A Ponzi Scheme of Acquisitions - 21 Vianet Group Exposed

WWW.TRINITYRESEARCHGROUP.
COM SEPTEMBER 10, 2014

A Ponzi Scheme of Acquisitions: 21
Vianet Group Exposed

A PONZI SCHEME OF ACQUISITIONS: 21 VIANET GROUP EXPOSED SEPTEMBER 10, 2014
PAGE 2 / 121
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TABLE OF CONTENTS

Disclaimer ....................................................................................................................................... 2
Executive Summary ........................................................................................................................ 6
List of Exhibits .............................................................................................................................. 11
Introduction ................................................................................................................................... 14
Field of IDC Dreams ..................................................................................................................... 17
What VNET Does ................................................................................................................... 17
Serving Two Masters, Cabinet Growth and Utilization.......................................................... 17
Chinas Massive IDC Oversupply .......................................................................................... 20
Defying Gravity: VNETs Stable Margins ............................................................................. 20
Inconsistent Sales Force Productivity ..................................................................................... 21
Feeding the Beast .......................................................................................................................... 23
Part I: Lie ................................................................................................................................ 23
Investigation of IDC Network Shows Material Overstatement ........................................ 23
Quickly Losing Partners ................................................................................................... 23
Financial Impact of Overstatement ................................................................................... 24
VNETs Balance Sheet Problem ............................................................................................. 25
Accounts (Not) Receivable ............................................................................................... 25
Hemorrhaging Cash .......................................................................................................... 27
Increasingly Indebted ........................................................................................................ 28
Part II: Cheat and Steal, the Ponzi Scheme at Work ............................................................... 29
Master Pumpers ................................................................................................................ 29
(Ab)Use of Proceeds ......................................................................................................... 29
An Acquisition Inquisition ................................................................................................ 32
VNETs Midas Touch ....................................................................................................... 32
VNETs Impeccable Timing ............................................................................................. 33
Vicious Cycle .......................................................................................................................... 36
A Track Record of Value Destruction .................................................................................... 38
iJoy: Ghost in the (Cache) Machine .............................................................................................. 40
iJoys Filings: The Basics ....................................................................................................... 40
PAGE 4 / 121
Corporate Structure ........................................................................................................... 41
iJoys Ghost Offices .......................................................................................................... 42
A Ghost Board of Director [sic]........................................................................................ 44
Undercapitalized, Low Employee Count and Other Peculiarities .................................... 45
iJoys Orchestrated Acquisition .............................................................................................. 46
Woeful Financial Performance ......................................................................................... 46
Peng Yangs Takeover ...................................................................................................... 47
Two Suspicious Transactions ........................................................................................... 48
iJoys Transformation ............................................................................................................. 50
Literally Incredible Post-Acquisition Performance .......................................................... 50
Increasingly Far-Ranging Business Scope ........................................................................ 52
The Taxing Search for iJoys Products ................................................................................... 53
A Complete Unknown Selling Useless Software ............................................................. 53
Clues from Chinas Tax Authority ................................................................................... 54
iJoys Sale of Useless Software to a Trading Company ......................................................... 56
The MNS Shell Game ................................................................................................................... 59
Cheng Ran and the Seven MNS Dwarfs (the Fable of the Managed Network Entities) .... 59
MNS Entities Before VNET Acquisition ......................................................................... 60
MNS Entities After VNET Acquisition ............................................................................ 60
Review of the MNS Entities SAIC Filings ............................................................................ 62
More Ghost Offices........................................................................................................... 62
More Ghost Boards ........................................................................................................... 62
Tiny Registered Capital .................................................................................................... 62
Minimal Employee Count ................................................................................................. 62
Inconsistent Registered Business Scope and Licensing .................................................... 63
Cheng Ran Missing from Registrations ............................................................................ 63
Suspicious Ownership Changes Before Acquisition ........................................................ 63
SAIC Numbers Show SEC Numbers 51% Overstated ........................................................... 63
Other Notable MNS Tuck-Ins ................................................................................................. 65
A Virtual Tour of VNETs MNS Shells ................................................................................. 66
What Business Are They Really In? ....................................................................................... 80
Not Licensed to Offer MNS Services ............................................................................... 82
Music Player and Online Gambling: Managed Network Services? ................................. 85
Shrinking Pool of IP Addresses .............................................................................................. 91
PAGE 5 / 121
A Sad Ending to the MNS Fable............................................................................................. 91
MNS, A Ticking Time Bomb ....................................................................................................... 94
Bandwidth Reselling ............................................................................................................... 95
How Bandwidth Is Distributed in China ........................................................................... 95
Chinese Law Prohibits Bandwidth Reselling ................................................................... 96
Chinas Grey Market for Bandwidth ................................................................................ 97
China Telecom and China Unicoms Response to the PLB/MNS Industry ..................... 98
VNETs MNS Is Mainly a Front for an Illegal Bandwidth Reselling Operation ................... 99
How VNET Describes Its MNS Business ........................................................................ 99
VNET Is Chinas Largest PLB ....................................................................................... 100
VNETs Largest MNS (PLB) Customer Is China Mobile .............................................. 102
MNS Revenue at Great Risk ................................................................................................. 106
VNET Blacklisted by State-Owned Telcos .................................................................... 106
Regulatory Intervention to Obsolete PLB ....................................................................... 106
iPoo: VNETs Longtop Moment ................................................................................................ 108
Persona Non Grata of the Broadband Industry ..................................................................... 108
Rejected by the People .................................................................................................... 108
iPoo, on Watch by the Government, Already Banned in Three Cities ........................... 109
Stiff-Armed by the Chinese SEC, I-Poo-O Fails ............................................................ 110
A Commoditized, Overleveraged Declining Business ................................................... 110
Insiders Garbage, VNETs Treasure ................................................................................... 112
History of iPoo Insider Valuation Marks ........................................................................ 112
VNETs Whopper of a Price in Context ......................................................................... 113
The Pony In the iPoo............................................................................................................. 113
Giantstone, Part II ................................................................................................................. 114
Conclusion .................................................................................................................................. 116
An Educated Estimate of VNETs Actual Financials ........................................................... 117
Liquidation Analysis ............................................................................................................. 118
Appendix ..................................................................................................................................... 121

PAGE 6 / 121
EXECUTIVE SUMMARY

SELL Target Price: $0
Ticker: VNET FD ADS Outstanding (mn): 66.4
Last Close: $21.88 Free Float (mn): N.A.
52 Week Range: $14.95 - 32.34 Daily Volume Range (ADS): 581,734-7,857,662
Market Cap (mn): $1,455 Short Interest (mn): 6.21

We conducted a six-month investigation of 21 Vianet Group (VNET) with an expanded team
of local accountants, lawyers, telecom and Internet industry executives/insiders and VNET
customers, partners and former employees. Our beliefs based on our key findings follow.

We rate VNET a zero due to overwhelming evidence that the company is committing
accounting and securities fraud. We expect VNET will end up delisted from the Nasdaq.

Since listing in 2011, VNET has reported fraudulent financials and operating metrics. At
least 31% of total revenue and 100% of EBITDA is fabricated (see Exhibit 1). An
incremental one third of total revenue is illicitly derived and therefore worthless.

VNET perpetrates its fraud through a Ponzi scheme (see Exhibit 2). VNET overstates
cabinet growth and utilization in the core Internet Data Center (IDC) hosting business
which burns through 27% of (overstated) revenue in cash due to exceedingly aggressive
construction. To make up for the IDC shortfall, VNET fabricates revenue and profits by
acquiring tangential businesses that do not consume cash. The cycle is then repeated through
constant financings. Since the 2011 IPO, VNET has raised 5.7 billion RMB ($915 million)
and done at least 23 non-core acquisitions.

VNET is overleveraged (Exhibit 3), hemorrhages cash (Exhibit 4) and is technically
insolvent. If even a portion of our findings is confirmed by auditors or debt holders, VNET
will be in official violation of basic debt covenants. A run on the balance sheet from debt
holder redemptions would cause a liquidation that wipes the equity out.

Our field checks of the acquired subsidiaries found mostly ghost offices, no visible assets or
operations of any kind and a litany of red flags in the local filings. iJoy (one of VNETs two
VIEs) in particular is a complete fraud that exists only to roundtrip cash into VNET.

VNETs Managed Network Services (MNS), the other third of total revenues, is a front for
Chinas largest illegal bandwidth reselling operation that was blacklisted by state-owned
China Telecom after investigation (see Exhibit 5) but continues to operate illegally.

The 2014 acquisitions of Aipu (iPoo) and Dermot Holdings (Dermot), VNETs two
largest ever, are signs the Ponzi scheme is spinning out of control. As previous acquisitions
end their useful life as shells used to launder acquisition proceeds back in as revenue, VNET
was forced to sustain the Ponzi by going all in with these two deals reminiscent of
Longtop Financials acquisition of Giantstone. iPoo failed to gain regulatory approval to
PAGE 7 / 121
list in China, was banned by the government in Guangzhou (a Tier 1 city), Wuhan and
Changsha and was featured in an inflammatory CCTV (largest state-run TV channel) expos.
VNET acquired iPoo at a monster 2,000% premium to, or 20x, its 2012 valuation.

Management has pumped the stock through promises of huge cloud revenue and a telecom
license that will never materialize. Despite Microsoft subsidizing the cost of VNETs
offerings (they are effectively free), revenue is still only 3% of total. Recent regulatory
actions against Microsoft include an unfavorable SAIC investigation and a ban of Microsoft
and IBM from the governments procurement program. Telecom authorities indicate the
national basic telecom license needed to offer interconnection will never be issued to a
private company, which explains why expectations for its issuance were pushed back from
1H2014 to 2H2014 to now sometime in 2015.

Exhibit 1: VNETs falsified financials belie a materially smaller unprofitable business

Exhibit 2: Illustration of VNETs Modus Operandi, the Ponzi Scheme

Figures in thousand RMB
FY 2013
(reported)
Fabricated
IDC
revenue
Fabricated
MNS
revenue
Fabricated
iJoy revenue
FY 2013
(clean)
Variance
%
Net revenues
Hosting and related revenues 1,259,303 270,950 - 118,905 869,448 69.0%
Managed network services 707,414 - 175,082 - 532,332 75.3%
Total net revenues 1,966,717 270,950 175,082 118,905 1,401,780 71.3%
Gross profit 516,872 270,950 175,082 109,519 (38,679) (7.5%)
Gross margin % 26.3% (2.8%)
Net income(loss) -47,003 270,950 175,082 109,519 (602,554) 1281.9%
Net margin % (2.4%) (43.0%)
Adjusted Net income 120,466 270,950 28,013 109,519 (288,016) (239.1%)
Adjusted net income margin % 6.1% (20.5%)
Adjusted EBITDA 365,613 270,950 28,013 101,500 (34,850) (9.5%)
Adjusted EBITDA margin % 18.6% (2.5%)
Data Center Build
and
Cabinet Expansion
Capital markets
Cash
Equity
(ADS)
d
Non-Core Aquisitions
(shell companies
and
asset-light companies)
Cash
Cash
and
Equity
Sale of Equity (ADS)
Cash (Proceeds of Sale of Equity)
Fake revenue and profit
but no free cash inflow
Step
1
Step
2a
Step
2b
Step
4
Steps
3, 5
PAGE 8 / 121

Exhibit 3: Constant financings to fund acquisitions and IDC expansion leave VNET increasingly indebted

Exhibit 4: VNETs alarming cash outflow

(200.0)
(100.0)
0.0
100.0
200.0
300.0
400.0
500.0
Revenue Financings M&A Net Debt
2010 2011 2012 2013 1H2014 Run rate
Items FY2010 FY2011 FY2012 FY2013 Total
Net revenues 525,203 1,020,929 1,524,158 1,966,717 5,037,007
Net cash generated from operating activities 81,372 166,135 173,923 64,531 485,961
as % of net revenues 15.5% 16.3% 11.4% 3.3% 9.6%
Deduction: investment on capital expenditures
Purchases of property and equiptment (58,619) (255,755) (446,725) (419,126) (1,180,225)
Purchases of intangible assets (730) (802) (133,882) (36,181) (171,595)
Total (59,349) (256,557) (580,607) (455,307) (1,351,820)
Proceeds from disposal of property and equipment 26,713 7,598 202 241 34,754
Free cash inflow (outflow) 48,736 (82,824) (406,482) (390,535) (831,105)
as % of net revenues 9.3% (8.1%) (26.7%) (19.9%) (16.5%)
Deduction: investment on acquisitions and related party transactions
Loans to related parties - - (15,024) (37,050) (52,074)
Receipt of loans to a related party - - - 1,219 1,219
Payments for business acquisitions, net of cash received (47,560) (107,744) (67,067) (61,793) (284,164)
Loans to seller of iJoy - - (12,885) - (12,885)
Loans to seller of BJ Yichengtaihe - - - (24,000) (24,000)
Deposit for acquisition of BJ Yichengtaihe - - - (1,000) (1,000)
Free cash inflow (outflow) after deduction of cash outflow on acquisitions and related
party transactions 1,176 (190,568) (501,458) (513,159) (1,204,009)
Total
Capital expenditures (32,636) (248,959) (580,405) (455,066) (1,317,066)
Cash used for M&A (47,560) (107,744) (94,976) (122,624) (372,904)
PAGE 9 / 121
Exhibit 5: Internal China Telecom notices we obtained show VNET is blacklisted as an illegal operation

Exhibit 6: Summary of our in-person investigation of VNETs most significant acquisitions through 2013

Ghost
offices (no
physical
locat ion)
Ghost
boards
(only 1
direct or)
Tiny
registered
capit al
(1 mn
RMB)
Registered
under wife's /
sist er's /
friends'
names
Registered
business
scope
different
from MNS
or IDC
Revenue
suddenly
spikes
enormously
right after
acquisit ion
Profit
suddenly
spikes
enormously
right after
acquisit ion
While rev
spiked,
employee
count
plummeted
Large
inject ion of
capital from
seller right
before
acquisition
Transfer of
ownership
before
acquisit ion
Websit es
not
aligned
wit h
business
Beijing Chengyishidai Net work
Technology Co., Ltd. (CYSD)
X X X X X X X X NA X X
Zhiboxint ong (Beijing) Net work
Technology Co., Ltd. (ZBXT)
X X X X X X X X X X
no
website
Beijing Bikonghengtong Network
Technology Co., Ltd. (BKHT)
X X X X X X X X X X
no
website
Xingyunhengtong Beijing Network
Technology Co., Ltd. (XYHT)
X X X X X X X X X X
no
website
Beijing Bozhiruihai Network
Technology Co., Ltd. (BZRH)
X X X X X X X NA NA NA
no
website
Jiujiang Zhongyat onglian Network
Technology Co., Ltd. (ZYTL)
X NA NA NA X X X NA NA NA
no
website
Fuzhou Yongjiahong
Communicat ion Technology Co.,
Lt d. (YJH)
no
website
Guangzhou Gehua (Gehua) NA NA NA NA X NA NA NA NA NA X
iJoy Holdings Limt ed, it s subsidiary
Suzhou Aizhuoyi Information
Technology Co., Ltd. and affiliate
Beijing iJoy Information
Technology Co., Ltd. (i Joy")
X X X NA X X X X NA X X
Beijing Tianwang Zaixian
Lt d. and
Beijing Yilong Xinda Technology
Co., Lt d. (TWYL)
X X X NA X NA NA NA NA NA X

PAGE 10 / 121
Exhibit 7: A history of value destruction: Outcome of VNETs significant acquisitions

Year Acqui si ti on Rationale Outcome Summary of Fi ndi ngs
May 2007 Tiant ian Online Expansion int o online video
business
Ceased support ing operat ions Speculat ive acquisit ion t hat event ually failed. Today, t he websit e provides out dat ed
news to minimal traffic.
Oct ober 2007 Shanghai
St at eline Net work
ISP Shut down Corporat e websit e's last update is in 2004.
December 2007 VV91 Regional expansion
Sout hwest
NA No public or government sources have any informat ion or registration for t his
business. Nobody in our indust ry net work has heard of it .
May 2008 Lanmang IDC net work expansion Shut down All services have been moved to 69hds.com, a subsidiary of Alibaba Group.
Sept ember 2010 Managed
Network Ent ities
(7 total)
Managed net work expansion Business degradat ion. Failed
t o meet profit t arget s
st iput lat ed in merger
agreement .
Net work of shell companies with no verifiable physical presence or operat ions.
Mult iple business registrat ions by same owner used t o obfuscat e cent rally managed
illegal bandwidt h reselling operat ions from t elcos. Blacklist ed by China Telecom for
violat ion of bandwidt h cont ract.
Prior t o Oct ober
2010 pre-IPO
reorganizat ion
Five undisclosed
companies
Expansion int o new
businesses (specifics
undisclosed)
All writt en off F-1 discloses disposal during pre-IPO reorganizat ion of five "subsidiaries/invest ees"
wit h "insignificant business operat ions" and "insignificant assets, liabilit ies and
operat ing result s."
November 2011 Guangzhou Gehua Managed net work expansion Business degradat ion. Failed
t o meet profit t arget s
st iput lat ed in merger
Shell company with no verifiable physical presence or operations. Acts primarily
as bandwidth reseller (illegal). Only licensed as an ISP.
Sept ember 2012 Fast web Expansion int o Cont ent
Delivery Net work (CDN)
b i
Losing market share,
achieved only 6% net margin
Financial guidance by management team of 200%+ growth inconsistent with
locally filed financial performance.
February 2013 Tianwang Online Managed net work expansion Together with Yilong Xinda,
achieved only 3% net margin
Shell company with no verifiable physical presence or operations. Related party
to Yilong Xinda.
February 2013 Yilong Xinda Managed net work expansion Together with Tianwang
Online, achieved only 3%
net margin
Shell company with no verifiable physical presence or operations. Acts primarily
as bandwidth reseller (illegal). Only licensed as an ICP (content provider). Only
evidence of existence is a website with a music player that streams pirated music.
April 2013 iJoy Holdings
Limt ed and
relat ed ent it ies
Expansion of CDN business TBD Shell company with no verifiable physical presence or operations. Numerous
related party and intercompany transactions despite no evidence of operations.
Sold software to fictitious customer. 95% of revenue fraudulent and round-
tripped, contributing nearly 100% net margin to VNET's consolidated financials.
2014 Aipu Holdings Expansion int o
consumer/ret ail last -mile
services
TBD Filed to go public in Chinese domestic market but failed to get regulatory approval
last year. Gave up IPO due to deteriorating financials and lack of proper licenses
to operate their business. Banned in Guangzhou due to customer complaints.
Subjeect of negative cCTV exposShell company with no verifiable physical
presence or operations. Numerous related party and intercompany transactions
despite no evidence of operations. Sold software to fictitious customer.e. Aquired
by VNET for 20x valuation at which private equity firm sold its stake in 2012.

PAGE 11 / 121
LIST OF EXHIBITS

1: VNETs falsified financials belie a materially smaller unprofitable business (Page 7)
2: Illustration of VNETs Modus Operandi, the Ponzi Scheme (Page 7)
3: Constant financings to fund acquisitions and IDC expansion leave VNET increasingly
indebted (Page 8)
4: VNETs alarming cash outflow (Page 8)
5: Internal China Telecom notices we obtained show VNET is blacklisted as an illegal operation
(Page 9)
6: Summary of our in-person investigation of VNETs most significant acquisitions through
2013 (Page 9)
7: A history of value destruction: Outcome of VNETs significant acquisitions (Page 10)
8: VNETs capacity expansion vs. utilization (Page 18)
9: VNET has consistently lagged guidance (per earnings calls) for capacity expansion (Page 18)
10: VNETs capacity expansion by quarter vs. utilization (including 2H14 and 2015 projections)
(Page 19)
11: Historical versus projected impact of aggressive cabinet expansion (Page 19)
12: Sales Force Productivity Inconsistent with Utilization (Page 21)
13: Summary of investigation of key IDC metrics (as of 2Q 14) (Page 23)
14: Wechat conversation with China Telecom Nanjing sales team (Page 24)
15: Account receivable (right hand side) overlaid on top of cabinet deployment (left hand side)
(Page 25)
16: VNETs low account concentration (VNET investor presentation) (Page 26)
17: Days Sales Outstanding (DSO) vs. Utilization (Page 26)
18: Free Cash Flow Analysis: 2010-2013 (Page 27)
19: Net Debt (Page 28)
20: VNET Financings: 2010-1H2014 (Page 29)
21: VNET M&A Activity (Page 30)
22: MNS declining contribution to total revenue (Page 31)
23: Summary financials for VNETs major acquisitions before and after acquisition (Page 33)
24: History of cabinet expansion and suspicious acquisition timing (Page 34)
25: VNETs profitable IPOs courtesy of a well-timed profit peak in the well-timed acquisition of
MNS Entities (Page 34)
26: iJoys impact on VNETs consolidated margins (Page 35)
27: Financial consequences of feeding the IDC beast (Page 36)
28: Capex per cabinet (Page 37)
29: A long history of value destruction through acquisitions (Page 39)
30: There are no results for a search for iJoy on VNETs own website (Page 40)
31: Corporate structure of iJoy Holdings Limited (Page 41)
32: Business License of Suzhou Zhuoaiyi and Share Pledge Agreement by Peng Yang and
Suzhou Zhuoaiyi (Page 42)
33: iJoys registered office does not exist (Page 43)
34: List of all registered addresses for iJoy and results of our in-person investigation (Page 44)
35: Suzhou iJoys corporate structure with single-director governance (Page 45)
36: Beijing iJoys business license just before acquisition by VNET (Page 45)
37: Timeline of iJoys Corporate History (Page 46)
PAGE 12 / 121
38: Summary financials from Beijing iJoys with SAIC filings for 2009, 2010 and 2011 (Page
47)
39: Summary financials from Beijing iJoys with SAIC filings for 2012 (Page 48)
40SAIC filing of Suzhou Aizhuoyi (Page 49)
41: Summary of iJoys income statement before and after acquisition by VNET (Page 50)
42: Comparison of gross margins for leading CDN companies (Page 51)
43: Beijing iJoys business scope registered with the SAIC (Page 52)
44: Beijing iJoys shareholder resolution to change business scope (Page 52)
45: Product offerings on www.unionread.coms (iJoys corporate website) (Page 53)
46: Historical copyright registration records for iJoys software (Page 55)
47: Change of Beijing iJoys business scope to include import and export of technology (Page
57)
48: July 2013 receipt from sale of iJoy CDN software to CBNB, a top 5 Chinese iron ore
importer (Page 57)
49: Corporate Structure of seven Managed Network Entities (Page 59)
50: Consolidated Summary Financials for Managed Network Entities Post VNET Acquisition
(Page 60)
51: Acquisition Valuation for MNS Entities (Page 61)
52: Effect of MNS Entities Acquisition on VNETs Consolidated Financials (Page 61)
53: Employee count of MNS entities (Page 62)
54: Revenue Reported to SAIC by MNS Entities (Page 64)
55: Revenue from MNS Entities Reported to SEC (F-1 filing) for 1Q2010 3Q2010 (Page 64)
56: Summary of findings from investigation of seven MNS Entities (Page 66)
57: Headquarters for Beijing Chengyishidai (CYSD) reported to SAIC (Page 67)
58: Pictures of our CYSD office visit (Page 67)
59: Headquarters for Jiujiang Zhongyatonglian Network Technology Co., Ltd. (ZYTL)
reported to SAIC (Page 68)
60: Pictures of our ZYTL office visit (Page 67)
61: Headquarters for Beijing Zhiboxintong (ZBXT) reported to SAIC (Page 69)
62: Pictures of our ZBXT office visit (Page 70)
63: Headquarters for Fuzhou Yongjiahong Communication Technology Co., Ltd. (YJHT)
64: Pictures of our YJHT office visit (Page 72)
65: Headquarters for Beijing BikonghengtongNetwork Technology Co., Ltd. (BKHT) reported
to SAIC (Page 73)
66: Pictures of our BKHT office visit (Page 73)
67: Headquarters for Xingyunhengtong Beijing Network Technology Co., Ltd. (XYHT)
68: Pictures of our XYHT office visit (Page 75)
69: Headquarters for Beijing Bozhiruihai Network Technology Co., Ltd. (BZRH) reported to
SAIC (Page 76)
70: Pictures of our BZRH office visit (Page 77)
71: Headquarters for Beijing Tianwang Online (TWYL) reported to SAIC (Page 78)
72: Pictures of our TWYL office visit (Page 79)
73: Job posting by CYSD on 51Job.com (Page 80)
74: CYSDs website (Page 81)
PAGE 13 / 121
75: Job posting by ZBXT on 51Job.com (Page 81)
76: Check results on www.miit.cc for 7 MNS entities licenses (Page 82)
77: Beijing Tianwang Online introduction on Baike (Page 85)
78: Beijing Tianwang Online website (Page 86)
79: Job posting by Yiling Xinda on chinahr.com (Page 86)
80: Results of Check on www.miit.cc for Yilong Xindas Licenses (Page 87)
81: Yilong Xindas website (Page 87)
82: Job posting by Yiling Xinda on alljobsearch (Page 88)
83: Another website of Yiling Xinda (Page 88)
84: Yilong Xindas website had suddenly transformed into an online gambling site (Page 90)
85: Comparison of IP address allocations to CYSD as of June 30, 2013 (L) and December 31,
2012 (R) (Page 91)
86: Performance of MNS Entities through FY2013 (Page 92)
87: Effect of MNS Entities Sudden Margin Erosion on VNETs Consolidated Financials (Page
92)
88: VNET acquisition- related accounts due to related parties, 2013 20-F (Page 93)
89: VNET Is Blacklisted at China Telecom as an Illegal Bandwidth Reseller (Page 94)
90: Notice of Investigation of VNET by China Telecom (Page 95)
91: Network topology for a traditional PLB (Page 98)
92: Network topology for a PLB2.0 (Page 98)
93: Internal Notice and regulations issued by CT to stop MNS connections (Page 99)
94: List of 7 MNS entities licenses (Page 100)
95: China Mobile Henan Branch Bandwidth Auction Results (Page 103)
96: China Mobile Xinjiang Branch Bandwidth Auction Invitation and Results (Page 104)
97: China Mobile Hainan Branch Bandwidth Auction Invitation and Results (Page 105)
98: China Mobile Hunan Branch Bandwidth Auction Invitations. BKHT is on the list of bidders.
(Page 106)
99: VNETs revenue mix over time (Page 107)
100: Notice of ban from Guangdong Telecommunication Administration (Page 110)
101: Key Metrics for iPoo (Page 111)
102: Debt-to-Asset Ratio for iPoo and Comparable Companies (Page 111)
103: Key metrics for top three last-mile broad band companies (Page 113)
104: VNETs reported income statement vs pro forma without fabricated revenues (Page 118)
105: Liquidation analysis as of December 31, 2013 (Page 119)

PAGE 14 / 121
INTRODUCTION

At first glance, VNETs vision is attractive. VNET is purportedly in the early innings of building
Chinas leading Internet infrastructure company. The problem is VNETs vision requires that
industry dynamics support it, and they do not. It is not only that Chinas Internet Data Center
(IDC) industry is dominated by the monopolistic state-owned fixed line telecom carriers China
Telecom and China Unicom. The industry is in a state of massive oversupply, with the average
IDC running significantly below half capacity. This has resulted in a mass exodus from hosting
as data center operators refashion themselves into providers of Content Delivery Network
(CDN), Virtual Private Network (VPN) and other bandwidth services.

Except for VNET. Citing insatiable demand for its quickly expanding IDC network, VNET went
public on April 21, 2011 setting irrational expectations for cabinet growth and profitability.
Unable to deliver what the industry could not support, VNET overstated its assets and financials
and embarked on a string of acquisitions to make up the shortfall in revenue and profitability.
Management executed record financing after another by pumping the share price with promises
of continued expansion. And with the proceeds, VNET continued overbuilding while acquiring
non-core assets in between financings to keep the Ponzi scheme going.

Managements hope all along was that the development of the Chinese Internet infrastructure
industry would catch up to the vision. That demand as well as margins and new, legitimate
sources of profits would evolve quickly enough to cover up the fraud.

But that hope never materialized. Instead, VNET was forced to do increasingly larger financings
and increasingly riskier acquisitions to feed the beast of cabinet expansion. Over time, the Ponzi
scheme got harder, not easier, to sustain. The capital intensive core IDC business burns cash
much too quickly and the fledgling cloud business VNET hoped would save the day is not
ramping enough. Even with Microsofts partnership, cloud software revenue is under 3% of total,
hopelessly behind the pace needed to overtake the rate of fraud. So the Ponzi scheme goes on as
it spins out of control.

Beyond the Ponzi schemes unsustainability, three major structural problems signal imminent
collapse.

1. VNET is technically insolvent with a balance sheet that will not sustain the recently
stated goal of adding 10,000 cabinets in 2014 (to a base of 14,000 cabinets from 2013)
and then another 10,000 cabinets in 2015. The additional debt and cash burn required to
increase cabinets by almost 2.5 times in two years will cripple the company.

2. The Managed Network Services (MNS) business that VNET uses to make most of its
fraudulent acquisitions is run illegally. VNETs SEC filings paint a very inaccurate
picture of MNS. In reality, aside from housing most of the fraudulent acquisitions, MNS
is a front for an illegal bandwidth reselling operation that has already been dinged for
violation by China Telecom and could be shut down any day. Moreover, recent
regulatory developments will soon make bandwidth reselling obsolete.
PAGE 15 / 121

3. VNET hopes that cloud software revenue and the receipt of a basic telecom license to
provide high-margin interconnection services will solve the companys cash flow
problem. Neither initiative will deliver.

The cloud software business which at the moment is just Microsoft (soon IBM too) has
no hope of achieving the type of growth promised to investors. Our field work revealed
that VNET was only able grow cloud sales because Microsoft is subsidizing customer
costs (offering products for free) in an effort to gain share of a market it could not
penetrate otherwise. Even with those subsidies, if the Internet industrys preference for
open source platforms doesnt severely limit Microsoft, regulation will. Already, the
Chinese governments xenophobic policies have banned Microsoft and IBM from their
procurement program.

As for the telecom license, there is a reason why management has pushed back
expectations three times already from 1H2014 to 2H2014 and now to sometime in 2015.
Our regulatory contacts are confident that the government will never issue such a license
at a national level to a private company.

This report presents the results of six months of investigative work aided by an extended team
of local Chinese accountants, lawyers, telecom industry executives and insiders, former VNET
employees, current and former VNET customers and current and former VNET service providers
(e.g. data center construction companies). We organize our findings and their supporting
evidence into the following sections.

Field of IDC Dreams
We investigated all 72 data centers in VNETs IDC network for over three months,
visiting in person and conducting over 50 interviews of sales staff, partners, customers,
contractors and competitors. We found VNET overstates cabinets and utilization,
overstates 27% of IDC revenue and has negative EBITDA (not the 20% EBITDA
margins IDC purportedly has).

Our field work points to a highly overbuilt network of overpriced cabinet inventory that
has drained VNETs balance sheet. As management keeps delaying the data center
rollout hoping demand or the fledgling cloud business will eventually catch up, they have
been forced to lie about the assets and performance of their IDC business while
fabricating the shortfall in revenue and margins through fraudulent acquisitions.

iJoy: A Ghost in the (Cache) Machine
A deep dive on iJoy, one of VNETs two VIEs. iJoy, with no fixed assets and nearly
100% net margin, is a shell company whose acquisition was orchestrated by VNET to
roundtrip cash. We provide evidence of the acquisitions orchestration and the subsequent
money laundering so critical to VNETs margins.

The MNS Shell Game
PAGE 16 / 121
A deep dive into roughly one third of VNETs consolidated revenue, the MNS business.
We review key findings from our in-person investigation of all 10 of VNETs major
MNS acquisitions, including evidence collected from our in-person field work, review of
local government filings and review of public records. Although we found no assets,
offices or required licensing, we did find a long list of red flags in the government filings
and public records, e.g. fake business registrations, tiny registered capital and employee
count, suspicious asset transfers and most of all huge inconsistencies between their
financial contribution to VNETs consolidated numbers and historical performance
reported to PRC authorities.

MNS, A Ticking Time Bomb
MNS was the perfect place to hide the fraud but is now the Ponzi schemes weakest link
as it faces shutdown of its illicit operations and technical obsolescence at once. We reveal
evidence of the illegal operations and VNETs blacklisting at China Telecom.

iPoo: VNETs Longtop Moment
The massive back-to-back acquisitions of Aipu (iPoo) and Dermot make little strategic
sense but needed to be done to sustain the Ponzi scheme. As ridiculously outsized IDC
expansion looms and the MNS business used to prop margins deteriorates, VNET had no
choice but to acquire again, this time in enormous size. As with Longtops acquisition of
Giantstone, these deals mark the top for VNET shares.

Conclusion
Our concluding thoughts end with a detailed liquidation waterfall that shows what will
happen to every stakeholder across the capital structure in the event of a forced
liquidation of the company due to debt holder redemptions, a shutdown and/or further
erosion of the MNS business or a balance sheet event driven by sustained cash burn and
overleveraging.

PAGE 17 / 121
FIELD OF IDC DREAMS

What VNET Does
VNET has two major lines of business and one minor. Through its core business, hosting and
related services, the company operates a network of Internet data centers (IDCs) from which they
lease cabinets to customers looking to outsource hosting of their Internet servers. IDC is largely
the product of massive capex-driven organic expansion over the years and is the primary
beneficiary of VNETs capital expenditures. All major strategic initiatives, particularly VNETs
partnership with Microsoft to offer cloud software services on top of their hosting, have been
undertaken through this business. IDC is the business that investors value. Depending on the
year, between 60-80% of VNETs business is IDC.

VNETs other major business, managed network services (MNS), is a mystery to most. It is
usually an afterthought few focus on. MNS purports to operate much of the technology related to
running and maintaining an efficient network, but as VNET acknowledges in the 2013 20-F,
our managed network services are primarily offered in the form of bandwidth.
1
Through
MNS, VNET buys bandwidth from Chinas major telecom carriers, mainly China Telecom and
China Unicom, and packages its own technology services such as hosting area network
services and route optimization on top of it. Unlike IDC, MNS is not capital intensive, is low
in value-add and has low barriers to entry. MNS is the result of many small acquisitions.

Starting in 2013, the acquisitive VNET entered a third line of business, content delivery network
(CDN), also by acquisition. CDN offers content caching, like competitors ChinaCache (Nasdaq:
CCIH), China NetCenter (CNC, listed in Chinas A-share market), and others. This is the
smallest of the three businesses. Even though it does not belong in IDC, VNET consolidates
CDN into IDC and does not break CDN out separately when reporting earnings.

Serving Two Masters, Cabinet Growth and Utilization

Because IDC is highly capital intensive and it is the majority of revenue, VNETs business
model is not that different from traditional offline retail. Just as a retailers value is driven off of
the size of its geographic footprint and the trend in same store sales, number of cabinets in the
IDC network and their overall utilization are the two masters VNET must serve.

If VNET can grow cabinets in its IDC network every quarter and keep utilization up, the
business model must be working. That is the hope VNET has sold to investors and those two
metrics are what ultimately drive VNETs stock price. The reality is VNET has never been able
to make this simple model work because capacity expansion significantly outpaced demand.

1
2013 20-F filing.
PAGE 18 / 121
Exhibit 8: VNETs capacity expansion vs. utilization

Management focuses investors on the cabinet growth story, consistently setting overly aggressive
targets they fail to meet.

Exhibit 9: VNET has consistently lagged guidance (per earnings calls) for capacity expansion

Variance
Actual Results vs. Expectations Deployed Guidance Count %
FY2012 Cabinet Additions 4,101 5,000 (899) (18.0%)
FY2013 Cabinet Additions 2,124 8,000 (5,876) (73.5%)
4Q2013 Cabinet Additions 1,081 5,000 (3,919) (78.4%)
1Q2014 Cabinet Additions 734 1,000-1,500 (516) (41.3%)
2Q2014 Cabinet Additions 1,870 2,000 (130) (6.5%)

Despite an expansion much slower than guided, utilization still dropped sharply in 2012 and
2013 from the previous three years due to the overly aggressive pace of cabinet deployment.

Undeterred, VNET continues building and building like the construction companies building out
Chinas famous ghost cities
2
. Plunging utilization be damned, management continues selling the
story that if they build it, customers will eventually come.

In the latest earnings call CFO Shang Hsiao of Camelot (NYSE:CIS) fame
3
provided color on
VNETs cabinet expansion plans for 2014 and 2015
4
:

And like I mentioned earlier, this year, we will [be] adding 10,000 cabinets. Next year,
again, we will add an additional 10,000 cabinets.

2
http://www.businessinsider.com/60-minutes-chinas-ghost-cities-2013-3
3
http://www.camelotchina.com/investors/investors_corporateGovernance.htm
4
http://seekingalpha.com/article/2456295-21vianet-vnet-on-q2-2014-results-earnings-call-
transcript?all=true&find=vnet%2Bearnings%2Bcall
60.0%
65.0%
70.0%
75.0%
80.0%
85.0%
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
Cabinets
Utilization
PAGE 19 / 121
As if that wasnt absurd enough, after breaking out the remaining portion of that massive ramp
(3,000 in Q3 and 4,000 more in Q4), he goes on to say that utilization wont change much:

But going forward, okay, this is starting from the utilization rate, right now, we have
currently around 73,9%. I think this utilization rate probably will be between 70% to
71% in the third quarter. Again, probably 69% to 70% in the fourth quarter.

Do the following two charts, which put Mr. Hsiaos words to the eyeball test, make any sense?

Exhibit 10: VNETs capacity expansion by quarter vs. utilization (including 2H14 and 2015 projections)

Exhibit 11: Historical versus projected impact of aggressive cabinet expansion

Utilization dropped 15 points in two quarters when VNET ramped capacity by 3,620 cabinets.
Does anyone really believe that utilization is barely going to move when twice as many cabinets
are deployed in the next two quarters, and then another 10,000 on top of that in 2015?

If that passes someones eyeball test, we have a smell test for them.

60.0%
65.0%
70.0%
75.0%
80.0%
85.0%
-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
Cabinets
Utilization
FY2012 FY2013 FY2014
1Q2012 2Q2012 3Q2012 4Q2012 1Q2013 2Q2013 3Q2013 4Q2013 1Q2014 2Q2014 3Q2014P 4Q2014P FY2015
Cabinets 8,027 10,394 11,647 11,917 11,963 12,226 13,307 14,041 15,074 16,944 19,944 23,944 33,944
Increase (cabinets) 211 2,367 1,253 270 46 263 1,081 734 1,033 1,870 3,000 4,000 10,000
Increase (%) 2.7% 29.5% 12.1% 2.3% 0.4% 2.2% 8.8% 5.5% 7.4% 12.4% 17.7% 20.1% 41.8%
Utilization 82.4% 81.2% 67.7% 66.3% 68.1% 70.2% 73.7% 71.2% 73.8% 73.9% 70.5% 69.5%
PAGE 20 / 121
Chinas Massive IDC Oversupply

If VNET hits the goal of 10,000 new cabinets in 2014, it is on pace for a 5-year CAGR of 42%, a
nearly 6-fold increase in the face of serious degradation in utilization and industry-wide
oversupply. How much oversupply, you ask? The Chinese government has an answer.

On July 30 of this year, the Ministry of Industry and Information Technology (MIIT), the
regulatory body that oversees the technology sector, issued a report on the state of the data center
market
5
, Circular No.225(2014), Report on Planning and Construction Schedule of China Data
Centers since 2011. Among the various industry facts disclosed, we highlight these to put
VNETs insane capacity expansion plans through the smell test:

From 2011 through the first half of 2013, 255 data centers have been built and 177 of
them have been put to use. About a third of all construction has yet to be commercialized
The 255 data centers break out as follows: 23 are super data centers (over 10,000 cabinet
capacity), 42 are mid-sized data centers (3,000 10,000 cabinet capacity) and 190 are
small data centers (under 3,000 cabinet capacity)
The industry hugely overestimated demand, since demand was estimated at 7.28 million
servers but only came in at 0.57 million, less than 8% of estimates!
Here is the kicker: Utilization rates for super, mid-sized, and small data centers are 1.8%
(1 point 8%, not a typo), 21.5% and 40%, respectively

VNETs IDC network contains mainly small and mid-sized data centers (some partnered
cabinets might be hosted in larger ones), so the benchmark for their purported industry-
leading 73.9% utilization is between 21.5% and 40%.

Does that not smell fishy? Against this kind of industrial oversupply, is VNET really going to
add 10,000 extra cabinets this year on top of the 14,000 they ended 2013 with, of which 30%
were not utilized? And then another 10,000 extra cabinets in 2015?

Defying Gravity: VNETs Stable Margins

VNETs CFO himself has stated at conferences and road shows that VNET (as does any IDC
business) has a high degree of operating leverage because over 80% of the cost structure is fixed,
with bandwidth and cabinet leasing making up most of it. Operating leverage, like any kind of
leverage, cuts both ways. When business is booming and data centers are running at full
capacity, any incremental utilization turns into revenue that flows right to the bottom line since
the costs, being fixed, have largely been incurred. But when you have high fixed costs and
monetization drops suddenly, the negative effect on margins is enormous as the shortfall in
revenue has a disproportionate impact on the bottom line for every point of utilization lost.

5
http://www.miit.gov.cn/n11293472/n11293832/n12845605/n13916973/16084590.html
PAGE 21 / 121
As dubious as VNETs capacity expansion plans may look relative to utilization or, even worse,
relative to the Chinese industrial backdrop, what is really unbelievable is that margins gross,
EBITDA, net or any other have held their levels throughout the entire process. This is a
huge red flag.

Any IDC businesss margins are highly sensitive to utilization metrics. That is especially true
when utilization falls while capacity ramps by a factor of two or even three times the base, as it
did for VNET.

Inconsistent Sales Force Productivity

A look at sales force productivity reveals another key operating metric inconsistent with VNETs
reported utilization trend. VNET breaks out their employee base by function in their 20-F filings,
including head count for sales, marketing and customer support (S&M). S&M head count went
from 241 in 2011 to 323 in 2012 and 252 in 2013.

For the full years 2011, 2012 and 2013, reported utilization was 80.6%, 66.3% and 70.3%,
respectively. Even though utilization dropped by over 10 points, which is a massive swing for a
business with high fixed costs, sales per sales and marketing employee almost doubled in 2013
versus 2011.

Exhibit 12: Sales Force Productivity Inconsistent with Utilization

Even in 2012, when utilization plunged year on year, sales force productivity somehow went up.
Since management has consistently indicated monthly recurring revenue has risen in the order of
10% historically, pricing cannot be the reason behind this discrepancy.

Moreover, we learned from our many interviews with management teams and sales executives in
the IDC industry that on average, it takes 12-18 months to fill a new data center to more than half
capacity. VNET appears to be a huge outlier in that they can fill as much as half the new cabinet
capacity coming online within a quarter. In their latest earnings call, management reported that
about half of the approximately 7,000 cabinets coming online throughout the remainder of the
year had been sold already.
6

6
http://seekingalpha.com/article/2456295-21vianet-vnet-on-q2-2014-results-earnings-call-
transcript?all=true&find=vnet%2Bearnings%2Bcall
2011 2012 2013
IDC Hosting Revneue (RMB 000) 614,612.0 866,882.0 1,259,303.0
Number of S&M employees 241 323 252
Revenue per S&M employee 2,550.3 2,683.8 4,997.2
Growth 5.2% 186.2%
Full-year utilization 80.6% 66.3% 70.3%
PAGE 22 / 121

Whether VNETs numbers make sense is a rhetorical question. They dont. The more interesting
question is how VNET gets away with so much overbuilding without taking a hit on margins or
driving the balance sheet right into a wall with what must be an unbelievable amount of cash
burn. How does VNET feed the beast?

As the old saying goes:

Lie, cheat and steal.

Let us first discuss the lies.

PAGE 23 / 121
FEEDING THE BEAST

Part I: Lie

VNET lists the locations of its 72 data centers on the Chinese version of its corporate website.
Click on each section of the map on this webpage to show a complete list of data centers by
region: http://www.ch.21vianet.com/?page_id=927. (Interestingly, the English version of the
corporate website does not list the individual data centers. Clicking on the map does nothing:
http://www.en.21vianet.com/?page_id=176).

Investigation of IDC Network Shows Material Overstatement
Using these regional lists of data centers, which we confirmed with management are updated and
accurate, we conducted an exhaustive field study of VNETs national IDC footprint throughout
China. We determined the number of cabinets and utilization for each data center by doing a 360
degree review consisting of:

In-person visits
Telephone interviews with data center staff, direct and indirect sales channels and
headquarter sales staff
In-person and telephone interviews of key VNET customers
In-person interviews with two contractors responsible for construction of VNETs data
centers
In-person interviews with senior management of major IDC and CDN companies
Telephone interviews with telecom carriers

Our investigation concluded that VNET has overstated the number of cabinets in its IDC
network by at least 2,460 (14.5% of reported) and overstated their utilization by at least
11.1 points.

Exhibit 13: Summary of investigation of key IDC metrics (as of 2Q 14)

Variance
Reported Actual Count % Reported Actual
Partnered Cabinets 5,462 3,950 (1,512) (27.7%) Utiliized Cabinets 12,522 9,090
Self-built Cabinets 11,482 10,534 (948) (8.3%) Utilizaation Rate 73.9% 62.8%
Total 16,944 14,484 (2,460) (14.5%)

Appendix A lists the results of our investigation of all 72 VNET data centers, both partnered and
self-built, by location.

Quickly Losing Partners
Of the 72 data centers that VNET lists in their IDC network, only 12 are self-built. 60 are
partnered, meaning VNET leases cabinets from other companies who own the data centers and
related fixed assets. As you can see from our investigation results in Appendix A, 31 of the 60
PAGE 24 / 121
alleged partnerships had been terminated at the time of our visits and interviews. Given that the
state-owned telcos from whom VNET provisions their bandwidth are also VNETs biggest IDC
partners, the fact that VNET has managed to get blacklisted for illegal bandwidth reselling at the
largest telco, China Telecom, cannot be helping that partnership. As already noted, throughout
our investigation, we gave VNET the benefit of the doubt when the state of a partnership was
inconclusive, but in doing so we may have undercounted the terminated partnerships given more
recent data points such as the Wechat sales inquiry below. (As you can see from the breakout of
our investigation results by data center, we gave VNET credit for 40% utilization of 250
partnered cabinets in Nanjing.)

Exhibit 14: Wechat conversation with China Telecom Nanjing sales team

It makes a lot of sense that VNET has lied mainly by overstating partnered cabinets. It is much
easier to tell investors you are leasing some extra cabinets from the enormous China Telecom
data center down the road than it is to lie about having built a data center from scratch or making
your own data center appear three or four times busier than its 15% utilization.

Financial Impact of Overstatement
A hopeless optimist might say, overstating cabinets by 15% isnt that bad, is it? Its not like they
lied about half their cabinets or anything, right?

It might as well be half. Because margins are highly sensitive to utilization in a data center
business, 11 extra points of utilization is the difference between being profitable and losing
money.

Having 14.5% fewer cabinets running at 62.8% versus 73.9% utilization means VNETs income
statement gets hit with the double whammy of materially lower utilization off a materially
PAGE 25 / 121
smaller base. This translates to a 27.3% overstatement in revenue. (If you have 100 cabinets
running at 73.9%, you have 73.9 billable cabinets. If you have 85.5 running at 62.8%, you only
have 53.7, or 27.3% less.)

Due to the IDC businesss high fixed cost, this 27.3% comes off the top line and hits the bottom
line almost dollar for dollar. Since VNET has an adjusted EBITDA margin around 18% or 19%,
a 27% hit to EBITDA means the company goes from being in the black with respectable margins
to being deeply in the red.

VNETs Balance Sheet Problem

Obviously, if VNET is overstating IDC revenue, the overstatement has to come from
somewhere. The balance sheet is a sensible first place to look.

Accounts (Not) Receivable
Below is a chart that shows how accounts receivable changed as VNET built beyond their ability
to fill their data centers to acceptable levels.

Exhibit 15: Account receivable (right hand side) overlaid on top of cabinet deployment (left hand side)

The 99% four-year CAGR in AR, nearly three times the aggressive pace of cabinet
deployment, raises all types of red flags.

All of VNETs IDC businesses should have little variance in collection terms. They are all
recurring revenue businesses and over two thirds of the revenue is IDC, a well-diversified
business. VNETs own investor presentation boasts that account concentration is low with the
top customer being under 5% of revenue and the top five customers being under 14%.

-
100,000
200,000
300,000
400,000
500,000
600,000
700,000
800,000
900,000
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
Cabinets
AR
(Thousands RMB)
PAGE 26 / 121
Exhibit 16: VNETs low account concentration (VNET investor presentation)

VNET has never had a problem collecting. Bad debt charges have never been an issue. Very low
churn proves VNET has a good relationship with customers. In the last second quarter earnings,
overall churn rate was down to almost zero with top customers having literally zero churn.

So what is going on with AR?

A closer look reveals that it was not only AR that spiked as utilization started to plunge. Days
Sales Outstanding (DSO) for AR started to spike upwards, eventually more than doubling from a
stable trend in the 40s throughout the year of the IPO.

Exhibit 17: Days Sales Outstanding (DSO) vs. Utilization

For a business with recurring revenue, minimal account concentration (one huge bad customer
cannot derail AR and DSO), good customer relationships with minimal churn and minimal bad
debt, how can these charts be explained?

There are only four possibilities:

1. Billing terms have changed (they havent)
60.0%
65.0%
70.0%
75.0%
80.0%
85.0%
-
20
40
60
80
100
120
DSO
Utilization
PAGE 27 / 121
2. Customer composition has turned from diversified to concentrated with huge customers
who pay really late (It hasnt VNET has low account concentration)
3. Customer relationships have soured (they havent, evidenced by very low churn)
4. The AR is not revenue waiting to be collected

We are convinced VNET is fabricating revenue to make up for the shortfall in actual revenue
from the massive ramp in cabinets that coincided with a massive drop in utilization. Of course it
makes sense that AR and DSOs would ramp most aggressively as utilization plunged.

Hemorrhaging Cash
An analysis of VNETs free cash flow over the years shows what happens when cabinets go
from 5,750 in 2010 to 14,041 in 2013 while utilization goes from mid-80s to 60s and low-70s,
even if you fake those numbers substantially to make growth appear more robust than it is.

Exhibit 18: Free Cash Flow Analysis: 2010-2013

VNET has burned through 28% of its past three years of inflated revenue in cash! Of
course, this 28% assumes every dollar of reported revenue is real, which we very strongly doubt
is the case. We believe VNET actually burns through more than half of its actual revenue in
cash.

The FCF analysis only goes through 2013 because VNET does not report cash flow quarterly.
We cannot wait to see what 2014 will look like when cabinets soar to 24,000 and utilization sags
back down to high 60s or 70% as management projects. Although we wont know the official
number until next year, we can guarantee it will be stunning Especially as we expect actual
Items FY2010 FY2011 FY2012 FY2013 Total
Net revenues 525,203 1,020,929 1,524,158 1,966,717 5,037,007
Net cash generated from operating activities 81,372 166,135 173,923 64,531 485,961
as % of net revenues 15.5% 16.3% 11.4% 3.3% 9.6%
Deduction: investment on capital expenditures
Purchases of property and equiptment (58,619) (255,755) (446,725) (419,126) (1,180,225)
Purchases of intangible assets (730) (802) (133,882) (36,181) (171,595)
Total (59,349) (256,557) (580,607) (455,307) (1,351,820)
Proceeds from disposal of property and equipment 26,713 7,598 202 241 34,754
Free cash inflow (outflow) 48,736 (82,824) (406,482) (390,535) (831,105)
Deduction: investment on acquisitions and related party transactions
Loans to related parties - - (15,024) (37,050) (52,074)
Receipt of loans to a related party - - - 1,219 1,219
Payments for business acquisitions, net of cash received (47,560) (107,744) (67,067) (61,793) (284,164)
Loans to seller of iJoy - - (12,885) - (12,885)
Loans to seller of BJ Yichengtaihe - - - (24,000) (24,000)
Deposit for acquisition of BJ Yichengtaihe - - - (1,000) (1,000)
Free cash inflow (outflow) after deduction of cash outflow on acquisitions and related
party transactions 1,176 (190,568) (501,458) (513,159) (1,204,009)
Total
Capital expenditures (32,636) (248,959) (580,405) (455,066) (1,317,066)
Cash used for M&A (47,560) (107,744) (94,976) (122,624) (372,904)
PAGE 28 / 121
utilization to hit a level between 30-35%, more in line with the top end of the MIIT-reported
industry average of 21.5-40%.

Increasingly Indebted
So far, VNETs approach to creating shareholder value appears to be as follows.

1. Promise growth that defies not only the competitions but also the governments own
assessment of market demand
2. Burn 28% of (materially faked) revenue in cash to keep the growth story going by
building out the IDC network far beyond what is prudent
3. Deliver hugely outlying utilization and revenue performance by faking the difference
between actual revenue and what the street demands in utilization and cabinets to keep
the share price going
4. Let AR balloon at a 99% CAGR while DSOs are on pace to triple

With this approach, something has to give. And that something is the balance sheet.

Since VNETs April 2011 IPO left the company in the enviable position of having RMB 1.1
billion of net cash, there has been an enormous 2.7 billion RMB swing in net debt.

Exhibit 19: Net Debt

Clearly, lying about IDC metrics and faking revenue might make the income statement look
pretty but it does a real number on the balance sheet. Most important of all, falsifying IDC
metrics does not put cash on the table. For VNET, as capital intensive a business as we have ever
seen, putting cash on the table to fund the enormous and sustained burn is a matter of life and
death, solvency and bankruptcy.

So where does VNET get all that cash to keep feeding the insatiable beast?

All figures in thousands RMB
Q2 2014 Pro Forma
FY 2010 FY 2011 FY 2012 FY 2013 Q2 2014 Post-Acquisitions
Short-term bank borrowings 35,000 100,000 176,961 173,726 296,736 296,736
Current portion of long-term bank borrowings - - 167,879 197,000 64,779 64,779
Current portion of capital lease obligations 15,824 26,012 36,719 14,600 18,076 18,076
Long-term bank borrowings - - 63,000 965,740 924,166 924,166
Non-current portion of capital lease obligations 58,190 73,896 52,352 337,139 355,578 355,578
Redeemable preferred stock/noncontrolling interests 991,110 - - 100,000 100,000 100,000
Bonds payable - - - 998,505 2,263,977 2,263,977
Less:
Cash and cash equivalents 83,256 410,389 432,254 1,458,856 2,138,589 2,138,589
Short-term investments - 894,540 222,701 1,101,826 1,103,634 1,103,634
Restricted cash used as pledge for bank borrowings - - 290,766 292,099 128,087 128,087
Less:
Cash consideration for Aipu (assume 50% of 700,000 RMB) (350,000)
Cash consideration for Dermot (assume 60% of 1,050,000 RMB) (600,000)
Net Debt 1,016,868 (1,105,021) (448,810) (66,071) 653,002 1,603,002
PAGE 29 / 121
Part II: Cheat and Steal, the Ponzi Scheme at Work

They raise it. LOTS of it. Because to pay Paul, you must first rob Peter.

Master Pumpers
Nobody pumps their company better than VNET, which has successfully executed over RMB
5.7 billion ($915 million) in financings since 2011, the year of the IPO. That is greater than half
the entire market cap of VNET today, after the stock has shot up more than 300% in the past year
and a half!

Exhibit 20: VNET Financings: 2010-1H2014
Figures in RMB millions
Capital Inflow (Outflow)
Date Type Financing Activities Counterparty RMB USD
FY 2010 Debt Proceeds Increase in short-term bank borrowings domestic banks 35.0 5.2
FY2011 February 28 Equity Sale Equity stake Cisco 32.3 5.0
FY2011 April 1 IPO VNET IPO, issuing 14.95m ADS for ~$204.3m IPO investors 1,320.5 204.3
FY 2011 Debt Proceeds Change in Bank Debt domestic banks 65.1 10.1
FY 2011 Debt Proceeds Change in Capital Leases domestic leasing companies 25.9 4.0
FY 2012 Debt Proceeds Change in Capital Leases domestic leasing companies (10.8) (1.7)
FY2013 March 15 Debt Proceeds Proceeds from Dim Sum Bonds Bond investors 972.8 158.2
FY2013 October 13 Equity Sale Secondary equity stake for $100 million (87%
new shares, 13% existing shareholders)
Temasek 533.3 87.0
FY 2013 Debt Proceeds Change in Capital Leases domestic leasing companies 262.7 42.7
FY 2014 June 30 Debt Proceeds Proceeds from Dim Sum Bonds Bond investors 1,265.5 205.5
FY 2014 June 30 Debt Proceeds Change in Bank Debt domestic banks (50.8) (8.3)
FY 2014 June 30 Debt Proceeds Change in Capital Leases domestic leasing companies 21.9 3.6
Total Financings 5,705.2 914.7

(Ab)Use of Proceeds
And what has VNET done with all that money?

PAGE 30 / 121
Obviously, a substantial portion of the proceeds has been burned to fund the massive data center
build. As we have discussed already, a cumulative $406 million in non-acquisition driven capex
has been burned from 2010 to 2Q2014.

Most of the rest of the proceeds (the majority) from all the non-stop financings went to buy 24
non-core subsidiaries light on fixed assets.

Exhibit 21: VNET M&A Activity

Figures in RMB millions
Capital Inflow (Outflow) Capital Inflow (Outflow)
Date Type Names of Entities Counterparty Type of Business % Stake RMB USD RMB USD
Before 10/2010 Acquisition Five acquisitions (names not disclosed)
through aBitCool
Hosting
6/22/2007 Acquisition Shanghai Guotong Network Co., Ltd. Hosting (61.8) (61.8)
4/30/2009 Disposal Shanghai Guotong Network Co., Ltd. aBitCool Hosting 68.9 68.9
3/1/2010 Disposal Guangzhou Juliang Internet Information aBitCool Hosting 10.8 10.8
9/30/2010 Acquisition Beijing Chengyishidai Network Technology
Co., Ltd
Beijing Shi Dai Tong Lian Technology Co.,
Ltd., a third party company controlled by Mr.
Cheng Ran
Managed Network
Services
51% (172.4) (25.5) (252.6) (37.3)
Zhiboxintong (Beijing) Network Technology
Co., Ltd.
Managed Network
Services
51%
9/15/2011 Acquisition Telehouse Beijing Co., Ltd. aBitCool (21Vianet Zhi Hui Ke Ji Co., Ltd. and
Beijing 21Vianet Zhi Hui Neng Yuan System
Technology Co., Ltd., both controlled entities
of aBitCool)
Manufacturing and rental
of cabinets. KDDI is the
joint investor of
Teleohouse Beijing.
10% (8.2) (1.3) (8.2) (1.3)
10/1/2011 Acquisition Shanghai Cloud 21Vianet Network Co., Ltd. aBitCool (21Vianet Zhi Hui Ke Ji Co., Ltd.
controlled entities of aBitCool)
Shell company without
any operation
100% (18.2) (2.8) (18.2) (2.8)
10/19/2011 Acquisition Guangzhou Gehua Network Technology and
Development Company Limited
Tianjin GuanBang Network Technology
Co.and Beijing Huibang
Managed Network
Services
100% (77.5) (12.0) (116.4) (18.0)
10/27/2011 Acquisition Shenzhen Cloud Information Technology Co.,
Ltd.
aBitCool (21Vianet Zhi Hui Ke Ji Co., Ltd.
controlled entities of aBitCool)
Shell company without
any operation
100% (7.9) (1.2) (7.9) (1.2)
12/15/2011 Acquisition Beijing Chengyishidai Network Technology
Co., Ltd
Beijing Shi Dai Tong Tian Network
Technology Co., Ltd. and Concept Network
Limited
Managed Network
Services
49% (169.2) (26.2) (242.7) (37.5)
Zhiboxintong (Beijing) Network Technology
Co., Ltd.
Managed Network
Services
49%
2/15/2012 Acquisition Radio spectrumin the 2.3 GHz band in Hong
Kong
OFTA Radio spectrumlicense (121.4) (19.3) (121.4) (19.3)
4/1/2012 Acquisition Yizhuang Venture Investment Fund Yizhuang Venture Investment Fund Venture Capital Fund NA (101.0) (16.0) (101.0) (16.0)
7/2/2012 Acquisition 21Vianet@Xian Holding Ltd. aBitCool Inc. Hosting 100% (16.0) (2.5) (16.0) (2.5)
9/9/2012 Acquisition Fastweb International Holding Lyzh Consulting Ltd. DFS & DFJ Funds CDN 100% (116.0) (18.4) (119.6) (19.0)
2/28/2013 Acquisition Beijing Tianwang Online Communication
Technology Co., Ltd
Beijing Kaihua Kewei Technology Co.,
Limited
Virtual Private Network
Services / MNS
100% (73.4) (11.9) (77.5) (12.6)
Beijing Yilong Xinda Technology Co., Ltd. Virtual Private Network
Services / MNS
100%
4/30/2013 Acquisition iJoy Holding Limited Peng Yang CDN 100% (96.9) (15.8) (178.7) (29.1)
10/21/2013 Acquisition Beijing Yichengtaihe Investment Co., Ltd Land use 100% (198.8) (32.3) (198.8) (32.3)
4/16/2014 Acquisition Minority stake in M87(Series A) Mobile software (18.5) (3.0) (18.5) (3.0)
6/4/2014 Acquisition Sichuan Aipu Network Co., Ltd. Sichuan Aipu Network Co., Ltd. ISP 50% (700.0) (113.7) (700.0) (113.7)
TBD Acquisition Dermot Holdings Limited and its subsidiaries Diyixian.comLimited Virtual Private Network
Services / MNS
100% (1,050.0) (170.5) (1,050.0) (170.5)
Total M&A (2,927.5) (472.4) (3,209.5) (516.2)
Acquisition Date Revalued Up To Date

PAGE 31 / 121

There are some important observations that do not jump out of this chart.

VNET has been about as acquisitive as any of Chinas largest Internet companies, having
done 24 acquisitions since it prepared to go public in 2011.

But unlike Alibaba, Tencent, Baidu or Qihoo 360, VNETs total acquisition consideration
is a very large percentage of its market cap (almost 30%) and revenue (about 100% of
2014 revenue guidance).

Despite having acquired a total consideration of RMB 3.2 billion ($516 million), close to
30% of its current market cap, only 0.5% of total acquisitions went towards assets for
its core IDC business, hosting, and that negligible amount was for an intercompany
transaction with aBitCool (one of VNETs own VIEs).

None of the acquisitions targeted companies with substantial fixed assets, which is
surprising since an IDC network is essentially a large fixed asset. In the US, IDC
companies (e.g. Equinix) have claimed to be REITs and applied for conversion to REIT
status. VNETs highly unusual M&A strategy is analogous to that of a commercial real
estate company that only buys tangential service businesses with no buildings or other
fixed assets.

The vast majority of the acquisitions have been tucked quietly into the commoditized,
slower-growth, asset-light MNS business that management rarely talks about.

And yet, despite all the acquisitions, MNS revenue contribution is sharply declining.

Exhibit 22: MNS declining contribution to total revenue

The two CDN acquisitions (FastWeb and iJoy) are consolidated into IDC even though
they have no IDC assets and offer no hosting services.

0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
Hosting and related revenues
Managed network services
PAGE 32 / 121
The consideration values have gone up consistently and exploded in size in 2014 with the
back to back acquisitions of iPoo and Dermot, which collectively represent over half the
total consideration paid throughout the entire period.

An Acquisition Inquisition
This pattern of constant non-core acquisitions begs many questions.

It is unusual for a company in massive organic expansion mode to also go on acquisition
binges right before periods of high execution risk when the distraction of M&A is least
desirable. Why is that the only time VNET acquires anything significant?

For example, why would VNETs management acquire iPoo and Dermot back to back for
a combined consideration significantly greater than VNETs own IPO in 2011 right
before it expands capacity by a combined 17,000 cabinets (over 120% growth)?

Why is virtually all the capital deployed into non-IDC assets, especially the MNS
business the company acknowledges is much less strategic?

Why does VNET only acquire service businesses with no fixed assets?

Why would a company confident in its core business bother with so many tiny
acquisitions into the non-core MNS business that is declining in revenue contribution?

Why is there such poor disclosure about VNETs many acquisitions? Truly minimal
information such as the names of the acquired entities and occasionally some high level
valuation information is about all we get in SEC filings. Why is there little to no
information reported about the acquired entities financial performance and corporate
history before acquisition?

Why do non-hosting businesses get reported with core IDC? CDN and Microsoft cloud
software do not belong in IDC. The excuse management gave when we asked was that
they are not broken out separately because they are too small. Shouldnt management
want to report emerging businesses off a small base to show their strong growth? That is
what the large majority of other public companies in this situation do.

VNETs Midas Touch
Before we decided to investigate VNETs major acquisitions in person, we spent considerable
time trying to figure out their performance. Although VNET discloses little information about its
acquisitions, we were able to get our hands on filings to Chinas State Administration for
Industry and Commerce (SAIC)
7
to get a view of their pre-acquisition performance to compare
to the post-acquisition performance reported in SEC filings

7
http://www.saic.gov.cn/english/aboutus/
PAGE 33 / 121
Exhibit 23: Summary financials for VNETs major acquisitions before and after acquisition

It is not hard to see that VNETs acquisitions deliver stunning outperformance in growth,
profitability or both immediately after consolidation.

VNETs Impeccable Timing
It is very unusual for a company to acquire non-core businesses that outperform that dramatically
as soon as they are tucked in. It is even more unusual, and also highly counterintuitive, for that to
happen during critical periods of heightened execution risk e.g. before the IPO (MNS Entities),
when margins plunged (Fastweb) and before substantial ramps in cabinet expansions (Gehua,
TWYL and iJoy, iPoo and Dermot). And yet that is exactly what happens without fail for VNET.
It is practically a law, as the chronological chart of acquisitions overlaid with cabinet growth
shows below.

PAGE 34 / 121
Exhibit 24: History of cabinet expansion and suspicious acquisition timing

Six months before its April 2011 IPO, as VNET realized that a cash-burning unprofitable data
center business might not be well-received by the public markets, VNET got serious about MNS,
a business it was not in previously. On September 30, 2010, VNET acquired the two parent
companies of a seven-company network of MNS businesses it refers to as Managed Network
Entities in the 2011 20-F. As Exhibit 23 shows, the MNS Entities net margins from 2009-2013
were -2.4%, 7.7%, 18.5%, 19% and 8.6%. The effect of that sudden peak in profitability between
2011 and 2012 was a successful VNET IPO driven by a company that appeared to have turned
the corner in profitability just in time for its listing. We note that profitability was achieved by
acquisition in spite of the core IDC businesss underperformance.

Exhibit 25: VNETs profitable IPOs courtesy of well-timed profit peak in well-timed acquisition of MNS Entities

-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
7 MNS Entities
Gehua (MNS)
Fastweb
TWYL iJoy
iPoo
Dermot
IPO
Plunge in utilization
FY 2010 FY 2011 FY 2012 FY 2010 FY 2011 FY 2012
Net revenues 525,203.0 1,020,929.0 1,524,158.0 465,028.0 750,929.0 1,174,158.0
Cost of sale (396,858.0) (744,371.0) (1,098,477.0) (363,761.8) (582,371.0) (877,977.0)
Gross profit 128,345.0 276,558.0 425,681.0 101,266.3 168,558.0 296,181.0
Gross margin % (25.0%) (25.0%) (25.0%) # (25.0%) (25.0%) (25.0%)
Operating expenses (353,614.0) (198,468.0) (327,312.0) (339,027.6) (143,118.0) (267,812.0)
Changes in the fair value of
contigent purchase
consideration payable (7,537.0) (63,185.0) (17,430.0) (7,537.0) (63,185.0) (17,430.0)
Operating income(loss) (EBIT) (232,806.0) 14,905.0 80,939.0 (245,298.3) (37,745.0) 10,939.0
Other income(expense) 1,792 34,170 7,951 1,792 34,170 7,951
Interest income(expense) -2,213 10,541 4,925 -2,213 10,541 4,925
Income(loss) before income tax -233,227 59,616 93,815 -245,719 6,966 23,815
Income tax benefit (expense) (1,588.0) (13,677.0) (36,159.0) (963.4) (11,044.5) (32,659.0)
Net income(loss) (234,815.0) 45,939.0 57,656.0 (246,682.7) (4,078.5) (8,844.0)
Consolidated with 7 MNS Entities Consolidated without 7 MNS Entities
PAGE 35 / 121

Fresh with cash from the IPO, VNET acquired another MNS company named Gehua towards the
end of 2011, right before the companys most aggressive period of cabinet deployment
theretofore.

Similarly fortuitous timing can be seen in the acquisition of Fastweb, a CDN business that is also
not core to IDC, right after the plunge in utilization we discussed in the last section (see Exhibit
8 for utilization trend). Exhibit 23 shows a business that declined between 2010 and 2011, both
unprofitable years, before it was acquired by VNET in 2012. Suddenly, revenue doubled and net
margins went from negative to a robust 19%. Our calls to the IR team and the CFO over the past
two quarters resulted in wildly bullish projections for Fastweb in 2014 and 2015, although the
level of wild bullishness varied by the day and the source. We were told Fastweb would deliver
anywhere between 150-300% year on year growth in 2015, just in time for the huge 27,000
cabinet build out in 2H2014 and 2015 that will depress utilization and therefore margins.

Throughout our diligence of Fastweb, we were able to interview engineers from Microsoft who
can be found any day of the week at VNETs headquarters (they are easy to spot, many being of
Indian descent). Who does Microsoft, VNETs loyal and exclusive partner for cloud software,
use for CDN services in China? Apparently Microsofts commitment and loyalty to VNET only
goes so far, since we were able to confirm with both Microsoft engineers and the management
team of industry leader ChinaCache (Nasdaq:CCIH) that Microsoft uses CCIH and not Fastweb,
a business everyone in the industry other than VNET confirms is losing market share. How
Fastweb loses share but projects 150-300% growth next year is as curious as the explosion in
growth and profit immediately after VNET acquired it.

Another case of prescient timing occurs in 2Q2013 when VNET acquired another non-core CDN
business referred to as iJoy in the 2013 20-F. This was right after the plunge in utilization that
somehow had no impact on margins but apparently was bad enough to stall cabinet deployment
for three quarters until iJoy was acquired. Not only did cabinet growth resume immediately
thereafter, it is not hard to see how margins held throughout that period from the analysis below.

Exhibit 26: iJoys impact on VNETs consolidated margins

PAGE 36 / 121

It was only after consolidating iJoy that VNET was able to maintain gross margin around 26%
from 2Q2013 to 2Q2014. Similarly, adjusted EBITDA margin was held between 18% and 19%
throughout that period. Without the consolidation of iJoys gross profit, VNETs organic gross
margins would have dropped to as low as 15% and adjusted EBITDA margin would have
decreased to as low as 9% in the last quarter of 2013.

Most recently, right ahead of the exceedingly aggressive 17,000 cabinet build of 2H2014 and
2015, VNET suddenly decided to diversify into two other non-core businesses, consumer
broadband services (last mile broadband) and virtual private network (VPN) services, by
making the two largest acquisitions in their long history of non-core acquisitions. The back to
back timing of acquisitions of this size notwithstanding, more curious is their timing ahead of an
epic cabinet ramp as the acquired MNS subsidiaries revenue is stalling and margins are quickly
eroding. Even for these much larger acquisitions, VNET will not get much in the way of fixed
assets, so investors might hope there is at least significant strategic value to the core IDC
business. Alas, there is not. They are both non-core add-ons, with iPoo having practically zero
synergy as it is a consumer business. By now the answer to why VNET, a purportedly high
growth business in a developing industry, would deploy so much of its precious cash to acquire
low-growth established companies outside of its core industry should be obvious. It will be
impossible for VNET to survive the massive cabinet build ahead without inorganic financial
help.

Vicious Cycle

It is clear that financings are VNETs key growth driver. VNET raises a huge percentage of
revenue and market cap to acquire increasingly larger non-core companies to make up for the
shortfall in revenue from the core business. That core business consumes about half the cash
from financings to fund an IDC build that burns cash at an alarming rate. The result has been a
massive swing in the balance sheet from net cash to net debt in three short years.

10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
Gross margin % (without iJoy) Gross margin % (with iJoy)
PAGE 37 / 121
Exhibit 27: Financial consequences of feeding the IDC beast

While management waits for its nascent cloud software business to ramp, the IDC business is
burning a hole through the balance sheet that will require an enormous amount of fundraising.

Between 2011 and 2Q2014, by far VNETs period of largest cabinet expansion, capex per self-
built cabinet (since partnered cabinets incur no capex) was approximately RMB 139,000.

Exhibit 28: Capex per cabinet

VNET plans to launch 17,000 incremental cabinets through the end of 2015, which at a rate of
RMB 139,000 per cabinet, would require over RMB 2.4 billion ($396 million) to finance. Note
that this is a conservative assumption since we are not charging the balance sheet with
commitments for the completion of ongoing data center construction and other associated IDC
network expansion costs.
(200.0)
(100.0)
0.0
100.0
200.0
300.0
400.0
500.0
Revenue Financings M&A Net Debt
2010 2011 2012 2013 1H2014 Run rate
PAGE 38 / 121

What will that do to the companys net debt position, and how will the companys trailing three
year track record of burning 28% of its total net revenue in free cash flow factor into the
companys liquidity?

More importantly, if VNET is overstating cabinet count and utilization to such a degree that the
overstatement alone wipes out all the reported EBITDA, an assumption for which we have
provided ample evidence (we have yet to discuss the acquisitions in detail), how will VNET
stay solvent, let alone support its current expansion plans?

Investors, stockholders in particular, should respect their place in the capital structure and act
accordingly, because a liquidation of VNET today would render all of VNETs equity worthless,
even without the planned capacity expansion.

A Track Record of Value Destruction

Most companies use acquisitions to consolidate the industry of their core lines of businesses.
Less frequently, smaller acquisitions are used to gain access to promising new lines of business
as established companies saturate their slowing industries. VNETs acquisitions fly in the face of
these tried and true best practices. VNET only acquires outside of its core business and uses
acquisitions to troubleshoot growth problems in the core.

Since VNET tucks these acquisitions into only two categories, IDC and MNS, breaking out only
revenue separately, investors cannot track regularly whether their capital is being deployed
productively or not.

What happens to these acquisitions over the long term is a critical questionnot merely one of
management competence but more importantly, solvency. We have seen that roughly half the
capital raised in VNETs non-stop financings has yet to deliver an economic benefit as the IDC
network bleeds cash like a stuck pig, making VNET increasingly indebted. Does the other half of
the funds from financings deliver acceptable returns in future cash flows for investors?

VNETs track record suggests the answer is a resounding no.

PAGE 39 / 121
Exhibit 29: A long history of value destruction through acquisitions

Out of the two dozen acquisitions the company has closed so far (Dermot has yet to close), only
two companies have yet to sorely disappoint: Aipu, which was consolidated into VNET just last
quarter, and the mysterious iJoy, an outlying winner (so far) from a long list of miserable
failures.

So naturally, we began our extensive six-month investigation of VNETs many acquisitions with
iJoy.

Year Acquisiti on Rational e Outcome
May 2007 Tiantian Online Expansion into online video business Ceased supporting operations
Oct ober 2007 Shanghai Stat eline
N k
ISP Shut down
December 2007 VV91 Regional expansion Southwest NA (no evidence of it s existence)
May 2008 Lanmang IDC network expansion Shut down
September 2010 Managed Net work
Entit ies (7 total)
Managed network expansion Business degradation. Failed to meet profit t argets stiputlated in
merger agreement . Rapidly shrinking contribut ion to total revenue.
Prior to October
2010 pre-IPO
reorganization
Five undisclosed
companies
Expansion into new businesses
(specifics undisclosed)
All writ ten off
November 2011 Guangzhou Gehua Managed network expansion Business degradation. Failed to meet profit t argets stiputlated in
merger agreement . Rapidly shrinking contribut ion to total revenue.
September 2012 Fast web Expansion into Content Delivery
Network (CDN) business
Losing market share, achieved only 6% net margin
February 2013 Tianwang Online Managed network expansion Toget her with Yilong Xinda, achieved only 3% net margin. Rapidly
shrinking contribut ion to total revenue.
February 2013 Yilong Xinda Managed network expansion Toget her with Tianwang Online, achieved only 3% net margin.
Rapidly shrinking contribut ioon to t otal revneue.
April 2013 iJoy Holdings Limted
and related ent ities
Expansion of CDN business TBD
2014 Aipu Holdings Expansion into consumer/retail last-
mile services
TBD (just consolidated as of 2Q2014)
PAGE 40 / 121
IJOY: GHOST IN THE (CACHE) MACHINE

In April 2013, VNET completed the acquisition of 100% of iJoy, its subsidiaries and
consolidated affiliates (collectively known as iJoy) with a purchase consideration of RMB 97.0
million as part of a purported strategic expansion into CDN/content caching. VNET had
previously acquired another CDN company, FastWeb, and appeared to be getting serious about
the CDN space.

We paid particularly close attention to iJoy because it is listed in the 2013 20-F filings as one of
VNETs two VIEs, an entity called aBitCool being the other. Also, iJoy appears to be an
incredibly profitable business with nearly 100% net margins.
8
Despite all that, we wondered why
VNET is so secretive about iJoy, disclosing so little about this company in its 20-F filings
despite its substantial contribution to consolidated margins. Uncharacteristically, VNET never
issued a press release about iJoys acquisition despite issuing one for the less significant
FastWeb
9
and the two acquisitions of iPoo
10
and Dermot
11
that were done immediately after. If
iJoy is significant to VNET, it is certainly hard to tell. iJoy doesnt even show up on a search on
VNETs own corporate website:

Exhibit 30: There are no results for a search for iJoy on VNETs own website

iJoys Filings: The Basics

As skeptical as we were going into our review of iJoys SAIC filings, even we were surprised by
the number of red flags that our first cursory scan of iJoys SAIC filings revealed.

8
2013 20-F, page F-39
9
http://ir.21vianet.com/releasedetail.cfm?ReleaseID=708303
10
11
PAGE 41 / 121
Corporate Structure
iJoys consolidated PRC variable interest entity is called Beijing iJoy Information Techonology
Co., Limited (Beijing iJoy). The wholly owned PRC subsidiary of iJoy Holding Limited is
named Suzhou Zhuoaiyi Information Technology Co., Limited (Suzhou iJoy).
12
The following
diagram illustrates the current corporate structure of the principal operating entities controlled by
and affiliated with iJoy Holdings Limited:
13

Exhibit 31: Corporate structure of iJoy Holdings Limited

iJoy Holding Limited
Asiacloud Wireless Ltd.
(Hong Kong)
Suzhou Zhuoaiyi
Information Technology
Limited
(Suzhou iJoy)
Beijing iJoy Information
Technology Limited
(Beijing iJoy)
Suzhou Aizhuoyi
Information Technology
Limited
Peng Yang
The founder and seller of
iJoy
Outside PRC
In PRC
VIE 99% equity owner Related party
Related party
100% acquired on April 30, 2013
Shanghai iJoy Information
Technology Limited
(Shanghai iJoy)
100% owned
Peng Yangs father
1% equity owner
WFOE

PRC regulation currently restricts foreign ownership of telecommunications value-added
businesses.
14
The shareholder(s) of Beijing iJoy must be PRC citizen(s) who is (are) forced to
enter into a share pledge agreement with Suzhou iJoy to provide effective control for Suzhou
iJoy. According to SAIC filings, Peng Yang is the sole owner of Beijing iJoy with a personal
registered permanent residence in Beijings Xicheng district.

On October 30, 2012, Peng Yang signed a definite loan and share pledge agreement with Suzhou
iJoy to pledge his 100% shares in Beijing iJoy (, ). Per
Suzhou iJoys SAIC filings, its sole investor is a Hong Kong company, iJoy Information Limited
which was renamed to Asiacloud Wireless Limited in late 2013. This Hong Kong based
company is entirely invested and controlled by iJoy Holdings Limited (BVI). Below is the

12
2013 20-F, page 52
13
iJoy Information Limited (Hong Kong) was renamed to Asia wireless Limited in June 2013.
14
2013 20-F, pages 52, 53 and 54
PAGE 42 / 121
scanned copy of Suzhou iJoys business license and share pledge agreement entered into by Peng
Yang and Suzhou iJoy.

Exhibit 32: Business License of Suzhou Zhuoaiyi and Share Pledge Agreement by Peng Yang and Suzhou
Zhuoaiyi

Translation of Business License of Suzhou Zhuoaiyi:
Name of Company: Suzhou Zhuoaiyi Information Technology Co., Limited. The sole owner of Company: iJoy Information Limited
(Hong Kong)

Translation of Share Pledge Agreement by Peng Yang and Suzhou Zhuoaiyi:
The parties who entered into the agreement include Peng Yang and Suzhou Zhuoaiyi Information Technology Co., Limited. Pursuant
to the share pledge agreement, Peng Yang as the nominee shareholder has pledged all his equity interest in Beijing iJoy Information
Technology Co., Limited to guarantee the repayment of the loan specified in the Article 2.0 of the agreement.

The important points are that Peng Yang was the sole owner of iJoy before its acquisition by
VNET and that Mr. Peng apparently went out of his way to set up offshore entities in preparation
for a sale to a foreign-listed company such as VNET.

iJoys Ghost Offices
iJoy is registered with the SAIC under a ghost office that is occupied by another company.

PAGE 43 / 121
Exhibit 33: iJoys registered office does not exist

We tried to find iJoys operations everywhere it made sense to find them but mostly struck out.
We obtained all of iJoys registered addresses from Beijing iJoy and Suzhou iJoys SAIC filings,
iJoys website and other public sources. All but one of the addresses led to ghost offices that
could not have been used for real operations, and two of the ghost offices were occupied by
different companies.

PAGE 44 / 121
Exhibit 34: List of all registered addresses for iJoy and results of our in-person investigation

Name of Company Registered Address Note Source
Beijing iJoy
(
)
83440
8
Room 408, 4
th
Floor, Building No.83,
Deshengmenwai Avenue, Xicheng District,
Beijing
Ghost address.
The room is occupied by
another company.
SAIC
15

Beijing iJoy
(
)

10
202
Room 202, 2
nd
Floor, Science Research
Building, Beijing University of Posts and
Telecommunications
Real office address with
less than 10 people.
Company
website
16

Suzhou Zhuoaiyi /
Suzhou iJoy
(
)
150
5
Room 1505, TechnologyPlaza, Qianjin
Road East, Kunshan Development Zone,
Suzhou, Jiangsu Province
Ghost address.
The room is occupied by
another company.
SAIC
Suzhou Aizhuoyi
(
)
18A
2009
Room 2009, Modern Plaza, Weiye Road,
Kunshan Development Zone, Suzhou,
Jiangsu Province
Ghost address only for
registration purpose.
Occupied about 60-65
square meters and
nobody found working
there.
SAIC
Shanghai iJoy
(
)
Established on May 30,
2013 with registered
capital of RMB
5,000,000
3512A637-16
Room A637-16, Building No.2, No.351
Guoshoujing Road, Zhangjiang High Tech
Zone, Pudong District, Shanghai

Ghost address only for
registration purpose.
Occupied about 30-35
square meters and
nobody found working
there.
SAIC

A Ghost Board of Director [sic]
iJoy not only has ghost offices, it also has a ghost board. SAIC filings show only one director
who apparently runs board meetings with himself.

15
http://qyxy.baic.gov.cn/
16
http://www.unionread.com/company_info_contant.html
PAGE 45 / 121
Exhibit 35: Suzhou iJoys corporate structure with single-director governance

Undercapitalized, Low Employee Count and Other Peculiarities
iJoys tiny RMB 10 million ($1.6 million) of registered capital and, depending on the year, five
to eight employees were also surprising given its acquisition by VNET, a nearly two-billion USD
market cap public company that runs a fundamentally different business. How much strategic
value could such a puny company really have to VNET?

Exhibit 36:Beijing iJoys business license just before acquisition by VNET

We found it quite strange too that on March 14, 2013, a month before the acquisition by VNET
on 4/30, there was a sudden large increase in registered capital from RMB 5 million to 10
million. As we dug deeper, we noticed this was preceded by a transfer of ownership to Peng
Yang from the prior owners on July 2012 (see Appendix B).
PAGE 46 / 121
As we dug deeper into iJoys articles of incorporation and the various shareholder resolutions
filed locally, what went on between 2012 and iJoys April 2013 acquisition became clear to us,
as did the purpose of iJoys acquisition by VNET.

iJoys Orchestrated Acquisition

The following timeline illustrates iJoys corporate history.

Exhibit 37: Timeline of iJoys Corporate History

Woeful Financial Performance
The first thing to note is iJoys woeful financial performance for the first three years it was in
business. For 2009, 2010, and 2011, all iJoy did was lose money. Particularly notable are the
steep operating losses of RMB 3.71 million from a tiny RMB 0.91 million of revenue in 2011.

Peng Yang, Shu Huaying and Hu
Yiwen establish iJoy, contributing
10 mln RMB of registered capital
Registered business scope:
developing/selling hardware and
software, developing information
systems, related technical services
and IT consulting
2009 rev. / net income:
0 RMB /
(0.01) mln RMB
0.47 mln RMB /
(0.27) mln RMB
Registered capital
cut in half to 5 mln
RMB
0.94 mln RMB /
(3.71) mln RMB
Shu and Hu sell 10%
each to Peng
Shu and Hu sell
13.5% each to
Peng
Peng Yang
establishes iJoy
Holding Limited, a
BVI (offshore)
company
Shu and Hu sell
10% each to
Peng
Peng establishes iJoy
Information Limited,
a Hong Kong
company (later
renamed to Asiacloud
Wi l )
Peng pledges all his
shares in Suzhou
Zhuoaiyi to borrow a
nominal 0.5 mln RMB
Peng estalishes
PRC WFOE
named Suzhou
Zhuoaiyi
Information
Technology Co.,
Limited
8.38 mln RMB /
2.45 mln RMB
Peng increases his
investment in Beijing iJoy
to 10.08 mln RMB
contributing intellectual
property
VNET acquires
100% of iJoy for
97 mln RMB
Business scope
changed to include
technology and goods
import and export
118.91 mln RMB /
103.3 mln RMB
Business scope changed
to include Internet
virtual network
services, IDC services,
Internet access network
services and
information services
VNET lends
12.885 mln RMB
to Peng Yang
PAGE 47 / 121
Exhibit 38: Summary financials from Beijing iJoys with SAIC filings for 2009, 2010 and 2011

Right before the end of that brutal year, the founders resolved to cut the registered capital of iJoy
in half from RMB 10 million to 5 million. It is no wonder two of the three co-founders, Shu
Huaying and Hu Yiwen, could not bail fast enough after that. In three transactions throughout
2012, Shu and Hu sold all their shares to Peng, who clearly had other plans (See Appendix B.)

Peng Yangs Takeover
Before Peng even took possession of all of iJoys shares, he began establishing a much more
sophisticated corporate structure that was clearly intended to put the company up for sale. Why
else would a tiny, struggling Chinese company with barely any revenue go through the legal
motions of creating an offshore structure to hold the onshore entities? The result of Pengs
efforts is the corporate structure depicted in Exhibit #, which includes a VIE and a WFOE
wholly owned by an offshore company, not exactly a run-of-the-mill structure for a Chinese
company with registered capital of under a million USD.

A funny thing started to happen as Peng gained control of iJoy. The financial performance
started to improve, with a nice swing in profitability from being so hopelessly in the red in 2011
that two of the three co-founders threw in the towel to being very nicely profitable in 2012 after a
near 10-fold improvement in revenue. Peng was suddenly proving to be some kind of operator
indeed.

2009 2010 2011
PAGE 48 / 121

Exhibit 39: Summary financials from Beijing iJoys with SAIC filings for 2012

On March 2013, Peng Yang increased his investment in Beijing iJoy in the form of valued
intellectual property, rather than cash, to RMB 10.08 million. In China, it is a common practice
for shareholders without the necessary cash to contribute to increase their companys registered
capital via non-cash intellectual assets. The process involves engaging a valuation firm to
appraise the value of so-called high tech intellectual property. The valuation firms report is
then presented to the SAIC for approval. The motivation behind this is to meet the minimum
registered capital threshold of RMB 10 million in order to gain approval for value-added
telecommunication licenses.

Two Suspicious Transactions
Right around the time of this increase in registered capital, VNET issued a loan of RMB 12.885
million ($2.1 million) to Peng Yang.
17
No more than three or four months later VNET acquired
100% of iJoy. The timing and size of the loan relative to the companys registered capital made
us wonder for what purpose VNET would issue a loan to the seller of a company it was weeks
away from acquiring.

We noticed an even more irregular transaction disclosed on VNETs 2013 20-F
18
:

17
2013 20-F, page F-9
18
2013 20-F, page 92
PAGE 49 / 121
For the year ended December 31, 2013, we paid RMB61.2million (US$10.1 million) to
Suzhou Aizhuoyi Information Technology Company Limited, a company controlled by
seller of iJoy, for the computer and network equipment purchased by us.

Recall from Exhibit # that Suzhou Aizhuoyi (not to be confused with Suzhou Zhouaiyi, i.e.
Beijing iJoy) the company from which VNET bought RMB 61.2 million worth of hardware is a
related party 99% owned by Peng Yang and 1% owned by Pengs father.

A review of Suzhou Aizhuoyis SAIC filings revealed an even smaller company than iJoy ever
was, with registered capital of RMB one million.

Exhibit 40: SAIC filing of Suzhou Aizhuoyi

(Note: The registered capital was increased from RMB1m to RMB 10m on August 11, 2014)

We do not believe Aizhuoyi ever even existed, since its registered office is not only in the same
exact building as Suzhou iJoy (Technology Plaza, Qianjin Donglu, Kunshan Development
Zone), but also occupied the same room 1505 that we were unable to verify (recall another
unrelated company occupied that room) from through November 2013, after VNET had acquired
iJoy, at which point Peng Yang filed with the SAIC to change the registered office address.

It makes little sense that large publicly listed VNET bought servers from little Suzhou Aizhuoyi
when all logic would point to that transaction going the other way. VNET is obviously the much
larger and more financially capable company with much more scale economies to exploit in the
pedestrian act of buying servers. Interestingly, that was the only time VNET has ever bought
servers from an acquired company that we could find.

Both the loan to Peng pre-acquisition and the surprising large purchase of hardware from a shell
company reeked to us, leaving several obvious questions unanswered:

How exactly did little Suzhou Aizhuoyi, the company with RMB1 million of registered
capital gain a hold of that much valuable equipment at the time of transaction?
PAGE 50 / 121
What was the real purpose of this transaction? Could VNET, with all its vendor
relationships, not find a better source from which to procure its hardware?
What equipment exactly did VNET purchase from SuZhou Aizhouyi?
How much profit did Suzhou Aizhuoyi and therefore Peng Yang make from this
transaction?

No matter how hard we tried, we could not reconcile the facts that VNET bought a company
with horrible financials not core to either of its major businesses, IDC or MNS, with no
registered office location, with no board of directors, with only minimal registered capital and
only eight employees for RMB 97 million and then immediately bought RMB 61.2 million worth
of servers from a shell company controlled by the seller. That was really strange. Then there was
the change in ownership from multiple owners to a single owner who sold his company less than
a year after spending a year buying it for himself and going through the pain of legally
restructuring the company into a dual onshore/offshore holding structure, right before receiving a
large loan from VNET.

Things were getting interesting.

iJoys Transformation

Literally Incredible Post-Acquisition Performance
The most telling finding related to iJoy is the financial transformation it made right after the
change in ownership in 2012 and then again right after it was acquired into VNETs IDC
business in the beginning of 2Q2014.

Exhibit 41: Summary of iJoys income statement before and after acquisition by VNET

FY 2011 FY 2012 FY 2013
Q1
FY2014
Q2
FY2014
2013Q1 2013Q2 2013Q3 2013Q4
Consolidated
amounts after
acquisition date
Net revenues 942 8,376 118,905 31,106 25,600 2,182 18,735 18,209 79,779 116,723
Cost of sale -377 -1,526 -9,386 -4,344 -3,200 -80 -303 -1,356 -7,647 -9,306
Gross profit 565 6,850 109,519 26,762 22,400 2,102 18,432 16,853 72,132 107,417
Gross margin % 60% 82% 92% 86% 88% 96% 98% 93% 90% 92%
Operating expenses -4,243 -4,760 -13,203 -4,197 -3,700 -286 -873 -1,428 -10,616 -12,917
as percentage of revenues 450% 57% 11% 13% 14% 13% 5% 8% 13% 11%
Operating income(loss) (EBIT) -3,678 2,090 96,316 22,565 18,700 1,816 17,559 15,425 61,516 94,500
Other income(expense) - 360 4,491 3,709 230 - - 196 4,295 4,491
Interest income(expense) -30 4 2,498 790 770 - 1 3,711 -1,214 2,498
Income(loss) before income tax -3,708 2,454 103,305 27,064 19,700 1,816 17,560 19,332 64,597 101,489
Income tax benefit (expense) - - - - - - - - - -
Net income(loss) -3,708 2,454 103,305 27,064 27,064 1,816 17,560 19,332 64,597 101,489
Net income margin % -394% 29% 87% 87% 106% 83% 94% 106% 81% 87%
Breakdown of FY 2013
PAGE 51 / 121

It is not only iJoys explosion of growth that is rather difficult to believe. iJoys improbable
profitability raised our eyebrows as well.

iJoys gross margin in 2013 and Q1 2014 was 92% and 86% respectively, much higher than that
of the two dominant Chinese CDN players ChinaCache and ChinaNetCenter and even higher
than the number 1 global CDN service provider Akamai Technologies.

Exhibit 42: Comparison of gross margins for leading CDN companies

Key CDN Players GP % 2012 GP % 2013 GP % Q1 2014
ChinaCache
19

31.4% 31.4% 30.3%
ChinaNetCenter
20

30.5% 38.7% 36.1%
Akamai Technologies
21
61.4% 67.6% 69.2%
iJoy 82.0% 92.0% 86.0%

iJoy spent a mere 13% of total net revenues in operating expenses in 2013. Such extremely high
operating leverage is implausible.

What exactly was iJoy doing to turn in such incredible performance? And why was VNET being
so quiet about the cash cow it had clearly acquired for next to nothing? Why was VNET only
talking about Fastweb as its CDN play while never mentioning iJoy in conference calls, investor
meetings, press releases or industry events?

19
According to ChinaCache filing in Form 20F and 6-K with U.S. SEC
20
According to ChinaNetCenter official website at http://www.chinanetcenter.com/Home/Notice/41?val=2
21
According to Akamai Technologies Inc. filing in Form 10-Q and 10-K with U.S. SEC
942
8,376
118,905
-3,708
2,454
103,305
-20,000
-
20,000
40,000
60,000
80,000
100,000
120,000
140,000
FY 2011 FY 2012 FY 2013
Net revenues Net income(loss)
2,182
18,735 18,209
79,779
1,816
17,560
19,332
64,597
-
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
2013Q1 2013Q2 2013Q3 2013Q4
Net revenues Net income(loss)
PAGE 52 / 121
Increasingly Far-Ranging Business Scope
VNET claims iJoy is a CDN software business but before its acquisition in April 2013, the
registered business scope was computer hardware/accessories development and computer
technology service, neither related to CDN.

Exhibit 43: Beijing iJoys business scope registered with the SAIC

On October 15, 2013, Beijing iJoy modified its business scope by adding technology import and
export. This is a very strange addition. Then on March 28, 2014, iJoys registered business scope
was modified again to include a variety of data center and networking areas.

Exhibit 44: Beijing iJoys shareholder resolution to change business scope

Translation of Shareholder Resolutions on October 15, 2013:
To change the business scope by adding technology and goods import and export.

PAGE 53 / 121
Translation of Shareholder Resolutions on March 28, 2014:
To change the business scope by adding Internet virtual network services (B-14), Internet Data Center services
(B-11), Internet access network services (B-15) and information services (B-25)

The Taxing Search for iJoys Products

Wondering how such a tiny company with historically atrocious financial performance could
reinvent itself so many times, we turned to iJoys own website for answers. iJoys corporate
website www.unionread.com shows three different products for sale: UR-Market, UR-CDN and
UR-Cloud services.

Exhibit 45: Product offerings on www.unionread.coms (iJoys corporate website)

Products Descriptions
UR-Market
3G Fueling Content Delivery
Platform

Helps customers deliver wireless content to end users throughout
iJoys nationwide promotion and distribution channels
UR-CDN

Basic CDN software
UR-Cloud

Basic cloud computing software

Confused by the product descriptions and failing to understand how CDN or cloud computing
could be sold as packaged software, which is purportedly what iJoy does, we tapped our expert
network and conducted dozens of interviews for several weeks.

A Complete Unknown Selling Useless Software
Our biggest problem was finding anyone who had heard of iJoy or any of the UR products. We
interviewed many management teams, including those of the three dominant CDN players in
China, ChinaCache (Nasdaq:CCIH), ChinaNetCenter (SH:600804) and Dnion Technology,
among other industry veterans. We spoke with over 20 of Chinas most successful wireless
application developers and operators. We asked them whether they or any of their teams had
heard about or as an independent CDN or cloud computing services
provider. The feedback was unanimous. None of them had ever heard of iJoy.

Towards the end of a multi-week effort, we finally met a telecom industry professional who had
heard of UR-CDN. According to our source, iJoy had tried to persuade China Telecom to adopt
their UR-CDN technology but China Telecom declined, citing poor quality and reliability as well
as lack of scalability as major issues.

We interviewed all the major telcos, all the major third-party CDN service providers and dozens
of content providers (both Web-based and mobile) and the feedback was once again unanimous.
Nobody could see a market for CDN being sold as software for implementation by whoever
would buy such a thing.

PAGE 54 / 121
Turning to more developed Internet markets to see if there are any precedents for companies that
sell CDN software (as opposed to offering it as a service like all the successful CDN companies
do), we were unable to find any precedent. All our interviews were negative on the concept of a
company that sold CDN software.

After months of trying to find anyone else who had heard of iJoy or might buy their products, we
gave up and turned to the regulatory filings once again to seek clues as to how iJoy could be
making significant revenue and profit for VNET. This time, we struck gold.

Clues from Chinas Tax Authority
VNETs 2013 20-F states the following
22
:

Our other income decreased fromRMB11.6 million in 2012 to RMB6.2 million (US$1.0
million) in 2013. Other income in 2012 was primarily attributable to a bargain purchase
gain related to the acquisition of 21VXian. Other income in 2013 was primarily
attributable to the value-added tax refund enjoyed by Beijing iJoy.

The VAT refund referenced in the 20-F can only be the result of the sale of qualified software
filed with and approved by Chinas State Taxation Bureau. On October 13, 2011 the Ministry of
Finance and the State Taxation Bureau jointly announced a rule, Circular No. 100(2011), with a
term effective from January 1, 2011 which permits sellers of PRC software to be eligible for a
VAT refund only if the following conditions are satisfied in accordance with the State Taxation
Bureaus rules and regulation
23
.

1. The vendor obtains a testing report issued by independent software test institutions
certified by the governing provincial qualified testing bureau
2. The vendor obtains a Software Certification issued by the local software registration
associations and the Computer Software Copyright Certification issued by Chinas
Copyright Protection Center
3. The rate of VAT refund is 14% of the contractual value excluding VAT (17%)

Our legal counsel advised us that in order to avoid abuse, the application process is designed to
be complicated and time-consuming, taking at least three months from the day of application to
the State Tax Bureau.

According to Chinas tax code, an enterprise that sells software must pay VAT rather than
business taxes. Therefore, whatever Beijing iJoy sells to its customers must be software and not
some kind of service.

Based upon SAIC filings and the 2013 20-F, we know Beijing iJoy received a VAT refund of
RMB 4.5 million in Q3 and Q4 2013 which corresponds to taxable revenues recognized in the
period from April 30, 2013 to the end of third quarter of 2013. We estimate iJoys software sales
below:

22
2013 20-F, pages 71 and 74
23
http://www.shui5.cn/article/19/51620.html
PAGE 55 / 121

Realized contractual value for the corresponding period = VAT refund * 1.17/14%
= 4491 * 1.17 / 14% = 37,532 million

Recognized revenue for the corresponding period = Realized contractual value / 1.17
= 37,532 / 1.17=32,078 million

The recognized revenues from software sales were about RMB 32.1 million, or 86% of total
revenues for the corresponding period.

Since iJoy collected a VAT refund, it must have sold software, and since it must have sold
software, that software must have been registered with Chinas Copyright Protection Center. We
searched www.ccopyright.com.cn for any computer software developed and registered by
and finally found some signs that iJoy existed at all. Below is a list of all of iJoys
computer software with copyright registration records:

Exhibit 46: Historical copyright registration records for iJoys software

Registration No.
Classificatio
n Series No.
Name of software copyright
Copyright
Series No.
Date of
Initial
Publication
Date of
Registration
2014SR028116 30000-0000 3G
3G Gas Station Royalty Points Platform System
V1.0 2013-10-08 2014-03-07
2014SR028114 30000-0000 3G
3G Gas Station Commission Distribution System
V1.0 2013-10-12 2014-03-07
2013SR123789 30200-0000
Mobile Internet Contents Distribution Platform System
V1.0 2013-08-09 2013-11-11
2013SR120067 30000-0000 4G TDD-LTE
Mobile Education Contents Distribution Platform System,
based on 4G TDD-LTD
V1.0 2013-08-08 2013-11-06
2013SR119270 30000-0000 4G TDD-LTE
Mobile Contents Distribution Platform System, based on 4G
TDD-LTD
V1.0 2013-08-08 2013-11-05
2013SR119167 30000-0000 SIM(Cloud-SIM)
Global Mobile Cloud-SIM Platform System
V1.0 2013-08-01 2013-11-05
2013SR032514 10000-0000 CDN
UR-CDN Billing System
V1.0 2012-08-17 2013-04-10
2013SR032512 10000-0000 CDN
UR-CDN Traffic Dispatching System
V1.0 2012-08-16 2013-04-10
2013SR032456 10000-0000 CDN
UR-CDN Monitoring System
V1.0 2012-08-16 2013-04-10
2013SR032452 10000-0000 CDN
UR-CDN Client Management System
V1.0 2012-08-15 2013-04-10
2013SR028217 10000-0000 CDN
UR-CDN Caching System
V1.0 2012-08-17 2013-03-26
2013SR028214 10000-0000 CDN
UR-CDN System
V1.0 2012-08-15 2013-03-26
2013SR028131 10000-0000 CDN
UR-CDN Operation System
V1.0 2012-08-15 2013-03-26
2013SR013091 30209-8400 iPad
Open Class iPad Client End Software
1.0 2012-04-20 2013-02-16
2012SR067089 30000-0000
Website Equipment Management System
V1.0 2012-06-01 2012-07-24
PAGE 56 / 121
2012SR058363 30206-0000 3G
3G Mobile Cellphone Assistance System Software
V1.0 2012-03-21 2012-07-03
2012SR051820 30104-0000 3G
3G Gas Station Platform System Software
V2.0 2012-03-01 2012-06-16
2012SR006458 30100-0000
Mobile Phone Gas Station Platform System Software
V1.0 2011-04-19 2012-02-03
2011SR080034 30200-0000 3G
3G Gas Station Platform System Software
V1.0 2011-03-03 2011-11-04
2011SR079527 30100-6000
Mobile Application and Cloud Storage System Software
1.0 2011-04-15 2011-11-03
2011SR079488 30205-6100
Fanzai Education Application Store System Platform Software
1.0 2011-06-09 2011-11-02
2011SR079486 30104-6000
Mobile Education Society System Software
1.0 2011-05-06 2011-11-02
2011SR079461 30104-6000
Mobile Application and Resources Distribution Platform
System Software
1.0 2011-02-03 2011-11-02
2011SR066748 30200-6200
Mobile Phone Software Installation Software
2.1.1 2010-11-08 2011-09-19
2011SR066745 30200-6100
Pad Electronic Newspaper Interactive Platform Software
1.0 2011-01-07 2011-09-19
2011SR063253 30209-8400
Fanzai Education Resources Bank System Software
1.0 2011-03-09 2011-09-03
2011SR063242 30200-8400
Fanzai Education Resources Distribution Platform Software
1.0 2011-03-04 2011-09-03
2011SR062862 30104-6000
Mobile Phone Software Download Platform System
2.3 2011-03-03 2011-09-02
2010SR005891 65000-0000
Unionread Book Store Management System
V1.0 2010-01-10 2010-02-01

These registration records help explain what happened throughout iJoys timeline. Before 2012,
iJoy was focused on developing software for mobile carriers for reading, education, application
download, mobile resource storage and other such uses. As the numbers show, that did not go
very well for iJoys three co-founders. Having burned through much of the capital they
contributed in 2009 when they started the company, two of them called it quits while the
persistent Peng Yang decided to reinvent the company.

August 2012 was an inflection point. By then, Peng had become sole owner of iJoy and was well
on his way to finalizing the corporate structure that would allow VNET to eventually acquire his
company. As he was busy preparing his company for sale, Peng ditched any prior focus on
mobile software and began registering CDN software with the copyright authority.

iJoys Sale of Useless Software to a Trading Company

The nagging question of who would buy iJoys products remained unresolved until we
remembered that one of iJoys various business scope changes made little sense: technology
import and export. Why would a tiny Chinese CDN software company find any business
importing and exporting technology?

PAGE 57 / 121
Exhibit 47: Change of Beijing iJoys business scope to include import and export of technology

We were able to obtain evidence that iJoy has in fact successfully sold CDN software before, but
not to anyone investors might expect. After months of due diligence, the only iJoy customer we
were able to verify was none other than state-owned enterprise China Base Ningbo Group
Company (CBNB), one of Chinas largest iron ore importers.

Exhibit 48: July 2013 receipt from sale of iJoy CDN software to CBNB, a top 5 Chinese iron ore importer

Beijing Yuelian
Information
Technology Co.,
Ltd
UR-CDN
V1.0
CBNB
Beijing VAT
invoice
PAGE 58 / 121
CBNBs corporate website www.cbnb.com.cn describes CBNB as a comprehensive trading
company engaged in import and export, trade logistics and automobile sales and services.
Imports include iron ores, asphalt, plastics, liquid chemicals, coal, copper and cotton. But no
CDN software. Exports include steel, textile, garment, hardware machinery and automobile
accessories. But again, no CDN software.

China-Base imports over 15 million tons of iron ore annually and is one of Chinas five largest
iron ore importers. Why such a company would buy CDN software from a tiny no-name Chinese
company not even its industry peers have heard of, and in such relatively small amounts to boot,
is incomprehensible.

A much more plausible explanation is that Peng Yang has taken advantage of a personal
relationship to forge contracts used to launder into VNET cash received from the pre-acquisition
loan from and the sale of his company to VNET.

Data Center Build
and
Cabinet Expansion
Capital markets
Cash
Equity
(ADS)
d
Non-Core Aquisitions
(shell companies
and
asset-light companies)
Cash
Cash
and
Equity
Sale of Equity (ADS)
Cash (Proceeds of Sale of Equity)
Fake revenue and profit
but no free cash inflow
Step
1
Step
2a
Step
2b
Step
4
Steps
3, 5
PAGE 59 / 121
THE MNS SHELL GAME

VNET has been most acquisitive into the MNS business which made up roughly one third of the
consolidated revenue in 2013. Before 2014, the year of the monster acquisitions of iPoo and
Dermot, the companys most significant M&A transaction was the acquisition of two companies
referred to as the Managed Network Entities from a seller named Cheng Ran.

Cheng Ran and the Seven MNS Dwarfs (the Fable of the Managed Network
Entities)

In the childrens fable that Disney made famous, Snow White is a plain scullery maid destined to
live a life of misery with seven nondescript dwarfs until she bites the infamous poisoned apple
that puts her in a coma. The fable ends well when Snow White awakens miraculously to the kiss
of a heroic prince who rescues her and makes her a princess and then its happily ever after.

The VNET version of this rags to riches fable is no less dramatic than Disneys animated film.
The story starts before the VNET IPO with a man named Cheng Ran who is the owner of a
funky roll-up of seven MNS companies consolidated into two related parent companies called
Beijing Chengyishidai (CYSD) and Beijing Zhiboxintong (ZBXT). Collectively, these seven
entities are referred to in VNETs 20-F filings as the Managed Network Entities (MNS
Entities). Below is a chart that shows the legal structure of the Managed Network Entities from
the latest SAIC filing (post-acquisition by VNET).

Exhibit 49: Corporate Structure of seven Managed Network Entities

PAGE 60 / 121
MNS Entities Before VNET Acquisition
Like Snow White before her prince, Cheng Ran and his seven MNS dwarfs, CYSD, ZBXT,
ZYTL, YJHT, BKHT, XYHT and BZRH lived a nondescript life. The seven MNS Entities
together were barely profitable as they faced stiff competition in a commoditized industry with
little differentiation beyond price. Top line was growing for everyone as early demand in the data
center services industry grew quickly off a tiny base. But it was a race to the pricing bottom that
nobody could win for a long, long time and is still playing out four to five years later. The
already razor-thin margins were getting squeezed down to around 5% gross margin and tinier net
margins.

MNS Entities After VNET Acquisition
On September 2010, before the 2011 IPO, VNET came to the rescue like Snow Whites
charming prince. VNET offered to buy 51% of both CYSD and ZBXT from Cheng Ran for the
fantastic total price of RMB 172.4 million plus a call option to buy 100% of both for the total
price of RMB 270.5 million. Giving the MNS Entities full credit for their run rate FY2010
financials from Exhibit 51 that works out to a P/E of 104x. For Cheng Ran, it was like being
kissed by the proverbial prince and the deal was done.

What happened immediately after the acquisition was magical indeed.

Exhibit 50: Consolidated Summary Financials for Managed Network Entities Post VNET Acquisition

Immediately after acquisition and as soon as their financials were consolidated by VNET, the
MNS entities cranked out a record growth quarter that brought in more than half the prior years
CYSD + ZBXT: Pre-Acquisition CYSD + ZBXT: Post-Acquisition
FY2009
Q1-Q3
FY2010
FY2010
run rate as of
end of Q3
Q4
FY2010
FY2011
Net revenues 111,242.0 125,427.0 167,236.0 60,175.0 270,000.0
Cost of sale (105,492.0) (118,442.0) (157,922.7) (33,096.3) (162,000.0)
Gross profit 5,750.0 6,985.0 9,313.3 27,078.8 108,000.0
Gross margin % 5.2% 5.6% 5.6% 45.0% 40.0%
Operating expenses (4,795.0) (5,794.0) (7,725.3) (14,586.4) (55,350.0)
Changes in the fair value of contigent
purchase consideration payable - - - - -
Operating income(loss) (EBIT) 955.0 1,191.0 1,588.0 12,492.3 52,650.0
Other income(expense) - (757.0) (1,009.3) - -
Interest income(expense) 5.0 7.0 9.3 - -
Income(loss) before income tax 960.0 441.0 588.0 12,492.3 52,650.0
Income taxbenefit (expense) (3,614.0) 2,000.0 2,666.7 (624.6) (2,632.5)
Net income(loss) (2,654.0) 2,441.0 3,254.7 11,867.7 50,017.5
Adjusted Net income (2,654.0) 2,441.0 3,254.7 11,867.7 50,017.5
Adjusted net income margin % (2.4%) 1.9% 1.9% 19.7% 18.5%
Adjusted EBITDA 2,989.0 5,876.0 7,834.7 14,054.0 61,290.0
Adjusted EBITDA margin % 2.7% 4.7% 4.7% 23.4% 22.7%
PAGE 61 / 121
total revenue at a 45% gross margin, a nine-fold improvement, and a 20% net margin, a 10-fold
improvement!

Suddenly, a deal so expensive only a moron would do it turned into the steal of the century.

Exhibit 51: Acquisition Valuation for MNS Entities

The effect on VNETs consolidated performance was enough to get VNET finally profitable, just
in time for its 2011 IPO.

Exhibit 52: Effect of MNS Entities Acquisition on VNETs Consolidated Financials
24

What kind of cost synergies might explain this miraculous jump in growth and profitability?
Were the MNS Entities operating under ridiculously punitive contracts with their suppliers that
VNET was able to immediately remedy with their superior ones? Were the MNS Entities bloated
with hundreds of employees that were suddenly laid off?

24
Source: SAIC filings, VNET F-1, 2001, 2012 and 2013 20-F
Consideration for 51% of MNS Entities 172,439.0
Implied consideration for 100% 338,115.7
FY2010 P/E 103.9x
FY2011 P/E 6.8x
Consideration for 100% of MNS Entities 270,458.0
FY2010 P/E 83.1x
FY2011 P/E 5.4x
FY 2010 FY 2011 FY 2012 FY 2013 FY 2010 FY 2011 FY 2012 FY 2013
Net revenues 525,203 1,020,929 1,524,158 1,966,717 465,028 750,929 1,174,158 1,606,717
Cost of sale 396,858 744,371 1,098,477 1,449,845 363,762 582,371 877,977 1,176,245
Gross profit 128,345 276,558 425,681 516,872 101,266 168,558 296,181 430,472
Gross margin % 24.4% 27.1% 27.9% 26.3% 21.8% 22.4% 25.2% 26.8%
Operating expenses 353,614 198,468 327,312 419,217 339,028 143,118 267,812 365,217
contigent purchase
consideration payable
7,537 63,185 17,430 55,882 7,537 63,185 17,430 55,882
Operating income(loss) (EBIT) 232,806 14,905 80,939 41,773 245,298 37,745 10,939 9,373
Other income(expense) 1,792 34,170 7,951 9,820 1,792 34,170 7,951 9,820
Interest income(expense) 2,213 10,541 4,925 88,272 2,213 10,541 4,925 88,272
Income(loss) before income tax 233,227 59,616 93,815 36,679 245,719 6,966 23,815 69,079
Income tax benefit
(expense)
1,588 13,677 36,159 10,324 963 11,045 32,659 8,704
Net income(loss) 234,815 45,939 57,656 47,003 246,683 4,079 8,844 77,783
Consolidated with CYSD & ZBXT Consolidated without CYSD & ZBXT
PAGE 62 / 121
Looking for rational explanations, we dug through the MNS Entities SAIC filings. We found all
the red flags iJoy had and then some.

Review of the MNS Entities SAIC Filings
25

More Ghost Offices
Every single one of the seven MNS Entities is registered with the SAIC under a ghost address,
meaning none of them has an actual physical office. You can see for yourself in the virtual tour
of the MNS Entities that follows this section.

More Ghost Boards
As with iJoy, the MNS Entities do not just have ghost offices. They also have ghost boards. All
seven MNS Entities hold board meetings with a grand total of one director.

Tiny Registered Capital
Each MNS Entity has registered capital of under RMB one million, which is the minimum
required to enter the bidding process for bandwidth reselling run by potential customers such as
China Mobile and other large third-party bandwidth purchasers. Even stranger is that several of
the MNS Entities did not even pass that low bar despite purportedly being in the MNS business.
BKHT and XYHT only have RMB 30,000 in registered capital.

Minimal Employee Count
Aside from the magnitude of the MNS Entities improvement in financial performance post-
consolidation, the fact that it occurred so suddenly while employee count decreased makes the
feat even more improbable.

Exhibit 53: Employee count of MNS entities

25
Appendix C
All figures in RMB except empoyee count
2007 2008 2009 2010 2011 2012
CYSD
Revenue 14,220,700 49,509,300 48,444,177 62,198,243 82,862,275 n/a
Profits 71,100 818,300 221,292 131,943 9,877,896 n/a
Number of Employees 7 23 23 25 15 n/a
BKHT
Revenue - - 1,641,850 8,114,316 11,428,581 26,305,701
Profits - - (503,504) 103,636 940,430 4,746,002
Number of Employees - - 2 25 17 14
XYHT
Revenue - 2,308,200 5,612,915 7,081,500 7,013,028 n/a
Profits - 1,300 2,094 337,828 796,074 n/a
Number of Employees - 3 3 24 15 n/a
PAGE 63 / 121
Inconsistent Registered Business Scope and Licensing
None of the MNS Entities had registered a business scope that made sense given their line of
business. BKHT, CYSD, XYHT and YJHT are examples, with bizarre entries such as
technology development, information consulting, cultural exchange, conference service,
advertising and logo design.

While looking to confirm business scope for the MNS Entities, we were unable to find corporate
websites for most of them. Only CYSD had a website which had no content relevant to
managing a network service and offered a bunch of consumer Internet service products instead.

Cheng Ran Missing from Registrations
You would expect the MNS Entities to be registered under their owner, Cheng Ran. But if Cheng
Ran really does own the businesses, he certainly went out of his way to hide that fact. All seven
MNS Entities are registered under Chengs wife, sister or friend.

It was only after we confirmed that the MNS Entities were really just a network of bandwidth
resellers (refer to following section: MNS, a Ticking Time Bomb) that this strange pattern
made any sense. Bandwidth reselling is illegal for third parties (non-telecom carriers), so there is
plenty of reason why Cheng Ran would want to hide behind the names of friendly parties who
cannot be investigated since they are not involved in the operations of his companies. The
various registered names serve another important purpose. In the bidding process for the resale
of bandwidth, each bidder can only bid once. However, some rogue companies register multiple
subsidiaries under different owners to enter multiple bids at once, a process called wei biao (
). Wei biao (), of course, is illegal.

Suspicious Ownership Changes Before Acquisition
BKHT and XYHT transferred ownership to ZBXT right before being acquired by VNET. In the
process, XYHTs registered capital went from RMB 30,000 to 100,000.

SAIC Numbers Show SEC Numbers 51% Overstated

Below are the revenue figures reported to the SAIC by the MNS Entities. Note that for the full
fiscal year 2010, which is the same as calendar year for the MNS entities, the MNS Entities (i.e.
CYSD and ZBXT plus their five subsidiaries) reported RMB 122.89 million.

PAGE 64 / 121
Exhibit 54: Revenue Reported to SAIC by MNS Entities

VNET acquired the MNS Entities on 9/30/2010 and consolidated them for the full fourth quarter
of 2010. The following comment can be found in their F-1, on page F-33:

The revenue and net profit of Managed Network Entities since the acquisition date
included in the consolidated statements of operations for the year ended December 31,
2010 were RMB 60,175,000 and RMB 11,869,000, respectively.

Later in the F-1, on page P-2, VNET breaks out how much revenue the MNS Entities
purportedly did for the first nine months of the year:

Exhibit 55: Revenue from MNS Entities Reported to SEC (F-1 filing) for 1Q2010 3Q2010

To state the very obvious, VNET claims that the MNS Entities did more revenue in the first nine
months of 2010 than the MNS Entities told the SAIC they did for the entire year. And then, they
have the audacity to claim that Q4 was by far the best quarter, generating a big increase of RMB
60.18 million on top of the overstated RMB 125.43 million, bringing the total to RMB 185.61
million for 2010, or over 51% more than the MNS Entities actually did!

Now we know where some of that fabulous synergy VNET and their accomplice Cheng Ran
found actually came from.

PAGE 65 / 121

Other Notable MNS Tuck-Ins

On October 19, 2011, ABC acquired 100% equity interest in Guangzhou Gehua (Gehua) to
expand its MNS business at a total consideration of RMB 77.5 million. To keep the MNS gravy
train going, VNET followed Gehua up with the acquisitions of Beijing Tianwang Online
Communication Technology Co., Ltd (Tianwang) and Beijing Yilong Xinda Technology Co.,
Ltd. (Yilong) in February of 2013 for a combined consideration of RMB 73 million. We put
these three MNS subsidiaries, Gehua and the combined TWYL, through the same examination as
the MNS Entities. The results are summarized below.

PAGE 66 / 121
Exhibit 56: Summary of findings from investigation of seven MNS Entities

Ghost
offices (no
physical
locat ion)
Ghost
boards
(only 1
direct or)
Tiny
registered
capital
(1 mn
RMB)
Regist ered
under wife's /
sist er's /
friends'
names
Registered
business
scope
different
from MNS
or IDC
Revenue
suddenly
spikes
enormously
right aft er
acquisit ion
Profit
suddenly
spikes
enormously
right aft er
acquisit ion
While rev
spiked,
employee
count
plummeted
Large
inject ion of
capit al from
seller right
before
acquisit ion
Transfer of
ownership
before
acquisit ion
Websit es
not
aligned
wit h
business
Beijing Chengyishidai Net work
Technology Co., Lt d. (CYSD)
X X X X X X X X NA X X
Zhiboxint ong (Beijing) Net work
Technology Co., Lt d. (ZBXT)
X X X X X X X X X X
no
websi te
Beijing Bikonghengt ong Net work
Technology Co., Lt d. (BKHT)
X X X X X X X X X X
no
websi te
Xingyunhengt ong Beijing Net work
Technology Co., Lt d. (XYHT)
X X X X X X X X X X
no
websi te
Beijing Bozhiruihai Net work
Technology Co., Lt d. (BZRH)
no
websi te
Jiujiang Zhongyat onglian Net work
Technology Co., Lt d. (ZYTL)
X NA NA NA X X X NA NA NA
no
website
Fuzhou Yongjiahong
Ltd. (YJH)
no
website
Guangzhou Gehua (Gehua) NA NA NA NA X NA NA NA NA NA X
Beijing Tianwang Zaixian
Ltd. and
Beijing Yilong Xinda Technology
Co., Ltd. (TWYL)
X X X NA X NA NA NA NA NA X
iJoy Holdings Limt ed, it s subsidiary
Suzhou Aizhuoyi Informat ion
Technology Co., Lt d. and affiliat e
Beijing iJoy Informat ion
Technology Co., Lt d. (iJoy")
X X X NA X X X X NA X X

A Virtual Tour of VNETs MNS Shells

We visited all seven of the SAIC-registered companies known as MNS Entities as well as the
two subsidiaries TWYL and found that all of them had registered as their headquarters either
ghost offices that did not actually exist or offices that had no evidence of operations whatsoever.
Below are screen shots of the SAIC registrations for each of the seven MNS entities and pictures
that we took in person of their registered office locations.

Our first visit to the MNS Entities was to CYSD, which is supposedly headquartered in Beijing
No. 110, Zhaojia Rd., Room 423A.

PAGE 67 / 121
Exhibit 57: Headquarters for Beijing Chengyishidai (CYSD) reported to SAIC

Our visit revealed that the SAIC-registered headquarters referenced a room that does not exist,
Room 423A. The last room on the floor was 422. Moreover, all the rooms in the fourth floor
were empty.

Exhibit 58: Pictures of our CYSD office visit

PAGE 68 / 121

Our next visit was to the wholly owned subsidiary of CYSD, a company called Jijujian Zhongya
Tonglian Network (ZYTL) that is supposedly headquartered in the 3
rd
Floor of Xingang Town
in Jiujiang.

Exhibit 59: Headquarters for Jiujiang Zhongyatonglian Network Technology Co., Ltd. (ZYTL) reported to
SAIC

PAGE 69 / 121
Exhibit 60: Pictures of our ZYTL office visit

Next, we visited ZBXT, supposedly headquartered in Room 5307 of Beijing Zhichunlu No. 111
in Lixiang Plaza.

Exhibit 61: Headquarters for Beijing Zhiboxintong (ZBXT) reported to SAIC

There was a technology company headquartered in Room 5307 but unfortunately it was not
ZBXT. A company called Beijing Neteon Tech occupied that room and there was no sign of
ZBXT in the entire building. We searched the entire building and found in Room 5323 a
PAGE 70 / 121
company named Zhibo Lianhe Tech, which sounded close enough to ZBXT to investigate. 5323
was a classroom, not a corporate office.

Exhibit 62: Pictures of our ZBXT office visit

PAGE 71 / 121

We then headed to Fuzhou Yongjiahong Telecommunication Technology (YJHT), one of
ZBXTs four wholly owned subsidiaries, supposedly headquartered in Fuzhou No 21-1-702,
Longtingjing. We found no signs of YJHT in what was a residential area and not even a
corporate location.

PAGE 72 / 121
Exhibit 63: Headquarters for Fuzhou Yongjiahong Communication Technology Co., Ltd. (YJHT) reported to
SAIC

Exhibit 64: Pictures of our YJHT office visit

The second ZBXT subsidiary we visited was Beijing Bikong Hengtong Network (BKHT),
supposedly headquartered in Beijing No. 42, Unit 3, Room 418, Shiliu Yuan Beili.

PAGE 73 / 121
Exhibit 65: Headquarters for Beijing BikonghengtongNetwork Technology Co., Ltd. (BKHT) reported to SAIC

Exhibit 66: Pictures of our BKHT office visit

By this point, we were not surprised to find an empty office room that had not been occupied for
two years.

PAGE 74 / 121

The third ZBXT subsidiary we visited was Xinyun Hengtong Network (XYHT), supposedly
headquartered in Beijing No. 2, Room 9A, Youanmenwai Daijie.

Exhibit 67: Headquarters for Xingyunhengtong Beijing Network Technology Co., Ltd. (XYHT) reported to
SAIC

PAGE 75 / 121
Again we found that the room was empty and has not been occupied in some time. To make sure
there had not been a careless mistake made in XYHTs filing, we checked 9B as well but no
luck. 9B was occupied by a company called Enjiwei where employees had never heard of
XYHT.

Exhibit 68: Pictures of our XYHT office visit

Finally, we visited the fourth and last subsidiary of ZBXT, a company called Beijing Bozhi
Ruihai Network (BZRH) supposedly headquartered in Beijing No. 72-B, Room 2605, West
Third Ring, Beilu.

PAGE 76 / 121
Exhibit 69: Headquarters for Beijing Bozhiruihai Network Technology Co., Ltd. (BZRH) reported to SAIC

This time, we were not even able to check the room due to a sign on the door of Room 2605 that
warned This door does not open. Even if it were to open, it would open to a company called
Renrunda Culture and not BZRH, as the company listing at the lobby suggests.

PAGE 77 / 121
Exhibit 70: Pictures of our BZRH office visit

PAGE 78 / 121
Our visits to Beijing Tianwang Online and Bejing Yilong Xinda Tech (TWYL) were no more
productive, as you can see below.

Exhibit 71: Headquarters for Beijing Tianwang Online(TWYL) reported to SAIC

PAGE 79 / 121
Exhibit 72: Pictures of our TWYL office visit

PAGE 80 / 121
What Business Are They Really In?

Of all the purported facts about VNETs MNS subsidiaries we tried to verify, we had the hardest
time pinning down exactly what business they were really in. From the wildly inconsistent
registered descriptions in the SAIC filings to the lack of corporate websites for most of them to
the lack of recognition by any industry insider of the dozens we interviewed, we found the task
impossible.

Confusing the matter further was how some of these MNS companies described themselves
publicly. Some examples follow.

In a job posting on 51Job.com, Chinas leading consumer job portal, CYSD describes their
business scope as voice service, private line rental, corporate telecom, system integration, SDH
renting and bandwidth renting.

Exhibit 73: Job posting by CYSD on 51Job.com

But on their own website, they describe their core service as ISP (Internet service provider).

PAGE 81 / 121
Exhibit 74: CYSDs website

Also on 51job.com, ZBXT describes itself as a provider of ISP, private line, bandwidth rental
and fiber rental. Gehua is also an ISP, per their own job posting.

Exhibit 75: Job posting by ZBXT on 51Job.com

PAGE 82 / 121

Not Licensed to Offer MNS Services
The main problem with these self-descriptions is that as ISPs, VNETs MNS subsidiaries are not
allowed to resell bandwidth. Only telecom carriers, registered properly with a basic telecom
license, can trade bandwidth among each other.

We checked the license registration records for all MNS Entities and found that CYSD was only
licensed for regional Internet Access Service and Information Services (B-15 & B-25). Other
MNS Entities hold the license for regional Information Services (B-25).

Exhibit 76: Results of Check on www.miit.cc for 7 MNS Entities Licenses

PAGE 83 / 121

PAGE 84 / 121

PAGE 85 / 121

Music Player and Online Gambling: Managed Network Services?
We were thoroughly confused after our diligence of the two subsidiaries TWYL. According to
VNETs 2013 20-F, these two companies principally provide virtual private network services
and managed network services. If that is really the case, we found no evidence of that in filings,
registrations, other public sources or even in these companies own self-descriptions.

According to Baike (Chinas version of Wikipedia), Beijing Tiawang Onlines self-reported
description is software developer that also provides internet dial-up, long-distance telephone and
IDC hosting services.
26
We checked their official website: www.trionet.cn and were surprised to
see the website was actually China Unicoms Beijing website.

Exhibit 77: Beijing Tianwang Online introduction on Baike

We later found that Tianwang Onlines website is registered under the name Encrypt Cyber
Digital. You can see at the bottom of the home page that Encrypts website is owned by
Tianwang Online. This website has the exact same content that CYSDs website has, offering
ISP application services to consumers, not businesses.

26

http://www.baike.com/wiki/%E5%8C%97%E4%BA%AC%E5%A4%A9%E7%BD%91%E5%9C%A8%E7%BA%BF%E9%80
%9A%E4%BF%A1%E6%8A%80%E6%9C%AF%E6%9C%89%E9%99%90%E5%85%AC%E5%8F%B8
PAGE 86 / 121
Exhibit 78: Beijing Tianwang Online website

Our search for signs of life for Yilong Xinda (the other half of TWYL) was quite amusing if not
more productive. We found all job descriptions online for Yilong Xinda were actually operated
by Tianwang Online, which seemed to confirm that the two businesses are really just one, split
for optical purposes only. The job posting on public job board ChinaHR below shows Yilong and
Tianwang are actually the same company.

Exhibit 79: Job posting by Yiling Xinda on chinahr.com

PAGE 87 / 121
Our search for MIIT filings revealed that Yilong Xinda is only licensed as an Internet Content
Provider (ICP) and is therefore only allowed to provide Internet content such as news, music,
pictures and other online media.

Exhibit 80: Results of Check on www.miit.cc for Yilong Xindas Licenses

Wondering why Yilong Xinda too was improperly licensed, and this time licensed for a business
that is very far removed from offering B2B managed network services, we looked for evidence
that it was operational at all, even as an ICP. We found that the website www.Jeloog.com is
operated by Yilong, as confirmed by the same registered address as Yillong.

Exhibit 81: Yilong Xindas website

PAGE 88 / 121
This address also matched the address on Alljobsearch.cn, another public job board.

Exhibit 82: Job posting by Yiling Xinda on alljobsearch

The most surprising finding of all is that Yilongs website, www.yloog.net, was nothing more
than a consumer music player for nine pirated songs despite the corporate-looking home page
below.

Exhibit 83: Another website of Yiling Xinda

PAGE 89 / 121

PAGE 90 / 121

We checked www.yloog.net again recently and found that the website had suddenly transformed
into an online gambling site.

Exhibit 84: Yilong Xindas website had suddenly transformed into an online gambling site

PAGE 91 / 121
Shrinking Pool of IP Addresses

Recall that CYSD is one of the two holdcos for the MNS Entities. According to VNETs 2013
20-F, CYSD has operated a private line business (PLB) since 2009. Is it not curious that during a
period of strong double-digit growth, the allocation of IP addresses decreased by not one but two
orders of magnitude for CYSD as of June 30, 2013?

Exhibit 85: Comparison of IP address allocations to CYSD as of June 30, 2013 (L) and December 31, 2012 (R)

How that technical fact reconciles with CYSDs reported financial performance is beyond us.

A Sad Ending to the MNS Fable
Alas, it is only in fairy tales that the good times roll on forever unabated. In a real-world Ponzi
scheme, there is only so much money you can launder in before you run out of it.

Predictably, the MNS Entities explosive breakout performance was not long-lived, and Cheng
Ran had to start taking numbers down. In 2013, margins plummeted by 65% and the profit
contribution to VNETs consolidated financials sank by more than half the prior years.

PAGE 92 / 121
Exhibit 86: Performance of MNS Entities through FY2013
27

The effect on VNETs consolidated bottom line was obvious as VNET went back into the red
without the MNS Entity gravy train running at full steam.

Exhibit 87: Effect of MNS Entities Sudden Margin Erosion on VNETs Consolidated Financials

27
Source: SAIC filing, 2013 20-F

CYSD + ZBXT: Pre-Acquisition CYSD + ZBXT: Post-Acquisition
FY2009
Q1-Q3
FY2010
FY2010
run rate as of
end of Q3
Q4
FY2010
FY2011 FY2012 FY2013
Net revenues 111,242.0 125,427.0 167,236.0 60,175.0 270,000.0 350,000.0 360,000.0
Cost of sale (105,492.0) (118,442.0) (157,922.7) (33,096.3) (162,000.0) (220,500.0) (273,600.0)
Gross profit 5,750.0 6,985.0 9,313.3 27,078.8 108,000.0 129,500.0 86,400.0
Gross margin % 5.2% 5.6% 5.6% 45.0% 40.0% 37.0% 24.0%
Operating expenses (4,795.0) (5,794.0) (7,725.3) (14,586.4) (55,350.0) (59,500.0) (54,000.0)
Changes in the fair value of contigent
purchase consideration payable - - - - - - -
Operating income(loss) (EBIT) 955.0 1,191.0 1,588.0 12,492.3 52,650.0 70,000.0 32,400.0
Other income(expense) - (757.0) (1,009.3) - - - -
Interest income(expense) 5.0 7.0 9.3 - - - -
Income(loss) before income tax 960.0 441.0 588.0 12,492.3 52,650.0 70,000.0 32,400.0
Income taxbenefit (expense) (3,614.0) 2,000.0 2,666.7 (624.6) (2,632.5) (3,500.0) (1,620.0)
Net income(loss) (2,654.0) 2,441.0 3,254.7 11,867.7 50,017.5 66,500.0 30,780.0
Adjusted Net income (2,654.0) 2,441.0 3,254.7 11,867.7 50,017.5 66,500.0 30,780.0
Adjusted net income margin % (2.4%) 1.9% 1.9% 19.7% 18.5% 19.0% 8.6%
Adjusted EBITDA 2,989.0 5,876.0 7,834.7 14,054.0 61,290.0 81,200.0 43,920.0
Adjusted EBITDA margin % 2.7% 4.7% 4.7% 23.4% 22.7% 23.2% 12.2%
FY 2010 FY 2011 FY 2012 FY 2013 FY 2010 FY 2011 FY 2012 FY 2013
Net revenues 525,203 1,020,929 1,524,158 1,966,717 465,028 750,929 1,174,158 1,606,717
Cost of sale 396,858 744,371 1,098,477 1,449,845 363,762 582,371 877,977 1,176,245
Gross profit 128,345 276,558 425,681 516,872 101,266 168,558 296,181 430,472
Gross margin % 24.4% 27.1% 27.9% 26.3% 21.8% 22.4% 25.2% 26.8%
Operating expenses 353,614 198,468 327,312 419,217 339,028 143,118 267,812 365,217
contigent purchase
consideration payable
7,537 63,185 17,430 55,882 7,537 63,185 17,430 55,882
Operating income(loss) (EBIT) 232,806 14,905 80,939 41,773 245,298 37,745 10,939 9,373
Other income(expense) 1,792 34,170 7,951 9,820 1,792 34,170 7,951 9,820
Interest income(expense) 2,213 10,541 4,925 88,272 2,213 10,541 4,925 88,272
Income(loss) before income tax 233,227 59,616 93,815 36,679 245,719 6,966 23,815 69,079
Income tax benefit
(expense)
1,588 13,677 36,159 10,324 963 11,045 32,659 8,704
Net income(loss) 234,815 45,939 57,656 47,003 246,683 4,079 8,844 77,783
Consolidated with CYSD & ZBXT Consolidated without CYSD & ZBXT
PAGE 93 / 121
So what did Mr. Cheng Ran do? Cheng RAN. For the hills, it appears. As disclosed in VNETs
2013 20-F, he did not get any additional proceeds from the contingent portion of the purchase
consideration for his MNS Entities in 2013 as he missed his profit targets.

Exhibit 88: VNET acquisition- related accounts due to related parties, 2013 20-F

PAGE 94 / 121
MNS, A TICKING TIME BOMB

If we are to believe that the MNS Entities and other related acquisitions are mainly shell
companies, there is a good question that remains unanswered.

Let us give these subsidiaries a little benefit of the doubt and assume that they generate at least a
small portion of their reported revenue. Let us assume that they do not exist only on paper and
that they do not generate literally zero revenue, fraudulent or otherwise.

What kind of substantial business, even if fraudulent, can be run by a handful of employees
without real offices to work in, without meaningful capital to spend (remember how tiny the
registered capital was for each MNS Entity) and with minimal supervision (hence, the one-
person board meetings and Cheng Rans notable absence in any of the operating records)?

The short answer is an illegal one.

Exhibit #: VNET Is Blacklisted at China Telecom as an Illegal Bandwidth Reseller

PAGE 95 / 121
Exhibit 90: Notice of Investigation of VNET by China Telecom

Translation: Important Notice of Investigation

Enterprise Business Unit, China Telecom Urgent Confidential

Sent to: Every provincial China Telecom Enterprise Business Unit

Title: Notice on 21 Vianet, Client Report

Content: In order to further terminate illegal high bandwidth access service, China Telecom decides to investigate 21
Vianets high bandwidth access business. The detailed requests are as follows: (1) every provincial China Telecom unit
collects, reviews and investigates all 21 Vianets client contracts, agreements, etc. Provincial China Telecom units need to
report investigation results to headquarters no later than September 10 of 2010. You need to conduct investigation
thoroughly on 21 Vianet and its clients to verify any illegal business and contracts. Every Provincial China Telecom unit
needs to report to headquarters on whether 21 Vianet contract and price violate China Telecom regulation.

Bandwidth Reselling

How Bandwidth Is Distributed in China
Due to antiquated networking infrastructure and a quickly growing Internet industry, bandwidth
in China is a scarce commodity. Even though China has the largest Internet population in the
world and one that is three times larger than the US population, the countrys legacy
telecommunications infrastructure is not well-suited to handle all the bandwidth consumption.
PAGE 96 / 121
This is why the Internet in China is notoriously slow and the government controls bandwidth
trading, allocation and pricing with a tight regulatory fist. A license is required to do practically
anything related to the Internet in China, build a data center, operate a data center, run an ISP
(Internet service provider), offer content to consumers, etc. and a license to operate as a telco is
especially required and practically impossible to get for everyone but a handful of state-owned
companies. These state-owned companies control the underlying Internet in China and are
heavily regulated as to how they sell bandwidth, for how much and to whom.

At the highest level, bandwidth is mostly supplied by a state-owned monopoly in each half of
China. In the north it is state-owned telco China Unicom (CU). In the south it is state-owned
telco China Telecom (CT). Even other major state-owned companies like leading mobile carrier
China Mobile who may be appropriately licensed to sell bandwidth but are not given enough
allocation by the government must buy bandwidth from the two dominant licensed telcos (CU
and CT) by law. One of the ways the government controls the bandwidth supply problem is by
making it illegal for anyone other than a company in possession of a general telecom license to
sell bandwidth.

Of course, even as state-owned enterprises, the telcos compete with each other, so CU and CT
sell bandwidth at high prices to the smaller telcos to ensure their own industrial dominance.

Chinese Law Prohibits Bandwidth Reselling
The Chinese telecom industrys laws have changed to suit the times over the years, but it has
never been legal to resell bandwidth without a basic telecom license. The only bandwidth trading
allowed in China is among the licensed telcos themselves through a network of interconnections
to facilitate the traffic flow. Anyone else without a basic telecommunication business license
cannot resell bandwidth nor can they operate interconnections commercially.

Here are some relevant passages.

China Telecommunication Law 2000
Article 8 The telecommunications business is divided into basic telecommunication
services and value-added telecommunication services. Basic telecommunication services
provide public network infrastructure, public data transmission or basic voice
communication services.

Article 9 An applicant to operate a basic telecommunications business shall meet
the following conditions: A. The State-owned stakes or shares in the company shall be no
less than 51%;

Article 13 A telecommunications business operator may not provide
telecommunications resources, public network infrastructure, public data transmission,
or connection services to an organization or individual which has not been granted a
telecommunications business permit.

Revised Catalogue of Telecommunication Services 2013
PAGE 97 / 121
A14 The first category of data transmission service includes but is not limited
to transmitting IP data packets from customers origin server to target network by
utilizing IP technology.

Revised Catalogue of Telecommunication Services 2003
Valued added telecom services
B4-2-3: The second category of Internet access services is defined as providing Internet
access services to various users by utilizing access servers and service nodes that are
built up on certain software and hardware sources and connected to public telecom
infrastructure..Internet access services include two kind of applications, one is to
provide Internet access services to ICPs who provide contents, online trading and online
application services. Another service is to provide Internet access services to end users.

We interviewed several PRC lawyers to discuss the difference between Internet data
transmission services under catalogue of basic telecom services and Internet access service under
that of valued added telecom services. We were told that if the service recipient is either ICP or
end user, data transmission services are categorized as value added services and the operator of
value added services should apply for an ISP (B-25) license. Otherwise, the provider of data
transmission services to telecom carriers should obtain a basic telecom service license.

With regards to MNS business, the service provider transmits Internet data packets from one
telecom carrier to another carrier by utilizing network address transfer technology. The recipients
of services are telecom carriers or Internet access service providers, rather than either Internet
content providers or end users. Therefore, MNS business is very likely to be categorized as the
basic telecom service (A-14) that requires at least 51% equity interest invested a state-owned
entity.

Chinas Grey Market for Bandwidth
As Chinese bandwidth demand surged from the early 2000s, smaller Internet access providers
like China Mobile, China Railcom and the emerging cable TV operators became so bandwidth-
constrained and were so severely squeezed in pricing by the CU/CT telco duopoly that they
turned to an emerging grey market for bandwidth operated by small traffic trading companies
that stayed purposely small to fly under the telecom authoritys radar and avoid discovery. They
would buy bandwidth at favorable prices legally from the telcos and then resell the bandwidth at
a premium by diverting traffic illegally to their customers using technology to mask their actions
(through use of techniques such as IP routing and optical fiber butting at self-built network
access points).

These rogue trading operations became known as Third-Party Private Line Businesses (PLBs),
and the smaller telcos and other large corporate consumers of bandwidth increasingly turned to
them to lower their total cost of procurement.

PAGE 98 / 121
Exhibit 91: Network topology for a traditional PLB

As technologies advanced, and competition within the obviously unregulated PLB industry
intensified, the PLBs evolved to offer additional services packaged with their resold bandwidth,
like security and content caching (an effective way to save on bandwidth costs is to cache
content on the network to make it accessible without another network round trip to access it).

Exhibit 92: Network topology for a PLB2.0

China Telecom and China Unicoms Response to the PLB/MNS Industry
Chinas system of delegating literally 80% of its bandwidth allocation to two competitive telcos
is clearly not scalable, but it is the system nonetheless, and the dominant telcos have the legal
right and the industrial motivation to squash PLBs. It should come as no surprise that CT and CU
carry out strict network-wide inspections so on a regular basis, maintaining proprietary
monitoring systems to ensure compliance and keeping internal records of customer violations.
And when they discover violations, the consequences for the perpetrators are dire.

PLBs has hurt the financial interest of CT and CU and reduce their competitive advantages
against China Mobile and other carriers. Despite the strong market need for PLBs, especially as
mobile Internet usage has surged in China, CT and CU routinely crack down on illegal private
interconnections, which cause network instability and poor service quality. In a recent example
of how seriously the telcos are willing to pursue perpetrators, in 2010 China Telecom stopped
serving bandwidth to other carriers who had procured bandwidth from illicit sources and as a

China Unicom
China
Mobile
Cable TV
operators
China Telecom
China
Railcom

IP
translation
routing

Optical
fiber
butting
China
Unicom
China Mobile
Zhejiang
China Mobile
Jiangsu
China
Telecom1
China Mobile
Jiangsu
China
Telecom2
Cache
Security
Cache
Security
2.4G
3G
PAGE 99 / 121
result, many China Railcom and China Mobile end users nationwide were not able to get access
to Internet.

Exhibit 93: Internal Notice and regulations issued by CT to stop MNS connections

VNETs MNS Is Mainly a Front for an Illegal Bandwidth Reselling Operation

How VNET Describes Its MNS Business
In its F-1 registration filing, VNET explains the MNS business with this description.

Our managed network services are primarily offered in the form of bandwidth, which is
optimized through our proprietary smart routing platform and supplemented by our hosting area
PAGE 100 / 121
network and our data transmission network. Our managed network services primarily consist of
the following:

Hosting Area Network Services. Our data centers are distributed throughout China. We
connect most of our data centers with private optical fibers, forming our hosting area network.
Our hosting area network connects the servers housed in our data centers so that data
transmission among our customers can be achieved without going through telecommunication
backbones or internet hubs, enabling secure, faster and more reliable data transmission.

Route Optimization. In China, carriers generally operate their independent systems, and their
networks are not connected with each other. Because we are connected to all major carriers,
customers that use services from one carrier can reach users of other carriers through our
network or through other internet hubs. Our proprietary system is a smart routing platform,
which functions like an intelligent switchboard automatically selecting the best and fastest routes
and directing traffic through our own or others networks. For example, from our data centers,
we can direct data to the networks of China Telecom or China Unicom, or, when the networks of
China Telecom and China Unicom are congested or otherwise experiencing problems, to our
own transmission networks. Through our proprietary smart routing technology, we are able to
optimize the connectivity of our network and deliver data in a fast and efficient manner.

Is it really plausible that Cheng Ran and his seven dwarfs can do all that?

That description, while full of buzzwords like smart routing and hosting area network and
data transmission network, is a gross misrepresentation of what VNET actually does in its
MNS division.

VNET Is Chinas Largest PLB
What VNET mainly does in its MNS division is resell bandwidth, procuring it directly from the
only entities that can supply it legally in China, the state-owned telcos and some smaller
government-affiliated networks with the appropriate telecom licenses. And without question,
when VNET resells bandwidth, it does so illegally, because the only licenses that VNET has
are an IDC license to build and operate data centers and an ISP license to offer Internet services
to customers. VNET does not have and never has had a basic telecommunications license.

Exhibit 94: List of 7 MNS entities licenses

Subsidiary Business Scope
from SAIC filings
License held Source Violation
Beijing Chengyishidai
Network Technology Co.,
Ltd. (CYSD ,
)

Internet access service,
technology development,
technical services,
technology assignment and
consultancy
Local ISP and ICP license
(Jing B2-20060078 B15 &
B25 and Jing ICP090377) to
authorize the provision of
Internet Access Services and
Information Services in
Beijing only
SAIC and
MII online
research
28

Illegal
operation of
basic data
transmission
nationwide

28
http://qyxy.baic.gov.cn/ and http://www.miit.cc/
PAGE 101 / 121
Zhiboxintong (Beijing)
Ltd. (ZBXT ,
)

Information services in
category B of Value added
telecom service, technology
development, technology
assignment and information
consultancy
(Jing B2-20090073 B25 and
Jing ICP080074)to authorize
the provision of Internet
Access Services and
Information Services in
Beijing only
SAIC and
MII online
research

Illegal
operation of
basic data
transmission
nationwide
Beijing Bikonghengtong
Ltd. (BKHT ,
)

assignment and information
consultancy
Local ISP license (Jing B2-
20090112 B25)to authorize
the provision of Internet
contents in Beijing only
SAIC and
MII online
research

Illegal
operation of
basic data
transmission
nationwide
XingyunhengtongBeijingN
etwork Technology Co.,
Ltd. (XYHT,
)

assignment and promotion
(Jing B2-20110150 B25 and
Jing ICP120073)to authorize
the provision of Information
Services in Beijing only
SAIC and
MII online
research

Illegal
operation of
basic data
transmission
nationwide
Beijing Bozhiruihai
Ltd. (BZRH,
)
assignment and promotion
Local ISP license (Jing B2-
20090091 B25) to authorize
Services in Beijing only
SAIC and
MII online
research
Illegal
operation of
basic data
transmission
nationwide
Fuzhou Yongjiahong
Communication
Technology Co., Ltd.
(YJH,
)
Telecom technology
services and consultancy,
telecom equipment
wholesale, purchase and sell
agent
Local ISP license (Min B2-
Services in Fujian province
only
SAIC and
MII online
research
Illegal
operation of
basic data
transmission
nationwide
Jiujiang Zhongyatonglian
Ltd. (ZYTL,
)

telecom service, telecom
and network development,
sale of telecom equipment
and maintaince
Local ISP license (Gan B2-
Services in Jiangxi province
only
SAIC and
MII online
research
Illegal
operation of
basic data
transmission
nationwide

Notes: for example, the series No. of license of Jing B2-20060078 represents the following facts:

1) This license was registered with Ministry of Information and Industry in the year 2006 with a series no. 78
2) The holder of this license is authorized to provide value added services falling into Category B (A stands for basic telecom
services and B stands for value added telecom services)
3) The value added services belong to 2
nd
tier services, including storage transfer, call center, Internet access and information
services, respectively.
4) The license holder is authorized to operate in the province of Beijing and serves Beijing customers only.

VNETs MNS network is nothing more than a front for a major PLB operation, which we
believe is Chinas largest. VNET basically admits this fact in its own description, Our managed
network services are primarily offered in the form of bandwidth All the other flowery talk of
optimization and hosting within its MNS division is largely a hoax. Could Cheng Ran even host
a single server in any of his seven ghost offices? No, but he sure knows how to trade bandwidth
illegally. Our many interviews with industry insiders pegged Mr. Chen as one of the pioneers in
the PLB space and one of the larger operators of PLB networks.

PAGE 102 / 121
Chens humble beginnings illustrate how low the barriers to entry are for PLBs and how little
resource is required to set one up. Cheng Ran was a telecom engineer who worked at Beijing
Teletron Engineering Company (Beijing Teletron, ) and
moonlighted as a bandwidth pirate while working a full-time job. His moonlighting initiatives
began in 2006 and by 2008, he found enough success to quit his day job and run a PLB full-time.

VNETs network of PLBs which feature Chengs MNS Entities has gone undiscovered because
it is spread out across many smaller acquired subsidiaries each with their own shells to better
hide their illegal trading activities from the telcos. This explains why the MNS Entities SAIC
filings show an overly complicated corporate structure of shell companies registered under
various individuals names without any physical locations, all the harder to track. It is also easier
for multiple seemingly unrelated companies to provision bandwidth from the telcos without
getting outed as a related PLB operation that pools that bandwidth for resale.

VNETs Largest MNS (PLB) Customer Is China Mobile
We extensively interviewed some of Chinas more prominent PLB operators as well as leading
companies in the data center industry to gain a better understanding of how the PLB market is
split among its larger participants.

We found consensus on three key points.

1. There are three key purchasers of PLB services: China Mobile, China Railcom and cable
TV operators as a group. The total market for PLB is about 1,000 Gbps, of which China
Mobile represents about 600, China Railcom about 300, and the cable operators about
100.
2. The level of sophistication varies widely among these purchasers. The execution price
paid by China Railcom is the highest, up to 100,000-150,000 RMB/Gbps/month. China
Mobile pays the least, roughly 60,000-90,000 RMB/Gbps/month. In 2014, with about
1,000 Gpbs of demand, the PLB market size is approximately RMB 1.2-1.5 billion.
While China Railcom pays the most, it is also the customer that is hardest to get. They
have trained third-party bandwidth purchasing organizations since 2002 that have built
relationships with small suppliers for over a decade, so newer entrants like VNET stand
little chance of servicing them.
3. Most of VNETs PLB efforts are focused on China Mobile. Unfortunately for VNET,
CM is such a sophisticated bandwidth buyer that they have their own systematic dynamic
pricing system based on local reverse auctions run for PLBs to bid for their business. This
has crushed VNETs MNS margins recently.

As we did our field work, it became obvious that China Mobile is indeed VNETs largest PLB
and therefore MNS customer. Screen shots of results from local China Mobile bandwidth
auctions follow.

PAGE 103 / 121
Exhibit 95: China Mobile Henan Branch Bandwidth Auction Results

PAGE 104 / 121
Exhibit 96: China Mobile Xinjiang Branch Bandwidth Auction Invitation and Results

PAGE 105 / 121
Exhibit 97: China Mobile Hainan Branch Bandwidth Auction Invitation and Results

PAGE 106 / 121
Exhibit 98: China Mobile Hunan Branch Bandwidth Auction Invitations. BKHT is on the list of bidders.

Why does VNET not disclose very proudly a Tier 1 customer like China Mobile in its filings and
in its investor presentations and earnings calls?
The obvious answer is that there is nothing to be proud of in operating an illegal rogue operation
for as much as 35% of your total revenue.

The not so obvious answer is that the revenue is about to go away.

MNS Revenue at Great Risk

VNET Blacklisted by State-Owned Telcos
We confirmed with numerous industry insiders that the telcos were catching on to what was
going on within VNETs MNS business. Unbeknownst to VNET at the time of their acquisitions,
many of their fraudulent and illicit shells had already been blacklisted or sent cease and desist
warnings for violations.

Regulatory Intervention to Obsolete PLB
If law enforcement forces are unable to regulate the PLB industry as is often the case with grey
markets that service legitimate markets, market forces driven by regulatory change will.

Even more damning than the proof of VNETs illegal MNS operations is our finding that the
Chinese telecom authorities are finally waking up to the realities of their antiquated method of
managing national bandwidth procurement, allocation and distribution. We were notified that
recently, China Mobile and China Telecom have entered into a new mutual agreement to set
forth new standards for the financial settlement of inter-networks bandwidth link-up. As
PAGE 107 / 121
stipulated in the agreement, CM and CT will increase the scale of traffic peering with lower fees
for Internet backbone interconnections. In the coming few months, CT and CM will establish
new NAPs (network access points) to enlarge total interconnection capacity by an estimated 150-
200 Gbps as a first step.

When this happens, it is inevitable that CM and CU will enter into a similar alliance to solve the
problems of backbone interconnection. Such a major unified step forward in the commercial
development of Chinas Internet backbone would effectively obsolete PLBs.

We were also notified recently that in recent months, as requested by the MIIT, more NAPs have
been built and opened to enlarge total interconnections among telcos. Regions so far include
Wuhan, Hangzhou, Shenyang, Chongqing, Shenzhen, Chengdu and Xian.

Whether consciously, by recognition that they need to start weaning themselves off the illicit
PLB teat, or because they recognize how fragile the MNS revenue really is as violation notices
from telcos keep mounting, PLB is clearly losing share of VNETs revenue and VNET is clearly
losing share of the PLB market.

Exhibit 99: VNETs revenue mix over time

How will VNET replace all the lost MNS revenue? What will VNET do if the primary place
from which it fabricates financials is obsoleted?

Enter iPoo and Dermot.

0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
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Hostingandrelatedrevenues Managednetworkservices
PAGE 108 / 121
IPOO: VNETS LONGTOP MOMENT

Every Ponzi scheme reaches a critical point at which it begins to collapse under its own weight.
For VNET, we believe the massive back to back acquisitions of iPoo and Dermot will mark the
peak of VNETs financing-driven bubble. Although sell-side analysts and investors alike have
focused on their potential impact to VNETs P&L assuming that VNET is a going concern, we
draw your attention to the balance sheet instead because we do agree VNET is a huge concern,
but not of the going variety.

As discussed previously (see Exhibit 28), VNET will require another RMB 2.4 billion ($396
million) if it goes through with the planned 17,000 cabinet ramp through 2015. That would take
its net debt from the current post-Dermot RMB 1.6 billion ($261 million) to RMB 4.0 billion
($657 million), not quite double. The acquisitions of iPoo and Dermot alone have more than
doubled VNETs leverage and next years cabinet goal would nearly double it again.

Given the amount of balance sheet risk VNET is taking this year, can any reward offset that kind
of risk? What is VNET getting in their biggest purchases ever, which together exceed the
cumulative consideration of all their past acquisitions?

Persona Non Grata of the Broadband Industry

To say iPoo is a troubled, unwelcome company with little industrial support is not an opinion. It
is a statement of fact. We point investors to the following facts.

Rejected by the People
No less than five different government-affiliated organizations have already responded
negatively to iPoo to varying degrees over the past three years. Since iPoo is a consumer last
mile broadband company, we will start with state-owned CCTV, Chinas dominant TV
broadcast company which featured iPoo in an expos warning consumers about fraudulent
consumer broadband operators. An online replay of the program can be viewed here:
http://tv.cntv.cn/video/C10354/7b5cc96153864f8f95ca119dae739058.

The expos highlights iPoos poor product quality, complete lack of customer service and the
illegal operations in the city of Changsha in which iPoo claims to have a business but has not
been authorized by the local telecom authority. Mr. Chen, a duped customer, had the following
to say:

I cannot access my [iPoo] broadband, it keeps showing that the connection is not
working. [Then in response to whether he had called customer service:] I called for
five, six days, but nobody answered the phone. I called the Telecom Administration
Bureau and they told me the only three legal broadband operators are China Telecom,
China Unicom and Great Wall. They dont have [iPoo] on the legal operator list!"

The reporter then gives the following public service announcement:
PAGE 109 / 121

We received a lot of calls regarding [iPoos] broadband problem and we encourage
viewers to call us if you find more issues and we encourage the government to look into
this issue."

The SAIC, a department of the central government, corroborates the key points from the CCTV
expos in this article: http://hb.qq.com/a/20110425/000492.htm. We urge investors unable to
read Chinese to use Google Translate to give that report a skim. The article reports false
advertising, lack of service (as in, payment made, zero service provided), terrible customer
service (as in, no customer service at all) and technology that simply does not work upon
installation. Is it any surprise that Aipus unhappy customers reportedly logged 120 complaints
per day?

iPoo, on Watch by the Government, Already Banned in Three Cities
The regulators of not just Changsha, as reported by CCTV, but also two major Chinese cities
Guangzhou (a Tier 1 City) and Wuhanhave already banned iPoo from building or operating a
consumer last-mile broadband network in their cities. iPoo admits these facts in their own IPO
filing from June of last year:

Translation: According to the 7th rule of Chinas Telecom Laws, Licensing and Permit to
Telecom service, [iPoo] failed to obtain the required local access network operator
license while using Internet access permit instead to operate local access networks.
Consequently, our business was affected by the governments penalty and ban from doing
business in Guangzhou and Wuhan.

The following notice from the China Telecom Administration of the enormous Guangdong
province make iPoos own admission crystal clear.

PAGE 110 / 121
Exhibit 100: Notice of ban from Guangdong Telecommunication Administration

Stiff-Armed by the Chinese SEC, I-Poo-O Fails
So far, we count four government organizations whose opinions of iPoo are far from supportive
(CCTV, SAIC, Guangzhou government, Wuhan government). Chinas securities exchange
commission makes it five.

In June 2013, iPoo filed an IPO prospectus in anticipation of a public offering later this year in
Chinas A-Share market
29
. We have obtained and uploaded the document (in Chinese) here:
http://www.scribd.com/doc/239150666/IPoo-Prospectus. Those who cannot read Chinese need
not fret, you will not miss much. Suffice it to say the IPO was not approved when Chinas
Securities Commission reviewed the application on January 2014
30
.

The state will probably never release the exact reasons for rejecting the application. However, it
is not hard to find industry executives who mention accounting problems along with governance
issues and iPoos widely known past transgressions as reasons for the failed listing, especially
since some of those executives include iPoos own employees. Throughout our due diligence,
iPoos employees were among our best sources of information about their own company.

A Commoditized, Overleveraged Declining Business
Aside from iPoos penchant for angering customers with false advertising and lack of service,
the failure to obtain the appropriate licenses to operate in all its regions and the bans in major
cities that it was dealing with, iPoo had other more fundamental business problems. For one, its
business is shrinking rather rapidly:

29
http://finance.china.com.cn/stock/xgdt/20130618/1559937.shtml
30
http://finance.ifeng.com/a/20140121/11513093_0.shtml
PAGE 111 / 121
Exhibit 101: Key Metrics for iPoo
31

This trend is no surprise to anyone familiar with the telecom industry in China which, by the
way, includes iPoos own Lei Ke, a Vice President who had the following to say to government-
affiliated Chongqin Evening News
32
:

Aipus broadband business has reached a bottle-neck with profit margin dropping
lower. Low-profit broadband operators are in urgent need of restructuring.

That was on December 2012, almost two years ago. Immediate already happened a long time
ago. Last-mile broadband access is not where the action was then and it certainly is not where the
action was last quarter, when VNET paid an enormous sum for a declining commoditized
business.

Why would VNET, purportedly growing at a long-term CAGR of 30-40%, buy a business that is
so saturated and commoditized that even its own executives admit it freely in media interviews?

Although we cannot fathom a guess, it certainly could not have been for the financials. Not only
is iPoo low in profit and declining, it is also the most leveraged company in its peer group even
when compared to businesses many multiples larger in size that have much larger fixed asset
requirements.

Exhibit 102: Debt-to-Asset Ratio for iPoo and Comparable Companies
33

Company Debt-to-Asset Ratio
China Telecom 51.19%
China Unicom 59.06%
Dr. Peng 56.44%
Sinnet 13.75%
Gehua Cable 47.15%
Topway Cable 22.93%
Aipu Network 75.60% (2012)
88.35% (2011)

31
Source: iPoo IPO Prospectus, CICC research, Morgan Stanley research (http://www.ch.21vianet.com/?p=2260), iPoo employee
interviews
32
http://www.cqwb.com.cn/cqwb/html/2012-12/28/content_338556.htm
33
Source: iPoo IPO Prospectus, 2013
All figures in RMB thousands
except for Users
2010 2011 2012 2013 2014E
Revenue 298,020.6 524,176.6 682,255.3 650,000.0 510,000.0
Growth 75.9% 30.2% (4.7%) (21.5%)
Users 582,700 839,000 1,020,000 980,000 740,000
Growth 44.0% 21.6% (3.9%) (24.5%)
ARPU 59.0 58.6 59.1 58.5 58.0
Net Income 16.6 49.9 92.4 60.0 51.0
Growth 199.6% 85.3% (35.0%) (15.0%)
Cash 22.9 56.7 35.5 NA NA
Accounts Receivable 26.5 17.5 33.6 NA NA
Accounts Payable 17.3 9.2 5.7 NA NA
PAGE 112 / 121

An iPoo employee who was sick of working at the terribly managed eroding business that he
believes iPoo is went as far as writing a public letter neatly summarizing iPoos various
fundamental problems
34
. Per the former employees own admission (translated):

Aipu faces many problems such as a decline in user base, lacking capex to upgrade its
network, revenue lost every month and service quality issues Aipus enemy is not
China Unicom, Not China Telecom, Not Dr.Peng, but itself.

Apparently, it wasnt just VNET employees who felt that way.

Insiders Garbage, VNETs Treasure

History of iPoo Insider Valuation Marks
35

If insiders are most in the know at their own companies, especially when they are private, then
watching their actions are most telling. Indeed, iPoo insiders actions speak much louder than
any angered employees or duped customers words. The history of insiders view on what iPoo
is worth is tragically comical.

In 2010, Aipu Investment, a captive investment fund within iPoo, attempted a sale of 27.5% of
its equity stake in its parent company iPoo for RMB 27.5 million in China Southwest United
Asset and Equities Exchange. This implied a valuation of RMB 100 million for iPoo. However,
not one bidder showed up.

In November 2011, domestic private investment firm JD Capital invested RMB 46 million in
iPoo for 17% ownership, valuing the company at RMB 250 million. The 49.9 million of net
income that iPoo disclosed for 2011 in its IPO prospectus would make the JD Capital mark
approximately 5x trailing P/E.

In 2012, Chengdu Guotao Investment (Guotao) sold their 22.5% stake in iPoo for RMB 27.5
million. The RMB 92.37 million in net profit that iPoo reported for 2012 in its IPO prospectus
sets the Guotao mark at a lowly 1.4x trailing P/E. Not exactly a vote of confidence from the
second largest shareholder.

Unfortunately, we did not get a mark in 2013 because the I-Poo-O flopped. However, we got the
mother of all marks in 2014. On June 4, 2014, VNET agreed to acquire iPoo for the whopping
valuation of RMB 1.4 billion
36
, paying the first RMB 700 million installment up front.

Our inquiries to VNETs management resulted in a vague response that stated about half of the
acquisition was agreed to be paid in cash. Our sources differ and confirm that iPoos sellers have
asked for 100% cash. That would certainly be more aligned with past insider behavior and the
way the transaction will be consummated since the iPoo acquisition will not use a VIE structure

34
http://tieba.baidu.com/p/3077123918
35
http://tech.sina.com.cn/i/2012-05-18/02377126726.shtml
36
PAGE 113 / 121
and iPoos institutional shareholders are domestic firms that cannot be paid in anything but
RMB. The very large cash component (if it is not 100% cash) would also explain why the
Chinese media reported that VNET plans to raise an incremental RMB one billion of debt to
fund the acquisition of iPoo, which the company has yet to discuss with US investors:
http://news.idcquan.com/news/59752.shtml.

VNETs Whopper of a Price in Context
To put the enormous RMB 1.4 billion price tag that VNET put on iPoo in perspective, it is not
enough to simply refer to Guotaos 2012 mark. After all, that is bottom picking a bit and 2012
was two years. A lot can change in two years such as iPoos financials, which shed 25% of its
2012 top line and 45% of its 2012 bottom line. That makes VNETs price on a P/E basis over
2,000%, or 20x, higher than the Guotao valuation.

As far as comps go, the next best thing to an internal mark is a direct competitors precedent
acquisition value. As luck would have it, Great Wall, the dominant non-state-owned last-mile
bandwidth provider in China was acquired by Dr. Peng, a publicly listed company (in the A-
Share market) in two tranches, 50% at a price of RMB 600 million in December 2011 and 50%
at a price of RMB 712 million in December 2012. Dr. Pengs blended acquisition valuation was
RMB 656 million.

VNET paid 2.13x more for iPoo than Dr. Peng did for Great Wall. Naturally, we must ask, is
iPoo more than twice the business Great Wall is?

After the iPoo deal announcement, CICC issued a sell-side report on June 5, 2014 with the
following stats for iPoo and its two largest direct competitors, Great Wall and Founder.

Exhibit 103: Key metrics for top three last-mile broad band companies

Great Wall iPoo Founder
2013 Revene (RMB mln) 3,902.0 500.0 387.0
User base (mln) 6.16 1.00 0.38
Profit margin 10.0% NA 12.0%

We note that CICC got iPoos 2013 revenue figures wrong. iPoo projects RMB 500 million for
2014. In 2013, their revenue projection at the time of the IPO prospectus was actually higher,
RMB 650 million.

For a business that is literally 6 times larger than iPoo by either revenue or by user base, Dr.
Peng paid less than half the price VNET paid for iPoo.

The Pony In the iPoo

In so many ways, the iPoo acquisition makes absolutely no sense. Certainly not from a strategic
sense, not from a shareholder value perspective and not from a debt holders perspective either.
But as they say, beauty is in the eye of the beholder.
PAGE 114 / 121

iPoo, viewed from the eyes of a Ponzi schemer, makes all the sense in the world.

VNET has some major structural problems to deal with. They need to continue showing strong
growth in the core IDC business, which requires enormous amounts of cash to sustain. That cash
needs to be financed, which requires that the company be able to show positive and growing
EBITDA to be able to raise debt. Since the core business generates no EBITDA, VNET has to
find it in non-core businesses that it must keep acquiring to manufacture revenue (AR and FCF
be damned), since none of the acquired businesses have proven to be able to keep up with the
promises for core business growth VNET has sold to investors. The great majority of them have
not even sustained themselves, let alone kept pace with growth.

The difficulty of executing that initially simple Ponzi scheme increased dramatically as the
financings and the acquisitions got bigger. That MNS revenue is being jeopardized by regulators
catching on and the MNS industry is in overall margin free fall are not helping. And that little
iJoy is being squeezed for all it is worth, all 100% net margins worth, puts a limit on where else
the company can go to find the financial growth promised to investors.

iPoo is a necessary acquisition for VNET as all these problems pressure the Ponzi scheme and an
epic capacity expansion period begins. The exact same can be said of Dermot.

Have we not seen this movie before?

Giantstone, Part II
The similarities between VNET and Longtop Financial, arguably the most famous US-listed
Chinese fraud of all time, are endless. But we need only focus on one: when the music stopped,
and why.

Like VNET, Longtop manufactured revenue by laundering cash into the business as revenue,
using both falsified core business contracts and round-tripped acquisition proceeds to promise
unending long-term growth to investors. Both companies AR and DSOs shot up as fast (for
VNET faster) than any metric on the income statement that public market investors seem to
focus on at the exclusion of everything else. So the mounting debt and AR went unnoticed until
the Ponzi got so out of control that the only way a balance sheet disaster could be averted was to
buy more time with the largest possible acquisitions that were available. Longtop acquired
Giantstone in the largest deal it ever did by a very large margin, and used the acquired subsidiary
primarily as a vehicle to roundtrip acquisition proceeds in as revenue, fueling the stock price
until one of two things was to happen: either the core business actually started to deliver or until
the next large acquisition was executed. Longtop collapsed and was delisted soon thereafter.

Those are the key similarities. Now on to the differences which are even more important.

The urgency with which VNET did two very substantial acquisitions, back to back, and the
incredibly low quality of iPoo in particular stand out even from the Giantstone precedent. Then
there is the severity of the balance sheet damage VNET is willing to inflict in its quixotic quest
to build what is, at the current ridiculous pace, destined to become a data center ghost town. At
PAGE 115 / 121
least Longtop was a software and service business without the need to invest so heavily in fixed
assets that depreciate as they sit severely underutilized. The sheer volume of acquisitions that
VNET has done to date, which puts it on par with Chinese peers ten or even thirty times its size,
and the percentage of market cap and total revenue that VNET acquires and raises every year
makes VNET unique in the ADR space. And let us not forget another VNET differentiator, its
audacity to generate as much as a third of its total revenue illicitly and acquire to do more of it.
Also worth another mention is the fact that management never decides to acquire anything that is
truly strategic, a core part of its IDC business, never putting their money where their mouth is.
Quite telling indeed.

PAGE 116 / 121
CONCLUSION

VNETs story is one that we plan to continue telling. Consider this report part 1 of several more.
In future editions, we plan to cover less critical topics such as Dermot (since the deal is not
closed yet) and the cloud partnership (since it is but 3% of revenues at the moment and in our
opinion doomed).

The purpose of this report was to set forth our key findings from six months of investigative
work so that investors, long or short, could consider them and act accordingly. While some of
what we have stated is in fact opinion, we humbly suggest that the majority of what we presented
is inarguable. In our concluding thoughts, we would like to remind you of some of these points.

VNET has misrepresented its IDC network assets and performance. While some may
argue about the accuracy of our findings, as extensively researched as they were, there is
no denying that VNET has claimed to be operating 72 data centers when a significant
percentage of their outsourced data center partnerships have been terminated. By our
count, its over 50%, which results in roughly a quarter of the cabinets being overstated
and all the EBITDA being stripped away, but someone else may spend the three months
we spent and come forth with a marginally different number. In our view, the question is
binary and not one of degree. Either VNET overstated IDC figures or it did not, and the
evidence is overwhelmingly in favor of the former.

According to the SAIC, VNET has misrepresented the financials of at least some if not
all of its acquired companies. While the SAIC is not the SEC, the discrepancy is large
and impossible to ignore, particularly for a company for which M&A appears to be a
critical priority.

Almost a full third of VNETs revenues comes from a business unit that VNET rarely
talks about and is almost universally known as illicit in Chinese IDC circles. China
Telecom, the largest fixed line carrier in China and one of two monopolistic players in
the telco industry, has blacklisted VNET and various of its MNS subsidiaries for breaking
the law. How any investor attributes any value to this business line is beyond us.

VNET has raised over half its market cap in various financings of equity and debt since
its listing in 2011 and burned a substantial portion of it building a highly underutilized
(and overstated) network of IDCs. The other substantial portion, more than half, has been
spent on two dozen non-core acquisitions, the majority of which have failed as
businesses.

Despite such poor return on invested capital (whether invested in fixed assets, non-core
assets or shells) and an IDC network that is clearly underutilized (even when you use
VNETs overstated figures), VNETs margins have held within a tight band for
practically ever. This makes zero sense and begs many questions as to how it is possible.

PAGE 117 / 121
VNETs balance sheet is scary. It is. The rate of growth in net debt, the even greater rate
of growth in AR and DSOs and the amount of acquisitions and their unknown impact are
not good complements to a free cash outflow of nearly 30% of the past three years
revenues. If you cast the overstated income statement aside for a moment, VNET is the
very picture of a terminally ill company. That alone makes VNET a fantastic short. The
rest is almost merely icing on a very big cake.

The timing of almost all if not all the many acquisitions VNET has done, all but one tiny
intercompany transaction being non-core to IDC, is uncanny. Right before an IPO, right
before a big financing, right before a large cabinet deployment or IDC build, right as
margins are beginning to show some compression, right as previously acquired
businesses are slowing or even declining Uncanny.

That highly suspicious timing does not go well with the types of acquisitions VNET does.
The illicit MNS Entities with no visible operations anywhere, iJoy the shell with 100%
net margins that sells to iron ore trading companies a ridiculous product that no other
software company in the world sells and iPoo, perhaps the most overvalued company we
have ever seen. It is little wonder that VNETs M&A track record is horrific, with most
of the companies it has acquired being shut down, disposed of, or seriously degraded.

What does this all mean? It means the business you thought VNET had is not really what it has.
How different it is in actuality is up to interpretation.

An Educated Estimate of VNETs Actual Financials

The following summary financials compare key line items from VNETs reported income
statement to the same figures pro forma everything we were able to verify, particularly the
overstated IDC metrics and the overstated MNS revenue and margins. We would like to remind
investors that as bad as our numbers look next to VNETs, the reality is that they still include a
very significant portion of MNS revenue, which we value at zero but have kept in our analysis
anyway to give Cheng Ran and his cronies the benefit of the doubt they do not deserve.

PAGE 118 / 121
Exhibit 104: VNETs reported income statement vs pro forma without fabricated revenues

Liquidation Analysis
We have yet to make an investment recommendation throughout this entire report, so we will
make one now. Consider the following analysis. It shows what happens to your investment, no
matter which security you hold or where you hold it, if any significant debt holder reads this
report and agrees with even one or two of the points we just made above.

In other words, it only takes one significant lie or misrepresentation to bust a covenant, and as
we stated, VNETs balance sheet is outright scary. Know your place in the capital structure
because we believe a lot of investors are going to get wiped out.

Note: The following liquidation analysis relies on information from VNETs 2013 20-F, which
classifies VNETs various corporate entities as set forth in the F pages (F-14). Inputs into the
analysis for the Consolidated VIEs and the Holding Parent Company are found on F-20 F-21
and F-75 F-76, respectively. From those inputs and the consolidated balance sheet information
(F-3 F-4), we can calculate the figures for the Consolidated HK and PRC Subsidiaries. This
allows us to effectively analyze a liquidation process not only in consideration of the capital
structure but also the order of liquidation within VNETs entities.
FY 2013
(reported)
Fabricated
IDC
revenue
Fabricated
MNS
revenue
Fabricated
iJoy revenue
FY 2013
(clean)
Variance
%
Net revenues
Hosting and related revenues 1,259,303 270,950 - 118,905 869,448 69.0%
Managed network services 707,414 - 175,082 - 532,332 75.3%
Total net revenues 1,966,717 270,950 175,082 118,905 1,401,780 71.3%
Gross profit 516,872 270,950 175,082 109,519 (38,679) (7.5%)
Gross margin % 26.3% (2.8%)
Net income(loss) -47,003 270,950 175,082 109,519 (602,554) 1281.9%
Net margin % (2.4%) (43.0%)
Adjusted Net income 120,466 270,950 28,013 109,519 (288,016) (239.1%)
Adjusted net income margin % 6.1% (20.5%)
Adjusted EBITDA 365,613 270,950 28,013 101,500 (34,850) (9.5%)
Adjusted EBITDA margin % 18.6% (2.5%)
PAGE 119 / 121
Exhibit 105: Liquidation analysis as of December 31, 2013

Comparison of Consolidated Group and VIEs Balance Sheet
Consolidated as of
December 31, 2013
(1)Consolidated VIEs
as of December 31,
2013
Consolidated
Holdings and WFOEs
as of December 31,
2013
(3) Holding Parent
Company as of
December 31, 2013
Consolidated HK and
PRC Subsidiaries as
of December 31, 2013
(2)Re-classified
Consolidated HK and
PRC Subsidiaries as of
December 31, 2013
Current Assets
Cash and cash equivalents 1,458,856 259,987 1,198,869 590,682 608,187 608,187
Restricted cash 193,020 3,020 190,000 190,000 - -
Accounts receivable, net 610,413 605,205 5,208 - 5,208 5,208
Short-term investments 1,101,826 900,000 201,826 81,826 120,000 120,000
Prepaid expenses and other current assets 154,875 110,865 44,010 76,606 -32,596 -
Deferred taxassets 17,816 22,811 -4,995 - -4,995 -4,995
Amount due fromPRC and HK subsidiaries - - - 1,672,335 -1,672,335 -
Amount due fromVIEs - - - - - 634,755
Amount due fromrelated parties 67,498 9,800 57,698 24,387 33,311 33,311
Total 3,604,304 1,911,688 1,692,616 2,635,836 -943,220 1,396,466
Property & equipment, net 1,402,177 813,939 588,238 - 588,238 588,238
Intangible Assets, net 336,889 230,607 106,282 - 106,282 106,282
Goodwill 410,500 410,500 - - - -
Restricted cash 219,056 - 219,056 100,000 119,056 119,056
Non-current Deferred taxassets 14,149 13,482 667 - 667 667
Other non-current assets 37,760 11,645 26,115 26,115 - -
Investment in subsidiaries - - - 895,390 -895,390 -
Investment 106,727 98,526 8,201 - 8,201 8,201
Total Assets 6,131,562 3,490,387 2,641,175 3,657,341 -1,016,166 2,218,910
Current Liablities
Short termbank borrowings 173,726 173,726 - - -
Accounts payable 188,217 186,381 1,836 1,836 34,432
Notes payable - - - - -
Accrued expenses and other payables 292,421 195,817 96,604 255 96,349 96,349
Advances fromcustomers 33,104 33,104 - - -
Income taxpayable 11,476 11,427 49 49 49
Amounts due to related parties 147,699 47,754 99,945 99,945 - -
Amounts due to inter-companies - 634,755 -634,755 -634,755 -
Deferred taxliabilities 3,115 3,115 - - -
Current portion of Long term bank loans 197,000 - 197,000 197,000 197,000
Current portion of capital lease obligations 14,600 14,600 - - -
Total 1,061,358 1,300,679 -239,321 100,200 -339,521 327,830
Long-term Liabilities
Amounts due to related parties -Non current 78,321 - 78,321 78,321 - -
Amounts due to Holdings loans - Non current - - - - - 1,672,335
Non-current portion of capital lease obligations 337,139 337,122 17 - 17 17
Non-current portion of Long termbank loans 965,740 900,000 65,740 21,265 44,475 44,475
Bonds 998,505 - 998,505 998,505 - -
Unrecognized taxbenefits 18,559 18,559 - - - -
Deferred taxliabilities 78,593 74,417 4,176 - 4,176 4,176
Deferred government grant 18,046 18,046 - - - -
Mandatorily redeemable noncontrolling interests 100,000 100,000 - - - -
Total 2,594,903 1,448,144 1,146,759 1,098,091 48,668 1,721,003
Total Liabilities 3,656,261 2,748,823 907,438 1,198,291 -290,853 2,048,833
Total mezzanine equity - - -
Treasury stock -8,917 - -8,917 -8,917 - -
Ordinary shares 26 - 26 26 - 895,390
Additional paid-in capital 3,944,764 107,797 3,836,967 3,836,967 - -
Accumulated other comprehensive income -82,589 - -82,589 -82,589 - -
Statutory reserves 35,178 - 35,178 - 35,178 35,178
Accumulated deficit -1,429,410 617,518 -2,046,928 -1,286,435 -760,493 -760,493
Total Shareholders' Equity 2,459,052 725,315 1,733,737 2,459,052 -725,315 170,075
Non-controlling interest 16,249 16,249 - - -
Total Liabilities & Shareholders' Equity 6,131,562 3,490,387 2,641,175 3,657,343 -1,016,168 2,218,908
(Figures in RMB '000)

PAGE 120 / 121
Liquidation Analysis for VIEs, Subsidiaries and Holding Company
Order of liquidation within VNET Group
Assets realization
rate
(1)Consolidated VIEs
as of December 31,
2013
Assets realization
rate
(2)Consolidated HK
and PRC Subsidiaries
as of December 31,
2013
Assets realization
rate
(3) Holding Parent
Company as of
December 31, 2013
Company's Title To property in Possession
1 Cash and cash equivalents 100% 259,987 100% 608,187 100% 590,682
2 Restricted cash 100% 3,020 100% - 33% 62,000
3 Accounts receivable, net 55% 332,863 55% 2,864 55% -
4 Short-term investments 100% 900,000 100% 120,000 100% 81,826
5 Prepaid expenses and other current assets 0% - 0% - 0% -
6 Deferred taxassets 0% - 0% - 0% -
7 Amount due from PRC and HK subsidiaries 0% - 100% - 0% -
8 Amount due from VIEs 100% - 0% - 100% -
9 Amount due from related parties 100% 9,800 100% 33,311 100% 24,387
10 Property & equipment, net 70% 569,757 70% 411,767 70% -
11 Intangible Assets, net 0% - 0% - 0% -
12 Goodwill 0% - 0% - 0% -
13 Restricted cash 100% - 100% 119,056 100% 100,000
14 Non-current Deferred taxassets 0% - 0% - 0% -
15 Other non-current assets 0% - 0% - 0% -
16 Investment in subsidiaries 0% - 0% - 0% -
17 Investment 100% 98,526 100% 8,201 100% -
Total 2,173,953 1,303,386 858,895
Liquidation Process in Order
1 Liquidators costs (1% of total assets) 6,981 4,438 7,315
2 Costs incurred by an administrator (1% of total assets) 6,981 4,438 7,315
3 Amounts owing to employees for leave 33,098 33,098 -
4 Payments owing in respect of employee social insurance 13,239 13,239 -
5 Unpaid amounts owing to taxbureaus 11,427 49 -
6 Secured banks with fixed charge over assets 1,049,085 241,475 21,265
7 Secured capital leasing companies with fixed charge over assets 351,722 17
8 Banks without security over assets 124,641 - -
9 Trade creditors without security over assets 382,198 130,781 -
10 Operating lease, capital and bandwidth/cabinets purchase commitments 258,304 1,168,088 355,958
11 Amounts due to related parties - - -
12 Amounts due to inter-companies WFOE -10% -63,722 -17% -292,236 -
13 Bonds payable to bondholders - - 47% 467,042
14 Ordinary Shareholders - - -
Total 2,173,953 1,303,386 858,895
Unsettled portion of liabilities -63,722 -292,236
Notes:
1. In this analysis, we derived all financial figures from page F3-6, F20-21,F75-76 of 20F 2013.
2. We determined assets realization rate for each catogories of assets at our best estimation and average industry level.
3. We determined liquidation preference order that is accepted in the most legal systems, especially applicable in PRC, Hong Kong and Cayman Islands.
4. The Bonds are unsecured and rank senior in right of payment to any of the Companys indebtedness that is expressly subordinated to the Bonds;; equal in rightof payment to any of the Companys liab
that are not so subordinated; but rank lower than any secured indebtedness of the Company and all liabilities (including trade payables) of the Companys subsidiaries and Consolidated VIEs.
5. We assumed that all amounts due to related parties are in association with payment of acquisition consideration in shares and will not be paid in cash.All amounts due from related parties will be fully co
6. As per 20F 2013, there was 1,471 employeed working for VNET as of December 31, 2013. We assumed that VNET shall pay average three months salary for employee leave and related social insurance
for the same period of time, based on average monthly salary of RMB 15,000.
7. The liquidation order starts from PRC VIEs, HK and PRC subsidiaries and then Holding company in Cayman.
8. We assumed that assets realization rate for AR and property is 55% and 70%, respectively. We think that 40% of AR balance is fraudulent.
70% assets realization rate for property is in line with current discount ratio for a property mortgage loan.
9. We assumed not considering any payment related to acquisition of iPoo and Dermont.
10. VNET has huge amounts of outstanding non-concelable commitments as of December 31, 2013, including capital commitments to purchase computer and network equipment, operating lease
commitments related to premises and data center space, bandwidth and cabinets capacity purchase commitments. (Page F-72 and 73, 20F 2013)
11. VNET should pay off all unpaid portion in relation to non-concelable commitments from Holdings company before settling with Bondholders.
(Figures in RMB '000)

PAGE 121 / 121
APPENDIX

NOTE: Appendix A, Appendix B and Appendix C are made available
separately in order to limit the file size of this report.

Download them here:
http://www.scribd.com/doc/239278904/A-Ponzi-Scheme-of-Acquisitions-21-
Vianet-Group-Exposed-Appendix

A Ponzi Scheme of Acquisitions - 21 Vianet Group Exposed

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