Overview of the incident: On November 26, 2023, the company issued an indicative announcement on planning major asset restructuring and signing the “Framework Agreement on the Acquisition of a Controlling Interest in Solus Optoelectronics”, and also issued an announcement on foreign investment and financial support.

It is proposed to acquire shares in Sols Optoelectronics to expand the optical communication business: According to the announcement, the company is currently planning to purchase a controlling interest of no less than 51% of Source Photonics Holdings (Cayman) Limited (Soles Optoelectronics). After the acquisition is completed, the company will control the target company. At the same time as signing the “Framework Agreement”, the company signed a “Convertible Bond Investment Agreement” with Sols Optoelectronics (Chengdu) Co., Ltd. (Chengdu), a wholly-owned subsidiary of Sols Optoelectronics in China, Source Photonics, LLC (Sols US), and Solus Optoelectronics signed a “Convertible Bond Investment Agreement”. The company and Sols Optoelectronics signed a “Warrant Agreement to Purchase Preferred Shares of Sols Optoelectronics”. It was agreed that the company would first provide Solus Chengdu with a total value equal to 50 million RMB convertible bonds in US dollars. Solce Optoelectronics and Solce US provide the company with joint liability guarantees for all repayment obligations of Solse Chengdu under the “Convertible Bond Investment Agreement”, and Soles US provides equity pledge guarantees for all repayment obligations of Solus Chengdu under the “Convertible Bond Investment Agreement”; after completing the corresponding overseas investment procedures for enterprises, the company converted convertible loans (meaning $269 per share) into convertible loans (meaning $269 per share for all companies) Equity investment of Solace Optoelectronics. This Series D investment is carried out independently of this transaction and is not a prerequisite for each other.

Sols is an optical communication manufacturer with outstanding technical strength, and has a comprehensive layout of optical chips/optical components/optical modules: Solus Optoelectronics mainly conducts its main business through controlled subsidiaries. Its main products include optical chips, optical components, and optical modules. It uses the IDM operating model, and has comprehensive R&D capabilities and vertical technology integration capabilities.

Downstream application scenarios cover data centers, transmission networks, 5G networks, access networks, etc. Its new high-speed optical module products for data centers, such as 400G and 800G, have achieved large-scale mass production. In terms of chip manufacturing, Solus Optoelectronics has 25G, 53G and 106G EML chip design, manufacturing and large-scale delivery capabilities that have attracted industry attention, as well as 25G high-speed DFB chip design, manufacturing and large-scale delivery capabilities. Benefiting from independent R&D and production capabilities of high-speed laser chips, Solus Optoelectronics can guarantee the current shortage of DFB and advanced EML chips in the domestic market, avoid supply chain risks, effectively control optical chip costs, and achieve efficient development and delivery of new optical module products. According to the 2022 audit report provided by Sols Optoelectronics, its total assets at the end of 2022 were approximately $319 million, and net assets were approximately $124 million. In 2022, we achieved sales revenue of $226 million and net profit of approximately $26.8 million.

Investment advice: We expect the company's net profit from 2023-2025 to be -1.23/-0.62 billion yuan. Currently, the company continues to strategically reduce the traditional real estate business, promote the clearance of traditional real estate development businesses other than core properties, and focus on promoting the transformation of companies driven by digital technology. At the same time, the acquisition of Solus Optoelectronics is also expected to provide the company with new business growth points and maintain a “careful recommendation” rating.

Risk warning: The acquisition has not progressed as expected, and the demand for the traditional main real estate business has fallen short of expectations.