ab 2 September 2025 Global Research First Read Chinese Internet Data Centre Sector 2025 A-share Conference: AI demand ready to take off Industry outlook: demand to pick up; sustained project-level IRR Both Sinnet and Athub see strong IDC demand outlook driven by AI. The limited IDC tender releases over the past two quarters was mainly attributable to chip supply uncertainties, which should be solved going forward. Industry IDC rental prices remain stable and project-level unlevered IRR is around HSD. Althou ...

Summary of the Conference Call Transcript Industry Overview - **Industry**: Chinese Internet Data Centre (IDC) Sector - **Quarter**: Q225 Key Points and Arguments Market Demand and Orders - There were not many new IDC orders in Q225 due to the H20 ban in April, with NVIDIA indicating a potential resumption in July, but the Chinese government's stance remains uncertain [2] - Market demand is characterized as "2+X", where "2" refers to ByteDance and Alibaba, noted as the most aggressive investors in AI [2] Utilization and Financial Performance - GDS and VNET are expected to see steady utilization ramp-up, forecasting an 8% and 22% year-over-year increase in adjusted EBITDA, respectively [3] - China Mobile reported a GPU utilization rate increase from 20% before the DeepSeek shock in January to 55% in Q225, indicating a shift in deployment methods [3] Future Catalysts - Key factors to monitor include: 1. Hyperscalers' capital expenditure outlook, particularly from Alibaba and ByteDance, which may focus more on inference demand [4] 2. The release of DeepSeek R2, with a noted market focus on 2C applications, despite 90% of token usage being on the 2B side [4] 3. Cloud revenue growth, with expectations for acceleration due to lower digital penetration in China compared to the US [4] Financial Projections - VNET's revenue for Q225 is projected at RMB 2,330 million, reflecting a 16.9% year-over-year increase, while GDS's revenue is expected to be RMB 2,794 million, an 8.3% increase [7] - Adjusted EBITDA for VNET is forecasted at RMB 699 million, a 21.8% increase year-over-year, while GDS's adjusted EBITDA is expected to be RMB 1,336 million, also an 8.3% increase [7] Valuation Insights - The inaugural year of IDC C-REITs is expected to provide a valuation benchmark, potentially driving sector re-rating in the long term [5] - GDS's C-REIT traded 30% higher on its first day, but GDS's share price did not react, indicating a tech-focused investor base prioritizing growth over returns [5] Risks and Challenges - **Downside Risks**: Weaker-than-expected AI demand, faults at data centers, higher interest rates, and unfavorable regulatory environments [8] - **Upside Risks**: Stronger-than-expected AI and cloud business growth, lower electricity costs, and tighter control on licensing [8] Valuation Methodology - VNET is valued based on target EV/EBITDA multiples, with key risks including refinancing challenges and customer churn [9] - GDS is valued using a sum-of-the-parts (SOTP) approach, with risks including slower cloud/AI growth and reputational damage from outages [10] Additional Important Information - The report emphasizes the importance of monitoring hyperscalers' cloud revenue growth, which is crucial for understanding the overall health of the IDC sector [4] - The visibility of IDC tenders by hyperscalers is expected to improve in Q325, suggesting a potential recovery in new orders [4]