Investment Rating - The report does not provide a specific investment rating for the company, but it estimates a fair value of $1.95 per share, indicating a potential upside of 7.0% from the current price of $1.82 [5]. Core Insights - The company's Q1 2024 performance was slightly below expectations, with revenues of approximately 1.90 billion RMB, a year-on-year increase of 5.1%. Adjusted EBITDA was 540 million RMB, a decrease of 2.9% year-on-year, representing 24.2% of the full-year forecast [1][3]. - The company maintains its full-year guidance, expecting revenues between 7.8 billion and 8.0 billion RMB, with a year-on-year growth rate of 5.2% to 7.9% [1]. - Wholesale business growth is a key driver for overall performance, with Q1 2024 wholesale revenue reaching 360 million RMB, a quarter-on-quarter increase of 22.4%, contributing 19% to total revenue [1][3]. - Retail business saw a decline, with Q1 2024 retail revenue at 920 million RMB, down 5.2% quarter-on-quarter, contributing 49% to total revenue [1][3]. - The company has a high pre-lease rate of 74.5% for its 139 MW of projects under construction, which is expected to drive future capacity and revenue growth [2]. Summary by Sections Financial Performance - Q1 2024 revenue was 1,898 million RMB, with a gross profit of 411 million RMB, reflecting a year-on-year increase of 16.6% [3]. - Adjusted EBITDA margin improved to 28.4%, up 5.2 percentage points quarter-on-quarter [1][3]. - Net profit for Q1 2024 was -159 million RMB, a significant decline compared to the previous year [3]. Business Segments - Wholesale revenue accounted for 19% of total revenue in Q1 2024, up from 16% in Q4 2023, while retail revenue's contribution decreased to 49% [1][3]. - Non-data center business revenue remained stable at 613 million RMB, contributing 32% to total revenue [1][3]. Future Growth Potential - The company has 557 MW of projects in the pipeline, with a strong pre-lease rate expected to support future revenue growth [2]. - The expansion target for 2024 has been raised from 100-120 MW to 100-140 MW due to the positive outlook for the wholesale business [1].

Financial Data and Key Metrics Changes - The net revenue increased by 5.1% to CNY 1.9 billion, driven by the growth of the core business [18][20] - Adjusted EBITDA was CNY 539.8 million with an adjusted EBITDA margin of 28.4% [20] - The net loss attributable to VNET was CNY 187 million [20] - Total cash and cash equivalents, including restricted cash, was CNY 2.1 billion at the end of the first quarter [20] Business Line Data and Key Metrics Changes - Wholesale IDC business revenue increased by 59.1% to CNY 361 million, primarily due to new orders and increased demand [19][20] - Retail revenue decreased by 7.1% to CNY 923.7 million, attributed to the consolidation and redevelopment of several data centers [20] - Capacity in service for wholesale was 332 megawatts, with a utilization rate of 71% [17][18] - Retail capacity in service remained flat at around 52,000 cabinets, with a utilization rate stable at 64% [18] Market Data and Key Metrics Changes - The demand for high-density power cabinets is increasing, particularly driven by AI-related needs from industries such as chip manufacturing and autonomous driving [38] - The company is seeing stable growth in the overall demand for the data center market in China, with a strong focus on AI capacities [37][38] Company Strategy and Development Direction - The company is focusing on high-quality growth and effective cost strategies while pursuing high-density development [7][21] - A strategic agreement was signed to build a green AI supercomputing data center, indicating a commitment to sustainable practices [8][13] - The company plans to continue enhancing its core capabilities to capture market opportunities driven by the AI boom [21] Management Comments on Operating Environment and Future Outlook - Management expressed confidence in the favorable market environment for the IDC industry, driven by government initiatives to optimize computing power resources [8] - The company expects net revenue for 2024 to be in the range of CNY 7.8 billion to CNY 8 billion, representing a year-over-year increase of 5.2% to 7.9% [21] - Management highlighted the importance of transitioning from CPU-based to GPU-based infrastructure to meet the growing AI demands [10] Other Important Information - The company has enhanced its disclosures with more detailed operational and financial metrics starting from Q1 2024 [15] - The total capacity under construction was 139 megawatts, with a pre-commitment rate of around 75% [18] Q&A Session Summary Question: Definition of retail and wholesale - Management clarified that wholesale projects are defined as those over 40 megawatts, targeting major clients, while retail projects are smaller than 20 megawatts, mainly serving small and medium-sized enterprises [27][28] Question: Operating cash flow comparison - Management explained that the lower operating cash flow in Q1 2024 compared to Q1 2023 was due to one-off projects in the previous year, such as government grants [30] Question: Retail cabinet redevelopment impact - Management indicated that the redevelopment involves transitioning from low-density to high-density power cabinets, which may reduce the total number of cabinets but will better utilize resources [31] Question: Growth outlook for business lines - Management projected a 55% growth for wholesale, while retail remains flat, with non-IDC expected to grow by 5% [33] Question: G&A expense increase - Management noted that the increase in G&A expenses was due to debt repayments and stock expenditures for employees [34] Question: Overall demand for the data center market - Management reported stable growth in demand, particularly for AI-related services from various industries [36][38] Question: Expansion plans for wholesale business - Management confirmed ongoing negotiations for new projects and adherence to the CapEx plan for 2024 [39]

Core Viewpoint - VNET Group, Inc. reported a promising start to 2024, with a 5.1% year-over-year increase in total revenues, driven by strong performance in its wholesale IDC business, which saw a 59.1% increase in revenues [2][3][10]. Financial Highlights - Total revenues for Q1 2024 were RMB1.90 billion (US$262.9 million), up from RMB1.81 billion in Q1 2023 [3][10]. - IDC business revenues increased by 5.2% to RMB1.28 billion (US$177.9 million) [3][10]. - Wholesale IDC revenues surged by 59.1% to RMB361.0 million (US$50.0 million) [3][10]. - Retail IDC revenues decreased by 7.1% to RMB923.7 million (US$127.9 million) [3][10]. - Non-IDC business revenues rose by 5.0% to RMB613.5 million (US$85.0 million) [3][11]. - Adjusted cash gross profit increased by 1.5% to RMB765.5 million (US$106.0 million) with a gross margin of 40.3% [3][12]. - Adjusted EBITDA decreased by 2.9% to RMB539.8 million (US$74.8 million), with an EBITDA margin of 28.4% [3][14]. Operational Highlights - As of March 31, 2024, wholesale IDC capacity in service was 332MW, with a utilization rate of 71.0% [4][10]. - Retail IDC capacity in service was 52,068 cabinets, with a utilization rate of 64.0% [5][6]. - The company secured a new order for approximately 15MW from an existing client, expected to be completed within 2024 [2]. Business Outlook - VNET expects total net revenues for 2024 to be between RMB7,800 million to RMB8,000 million, reflecting a year-over-year growth of 5.2% to 7.9% [17]. - Adjusted EBITDA is projected to be in the range of RMB2,220 million to RMB2,280 million, representing year-over-year growth of 8.9% to 11.8% [17].

Exhibit 99.1 VNET Reports Unaudited Fourth Quarter and Full Year 2023 Financial Results BEIJING, March 27, 2024 /PRNewswire/ -- VNET Group, Inc. (Nasdaq: VNET) ("VNET" or the "Company"), a leading carrier- and cloud-neutral internet data center services provider in China, today announced its unaudited financial results for the fourth quarter and full year ended December 31, 2023. "Throughout 2023, we strongly executed our effective dual-core strategy amid the steady economic recovery, ending the year on a s ...

Core Viewpoint - Shares of 21Vianet (VNET) have recently declined by 5.5% over the past week, but the formation of a hammer chart pattern suggests potential support and a possible trend reversal in the future [1] Technical Analysis - The hammer chart pattern indicates a minor difference between opening and closing prices, with a long lower wick suggesting that selling pressure may be exhausting [1] - This pattern typically forms during a downtrend, where the stock opens lower, makes a new low, but then closes near or above the opening price, signaling a potential loss of control by bears [1] - Hammer candles can appear on various timeframes and should be used alongside other bullish indicators for confirmation [1] Fundamental Analysis - There has been a positive trend in earnings estimate revisions for VNET, with a 133.3% increase in the consensus EPS estimate for the current year over the last 30 days, indicating improved earnings expectations [1] - VNET holds a Zacks Rank of 2 (Buy), placing it in the top 20% of over 4,000 ranked stocks, which typically outperform the market [1] - The Zacks Rank serves as a timing indicator, suggesting that VNET's prospects are beginning to improve, reinforcing the potential for a turnaround [1]

Company Overview - VNET Group, Inc. is a leading carrier- and cloud-neutral internet data center services provider in China [3] - The company offers hosting and related services, including IDC services, cloud services, and business VPN services [3] - VNET operates in over 30 cities across China, serving a diverse base of more than 7,500 enterprise customers from various industries [3] Upcoming Financial Results - VNET will report its unaudited first quarter 2024 financial results on May 29, 2024, after the close of U.S. markets [1] - An earnings conference call will be held at 9:00 PM U.S. Eastern Time on May 29, 2024, or 9:00 AM Beijing Time on May 30, 2024 [1] - Participants can register for the call through a provided link and will receive dial-in numbers and instructions upon registration [1]

Core Insights - VNET Group, Inc. has published its 2023 Environmental, Social and Governance (ESG) Report, highlighting its commitment to sustainability and ethical governance [1][2] Sustainability Initiatives - The company aims to bring green direct-current electricity from data centers to millions of households over the next 25 years [2] - VNET achieved an average annual Power Usage Effectiveness (PUE) of 1.29 in 2023 [2] - The company participated in multi-region green power trading, purchasing approximately 56.90 million kWh of green power in 2023 [2] - VNET obtained a total of 10 green data center certifications [2] Operational Performance - The company reported zero major operational disruptions and network outages in its Internet Data Center (IDC) services [2] - VNET achieved 100% coverage of information security training for its employees [2] Social Responsibility and Governance - The percentage of female employees in management positions increased to 31% [2] - VNET passed the Anti-bribery Management Systems (ISO 37001) certification [2] ESG Ratings and Recognition - VNET received an "A" rating from MSCI for the second consecutive year, the highest ranking in China's Internet Service & Infrastructure industry [2] - The company scored 53 in the 2023 S&P Global Corporate Sustainability Assessment, ranking highest among China's IT Services industry and in the top 11% globally [2] - VNET was awarded a "B" rating on the 2023 CDP Climate Change Questionnaire, surpassing 94% of participants from China [2]

[Form 6-K Report of Foreign Private Issuer](index=1&type=section&id=Form%206-K%20Report%20of%20Foreign%20Private%20Issuer) This report outlines VNET Group's Form 6-K filing for April 2024, including filing details and the exhibit index [Filing Information](index=1&type=section&id=Filing%20Information) VNET Group, Inc., a foreign private issuer, submitted a Form 6-K report to the SEC for April 2024, authorized by CFO Qiyu Wang, confirming annual reports are filed under Form 20-F - VNET Group, Inc. filed a Form 6-K for the month of April 2024 as a foreign private issuer[1](index=1&type=chunk) - The company confirms it files its annual reports under Form 20-F[1](index=1&type=chunk) - The report was signed and authorized by **Qiyu Wang, Chief Financial Officer**, on April 26, 2024[2](index=2&type=chunk) [Exhibit Index](index=3&type=section&id=Exhibit%20Index) The report includes one exhibit, 99.1, which is a press release announcing that VNET has filed its Annual Report on Form 20-F for the fiscal year 2023 - The sole exhibit listed is **Exhibit 99.1**, a press release titled "VNET Files Its Annual Report on Form 20-F for Fiscal Year 2023"[3](index=3&type=chunk)

Core Viewpoint - VNET Group, Inc. has filed its annual report on Form 20-F for the fiscal year ended December 31, 2023, with the SEC, which includes audited consolidated financial statements [1]. Company Overview - VNET Group, Inc. is a leading carrier- and cloud-neutral internet data center services provider in China, offering hosting and related services such as IDC services, cloud services, and business VPN services [3]. - The company operates in over 30 cities across China and serves a diverse base of more than 7,500 enterprise customers, including internet companies, government entities, blue-chip enterprises, and small to mid-sized enterprises [3]. Investor Relations - The company will provide hard copies of its annual report containing the audited consolidated financial statements free of charge to shareholders and ADS holders upon request [2].

Part I [Explanatory Note](index=6&type=section&id=Explanatory%20Note) This note clarifies VNET's structure as a Cayman Islands holding company operating in China via Variable Interest Entities (VIEs) and outlines the associated legal and regulatory risks - VNET Group, Inc is a **Cayman Islands holding company**, not an operating company; its primary operations are conducted through subsidiaries and **Variable Interest Entities (VIEs)** in China[11](index=11&type=chunk) - Investors purchase equity in the Cayman holding company, not the operating VIEs, with control derived from **contractual arrangements not yet tested in a PRC court**[11](index=11&type=chunk) - The company was previously identified under the **HFCA Act** in May 2022, but the PCAOB vacated this determination in December 2022 after gaining inspection access[13](index=13&type=chunk) - Recent PRC regulations require a cybersecurity review for foreign listings of platform operators with over 1 million users, but VNET has **not been required to undergo such a review** as of the report date[16](index=16&type=chunk) - Under new CSRC regulations, the company submitted an initial filing on January 3, 2024, related to a **US$299 million strategic investment** from SDHG-owned entities[15](index=15&type=chunk)[20](index=20&type=chunk) [Key Information](index=12&type=section&id=ITEM%203.%20KEY%20INFORMATION) The company's VIE structure, related financial data, fund transfer limitations, and a comprehensive summary of key risk factors are presented [Corporate Structure and Related Risks](index=12&type=section&id=Our%20Corporate%20Structure%20and%20Its%20Related%20Risks) VNET's reliance on a VIE structure to operate in China is explained, detailing the contractual controls and inherent risks - VNET operates in China through **four VIEs** due to PRC restrictions on foreign ownership in value-added telecommunications services[24](index=24&type=chunk) - Control over the VIEs is maintained through a series of **contractual arrangements**, including Share Pledge Agreements, Powers of Attorney, and Equity Option Agreements[27](index=27&type=chunk)[28](index=28&type=chunk)[29](index=29&type=chunk) - The company acknowledges **significant risks** associated with its VIE structure, including potential non-compliance by PRC authorities and conflicts of interest[35](index=35&type=chunk)[36](index=36&type=chunk) [Financial Information Related to VIEs and Parent](index=16&type=section&id=Financial%20Information%20Related%20to%20the%20VIEs%20and%20Parent) Condensed financial data for the holding company, subsidiaries, and VIEs is presented, along with details on inter-company cash transfers **Condensed Consolidated Statement of Operations Data for FY 2023 (RMB in thousands)** | | VNET Group, Inc. | Other Subsidiaries | Primary Beneficiary of VIEs | VIEs and VIEs' Subsidiaries | Consolidated Totals | | :--- | :--- | :--- | :--- | :--- | :--- | | **Third-party revenue** | — | 1,028,905 | — | 6,384,025 | 7,412,930 | | **Gross profit** | — | 425,500 | (1,079) | 868,064 | 1,292,485 | | **Net (loss) income attributable to VNET Group, Inc.** | (2,643,836) | (1,142,564) | 139,753 | (1,021,429) | (2,643,836) | **Condensed Consolidated Balance Sheet Data as of Dec 31, 2023 (RMB in thousands)** | | VNET Group, Inc. | Other Subsidiaries | Primary Beneficiary of VIEs | VIEs and VIEs' Subsidiaries | Consolidated Totals | | :--- | :--- | :--- | :--- | :--- | :--- | | **Total assets** | 13,545,223 | 22,773,632 | 998,316 | 17,294,365 | 30,385,903 | | **Total liabilities** | 7,530,808 | 20,680,221 | 154,228 | 18,026,248 | 23,871,520 | | **Total equity** | 6,014,415 | 2,093,411 | 844,088 | (731,883) | 6,514,383 | **Cash Transfers Through Organization (RMB in thousands)** | | 2021 | 2022 | 2023 | | :--- | :--- | :--- | :--- | | **Cash received by VNET Group, Inc.** | 2,694,169 | 120,488 | 242,571 | | **Cash paid by VNET Group, Inc. to subsidiaries** | (2,688,968) | (1,941,696) | (273,432) | | **Cash paid by subsidiaries to VIEs** | (1,337,056) | (3,043,923) | — | - The company faces **significant restrictions on transferring capital out of China**, as PRC subsidiaries must set aside statutory reserves before paying dividends[46](index=46&type=chunk) [Risk Factors](index=21&type=section&id=D.%20Risk%20Factors) A comprehensive summary of material risks is outlined across business, corporate structure, China operations, and ADS categories - The report outlines a comprehensive summary of material risks across four main categories: **Business and Industry, Corporate Structure, Doing Business in China, and Our ADS**[53](index=53&type=chunk)[56](index=56&type=chunk)[57](index=57&type=chunk)[60](index=60&type=chunk) [Information on the Company](index=78&type=section&id=ITEM%204.%20INFORMATION%20ON%20THE%20COMPANY) An overview of the company's history, business operations, organizational structure, and properties is provided [History and Development of the Company](index=78&type=section&id=A.%20History%20and%20Development%20of%20the%20Company) Key milestones are detailed, including its founding, Nasdaq listing, strategic partnerships, and recent major investments - VNET commenced operations in 1999, established its Cayman Islands holding company in 2009, and **listed on Nasdaq in 2011** under the ticker "VNET"[227](index=227&type=chunk) - The company has formed strategic partnerships with **Microsoft** to operate its cloud offerings in China and with **Warburg Pincus** to build a digital real estate platform[227](index=227&type=chunk) - In December 2023, the company completed a strategic investment of **US$299 million from SDHG-owned entities** for renewable energy and computing power projects[229](index=229&type=chunk) - The board received two non-binding **going-private proposals in 2022** and a special committee is evaluating these proposals[229](index=229&type=chunk) [Business Overview](index=81&type=section&id=B.%20Business%20Overview) The company's position as a leading carrier-neutral data center provider in China with a "dual-core" strategy is described - VNET is a leading carrier-neutral and cloud-neutral data center service provider in China, operating with a **"dual-core" strategy** targeting both retail and wholesale customers[232](index=232&type=chunk) **Data Center and Cabinet Capacity Growth** | As of December 31, | 2021 | 2022 | 2023 | | :--- | :--- | :--- | :--- | | **Total Data Centers** | 104 | 143 | 162 | | - Self-built | 40 | 45 | 50 | | - Partnered | 64 | 98 | 112 | | **Total Cabinets** | 78,540 | 87,322 | 93,597 | | - Self-built | 74,143 | 82,581 | 89,357 | | - Partnered | 4,397 | 4,741 | 4,240 | - The company's service offerings include **Managed Hosting Services, Cloud Services** (in partnership with Microsoft), and **VPN Services**[234](index=234&type=chunk) - As of December 31, 2023, VNET served over **7,500 enterprise customers** with a low average monthly hosting churn rate of **0.4%** for 2023[248](index=248&type=chunk) - The company faces competition from state-owned carriers, other carrier-neutral providers, in-house data centers, and cloud service providers[258](index=258&type=chunk) [Organizational Structure](index=110&type=section&id=C.%20Organizational%20Structure) The company's business is conducted through contractual arrangements with its VIEs to comply with PRC foreign ownership laws - VNET conducts its business in China through **contractual arrangements with its VIEs** to comply with PRC legal restrictions on foreign ownership[333](index=333&type=chunk) - In April 2024, the company entered into a series of **amended and restated contractual agreements** with certain VIEs to replace and supersede prior agreements[334](index=334&type=chunk) - The contractual arrangements provide VNET with **effective control and economic benefits** of the VIEs[335](index=335&type=chunk)[336](index=336&type=chunk)[338](index=338&type=chunk)[340](index=340&type=chunk) [Property, Plants and Equipment](index=114&type=section&id=D.%20Property,%20Plants%20and%20Equipment) The company's portfolio of leased and owned properties for data centers and offices is detailed - As of December 31, 2023, the company leased approximately **425,903 square meters** for its self-built data centers and owned buildings with a total floor area of approximately **387,879 square meters**[343](index=343&type=chunk) [Operating and Financial Review and Prospects](index=115&type=section&id=ITEM%205.%20OPERATING%20AND%20FINANCIAL%20REVIEW%20AND%20PROSPECTS) A detailed analysis of financial performance is provided, highlighting revenue growth, significant net loss from impairments, and liquidity status [Operating Results](index=115&type=section&id=A.%20Operating%20Results) Financial performance for 2023 shows revenue growth but a significant net loss due to large impairment charges **Key Financial Performance (RMB in millions)** | Metric | 2021 | 2022 | 2023 | | :--- | :--- | :--- | :--- | | **Net Revenues** | 6,189.8 | 7,065.2 | 7,412.9 | | **Gross Profit** | 1,438.0 | 1,358.3 | 1,292.5 | | **Gross Margin** | 23.2% | 19.2% | 17.4% | | **Operating Profit (Loss)** | 21.3 | 121.2 | (1,970.9) | | **Net Income (Loss)** | 515.1 | (762.0) | (2,597.2) | - Net revenues increased by **4.9% in 2023 to RMB 7,412.9 million**, driven by a growing number of utilized cabinets and increased demand for cloud services[377](index=377&type=chunk) - The company incurred a significant **net loss of RMB 2,597.2 million in 2023**, primarily due to a one-time impairment of goodwill and long-lived assets[381](index=381&type=chunk) **Key Operating Metrics** | Metric | 2021 | 2022 | 2023 | | :--- | :--- | :--- | :--- | | **Cabinets Under Management (End of Period)** | 78,540 | 87,322 | 93,597 | | **Cabinet Utilization Rate (End of Period)** | 53.1% | 55.0% | 59.0% | | **Avg. Monthly Recurring Revenue per Cabinet (Retail)** | RMB 9,190 | RMB 9,270 | RMB 9,497 | | **Avg. Monthly Churn Rate (Managed Hosting)** | 0.2% | 0.2% | 0.4% | [Liquidity and Capital Resources](index=124&type=section&id=B.%20Liquidity%20and%20Capital%20Resources) The company's liquidity position, cash flows, debt structure, and available credit facilities are detailed - As of December 31, 2023, the company had cash of **RMB 5,099.0 million** but also an accumulated deficit and net current liabilities, raising **going concern doubts**[384](index=384&type=chunk) **Cash Flow Summary (RMB in millions)** | Cash Flow | 2021 | 2022 | 2023 | | :--- | :--- | :--- | :--- | | **Net cash from operating activities** | 1,387.9 | 2,440.2 | 2,063.5 | | **Net cash used in investing activities** | (3,772.6) | (3,559.3) | (3,905.1) | | **Net cash from financing activities** | 967.6 | 2,298.1 | 3,941.1 | - As of December 31, 2023, total outstanding debt was **RMB 5,866.8 million**, with unused credit lines of **RMB 2,811.1 million**[386](index=386&type=chunk)[399](index=399&type=chunk) - In 2023 and early 2024, the company repurchased all remaining **2025 and 2026 Convertible Notes**[387](index=387&type=chunk)[388](index=388&type=chunk) [Research and Development](index=130&type=section&id=C.%20Research%20and%20Development,%20Patents%20and%20Licenses,%20etc.) R&D expenses and the company's intellectual property portfolio, including patents and software copyrights, are presented **R&D Expenses (RMB in millions)** | Year | R&D Expense | | :--- | :--- | | 2021 | 188.5 | | 2022 | 306.8 | | 2023 | 322.2 | - As of December 31, 2023, the company's R&D efforts have resulted in **170 patents, 105 patent applications, and 335 software copyright registrations** in China[404](index=404&type=chunk) [Critical Accounting Estimates](index=131&type=section&id=E.%20Critical%20Accounting%20Estimates) Key accounting estimates are discussed, including significant impairment charges for goodwill and long-lived assets - The company recognized a **full goodwill impairment of RMB 1,364.2 million** for FY 2023 due to adverse macroeconomic conditions and a sustained decrease in share price[408](index=408&type=chunk) - An **impairment loss of RMB 506.7 million** was recorded for long-lived assets for FY 2023 due to weaker-than-expected operations[409](index=409&type=chunk) - The company revised the estimated useful lives of certain data center assets, which is expected to **reduce depreciation expense by approximately RMB 395 million** in 2024[374](index=374&type=chunk) [Directors, Senior Management and Employees](index=132&type=section&id=ITEM%206.%20DIRECTORS,%20SENIOR%20MANAGEMENT%20AND%20EMPLOYEES) Details on leadership, compensation, board structure, and workforce are provided [Directors and Senior Management](index=132&type=section&id=A.%20Directors%20and%20Senior%20Management) Key leadership members, including the Founder, Co-Chairpersons, and CFO, are identified - As of the report date, key leadership includes **Sheng Chen** (Founder, Co-Chairperson, Interim CEO), **Jianbiao Zhu** (Co-Chairperson), and **Qiyu Wang** (CFO)[412](index=412&type=chunk)[413](index=413&type=chunk) [Compensation](index=136&type=section&id=B.%20Compensation) Aggregate compensation for directors and executives is disclosed, along with details of the company's share incentive plan - For the year ended December 31, 2023, the aggregate compensation paid to directors and executive officers was **RMB 14.2 million (US$2.0 million)**[421](index=421&type=chunk) - The company maintains the **2020 Share Incentive Plan**, which was amended in January 2024 to increase the maximum number of authorized shares[421](index=421&type=chunk) [Board Practices](index=138&type=section&id=C.%20Board%20Practices) The composition and responsibilities of the Board of Directors and its three main committees are outlined - The Board of Directors consists of seven members and has three committees: an **Audit Committee, a Compensation Committee, and a Nominating and Corporate Governance Committee**[425](index=425&type=chunk)[428](index=428&type=chunk) - The Audit Committee is chaired by Sean Shao and includes two other independent directors, overseeing financial reporting integrity and compliance[429](index=429&type=chunk) [Employees](index=140&type=section&id=D.%20Employees) A breakdown of the company's workforce by functional area as of year-end 2023 is presented **Employees by Function as of December 31, 2023** | Functional Area | Number of Employees | % of Total | | :--- | :--- | :--- | | Operations | 1,480 | 49% | | Sales, marketing and customer support | 383 | 13% | | Research and development | 528 | 17% | | General and administrative | 647 | 21% | | **Total** | **3,038** | **100%** | [Major Shareholders and Related Party Transactions](index=141&type=section&id=ITEM%207.%20MAJOR%20SHAREHOLDERS%20AND%20RELATED%20PARTY%20TRANSACTIONS) The company's principal shareholders are identified and significant transactions with related parties are detailed [Major Shareholders](index=141&type=section&id=A.%20Major%20Shareholders) Principal shareholders and the company's multi-class share structure are detailed **Principal Shareholders as of February 29, 2024** | Shareholder | % of Beneficial Ownership | % of Voting Power | | :--- | :--- | :--- | | Shandong Hi-Speed Holdings Group Limited | 41.2% | 35.0% | | Sheng Chen (Founder) | 4.1% | 17.3% | | FIL Limited | 5.2% | 4.4% | - The company has a multi-class share structure with **Class A (1 vote/share), Class B (10 votes/share), and Class C (1 vote/share with veto rights)** shares outstanding[437](index=437&type=chunk) [Related Party Transactions](index=145&type=section&id=B.%20Related%20Party%20Transactions) Key transactions with related parties during 2023, including loans and service purchases, are disclosed - In 2023, the company engaged in several related party transactions, including providing a loan of **RMB 80.3 million** and obtaining a loan of **RMB 350.0 million**[445](index=445&type=chunk) [Financial Information](index=146&type=section&id=ITEM%208.%20FINANCIAL%20INFORMATION) Significant legal proceedings, including arbitration and a class action lawsuit, are discussed alongside the company's dividend policy [Legal Proceedings and Dividend Policy](index=146&type=section&id=A.%20Consolidated%20Statements%20and%20Other%20Financial%20Information) The company's involvement in ongoing legal disputes and its intention to retain earnings for business expansion are outlined - The company is involved in arbitration related to the 2021 acquisition of BJ TenxCloud, with seller claimants seeking approximately **RMB 180.1 million**[449](index=449&type=chunk) - A putative **securities class action lawsuit** was filed against the company in late 2023, alleging materially false or misleading statements[451](index=451&type=chunk) - The company **does not plan to pay any dividends** in the foreseeable future and intends to retain earnings to operate and expand its business[452](index=452&type=chunk) [Additional Information](index=148&type=section&id=ITEM%2010.%20ADDITIONAL%20INFORMATION) Details on corporate governance, material contracts, exchange controls, and taxation implications are provided [Memorandum and Articles of Association](index=148&type=section&id=B.%20Memorandum%20and%20Articles%20of%20Association) The rights and conversion terms of the company's multi-class share structure are summarized - The company's ordinary shares are divided into **Class A (1 vote/share), Class B (10 votes/share), Class C (1 vote/share with specific veto rights)**, and authorized but unissued **Class D (500 votes/share)**[460](index=460&type=chunk)[462](index=462&type=chunk)[464](index=464&type=chunk) - Class B, C, and D shares are convertible into Class A shares on a 1:1 basis, with automatic conversion triggers upon transfer to non-affiliated parties[460](index=460&type=chunk)[462](index=462&type=chunk) [Material Contracts](index=152&type=section&id=C.%20Material%20Contracts) Key investment agreements with entities such as Blackstone and SDHG are outlined - In January 2022, the company entered into an investment agreement with **Blackstone** for the issuance of **US$250 million in 2% convertible notes due 2027**[467](index=467&type=chunk) - In November 2023, the company entered into an investment agreement with SDHG-owned entities for a **US$299 million equity investment**[469](index=469&type=chunk) [Taxation](index=153&type=section&id=E.%20Taxation) Tax implications in the Cayman Islands and PRC are discussed, along with the PFIC risk for U.S. shareholders - The company is incorporated in the Cayman Islands and is not subject to income tax there; its PRC subsidiaries are subject to a standard **25% Enterprise Income Tax (EIT)**, with some qualifying for a preferential 15% rate[471](index=471&type=chunk)[773](index=773&type=chunk) - There is a risk that the company could be classified as a **PRC resident enterprise**, which would subject it to PRC tax on its worldwide income[474](index=474&type=chunk) - For U.S. federal income tax purposes, the company believes it was **not a Passive Foreign Investment Company (PFIC)** for the 2023 taxable year[217](index=217&type=chunk)[481](index=481&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=158&type=section&id=ITEM%2011.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) The company's primary market risk exposures, including interest rate, foreign exchange, and inflation risks, are detailed - The company's primary market risk exposure relates to **interest rates** on its borrowings; a hypothetical 1% decrease in rates would have decreased 2023 interest expense by approximately **RMB 67.8 million**[486](index=486&type=chunk) - Significant **foreign exchange risk** exists due to substantial U.S. dollar-denominated debt and assets; a hypothetical 10% increase in the USD/RMB exchange rate would have increased the value of these assets by **RMB 322.5 million**[488](index=488&type=chunk) Part II [Controls and Procedures](index=162&type=section&id=ITEM%2015.%20CONTROLS%20AND%20PROCEDURES) Management's evaluation concludes that disclosure controls and internal controls over financial reporting were effective as of year-end 2023 - Management concluded that as of December 31, 2023, the company's **disclosure controls and procedures were effective**[499](index=499&type=chunk) - Based on an assessment using the COSO 2013 framework, management concluded that the company's **internal control over financial reporting was effective** as of December 31, 2023[500](index=500&type=chunk) - The independent registered public accounting firm, KPMG Huazhen LLP, issued an **unqualified opinion** on the effectiveness of the company's internal control over financial reporting[501](index=501&type=chunk)[503](index=503&type=chunk) [Corporate Governance and Other Disclosures](index=164&type=section&id=ITEM%2016.%20Corporate%20Governance%20and%20Other%20Disclosures) Various governance topics are covered, including audit committee experts, accountant fees, home country practices, and cybersecurity risk management [Audit Committee Financial Expert](index=164&type=section&id=ITEM%2016A.%20AUDIT%20COMMITTEE%20FINANCIAL%20EXPERT) The board has identified two members who qualify as audit committee financial experts - The board of directors has determined that **Mr. Sean Shao and Mr. Changqing Ye** are both audit committee financial experts[506](index=506&type=chunk) [Principal Accountant Fees and Services](index=164&type=section&id=ITEM%2016C.%20PRINCIPAL%20ACCOUNTANT%20FEES%20AND%20SERVICES) Fees paid to the principal accountant for audit and other services in 2022 and 2023 are disclosed **Accountant Fees (in US$ thousands)** | Fee Type | 2022 | 2023 | | :--- | :--- | :--- | | Audit fees | 2,275 | 1,936 | | Tax fees | 81 | — | | Other fees | 240 | — | [Corporate Governance](index=165&type=section&id=ITEM%2016G.%20CORPORATE%20GOVERNANCE) The company's adherence to home country governance practices, which provides exemptions from certain Nasdaq rules, is confirmed - As a foreign private issuer, the company follows certain **home country corporate governance practices**, exempting it from several Nasdaq requirements[511](index=511&type=chunk) [Cybersecurity](index=166&type=section&id=ITEM%2016K.%20CYBERSECURITY) The company's cybersecurity risk management program and governance oversight are described, with no material threats identified in 2023 - The company has an established cybersecurity risk management program, with oversight provided by the **audit committee of the board of directors**[514](index=514&type=chunk) - In 2023, the company did not identify any cybersecurity threats that have **materially affected** or are reasonably likely to materially affect its business[514](index=514&type=chunk) Part III [Financial Statements](index=173&type=section&id=ITEM%2018.%20FINANCIAL%20STATEMENTS) This section contains the company's audited consolidated financial statements for the past three fiscal years, prepared under U.S. GAAP **Consolidated Balance Sheet Highlights (RMB in thousands)** | As of December 31, | 2022 | 2023 | | :--- | :--- | :--- | | **Total Assets** | 26,948,405 | 30,385,903 | | **Total Liabilities** | 19,966,549 | 23,871,520 | | **Total Shareholders' Equity** | 6,981,856 | 6,514,383 | **Consolidated Statement of Operations Highlights (RMB in thousands)** | For the Year Ended December 31, | 2021 | 2022 | 2023 | | :--- | :--- | :--- | :--- | | **Net Revenues** | 6,189,801 | 7,065,232 | 7,412,930 | | **Gross Profit** | 1,438,030 | 1,358,256 | 1,292,485 | | **Operating Profit (Loss)** | 21,314 | 121,156 | (1,970,901) | | **Net Income (Loss)** | 515,101 | (761,994) | (2,597,169) | **Consolidated Statement of Cash Flows Highlights (RMB in thousands)** | For the Year Ended December 31, | 2021 | 2022 | 2023 | | :--- | :--- | :--- | :--- | | **Net cash from operating activities** | 1,387,922 | 2,440,214 | 2,063,480 | | **Net cash used in investing activities** | (3,772,613) | (3,559,252) | (3,905,109) | | **Net cash from financing activities** | 967,577 | 2,298,080 | 3,941,134 |