Event Overview:

1) Recently, Ziguang Co., Ltd. released the “2024 Semi-Annual Report”. In the first half of the year, the company achieved operating income of 37.951 billion yuan, a year-on-year increase of 5.29%; realized net profit to mother of 1 billion yuan, a year-on-year decrease of 2.13%; net profit after deducting non-return to mother was 0.894 billion yuan, an increase of 5.78% year-on-year.

2) At the same time, Ziguang Co., Ltd. disclosed the “Notice on the Progress of Major Asset Purchases”. The company plans to purchase 29% of the shares of Xinhua 3 Group Co., Ltd. from H3chordings Limited by means of cash payment, and purchase 1% of the shares of Xinhua 3 from Izar Holding Co., Ltd. by means of cash payment, for a total purchase of 30% of Xinhua 3's shares. As of the disclosure date of this announcement, the company has obtained documents and/or approval from the Chinese government agency under the “Revised and Restated Purchase Agreement for Sale of Shares to Exercise Options” as a prerequisite for the settlement of this transaction, and the company is actively and orderly proceeding with the work related to the settlement of this transaction.

Revenue grew steadily in the first half of the year. The market competitiveness of many products continued to improve. While the company's revenue maintained steady growth in the first half of the year, the organizational structure was optimized, operational efficiency was improved, and cost management was strengthened. Expenses decreased by 12.99% year-on-year during the first half of the year. The holding subsidiary Xinhua 3 achieved operating income of 26.428 billion yuan in the first half of 2024, an increase of 5.75% year on year; achieved operating profit of 1.996 billion yuan, an increase of 12.91% year on year. With the booming development of the digital economy, the company continues to empower customers in many industries such as operators, government, construction, finance, Internet, energy, education, and medical care. Among them, it has served the construction and operation of more than 190 smart city projects across the country, participated in the construction of government clouds in 18 national ministries, 26 provinces and more than 300 cities, districts, and counties, and participated in the construction of national e-government extranets, 21 provincial and more than 300 municipal, district, and county e-government extranets. In addition, the company also serves the digital transformation of more than 10,000 enterprises, including more than 300 Fortune 500 companies, more than 400 Chinese Fortune 500 companies, and more than 90% of central enterprise customers.

According to the company's semi-annual report, according to the latest data released by IDC, the company continued to lead the market share of many products in the first quarter of 2024. The company ranked first in the Chinese Ethernet switch, enterprise network switch, and park switch market with a market share of 34.8%, 36.5%, and 41.6% respectively; China's enterprise network router market share was 30.7%, ranking second; China's enterprise WLAN market share was 30.3%, ranking first; China's X86 server market share was 15.6%, maintaining second place in the market; China's UTM firewall market share was 22.9%, ranking second.

Improving the “double cornerstone” full-stack capability of computing power connectivity to meet AIGC application requirements. Following the “AIGC Open Strategy” proposed last year, in 2024, the company gave full play to the multiplier effect of computing power x connectivity, focusing on continuous technology and product innovation around efficient multiple computing power supply, high-quality network connectivity, intelligent storage, cloud and intelligence, active security, intelligent operation and intelligent energy consumption management, and released a full-stack leading full-stack Lingxi intelligent computing solution. Using Baiyeling's private domain model+N “1+N” large model strategy with N preferred ecological models technology Innovative implementation practices continuously improve the application capabilities to comprehensively support AIGC.

In terms of efficient multi-computing power supply, the company released the Aopei Computing Power Platform 3.0, which can support unified scheduling of heterogeneous computing power of 10,000 card clusters and multiple CPUs and GPUs, provide full-life cycle management of large models centered on AI data assets, support operation and maintenance management of large-scale intelligent computing centers, and achieve unified management, monitoring, and alerting of cluster computing power resources.

In terms of high-quality network connectivity, the company launched intelligent computing network solutions, which support various flexible networking architectures such as single-frame single-layer, box-box two-layer, and box-box two-layer with a comprehensive product layout, and improve network bandwidth utilization and reduce fault recovery time through load balancing and self-healing technology, and comprehensively enhance the network's carrying capacity for diverse heterogeneous computing power. At the same time, the H3C S12500 AI series of computing power cluster core switches based on the DDC architecture (distributed decoupling frame) was launched. It is specially designed for AI computing power scenarios to build a lossless network with natural zero packet loss for users with a more scalable, easier operation and maintenance management, and more cost-effective distributed decoupling frame scheme, effectively reducing end-to-end latency and jitter.

Major asset purchases are progressing smoothly. Subsequent collaborative development of Xinhua 3 can be expected. According to the announcement, Ziguang International, a wholly-owned subsidiary of the company, plans to purchase 29% of the shares of Xinhua 3 from HPE Cayman by paying 207140,7055.50 US dollars in cash, and plans to purchase 1% of the shares of Xinhua 3 from Izar Holding Co., using a total of 2142834885.00 US dollars to purchase 30% of Xinhua 3's shares. After the transaction is completed, the company's shareholding ratio in Xinhua 3 through its wholly-owned subsidiary Ziguang International will increase from 51% to 81%. Up to now, the company's board of directors, board of supervisors and shareholders' meeting have reviewed and passed the bill related to this transaction; the company has received the “Inquiry Letter on the Purchase of Significant Assets of Ziguang Co., Ltd.” (M&A and Reorganization Inquiry Letter [2024] No. 2) issued by the Shenzhen Stock Exchange, and responded to the inquiry letter from the Shenzhen Stock Exchange on June 27, 2024, and made additional disclosures in the “Reorganization Report” as required.

In terms of capital preparation, on July 18, 2024, Ziguang International and Industrial Bank Co., Ltd. Shanghai Pilot Free Trade Zone Branch, China CITIC Bank Co., Ltd. Haikou Branch, China Minsheng Bank Co., Ltd. Shanghai Pilot Free Trade Zone Branch and Huaxia Bank Co., Ltd. Shanghai Branch jointly signed a “M&A syndicate loan contract not exceeding RMB 9500,000,000 (or its equivalent amount)”. The total principal amount of Ziguang International's loan shall not exceed RMB 9.5 billion. The loan period is to pay the purchase price of this transaction. The loan period is The period from the date of withdrawal of the first loan funds (including that date) to the final maturity date (including that date) is a total of 7 years.

As of the disclosure date of the relevant announcement, Ziguang Co., Ltd. has obtained documents and/or approval from the Chinese government agency under the “Revised and Restated Purchase Agreement for Shares to Sell Options” as a prerequisite for the settlement of this transaction, and the company is actively and orderly proceeding with the work related to the settlement of this transaction.

Investment advice

As a global leader in next-generation cloud computing infrastructure construction and smart application services in the industry, Ziguang Co., Ltd. has leading digital technology, a full range of key software and hardware products required for next-generation information infrastructure construction, rich experience in digital construction and operation in the industry, and has deep customer resources and many excellent partners. We believe that in the future, the company may benefit from the IT infrastructure construction needs brought about by the AIGC outbreak and the recovery in downstream demand, and increase investment value in the acceleration trend of computing power and connectivity industries. The company is expected to achieve operating income of 87.045/98.322/111.482 billion yuan in 2024-2026, and realized net profit to mother of 2.495/2.98/3.622 billion yuan, respectively. Maintaining a buy-A investment rating, a 6-month target price of 26.17 yuan is given, which is equivalent to a dynamic price-earnings ratio of 30 times in 2024.

Risk warning:

Data center construction falls short of expectations; technology research and development falls short of expectations; demand in industries such as the Internet falls short of expectations; supply chain risks.