Hello, ladies and gentlemen. Thank you for standing by for the Third Quarter 2024 Earnings Conference Call for VNET Group, Inc. [Operator Instructions] Participants from our management include Mr. Gavin Shen, Rotating President; Mr. Qiyu Wang, Chief Financial Officer; Mr. Ju Ma, Executive Vice President; Mr. Qi Yang, Senior Vice President; Ms. Xinyuan Liu, 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. Xinyuan Liu. Please go ahead.

Thank you, operator. Hello, everyone, and welcome to our third quarter 2024 earnings conference call. Our earnings release was distributed earlier today, and you can find a copy on our IR 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. 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 press release and this conference call include the disclosure of unaudited GAAP and non-GAAP financial matters. VNET's earnings press release contains a reconciliation of the audited non-GAAP measures 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 Newlink.ai to deliver this quarter's prepared remarks, like I mentioned, our Rotating President; and Qiyu Wang, our CFO. 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'll start with an overview of our third quarter results. Let's turn to Slide 4. 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 in 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 to 78%, at 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 6 new order wins, totaling 84 megawatts. As you can see on Slide 5, in addition to the 2…

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 renminbi terms. Furthermore, unless otherwise specified, all the growth rates I'm 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 delivered 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 expense is 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 the cumulative net profit for the first 9 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…

[Operator Instructions] Your first question comes from Sara Wang with UBS.

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 1 or 2 -- only 1 or 2 hyperscale customer. So when I ask what is driving the demand here, is still AI computing demand? And how is 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. [Foreign Language] My second question is on the green energy project in Ulanqab. I believe it's definitely helping to win more customers on long-term relationship. 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? [Foreign Language]

This is Ju Ma, Executive Vice President. I will 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 6 new orders, totaling 84 megawatts. And most of them are AI workload-related 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 our 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, that 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 are 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 market needs like this, we are planning ahead. And one of the moves that we did is planning further -- plan for our Huailai 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.

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 starting to pick up. And for our retail -- for our wholesale campus, because we are seeing more economies -- effect of economies of scale, our construction cost is gradually coming down, also, we are having better creditworthiness. So that brings the total cost for these -- operational costs for these centers are coming down. And as a result, we are seeing increased ROI.

This is Qi Yang. I will take your third question on the Ulanqab green project. Recently, we have received the approval from related energy authorities in Inner Mongolia Autonomous Region. I think the approval will significantly increase the synergies between us and the Shandong Hi-Speed. With related to the construction work, it’s going to be carried out by the subsidiaries owned by Shandong Hi-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 Ulanqab 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 Ulanqab campus next year. And with regard to the margin, with all of that being said, I think the margin will improve.

Your next question comes from Shuyun Che with CICC.

Congratulations on the strong results. My first question is for the pre-REIT in Taicang. This project has made progress, may I know 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 VNET's plan to deliver 287 megawatts in the wholesale business in the next 12 months. Could management please share with us the outlook of the CapEx next year?

I'll take your first question. Actually, the Taicang project has been in the making for a while, and I'm very pleased to be able to share more details at this earnings call. For the first phase and second phase of our Taicang campus, right now, the utilization rate is around 50% plus, give or take. And given that is still ramping -- at the 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 an EBITDA at around RMB 570 million.

The Taicang 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 4 to 5 large insurance companies and has had engaged with 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 Taicang campus is around 50%. So we would likely to advance to 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 Taicang pre-REITs project, we are able to maintain the -- so we're going to have the cash inflow once that project is delivered as consult is done. Meanwhile, we will 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 Ulanqab project. [Foreign Language]

Next on CapEx. We are seeing robust demand for our wholesale services, and that would translate into 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.

Your next question comes from Daley Li with Bank of America Securities. Please go ahead.

Congrats on the strong results. I have two questions. First one is regarding the demand outlook by region, we have a project in Mongolia, Ulanqab, but also in Huailai in Hebei province. So how do we see the demand in the 2 regions in the next 2 to 3 years? And which region we may spend more CapEx in the future? [Foreign Language] 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? [Foreign Language]

I'll take your first question. Right now, for the group's development strategy, we would strategically focus on 3 campuses or 3 regions while exploring the possibilities and opportunities at other regions. So the first strategic focus area is the Ulanqab campus. So we position this as a green, scalable, large language model driven or oriented campus. And our goal is to build into a gigawatt scale campus. A majority of the requests or tasks we're handling at this campus is training related. So that's the majority of the request or the workloads that we're handling at this campus. And the second strategic focus region is our Huailai campus at Hubei province. We have started to receive new orders for this campus. So 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 benefit. 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 Taicang 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.

On your question on gross profit margin, there are 3 reasons that could explain the increase of our gross profit margin. One, we are constantly optimizing our IDC centers. That includes the optimization for the personnel as well as 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 3 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 3 conditions and reasons we are having a better gross profit margin.

Your next question comes from Tom Tang with Morgan Stanley.

Congratulations on the very strong results. I only have one question, which is on the fourth quarter outlook. So can we have some more details on how we think about the demand in the fourth quarter, especially for wholesale business and if we're expecting to see any -- more new orders coming in, whether it's from AI or training or different transitional demand? [Foreign Language]

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, we 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 going forward.

Your next question comes from Edison Lee with Jefferies.

[indiscernible] in terms of CapEx, in terms of maybe tech requirement for AI training versus inferencing demand? That's question number one. Question number two [indiscernible]. And question number three is looking at [indiscernible] your amount of power held for short-term development actually went up from 120 megawatts to 192 megawatts. So can you explain to us what was driving that growth? [Technical Difficulty] [Foreign Language]

Edison, can you please repeat your third question?

Number one question or number three question?

Number three.

Number three is on your Page 12, future development short term [Technical Difficulty].

Sorry, your connection is not stable.

I'll ask in the call back, don't worry. Just let's talk about the first two questions.

I'll take your first question. Given the current landscape supply and demand for the AI in China, we expect 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 inference and training, integrated services as well as pure inferencing-related requests. That's why we are actually expanding our services at Huailai and our retail service campuses to accommodate such demand. So we expect such a trend to continue well into next year and then with a stronger, quicker growth some time in Q4 next year.

I’ll talk about the CapEx. Other than the investment in our wholesale business, we spend around – so with regard to the RMB 1 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 RMB 1 billion to purchase GPU-related hardwares to meet users’ demand. So that will be delivered coupled with the – their other related requests.

Your next question comes from Timothy Zhao with Goldman Sachs.

Great. 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 is a Q-on-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 management can give us any outlook for the fourth quarter this year and next year, please? [Foreign Language]

Let me take your first question. I think that's mainly because for our wholesale business, the clients are moving in 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 2 reasons explain the increased MRR.

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.