21Vianet Group Inc (VNET) Fraud Charge Flawed: Canaccord

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21Vianet Group Inc (NASDAQ:VNET) was swift to answer the allegations raised by Trinity Research Group on Wednesday. The company’s management held a conference call in order to refute the claims of fraud and misrepresentation.

21Vianet responds to allegations

On Wednesday, Trinity Research accused 21Vianet Group Inc (NASDAQ:VNET) of grossly misrepresenting its financial results and overstating its “utilization.” The firm also claimed that the company was running its Managed Network Services business illegally. The segment makes up about a third of its business.

21Vianet management strongly refuted the claims and provided more information about their two most recent acquisitions on today’s conference call. Trinity’s thesis was partially based on 21Vianet’s habit of acquiring companies, and the firm levied accusations at the two acquisitions that management spoke about. They also promised a press release in the next few days to refute the claims in the report even further.

Research “fundamentally flawed”?

In a report dated Sept. 11, 2014, Canaccord Genuity analysts Greg Miller and Matthew Khan say they think Trinity’s research was “fundamentally flawed” based on the new information 21Vianet Group Inc (NASDAQ:VNET) management provided about their two most recent acquisitions. However, they did not provide much commentary beyond saying that the research was poorly done.

The analysts note that Trinity did offer detailed information about the cash burn caused by the company’s aggressive data center expansion. They say the problem though is that the report does not recognize that this is an industry-wide trend “that even the most successful data center companies experienced in their extreme growth phase.” They add that 21Vianet’s nonstop string of construction projects is not unusual for the data center industry.

Awaiting 21Vianet’s full rebuttal

The Canaccord Genuity team notes that they don’t have enough information to refute all of the fraud claims on their own. However, they’re “reasonably confident” that Trinity’s financial analysis “is of extremely poor quality and should cause serious questions about the credibility of the claims.” More specifically, they say suggesting that 21Vianet Group Inc (NASDAQ:VNET)’s Managed Network Services business has a 100% margin “strains credibility.”

The analysts maintained their Buy rating and $35 per share price target on 21Vianet Group as they await more information from the company’s management.

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