21Vianet Moving to Margins of Data Center Universe?

Microsoft’s China cloud services partner reports slowest revenue growth in first quarter among the country’s three major independent data center operators

Key takeaways:

• 21Vianet’s latest results show it’s the slowest-growing among China’s three major independent data center operators
• The company’s relative laggard status could weigh on its stock as it focuses on boosting capacity at current facilities rather than opening new ones

By Doug Young

The latest leg in the horse race between China’s three main independent data-center operators has just concluded, with 21Vianet Group Inc. (Nasdaq: VNET) becoming the final of the trio to report its first-quarter results. Wall Street gave the latest report a big thumbs down, with investors dumping shares to the tune of a 5.8% decline for the company’s stock in Tuesday after-hours trade.

Its latest results show 21Vianet slipping further behind its two main rivals, GDS Holdings (Nasdaq: GDS) and more notably Chindata (Nasdaq: CD), which both reported their quarterly results last week, in the race for supremacy among these three independent operators.

Truth be told, none of the three is among the largest cloud service providers in China. Those honors go to the big names led by Alibaba, which controls 40% of the market, followed by Tencent with a much smaller 10%. The only foreign name in the top five is Amazon’s AWS.

Global player Microsoft is present in China but isn’t much of a factor, which is too bad for 21Vianet. That’s because 21Vianet has been Microsoft’s China partner since 2014, and derives most of its business by offering the U.S. software giant’s Azure cloud services in the country. All foreign cloud services providers must work with such local data center operators in China, since Beijing doesn’t allow foreign ownership of domestic telecoms infrastructure.

It’s difficult to say if 21Vianet’s lackluster performance owes to lack of its own effort – or lack of effort from Microsoft – and it’s probably a combination of both. Regardless of the cause, the result is clear in 21Vianet’s top-line revenue, which grew at the slowest rate among the three main independent operators during the first quarter.

21Vianet reported 1.39 billion yuan ($211.7 million) in revenue for the quarter, up 27% from a year earlier, according to its latest results announced after markets closed on Wednesday. The company has continually lost money in recent years and continued that tradition with an 84.7 million yuan loss for the quarter. That marked an improvement from a 138.8 million yuan loss a year earlier, and a hefty 1 billion yuan loss in last year’s fourth quarter.  

At the risk of overwhelming readers with too many numbers, we’ll just say here that Chindata was the clear winner in terms of revenue growth with its figure up 64% to 643 million yuan for the quarter – more than double 21Vianet’s rate. GDS was in the middle with 37.5% first-quarter revenue growth, as that figure rose to 1.7 billion yuan, making it the largest of the trio.

Among those three, Chindata was also notable in the quarter for posting its first-ever profit, even as 21Vianet and GDS remained firmly in the loss column.

The other interesting metric where we can compare these three is utilization rates, which represent just how much of their capacity each is able to sell. 21Vianet is again the clear laggard in that regard with its latest utilization rate of 61.7%, compared with much higher rates of 72.9% and 70.6% for GDS and Chindata, respectively.

Pocketing Profits

We’ll spend the second half of this roundup focusing on what the future may hold for 21Vianet and its stock, as well as those of its peers. Shares for all three companies have taken a bath recently following a rally that saw 21Vianet more than double last year and GDS gain about 50%. Chindata’s shares also rallied more than 70% after its IPO last October, but are also down sharply since then.

One smart investor during that time was a venture capital firm named Tuspark Innovation, which sold $260 million worth of 21Vianet shares back to the company in March for about $32 per American depositary share (ADS), a 6% discount to the company’s latest price at that time. But the latest sell-off has taken 21Vianet’s ADSs down to around $21 level, meaning Tuspark got out at a good time.  

Of the three operators, we’ve previously written that Chindata appears the most-focused with its strategy of moving more operations to China’s less-populous areas with access to renewable energy supplies. Such a strategy among this group of heavy energy users is quite important in China, since Beijing’s has prioritized development of such clean-energy sources.    

Among the global cloud service providers, Amazon has also realized this particular imperative. It recently announced plans to build a major solar farm in east China’s Shandong province and partner with a data center provider in the interior Ningxia region where solar and wind power sources are abundant.

21Vianet has said that while last year a majority of its centers were in major cities, most of its growth over the next two years will be in surrounding areas of such cities. Its latest data appear to show the company isn’t exactly rushing to build new facilities and instead is focusing on adding capacity to existing ones.

It reported using 32 self-built data centers and 52 through partnerships at the end of last year, up modestly from 26 and 51, respectively, at the end of 2019. By comparison, the total capacity of all its facilities based on number of cabinets rose by nearly 50% over that period.

While the three companies’ shares moved mostly in sync during the first part of this year, Chindata’s stock may be breaking away from the three by rallying around 20% since the start of this month. By comparison, 21Vianet and GDS are still down sharply over that same period.

All three companies have provided revenue forecasts for 2021, with 21Vianet again at the bottom of the group by predicting around 28% growth. That compares with a forecast for around 50% growth from Chindata and 37% from GDS. At the end of the day, 21Vianet looks a bit slow-moving compared with its rivals, which could drag on its stock and broader outlook in the months ahead.

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