VNET and Dajia: Forging Ahead in China's Data Center Boom

VNET Group, Inc. (Nasdaq: VNET) and Dajia Investment Holding Company Ltd. have inked a definitive agreement to form a pre-REITs fund, signaling a significant milestone in China's data center sector. This strategic partnership reflects the growing interest among domestic institutional investors in channeling investments into new infrastructure projects, particularly in the burgeoning data center market.

The fund will invest in hyperscale data centers across mainland China, with the initial assets comprising the first and second phases of VNET's Taicang IDC Campus. This campus currently boasts an IT capacity of approximately 210MW and an estimated value of RMB5.74 billion, reflecting an implied post-closing valuation of around 10.1x EV/EBITDA. VNET will retain a 51% equity interest in the underlying assets, while Dajia will acquire and hold the remaining 49% interest. VNET will consolidate the fund's financial results and maintain operational control over the assets, ensuring stable, premium IDC services for its customers.

VNET's interim CEO, Josh Sheng Chen, expressed enthusiasm for the transaction, emphasizing the prowess of VNET's capital and asset management capabilities, as well as the strategic value of innovative financing structures. This collaboration not only bolsters VNET's capital sources but also enhances its balance sheet efficiency while contributing to China's high-quality digital economy development.

The formation of the pre-REITs fund aligns with VNET's broader goals of enhancing capital efficiency and fostering long-term growth. By retaining a 51% equity interest in the underlying assets and consolidating the fund's financial results, VNET maintains operational control while sharing the risk. This allows VNET to generate cash flow through innovative financing structures, diversifying its capital sources and bolstering its operational foothold in the rapidly evolving data center market.

The implied post-closing valuation of around 10.1x EV/EBITDA suggests a strong operating metric, appealing to value-driven investors. This valuation is competitive with other recent investments in the data center sector in China, such as China Telecom's 10.5x EV/EBITDA valuation in 2023 and Alibaba's 9.8x EV/EBITDA valuation in 2022.

As the data center market continues to grow, driven by rising AI-driven demand and the increasing attraction of high-quality customers, VNET's partnership with Dajia Investment positions the company to lead in the data center landscape. This strategic move could significantly boost shareholder value in the medium to long term, as VNET capitalizes on the growth potential of the data center industry and maintains a strong financial performance.