Recently, a variety of top Chinese tech firms have hit the US IPO markets, and the returns have been substantial. Qihoo 360 Technology (NASDAQ:QIHU), Dangdang (NASDAQ:DANG) Youku (NASDAQ:YOKU) have all posted 100%+ gains.
On Thursday, another fast-grower launched its IPO: 21Vianet Group (Nasdaq:VNET). The company is major player in China’s data center market. It was able to price its IPO at $15, raising $195 million. After selling off Friday, the stock was up 1% to $19.
But are there still opportunities for investors to make money on the stock? Let’s take a look at the pros and cons:
Pros
Scale. 21Vianet operates 47 data centers across 33 cities. The company even has its own optical fiber network. What’s more, 21Vianet has built a strong proprietary technology platform, called BroadEx, that allows for smart routing. This helps increase the speed of data traffic as well as the reliability.
Loyal customer base. The company has more than 1,300 customers, which include leading companies like Tencent,Youku, Taobao and Yeepay. No customer accounts for more than 4% of revenue and the average monthly churn rate is only 0.9%.
21Vianet also has a strong recurring revenue base. And, from 2008 to 2010, the top line saw an annual average growth rate of 47.7%.
China market. The data center space is growing at a rapid clip. China is the largest Internet market, which is expected grow to 558 milllion users by 2014. Some of the growth drivers include online video, online games and social networking services. Mobile is also critically important. Consider that 66.2% of Internet users in China access the web via mobile phones.
Cons
Competition. There are many tough rivals like ChinaNetCenter and Dnion Technology. Although, the big ones include China Telecom (NYSE:CHA) and China Unicom (NYSE:CHU), which are backed by the Chinese government. They have the advantage of operating their own networks. Moreover, some companies — like Baidu (Nasdaq:BIDU) and Alibaba — have their own datacenters.
Build-out. 21Vianet plans to invest heavily in bolstering its capacity. The goal is to nearly double the footprint by the end of 2013. While this is reasonable in light of the growth in China, there are certainly risks. As seen lately, the country has been experiencing some macroeconomic friction like inflation. To deal with this, the Chinese government has been ramping up interest rates.
Valuation. 21Vianet’s market value is roughly $1.3 billion. Thus, the shares are trading at more 20 times revenue, which is certainly a rich valuation.
Verdict
A report from IDC forecasts that the data center services market in China will go from $667 million in 2009 to $1.9 billion in 2014. And with 21Vianet’s strong platform, the company should continue to be a nice beneficiary.
No doubt, the volatility in the stock is likely to be significant. Yet this is something that IPO investors understand. Keeping this in mind, the pros outweigh the cons on 21Vianet’s stock.
