Hello, ladies and gentlemen. Thank you for standing by for the second quarter 2024 earnings conference call for VNET Group Inc. After the management's prepared remarks, there will be a question-and-answer session. [Operator Instructions] Participants from our management include Mr. Gavin Shen, Rotating President; Mr. Qiyu Wang, Chief Financial Officer; Ms. Xinyuan 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. Xinyuan Liu. Please go ahead.

Thank you, operator. Hello, everyone, and welcome to our second quarter 2024 earnings conference call. Our earnings release was distributed earlier today, and you can find a copy on our aside 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. VNET does not undertake any obligation to update any forward-looking statements, except as required under applicable laws. Please also note that VNET's earnings release and this conference call include the disclosure of audited GAAP and non-GAAP financial matters. VNET's press release contains a 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 website at ir.vnet.com. Next, I'd like to alert you that we will be utilizing text-to-speech technology powered by [indiscernible].ai. To deliver this quarter's prepared remarks are Gavin Shen, our Rotating President; and Qiyu Wang, our CFO. We are excited to showcase just one of the many innovative ways in which VNET is embracing AI trends and maximizing [indiscernible] value. Gavin and Qiyu will join the Q&A session in person. Additionally, this conference is being recorded. A 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 4. We delivered another solid quarter thanks to continued strong strategic execution. Our net revenues increased by 9.4% year-over-year to RMB 1.99 billion, and 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 IDC businesses separately. Our wholesale business remained a key revenue growth driver, with net revenues from this segment increasing by 81% year-over-year to RMB 402 million. Capacity in service for the wholesale business was steady at 332 megawatts and 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 in service increasing to 52,177 cabinets and a stable utilization rate of 63.7% as of the end of June. Furthermore, our fundamentals remain robust with a healthy unused credit line and cash position, providing ample support for our parent business operations and investments in future developments. Our reliable high-quality IT 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 a flagship campus in [indiscernible] province in the past year, which totaled around 206 megawatts, we recently achieved another breakthrough with 3 additional order wins totaling 235 megawatts and for our wholesale data center in the Greater Beijing Area in Ulanqab IDC Campus. Specifically, we secured a significant 200 megawatt order from an existing customer in the Internet industry during the second…

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 RMB 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 remain focused on high-quality revenue businesses, a tactic that continue 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 RMB 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 in development, we significantly improved our profitability with a quarterly turnaround in net profit 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 onetime loss of RMB 155.8 million due to stock option grants and the repayment of the convertible senior notes due 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…

[Operator Instructions] Your first question is from Yang Liu from Morgan Stanley.

Two questions from my side. First, congratulations on the big order win. My question is related with that. It's quite encouraging to see that you have 3 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. In the wholesale side, you keep winning new sizable orders. Can we expect that the foreseeable future, orders will continue to be the 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 VNET has done to kind of value for the potential AI demand? Especially, what we care most is what will be the expected ROIC or IRR for AI-related data center compared with [indiscernible]. [Foreign Language]

[Foreign Language] Thank you for your question. I am Gavin. So I'll 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 2 months, and it's been increasing significantly. And as we have shown in our presentations that we have won orders from 2 major clients, and they are specifically a large order of 230 megawatts, and another 2 of 19 megawatts and 16 megawatts. These new orders totaling capacity is around [235 megawatts]. And we are planning to deliver all of them within a year's time. So as you can see that we have strong customer demand and as well as increasing amount of new orders. So these are very robust. And we are planning to -- we are going to see similar types of clients for our capacity in Ulanqab. 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. So just a quick add on what I've just said, so for us, VNET, we grew from a business that's mainly targeted towards the 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.…

The next question is from Edison Lee from Jefferies.

Congratulations on the order wins and the good results. I have two questions. Number one is on the Ulanqab project, can you give us an idea on the CapEx cost per megawatt? And also, what kind of EBITDA margin you're expecting on this project? And then on that 1.2 gigawatt IT capacity that you are talking about, what do you think is the time frame that you can actually run that up to 1.2 gigawatts? So that's question number one. Question number two is, in your first half CapEx of RMB 1.8 billion, you said roughly RMB 1.4 billion is for wholesale. So does it mean that you spent RMB 400 million on retail, but the retail revenue will start growing. So I want to know what your CapEx plan is for your retail? And how do you decide how much CapEx you would allocate to retail? [Foreign Language]

[Foreign Language] Thank you for your question. As you can see that majority of the orders for Ulanqab is AI-oriented. And the average construction cost for per megawatt is lower than the construction cost for traditional data centers. 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 time line for the 1.2 gigawatt capacity in Ulanqab, we're planning to deliver them in 5 years' time. So on average, we'll be delivering 200 megawatts per year.

[Foreign Language] I'll take your second question. This is Qiyu. Yes, you are right that we have 500 -- so majority of our CapEx is for wholesale capacity. And we have dedicated RMB 550 million for retail capacity. And among them, RMB 100 million is used for the maintenance expenses replacing some of the legacy devices. And another RMB 400 million is to scaling up or repurposing some of the existing devices changing them to high power density cabinets. And additionally, there are some bills payable, so totaling -- all these totaling RMB 550 million. 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.

The next question is from Daley Li from Bank of America.

Congrats on the strong results and the strong orders and especially for AI. I have 1 question here regarding our financial plan as we have list the CapEx guidance for this year, maybe next year, it should be like a high level because we have more spending for the AI. Could management update us the financing plan and the progress? For example, it could be asset sale and rates in China. [Foreign Language]

[Foreign Language] Thank you for your question. You're right. We have raised our CapEx guidance for this year, and we restate by about RMB 1.2 billion. 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 under that backdrop, we are able to -- the current total debt to TTM 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 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 on 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 cost for these financing instruments are also at a lower level or coming down. On the rate front, the company is actively engaged in the exploration of C 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. And we look forward to having good news in the second half of the year. I would like to reiterate that to meet our raised CapEx for this year, we are able to manage or keep the that total debt to EBITDA below 6.5%, even though we could fit -- we would fully finance these CapEx through debt, if the debt or if the asset disposal plan failed to materialize, so we could guarantee we could meet these CapEx requirement 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.

The next question is from Tim Zhao from Goldman Sachs.

Congrats on the very solid results. My question is regarding the pricing trend. Just wondering if you could share with us what is the latest pricing trend for the wholesale business, including by different regions? And also on your retail business, you noticed that the pricing appears to be more stabilized. Just wondering, if we look at the second half of this year, are we expecting the retail business revenue to year-on-year growth? [Foreign Language]

[Foreign Language] Thank you for the 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 2 years, especially in the Yangtze River Delta area as well as the Beijing and its surrounding areas, the competitiveness of the IDC business is fairly strong. And we are actually seeing the pricing for these types of capacity is actually gradually stabilizing and started to pick up. That's evidenced by the new orders that we have received as well as the bids that we have won. 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 capacity has the potential to grow in the near future. 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 a 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 going to be released, we are pretty sure that we can have a more and more stable retail business in the upcoming future.

The next question is from Ethan Zhang from Nomura.

Okay. So I have two quick questions. The first one is regarding your utulization rates. How do you expect our utilization rate for the wholesale 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 planned IT power for our anchor base, how should we see our future CapEx trends? [Foreign Language]

[Foreign Language] Thank you for the question. As Gavin mentioned, the ramp-up speed for our retail -- the utilization rate for ramping up the capacity for our retail capacity is quite quick. And normally, -- wholesale, so a correction for wholesale, normally, we expect the utilization rate to be at around 90% in 6 months' to 12 months' time once they are delivered.

[Foreign Language] And a quick one, 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 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.

[Foreign Language] 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 it's growing significantly. Also, we are noticing some dynamic shifts in the supply of IDC capacities in China. So for 70% of our CapEx planned for this year, that's actually used for the deliveries scheduled for next year. In the next 2 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 Wona. If the ROI level of the Ulanqab products exceed our expectations, we are likely to increase the CapEx 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-build or build these capacities. So that means we are able to increase our capabilities to do CapEx without actually using our on-balance sheet cash reserves or credit lines. So these have been things that are actively ongoing and we will update the market once we have more information.

Operator, we can conclude the call if there are 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.