21Vianet Group Inc (NASDAQ:VNET) management vehemently denied the allegations of fraud raised by Trinity Research Group, and now investor sentiment seems to have swung back to the other extreme. Analysts from several firms have issued commentary about what Vianet management had to say in response to Trinity’s allegations.
21Vianet: Trinity has it wrong
In a report dated Sept. 12, 2014, Morgan Stanley analysts Gary Yu, Navin Killa and Yang Liu highlight some of the many points Vianet management said Trinity’s research report had wrong. They also provided commentary about why there are differences between the numbers in Trinity’s report and what Vianet management reported.
For example, Trinity’s report listed a lower number of cabinet numbers in Vianet’s core IDC business. The Morgan Stanley team believes this difference was “due to counting errors: (in other words, someone just can’t count).
They think the difference in the utilization rate cited by Trinity and management’s provided utilization rate was a “difference in definition.” They note that Vianet uses “daily weighted average” in determining its utilization rate.
It should be noted that with Morgan Stanley there is likely a conflict of interest, as the sell-side reports always contain in their disclaimers. As Neil Cough of DealBook notes:
But the report on Tianhe is notable because of the company’s size — a market value of about 59 billion Hong Kong dollars, or $7.6 billion — and its backers. Those include Morgan Stanley’s Asian private equity unit, which invested $300 million in Tianhe in 2012.
“We stand resolutely behind Tianhe’s world-class management team,” Homer Sun, the chief investment officer of the Morgan Stanley unit and a nonexecutive director of Tianhe, said on Thursday in a statement.
Remaining comfortable with 21Vianet, but…
The Morgan Stanley team says they are “comfortable” with the 17,000 cabinets Vianet reported with a 73.9% utilization rate in the second quarter of 2013. They note that management intends to offer more information on cabinet numbers and utilization rates at its individual data centers in the coming days.
They do see room for improvement in the company’s cash management, however, for receivables and also mergers and acquisitions—one of Trinity’s biggest points of contention in its report. The analyst note a significant increase in days of sales outstanding from between 70 and 90 days last year to between 100 and 110 days in the first half of this year.
Vianet management said it was due to better credit terms they extended to the company’s most important customers. Also reform in VAT could have extended receivables ahead of implementation in June.
In a separate report dated Sept. 11, 2014, JPMorgan analysts James Sullivan and Michelle Wei said they have seen similar increases in accounts receivable at other companies ahead of the implementation of VAT. They’re waiting for more information on this topic.
Vianet addresses mergers and acquisitions
On the topic of mergers and acquisitions, Vianet management said its seven major acquisitions were in line with their strategy to become one of China’s top internet infrastructure service providers. The Morgan Stanley team does think that the Aipu valuation of $250 million looks to be a little high. They also note that there are still doubts about several of the transactions between connected parties in connection with the acquisition of iJoy. They expect investors to remain concerned about these transactions until management more fully answers those concerns.
Nonetheless, they maintained their $35 per share price target and Overweight rating on 21Vianet.
Answers about alleged “illegal” operations
Vianet management also addressed the allegations that its Managed Network Services business is operating illegally and has “fabricated” financials and overstated revenues. The allegations were in connection with an internal document from China Telecom that said it would investigate Vianet. Management, however, said that China Telecom remains a key customer from them.
The JPMorgan team said their conversations with representatives from the industry indicate that reselling bandwidth “within a value-added services contract is legitimate.”
Options activity on 21Vianet skyrockets
On Thursday, investors started snapping up options on 21Vianet. Analyst Ratings Network noted that more than 12,000 call options were bought on Thursday. That’s a more than 700% increase from the average daily volume, which is around 1,500 call options.
