VNET Group, Inc. (21Vianet) — FY2020 Form 20-F
Reporting period: Fiscal year ended December 31, 2020. This is an annual report, not a quarterly filing; the supplied text does not provide standalone Q4 2020 results. Financial statements are prepared under U.S. GAAP. RMB amounts are shown unless otherwise noted.
Business context
VNET is a China-based carrier-neutral and cloud-neutral data center provider, offering retail and wholesale colocation, interconnectivity, cloud services and enterprise VPN services. At year-end it managed 53,553 cabinets across 32 self-built and 52 partnered data centers. The company operates in China primarily through contractual arrangements with variable interest entities (VIEs), rather than direct ownership of those operating entities.
Financial and operating metrics
| Metric | FY2020 | Prior comparable period / change |
|---|---|---|
| Revenue | RMB4,829.0 million (US$740.1 million) | Up 27.4% from RMB3,789.0 million in 2019 |
| Gross profit / margin | RMB1,076.0 million / 22.3% | RMB939.4 million / 24.8% in 2019 |
| Operating profit / margin | RMB116.6 million / 2.4% | RMB182.2 million / 4.8% in 2019 |
| Net loss | RMB2,680.3 million (US$410.8 million) | RMB181.2 million in 2019 |
| Net loss attributable to VNET | RMB2,709.3 million | RMB182.3 million in 2019 |
| Loss attributable to ordinary shareholders | RMB3,180.0 million; basic and diluted loss per share RMB4.47 (US$0.69) | Includes RMB470.6 million deemed distribution to preferred shareholders; reported loss per share was RMB0.27 in 2019 |
| Operating cash flow | RMB714.2 million | RMB802.9 million in 2019 |
| Capital expenditures for property and equipment | RMB2,473.3 million | RMB1,248.8 million in 2019 |
| Cash flow after property and equipment purchases | Negative RMB1,759.1 million | Calculated as operating cash flow less property and equipment purchases |
| Cash, restricted cash and short-term investments | RMB3,402.3 million | RMB2,721.0 million in 2019 |
| Total current assets / current liabilities | RMB6,055.6 million / RMB6,122.0 million | RMB5,228.2 million / RMB4,469.0 million in 2019 |
| Borrowings and bonds payable | RMB3,044.9 million of outstanding debt; RMB3,014.1 million carrying value of convertible notes reported separately | Convertible notes issued in 2020; see unusual items below |
Cabinets under management increased 47.6% to 53,553, while average cabinet utilization declined to 61.2% from 66.0%. Average monthly recurring revenue per managed retail cabinet rose to RMB8,984 from RMB8,747. Two individual customers each contributed more than 10% of FY2020 revenue; the filing does not identify them in the cited disclosure. The five largest suppliers accounted for 39% of bandwidth and cabinet resources, up from 21% in 2019.
Material changes and unusual items
- Revenue growth was driven by more billable cabinets, higher recurring revenue per cabinet, and demand for cloud and VPN services. Cost of revenue rose faster than revenue, increasing from 75.2% to 77.7% of revenue and reducing gross margin by 2.5 percentage points.
- Operating expenses increased 26.7% to RMB959.4 million, including higher sales, R&D and administrative costs. Share-based compensation increased to RMB136.8 million from RMB43.9 million in 2019.
- A RMB2,544.2 million noncash fair-value loss on convertible promissory notes was the principal driver of the sharp increase in net loss. The notes had US$200 million aggregate principal, a 2% coupon, a US$12-per-ADS conversion price, and redemption premiums in specified circumstances. The company also recorded RMB81.6 million of long-lived asset impairment and RMB13.0 million of long-term investment impairment.
- Financing activities generated RMB4,163.3 million, including proceeds from an August public offering and preferred shares and convertible notes. Investing activities used RMB3,889.2 million, including RMB2,473.3 million for property and equipment and RMB1,302.6 million in data-center acquisition prepayments.
- COVID-19 temporarily suspended some sales, travel and construction activity early in 2020. Management said existing data-center operations continued and activities largely returned to normal by the end of Q2, but administrative collection delays increased receivables.
Outlook, risks and contingencies
- Management estimated 2021 data-center capital expenditure of RMB5.0–6.0 billion and expected capacity to grow by approximately 25,000 cabinets. These are forward-looking estimates, not guarantees. It stated that working capital and available resources were sufficient for current needs and the next 12 months.
- Contracted wholesale capacity reached 170 MW at year-end 2020. The company reported seven Alibaba memoranda of understanding for data-center deployment in Eastern China; delivery, construction, utilization and returns remain execution risks.
- Debt and funding needs are significant: the company disclosed RMB2,158.3 million of principal repayments due in 2021 in its contractual maturity schedule, including the US$300 million 7.875% notes due October 2021. It also reported RMB2,549.5 million of purchase commitments, including equipment/construction and bandwidth/cabinet capacity, primarily due within one year.
- Key risks include dependence on Chinese internet-industry customers and third-party telecom suppliers; power availability and cost; data-center construction, utilization and energy-efficiency regulation; evolving cybersecurity and data rules; and the enforceability of VIE arrangements and required telecommunications licenses. In November 2020, MIIT identified cloud-system security issues and required remediation by December 11, 2021; remediation was in progress at the report date.
- Other material risks include restricted movement of cash from China, foreign-exchange exposure, substantial lease obligations, and uncertainty over PRC tax treatment. The company reported that it did not maintain business-interruption or third-party-liability insurance.
- The filing reports an unqualified audit opinion and effective internal control over financial reporting at December 31, 2020. It also describes limits on PCAOB inspection access to China-based auditors and potential U.S. listing consequences if inspection requirements are not met.
- Post-year-end events: VNET issued US$600 million of zero-coupon convertible senior notes in January 2021; preferred shares converted into 54.6 million Class A shares in March; and it repurchased 48.6 million Class B shares from Tuspark for approximately US$260 million in April. These events were not FY2020 operating results.
Most important facts for investors to verify
- Reconcile the reported FY2020 net loss, loss attributable to VNET, and larger loss attributable to ordinary shareholders, including the preferred-share deemed distribution and cumulative dividend.
- Review the convertible-note fair-value assumptions and potential dilution or redemption cash requirements, alongside the 2021 note maturity and subsequent US$600 million financing.
- Track cabinet utilization, new capacity ramp-up, gross margin, capital spending and the funding available to meet the 2021 investment plan.
- Examine customer and supplier concentration, receivable collection trends, and the nature and progress of MIIT-mandated cybersecurity remediation.
- Assess VIE enforceability, license and regulatory compliance, cash-transfer restrictions, audit-inspection developments, and the effect of the post-year-end share transactions on voting control.