A Chinese Tech in a Fast-Growing Sector

 | Jun 11, 2012 | 7:00 AM EDT  | Comments
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Last Wednesday, we took a look at InterXion Holding (INXN), one of Europe's largest carrier-neutral data centers. Independent providers of technology infrastructure and managed services are in increased demand as more and more data moves to the cloud, and firms are finding it difficult to meet their data hosting needs internally.

While InterXion remains a great way to play this growth theme in Europe, 21Vianet Group (VNET) gives us an opportunity to specifically profit from the growth of China. 21Vianet is the largest provider of carrier-neutral data-center services in that country, providing hosting, managed network services and cloud computing infrastructure services.

It was founded in 1996, and chief executive Shang-Wen Hsiao has been in the top spot since June 2010. He comes with plenty of experience, having previously been the chief financial officer of Greatdreams and Memsic.

The company has its own proprietary routing technology, BroadEx, which it uses to enable customer data to travel quicker and more reliably. It operates 66 data centers in 33 cities throughout China and has more than 1,600 customers in a plethora of public and private sectors. Additionally, the carrier-neutral data centers are all interconnected, with networks operated by all carriers, major non-carriers and local Internet service providers in China.

 

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Internet businesses in China face several unique problems as a result of the historical focus on individual province infrastructure rather than on the country as a whole. Internet connection speeds vary greatly from province to province, and the average Internet connection speed in a major city like Shanghai resembles that of an antiquated dial-up connection.

To give you some perspective, the average global download speed in China is about 100 kilobytes per second, whereas the U.S. comes in at about 5,000 kilobytes per second. Additionally, there are a limited number of network access points between northern and southern China, often limiting speeds further with bottlenecks.

As a result of these legacy issues as well as the level of development in some geographic areas, Chinese traffic per Internet user is about 30% of the global average. So in other words, a data-center provider probably has more opportunities in China than in any other geographic location in the world, and 21Vianet is in a great position to take advantage of these structural deficiencies.

According to JPMorgan, video and e-commerce Internet traffic is expected to grow by nearly 70% annually through 2013, with social networking traffic growing at a rate of 44%. To keep up with this growth, data-center revenue in China is growing at 25%, with specific carrier-neutral firms growing at an even higher rate of over 30% annually.

The company's revenue structure is split between hosting services, which represents about 70% of total sales, and managed network services, which accounts for the remaining 30%. The hosting services unit houses client servers, infrastructure and networking equipment, while managed network services optimize data delivery over the company's transmission network.

While the sector as a whole has been experiencing fantastic growth, 21Vianet has far exceeded the peer group, growing total sales by 94% last year and nearly 70% in 2010.

The company went public on April 20, 2011, and six ordinary shares represent one of the American depositary shares, which trade here on the Nasdaq. Shares are up more than 16% this year, and recent first-quarter results largely exceeded analysts' expectations. Last month, the company reported a 71% increase in revenue to $54.7 million, while earnings came in at $0.12 per share.

At the moment, Chinese stocks are out of favor. But nothing is going to stop demand for Internet connections, so put 21Vianet on your radar for purchase in the next few months, particularly if it retests last year's lows of around $9.

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