Earnings Call Transcript - VNET Q2 2021

Operator, Operator

Good morning and good evening, ladies and gentlemen. Thank you and welcome to 21Vianet Group's Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. We will be hosting a question-and-answer session after management's prepared remarks. With us today are Mr. Samuel Shen, Chief Executive Officer and Executive Chairman of Retail IDC; Mr. Tim Chen, Chief Financial Officer; and Ms. Xinyuan Liu, Investor Relations Director of the company. I will now turn the call over to the first speaker today, Ms. Liu, IR Director of 21Vianet. Please go ahead, ma'am.

Xinyuan Liu, Investor Relations Director

Hello, everyone. Welcome to our second quarter 2021 earnings call. Before we start, please note that this call may contain forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and observations that involve known and unknown risks, uncertainties and other factors not under the company's control, which may cause actual results, performance or achievements of the company to be materially different from the results, performance or expectations implied by these forward-looking statements. All forward-looking statements are expressly qualified in their entirety by the cautionary statements, risk factors and details of the company's filings with the SEC. 21Vianet undertakes no duty to revise or update any forward-looking statements for selected events or circumstances after the date of this earnings call. I will now turn the call over to Mr. Samuel Shen, CEO of 21Vianet.

Samuel Shen, CEO

All right. Thank you, Xinyuan. Good morning and good evening, everyone. Thank you all for joining us on our earnings call today. We're very pleased to announce another quarter of strong results. Our revenue of approximately RMB1.5 billion and adjusted EBITDA of RMB425.1 million both exceeded the high end of our guidance, representing year-over-year growth of 30.8% and 38.7% respectively. Meanwhile, our adjusted EBITDA margin improved to 28.4% from 26.8% a year ago. This robust growth continued to be driven by strong IDC market demand, meticulous strategy execution, and our increasingly diversified customer base. In the second quarter, the government released some new regulations which were generally issued in support of fair competition with very little impact on our business today. In fact, during the quarter, we continued to observe growing demand for our carrier and cloud-neutral IDC services across various industries, including e-commerce, financial services, logistics, and automobiles. The government continues to support the trend of digitalization and implement policies that are favorable to the IDC industry. For example, the 14th five-year plan, which was announced earlier this year, is promoting digital initiatives. This demonstrates that industry digitalization remains a key strategy for China's industrial transformation. Importantly, in China, the concept of industrial digitalization is not merely focused on developing the digital industries but also on fueling the transformation of traditional industries through digital technologies. Such initiatives indicate that there will be more investments in new infrastructures going forward. In July, the Ministry of Industry and Information Technology issued a notice for the country's three-year plan to empower the digital economy. According to the notice, the government plans to implement an improved development pattern for new data centers to optimize data center layouts, improve network quality, accelerate computing capacity, and lower carbon emissions. We believe that this initiative will benefit industry leaders like us who have strong track records of ramping up IDCs to mature levels within reasonable time frames as well as effective systems for measuring and optimizing PUE levels to ensure sustainable IDC growth. On the back of these favorable conditions, our established market presence, scalable industry solutions, and strong customer relationships have remained robust. Now, turning to our business updates for the second quarter. Our dual-core growth engine strategy continued to drive our organic expansion. We added approximately 7,000 cabinets in the second quarter, while our cabinet deliveries in the first half of 2021 were in line with our expectations. As a result, our new cabinet deliveries, our compound utilization rate in the second quarter dropped to 59.9% from 61.7% in the prior quarter. Our utilization rate for mature IDC delivered prior to and during 2019 improved to 76.3% in the second quarter compared to 73.9% in the previous quarter. On the retail business front, gross momentum continued to be driven by high demand from both existing and new customers. For instance, during this quarter, we have seen a leading global food chain and global logistics companies ramp up their usage of our IDC solutions for colocation, connectivity, and additional value-added services. Meanwhile, we witnessed increasing demand from customers in industries such as artificial intelligence, technology, local services, and financial services. For our wholesale business, we continue to make steady progress. During this quarter, for example, we expanded our geographic coverage to Northern China and we expect to deliver approximately 30 megawatts in capacity to provide data support for a leading content community and social platform in China. In addition, for the June 18 mid-year shopping festival, we demonstrated our customer centricity by establishing a special team in preparing for our clients' advanced deployment of infrastructure and customer services. As a result, our e-commerce wholesale customers maintained smooth operations during the peak traffic period. For our Blue Cloud business, after nearly eight years of cooperation with Microsoft, in July, we further extended our collaboration to become one of the first partners for the Microsoft connected vehicle platform in China by providing our advanced cloud and edge mobility services. ESG initiatives have always been the driving force for our sustainable development. Therefore, it should not come as a surprise to everyone that we have been well prepared for the government's latest announcement on encouraging renewable energy enterprises to implement energy storage for peak load shifting by specifying the first quantitative requirements for the energy storage ratios of market-oriented renewable projects. This announcement is of great value and importance to the industry's direction of development. Through a collaboration with Tsinghua University's Energy Internet Innovation Research Institute, we launched our data center energy storage projects in Foshan, Guangdong Province, which is one of the first successful applications of large-scale energy storage technology for data centers in China. To further promote our brand awareness, we have proposed to change the company's name from 21Vianet Group Inc. to VNET Group Inc. The EGM to approve the change of name will be held on October 8 in Beijing. The notice of the extraordinary general meeting and form of proxy have been filed on Form 6-K with the SEC and posted on our Investor Relations website. As the government promotes new infrastructure initiatives, enterprises fully realize that digital transformation is no longer a nice-to-have but a must-have for business success and survival. As such, enterprises are constantly searching for trustworthy providers capable of supporting their digitalization processes and migrations to the cloud. Against this backdrop, we recently announced our acquisition of Peng's Cloud, a leading cognitive application and data platform service provider in China. Peng's Cloud will play an integral role in extending our suite of full-stack solutions for public, private, and hybrid clouds. Therefore, we will be able to provide full life-cycle support to our customers throughout their digital transformations and further enhance our leadership in the carrier and cloud-neutral IDC services market. In summary, we remain well-positioned to capitalize on growing market opportunities arising from the trend of digitalization. We remain confident in our full-year target for the delivery of 25,000 cabinets and a utilization rate of 60%. We reiterate our dual-core growth engine strategy and strong execution to acquire more customers from various industries, diversify our revenue streams, sustain our growth trajectory, and generate lasting shareholder value for the long term. With that, I will now turn the call over to Tim, who will further discuss our financial results for the quarter as well as his thoughts on our future growth. Hi, Tim.

Tim Chen, CFO

Thank you very much, Samuel. Good morning and good evening, everyone. Before we start our detailed financial discussion, please note that we will present non-GAAP measures today. Our non-GAAP results exclude certain non-cash expenses that are not part of our core operations. The details of these expenses may be found in the reconciliation tables included in our press release. Please also note that unless otherwise stated, all the financial numbers we present today are for the second quarter of 2021 and in renminbi terms, while percentage changes are on a year-over-year basis. We delivered stellar revenue growth and improved operating margins in the second quarter driven by our organic business development, dual-core growth engine, diversified customer base, and strong IDC market demand. Our net revenues and adjusted EBITDA rose by 30.8% and 38.7% respectively, both exceeding the high end of our previously announced guidance range. Net revenue in the second quarter of 2021 increased by 30.8% to RMB1.5 billion from RMB1.14 billion in the second quarter of 2020. This increase was mainly due to increased customer demand for our highly scalable carrier and cloud-neutral IDC solutions from both wholesale and retail IDC customers as well as the notable growth of our cloud business. Gross profit in the second quarter of 2021 was RMB359.5 million, representing a year-over-year increase of 32% from RMB272.3 million in the same period of 2020 and a sequential increase of 11.2% from RMB323.3 million in the first quarter of 2021. Gross margin in the second quarter of 2021 was 24% compared to 23.8% in the same period of 2020 and 23.3% in the first quarter of 2021. The year-over-year increase in gross margin was primarily attributable to our continued efforts in optimizing our operating efficiency. Adjusted cash gross profit, which excludes depreciation, amortization, and share-based compensation expenses, was RMB640.2 million in the second quarter of 2021 compared to RMB467.6 million in the same period of 2020 and RMB605.3 million in the first quarter of 2021. Adjusted cash gross margin in the second quarter of 2021 was 42.8% compared to 40.9% in the same period of 2020 and 43.6% in the first quarter of 2021. Adjusted operating expenses, which exclude share-based compensation expenses and impairment of loan receivable to potential investee, were RMB235.6 million in the second quarter of 2021 compared to RMB182.5 million in the same period of 2020 and RMB212.5 million in the first quarter of 2021. As a percentage of net revenues, adjusted operating expenses in the second quarter of 2021 was 15.7%, compared to 15.9% in the same period of 2020 and 15.3% in the first quarter of 2021. Adjusted EBITDA in the second quarter of 2021 was RMB425.1 million, representing an increase of 38.7% from RMB306.4 million in the same period of 2020 and an increase of 2.4% from RMB415.1 million in the first quarter of 2021. Adjusted EBITDA in the second quarter of 2021 excluded share-based compensation expenses of RMB27.5 million. Adjusted EBITDA margin in the second quarter of 2021 was 28.4% compared to 26.8% in the same period of 2020 and 29.9% in the first quarter of 2021. Our net profit attributable to ordinary shareholders in the second quarter of 2021 was RMB455.9 million compared to a net loss of RMB2.12 billion in the same period of 2020 and a net loss of RMB84.7 million in the first quarter of 2021. Basic and diluted profit was RMB0.52 and RMB0.04 per ordinary share, respectively, and RMB3.12 and RMB0.24 per ADS, respectively. Each ADS represents six Class A ordinary shares. As for our balance sheet, the aggregate amount of the company's cash and cash equivalents, restricted cash, and short-term investments as of June 30, 2021, was RMB5.03 billion, increasing by RMB1.63 billion from December 31, 2020. Meanwhile, net cash generated from operating activities in the second quarter of 2021 was RMB314.8 million compared with RMB161.8 million in the same period of 2020 and RMB274.5 million in the first quarter of 2021. Looking forward, we will continue to leverage our strong cash position as we execute our dual-core growth strategy and further diversify our customer base to capitalize on growing IDC demand. We are confident in our ability to build on our leading position in the IDC market to deliver continued growth to our shareholders. For the third quarter of 2021, we expect net revenues to be in the range of RMB1.53 billion to RMB1.55 billion and adjusted EBITDA to be in the range of RMB420 million to RMB440 million. For the full year of 2021, we anticipate net revenues to be in the range of RMB6.1 billion to RMB6.3 billion and adjusted EBITDA to be in the range of RMB1.68 billion to RMB1.78 billion. The midpoints of the company's updated estimates imply year-on-year increases of 28.4% and 30.7% in net revenues and adjusted EBITDA respectively. This forecast reflects the company's current and preliminary views on the market and its operational conditions which do not factor in any of the potential future impacts caused by the COVID-19 pandemic or other factors and are subject to change. This concludes our prepared remarks for today. Operator, we're now ready to take questions.

Operator, Operator

Our first question comes from the line of Camille Xu from Morgan Stanley. Please ask your question.

Camille Xu, Analyst

Thank you, management for the opportunity and congrats on very good results. My question is about the regulatory risk. The first one is on our client side. So do we see some recent regulations such as the data security review that may compress a little bit on the demand from the major Internet customers? So for policies on our side, is the recent regulations, such as the power quota allocation in Shanghai becoming a little bit more favorable to new entrants or SOE background or at least the non-VIE structured vendor? And do we see this will further intensify the competition, especially in the area with relatively more sufficient supply like in Guangzhou? That will be my question. Thanks.

Samuel Shen, CEO

Okay. Camille, this is Samuel. Thanks a lot for attending the session and for your questions. As we pointed out, Tim, and I mentioned to the investors in the second quarter, the government did release some new regulations. But if you look closely, the regulation basically is issued to support fair competition from a market perspective and, to a certain degree, there's very little impact on our business today. Additionally, regarding the security-related information, the regulation of security protection for critical information infrastructure was basically signed off on August 17 and will take effect on September 1. To a certain degree, we believe we have the highest standards for data security and we have already obtained the necessary certifications, such as ISO 27001 and ISO 20000 for both data security and services management for several years already. Thus, we believe we are well compliant with government regulation. Having said that, we will definitely keep a close eye on the further implementing regulations once they are published. As for the power quota from Shanghai, we currently have more than 62,000 cabinets under our management as of today. In this round of allocation in Shanghai, the allocation of 3,000 cabinets per company would not have any material impact on our business operations and development plans. That being said, we are actively communicating with the Shanghai government at both the city and district levels. We hope to continue to explore options that will allow us to secure the appropriate power moving forward. Thank you.

Camille Xu, Analyst

Thank you. Very helpful.

Operator, Operator

Our next question comes from the line of Edison Lee from Jefferies. Please ask your question.

Edison Lee, Analyst

Hi, good morning. Samuel and Tim, congrats on the great results. I have two questions. Number one is that I saw that the MRR, the retail MRR, fell a little bit on a sequential basis in 2Q. Can you comment on the trend there? And what are the drivers behind the MRR on retail? Number two is that I want to see on your three-year plan of 25,000 cabinets growth per year. I believe you're sticking to that. And I remember that in the last quarter, you said that 60% of resources have already been secured. Could you please give us an update on that level of securing the resources? And what is your outlook of that progress in the next two to three quarters? Thank you.

Samuel Shen, CEO

All right. Thank you, Edison. Tim, do you want to take those two questions?

Tim Chen, CFO

Yes, of course. Thanks, Edison, for your questions. With regards to the retail MRR, as you know, the MRR is made up of a variety of services that we offer. The over 9,000 MRR is still within our expectations. We've mentioned this before, but I would caution investors to avoid putting too much emphasis on quarter-to-quarter fluctuations since there will be volatility as we take on new cabinets and offer different services; rather, focus on the medium- to long-term trend. We expect to maintain the 9,000 MRR and potentially grow a little bit as we expand the wallet share of each of our customers and the range of services we offer to them. With regards to your second question, I can confirm that we will be targeting 25,000 cabinets per year. In terms of the update for next year, previously, we indicated around 60% may be secured; however, today, we estimate we are probably closer to two-thirds to 70%. As was the case last year, towards the end of the year, we will provide a more detailed disclosure or breakdown of the different projects that comprise this. As you can appreciate, we are in discussions with many different customers, and as we proceed, we'll have incremental visibility on which projects will land in '22 and which will likely move to '23. I hope that answers your questions, Edison.

Edison Lee, Analyst

Can I ask a follow-up? I noticed that Campus 02 seems to be new compared to the first quarter presentation. Could you share more details about that project?

Tim Chen, CFO

Yes. Well, it's a project that we've secured land and power quota for. We expect it to start in '22 but we are still discussing with the sales team on how the breakdown will be between '22, '23, and '24. So we'll provide more details on that, but it is indeed a newly acquired resource.

Edison Lee, Analyst

Okay. Great, thanks.

Operator, Operator

Our next question comes from the line of James Wang from UBS. Please ask your question.

James Wang, Analyst

Good morning, management. Thank you for your time today, and congratulations on the good results. My first question is just on your guidance. You've exceeded the top end of guidance for the second quarter and have kept your full year guidance unchanged. So I’m wondering whether you're being conservative there or if there are factors that could weigh on the second half. That's the first question. And the second question is just still around regulation. The share prices of your company and peers have been under a bit of pressure recently, and there's uncertainty surrounding U.S.-listed Chinese companies with VIE structures. I'd just like to understand how you are thinking about this listing risk and your funding plans for the cabinet expansions over the next few years. Lastly, regarding the older and less efficient data centers. The government is looking to improve PUE and the efficiencies of data centers in China, and there have been discussions about older, less efficient data centers in CBD areas potentially being moved out. Given your experience in the industry, can you give an understanding of the state of your existing data centers in the CBD areas? If the government were to move these data centers, would there be adequate compensation for such a move?

Tim Chen, CFO

Okay. Thanks, James. I'll take the first two, and probably pass the third one to Samuel in Beijing. Regarding our guidance, I wouldn't say it's conservative, but rather a recognition that revenue recognition can shift between quarters, leading to a bit more being reflected in Q2. We've had detailed discussions internally with all of our teams and mapped out the rest of the year. Hence, we still aim to maintain our guidance while acknowledging that Q2 exceeded our initial expectations. As for the VIE structure risk, we have disclosed all of our VIE structures and risks in the 20-F, which is standard for many peers. Currently, we haven't seen any new laws or regulations from the PRC government. Thus, before any new laws are adopted, the VIE structure remains valid. Additionally, we've heard from regulatory bodies suggesting their support for companies to list where they choose, which may provide a positive perspective on this issue. In terms of financing, the company has worked hard over the past 1.5 years to grow capital sourcing channels, and we don’t expect this issue to significantly hinder our growth. We continue to explore a spectrum of financing options, from asset-level project financing to offshore alternatives, including bonds, CDs, and equity. I hope this assists you, James. I'll pass to Samuel for the third question.

Samuel Shen, CEO

Sure. So James, in terms of your third question, it’s true the government has made mentions in past quarters about several initiatives. First, the 14th five-year plan articulates digital initiatives. Then in July, the MIIT issued a notice about the three-year plan to empower the digital economy, including the new data center initiative. From our perspective at VNET, we have distinct advantages compared to our peers. With 25 years of experience, we have full-stack services and a vibrant ecosystem with over 6,000 customers and various partners. Regarding the government's focus on older data centers and improving PUE, this gives us a great opportunity to potentially consolidate market players. We’ve been in close contact with the government, and we're looking for opportunities to consolidate some players in the market. I hope that provides some context on what we're aiming to do.

James Wang, Analyst

Great. Thank you, Samuel. Thank you, Tim.

Operator, Operator

Our next question comes from the line of Guohan Wang from Daiwa. Please ask your question.

Guohan Wang, Analyst

Thanks for the opportunity to raise questions and congratulations on the strong results. My question is regarding our new client commitments. We've attracted numerous new clients last quarter, and we've also acquired a leading community platform this quarter. I’d like to understand our visibility in attracting new clients and our strategy for acquiring wholesale clients. Additionally, I understand our execution for the first half is in line with expectations, but looking into the second half, is there any visibility or potential issues that management anticipates may impact our capacity delivery?

Tim Chen, CFO

Guohan, yes. Let me answer your questions, then see if Samuel has anything to add. In terms of new clients and customers attracted over the past quarter, yes, we've made strong progress. Previously, we had questions about our ability to grow beyond a single customer in the wholesale business. However, we have demonstrated strong capacity to attract new customers across various sectors. Regarding execution, the first half met our expectations, and currently, we don’t foresee issues in the second half. Of course, as with all things related to construction, there may be time shifts, but we still expect to hit 15,000 cabinets and achieve our overall target of 25,000 cabinets for the year. Samuel, do you have anything else to add on the customer side?

Samuel Shen, CEO

Yes, I would like to reiterate that since we initiated our dual-core strategy back in 2019, we have focused on hyperscalers and noticed a strong demand from large Internet companies for custom-designed data centers. On the retail side, the COVID-19 pandemic accelerated digital transformation, resulting in traditional enterprises such as financial services and logistics aggressively pursuing data center solutions. Therefore, we've observed significant increases in our scale of retail customers and anticipate robust growth in this segment. We not only cater to a handful of wholesale customers but have expanded to more than a dozen potential wholesale customers, and our scalable retail customer base continues to grow. Both engines of our business support each other and hedge risks effectively.

Guohan Wang, Analyst

So, may I double-check with you on any updates or signals regarding intensified supply issues in the areas surrounding Beijing, particularly in Langfang or other nearby locations?

Samuel Shen, CEO

Certainly. We primarily focus on Tier 1 cities as well as their surrounding areas. However, we are also paying attention to remote regions, such as North China and the western areas. The government’s three-year directional guidance also provides insight into future data center directions. We have secured additional resources in Hubei Province, which strengthens our power supply and quotas to serve both wholesale and retail clients, and our efforts will continue in that direction.

Operator, Operator

Our next question comes from the line of Clive Cheung from Credit Suisse. Please ask your question.

Clive Cheung, Analyst

Hi, management. Thank you for taking my question. I have a follow-up on competition. As for the second quarter, the slight decline in MRR, what impact, if any, was from competition rather than new capacity additions? That's my first question. The second question is, do we have any updates on the Tuspark sell-down?

Tim Chen, CFO

Thank you, Clive. Regarding the MRR, I won't point to a single factor, as it's a mix of our service offerings. Each customer's combination of services can lead to fluctuations. Management emphasizes the medium- to long-term trends, which we expect to remain around 9,000 and slowly increase as we expand our service range. In terms of the Tuspark transaction, we don't have a timetable due to it being a transaction between shareholders; however, the parties will file with the SEC as required. We will provide the market updates once we have further details.

Clive Cheung, Analyst

Okay. Thank you very much.

Operator, Operator

Our next question comes from the line of Arthur Lai from Citi. Please ask your question.

Arthur Lai, Analyst

Hi, thanks, Samuel and team. I have two questions. First, would you mind sharing the revenue mix in terms of wholesale and retail from your revenue cabinets? And what is the target horizon for the long-term? Secondly, we see your peers maintaining their long-term targets unchanged. As for your target of 25,000 cabinets per year growth, what do you envision for your long-term goals in the Phase 2? Additionally, one smaller question is that you mentioned this quarter, you've added logistics clients. Can you share a success story about how you grew this client and the scale of its demand?

Tim Chen, CFO

Arthur, I appreciate your questions. We currently don’t provide detailed breakdowns between wholesale and retail as wholesale is still a small portion. Roughly, 20% of our cabinets are wholesale compared to retail. Over time, you should see gradual growth of this contribution. From our revenue perspective, approximately two-thirds come from IDC, and one-third from VPN and cloud businesses. As for long-term targets, we’re maintaining the 25,000 per year goal for the foreseeable future. We don’t foresee major changes that would prompt increasing targets yet. Samuel, perhaps you could elaborate on the logistics client and your growth strategy?

Samuel Shen, CEO

Certainly, Arthur. We mentioned securing various customers this quarter, specifically referencing J&T Express, a fast-growing logistics company that supports many e-commerce providers. Our partnership with J&T Express encompasses both data solutions and full-stack services. We are pleased to have secured this strategic partnership to support their future growth. However, we cannot provide specific metrics regarding growth rates. Importantly, we've observed considerable momentum from traditional enterprises seeking to establish their data centers, and our dual-core strategy effectively supports various customer needs.

Arthur Lai, Analyst

Got you. Thank you.

Operator, Operator

Our next question comes from the line of Tina Hou from Goldman Sachs. Please ask your question.

Tina Hou, Analyst

Hi, good morning, management. This is Tina Hou from Goldman Sachs. I have two questions. The first one is regarding the competition environment in the market. So for example, in terms of winning new customers, what was the process like? How many competitors did you bid against in winning some of the new customers? And what is the latest project IRR you're getting on these new orders or new MOUs? The second question is regarding our non-GAAP EBITDA margin. I noticed that based on our full-year guidance midpoint, the EBITDA margin is about 27.9%. However, in the first half, we were trending above 29%. Are we expecting a drop to around 27% in the second half? Is this a conservative approach, or is there any reason to expect a lower EBITDA margin in the second half, such as lower overall utilization rates or lower ramping data center utilization rates?

Samuel Shen, CEO

Thank you, Tina. I'll take the first question and pass the second to Tim. Regarding competition, there is significant competition in the new infrastructure market, with traditional enterprises and carriers, as well as new players entering the space. However, we believe we maintain distinctive advantages among our peers, given our 25 years of experience, full-stack services, and a vibrant ecosystem. Despite competition, we have observed strong demand for customized data solutions and digital infrastructure. We also have a very competitive business model, as we are the only firm providing both wholesale and retail data services in the market. This dual-engine strategy gives us leverage across customer needs, enhancing our prospects. Tim, do you want to handle the second part of Tina's question?

Tim Chen, CFO

Sure, Tina. I would clarify that we expect EBITDA margins to decrease in the second half due to cabinet delivery ramp-ups, which are heaviest in the fourth quarter compared to the third quarter and second half overall. The split is roughly 10,000 in the first half and 15,000 in the second half. This will drive the lower projected EBITDA margins, impacting the full-year numbers you're considering.

Tina Hou, Analyst

Yes. Can I just have a follow-up question? In the presentation, management mentioned this year, the target overall utilization rate is 60%. Do we have a target for next year?

Tim Chen, CFO

In terms of next year, we will likely aim for a similar target, given the substantial rollout of cabinets. Even though we expect rapid expansion, we'll still maintain an overall target rate of around 60% for next year.

Ethan Zhang, Analyst

Good morning. Thanks for letting me ask the questions. So, I have just one question on CapEx. During the first half, I noticed that the company only spent around RMB1.1 billion on CapEx, which only represents around 20% of the full-year CapEx guidance of RMB5.5 billion. So I'm wondering whether the company will maintain its previous CapEx guidance or if this indicates we may focus more on M&A projects during the second half of this year or if capacity deliveries will further accelerate? Additionally, what is our current M&A strategy?

Tim Chen, CFO

Okay, thank you, Ethan. In terms of CapEx, you’re correct that it has been less in the first half but is due to our expectation of a significant ramp-up in the second half. We anticipate staying within the RMB5 billion to RMB6 billion target. Regarding M&A strategy, we're looking for opportunistic transactions that suit our needs and those of our customers. As you understand, M&A deals are difficult to predict; however, we are in discussions with potential transactions and focus on acquiring additional land and power assets as we grow. You can expect more actions in the next two quarters.

Operator, Operator

Ladies and gentlemen, this does conclude our conference for today. Thank you for participating. You may now disconnect.