On August 12, Southern Fund announced it had received a comprehensive inquiry letter from the Shenzhen Stock Exchange concerning the proposed 7.7 billion yuan expansion of its Runze Technology data center REIT. The detailed document, sent on August 10, contains 33 specific questions across six major sections, marking a thorough review of the project and highlighting the strict regulatory scrutiny applied to IDC computing power REIT expansions.
The expansion is the first for the Southern Runze Technology Data Center REIT since its listing in August 2025, which had an initial public offering size of 4.5 billion yuan based on the Langfang Runze International Information Port A-18 data center. This new round aims to acquire two additional data centers, A-7 and A-8, within the same park, with a proposed issuance size of 7.697 billion yuan and an asset appraisal value of 7.577 billion yuan, approximately 1.7 times the scale of the initial offering. The proceeds will fully fund a supporting ABS plan to hold all equity in the project companies, but completion depends on three key approvals: registration with the China Securities Regulatory Commission, SZSE approval of the product changes and ABS listing, and a vote by fund unit holders. Southern Fund acknowledged uncertainty in the timeline and outcome of these processes, pledging to respond to the inquiry and disclose updates within two days of submitting its reply, while warning investors of associated risks. Submitted on July 9 and accepted on July 16, the inquiry arrived less than a month later, signaling rapid regulatory intervention into core risks like asset operations, finances, valuations, and compliance across six areas: originator qualifications, real estate compliance, project cash flows, asset valuations, fund governance, and procedural adherence.
Regulatory Focus on Five Key Risks Highlights Industry Challenges
The most prominent issue in the inquiry is customer concentration risk. The A-7 and A-8 projects rely entirely on Beijing Telecom as their sole cash flow provider, with end customers limited to major internet companies and telecom subsidiaries. The exchange demands that the manager disclose lease renewal plans after contracts expire, a list of potential backup tenants, and complete risk mitigation strategies for scenarios like early termination or non-renewal. It also requires a breakdown of cabinet rental details and core contract terms, along with evidence of operational stability based on the client's own IDC plans and long-term partnership history. Data shows that collection rates for hosting services have fluctuated between 96% and 99.5% over the past three years, never reaching 100%, prompting a request to explain these fluctuations and reveal payment risks.
Another major concern is regional supply-demand imbalance in Langfang's IDC market. Submission materials indicate that in 2025, supply reaches 1,550 MW while demand is only 1,265 MW, creating a clear oversupply. The regulator requires the manager to analyze supply-demand trends, hosting service fee pricing over the past three years, and medium-to-long-term industry outlook, using the project's power-inclusive operating model, liquid cooling upgrades, and client base to demonstrate its core competitiveness. Financial data supports this price pressure, as A-7 and A-8 saw negative growth in hosting service unit prices over the past two years, with 2025 rental rates declining year-over-year. The exchange asks for a comparison with nearby comparable data centers to assess whether price declines are sustainable and evaluate the impact on the fund's long-term cash flows.
The project's uncommon power-inclusive model, where Runze Development centrally pays high-voltage electricity costs, is also scrutinized. Electricity is the largest operating cost, and the inquiry seeks disclosure of historical cabinet load rates, predictions of future changes, and evidence of the model's long-term sustainability with risk hedging measures. It requires a review of power purchase agreement pricing, disclosure of multi-voltage supply settlement mechanisms, and an analysis of cost fluctuations, including A-7's volatility and A-8's rising costs. The manager must also quantify the impact of liquid cooling upgrades, including cabinet ratios, high-density upgrade plans, and costs, to assess how technology changes affect returns.
Asset valuation assumptions are another target, with several optimistic predictions questioned. The rent growth assumption uses current contract prices, projecting 1% annual growth after 2030 and 5.1% every five years from 2035, but the regulator demands justification given historical declines and oversupply. The valuation predicts cabinet utilization stabilizing at 95% and signing rates at 100% after 2028, requiring additional data for 2026-2027 and proof of prudence based on historical levels and client demand. Cost estimates assume annual electricity price increases of only 0.5%, while total capital expenditures for the two data centers exceed 2.29 billion yuan, prompting a request to break down these costs and justify them against equipment renewal cycles and customized client needs. The inquiry also demands cross-validation with multiple valuation models and independent checks by financial advisors against comparable IDC transactions and peer REIT valuations.
Details on entities, compliance, and related-party transactions are also examined. The project involves dual originators, Runze Development and Range Intelligent Computing Technology Group Company Limited, with reorganization steps like equity transfers and contract swaps with Beijing Telecom. The regulator demands disclosure of progress and completion times, justification for the dual-entity structure, and full risk disclosure. It also requires a comparison of profitability across Runze's other 11 similar data centers in Langfang to explain the preference for A-7 and A-8. Compliance issues include verifying all construction and operating permits, addressing restrictions on transferring scientific research land, and clarifying asset transfer risks during the fund's lifecycle. Related-party transactions, such as an annual 1.9111 million yuan payment for shared substation services and 677,000 yuan for fiber services, need price comparisons with third-party markets to ensure fairness. Fund governance questions focus on management fee breakdowns, cost fluctuation reasons, and comparisons with peers, as well as requirements for establishing emergency response mechanisms, managing competition among multiple IDC REITs, and clarifying the rationale for allocating transition period profits to SPVs.
Stricter Oversight on Computing Power REIT Expansions Targets Cash Flow Stability
Industry experts note that this SZSE inquiry, covering the entire chain from assets to governance, reflects a trend of stricter regulation for IDC computing power REIT expansions. Unlike mature infrastructure assets like industrial parks or highways, data center REITs inherently face four major risks: customer concentration, regional supply-demand imbalances, high energy costs, and rapid technological changes, which are frequent focal points for exchanges. This inquiry sends a clear signal: the primary review standard is now cash flow sustainability, not just cabinet scale or asset size. Regulators are applying thorough risk checks on single-customer dependency, falling rents, fixed costs, and optimistic valuation assumptions, forcing managers to fully disclose potential downsides and set adequate mitigations to protect secondary market investors.
Southern Fund stated it will work with Range Intelligent Computing Technology Group Company Limited, financial advisor Huatai United Securities, and valuation agencies to complete responses within 30 working days, updating all submission documents. Market participants caution that until the inquiry is fully addressed, the unit holders' meeting is held, and CSRC registration is obtained, this 7.7 billion yuan expansion faces risks of delay, scale adjustment, or even termination. Investors should monitor subsequent responses closely, focusing on three key variables: single-customer contract renewals, falling regional rents, and valuation parameter adjustments, as they will impact the fund's long-term dividend capacity.
Disclaimer: This article is generated by an AI model. The market carries risks; investment should be cautious.
Below is Southern Fund's announcement
Below is the original announcement text