21Vianet (VNET) Positive Rating Maintained at Morgan Stanley

(Updated - September 11, 2014 3:22 PM EDT)

Morgan Stanley reiterated an Overweight rating on 21Vianet (NASDAQ: VNET) with a price target of $35. The company this morning held a conference call in response to allegations by short sellers. Analyst Gary Yu said 21Vianet's core business remains intact and is valued of $1 billion, or $15 per ADS. With the stock currently trading at about $16.50, he sees upside as management provides clarity on disputed items.

"We believe the lower cabinet number (-8% self-bult; -28% partnered) cited in the short seller report was due to counting errors, whereas the lower utilization rate cited in the same report was due to difference in definition, as VNET uses daily weighted average. We remain comfortable with VNET's reported cabinet number of 17K with utilization rate of 73.9% in 2Q13, especially as the company plans to provide more details on cabinet numbers and utilization rates at individual data center level in coming days," say Yu. "We expect the company to add 8K cabinets in each of 2014 and 2015 (vs. management target of 10K), driving 40%+ growth in core hosting revenue (ex-CDN and cloud). We value the core IDC businesses at US$1 bn, or US$15 per ADS, implying free option to cloud upside at current share price,"

"However, we see room for improvement in cash management on receivables and M&A. VNET's DSO increased significantly, from 70-90 days in 2013 to 100-110 days in 1H14. Management attributed the rising receivables balance to better credit terms given to key customers, whereas VAT reform is also likely to have led to some extension in receivables before June implementation. The company has already received Rmb150 mn payment in August (16% of Rmb931 accounts receivable balance in June), and expects DSO to improve to 80-90 days in coming quarters," continued the analyst.

"On M&A, VNET reiterated that the seven major acquisitions in the past were consistent with the company's strategy to become a leading Internet infrastructure service provider in China. However, we think that the valuation on Aipu acquisition (Rmb1.5 bn, or US$250 mn) of 12x 2014e EV/EBITDA appears to be on the high side, whereas lingering doubts raised over several connected party transactions related to the iJoy acquisition (Rmb97 mn, or US$16 mn) could raise investors' concerns until fully answered by management," he added.

For an analyst ratings summary and ratings history on 21Vianet click here. For more ratings news on 21Vianet click here.

Shares of 21Vianet closed at $20.12 yesterday.

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