VNET Group, Inc.

Hello, ladies and gentlemen. Thank you for standing by for the third quarter 2024 earnings conference call for VNet 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 the English line. Participants from our management include Mr Gavin Shen, Rotating President, Mr Shiyu Wang, Chief Financial Officer, Mr. Zhu Ma, Executive Vice President, Mr. Shi Yang, Senior Vice President, Ms. Xinhuan Leo, Investor Relations Director of the company. Please note that today's conference call is being recorded. I would now like to turn the call over to the first speaker today, Ms. Xinhuan Leo. Please go ahead.

Thank you, operator. Hello, everyone, and welcome to our Standard Order 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 know that VNAT's earnings precedents and this conference call include the disclosure of unaudited GAAP and non-GAAP financial matters. VNet'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.vnet.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 Qi Yu Wang, our CFO. Gavin and Qi Yu 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.vinet.com. Now, let's get started with today's presentation.

Good morning and good evening, everyone. Thank you for joining our call today. I'll start with an overview of our third quarter results. Let's turn to slide four. We delivered a strong quarter, led by a 12.4% year-over-year increase in net revenues to RMB $2.12 billion, mainly driven by the rapid growth of our wholesale IDC business. Adjusted EBITDA also increased by 20.2% year-over-year to RMB $595 million, thanks to our cost and resource allocation optimization efforts Our wholesale business maintained its strong growth momentum, with net revenues from this segment increasing by a remarkable 86.4% year-over-year to RMB 523 million as we capitalized on rising demand. Wholesale capacity and service reached 358 megawatts as of the end of September, increasing by 69 megawatts year-over-year and 26 megawatts quarter-over-quarter. Wholesale capacity utilized reached 279 megawatts, increasing by 119 megawatts year-over-year and 27 megawatts quarter-over-quarter. This reflects our ability to scale effectively and respond to the market's expanding digital infrastructure needs. The utilization rate of our wholesale business rose by 2.1 percentage points quarter-over-quarter, a healthy pace in this high-demand environment. and the utilization rate of our mature wholesale business reached a new high of 95.6%. Our retail IDC business continued to progress smoothly with capacity and service and utilization rate remaining stable as of the end of September. Furthermore, our ample cash position and unused credit line provided reliable support for the company's current business operations and future development. Together, these results position us well for sustained growth and demonstrate our dedication to enhancing shareholder value. Moving on to our new order wins during this quarter. We continue to attracting high quality customers during the third quarter with six new order wins totaling 84 megawatts. As you can see on slide five, in addition to the two IT services orders totaling 35 megawatts for campus that we mentioned on our last earnings call, we have secured another three orders for our data centers in the greater Beijing area and one elsewhere. Specifically, we won a new wholesale order from an internet customer for 32 megawatts at our Huai Lac IDC campus, located in Hebei province, one of our green computing clusters, which I will review in more detail later. We also received a 14 megawatt wholesale order from another internet customer. and a 1.2-megawatt retail order from a semiconductor customer for our data centers in Hebei Province, as well as a 1.8-megawatt retail order from an information and communications technology services customer for our data center in the northern region. The strong demand for our wholesale and retail data centers across key regions underscores the enduring customer appeal of our reliable and high-quality IDC services. Now, let's turn to slide 8 to look at the AI demand trends that shaped our development during the third quarter. We made significant strides in harnessing the growing AI-dreaming demand for high-performance computing power. We continue to see an increasing number of industries adopting AI applications for enhanced operational efficiency. AI-driven demand among our customers primarily stems from leading internet clients and industry leaders in the cloud computing services, short video, local services, financial, and semiconductor sectors. We have expanded our AI computing capabilities in response, aligning our infrastructure with the market's surging needs for AI model training and data processing. Currently, over 98% of our wholesale capacity and service is capable of meeting high-performance computing power requirements, empowering us to quickly capture and accommodate customers' AI-driven demand. We have witnessed the unprecedented surge of large language model development starting in 2023. During the past year, we have won around 300 megawatts of new orders, approximately 90% of which are set to facilitate AI demands of our customers. Additionally, we have deepened our collaboration with clients to better understand their specific AI requirements, enabling us to tailor our services to our customers more effectively. We are consistently advancing our research and development on power modules and refrigeration and heat dissipation solutions that can achieve air cooling of up to 30 kilowatts per cabinet and liquid cooling of up to 120 kilowatts per cabinet. We also continue to enhance our data centers with innovative designs, high-density cabinet deployments, and cutting-edge cooling technology. Moving to slide nine, I'd like to review our Wi-Fi IDC comfort. Bush is part of the Jiangjiakou Cluster of the National East Data West Computing Project and serves as a demonstration project for the National Collaborative Innovation System for National Integrated Big Data Centers. It is situated just approximately 60 kilometers from downtown Beijing, close to customers. enabling us to efficiently meet their high demands for computing power, including the integration of training and inference for large language models, as well as model fine-tuning. Our Hawaii IDC campus is a hyperscale green computing cluster with a total planned construction land area of around 326,000 square meters. Huai Lai, located in Hebei Province, northwest of Beijing, is home to our third computing power cluster, succeeding those in Wulan, Changhu, and Haicheng. Huai Lai offers multiple strategic and geographic advantages. Currently, our Huai Lai IDC campus's capacity stands at approximately 500 megawatts, and we plan to build the campus into a gigawatt-level capacity computing cluster in phases Owing to its exceptional service capabilities, our Hawaii IDC campus recently won a 32-megawatt order from an Internet customer to meet its demand for AI computing power. On a related note, we continue to develop our green data center business and recently received approval from the Energy Administration of Inner Mongolia for our first source grid load storage integrated project, a 300,000 kilowatt project known as the Wunantabu Green Energy Project. The approved project encompasses 200,000 kilowatts of wind power and 100,000 kilowatts of photovoltaic power, as well as 45,000 kilowatts of co-located energy storage equivalent to 180,000 kilowatt hours. It also includes the construction of a dedicated electricity transmission line from renewable energy sources to our Wulan-Chabu data center. Once stable operations are achieved, the project is expected to generate approximately 700 million kilowatt hours of green energy annually, providing our Wulan-Chabu campus with a steady, long-term supply of green energy. We view the Wulantabo Green Energy Project as another value creator for our business and are very excited about its approval. It is one of just a few source grid load storage integrated projects in the China's data center industry equipped with a dedicated electricity transmission line. Not only will this project supply renewable, cost-efficient green power to our Wulantabo campus, but it will also create more synergies for our strategic cooperation with Shandong High-Speed Holdings Group Limited to develop renewable energy projects in northern China. Furthermore, Wulantabu's approval will elevate the proportion of green power used in our data centers, propelling progress in carbon neutrality, one of our key ESG initiatives. Now moving on to a regional data update. As you can see on slide 10, we remain focused on the development of the Yangtze River Delta and the greater Beijing area, with the latter regions under construction capacity proportion increasing during the third quarter, mainly driven by the construction of our Huailai IDC campus. Now let's delve into our business updates, starting with our wholesale business on slide 11. Wholesale business continues to drive our overall growth, recording an 86.4% year-over-year increase in revenue this quarter. Our capacity and service increased by 26 megawatts quarter-over-quarter, reaching a total of 358 megawatts as of the end of September, for an increase of 69 megawatts from the end of September of last year. The utilization rate increased to 78% compared with 75.9% last quarter, with a mature capacity utilization rate of 95.6% and a ramp-up capacity utilization rate of 46.4%. These utilization rate improvements reflect our ability to facilitate quick customer move-ins and our timely responses to customer needs during the quarter. we have a clear growth path for our wholesale data center capacity. Let's move on to slide 12, which illustrates our progress in capacity development and utilization. Notably, our utilized capacity continued increasing during the past quarters from 236 megawatts in the first quarter to 252 megawatts in the second quarter to 279 megawatts in the third quarter primarily driven by strong customer demand from EJS Campus 02C and UNBO R06. We also further ramped up construction in the past quarters to capture future rising demand. increasing capacity under construction from 139 megawatts in the first quarter to 279 megawatts in the second quarter to a total of 297 megawatts in the third quarter. This increase is mainly attributed to the new order for our NOR Campus Era 1 and NHB Campus Era 1B, which will provide reliable, high-performance computing infrastructure to our clients. By the end of September, the pre-commitment rate for capacity under construction had risen to 88.4%. Additionally, the capacity held for short-term future development increased by 72 megawatts to 192 megawatts, primarily due to an abundance of demand with high certainty. We are closely communicating with our potential customers on multiple orders, which are soon expected to enter the construction phase. Given our high pre-commitment weight 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. Our retail IDC business continued to operate smoothly in the third quarter. The retail capacity in-service has increased slightly to 52,250 cabinets. The utilization rate was 63.1% as of the end of September, with mature capacity utilization rate holding steady at 69.5%. Our MR per retail cabinet has slightly increased to RMB 8,788 this quarter from RMB 8,753 last quarter. Turning to our new capacity on site 14, we see that the resource pipeline for our IDC business remains robust. Currently, we have seven data centers under construction. We plan to deliver an IT capacity of approximately 297 megawatts over the next 12 months from the fourth quarter of 2024 to the third quarter of 2025. Our capacity in service for the wholesale business was 358 megawatts as of the end of the third quarter of 2024, meaning that our expected new capacity is equivalent to approximately 83% of our current capacity in service. Specifically, we anticipate delivering approximately 191 megawatts in total during the upcoming fourth quarter of 2024 and the first quarter of 2025, and approximately 105 megawatts in total during the second and third quarters of 2025. For our non-IDC business, our DSM business continued to expand its customer base by acquiring two new customers in the industrial and manufacturing sectors. offering its premium ICT consultation and SD-WAN services to support customers' digital upgrades and business operations. The ESAN currently boasts more than 220 POPs in over 100 cities worldwide and will strategically expand its footprint to other countries and regions going forward. In conclusion, the strong execution of our effective strategy drove strong third quarter results. Looking ahead, we will continue to refine our core strengths to build high-performance data centers and offer innovative IDC services. We are confident that our industry know-how and innovation capabilities will empower our success amid the AI boom. Additionally, building on our strategic cooperation with Shandong High-Speed Holdings Group, we will continue to develop our green energy business and deepen our commitment to our ESG goals. Propelling VNet's high-quality and sustainable development remains our priority as we strive to deliver value to all of our stakeholders. Thank you, everyone. I will now turn the call over to Thi Nguyen to discuss more about our operating and financial performance.

Good morning and good evening, everyone. Before we start the detailed discussion of our third quarter performance, please note that unless otherwise stated, all the financials we present today are for the third quarter of 2024 and are in Remedy 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 third quarter, We remain focused on high-quality revenue businesses with high margins and deliver strong financial and operational results. Our total net revenues increased by 12.4% to RMB $2.12 billion. Our adjusted cash gross profit increased by 16.6% to RMB $861 million. While our adjusted EBITDA also grew year-over-year by 20.2% to RMB $595 million. In addition, our efforts to improve operational efficiency paid off, with sales and marketing, research and development, and general and administrative expenses decreasing by 12.9% year-over-year to RMB $246 million. For the third quarter, going forward, we will continue to refine cost control measures and optimize our working capital to maintain our robust financial position. Additionally, the company has deepened its emphasis on profitability through high-quality development, controlling costs, and increasing efficiencies. While maintaining healthy cash flow, we also significantly improved our profitability this year, delivering a net profit for the third quarter as well as a cumulative net profit for the first nine months of 2024. In the third quarter of 2024, the company recorded a net profit of RMB $332 million, a significant improvement from the net loss of RMB $40 million in the same period of last year. Sequentially, we recorded a substantial increase of 362%, primarily due to the company's consistent operational improvements and a gain on debt extinguishment. Let's look more closely at our top line. As we have mentioned previously, 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, our wholesale revenues remained our key revenue growth driver with strong momentum, increasing by 86% year-over-year to RMB 523 million, mainly driven by the EJS Campus 02C and NOR06 data centers. Our retail revenues continue to account for the largest part of net revenues. Our retail revenues remained relatively stable, increasing sequentially by 1.1%. to RMB $975 million. Our non-IDC business continued to progress smoothly. During the third quarter, we maintained solid margins thanks to our continuous efforts to enhance overall efficiency. As we have shown on slide 18, our adjusted cash growth margins and EBITDA margins remained quite stable. Moving on to liquidity on slide 19, we maintained a strong cash flow during the quarter. we recorded a net operating cash inflow of RMB $1.43 billion for the first nine months of 2024, slightly higher than that of the same period of last year, primarily due to steady payment collection from customers and effectively measured expenditures. Our cash position remained healthy with the company's total cash equivalents restricted cash and short-term investments reaching RMB 2.1 billion stable compared to that as of the end of the second quarter. Next, let's take a look at debt on slide 20. We maintained our prudent approach to debt management with our net debt to the trailing 12 months adjusted EBITDA ratio at 4.9 and total debt to the trailing 12 months adjusted EBITDA ratio at 5.6, both 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 nine months of 2024, our CapEx was RMB 3.35 billion, of which RMB 2.3 billion was used for wholesale business expansion. We expect our CapEx for the full year 2024 will likely reach the high end of our guidance, around RMB 5.5 billion. Supported by our healthy balance sheet, solid cash flow, and the steady progress we're making in selling mature assets, we have sufficient capital to support our CapEx plan for the near future while maintaining a reasonable leverage position. Now moving to our full year guidance for 2024. On slide 22, we have decided to increase our full year guidance for total net revenues and adjusted EBITDA, primarily because faster than expected move-ins from our core customers, wholesale projects are accelerating the growth of our wholesale IDC business. along with our retail businesses' steady progress. Specifically, we expect total net revenues to be in the range of RMB 8 billion to RMB 8.1 billion, a year-over-year increase of 7.9% to 9.3%, and adjusted EBITDA to be on the range of RMB 2.28 billion to RMB 2.3 billion, representing a year-over-year increase of 16.4% to 17.4%. Next, I want to share some details on her pre-REITs project. As previously mentioned, we are proactively advancing the capitalization of our wholesale data centers and have made significant progress recently. Currently, we are in the final stages of entering into a definitive agreement with one of China's leading insurance companies and expect to sign this agreement by the end of 2024 to co-establish a pre-REITs fund. through which the fund will acquire a 100% stake in the first and second phases of our Taitham IDC campus. VNet will retain a 51% equity interest in the underlying assets through the fund and will continue to consolidate the project's financial results in the company's financial statement. and manage the daily operations of the assets to provide a seamless customer experience. The underlying assets have a total IT capacity of approximately 210 megawatts and are valued at RMB 5.74 billion. VNet will receive approximately RMB 1.15 billion as the consideration of equity interest held by the insurance company. This transaction marks the first direct investment by a major Chinese insurance company, in mature data center assets in china it highlights we net prowess and effectively managing capital cycle bolstering and diversifying the company's capital sources with long-term investors while further enhancing the company's balance sheet efficiency If this project progresses as planned, it will further strengthen our cash reserves and reduce our debt ratio. The company will continue to pursue exits for our existing premium data centers through multi-tiered REIT structures, including public REITs. This will create a steady source of incremental cash flow and build a healthy, sustainable capital structure and asset operating cycle supporting our high-quality long-term development. As Gavin mentioned earlier, our source grid load storage integrated project in Ulan Chabu, facilitated in collaboration with Shandong Hay Speed Holdings Group Limited, recently obtained local governmental approval This project is expected to come into service during the second half of next year and will further increase the proportion of VNet's green energy usage. Going forward, we will further deepen our commitment to our ESG initiatives. to sum up we were pleased to deliver another better than expected quarter led by robust growth in our wholesale business continued revenue growth and significantly enhanced profitability thanks to the strong execution of our effective dual core strategy supported by our robust business fundamentals and healthy cash position. We will continue to invest in business development, especially AI-driven opportunities, to propel our 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 one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. 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 comes from Sarah Wang with UBS. Please go ahead.

Thank you for the opportunity to ask a question. I have two questions. First is that it's actually encouraging to see that we have signed multiple new orders for this quarter rather than only one or two hyper-sealed customer. So when I ask what is driving the demand here, it's still AI computing demand and how the pricing or return on the new orders we see this year. Maybe a little bit more on the pricing. So given some of our peers are also raising CapEx, how shall we think about competition going forward? 在驱动这样的一个需求是不是仍然是以AI训练的需求为主? 那另外也是想请教一下 关于这些新订单的这个定价 或者是整个的回报的趋势 我们的一些这个同行友商 可能也会想说提升资本支出 那我们会不会怎么去考虑 这个未来竞争的一个趋势 My second question is on the green energy project in 乌兰茶库 I believe it's definitely helping to win more customers in long-term relationships How shall we think about pricing and margin of this project, given we now have an integrated solution of the green power supply? So can we think about the pricing and margin might be better than before? Will the discount or return rate of our software project be better than before? Thank you. Okay, thank you for your question.

Let me answer your first question. As you just mentioned, in this third quarter, our new orders are still relatively large. At present, we have received six new orders. The total is 84 megawatts. This is indeed due to the drive of AI, which makes the demand continue to grow. In the six orders we received, 84 megawatts, we are still in a situation where training is the main demand. Of course, in the past year, we have signed a total of about 300 megawatts of new orders. Here, the demand for AI and related orders accounted for more than 90%. So, as you said, among the new orders, the need for AI training is still one of our main needs. This is the first case. At the same time, we also see that while the demand for AI continues to grow in China, the demand for AI applications, that is, reasoning, is gradually rising. In this year, our orders When we analyzed our orders, we found that the trend of rising in demand gradually increased. Although the ratio is still above 90, it is the demand for training, but the demand for reasoning increases rapidly. So we have a judgment, that is, next year, our demand is still mainly based on training, but the ratio of reasoning will be higher and higher. In order to meet the customer's demand, and also the trend of market demand, our company has made some preparations in two aspects. The first is that Huai Lai Data Center is based on its land advantage. You know it is very close to Beijing. So while we are supporting the demand for training now, we have launched Huai Lai, which we call the training and reasoning unit. Thank you.

This is ,, Executive Vice President. I'll take your first question. As you rightly pointed out to that, we did have a lot of new orders from Q3. And to be specific, we signed six new orders totaling 84 megawatts. And most of them are AI workload related to requests. And so with that being said, Our total new orders received for the past year totaled 300 megawatts, and among them, 90% of them are AI workload-related. So, of course, you are right that the growth is mainly driven by the market demand from AI-related workload. And looking forward, we do notice that in the market, there is stronger demand for inference as more applications are being rolled out because of the AI boom. And we're seeing a faster growth of inference-related requests in the market. So our reading is that inference will become a stronger market demand going into next year. However, its proportion is going to increase among the new orders. So to respond to markets' needs like this, we are planning ahead. And one of the moves that we did is plan for our Huai Lai IDC Center Campus because given its geographic proximity to Beijing, and we are actually launching integrated training and inference services to cater to users' needs. And just a quick add to that, we have started to serve our clients for their inferencing needs starting from Q3 in our retail campus. So that's an answer for your question on the new orders.

It is expected that in the second half of next year, the price may have some steady recovery. At the same time, we are proud of the scale effect of the development of our base business and the continued improvement of our true level. Our construction cost and financing cost have been further reduced, so the investment return of the project has been significantly improved.

On your second question, this is Gavin, rotating president. For the pricing of our newly secured orders, it remained consistent with our previous orders. As we are seeing a more balanced supply and demand, we are anticipating the price will become gradually stable in the second half of the year and even started to pick up. And for our retail, for our wholesale campus, because we are seeing more economies, effective economies of scale, our construction costs is gradually coming down. Also, we are having better credit worthiness. So that brings the total costs for these operational costs for these centers are coming down. And as a result, we're seeing increased ROI.

Next, I would like to answer your third question about Ulancha. The project has been officially approved by the relevant departments in Inner Mongolia. This will also promote further coordination between us and strategic shareholder Shanggao Control Group. Shanggao Control Group's new energy company will coordinate the implementation of the project. The capacity of this project is 300,000 kilowatts. After the stable operation of the project, it is expected to produce about 700 billion kilowatts of green energy every year, and provide long-term stable green energy supply for our Ulan tea plant. The project is expected to start power generation in the second half of next year, which will greatly increase the proportion of companies directly using green energy. In addition, according to the current preliminary calculations, it will also have a good promotion of our project yield.

This is , and I will take your third question on the Green Project. Recently, we have received the approval from related energy authorities in the Mongolia Autonomous Region. I think the approval will significantly increase the synergies between us and the Shandong High Speed. With related to the construction work, it's going to be carried out by the subsidiaries owned by Shandong High Speed. That's the new energy construction company. They will be doing the construction work for that. So we have received a total granted capacity of 300,000 kilowatt for this project. So once this project is put into operation, It is expected to generate a total of 700 million worth of kilowatt hours of green electricity. So this would provide long-term green energy supply to our Ulan-Chapel campus. We are expecting that in the second half of the year, the electricity will be integrated into the grid. and start to supply the power. So once that's done, it's going to significantly increase the proportion of green energy used by the Ulanjabu campus next year. And with regard to the margin, with all of that being said, I think the margin will improve.

Next question, please. Thank you. Your next question comes from Shuyang Shi with CICC. Please go ahead.

Congratulations on the strong results, and thank you for the opportunity to ask questions. My first question is for the pre-rates in Taichung. This project has made progress many more details such as the current utilization rate, revenue, and EBITDA margin, and will the company carry out similar projects in the future? and my second question is about as the VNH plans to deliver 297 megawatts in the wholesale business in the next 12 months could management please share with us the outlook for the capex next year My second question is the company's base business growth is very strong. In the next 12 months, the plan is to pay 297 trillion. Can the management team share a general idea with us about next year's capital spending? Thank you.

I will answer these two questions. First of all, let's talk about the situation of the Taicang project. As you all know, we have been promoting this project for a while. I am very happy I'll take a first question.

Actually, the TITON project has been in the making for a while, and I am very pleased to be able to share more details at this earnings call. For the first phase and second phase of our TITON campus, right now the utilization rate is around 50 plus, give or take. And given that it's still ramping up stage, we expected that the utilization rate will rise to 95% by the end of next year. And by that time, we would have a EBITDA at around 570 million RMB.

The Taicang project should be the first time for a large Chinese insurance agency to directly buy IBC assets in China. We have accumulated a lot of experience in this project, and have worked with four to five large insurance companies before and after. We have conducted in-depth research and established a good cooperation base. In the future, we will actively promote similar projects. The market share of this Taisang project fell by about 50%. In the future, we hope that in the early stage, that is, when the market share is lower, we can achieve the pre-raise fall, so that the company can achieve a part of the equity cash flow earlier.

The Taitung project marks the very first example where China's large-scale insurance company directly purchased the equity stake of domestic IDC. And we have gained a lot of experience through this project. In the process, we have engaged four to five large insurance companies and had engaged them extensively. And this laid a very good solid foundation for our future cooperation. So going forward, we would advance similar projects. So at the moment, the utilization rate for our Taitung campus is around 50%. So we would likely to... advance such a project when the utilization rate is lower than this, because this would allow us to generate some net cash flow. So for the TITAN prerates project, we are able to maintain the... So we're going to have the cash inflow once that project is delivered as consult. It's done. Meanwhile, we'll still consolidate the financial statements into our group level statements. And our goal for 2025 is to carry out the pre-REITs project for our first phase Wu Lan Cha Bu project.

Next on CapEx.

We're seeing robust demand for our wholesale services, and that would translate into an increased CapEx for 2025. Our strategy is to work closely with our strategic suppliers and to maximize the synergies in order to make sure that our CapEx grow at a steady pace.

Next question, please.

Thank you. Your next question comes from Dali Li with Bank of America Securities. Please go ahead.

Hi, management. Thanks for taking my questions. Congrats on the strong results. I have two questions. First one is regarding the demand outlook, you know, by region. We have in Mongolia, but also in Hualai, in Hebei Province. So how do we see the demand in the two regions in the next two to three years, and which region we may spend more capital in the future? Let me translate it. I want to ask about the future demand from a regional perspective. For example, in Hualai, Hualai, Hualai, Hualai, Hualai, Hualai, Hualai, Hualai, Hualai, My second question is about the gross profit margin. We see the Q3 gross margin is in a good trend. And what's the key drivers for the better gross profit margin? How do we see the future gross margin trend? Thank you.

Our company's overall development strategy is to focus on three strategic bases for the development of a region. At the same time, we will also study the possibility of development in other regions. Currently, from the positioning point of view, Wulanchabu is a green large model training base that needs to be expanded. Our future development goal will be in Jiwaji. In addition to training, of course, it can also support some return needs. Of course, it must be mainly based on training. This is our positioning for Ulan-Tabu. This time, we lit up our Huai Lai base. We got a client order. In the future, Huai Lai base, we will also do it according to the development goal of Jiwa Ji. Due to the advantage of its geographical location, we will use it as a demand base in our Beijing area. It will also focus on supply and demand, including part of the small-scale training business. At the same time, because its physical position is relatively superior, it will also take into account some of the main business needs of our Beijing region. The third big base is our Taichung base in Jiangsu. It will also continue to develop. I'll take your first question.

Right now, for the group's development strategy, we would strategically focus on three campuses or three regions while exploring the possibilities and opportunities at other regions. So the first strategic focus area is the Ulanjabu campus. So we position this as a green, scalable, large language model driven or oriented campus. And our goal is to build it into a Geekwater scale campus. Majority of the requests or tasks we're handling at this campus is in training related. So that's the majority of the requests or the AI workloads that we're handling at this campus. And the second strategic focus region is our Huai Lai campus at Hebei Province. We have started to receive new orders for this campus. We are very pleased to see that. And our goal is also to scale this into a gigawatt hour, a gigawatt campus. Given its geographic proximity to Beijing, it could enjoy the spillover benefits. So we're going to use this campus to accommodate inference as well as some small-scale training-related workloads. And other than that, we're going to use this campus to accommodate some other requests by our existing clients from Beijing. And the next strategic campus for us is the Taichung Campus located in Jiangsu Province. We're going to be using this. This is a core node to support our clients in the Jiangsu region. We're planning to carry out the construction for the third phase. Meanwhile, we'll explore other opportunities in Suzhou and within Jiangsu province to expand our wholesale business in that region. 关于毛利率提升的原因,我来回答一下。

There are three main reasons. The first is that the company is continuously optimizing our operating costs, including the optimization of data center personnel costs and the improvement of PoE. The second reason is that the current income structure of the company's base business is getting higher and higher. The interest rate of the base business itself is relatively On your question on gross profit margin, there are three reasons that could explain the increase of gross profit margin. One, we are constantly optimizing our

IDC centers. That includes the optimization for the personnel as well as the PUE. And the second reason is the rising share of wholesale business among our revenue because it has a higher gross profit margin than retail business as well as non-IDC business. And the third reason is that last year we made adjustment to our discount term so that we have a lower discount rate. All these three reasons explained the rise of our gross profit margin. On the last reason, third reason, we adjust the term for our depreciation. So hence, it's more, it's reflecting the actual situation on the ground. So with these three conditions and reasons, we are having a better gross profit margin.

Next question, please.

Thank you. Your next question comes from Tom Tang with Morgan Stanley. Please go ahead.

Thanks, Marshall, for the opportunity to ask questions and congratulations on the very strong result. I only have one question, which is on the fourth quarter outlooks. So can we have some more details on how we think about the demand in the fourth quarter, especially for the health-health business, and if we're expecting to see any more new orders coming in, whether it's from AI or training or different traditional demand. Let me answer your question. Currently, based on our guidance forecast, our company's

uh, uh, Let me take your question. If you look at our guidance, we expect that our wholesale business to grow at a faster pace in Q4.

And in terms of the revenue and gross profit for our retail business and non-IDC business, that will be consistent with the guidance that we give. So it's going to be relatively consistent or flat. If you look at our deliveries in Q3, and based on that, are confident that we are able to fulfill the annual delivery target set. So with that being said, we are confident that we can fulfill our operational plan given forward.

Next question, please.

Thank you. Your next question comes from Edison Lee with Jefferies. Please go ahead.

in terms of CAPEX, in terms of maybe TAP requirement for AI training versus inferencing demand. That's question number one.

Question number two is...

And question number three is, when I look at your amount of power held for short-term development actually went up from 120 megawatt to 192 megawatt.

So can you explain to us what was driving that growth?

Second question.

uh Edison, can you please repeat your third question?

Hello, Edison.

Number one question or number three question. Yes.

Number three. Thank you.

Oh, number three is on your page 12.

For the development short term.

Sorry, your connection is not that stable.

I think that's good. Okay. I'll ask in the callback. Don't worry. Let's talk about the first two questions.

Okay. Thank you.

Let me answer your first question. Just like what I shared with you earlier, through this year's service to domestic AI scenarios, This year, the demand for domestic AI training is still very strong. This trend will remain until next year. At the same time, we are in our own HuaiLai base and city data center. We also saw that customers have made requests for reasoning. At the same time, among our paid customers, I'll take your first question.

Given the current landscape and supply and demand for the AI in China, we expected the demand for training-related workload will continue to perform very strongly, and that's going to last into next year. However, we did notice that there are some industries like quantitative trading firms as well as autonomous driving firms They are having stronger demand for integrate, for inference and training integrated services as well as pure inferencing related to the request. That's why we are actually expanding our services at Hawaii and our retail service campuses to accommodate such a demand. So we expect such a trend to continue well into next year. and then with a stronger, quicker growth sometime in Q4 next year.

Let me answer the second question about capex. We have about 1 billion capex. Half of it is used in our city data center. I'll talk about the CapEx. Other than the investment in our wholesale business,

we spend around, so with regard to the one billion, over half of that is spent on our retail data centers. That is used for the maintenance, repairs, and repurposing of these retail data centers. And we used the other half of the one billion to purchase a GPU-related hardware to meet users' demand. So that will be delivered coupled with their other related requests.

Next question, please.

Thank you. Your next question comes from Timothy Zhao with Goldman Sachs. Please go ahead.

Great. Thank you, Benjamin, for taking my question. I have two questions here. One is that I think on your wholesale IDC business, based on my calculation, I think in terms of the monthly recurring revenue or monthly services revenue, it seems that there's a Q&Q increase to a bigger extent. Could you explain the reason or the drivers behind? And secondly, I think for your in-service capacity for the wholesale IDC business, just wondering if Benjamin can give us any outlook for the fourth quarter this year and next year. I will quickly translate it. Thank you for accepting my question. I have two questions here. The first question is about the price of our wholesale IDC. According to my estimate, the wholesale IDC price of this quarter seems to have increased significantly. Could you please share with us the reasons behind this? What are the reasons? The second question is about the expectation of our in-service capacity, especially regarding the expectation of in-service capacity in this year's quarter and next year's wholesale IDC. Could you please comment on this? Thank you.

Okay, let me answer your question. In essence, there is such a performance display, which is still in line with our customer pricing rhythm and is better than expected. So, the MR of wholesale business is higher than expected. Secondly, as I said in the previous question, under the scale effect, the cost of construction and financing have decreased. So, our profit rate is better than expected. So, this is the current Let me take your first question.

I think that's mainly because for our wholesale business, the clients are moving a lot faster than we expected. So that's why we are seeing the monthly recurring revenue increasing quarter over quarter. And other than that, thanks to the effective scale of economies, the decrease in construction costs as well as the funding costs, our profitability is also improving, and it's better than our expectation. So these two reasons explain the increased MRR.

Our second question is... Yes, our second question is our overall perspective on the JiaoFu project. Because we have a time to confirm when JiaoFu and customers meet, because we are revealing based on the season, So, from the current forecast, the goal of the entire year is to maintain the exchange rate. It is now November, so part of the exchange rate plan is completed in Q4. So, at present, it is stable. on the delivery outlook, we maintain our current delivery plan unchanged.

we are going to deliver the rest of the planned deliveries in Q4. So that's on the planned delivery for this year. Looking ahead to the next year, given the orders that we have received as well as the potential expansion with our existing clients, we have already also given our guidance on the capacity to be delivered next year.

Ladies and gentlemen, that concludes our conference for today.

Thank you for participating. You may now disconnect your lines.