Analyst Note| Dan Baker |
No-moat VNET Group’s second-quarter 2022 result was respectable, but management lowered 2022 guidance given the impact of coronavirus lockdowns on data center buildouts and customer move-in rates, and economic uncertainty. Second-quarter revenue increased 15.2% year on year with adjusted EBITDA up 14.5% year on year. However, management reduced its full-year 2022 guidance to a midpoint of 19.5% revenue growth and 6.9% adjusted EBITDA growth from 22.8% revenue growth and adjusted EBITDA growth of 16.9% previously. This new guidance implies second-half midpoint year-on-year revenue growth of 21.9%, but EBITDA decline of 3.5% with second-half adjusted EBITDA margin expected to decline to 21.9%—well below the 28.3% reported in 2021 and 29.5% reported in first-half 2022. We lower our fair value estimate to USD 8.80 per share from USD 9.55 per share previously. In our view the stock is undervalued, trading at a price/book value of around 0.7 times with shares having traded at over 7 times price/book at the peak and having traded at over 1 times from mid-2018 until early February 2022. We believe a price/book of over 1 times is justified given the company does not revalue its portfolio and many of its data centers have likely increased in value since they were built, particularly those in downtown areas of major cities.