21Vianet’s Call to Investors Backfires as Selloff Deepens

By Bloomberg News  

With its stock reeling and a short seller claiming corporate fraud, 21Vianet Group Inc. (VNET) convened investors to a conference call early yesterday in a bid to regain their confidence.
The call only made matters worse.
American depositary receipts of 21Vianet, a Beijing-based Internet data-center operator, plunged 21 percent within four minutes of the opening of trading on the Nasdaq Stock Market in New York yesterday. The shares ended the day down 23 percent, extending their record slump this week to 45 percent and erasing about $830 million of market value.
While 21Vianet officials rejected allegations made by the short seller, Trinity Research Group, as “unfounded” on the call, their answers to
key questions about their finances, including a surge in accounts receivable, were too vague to reassure investors, said Jun Zhang, a San Francisco-based analyst at Rosenblatt Securities Inc. who listened to the call.
“The management didn’t sound well prepared for the conference call and the managers who answered the questions seemed not very familiar with its business details,” Zhang, who is the head of China equities research at Rosenblatt, said by phone. “They didn’t provide sufficient clarifications to a few questions raised by investors such as increasing accounts receivable, and sometimes gave contradictory explanations over the call on the same issue.”

Management Jargon

The Bloomberg China-US Equity Index sank 0.5 percent to 116.35 in New York. Its four-day decline was the longest in six weeks. The iShares China Large-Cap ETF, the largest Chinese exchange-traded fund in the U.S., slid 0.3 percent to $41.11, the lowest in more than a week. The Shanghai Composite Index retreated 0.4 percent to 2,303.55 at 9:52 a.m. local time.
21Vianet’s logo adorns a five-story office building in Beijing’s Chaoyang district near other technology companies including Tujia.com, which provides a service similar to Airbnb. A security pass is required to access the floors.
About 200 people were working from a row of desks on the third floor, with a flat-screen television playing a video highlighting the company’s achievements over the past two decades, advertisements for swimming and yoga, and plans for a singing contest.

Short Targets

Chen Ning, a media official for 21Vianet, said she was in a meeting and unable to meet with a Bloomberg News reporter at its headquarters today. No one was available to speak with a reporter because her co-workers on the team were out and managers were meeting investors, she said.
The company is preparing to make further announcements in China and the U.S., Chen said.
21Vianet joins a growing list of Chinese technology companies that have been targeted by short sellers. NQ Mobile Inc. (NQ) has become the most high-profile case of late, with Muddy Waters LLC’s Carson Block calling the company a fraud in October and saying he was betting against the stock. NQ Mobile, which has sunk 73 percent since then, has called Block’s claims “false.”
Vijay Marolia, chief investment officer at Regal Point Capital Management, said he has taken out a short position on 21Vianet as he’s started to see some potential parallels between the company and NQ Mobile. He said he was unimpressed with 21Vianet officials on the conference call.

Investor Questions

They were “long on jargon and short on detailed answers, and not very convincing,” Marolia said in an e-mailed comment from Orlando, Florida. “I have a feeling that very few people could follow the answers given, and we certainly need more clarification on the accounts receivable. That’s a perfect example of not being able to understand the answer from the company.”
21Vianet was questioned by at least two people on the call about its booking of accounts receivable, or money it’s owed by customers. At one point, an analyst called the increase in accounts receivable “fairly undeniable” and asked for an explanation. A company official attributed the increase to longer credit terms given to key customers amid stronger competition and to the impact of tax changes in China.
Eric Chu, 21Vianet’s vice president of capital markets, didn’t respond to a request for comment on Zhang and Marolia’s claims that the management team hadn’t explained itself adequately.

Short Interest

Trinity Research released a report Sept. 10 saying the company overstates its business and uses financings and acquisitions to inflate growth. The research firm, founded this year, said investors should assume it will profit from a decline in 21Vianet’s stock price.
Short interest jumped to 14 percent of 21Vianet’s shares outstanding as of Sept. 10, from 2.2 percent last week, according to data compiled by Markit, a London-based provider of financial information. Trading volume was 18 times the 90-day average yesterday, data collated by Bloomberg show.
The yield on 21Vianet’s 2 billion yuan ($326 million) of three-year Dim Sum bonds sold in June has surged 2.17 percentage points this week to 8.55 percent, according to data compiled by Bloomberg. The debt was to fund new data centers and acquisitions.
21Vianet plans to issue a more thorough release in the coming days, Chu said on the call, during which company management answered questions from analysts and investors on issues raised by Trinity Research ranging from accounts receivable to its acquisitions.

‘Factually Erroneous’

The allegations were “factually erroneous at all levels throughout their report,” Chu said. “We’ve also had tremendous amount of due diligence conducted with several of our international partners who spent months combing through financials, interviewing with our various team members and inspecting all our facilities throughout China.”
Not everyone is convinced by Trinity Research’s allegations.
21Vianet’s core data-center business remains intact, Morgan Stanley analysts in Hong Kong led by Gary Yu wrote in a note dated Sept. 12, saying they are “comfortable” with the company’s reported cabinet number and utilization rate for the second quarter. They project revenue growth of 40 percent from 21Vianet’s core business as it continues to add cabinets, where servers are placed, in 2014 and next year.
Even so, the company has room for improvement in cash management on its receivables and acquisitions, according to Morgan Stanley, which kept the equivalent of a buy rating on the stock.
Details provided by 21Vianet management on the conference call regarding its two most recent acquisitions showed that Trinity Research’s analysis was “fundamentally flawed,” analysts at Canaccord Genuity Group wrote in a note to clients yesterday. 21Vianet’s cash-burning investments on data center expansion highlighted in the Trinity Research report “is far from unusual or suspicious,” Canaccord said in the note.
“We will have to await the more detailed refutation of the report before we believe the stock will again trade on the fundamentals that our $35 price target is based upon.”