21Vianet Rallies as Analysts Doubt Short-Seller Report

Analysts from Morgan Stanley to Credit Suisse Group AG are sticking to their bullish calls on 21Vianet Group Inc. after a short seller sparked a record rout by alleging the Chinese Internet data-center operator is a fraud.

The American depositary receipts of the Beijing-based company surged 28 percent to $19.87 on Sept. 12, the most since its initial public offering in April 2011, following the analysts’ recommendations. The rally came after a 45 percent tumble in the previous four days as Trinity Research Group released a report which claimed the company overstated its business and revenue. 21Vianet has called the allegation “unfounded” and “unsubstantiated.”

While acknowledging that 21Vianet needs to reduce its accounts receivable and provide clarity on its past acquisitions, analysts at banks including Morgan Stanley, Credit Suisse and Canaccord Genuity Corp dismissed the short-seller claim that the company is a fraud. Morgan Stanley analysts on Sept. 12 maintained their $35 price target, or 76 percent above last week’s close, saying they are “comfortable” with the company’s financial statements.

“When you have first-tier investment banks aggressively supporting the company, it suggests that they see the visibility of the company’s business,” which is positive for the shares, Henry Guo, an analyst at JG Capital, said by phone from San Francisco on Sept. 12.

Short Targets

The Bloomberg China-US Equity Index sank 4 percent last week, the biggest retreat since March. The iShares China Large-Cap ETF, the largest Chinese exchange-traded fund in the U.S., slipped 3.7 percent to $40.95, the biggest weekly decline in six months.

Trinity Research, which only identifies themselves as a team of accountants, money managers and company executives, and Eric Chu, 21Vianet’s vice president of capital markets, didn’t respond to e-mails seeking response to the trading and the analysts’ comments.

21Vianet, which counts Singapore’s sovereign wealth fund Temasek Holdings Pte as its largest shareholder, joins a growing list of Chinese technology companies that have been targeted by short sellers. NQ Mobile Inc. has become the most high-profile case of late, with Muddy Waters LLC’s Carson Block calling it a fraud in October and saying he was betting against the stock. NQ Mobile, which has sunk more than 70 percent since then, has rejected Block’s claims.

Bond Yields

Trinity Research released a 121-page report Sept. 10 saying 21Vianet’s share price should fall to zero as the company overstates the numbers of cabinets, where servers are stored, 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 the company’s stock price.

Short interest jumped to 16 percent of 21Vianet’s shares outstanding as of Sept. 11, from 2.2 percent the prior week, according to data compiled by Markit, a London-based provider of financial information.

The turmoil also spilled into the company’s bonds. The yield on 21Vianet’s 2 billion yuan ($326 million) of three-year Dim Sum bonds sold in June more than doubled last week to 15.3 percent, from 6.38 percent, according to data compiled by Bloomberg.

Morgan Stanley analysts wrote in a note that the company’s reported cabinet numbers and utilization rate for the second quarter are reasonable. The differences between the short seller and the company’s numbers are due to counting errors and a difference in definitions, analysts in Hong Kong led by Gary Yu wrote.

Accounts Receivable

21Vianet’s core data-center business, which accounts for two-thirds of its revenue, is alone worth $1 billion, or $15 a share, and its cloud business provides further upside, according to the analysts. They expect revenue growth of 40 percent from the data-center business as the company continues to add cabinets in 2014 and next year.

Even so, the company has “room for improvement” in reducing accounts receivable and acquisition deals, Yu said.

Accounts receivable, or money it’s owed by customers, increased to 845 million yuan ($137 million) in the second quarter, from 76 million at the end of 2010, according to the company’s filings.

On the conference call on Sept. 11, company officials attributed the increase to longer credit terms given to key customers amid stronger competition and to the impact of tax changes in China. The officials said they plan to issue a more thorough release in the coming days.

Analysts at Credit Suisse, Canaccord Genuity and JPMorgan Chase & Co. kept their bullish ratings on the stock after Trinity Research’s report was published. They have price targets of at least $35.

21 Vianet is “accused of running a ‘Ponzi scheme’” Credit Suisse analysts Colin McCallum and Jennifer Gao wrote in a note dated Sept. 12. “We disagree.”

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