VNET Group - Earnings Call - Q4 2024
March 12, 2025
Transcript
Operator (participant)
Thank you for standing by for the Fourth Quarter and Full Year 2024 Earnings Conference Call for VNET Group Incorporated. 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. Ju Ma, Rotating President; Mr. Qiyu Wang, Chief Financial Officer; Mr. Qi Yang, Senior Vice President; and Ms. Xinyuan Liu, Head of Investor Relations of the company. Please note that today's conference call is being recorded. I will now turn the call over to the first speaker today, Ms. Xinyuan Liu. Please go ahead.
Xinyuan Liu (Head of Investor Relations)
Thank you, operator. Hello everyone and welcome to our Fourth Quarter and Full Year 2024 Earnings Conference Call. Our earnings release was distributed earlier today, and you can find a copy on our IR site as well as on 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 obligations 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 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 site at ir.vnet.com. Now let's get started with today's presentation. Mr. Ma, please go ahead.
Ju Ma (Rotating President)
Good morning and good evening, everyone. Thank you for joining our call today. I'd like to begin with several key achievements from our fourth quarter and full year performance in 2024. Firstly, our wholesale business has delivered remarkable growth, while our retail business has remained stable. Secondly, our net revenue and adjusted EBITDA have significantly surpassed our previous guidance. Thirdly, we have recently secured a total of 252.5 MW in orders from customers across the internet, cloud computing, and intelligence driving industries. Looking ahead to 2025, our delivery plan and orders from customers for the next 12 months have seen substantial increases. I will now provide a detailed overview of these achievements. Let's turn to slide five. We closed 2024 with a strong fourth quarter, highlighted by our wholesale IDC business's remarkable performance as we identified and capitalized on emerging market opportunities, especially advanced technology-driven demand.
As of December 31, 2024, our wholesale capacity in service increased significantly, rising by 127 MW, quarter-over-quarter, to 486 MW. Wholesale capacity utilized reached 353 MW, increasing by 73 MW quarter-over-quarter, thanks to strong customer demand for our wholesale data centers. We have also observed a notable uptick in our wholesale customers' moving pace, recently accelerating to 6-12 months from around 24 months in the past. Meanwhile, our retail IDC business continued to progress smoothly. As of December 31, 2024, our retail capacity in service was 52,107 cabinets, with self-built cabinets increasing by 212 year-over-year and 189 quarter-over-quarter. We also delivered impressive financial results for the fourth quarter and full year. Let's move on to slide six. Our net revenue increased by 18.3% year-over-year to RMB 2.25 billion for the fourth quarter.
Notably, revenue from the wholesale business reached a record high at RMB 665 million for the quarter, representing our farthest year-over-year growth rates at 125.4% for any quarter of 2024. Adjusted EBITDA for the fourth quarter also increased by 63.8% year-over-year to RMB 721.3 million, mainly due to our wholesale IDC business's rapid growth. Our adjusted EBITDA margin for the fourth quarter increased by nearly 10 percentage points year-over-year to 32.1%. For the full year, we delivered net revenues of RMB 8.26 billion, up 11.4% year-over-year, and adjusted EBITDA of RMB 2.43 billion, up 19.1% year-over-year, both exceeding the high end of increased guidance we provided last quarter. Meanwhile, we achieved a full year net profit of RMB 248 million, marking a turnaround from net loss in 2023 through continuous profitability improvements.
Moving on to our new order wins on slide seven, our high-performance data centers, outstanding delivery capabilities, and premium services continued to attract quality orders. In the fourth quarter, we secured a 32 MW order from an existing internet customer for our capacity in the Yangtze River Delta, and one of our retail data centers located in the Greater Bay Area also won a 1.5 MW order from a new customer in intelligence driving industry during the quarter. Meanwhile, in the Wuhan Area, we signed a framework agreement with an internet customer for 100 MW of capacity, including a 28 MW order to be delivered in the fourth quarter of 2025. Additionally, we also secured a 55 MW order from a leading cloud computing customer in this region, demonstrating our customer's deep and enduring trust in our high-quality services.
Furthermore, we recently won a 64 MW wholesale order from an internet customer for the project. We are operating in Hebei Province with our joint venture partner, Changzhou Gaoxin Group. This joint venture enables us to serve more customers while minimizing the impact on our balance sheet, providing an efficient means of growing our customer base and optimizing our business layout. Looking ahead, we will continue utilizing joint venture structures to further enhance our efficiency and facilitate high-quality business development. Now, moving to our full year guidance for 2025 on slide eight, we expected total net revenues for 2025 to be between RMB 9.1 billion and RMB 9.3 billion, representing year-over-year growth of 10%-13%. Adjusted EBITDA is expected to be in the range of RMB 2.7 billion - RMB 2.76 billion, representing year-over-year growth of 15%-18%.
Based on our new orders and delivery plan, our capital expenditure for 2025 is expected to be in the range of RMB 10 billion-RMB 12 billion, representing year-over-year growth of 101%-141%. Also, we expected to deliver 400-450 MW in the next 12 months, an increase of 161%-194% from 2024's total deliveries. Moving into 2025, we are seeing persistent high demand for high-performance data centers, with recent breakthroughs by DeepSeek propelling the dramatic AI development and driving the IDC industry's rapid growth. As such, we are confident that the immense growth potential in China's IDC market is poised to be further unlocked. Let's take a closer look at our recent observations on slide nine, starting with DeepSeek's impact.
DeepSeek's innovative achievements have significantly bolstered confidence in domestic AI development, catalyzing a surge in inference demand and enterprises, a enthusiasm for investing in AI, including large CSP, internet enterprises, and small medium enterprises. DeepSeek's innovative models and technologies are enhancing efficiency and reducing both costs and dependencies on high-performance chips for training and inference. It will become easier for companies to execute their AI strategies, triggering wider AI adoption industry-wide and a greater need to build out AI infrastructure. In turn, lower overview barriers to entry for AI will unleash greater demand for our reliable wholesale IDC services. Furthermore, as more companies integrate AI into their operations, inference demand is expected to surge. We have already observed significant growing demand from small and medium-sized enterprises for private deployment of DeepSeek.
We expect this positive market trend to persist for the foreseeable future, bringing exciting business opportunities for our retail IDC business. We will seize these opportunities to effectively enhance our retail data centers' utilization rate and MRR, laying a solid foundation for our long-term business development. Let's turn to slide ten. As we have shared previously, the Yangtze River Delta and the Beijing-Tianjin-Hebei Region are our core business regions. The layout of our wholesale capacity in service is dynamically balanced in two regions, with the proportion of capacity under construction in the Beijing-Tianjin-Hebei Region increasing. On a related note, industry research suggests that overall utilization rates at China's data centers are set to increase steadily. Tier one cities with vibrant digital economies are expected to begin experiencing supply shortages of the high-performance data centers needed to run AI applications as AI-related businesses expand.
More specifically, as a crucial area for the development of China's AI, internet, and high-tech technology industry, the Beijing-Tianjin-Hebei Region is experiencing steady growth in data center adoption and utilization rates. With the deepening application of generative AI and enhancement of computing power and network infrastructure, the overall utilization rate of wholesale data centers in the Beijing-Tianjin-Hebei Region is projected to reach 85% as early as 2025, marking the first potential supply shortage in the market. In the Yangtze River Delta region, a new wave of structural upgrades in AI technology will temporarily relieve pressure on the supply demand imbalance in 2025. Given the sustained growth in demand, the overall utilization rate of wholesale data centers in the Yangtze River Delta region is expected to reach 85% by 2026, at which point this area will also face supply shortages.
As a leading player in the computing infrastructure industry, we have a clear growth path for our IDC business. Our strong delivery and service capabilities position us well to capture market opportunities stemming from these shortages, driving our sustainable growth. Now, let's delve into our business updates, starting with our wholesale business on slide 11. As the company's primary growth engine, our wholesale business achieved outstanding fourth-quarter results in terms of gross revenue, which reached RMB 665 million, and gross rates which accelerated to 125.4% year-over-year. This segment is thriving as high-performance IDC services remain in high demand across the market, especially as leading internet players continue to deepen their investment in AI, further driving demand growth. To meet this demand, we increased capacity in service during the quarter by 127 MW to 486 MW.
Meanwhile, capacity utilized rose by 73 MW to 353 MW, mainly driven by high utilization and faster-than-expected movings at our E-JS Campus O2. Our wholesale business utilization rate decreased slightly to 72.6% due to our delivery of 127 MW concentrated in the fourth quarter of 2024. We also delivered a mature capacity utilization rate of 95.6%, a relatively high level, and a ramp-up capacity utilization rate of 34%. We have a clear growth path for our wholesale data center capacity. Let's move on to slide 12. We maintained our growth trend in overall wholesale data center capacity with 486 MW in services and utilized capacity increasing to 353 MW by the end of the fourth quarter. Our capacity under construction was 406 MW in the fourth quarter, with a pre-commitment rate for capacity under construction of 82.9% by the end of December.
Additionally, capacity held for short-term future development increased sequentially by 75 MW to 267 MW, primarily due to an abundance of demand with high certainty. With strong AI development driving greater market demand for IDC services, we will continue to press forward with our robust expansion plan for wholesale data center capacity, laying a foundation for further business growth. Moving to our retail IDC business on slide 13, our retail business remained stable and continued to progress smoothly in the fourth quarter. Retail capacity in service was 52,107 cabinets, with 33,068 utilized cabinets for a utilization rate of 63.5% as of the end of December. MRR per retail cabinet increased slightly to RMB 8,794 this quarter. Turning to our delivery plan on slide 14, in 2024, we successfully brought a total of 153 MW into services, showcasing our robust and efficient delivery capabilities and deep commitment to meeting customer demand.
This includes our 127 MW during the fourth quarter and 26 MW in the first nine months, fast surpassing our guidance. For 2025, customer demand for high-performance, reliable IDC resources remained strong, and we expected our deliveries will set a new annual record. We currently have eight data centers under construction and plan to deliver 406 MW of capacity over the next 12 months, or around 140 MW during the first half of 2025 and around 266 MW in total during the second half of 2025, reflecting strong customer demand and our outstanding delivery capabilities. Non-IDC business also remains a key component of our overall business growth. Notably, we continued to expand our Diyixian business customer base by acquiring new customers from the medical technology, professional services, and consulting industries for Diyixian premium dedicated internet services, EVPL, and SD-WAN services.
In conclusion, our effective new growth strategy and strong execution drove excellent fourth quarter and full year 2024 results. Moving into 2025, we remain confident in China's growth potential, led by surge in demand in the IDC industry due to the AI boom. To capitalize on this opportunity, we will continue to innovate, strengthening our capability and expanding our high-performance data center network to offer our customer solutions designed to seamlessly address their demands in the AI era. As always, we are committed to delivering sustainable long-term value to all of our stakeholders. Now, I will turn the call over to our CFO, Qiyu, for further discussion of our operating and financial performance. Thank you, everyone.
Qiyu Wang (CFO)
Good morning and good evening, everyone.
Before we start the detailed discussion of our fourth quarter performance, please note that, unless otherwise stated, all the financials we present today are for the fourth quarter and the full year of 2024 and are in RMB terms. Furthermore, unless otherwise subject to, all the growth rates I'm reviewing are on a year-over-year basis. Let's turn to slide 16. We exceeded our expectations for the full year 2024, capped by a strong fourth quarter as we remained focused on high-quality revenue business. In the fourth quarter, our total net revenue increased by 18.3% to RMB 2.25 billion. Our adjusted cash gross profit increased by 24.6% to RMB 923.9 million. Our adjusted EBITDA also grew year-over-year by 63.8% to RMB 721.3 million.
For the full year, our total net revenue was RMB 8.3 billion, representing an increase of 11.4% compared to the same period last year, and adjusted EBITDA reached RMB 2.4 billion, reflecting an impressive 19.1% increase from the prior year, both exceeding our guidance. Furthermore, our bottom line turned profitable, with net income reaching RMB 248.4 million, achieving a significant improvement from net loss of RMB 2.6 billion for the full year 2023. Let's look more closely at our top line. As we have mentioned previously, we have divided total net revenue from IDC business into wholesale and retail IDC business based on the nature and the scale of our data center projects, with revenue from non-IDC business remaining separate.
As you can see on slide 17, in the fourth quarter, our wholesale revenues remained our key revenue growth driver, with strong momentum significantly increasing by 125.4% year-over-year to RMB 665.2 million, mainly driven by the E-JS Compass 02. Our retail revenues continue to account for the largest part of our net revenue. Our retail revenues remained relatively stable at RMB 964.8 million. Our non-IDC business continued to progress smoothly. During the fourth 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 margin remained quite stable. Our adjusted EBITDA margin rose significantly to 32.1% compared with 23.2% in the same period of 2023. Moving on to liquidity on slide 19, we maintained a strong cash flow during the quarter. Also, we recorded a net operating cash flow of RMB 2.01 billion for the full year of 2024.
Our cash position remained healthy, with the company's total cash equivalent and restricted cash reaching RMB 2.08 billion as of December 31, 2024, stable compared to the end of the third quarter. Next, let's take a look at the debt on slide 20. We maintained our prudent approach to debt management, with our net debt to the trailing 12-month adjusted EBITDA ratio at 4.9 and total debt to trailing 12-month adjusted EBITDA ratio at 5.5. Both remaining at a healthy level, and our trailing 12-month adjusted EBITDA to interest cover rate improved to 6.5 as of December 31, 2024. We prioritized long-term debt maturity planning in our debt and strategic management to ensure the security of debt repayment. Additionally, the company's short and medium-term debt maturing in 2025-2027 comprised 56.9% of our total debt. Turning now to CapEx spending.
As you can see on slide 21, for the full year 2024, our CapEx was RMB 4.98 billion, with a majority allocated to the expansion of our wholesale IDC business. Mainly due to linear supply chain expenditure management, some CapEx was deferred to 2025. We expect our CapEx for full year 2025 to be in the range between RMB 10 billion and RMB 12 billion, exceeding the level of 2024. The increase is mainly to support our 400-450 MW delivery plan for 2025, which is expected to be three times greater than that of 2024, surpassing the total delivery capacity of the past three years combined. Before I conclude, let me share a few of our achievements in ESG.
We view our commitments and responsibilities to our industry, environment, and society as cornerstones of our ongoing success, and I'm proud of reports that our ESG efforts continue to win recognition from global renowned ESG rating institutions this year. Recently, we secured a spot in the S&P Global Sustainability Yearbook 2025 with our record score of 70 in S&P's 2024 Corporate Sustainability Assessment. This is VNET's fourth inclusion in the global edition following two consecutive years in the China edition. Notably, VNET is one of just 21 China mainland enterprises recognized in the 2025 yearbook, and so honorary from Chinese IT service industry. Our score also ranked us in the top 7% of IT service industry globally. In addition to this recognition by S&P Global, we received an A rating from MSCI for the third consecutive year, reaffirming our leadership of China's internet service and infrastructure industry.
We attained a B grade in CDP's Climate Change Questionnaire in 2024, with 8 out of 16 categories achieving A-grade recognition. This accomplishment not only highlights our effective ESG strategy but also reflects our long-term investment value and development prospects. In summary, we are delighted to end 2024 with stronger-than-anticipated results driven by impressive growth in our wholesale IDC business. Looking ahead, we will continue to execute our high-quality development strategy and invest in future growth, particularly AI-related opportunities, to propel our long-term sustainable development. This concludes our prepared remarks for today. We are now ready to take questions.
Operator (participant)
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 Shuyun Che with CICC. Please go ahead.
Shuyun Che (Analyst)
Thank you for taking my question, and congratulations on the strong result and orders. My first question is, the wholesale business order in last quarter and recently has been really strong. To deliver these orders, the CapEx outlook for 2025 has been increased. Could management provide details on the arrangement of CapEx for 2025 and how much of this spending will be covered through the funds from our raised projects? Also, according to the announcement, the retail data center will bring a new order from customers in the intelligent driving industry.
My second question is, given the strong demand from the AI computing, could management provide insights into the potential impact of AI-related orders on the retail segment? Could you share with us the utilization rate trends and the pricing trends in the retail business? Thank you. [Foreign language]
[Foreign language]
Thank you for the question. I want to take up the further question to begin the answer. In 2025, we are setting a high threshold, a high standard for the CapEx. Compared to that of 2024, we gave it a 100% increase. Over 90% of the 2025 CapEx will go directly into the wholesale IDC business. In 2025, over 400 MW will be delivered in our wholesale IDC business.
[Foreign language]
Among them, 83% have been on the determined orders as well as the capacities to deliver. For the remaining capacities, we are about to sum them up recently.
The remaining CapEx will go directly into the retail IDCs for the purpose of the high power density cabinet retrofit as well as the value-added business.
[Foreign language]
I also want to add a few more comments about the questions on the REITs. I have to say that 2025 marks the starting point for China to experience the security asset utilization of the data industry, as well as it is also recognized as a starting year for different types of REITs being implemented. In last Q3, the Q3 of 2024, we experienced the first pre-REITs, and last week, I'm so happy to see two of my partners have launched their ABS, the asset-backed securities, in the name of the also known as private REITs, and their public REITs have also been affected by the exchange.
[Foreign language]
And please note that other private REIT projects have also been accepted by the Shanghai Stock Exchange. Our public REITs are in the key stage of being examined and proved. It is estimated that in 2025, two to three of our REITs of a different nature and background will be implemented. As a result, we are able to recover up to RMB 2 billion.
[Foreign Language]
Now let me check with you about the second question about development of the large language model and AI application. We are very happy to see that in the beginning of 2025, the operation of DeepSeek has driven up the demand on the AI application. The application of DeepSeek has played down the threshold of adopting the large language models, giving us a strong push in the model referencing.
We are also seeing that the threshold of deploying DeepSeek in the private sector has been played down. As a result, the development and adoption of the smart applications has been expanded.
[Foreign language]
You just mentioned autonomous driving. This is one of the key vertical scenarios I have explained to you. I have to say that autonomous driving is extremely and dramatically important. In the Q4 of 2025, our company had already made very good breakthroughs in this regard. In 2025, we will continue the autonomous driving as a key sector to expand our customers as well as to offer premium services.
[Foreign language]
To be more specific, I want to share with you my understanding on the utilization. We have already experienced the boost from the demand from this market, and we are staying very positive about that.
In terms of the price mechanism and pricing trends of the single cabinet, those AI server deployment-friendly or specific single cabinet, their price will be higher than that of the traditional ones.
Xinyuan Liu (Head of Investor Relations)
Next question, please.
Operator (participant)
Thank you. Your next question comes from Sara Wang with UBS. Please go ahead.
Sara Wang (Equity Research Analyst)
Thank you for the opportunity to ask questions, and congratulations on the solid set of results. I have two questions. First one is that I noticed that among our new order wings, there are 64 MW JV projects with Changzhou Gaoxin Group. Would management please walk us through the framework, partnership with the Changzhou partner, and then how is that reflected in our revenue or CapEx guidance? My second question is regarding the supply-demand dynamics.
I think from the management's comments that since management is really confident in the supply-demand dynamics over the next one or two years, and even mentioned supply shortage, how should we think about this? Because the supply chain in China is still quite efficient, and then are there any new entrants into the market, or are competitors delivering new projects into the market? How shall we think about the supply given the demand is already quite strong? Thank you. [Foreign language]
[Foreign language]
Thank you for the question. I want to share with you a little bit of a background of this question. First of all, I have to say that the demand is really going high fast in this year. Two years ago, our company created a JV together with Changzhou SOE.
From that JV, we are holding 13% of the equity, which is equivalent to the 64 MW order you are mentioning.
[Foreign language]
Please be noted, the order on the 64 MW together with the JV will never be incorporated into the CapEx I just introduced, and it will not be in our balance sheet as well.
[Foreign language]
We have to say we are going to win profit from this project of 64 MW in the name of the management fee or in the format of the capital operation fee. This is a great milestone for us to run and operate a project to serve our customers, but we are not going to have that to put that in our balance sheet. In other words, we are going to drive up our capacity to use up the light assets while satisfying the strong demand from the core customers.
[Foreign language]
Your next question is about the trend as well as the market competition. Let me check with you about several observations. According to the latest survey from the industry third party, according to the supply and demand situations of the domestic market, it is estimated that in 2025, in the Beijing-Tianjin-Hebei Region, the wholesale IDC business will experience the supply shortage. In 2026, this will also happen in the Yangtze River Delta.
[Foreign language]
This conclusion from the third party Data Industry Association is in line with my gut feeling about this market. Your next part of this question is about the general competition of this market.
To be honest, most of my peers have prioritized the overseas market instead, which means for the bidding process we are engaging for the recent times, we're experiencing different peers at different sessions without consolidated or major peers or competitors. Next question, please.
Operator (participant)
Your next question comes from Yang Liu with Morgan Stanley. Please go ahead.
Yang Liu (Executive Director of Research Division)
Thanks for the opportunity. Congratulations on the strong booking first. I have two questions. The first one is regarding the future trend of the industry rental. As you mentioned, that it is likely to see supply shortage and also the hyperscalers' demand quite strong. What's your expectation of the per kilowatt rental in the next one or two years? Is it likely to see some price hike? My second question is regarding the unit cost or unit CapEx because of the data center upstream, like the diesel generator or other UPS, etc.
Those equipment are the key components, and whether there will be enough supply from upstream and whether there will be any pricing hike to give pressure on the unit CapEx. [Foreign language]
[Foreign language]
Thank you for the excellent questions. I will share with you some of my understanding about this market. We are seeing that ever since the launch of the large language models into this market, we are seeing the wholesale IDC centers' demands have been gradually released into this market. From the end of last year in 2024 all the way down to the first quarter of 2025, we are also seeing that the supply is a little bit in the shortage side.
When we are talking and discussing with the leading online and internet companies in China, we have to say that the resources they are going to choose and the companies they are going to work with are a little bit limited.
[Foreign language]
As my colleague has already briefed on you the general market situations in China, I want to add a few more comments. In China, the leading online and internet companies are choosing and working with different wholesale IDC suppliers. In different cities and regions, we are experiencing competition as well, even though the peers are different in different regions. In terms of the price trend as well as the pricing mechanism, we are offering the IDC business to meet appropriate market demand, which means that our price mechanism is driven by the market, and our pricing is quite stable.
[Foreign language]
I want to add a few more comments about this. On the cost front, when we are discussing about the diesel generator units and equipment, we are seeing that as the construction and installment are picking up, the traditional brands, especially those imported ones and JV brands, are not adequate.
[Foreign language]
We have to check the other side of the coin. The good news is the majority and the most part of the clients are increasingly comfortable in using the made-in-China equipment instead. We are also seeing that through different optimization, the price is even slightly lower.
[Foreign language]
Since we are having very large IDC scale on the market, the single building now can reach 50-60 MW per building, offering us huge rooms to even refine the design. Generally speaking, the unit CapEx is a little bit slightly lower.
[Foreign language]
When we are seeing the general picture of the supply and demand relationship on this market, the cost is slightly lower, the revenue will pick up, as a result, the return will pick up as well.
Xinyuan Liu (Head of Investor Relations)
Next question, please.
Yang Liu (Executive Director of Research Division)
Thank you.
Operator (participant)
Your next question comes from Edison Lee with Jefferies. Please go ahead.
Edison Lee (Equity Research Analyst)
Hi, thank you for taking my questions. And congratulations again on great results and very good order wins. I have two questions. I think the number one question is still more related to supply and demand, but more on the retail side. I believe that I totally agree with your assessment that I think SMEs can actually benefit from DeepSeek by deploying the model in private cloud or even on-premise.
Based on what you saw in the first quarter of this year, do you think that your retail revenue this year can actually get back to, let's say, mid-single digit growth? Is that possible? In 2026, do you think it will further accelerate? That is question number one. Question number two is about financing. Can you help us understand how you would actually fund the RMB 10 billion CapEx in 2025? Because your operating cash flow is somewhere around RMB 2 billion, and you can raise RMB 2 billion from REITs, and you still have RMB 6 billion to finance. [Foreign language]
[Foreign language]
Thank you for the question. I'm very much willing to share with you my personal views on the entry of DeepSeek and what its impact on the retail sector is. Actually, you know, after DeepSeek came out, it mainly, through innovation, greatly lowered the threshold for small and medium-sized enterprises and even individuals to use large models.
First of all, through the extreme innovation of the DeepSeek large language model, we have seen the threshold for the medium and small enterprises as well as individuals has been cut dramatically. The first is that now more and more small and medium-sized enterprises, and even some developers, are putting forward the demand for using city-type high electric cabinets.
[Foreign language]
I want to share with you my personal observation and will validate my personal judgment according to the practices we have already experienced. For the recent days, we are seeing a large number of small and medium-sized enterprises as well as individual developers show the strong demand in adopting and using the retail IDCs.
[Foreign language]
I want to share with you a couple of business models these small and medium-sized enterprises as well as those individual developers are using.
First of all, they will deploy their servers in the range of two servers all the way up to 16, and they will entrust their servers into the retail IDC we are running coupled with the DeepSeek, whether it is V3 or RE.
[Foreign language]
Let me check with you and share with you the business model too. Some of the clients will come to us requiring the IDC, the retail IDC rental services together with the procurement of extra GPU. With that being done, we are creating the new business model of HIT, the hybrid IT services.
[Foreign language]
We are experiencing a new round of demand from our clients. They are using our IDC as well as HIT, as I explained to you.
They are also requiring for us to deploy or to dispatch software engineers to work with them in developing value-added applications for them.
[Foreign language]
I know that you must be expert in reading my company VNET, and we know that VNET is running and implementing the corporate structure of the dual engine operation with retail and wholesale IDCs. When we are running the retail IDC business, we are reaching out to thousands of clients. In this round of large language model application, we will reach those clients first time to offer them either the retail services or the referencing models. Thank you for staying with me.
[Foreign language]
You are mentioning that we are having a very large CapEx in 2025. Agreed.
It is due to the strong demand from the wholesale IDC new wins, the new orders, and we are having two channels as well. Very much we are running cash flow as well as the REIT project I have just briefed.
[Foreign language]
Due to the corporate structure of the board, we are very much in the advantageous stage in having the low financing. For instance, if we are going to carry out a releasing a project back to low financing, we are going to have 80% of the LTV with the interest rate of no more than 3.5%, with a total maturity duration of 15 years.
[Foreign language]
I also want to share with you the results of our corporate estimations.
Based on our loan ratio as of now, and we have already paid back the majority of the transferable loans by the end of last year, and according to the current CapEx we are releasing, the EBITDA for the capital will be 6.50 as we are estimating and tabulating.
Xinyuan Liu (Head of Investor Relations)
Next question, please.
Operator (participant)
Your next question comes from Timothy Zhao with Goldman Sachs. Please go ahead.
Timothy Zhao (Equity Research Analyst)
Great. Thank you for taking my question and congrats on the very solid results. I have two questions here. One is, I think, about your downstream customers. I think given the rising data center demand from AI, just wondering if management can share your observations on the customers in terms of their, I think, preferences between the in-house data centers and third-party data center operators, and how is that different now versus a couple of years ago.
Secondly, on the wholesale data centers, as we are seeing faster inference demand growth, could you please comment on how your wholesale campuses cater to the inference versus training demand, and what is the customer requirement in terms of the power cost, in terms of latency, etc. [Foreign language]
Thank you for this question. It is very important, but also a very sensitive question, I have to say that. You are raising up the questions on orders as well as which pathway they are selecting, be it from the pathway of the rental or they are going to have their in-house choices. In the net, we have already delivered and shared with all the analysts. You could check some of the details as well. In this year, we are seeing the boosted demand from the online and internet industries.
When they are deploying the large language models, we are also collecting a lot of feedback.
[Foreign language]
As of now, the online and internet business is still one of the most important industries we are working with, and they are also offering the most important source where obtaining customers. As AI demand is driving up in the beginning of this year, we are seeing that the companies in the cloud computing, intelligent driving, as well as financing is also very much important. Please be noted, those companies in the large language models is also naturally.
[Foreign language]
You are also trying to find out whether those clients will go directly with the in-house choices or they will collaborate and rental from a third party. According to the feedback I collected from this market as well as my personal observations, both scenarios are coexisting.
[Foreign language]
Generally speaking, a few number of clients will go with self-built choices, and a majority of the clients will go with rental selection, which means that the largest proportion of the clients will go with a rental choice with the complementary part of these clients will go and build by themselves.
[Foreign language]
I want to share with you a little bit of the rationale behind. Since the market and the client has a booming demand on this regard, I do not think it is rational for the clients to build their own equipment by themselves. They are not going to use up that much resources. The general pathway is rental plus self-built, and this order should never be reversed. That is what we have observed from this market.
[Foreign language]
I also want to share with you the second part of the questions.
I want to start with you by analyzing a little bit of the wholesale IDC services we are offering. We are seeing the need is booming, and in the beginning of 2025, the determined uncontracted orders are on the way, and the deliveries are also on the way. As of now, we are collecting two pieces for new ideas from the customers. The first piece of idea is they are requiring the expanded capacity from us, and with that being said, they want us to have even better efficiency or high efficiency.
[Foreign language]
I also want to add a few more comments on the referencing part. The referencing models will happen within the retail IDC for most of the scenarios because the clients will consider convenience more than the price of the tariff.
In terms of the referencing model, in terms of the referencing models, it is whether at a private deployment or it is for the purpose of the applications of the development of the intelligent applications, which means that latency is not going to be troublesome.
[Foreign language]
To wrap it up, for our clients, they will deploy their inference models in the retail IDC instead of the wholesale IDC.
Xinyuan Liu (Head of Investor Relations)
Thank you for the question. Next question, please.
Operator (participant)
Your next question comes from Daily Lee with Bank of America Securities. Please go ahead.
Daily Lee (Analyst)
Thanks for taking my questions. Congrats on the solid results and the strong new orders. Here I have one question regarding the wholesale business. As a company, we have achieved strong new orders in the past two quarters, and we also have a quite solid delivery plan for this year.
By the end of this year, our capacity service probably will almost double compared to the number in 2024. How should we think about the growth outlook maybe in 2026 or even 2027 regarding the revenue or new orders pipeline? Thank you.
[Foreign language]
I will answer this question. We have a five-year plan because we have already foreseen that with the widespread application of AI, the overall domestic demand for data centers will continue to be strong. Thank you for this question, and I want to share with you my view on this question. The company has established a five-year plan ahead of the time because we are estimating that the AI deployment is going to be really strong in this Chinese market, driving up the demand for the domestic IDCs extensively.
[Foreign language]
In 2025, the total number of CapEx is in the range of the totality as the last three years, and in the year of 2026 to 2027, the company will continue to boost up the CapEx to meet up the requirements of our clients and customers in the market.
[Foreign language]
Our CapEx is strongly determined by the contract signed up with the client, which means that our CapEx is offering a new range of certainties to the growth of the future business.
[Foreign language]
I also want to release a little bit of the business models of the IDC sectors. Normally, we will go and construct to start off.
It will take six to nine months as a different project and place goes. After that, we will take around six to twelve months, additional six to twelve months to stack up all the requirements of the customers. It will be meeting 90% of the customer demands. At the end of the day, you are going to find that the growth of the CapEx will be a little bit slower than that of the CapEx.
Operator (participant)
Ladies and gentlemen, that concludes our conference for today. Thank you for participating. You may now disconnect your lines.