UBS Lowers GDS and VNET Targets, Maintains Buy Rating

Overview

This report is an earnings review of China's internet data center sector for Q126, focusing on the performance and outlook of GDS and VNET. Despite short-term chip supply uncertainty, UBS expects demand to accelerate in H226 and maintains a buy rating for both companies while lowering target prices to reflect near-term risks.

Core views

UBS anticipates data center demand to accelerate in H226 based on: 1) Ongoing order releases from hyperscale clients; 2) Domestic GPU shipments proceeding as planned; 3) Robust downstream AI demand and rising cloud prices. On the supply side, the central government's cautious approach to power quota approvals helps prevent oversupply. For specific names: - GDS' new projects in the west are expected to be delayed to H227, but long-term order prospects are positive, with potential for over 500MW in new orders. - VNET's Inner Mongolia campus is considered one of the most attractive in the industry, but its financing plans remain unclear, potentially weighing on the stock in the near term. Valuation-wise, UBS switches from a 2027E EV/EBITDA to a DCF model to better capture medium- to long-term demand prospects. The target price cuts reflect uncertainty in the domestic GPU ramp-up timeline. Overall, UBS views the sector as in the early stages of demand release, with leading operators gaining more market share as the cycle turns.

Analysis framework

UBS analyzes along demand and supply lines: Demand: Validates hyperscale order releases through industry research, tracks domestic GPU shipment progress, and assesses downstream AI demand intensity to gauge industry health. Supply: Monitors government power quota approval policies and new project delivery timelines. Valuation: Replaces the EV/EBITDA multiple with a DCF model to better reflect medium- to long-term growth potential. Adjusts earnings forecasts to account for delayed project deliveries in the west. The report also provides detailed comparisons of GDS and VNET, including order visibility, financing needs, and long-term growth potential.

Methodology notes

• Industry/Industrial Analysis FrameworkSupply-demand framework

  The report analyzes the industry's health through both demand and supply lenses.

  The supply-demand framework evaluates the balance between industry demand (order releases, AI demand) and supply (power quotas, project delivery timelines) to assess the industry's cyclical stage.

• Valuation MethodDCF (Discounted Cash Flow)

  The report uses a DCF model to revalue the companies.

  The DCF model estimates a company's intrinsic value by discounting future free cash flows, particularly suitable for firms with clear medium- to long-term growth prospects.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• GDS.US

  Benefits from positive long-term order prospects in the west, but faces short-term delivery delays.

  Strengths

  Strong market position, high order visibility.

  Weaknesses

  Western projects delayed until H227.

  Comparison

  Compared to VNET, GDS has better order visibility but less financing pressure.

  Risks

  Project delivery lags, slower power quota approvals.

• VNET.US

  Attractive Inner Mongolia campus, but unclear financing plans pose short-term pressure.

  Strengths

  Competitive Inner Mongolia campus, attracting multiple hyperscale clients.

  Weaknesses

  Unclear financing needs may limit capex.

  Comparison

  Compared to GDS, VNET faces greater financing pressure but has higher long-term growth potential.

  Risks

  Financing plan failure, order growth below expectations.

Key data

• GDS 2026E-2028E EBITDA Forecast Adjustment-2% to -9.8%Downgraded due to delayed project deliveries in the west.
• VNET Target PriceUS$15.5Down from US$17.0, reflecting uncertainty in financing plans.
• GDS Target PriceUS$60Down from US$62, still above the current price of US$45.00.

Impact & implications

UBS believes that despite short-term chip supply uncertainty, the medium- to long-term demand growth outlook for the data center sector remains positive. Leading operators like GDS and VNET are expected to gain more market share as the industry cycle turns. Investors should monitor chip supply ramp progress and clarity on financing plans.

Risks

• Weaker-than-expected AI demand
• Data center outages damaging reputation
• Higher-than-expected interest rates
• Adverse regulatory environment

What to watch

• Chip supply ramp progress
• Clarity on financing plans
• Order growth trajectory