21Vianet:  The Fraud Saga Continues...

Price Target Lowered to $5.00
Link to Newswire Release
September 2, 2016

21Vianet Group, Inc. (NASDAQ:VNET) has not been good to its shareholders.

On November 25th of last year, we published a detailed reported entitled: “Street Watchdog Starts 21Vianet Group at Sell Amid Findings of Fraud, PT $13,” based upon our findings of fraud in the company’s financial statements.  In the course of our research, we uncovered a consistent pattern of “overinflating top line revenues and/or understating bottom line losses over multiple quarters for several years.”  Our review at that time specifically covered the years 2011 – 2014.  When we wrote the report in November of last year, the stock was trading in the low $20s, and we set a one-year price target of $13.  The fraud was so consistent and pervasive that we reported our findings to the U.S. Securities and Exchange Commission. 

At the time, no one lent any credence to our research because there was a so-called “buy-out” or “privatization” offer of $23 per ADS on the table led by co-founder Josh Sheng Chen and backed by Kingsoft Corporation and Tsinghua Unigroup.  Additionally, Och-Ziff Capital (NYSE:OZM) owned over 25 million shares of 21Vianet at the time.  (This year we learned that the New York investment firm founded by billionaire Daniel Och has been the subject of a more than 5-year long civil and criminal bribery investigation by the U.S Department of Justice, but that’s an entirely different story.)

We strongly believed this particular Chinese privatization would not occur because of the company’s incredibly suspect financial statements and other macro forces in the Chinese economy.  It didn’t take a full year to hit the $13 price target range...that happened six months later in May of this year.  In May, we issued a second report:  “21Vianet Shareholders Hit With a One-Two Punch, Price Target Lowered to $9.00.”  Two months later the stock began trading in the $9s.  The market finally came to the realization that the going private transaction at $23 per ADS was unlikely to occur and also that the main operating entity of 21Vianet planned to dilute current shareholders by issuing RMB 1.75 billion in convertible bonds to repay existing bonds and fund operations. 

In June, Bloomberg reported that the group offering to buy out 21Vianet withdrew its non-binding going private proposal immediately “after a careful consideration” of current conditions.  At that time the company was so strapped for cash, it gave an affiliate of Tus-Holdings 51% voting power for a 21% ownership stake in the company via newly issued class A and class B shares.  With every quarter that passes, the company goes further and further in the hole.  After almost two decades of existence, a company should be operating profitably, yet of the last 10 quarters, only one has been profitable for 21Vianet – the third quarter of 2014.

At the time of our initial report, we had reviewed the financial statements of 21Vianet through the end of 2014.  Two weeks ago when the company issued its 2016 Q2 numbers, we thought we’d take a look at the numbers for 2015 and 2016 to see if the company had cleaned up its act.  Surprisingly, it had not.  When we looked at each of the quarterly reports for the four quarters of 2015, the sum of total net revenues is $576 million.  When we looked at the 2015 annual filing with the SEC in April, total net revenues are reported as $561 million.  The top line numbers for one or more of the quarters during 2015 has been “enhanced” if we are to believe the annual total reported to the SEC.  Similarly, the net loss attributable to ordinary shareholders for the four quarters of 2015 does not match what was reported to the SEC on its annual filing.

For 2016 the trend continues.  When we looked at both of the quarterly reports for the first two quarters of 2016, the sum of total net revenues is $271 million; yet the company reports 2016 YTD total net revenues of just under $267 million for its 2016 Q2 YTD numbers.  The discrepancies are not due to foreign exchange gains or losses, because the company accounts for those gains/losses as a separate line item on its Consolidated Statements of Operations.  At best, the company’s financial statements are sloppy and mismanaged; at worst, they are padded or enhanced to commit outright fraud.  In either case, we are lowering our price target for a third time to $5.00.

Disclosure:  We remain short VNET.  We do not have a financial relationship with the company.