UBS analysts suggest that fears surrounding AI-related data center spending in China are overblown. Following a valuation drop of 40-60% since February, key players like GDS and VNET are now trading at attractive entry prices.

UBS’s Positive Outlook

• Consistent Project Execution: Major players in China are committed to AI projects, with GDS and VNET completing projects on time.

• Market Valuation Recovery: Share prices have settled back more to pre-DeepSeek AI hype levels, removing much of the prior valuation premium.

• REIT Opportunities: Potential launches of data center REITs from GDS could provide additional upside for investors.

Recommended Stocks & Financial Position

• GDS Holdings (GDS): UBS maintains a Buy rating with a price target of $45. GDS demonstrates strong liquidity, critical for AI investment.

• VNET Group (VNET): Also rated Buy with a revised target of $12.80. VNET is projected to see significant EBITDA growth driven by strategic locations.

Modeling Future Growth

• Investors can model cash flows by using DCF analyses to assess how AI orders and REIT dividends might impact intrinsic values in the coming years.

• Conduct sensitivity analyses to understand risks associated with changing market dynamics.

Potential Risks to Consider

• AI Spending Slowdown: Any abrupt decline in AI investment could affect utilization rates.

• Regulatory Challenges: Stricter export controls may disrupt supply chains or increase costs.

• Macro Conditions: Broader economic uncertainties could affect growth.

Final Thoughts for Investors

1. Strategic Entry Point: Consider entering positions in GDS and VNET after recent declines.

2. Stress Test Investments: Utilize real data to ensure that investment cases stand up against various market scenarios.

3. Watch REIT Developments: Regulatory approval for data center REITs could lead to significant valuation changes.