Incident: The company announced on May 25 that the company signed a “Follow-up Arrangement Agreement” with HPE Cayman through its wholly-owned subsidiary Ziguang International to purchase 29% of its shares in Xinhua 3 from HPE Cayman through cash payment and purchase 1% of its shares from Izar Holding Co through cash payment. The remaining 19% of the shares will be processed through various forward disposition plans.
The acquisition plan was adjusted taking into account various factors. Currently, 30% of Xinhuasan's shares are acquired in cash, at a transaction price of US$2.143 billion (15.177 billion yuan). According to the company's announcement, after comprehensively considering factors such as the fulfillment of obligations in the previous agreement, its own monetary capital situation, and financing channels, etc., the company plans to make adjustments to the three minority shareholders' share acquisitions in Xinhua after negotiations with HPE entities:
1) The share acquisition ratio of Xinhuasan was adjusted from 49% to 30%:
In terms of the acquisition ratio and transaction price, the acquisition ratio was adjusted from 49% in the previous period to 30%, and Ziguang International purchased 29% of its shares in Xinhua 3 from HPE Cayman through cash payment, and purchased 1% of its shares from Izar Holding Co., Ltd. through cash payment. The price of 30% of the share transaction was US$2.143 billion/15.177 billion yuan.
In terms of delivery time, it is expected to be no later than August 31, 2024, and the grace period ends on October 21, 2024.
In terms of funding sources, the transaction capital comes from the company's own funds and bank loans. The company currently plans to apply for a loan of no more than RMB 10 billion or the equivalent in US dollars from the bank.
2) The remaining 19% of Xinhua3 shares were disposed of using various forward plans:
Disposal plan 1: Ziguang International relinquishes priority purchase rights for the remaining 19% of the shares, and HPE Cayman has the right to sell them once to a third party that meets specific conditions.
Disposal plan 2: Ziguang International grants HPE a sale option. HPE Cayman can exercise the right within the 16th to 36th month after the completion of the 30% share settlement in Xinhua 3, requiring Ziguang International to purchase the remaining shares.
Disposal plan 3: HPE Cayman grants Ziguang International a purchase option. Ziguang International can exercise the rights within the 16th to 36th month after the completion of the 30% share settlement in Xinhua 3. The transaction price of 19% of the shares triggered by the exercise of the right is US$1,357 million, and when Ziguang International exercises the purchase option, it can appoint a third party to purchase 19% of the shares.
3) According to the adjusted acquisition plan and taking into account the actual situation of the company, the company decided to terminate the issuance of A shares to specific targets in 2023.
After completing the acquisition of 30% of the shares in Xinhua 3, it will further strengthen the company's ICT full-stack layout capabilities and increase the company's profits. After the acquisition of 30% of Xinhua's shares, on the one hand, it will strengthen the company's “cloud network security storage” full-stack business capabilities, consolidate end-to-end intelligent computing solution capabilities, better meet the digital and intelligent upgrade needs of industry customers, and fully benefit from the wave of AI and the digital economy era. On the other hand, in 2023, Xinhua 3 achieved operating income of 51.939 billion yuan, up 4.27% year on year, and realized net profit of 3.411 billion yuan; 2024Q1 achieved operating income of 12.132 billion yuan, up 14% year on year, and realized net profit of 754 million yuan, up 8.27% year on year. After the transaction is completed, the company's shareholding ratio in Xinhua 3 will increase to 81%, further increasing the company's net profit to mother.
HPE will still hold 19% of Xinhuasan's shares in the short term to ensure the smooth development of Xinhuasan's international business. According to the company announcement, HPE will still own 19% of the shares in Xinhuasan in the short term and has set up a “safety cushion” for the development of Xinhuasan's international business. In 2024, Xinhua III will focus on strengthening the strategic layout of developed countries such as Europe and the US, and actively participate in the “Belt and Road” initiative and the process of Chinese enterprises going overseas. At the same time, Xinhua III will also focus on overseas user scenarios, provide more suitable products and solutions, achieve steady growth in overseas market revenue scale and continuous increase in market share, and accelerate the transformation of international business into a “second curve” of revenue growth.
Investment advice: Leading domestic ICT sector, “cloud-network-security-storage-terminal” full-stack layout, simultaneous development of government and enterprises+operators+overseas markets, and broad room for subsequent growth. Excluding H3C's 30% equity share balance, the company's net profit is estimated to be 2,375 billion yuan, 2,862 billion yuan, and 3.42 billion yuan respectively in 2024-2026, corresponding to PE of 25.4 times, 21.0 times, and 17.6 times, respectively, maintaining the “Highly Recommended” rating.
Risk warning: Risk of transactions being suspended, suspended or cancelled; risk of transaction approval; risk of exchange rate fluctuations; risk of capital raising falling short of expectations; digital transformation of the industry falling short of expectations; operator investment falling short of expectations.