21Vianet Underweight At Morgan Stanley On Bandwidth Concerns

21Vianet Group Inc VNET is likely to report negative FCF in the foreseeable future, with its core businesses continuing to face bandwidth pricing pressures, Morgan Stanley’s Yang Liu said in a report. He resumed coverage of the company with an Underweight rating and a price target of $8.

The recent capital investment from Tus-Holdings is likely to reaccelerate cabinet deployment, and cloud offers long-term upside, analyst Yang Liu mentioned. He added, however, that execution continued to be a concern area given the company’s disappointing track record.

Challenging Operating Outlook

All of 21Vianet’s major business segments are facing headwinds, Liu pointed out. While demand was rising for Internet data centers, the company was facing intensifying competition from other third-party service providers, particularly from companies with better access to capital.

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“We expect MNS business will continue to suffer from falling bandwidth price, whereas CDN business will also face fierce competition from Wangsu (premium service provider) and major Internet companies (discounted service providers),” the analyst wrote. Aipu's broadband business would likely come under pressure due to China Mobile’s aggressive bundled offerings.

While there is long-term upside from exposure to cloud computing services through partnerships with Microsoft Corporation MSFT and International Business Machines Corp. IBM, “execution remains key given the disappointing track record,” Liu commented.

Estimates

The analyst expects EBITDA to decline 5.6 percent to Rmb502mn in 2016. Although EBITDA is forecasted to rebound 19.7 percent to Rmb601mn in 2017 and 26.0 percent to Rmb757mn in 2018, driven by cabinet expansion and cloud take-up, FCF is expected to be negative through 2016-2019, due to massive capex investment, the analyst stated.