Incident Overview: On December 6, 2024, the company issued an announcement. The holding subsidiary Kirin Software plans to raise no more than 3 billion yuan in capital increase. Among them, the company participated in this capital increase through a private agreement. The subscription amount was no more than 2 billion yuan, and qualified investors selected through the market transaction subscribed no more than 1 billion yuan.

China Software's shareholding ratio to Kirin Software is expected to increase to nearly 50%, further unlocking the potential for state-owned enterprise reform. According to this announcement, the relevant details were sorted out: 1) Price: According to the evaluation report, the assessed value of all Kirin Software shareholders' equity is 8.355 billion yuan. The current public listing price is based on this assessed value and finally determined through public listing by a property rights trading agency.

2) Shareholding ratio after completing the capital increase: If the plan proposed in the plan (based on Kirin Software's capital increase of 3 billion yuan and the company's subscription of 2 billion yuan is estimated at the above evaluation price), the company's shareholding ratio of Kirin Software is expected to increase from 40.25% to 47.23%. If Kirin Software's public listing conditions are not met during the validity period of the evaluation report, China Software will participate in the subscription in advance. The subscription price is the price of each registered capital converted from Kirin Software's net asset assessment value registered by state-owned assets. The company's shareholding ratio is expected to increase from 40.25% to 51.79%. After Kirin Software's public listing conditions are met, qualified investors will continue to be introduced to raise no more than 1 billion yuan.

3) Governance structure: After the capital increase was completed, Kirin Software's governance structure remained unchanged, and the company still held and merged with Kirin Software.

4) Implementation progress: The transaction still needs to be reviewed and approved by the company's shareholders' meeting, Kirin Software's board of directors and shareholders' meeting.

Kirin Software's selection of external investors is yet to be approved by the State-owned Assets Supervisory Authority.

5) Source of capital: The amount of the company's participation in this capital increase comes from the capital raised by the company to issue A shares to specific targets. In February 2024, China Software released a fixed increase plan, investing heavily in R&D of core assets such as migrating integrated terminals and cloud-based server operating systems. In May 2024, the fixed increase plan was approved by parent company China Electronics.

At the same time, the company also announced on December 6 that the company plans to transfer all 66% of the shares of its subsidiary China Soft Systems to the relevant party, the Xin'an Institute, at a price agreement of 0.463 billion yuan. This transaction has improved asset liquidity, the company's financial structure will be more stable and reasonable, and its ability to operate continuously will be enhanced. It is conducive to optimizing the company's asset structure, providing healthy support for the company's transformation and development, and the company will further focus on its main business.

The capital increase for Kirin is of great significance, and Xinchuang leaders continue to strengthen their central position. Kirin Software is a technology enterprise under China Electronics. In December 2019, it was strongly integrated by Tianjin Kirin Information Technology Co., Ltd., and has now formed a product line represented by desktop operating systems, server operating systems, intelligent computing operating systems, industrial operating systems, intelligent computing operating systems, etc. It has reached the highest security level in China, fully supports mainstream domestic CPUs such as Feiteng, Kunpeng, and Longxin. It has leading advantages in system security, stability and reliability, ease of use and overall performance, and for the construction of major national projects. Provides secure and trustworthy operating system support.

Kirin Software has a prominent position at the core of the domestic operating system market: As of 2023, Kirin Software's operating system products have ranked No. 1 in the Chinese Linux market share for 12 consecutive years. With the development of the Xinchuang industry, Kirin Software's revenue and profit also achieved a rapid increase. The compound growth rates of revenue and net profit in 2020-2023 reached 28% and 37% respectively. According to this announcement, Kirin Software's revenue and net profit in 2023 were 1.273 billion yuan and 0.422 billion yuan respectively; revenue and net profit for the first 10 months of 2024 were 0.915 billion yuan and 0.191 billion yuan, respectively.

Kirin Software's current capital increase will help it increase R&D, broaden its product line, optimize its business structure, and use capital as a link to gather the industrial ecosystem and expand market space and application scenarios. At the same time, China Software's capital increase to Kirin Software helps the company implement the development layout, further cultivate the two major directions of “basic software and advanced party and government core application solutions”, focus on its main business through commercialization and specialized development, and accelerate high-quality development.

Investment advice: The company is an important “national team” in the field of innovation and the core power of the Internet communication business under China Electronics. It has established a relatively complete Internet communication market, R&D and technical service system, grasps core assets in segments such as Kirin Software and Dameng Data based on its own advantages, and maintains a leading position in the operating system and database segments. After this capital increase, the company further strengthened its advantages in the field of innovation, strengthened its market position as a leading domestic operating system, and was able to continuously consolidate its advantages through commercialization transformation and professional development. The company's net profit for 2024-2026 is expected to be 0.133/0.228/0.314 billion yuan, and the corresponding PE is 353X, 206X, and 150X respectively, maintaining the “recommended” rating.

Risk warning: Competition in the industry is intensifying; the pace of capital increase and integration is uncertain.