Chinese Internet Data Centre Sector_APAC Focus_ core AI asset undervalued

Summary of Chinese Internet Data Centre Sector Conference Call Industry Overview - The focus is on the Chinese Internet Data Centre (IDC) sector, which is currently undervalued compared to global peers despite higher project returns and EBITDA growth [3][4] - Chinese IDC companies achieved an average return of 13% in 2023, projected to rise to 15% by 2026, driven by AI-related demand [4][11] - The sector is expected to record a 20% CAGR in EBITDA from 2024 to 2026, outpacing the global average of 11% [4][11] Key Insights - Valuation Discrepancy: Chinese IDC firms are trading at a 25% EV/EBITDA discount compared to global peers, despite superior growth and returns [4][11] - Hyperscaler Demand: There is higher order certainty from hyperscalers, with demand driven by internal AI workloads rather than indirect cloud client demand [5][11] - Emerging Hubs: Inner Mongolia is identified as a new IDC hub due to low power tariffs and acceptable latency, with low vacancy rates and pre-committed projects from hyperscalers [6][11] Investment Recommendations - Top Picks: VNET, GDS, and Aofei are highlighted as top investment picks due to their potential for new order wins and upcoming REIT launches [3][7] - Price Targets: Price targets for VNET raised to $25.00 (92$66.00 (53% upside), and Aofei to Rmb28.10 (41% upside) [8][29][30][31] Financial Metrics - VNET: Expected EBITDA growth of 18% in 2025 and 26% in 2026, with a price target based on 18x 2026E EV/EBITDA [29] - GDS: Anticipated EBITDA growth of 12% in 2025 and 14% in 2026, with a price target based on 17x 2026E EV/EBITDA [30] - Aofei: Projected to achieve a 20%+ EBITDA CAGR from 2024-2026, with a price target of 25x 2026E EV/EBITDA [31] Market Dynamics - AI Demand: The launch of DeepSeek is expected to increase demand for AI training and inference, leading to a more diversified customer portfolio for IDC operators [38][41] - Utilization Rates: The industry utilization rate is projected to improve, with third-party IDC revenue growth expected to reaccelerate to 10-20% in 2025/26E [45][62] Risks and Considerations - Leverage Risks: The potential launch of REITs in 2025 may help diversify funding options and mitigate excessive leverage risks due to growth ambitions [6][11] - Market Competition: The IDC sector is experiencing increased competition, particularly from hyperscalers' in-house capacity, which could impact pricing and margins [41][45] Conclusion - The Chinese IDC sector presents a distinct opportunity for re-evaluation, with strong growth prospects driven by AI demand and favorable market dynamics. The current undervaluation compared to global peers suggests potential for significant upside in selected stocks.