Incident description

Following the announcement of the proposed acquisition of Yili Technology on December 6 to resolve competition issues in the industry, China Grid Communications issued another series of announcements on the evening of December 9, covering clarifying the acquisition method of Yili Technology, specific measures to fulfill competition commitments in the industry, and extending the implementation period of related transaction commitments, etc., to further clarify measures and time points to resolve competition issues in the industry.

Incident Reviews

Key elements of the series of announcements include: 1) Regarding the acquisition of Yili Technology: State Grid ICT plans to acquire 100% of Yili Technology's shares and 59.3% of its subsidiary Fujian Yirong Information Technology Co., Ltd. and 100% of Fujian Yili Electric Power Technology Co., Ltd. through cash, and will complete the share acquisition process by August 31, 2025. 2) Regarding implementation of peer competition commitments: According to the “Letter on a Clear Information and Communication Business Interface”, it was decided to resolve the business overlap issues between State Grid ICT and Nanrui Group, Zhixin Microelectronics and Shenzhen Guodian through a clear business interface, including: A) State Grid ICT's business will focus on cloud network infrastructure (value-added telecom operation, communication network construction, etc.), cloud applications (electricity marketing information systems, ERP, enterprise portals, etc.), related enterprise operation support services, etc.; B) Nanrui Group will no longer carry out enterprise management information technology services such as ERP and communication related to cloud network infrastructure construction Collection business. C) Zhixin Microelectronics and Shenzhen Guodian will no longer carry out communication collection services related to cloud network infrastructure construction. 3) Regarding extending the implementation period of related transaction commitments: Aim to reduce the share of related transactions of listed companies to less than 50% by December 27, 2029. Specific practices include actively developing new products, seeking mergers and acquisitions opportunities for high-quality domestic and external enterprises, and developing markets and customers outside the State Grid.

Further significant progress in resolving competition in the industry shows determination to advance, and further clarification of positioning is expected to lead to significant business growth. We believe that the series of announcements issued this time is significant. The core is to confirm that the controlling shareholders are progressing smoothly in resolving competition issues in the industry, and also highlights the strategic orientation of the State Grid to support the expansion and strengthening of the core business of relevant units. There is also a significant boost from the perspective of actual business contributions. On the one hand, the cash acquisition of Yili Technology will not cause stock dilution, which means that State Grid ICT will directly increase profits related to Yili Technology (net profit of 0.188 billion yuan in 2023) while the share capital remains unchanged. On the other hand, after the business of entities related to peer competition is clearly defined, since Nanrui Group, Zhixin Microelectronics, and Shenzhen Guodian will no longer carry out communication collection business related to cloud network infrastructure construction, the corresponding share may be mainly carried out by State Grid ICT in the future, which is expected to bring about a significant increase.

Furthermore, from a remote perspective, considering that the company will reduce the share of related transactions to less than 50% by the end of 2029, while the average share of transactions related to the State Grid in 2020-2023 is 85% of revenue, there is plenty of room for decline; the development of new products, new markets, new customers, and related mergers and acquisitions opportunities are expected to support the company's long-term growth in the future.

Investment proposal: The company is the core enterprise of power grid digital intelligence, and the controlling shareholder of the company is Xinshan Group. The business covers all aspects of electricity digitalization, enterprise digitalization, and cloud network infrastructure. The compound annualized growth rate of the State Grid's digital tender amount in 2020-2023 was over 20%, and a “digitally intelligent strong power grid” was proposed in '24 to further clarify the future trend of digitalization. It is expected that with the company's advantages in communication technology and top-down entry, it is expected that the business volume will continue to expand. Furthermore, the current issue of competition in the industry continues to be actively promoted, which has led to significant business growth in the past. Internal and external consolidation is expected to help the company change in size. Under the precautionary principle, the impact of acquisitions and other matters will not be considered. The company is expected to achieve net profit of 0.905, 1.039, and 1.18 billion yuan in 2024-2026, corresponding PE of 28.5x, 24.8x, and 21.9x, maintaining a “buy” rating.

Risk Alerts

1. The speed of digital investment and development of power grids falls short of expectations;

2. Out-of-network business is progressing faster than expected.

Risk Alerts

1. The speed of digital investment and development of power grids falls short of expectations. Since the main business of State Grid ICT is related to digital informatization, and the revenue of the State Grid and its affiliated companies currently accounts for a high proportion of the company's total revenue, if the State Grid's investment and development rate in the digital field is slow in the future, it is expected that it will affect the growth rate of the State Grid ICT overall business level.

2. Out-of-network business is progressing faster than expected. The off-network load-side market that State Grid ICT is currently focusing on has a large future industry space and capacity, but the number of companies currently participating in the load-side market is large. Therefore, if China Grid ICT's advantages in the load-side market are not fully unleashed in the future, there may be situations where the speed of load-side business expansion falls short of expectations, which in turn affects the company's future medium- to long-term business trends.