21Vianet Group: IPO Pick of the Week

Apr.18.11 | About: 21Vianet Group (VNET)

21Vianet Group (proposed VNET) is scheduling a $127 million IPO with a market capitalization of $575 million at a price range mid-point of $11 for Thursday, April 21, 2011. Full IPO Calendar lists 4 other IPOs for this week.

SUMMARY -- Sales increased 67% to $80 million for 2010 vs 2009. December quarter revenue was $30 million, which is $120 million annualized.

VNET is the largest carrier-neutral Internet data center services provider in China. The company provides connectivity not provided by carriers. In December 2010, VNET's customer base was 1355, up 10.6% from 2009. VNET customers have growing data center requirements.

VALUATION & CONCLUSION -- VNET's recurring revenue is a plus. Its growth is tied directly to customer’s growth requirements. At the price range mid-point the price is 4.8 times annualized December revenue.

Gross margins declined in the last six quarters from 27% to 24%. The loss in 2010 is based on $38 million in shareholder compensation charges, otherwise VNET would have shown a profit.

At the price range mid-point of $11 the stock should do well if quarterly revenue can continue to increase sequentially. Each ADS represents six shares.

VNET Valuation Metrics

BUSINESS -- VNET provides and operates data centers, rents out servers in cabinets and provides connectively not provided by mainline telecom carriers. VNET is the largest carrier-neutral Internet data center services provider in China as measured by revenues in 2009, according to data released by International Data Corporation, or IDC. S-1 page 1

VNET operates 47 data centers located in 33 cities throughout China, including all of China’s major Internet hubs, with over 5,700 cabinets under management housing over 39,000 servers. The data transmission network includes more than 260 points of presence, or POPs. A POP refers to an access point from one place to the rest of the Internet.

Most of the data centers and all of the POPs are connected by VNET’s private optical fibers network across China. As a carrier-neutral Internet infrastructure services provider, VNET's infrastructure is interconnected with the networks operated by all of China’s telecommunications carriers, major non-carriers and local Internet service providers, or ISPs.

CUSTOMER BASE -- As of December 31, 2010, VNET had 1,355 customers, up 6% from 1225 customers December 31, 2009. VNET's customers include many leading Chinese and global companies operating in China across a broad range of industries, including Internet companies, government entities, blue-chip enterprises, and small- to mid-sized enterprises.

The average monthly churn rate, or customer attrition rate, as measured by monthly recurring revenues was 0.9% in 2010. Monthly recurring revenue from the top 20 customers in 2010 has increased from $1.2 million in January 2009 to $2.7 million in December 2010.

GROWTH PLAN -- To meet customer’s growth objectives VNET may partner with China Telecom or China Unicom and lease cabinets from them.

Future operating results and growth prospects will largely depend on VNET’s ability to increase the number of cabinets under management while maintaining optimal cabinet utilization rate. With the rapid growth of China’s Internet industry, demand for cabinet spaces has increased significantly and VNET does not always have sufficient self-built capacity to meet demand; It usually takes six to eight months to build a data center with cabinets and equipment installed.

COMPETITION -- includes telecommunication carriers, carrier-neutral service providers, and in-house data centers.

Carriers -- competition includes state-owned telecommunication carriers, such as China Telecom (OTC:CCYXF) and China Unicom (OTCPK:CHUFF). According to IDC, in 2009, carriers occupied 64.9% of the data center services market. S-1 page 92

In addition, both carriers operate their own networks. Unlike China Telecom and China Unicom, which construct data centers primarily to help sell bandwidth, VNET provides connectivity to multiple networks in each of VNET’s carrier-neutral data centers, providing superior choice and performance according to VNET.

VNET’s private network provides enhanced connectivity among different networks according to VNET. In comparison, data centers operated by China Telecom and China Unicom generally provide access only to their own network and are often constrained by their own networks’ coverage.

Due to inadequate interconnectivity among Chinese carriers’ networks, interconnectivity bottlenecks remain a major problem in China, contributing to slow transmission speeds across services and applications.

Carrier-neutral service providers -- includes other carrier-neutral service providers, such as ChinaNetCenter and Dnion Technology.

In-house data centers -- businesses may choose to house and maintain their own IT hardware, such as Baidu (NASDAQ:BIDU) and Alibaba (HKG:1688), and other large enterprises, particularly in the financial services sector.

USE OF PROCEEDS -- $113 million

  • $70.0 million to expand data center infrastructure
  • $30.0 million to expand network infrastructure
  • Remainder for working capital and other general corporate purposes

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.