings contribution from foreign or non-Chinese Asian markets.
CFO Wang Qiyu, on the other hand, must use his expertise in the aforementioned onshore funding market to prepare for the potential refinancing of the company’s $600 million convertible bonds. In the company’s 20-F filing for fiscal year 2022, VNET emphasized that “holders of the 2026 Convertible Notes (in the principal amount of $600 million) have the right to require the Company to repurchase all (or part of) the 2026 Convertible Notes for cash.” Notes” after February next year.
A mix of positive and negative factors for VNET suggests a Hold rating on the stock. The company’s founders are interested in increasing their stake in VNET, which has adapted its management team to address the company’s specific challenges. However, VNET’s Q2 2023 financial results and full-year financial outlook are not positive.