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21Vianet Group (NASDAQ:VNET) reports 2Q12 earning on August 16th. The Street expects:

  • Revenue: $57.8 million
  • EPS: $0.12
  • Q3 revenue guide: $62.13 million

In Q1, VNET reported a solid quarter in which revenue increased 64% y/y to RMB 345.8 million. Discounting revenue contribution from Gehua, organic revenue grew 53% y/y.

Hosting revenue grew 47% y/y to RMB 189.5 million due to an increase in the total number of cabinets under management and managed network service revenue grew 91% y/y to RMB 156 million. Gross margin expanded to 28.4%, from 26.2%.

In my view, VNET's position as China's largest carrier-neutral independent data center provider makes it one of the most attractive and undervalued Chinese ADRs. The company is expected to grow its topline by 50% this year and is trading at half of its North American peer, Equinix (NASDAQ:EQIX), based on 2012 estimates.

The company has a strong reputation for quality and is used by top Chinese internet companies such as Tencent, Youku (NYSE:YOKU), Renren (NYSE:RENN) and Taobao. The company's top 20 customers approximately doubled their spend on VNET and there has not been a churn in the past two years.

As VNET focuses more on building its own data centers and expanding its managed network services, margin will improve materially.

Click to enlarge

Beyond Q2, investors should expect sales to accelerate. According to management, 2,000 new cabinets are expected to come online in June and an additional 2,400 are expected to be online in 2H12. Note that cabinet demand outpaced supply in Q1, the additional cabinet supply in the second half should further accelerate sales. In addition, pre-sales at the datacenters is strong and the company believes that 50% could be sold by September, which also allows the company to maintain a gross margin of 30%.

I am comfortable with the $15 price target I set for VNET. For a deeper analysis of the company, please refer to my December 28th, 2011 note "21Vianet: Banking On China's Internet Infrastructure".

Source: 21Vianet Q2 Earnings Preview: Expect Strong Ramp Up In The Second Half