21Vianet Group, Inc. (VNET) priced an upsized offering of 13 million shares at $15.00, well above the initial terms of 11.5M shares at $10-12. Proceeds from the sale are intended to be used for the expansion of their data center infrastructure, expansion of their network infrastructure, and for working capital and general corporate purposes. The offering is led by Morgan Stanley, Barclays, and JP Morgan.
Chinese IPOs accounted for 24% of the 2010 total U.S. listed IPOs and 7 of the top 10 day one performers in 2010. Most of these top performers were in the tech/internet category. So far in 2011, only 10% of the IPOs have been Chinese, companies, but this includes the top day one performer in Qihoo 360 Technology (QIHU), which was up 134% on the first day of trading. With above range pricing and strong investor demand, VNET looks to continue this trend.
VNET is the leading carrier-neutral internet data center (IDC) services provider in China. They operate 47 data centers in 33 cities throughout China, and have over 5700 cabinets under management. Most of their 260 points of presence (POPs) are connected by their private fiber optical network across China. They have over 1300 customers, with none representing over 3.5% of sales, including such top names as Youku (YOKU), Tencent, and renren (which has recently filed to go public in the U.S. and is expected to come the week of March 2).
The IDC market in China is well behind that of the U.S. with underdeveloped infrastructure, only 3 nationwide network access points, and approximately 90% of the internet traffic controlled by China Telecom and China Unicom. The carrier neutral segment is growing market share, representing 35.1% share of the $500M IDC market in China in 2009. This market is expected to grow to over $1.9B by 2014. The shift to more peering is leading to the increase in carrier neutral market share. VNET believes they have plenty of room to grow as less than 20% of traditional enterprise outsource their data center services, versus more than 50% in the U.S.
As leading carrier neutral IDC in China, VNET has approximately 19.2% market share, versus 9.3% for the number two player. The market is highly fragmented, with most of the enterprises hosting in house rather than outsourcing. They plan to continue their market leadership through the growth in both the number of cabinets and their gateway bandwidth capacity. VNET plans to rapidly grow their number of cabinets from 5750 in 2010 to over 10,000 in 2013e, and their gateway bandwidth capacity from 295 Gbps in 2010 to 1000 Gbps in 2013e.
VNET has grown revenue at a 47.7 % CAGR from 2008-2010, from approximately $36.9M to $79.6M. Their fourth quarter 2010 run rate represents over 50% growth over 2010. Both their adjusted EBITDA margin and adjusted net income margins were up in 2010, to 15.9% and 11.3% respectively.
Chinese tech related IPOs continue to spark interest with U.S. investors, and VNET is next in line. Demand for this IPO has been strong for the last week, as the upsized offering and price indicate. I view this company as an early stage Equinix (EQIX), and believe that the Chinese opportunity in the IDC market is just beginning.