21Vianet Group Inc (NASDAQ:VNET) issued a 91 page response to Trinity Research’s allegations, which were first reported by ValueWalk. The full response can be found below.
21Vianet Group Inc (NASDAQ:VNET) (“21Vianet” or the “Company”) is the largest carrierneutral Internet data center services provider in China.
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On September 10, 2014, Trinity Research Group (“Trinity”), a short seller that was allegedly formed in 2014, issued a report that made irresponsible and false accusations about 21Vianet.
21Vianet provides further details on the fraud allegations by Trinity Research
As further explained in details below, the allegations Trinity made contain numerous errors and unsupported speculation:
Trinity accused 21Vianet Group Inc (NASDAQ:VNET) of running a “Ponzi scheme.” The truth is that 21Vianet has been running a market-leading internet infrastructure business for almost 15 years, and this real business has tangible assets, important industry leading customers and contracts that provide stable monthly recurring revenues. 21Vianet’s monthly recurring revenue per cabinet is in excess of RMB10,000 and this has been so for the past nine fiscal quarters.
Trinity wrongly accused that 21Vianet materially overstates the numbers of its data center, cabinets and utilization rates. The truth is that the data provided by the Trinity Report contains many incorrect details and data regarding 21Vianet’s datacenter locations, number of cabinets, number of billable cabinets and utilization rates. As of June 30, 2014, the Company had 82 datacenters including 15 self-built and 67 partnered. The self-built datacenters had 11,482 cabinets, and partnered had 5,462 cabinets. 21Vianet has provided a breakdown of its top five selfbuilt and partnered datacenters that contained major discrepancies from the Trinity report.
21Vianet’s data center utilization rates
Trinity alleged that 21Vianet’s data center utilization rates should drop significantly with 21Vianet Group Inc (NASDAQ:VNET)’s increasing cabinet count. The truth is that Trinity failed to understand the Company business model and has used the wrong methodology. The correct methodology to calculate utilization rate should be using the weighted average billable cabinets and weighted average total capacity to calculate quarterly utilization rates. Cabinets that are deployed or billed earlier in the quarter receive a larger weighting because they are utilized for a longer period of time than cabinets that are deployed or billed later in the quarter. 21Vianet has provided the correct calculation.
Trinity claimed that China has a “massive” IDC oversupply, citing Circular 225 issued by the Ministry of Industry and Information Technology (MIIT). The truth is Trinity confused production rates with utilization rates. Production rates measure the status of facilities already built, as compared to the designed plan, while utilization rates measure the status of facilities sold, as compared to the actual capacity.
21Vianet’s overstated IDC revenue
Trinity claimed that because the Company has a significant increase in its A/R Balance and DSOs, this must be caused by overstated IDC revenue. The truth is that a major cause of the high A/R balance and prolonged DSO is the transformation from Business Tax (“BT”) to Value-Added Tax (“VAT”). From early 2012, China started a reform of its indirect tax system to phase in a VAT system to eventually replace the BT system. However, the telecommunication services sector was one of the last services sectors to be eligible for VAT inclusion and as of June 30, 2014, 21Vianet was only granted 1,000 VAT invoice forms. A significant portion of 21Vianet’s clients had intended to wait until 21Vianet could issue valid VAT invoices for them to claim the relevant tax credits, which contributed significantly to the high A/R balance. In the past few months, 21Vianet has been granted extra VAT invoices, which has begun to provide significant improvement in collections. As of September 5, 2014, the subsequent collections in aggregate amounted to approximately RMB277 million, representing approximately 33% of the total accounts receivables balance as of June 30, 2014. In the two full weeks after it had obtained the extra 1,000 VAT invoices, the average weekly collections amounted to approximately RMB40 million, representing about 63% increase as compared to the average weekly collections in the eight weeks before it.
Trinity presented its own analysis of 21Vianet Group Inc (NASDAQ:VNET)’s free cash flow showing that the Company has a significant liquidity issue. However, Trinity’s projection is misleading due to its lack of knowledge and understanding of the data center industry. Data center companies require upfront capital investments for the land, building and equipment required for the data center infrastructure, which will be paid back at a high IRR in the subsequent years with increasing utilization. In addition, the Company has a very solid cash position and expect to maintain it. As of September 5, 2014, 21Vianet had cash and cash equivalents of approximately RMB2.70 billion. In addition, the Company anticipates that cash flow from operations will continue to improve in the following quarters as the current bottlenecks in the invoicing system are further reduced. This is expected to further strengthening our cash balance.
See full report in PDF format here.