Strong Data Center Orders, Slowing Deliveries; Maintain Buy Ratings on GDS/VNET

Overview

This report reviews the Q1 2026 ADR performance of the China data center sector. Despite seasonal factors and domestic chip restrictions slowing quarterly delivery pace, industry order momentum remains strong. Goldman Sachs maintains Buy ratings on GDS and VNET, driven by increased hyperscale data center capital expenditure and robust order volumes. Target prices have been adjusted, reflecting the tension between GDS's slowing China business and DayOne's high overseas growth, as well as improved execution at VNET.

Core views

At the industry level, institutions hold a constructive view on the data center sector, buoyed by rising hyperscale data center capital expenditure (estimated combined CAPEX for Alibaba/Tencent at $48B/$53B in 2026/27, with ByteDance potentially reaching $70B/$100B) and strong order volumes. GDS and VNET secured 346MW and 519MW in orders year-to-date respectively, with capacity reserves continuing to expand. At the individual stock level, GDS retains a Buy rating, but its target price is lowered by 11%-13% to $49 / HK$47. The primary reasons are the slowed delivery pace in Q1 and a decline in average monthly rental rates (MSR) for its China business, though its overseas subsidiary DayOne performed strongly, with its valuation uplift partially offsetting these negatives. VNET retains a Buy rating, with its target price raised by 3% to $16. This is based on better-than-expected Q1 earnings, strong delivery execution, and the strategic investment by CATL eliminating uncertainty surrounding shareholder changes. DayOne, an overseas subsidiary in which GDS holds a 19.9% stake, saw revenue and Adjusted EBITDA grow 234% and 375% year-over-year respectively. Institutions have raised their valuation for DayOne to $16.4 / HK$16.0 per GDS ADR/H share, based on a 23x 2027 EV/EBITDA multiple. Revenue and EBITDA for 2026/27 are expected to grow rapidly.

Analysis framework

Institutions employ a Sum-of-the-Parts (SOTP) valuation method for GDS, separating its China business from its overseas DayOne business to reflect different growth and profitability profiles. The China business applies a 13.5x 2027 EV/EBITDA multiple, while DayOne applies a 23x 2027 EV/EBITDA multiple. VNET is valued using a 12x 2027 EV/EBITDA target multiple. Analytically, the focus is on tracking order volumes, delivery pace, achievement of capital expenditure targets, and pricing trends (MSR), combined with domestic chip shipment expectations to judge the subsequent improvement trajectory.

Methodology notes

• Valuation MethodologySOTP Valuation

  Sum-of-the-Parts Valuation

  Valuing different business segments of a company (e.g., GDS China vs. overseas DayOne) separately and summing them up. Suitable for diversified companies with significant structural differences and distinct growth drivers, allowing for more precise value reflection of each segment.

• Valuation MethodologyEV/EBITDA valuation

  Enterprise Value/EBITDA Valuation

  Using multiples of Enterprise Value to Earnings Before Interest, Taxes, Depreciation, and Amortization for valuation. Suitable for asset-heavy, high-depreciation industries like data centers, removing the impact of capital structure and depreciation policy differences for easier peer comparison.

• Industry Analysis FrameworkSupply and Demand Framework

  Supply and Demand Framework

  Analyzing the match between industry order volumes (demand) and capacity reserves/delivery volumes (supply) to gauge sector sentiment and the timing of future revenue conversion. New orders typically require 6-8 quarters to convert into revenue.

Asset mapping & comparison

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

• GDS Holdings (GDS/9698.HK)

  Benefiting from high growth in overseas DayOne, but dragged down by slowing China business deliveries

  Strengths

  Leader in China carrier-neutral data center market, largest capacity reserves, robust balance sheet

  Weaknesses

  Slowed delivery pace in China business, MSR trending downward

  Comparison

  Compared to VNET, GDS has a higher proportion of overseas business and is significantly influenced by DayOne's valuation

  Risks

  Delivery demand below expectations, slower ramp-up of overseas profits, downward pricing trends

• VNET Group (VNET)

  Benefiting from transition to wholesale IDC and introduction of strategic investors

  Strengths

  Strong delivery execution, fast order conversion, CATL synergies

  Weaknesses

  Traditional business may continue to decline

  Comparison

  Compared to GDS, VNET has a faster domestic delivery pace and greater potential for valuation re-rating

  Risks

  Insufficient financing capabilities, order execution below expectations, AI-related geopolitical risks

• DayOne

  Overseas subsidiary with 19.9% stake held by GDS, driving GDS valuation through high growth

  Strengths

  Rapid revenue and EBITDA growth, NVIDIA data center partner certification

  Weaknesses

  GDS ownership stake diluted to 19.9%

  Comparison

  Different growth profile compared to GDS China business, independent valuation is higher

  Risks

  Overseas expansion risks, capacity delivery progress

Key data

• GDS Target Price$49 / HK$47Lowered 11%-13%; implied upside 39%-48%
• VNET Target Price$16Raised 3%; implied upside 51%
• Hyperscale Capex ExpectationsAlibaba/Tencent $48B/$53BCombined 2026/27 expectation
• Year-to-Date Order WinsGDS 346MW, VNET 519MWAs of Q1 2026
• DayOne Stake19.9%Percentage held by GDS
• DayOne Valuation$18BBased on 23x 2027 EV/EBITDA
• GDS/VNET Valuation Multiples9-10x 2026E EV/EBITDACurrent trading multiple

Impact & implications

For GDS, the key upside driver this year is the growth of its overseas business, DayOne, to offset the slowdown in its China business. For VNET, as the proportion of wholesale IDC revenue increases and AI investments intensify, it is expected to benefit from valuation re-rating and compounded profit growth. The introduction of CATL as a strategic investor may bring synergies in energy storage battery systems and supply chain chains, eliminating uncertainty caused by shareholder changes.

Risks

• Delivery demand and utilization rate improvements below expectations
• Slower ramp-up of overseas revenue/profitability
• Pricing trends in China and overseas markets below expectations
• Customer attrition
• Deleveraging process slowing
• Insufficient financing capability to support growth targets
• AI-related geopolitical risks

What to watch

• Domestic chip shipment volume release (e.g., Cambricon, Moore Threads, etc.)
• Achievement of annual capital expenditure targets (GDS 9B RMB / VNET 12B RMB)
• Pace of converting new orders into revenue/EBITDA (typically requires 6-8 quarters)
• Sequential improvement in delivery pace for 2Q26 and the second half of the year