VNET Group, Inc.

Hello, ladies and gentlemen. Thank you for standing by for the second quarter 2024 earnings conference call for V-Net Group Inc. After the management's prepared remarks, there will be a question and answer session. Please note the Chinese line is in listen-only mode. If you wish to ask questions, please dial in through English line. Participants from our management include Mr Gavin Shen, Rotating President, Mr Chi-Yu Wang, Chief Financial Officer, Ms. Xinlin Liu, Investor Relations Director of the company. Please note that today's conference call is being recorded. I will now turn the call over to your first speaker today. Ms. Xinlin Liu, please go ahead.

Thank you, operator. Hello, everyone, and welcome to our second quarter 2024 earnings conference call. Our earnings release was disputed earlier today, and you can find a copy on our website as well as our newswire services. Please note that today's call will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. For detailed discussions of these risks and uncertainties, please refer to our latest annual report and other documents filed with the SEC. VNAT does not undertake any obligations to update any forward-looking statements except as required under applicable laws. Please also note that VNAT's earnings precedence and this conference call include the disclosure of unaudited GAAP and non-GAAP financial matters. VNAT's earnings precedence contains reconciliation of the unaudited non-GAAP matters to the unaudited GAAP matters. A summary presentation which we will refer to during this conference call, can be viewed and downloaded from our IR website at ir.vna.com. Next, I'd like to alert you that we will be utilizing text-to-speech technology powered by Neolink.ai to deliver this quarter's prepared remarks by Gavin Shen, our rotating president, and Xiyu Wang, our CFO. We are excited to showcase just one of the many innovative ways in which VNet is embracing AI trends and maximizing AI's value. Gavin and Qiyu will join the Q&A session in person. Additionally, this conference is being recorded. Webcast of this conference call will also be available on our website at ir.vnet.com. Now, let's get started with today's presentation.

Good morning and good evening, everyone. Thank you for joining our call today. I will start with an overview of our second quarter results. Let's turn to slide four. We delivered another solid quarter thanks to continued strong strategic execution. Our net revenues increased by 9.4% year-over-year. The RMB $1.99 billion in adjusted EBITDA increased by 7.3% year-over-year to RMB $574 million. As we mentioned on our last call, we are now reporting our net revenues and operational metrics for our wholesale and retail IBC businesses separately. Our wholesale business remained our key revenue growth driver with net revenues from this segment increasing by 81% year-over-year to R&B $402 million. Capacity and service for the wholesale business was steady. at 332 megawatts capacity utilized for the wholesale business increased by 16 megawatts from the first quarter to 252 megawatts with the utilization rate rising by 4.9 percentage points quarter over quarter to 75.9%. Our retail IDC business maintained its smooth development with capacity and service, increasing to 52,177 cabinets and a stable utilization rate of 63.7% as of the end of June. Furthermore, our fundamentals remained robust with a healthy unused credit line and cash position, providing ample support for our current business operations and investments in future development. Our reliable, high-quality IDC services continue to win customers' trust and support in the second quarter. As you can see on slide 5, following the large orders we won for our flagship campus in Jiangsu Province in the past year, which totaled around 206 megawatts. We recently achieved another breakthrough with three additional order wins totaling 235 megawatts for our wholesale data center in the greater Beijing area, the Wulan-Tsao-Buaidi Sea Campus. Specifically, we secured a significant 200 megawatt order from an existing customer in the internet industry during the second quarter. along with two new IT services orders for 19 MW and 16 MW, respectively, recently. We are confident in WooLunch Hubs. growth potential and expect this cutting-edge facility to break the historical growth record set by our flagship campus in Jiangsu province. I will introduce our Ulan-Chabuaydezhi campus in detail later. Next, I'd like to briefly review our differentiated business model and diverse service offerings before moving on to demand trends and detailed business updates. Let's turn to slide 6. With comprehensive offerings across IDC, cloud, and VPN services, we can create tailored, holistic data and computing solutions to comprehensively meet customers' mission-critical needs, while IDC is our core business, our non-IDC businesses. including cloud and WAPI in-services are important contributors to revenue and critical components of our overall growth. We made significant progress in our non-IDC business during the second quarter. For VPN services, D-Shen expanded its customer base by acquiring new customers in the semiconductor, retail, and IT manufacturing industries, as well as a large FOE customer. Regarding our Blue Cloud business, our efforts to maintain and expand Microsoft's global account based in China, continue to yield positive results. During the second quarter, we won new customers in derivative finance, manufacturing, and finance. Looking ahead, we are confident of achieving further growth. Our IDC business is driven by an effective dual-core growth strategy divided into wholesale and retail segments, as outlined here on slide 7. By offering a broad variety of services across our wholesale and retail IDC businesses, we can serve enterprises of any size from hyperscale with massive power and space needs to small and medium enterprises that require a full service. Hands-on approach. We have built a broad, diverse customer base with low dependency on any single large customer, serving over 7,500 enterprise customers. of which more than 1,500 enjoy our IDC services. Since our IPO, approximately 90% of our total net revenues have been recurring revenues demonstrating the solid sustainability of our overall revenue growth. The churn rate for our core IDC business has consistently remained below 1%, reflecting our high level of customer satisfaction. Additionally, in the second quarter of 2024, our top 20 customers contributed 45.7% of our revenue. further highlighting the risk diversification and revenue stability within our customer structure. Now let's turn to slide 8 for a closer look at the demand trends that shaped our development during the second quarter. AI has definitively entered the mainstream in the digital economy era, with almost every industry seeking AI tech and applications to advance streamline processes, and improve results as the leading IDC service provider in the new infrastructure industry. We offer state-of-the-art IDC services and premium value-added services to our customers. With the AI boom, particularly the surging demand for high-performance computing power for large language model training, we see unprecedented new opportunities in our industry. To capitalize on this rising AI-driven demand, we are planning to strategically invest in AI computing power by expanding our AI-related business. and deepening our understanding of customers' AI needs. We are well positioned to unleash our potential and create a new growth engine for the company. We currently cater to AI-driven demand primarily from leading internet clients and industry leaders in cloud services, short video and local services, and financial tech sectors. Recently, we successfully secured several orders totaling 235 megawatts of capacity, the vast majority of which is set to facilitate AI deployment for our customers. As an industry-leading player, We provide customers with tailored high-performance computing solutions while remaining at the forefront of AI trends. For instance, we're conducting research and development on advanced power modules and refrigeration and heat dissipation solutions that can achieve air cooling of up to 30 kW per cabinet. and liquid cooling of up to 120 kW per cabinet. Furthermore, during the second quarter, we continue to upgrade our data centers with innovative designs, high-density cabinet deployments, and cutting-edge cooling technology. Currently, over 95% of our wholesale capacity in service is capable of meeting high-performance computing power requirements. positioning us to seamlessly accommodate future AI-driven demand. Moving to slide 9. We are hard at work on our Wulanzhabu IDC campus I mentioned earlier, a state-of-the-art facility boasting a total planned construction land area exceeding 638 square kilometers and total planned IAT power exceeding 1.2 gigawatts. As of now, we have secured orders for over 200 megawatts This campus will support large language model training demand, especially from customers in the Internet, autonomous driving, and financial services sectors. We have utilized numerous innovative technologies for the Ulanjabu IDC campus. including building standardization, modular data centers, and bus-based electrical systems. For our first order, we expect the timeline from construction to delivery to take six months, which represents the leading 309 speed in the industry. and showcases our excellent execution capabilities. We also plan to implement standardized construction and operational management to reduce the costs associated with the project lifecycle. Meanwhile, we are practically working to optimize Ulaan Chabu campus power utilization. Large language model training in the AI era entails massive power consumption. In line with our commitment to ESG best practices, we are collaborating with our customers to explore power innovations that provide sufficient, stable, green, and more cost-effective power supply. to meet AI computing power needs and support our customers' ESG goals. Our Wulanchabu IDC campus benefits from a host of regional advantages. Wulan Tsavups' exceptional geographic location offers abundant land resources and a stable geological structure. The site's natural cooling capabilities are available for up to 10 months a year, providing significant energy savings. Furthermore, as a computing power hub in the East Data and West Computing Initiative, Wulan's hub enjoys optimal electricity prices and preferential policies and has a high proportion of clean energy cabinets, making it ideal for large-scale deployment of computing power. Finally, Wulan's hub's direct optical cable connection to Beijing ensures high transmission efficiency, enabling us to fulfill enterprises' requirements for high-speed, high-quality data transmission services. In addition to Wuland's hub, our broad network of data centers not only covers major cities nationwide, but also connects carriers and service providers in far-flung locations through a robust domestic data transmission network, as you can see in slide 10. The layout of our wholesale capacity and service is well balanced with the Yangtze River Delta accounting for 52% and the Greater Beijing Area accounting for 48% for wholesale capacity under construction. The Yangtze River Delta accounts for 45.8%, while the Greater Beijing Area accounts for 54.2%. 82.6% of our wholesale capacity on hold for future development is in the Greater Beijing Area, mainly due to the region's geographical advantages, convenient transportation, abundant green energy resources, and lower utility costs compared with other regions. Notably, the majority of AI-related demand is coming from the Greater Beijing Area. For our retail data centers, our self-built capacity in service was 48,516 cabinets as of the end of June. Specifically, 58.4% of capacity in service is in the Greater Beijing Area. 19.2% is in the Yangtze River Delta, and the rest is distributed among the Greater Bay Area and other regions in line with demand. Now let's delve into our business optics, starting with our wholesale business on slide 11. Wholesale business continues to drive our overall growth, recording an 81% year-over-year increase in revenue this quarter. Our capacity and service remained robust and stable quarter-over-quarter at 332 MHz as of the end of June, an increase of 108 MHz from the end of June of last year. Utilization rate increased to 75.9% with mature capacity, utilization rate of 94.9% and ramp-up capacity, utilization rate of 45.7%. These utilization rate improvements reflect our ability to facilitate quick customer move-ins during the quarter. We have also established a clear growth path for our wholesale data center capacity. Slide 12 depicts our progress across various aspects of the wholesale business in the second quarter. Notably, our utilized capacity increased by 16 MW from 236 MW in the first quarter to 252 MW in the second quarter. primarily driven by strong customer demand from EJS Campus 02C. We also began ramping up construction in the second quarter in anticipation of future rising demand, increasing capacity, under construction by 140 MW to a total of 279 MW. This increase is mainly attributed to the large border for NOI Campus 01 project, which will be developed and constructed in several phases based on customer demand. By the end of June, the pre-commitment rate for capacity under construction had risen to 85.5%. Given this high pre-commitment rate and the continuous growth in market demand, we are planning to further expand the capacity of our wholesale data centers, targeting a total capacity of approximately 1 gigawatt. to solidify our leadership position in the data center services sector. Moving to our retail business on slide 13. This segment continued to operate smoothly in the second quarter. Capacity increased to 52,177 cabinets. The utilization rate was stable quarter over quarter at 63.7% as of the end of June. with mature capacity utilization rate holding steady at 72.5% and ramp-up capacity utilization rate of 12.7%. Our MRO per retail cabinet increased slightly quarter over quarter to RMB 8,753 in addition to our solid capacity and service. Our new capacity pipeline for a wholesale business is robust. Slide 14 depicts our resource pipeline for the next 12 months. Currently, we have eight data centers under construction. We plan to deliver IT capacity in a range of approximately 210 to 290 MW over the next 12 months, vastly increasing our total capacity by the end of the second quarter of 2025. Our capacity in service for the wholesale business was 332 megawatts as of the end of the second quarter, meaning that our expected new capacity is equivalent to approximately 63% to 87% of our current capacity in service. In terms of the delivery timeline, we are maintaining our delivery target of approximately 100 to 140 MW for 2024 and we anticipate delivering approximately 110 to 150 MW in the first half of next year. Specifically, in the Yangtze River Delta, we have four data centers under construction, with 98 MW expected to be delivered this year and 30 MW in the first half of 2025. In the greater Beijing area, we have four data centers under construction with 27 megawatts expected to be delivered this year and 124 megawatts in the first half of 2025. In summary, our solid second quarter results reflect our core strengths and strategic and execution excellence. These assets have positioned WeNet as a front runner in the AI era going forward our innovative IDC services. Last high power density resources and diverse AI related capabilities will continue to empower sustainable high quality growth. We will remain committed to driving innovation and advancing industry development as we grow, delivering value to all of our stakeholders. Thank you, everyone. I'll now turn the call over to Tzu to discuss more about our operating and financial performance.

Good morning and good evening, everyone. Before we start the detailed discussion of our second quarter performance, please note that unless otherwise stated, All the financials we present today are for the second quarter of 2024 and are in renminbi terms. Furthermore, unless otherwise specified, all the growth rates I am reviewing are on a year-over-year basis. Moving on to slide 16. In the second quarter, we remained focused on high-quality revenue businesses, a tactic that continued to yield positive outcomes. Our total net revenues increased by 9.4% to RMB $1.99 billion. Our adjusted EBITDA also grew year-over-year by 7.3% to RMB $574 million. In addition, our efforts to improve operational efficiency paid off with operating expenses decreasing by 7.7% year-over-year and 36.8% quarter-over-quarter. to 230 million for the second quarter. Going forward, we will continue to refine cost control measures and optimize our working capital to maintain our solid financial position. Additionally, the company has deepened its emphasis on profitability by controlling costs and increasing efficiencies. Through high-quality investments and development, we significantly improved our profitability with a quarterly turnaround in net profits. while maintaining solid cash flows. In the second quarter of 2024, the company recorded a net profit of RMB 71.8 million, a significant improvement from the net loss of RMB 159 million. In the first quarter of 2024, representing a quarter-over-quarter increase of RMB 230.9 million, in the first quarter, The company recognized a one-time loss of RMB 155.8 million due to stock option grants and the repayment of the convertible senior notes due to 2026, excluding the impact of the above one off items. The adjusted net loss for the first quarter of 2024 was RMB 3.2 million, and the adjusted net profit for the second quarter was RMB 56.7 million, representing a quarter-over-quarter increase of RMB 59.9 million, primarily due to the company's consistent operational improvements. Let's look more closely at our top line. As we mentioned on our last goal, we have subdivided total net revenues from IDC business into wholesale and retail IDC business based on the nature and scale of our data center projects, with revenues from non-IDC business remaining separate. As you can see on slide 17, wholesale revenues remained our key revenue growth driver, increasing by 81% year over year. to RMB $402 million, mainly driven by the EJS Campus 02A, EJS Campus 02B, EJS 02C, and NHB 04 data centers. Our retail revenues continue to account for the largest part of net revenues. our retail revenues increased sequentially by 4.4% to RMB $965 million, thanks to the increase in MRR per cabinet and some one-off revenues. Our non-IDC business continued to progress smoothly, with revenues increasing by 4% year-over-year to RMB $627 million. We continue to improve overall efficiency and maintained solid margins, as we have shown on slide 18. Adjusted cash gross margins and EBITDA margins remained quite stable. Moving on to liquidity, on slide 19, we maintained a strong liquidity position during the quarter. We recorded net operating cash inflow for the first half of 2024 of RMB $673 million, primarily due to steady payment collection from customers and measured expenditures. The company's net cash inflow from operations in the first half of 2024 was slightly lower than that of the same period for the previous two years mainly due to the time lag of one off cash inflows such as tax rebates our cash position remained healthy after repaying six hundred million in convertible bonds at the end of the quarter the company's total cash equivalents restricted cash and short-term investments reached RMB $2.22 billion, an increase of approximately 23% compared to the 1st of February 2024. Next, let's take a look at debt on slide 20. This quarter's metrics showcase the effectiveness of our prudent approach to debt management, our net debt to the trailing 12 months. adjusted EBITDA ratio was 4.6, while total debt to the trailing 12 months adjusted EBITDA ratio was 5.5, remaining at a healthy level. We prioritize long-term debt maturity planning in our debt and strategic management to ensure the security of debt repayment. Notably, the company's short- and medium-term debt, maturing in 2024 to 2026, comprises only 32% of our total debt. Turning now to CapEx spending, which we view as a critical investment in our future growth and industry presence. As you can see on slide 21, our CapEx has remained relatively stable over the past three years at between RMB $3 billion and $4 billion. In the first half of 2024, OR CAPEX was RMB $1.88 billion, of which RMB $1.48 billion was used for wholesale business expansion. Our previous full-year CapEx guidance was from $3.7 billion to $4.2 billion. However, as Gavin mentioned, we have consistently invested in wholesale data centers over the past several years, gaining vast experience and customer recognition. As such, we are steadily winning customers. For our hyperscale wholesale data centers, in eastern and northern china amid recovering market demand as well as the mitigating competing situation we recently won several new orders totaling over two hundred megawatts of capacity due to the tight time requirement for deliveries Most of the orders are already under construction or will begin construction in the near future. As such, we are raising our full-year CapEx guidance to RMB 5.5 billion with CapEx for the second half of the year. expected to be r b three point one billion to r b three point six billion the company consistently upholds stringent requirements for payback when selecting new projects to ensure the internal rate of return of new investment remains at a reasonable level After the allocation of corporate overhead expenses, this in turn enabled us to drive sustainable shareholder value through effective high-quality scalability. Leveraging our healthy balance sheet and solid cash flow, we have sufficient capital to support the CapEx plan for the second half of this year and the near future. While maintaining a reasonable leverage position, moreover, as previously mentioned, we have proactively accelerated the capitalization for our wholesale IDC projects. If this progresses well as planned, we will be able to further strengthen our cash reserves and reduce the company's debt ratio, which will efficiently support our healthy and sustainable development in the long run. Now moving to our full year guidance for 2024 on slide 22. We expect total net revenues to be in the range of RMB 7.8 billion to RMB 8 billion, a year-over-year increase of 5.2% to 7.9%, and adjusted EBITDA to be in the range of RMB 2.22 billion to RMB 2.28 billion, representing a year-over-year increase of 8.9% to 11.8%. This is unchanged from our previous guidance. CapEx is expected to be in the range of RMB 5 billion to RMB 5.5 billion. The expanded range from previous estimates is mainly due to new orders and the increase in projects under construction, as I just mentioned. Before I conclude, I would like to share a brief update on our achievements in ESG. We recently received a score of 53 in the 2023 S&P Corporate Sustainability Assessment, ranking the highest among China's IT services industry. and in the top 11% in the industry globally. Our exceptional ESG performance was also recognized by S&P Global with Inclusion in Air Sustainability Yearbook 2024, China Edition, our second consecutive year of inclusion. Notably, WeNet is the industry's only participant to be included in the yearbook's China Edition for two consecutive years. As a standout among the thousands of companies assessed, our recognition in the yearbook further affirms the strength and effectiveness of our ESG efforts. Going forward, we will further deepen our commitment to ESG, advancing our goal of bringing green direct current electricity from AIDC to millions of households. nurturing a high-quality, low-carbon digital future, and delivering sustainable value to all stakeholders. In summary, we delivered another solid quarter, highlighted by continued revenue growth and profitability enhancement through strong execution of our effective dual-core strategy. With our robust business fundamentals and healthy cash position, we are well positioned to continue capturing AI-driven opportunities and driving high-quality, sustainable growth. This concludes our prepared remarks for today. We are now ready to take questions.

Thank you. We will now begin the question and answer session. If you wish to ask a question, please press star 1 on your telephone keypad and wait for your name to be announced. If you wish to cancel your request, please press star then 2. For the benefit of all participants on today's call, please ask your question to management in English and then repeat in Chinese. Your first question is from Yang Lu from Morgan Stanley. Please go ahead.

Thanks for the opportunity to add questions. Two questions from my side. First, congratulations on the big order win. And my question is related with that. It's quite encouraging to see that you have three very sizable orders booked in the past quarter and quarter to date. Actually, could you please update us in terms of the underlying demand in China? We saw that Your wholesale business booked high double-digit growth. The retail side is largely flattish. And the wholesale side will keep winning new sideboard orders. Can we expect that in the foreseeable future, wholesale will continue to be almost the only driver of the core business? And the second question is related with AI. Could management... update us in terms of what the preparation VNAT has done to get ready for the potential AI demand. Especially what we care most is what will be the expected RIC or IRR for AI-related data center compared with non-AI. I will now simply translate my question. The first question is about domestic market demand. First of all, we saw a very strong order. At the same time, if we look at the numbers of the second quarter, all the growth is contributed by the wholesale business. Is it that in the next period of time, the wholesale business will continue to remain strong and have new orders, while the retail business may have a stronger growth? This is... The first question. The second question is about AI. I would like to ask the company what preparations it has made in preparation for AI. Especially, investors are most concerned about the investment return of AI-related data centers, whether it is using ROIC or IL-2 indicators. What are the changes compared to traditional data centers? Thank you.

Thank you. I'm Gavin Shen. Let me answer your question. The first question is, we can see that in the whole of 2024, the number of IDC orders that we can see from the entire market is going to increase significantly compared to the past two years. Just like the exhibition of our conference today, we were lucky to get The orders of two major customers are 200, 49, and 16 MW, a total of 235 MW orders. It is also expected that within a year, more than 200 MW orders will be delivered. So from the current overall order and the needs of our customers, it is still very, very strong. So this type of customer is mainly based on an AI business in Ulaanbaatar. So it can be seen that Our wholesale business, due to the increase in customer orders, will continue to maintain a relatively strong business growth. Our retail business is also relatively stable at the moment. Just as you asked the second question, we will also increase our investment in retail business in the area of AI. It is expected that our future will not simply be Thank you for your question. I am Gavin, so I will take your first question. As we can see that for the whole year 2024, there is increasingly more orders from the market from the wholesale perspective.

That's particularly higher than – it's actually more than what we've seen in the previous two months, and it's been increasing significantly. And as we have shown in our presentations that we have one, two orders from two major clients, and they are specifically a large order of 230 megawatt and another two of 19 megawatt and 16 megawatt. These new orders totaling capacity is around 235 megawatts, and we're planning to deliver all of them within a year's time. So as you can see that we have strong customer demand, as well as increasing amount of new orders, so these are very robust. And we are going to see similar types of clients for our capacity in Wulan-Jabu. And as you can see that our wholesale business is benefiting from the strong customer demand. And I'm glad that you also mentioned about retail business. Our retail business is growing stably. And with regard to your second question, we'll definitely increase the proportion of value-added services when it comes to AI. So gradually we'll ramp up our proportion of that type of service in our service offerings, in our total service portfolio.

我再補充說明一下,我們過去這個世界互聯最初我們的核心業務是由零售IDC業務發展過來的。 那麼過去我們零售IDC業務的一個優勢在於我們一個是客戶體系,還有一個就是我們的增值服務。 So just a quick add on what I've just said.

So for us, VNet, we grow from a business that's mainly targeted towards a retail business in the past, and that's been a core business for us. And for us, we have clear advantages in this regard. We have a very established customer base, and we offer very diversified value-added services in this regard. We are going to continue to increase the proportion of value-added services in this AI regard, so as to increase the competitiveness of our business, as well as increasing the closeness and also the relationship with our clients, so as to push up the unit MRR per rack cabinet. 再回答一下您的第二個問題。

Currently, the company's overall business strategy is to actively embrace AI, Boeing AI. Currently, the orders in the market can be seen that most of the demand is from AI-related business. At the same time, we are not only actively exploring and AI-related infrastructure technology upgrades and innovations in the business of the center of the city, including some of the innovative technologies of the wind industry that we talked about last time. At the same time, we are also actively And with regard to your second question, our strategy, corporate strategy has been fully embracing AI and all in AI.

As you can see that we have majority of our new orders are AI related and we are going to actively explore for innovations and upgrades in these AIDC regard. So particularly, I want to mention that we have actually seen a lot of increasing demand for computing for AI. And particularly, I want to mention that for today's quarterly financial result presentations, the prepared remarks of me and Chi-Yu has been synthesized and generated by Neuralink, which is a product that's going to be released soon to the market.

Thank you. What you just asked about this for AI, what you just asked about the return of this project, the situation of IR and OIC, I will respond to it. In fact, from the cost side, these for AI data centers, from our construction cost, in fact, and this ordinary The cost of non-4AI data centers is not too significant. Overall, our return level is not significant in terms of the return on investment on the side of the data center itself. With the increase in the volume of this part of the project, maybe our overall cost is declining. This is related to the overall business size of the company. I will make an ad on the AI data centers and AI projects.

So you are asking about the IR and ROI on these types of projects. So I would just say, according to our observations, the cost for constructing these AI-based or oriented data centers is not significantly different from those non-AI data centers. So overall, the ROI is pretty much consistent from those costs of traditional data centers. And as we scale up our projects in this regard, we are able to bring the overall costs down. And as you can see, most of these types of AI-oriented data centers are deployed in Wulan Chabu, where it enjoys natural advantages when it comes to utilities. as we continue to seek innovation.

Next question, please. Thank you. The next question is from Edison Lee from Jefferies. Please go ahead.

Thank you for the question, and congratulations on the order wins and the good results. I have two questions. Number one is, on the Yulan-Tapu project, can you give us an idea on the CapEx cost per megawatt, and also what kind of EBITDA margin you're expecting on those projects? And then on that 1.2 gigawatt IT capacity that you are talking about, what do you think is the timeframe that you can actually ram that up to 1.2 gigawatt? So that's question number one. Question number two is, in your first half CapEx of 1.8 billion, you said roughly 1.4 billion is for wholesale. So does it mean that you spend 400 million RMB on retail? But your retail revenue is not growing. So I want to know what your CapEx plan is for your retail and how do you decide how much capex you're going to allocate to retail? I have two questions. The first one is, first of all, this is a very good company, and this is a new order. I want to know if you can give us some information about capital development, which may be the average level of every capital development in Java. Then, in the long term, if there is a debt, what level will the EBITDA rate reach? And then you, you, you, you, you, you, you, you, you Thank you Jeffrey. Let me answer your question. As of now, you can see that

This is called the basic facilities. We adopted some innovative technologies. At the same time, it also benefits from our scale effect. So our price level of 3000 watts is lower than before. So this is the first question. The second question is the development rhythm of our 1.2G watts. Currently, we expect that in the next five years or so, we will have a Thank you for your question. As you can see that the majority of the orders for Wulan Chapu is AI-oriented, and the average construction cost per megawatt

is lower than the construction cost for traditional data centers. That's because we are leveraging some innovative technologies in the underlying technological architecture, as well as some other aspects. Right now, predominantly, we're adopting air cooling solutions for these AI-oriented data centers. But as we continue to seek innovations in the underlying technologies, as well as our advantages in scale of economies, we are going to be able to keep the construction costs per megawatt at a lower level. And with regard to the delivery timeline for the 1.2 gigawatt capacity in Wulanchapu, we're planning to deliver them in five years time so on average we'll be delivering 200 megawatts per year uh

RMB is put in retail. One hundred million is our maintenance expenses. Normal equipment replacement. Another four hundred million is the expansion of some high-tech cabinets in the emergency room. Including some of the previous year's projects. The main distribution is like this. This year we should not have new large-scale retail data centers. I would like to mention that in our company's entire planning, we have some data center projects that are in our large base data center. We will open a small part for retail use. We put this part of CapEx in our entire CapEx of wholesale, because it is not easy to separate.

I'll take your second question. This is Chi Yu. Yes, you are right that we have 500, so the majority of our CapEx is for wholesale capacity. And we have dedicated 550 million for retail capacity. And among them, 100 million is used for the maintenance expenses, replacing some of the legacy devices. Another $400 million is to scaling up or repurposing some of the existing devices, changing them to high power density cabinets. Additionally, there are some bills payable. all these total 550 million RMB and for this year we don't plan to offer a lot of capex for retail capacity and also I have to point one point that is we reserve a small portion from our wholesale capacity for retail services however it's a little bit hard to single this part of expenses out so we would just include it put it under our wholesale expenses okay thank you very much next question please

Thank you. The next question is from Daily Lee from Bank of America. Please go ahead.

Hey, good morning, management. Thanks for taking my question. Congrats on the strong results and the strong orders and especially for the AI. I have one question here regarding our future financing plan as we have reached the capex guidance for this year. Maybe next year should be like high level because we have more spending for the AI and could management update us the financing plan and the progress is very, for example, like the asset sale and the rates in China. Let me translate it. First of all, the management of the company has a very strong performance. I have a question about the future financing plan of the company. Because we have also improved the outlook of capital expenditure this year. I would like to ask, in the future, Thank you for your question. Let me answer your question. This year, we have indeed increased the value of our CapEx by about 12 billion yuan.

The core reason for this is that we just mentioned that we have received a relatively large order. The demand for this order will naturally increase. From the perspective of capital source, because the company returned a relatively large amount of transferable debt at the beginning of the year, so the company's current total debt is only 5.5 times the ratio of EBITDA. If we completely adopt the method of debt financing, then we have reached At the end of the year, the total debt of EBITDA is still lower than 6.5 times that of the previous year. The company has always treated 6.5 times as a red line for us to control debt. So even if we use debt financing, we can fully meet the requirements. And with the support of our strong shareholders, the company is now having a very low difficulty in financing debt in China. Thank you for your question.

You're right. We have raised our CAPEX guidance for this year, and we raised that by about 1.2 million RMB, and that's because we have won a large order from our clients. So naturally, the CAPEX will increase. And so in terms of the sourcing of our financing channels, so to give you a background, earlier this year, in the first half of the year, we have repaid around a large amount of convertible debt. And we, under that backdrop, we are able to, you know, the current total debt to TDM EBITDA is around, the ratio is around 5.5 so if we were to fully finance all the upcoming CAPEX for this year through debt we are still able to manage or keep the debt, total debt to EBITDA below 6.5 and that's the red line that we have predetermined or defined within the company So that's something that I would like to share with you. And plus, we have won strong support from our shareholders, and our capability to raise or to secure funding or financing onshore is actually getting a lot more friendly or more favorable for us. and also the costs for these financing instruments are also at a lower level or coming down.

接着回答你关于这个REITs的问题, 就是确实是公司还在非常非常积极的推进公募REITs, 包括私募REITs,还有我们叫Pre-REITs, 就各种资产出售的动作, 现在都已经几个项目都已经在, On the rates front, the company is actively engaged in

the explorations of sea rates, private placements, as well as the pre-rates. We are actively negotiating with the terms and conditions with our trade partners. However, the company maintains a very prudent attitude towards these options, and we will update the market once we have any further progress. We look forward to having good news in the second half of the year.

我这里再补充一句,就是我们现在的这个CAPEX的提升规划,即使是我们所有的这个资产出售计划都没有在今年年内实现的情况下,我们完全靠境内的债务融资仍然可以满足我们的这个CAPEX提升的需求,同时控制公司的这个负债比率在

I would like to reiterate that to meet our raised KBACs for this year, we are able to manage or keep the total debt to EBITDA below 6.5, even though we would fully finance these KBACs through debt. the debt or if the asset disposal plans fail to materialize. So we could guarantee we could meet these CAPEX requirements by fully financing them through debt while we are unable to materialize those asset disposal plans. So that's a point I would like to reiterate.

Thank you. The next question is from Timothy Zhao from Goldman Sachs. Please go ahead.

Great. Thank you, Meghna, for taking my question and congrats on the very solid results. My question is regarding the pricing trend. I was wondering if Meghna could share with us what is the latest pricing trend? For the wholesale business, including by different regions, and also on your retail business, I do notice that the pricing appears to be more stabilized. Just wondering, if you look at the second half of this year, are we expecting the retail business revenue to resume young year growth? I will translate it very quickly. Thank you for accepting my question. My question is about the price trend. I would like to ask how we see the price trend of the wholesale IDC business, including the trend in the economy and the cross-border corner. Secondly, I see that the price of our retail IDC seems to have stabilized. I would like to ask how we see the price of our retail IDC Thank you. Thank you. Let me answer your question.

At present, our wholesale business, as you know, many investors in the market are clear that in the past two years, the entire central market, especially wholesale business, has been very competitive because of supply and demand, including market demand. But from this year's overall actual order, including the situation of a heavy target, our average price level is steady recovery. At present, some market behaviors that are relatively outdated have not appeared this year. And we can clearly feel that today's price has the possibility and space for recovery.

Thank you for your question. This is Gavin. I will take your question. With regard to the wholesale business, I'm pretty sure that the analysts and all the stakeholders in this business knows clearly that for the past two years, especially in the Yangtze River Delta area, as well as the Beijing and its surrounding areas, the competitive of the IDC business is fairly strong. And we are actually seeing the pricing for these types of capacities is actually gradually stabilizing and started to pick up. That's because, you know, that's evidenced by the new orders that we have received as well as the bids that we have won. And so we could say that these unfriendly or aggressive marketing undercutting behaviors are diminishing in the market. So that's why we are confident that the pricing for these IDC capacities has the potential to grow in the near future. 再回答一下您的第二個問題。

Our retail business as a whole is relatively stable. There will be minor fluctuations. In our press conference last quarter, we talked about the renovation of some of the retail sales centers' high-tech cabinets. At the same time, with the information that we revealed this time, we will plan for good business. So we hope that through the renovation of high-tech cabinets

With regard to your second question, our retail business is relatively stable with minor fluctuations. As we have mentioned in our last quarter's conference call, we are actually repurposing portion of our retail cabinets and racks. We're repurposing them to high-power density ones. Coupled with that, we are actively deploying for the computing business. Together with the upcoming Neuralink AI business that's soon going to be released, we are pretty sure that we can have a more and more stable retail business in the upcoming future.

Next question, please. Thank you. The next question is from Ethan Zhang from Nomura. Please go ahead.

Okay, thanks, management. So I have two quick questions. The first one is regarding your utilization rate. How do you expect our utilization rate for the hotel business for the second half or maybe next year? Secondly, a quick follow-up on our CapEx. So I saw we raised our... guidance for CapEx for full year. How do we expect the CapEx intensity for the next few years as we have this 1.2 gigawatt hour planned IT power for our Wuling Chapel base? How should we see our future CapEx trends? Let me answer these two questions. As Gavin mentioned,

The data center's price increase rate is very fast, so we expect to reach a stable performance of more than 90% in six months to a year. Thank you for the question.

As Gavin mentioned, the ramp-up speed for our retail, so the utilization rate for ramping up the capacity for our retail capacity is quite quick. And normally, we wholesale. So a correction for wholesale. And normally we expected the utilization rate to be at around 90% in 6 months to 12 months time once they are delivered. 对,但是这里稍微解释一下可能在以后的这个业绩披露里会出现某一个时间点上

The reason for the decline in the market share rate of our wholesale projects is that if we pay our wholesale data center at a certain time, the overall market share rate will decline due to the reason for the calculation. However, we will reveal more information later to let you predict the trend of market share rate change.

And quick on, so in the future disclosures, you may find that at a certain time point, the utilization rate for our wholesale capacity may come down slightly. That's made partly because we will, you know, do consolidated delivery in that specific time window. So that would bring down the utilization rate slightly. However, we would provide more details as we have more visibility into these deliveries so that you can have a clear gauge on the trend of utilization rate for our wholesale business.

The second one is about the future prospects of CapEx. This year, due to the needs of AI, it is actually more traditional the demand of the data center is still increasing significantly. In addition, there are some changes in the domestic supply side. So in fact, the demand for orders now is indeed relatively high. Out of the improved KPACs of the company this year, 70% of them are for the construction of the delivery. They are all for the delivery of next year or next year. How to plan for the next two years of CapEx? I think we will mainly consider two points from the management level. The first point is the return level of the project, especially depending on some unique regional advantages in the area of Ulan-Chapu. If the return level of the project in this area can meet our expectations, In that case, we may still increase our open source investment in this area next year. This is the first point. The second point is that it depends on the state of the company's asset sales and the landing of some of our innovative cooperation development models. On the one hand, through equity asset sales to increase the company's open source investment ability. In addition, there may be some projects that we will develop through cooperation. In other words, we will not use our asset balance sheet, but use the asset balance sheet of our partner to develop. The landing of these methods will actually have some impact on our future CapEx, that is, the CapEx in the asset balance sheet. That's all.

On the CapEx outlook for the upcoming few years, as you can see that for this year, the demand for AI-based and traditional type of IDC is quite strong and is growing significantly. Also, we are noticing some dynamic shifts in the supply of IDC capacities in China, so For 70% of our CAPEX plan for this year, that's actually used for the deliveries scheduled for next year. In the next two years to come, based on the company's internal planning, the management will prioritize the ROI of such type of projects, especially given the natural geographical advantages of Wulan Chabu. If the ROI level of Wulan Chabu projects could exceed our expectations, we are likely to increase the capacity in this region. And the second point I want to mention is that we are actively exploring asset disposal options. In tandem, we are seeking some collaboration partnership model to co-built or built these capacities so that means we are able to increase our capabilities to do K packs without actually using our on balance sheets cash reserves or credit lines and So these have been things that are actually ongoing and will update to the market once we have more information.

Operator, we can conclude the call if there is no more questions.

Thank you. There are no further questions at this time. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may now disconnect your lines.