Key points of investment

It is announced on May 24, 2024 that it plans to acquire 30% of the shares of Xinhua 3 in cash, and the proportion of Xinhua 3 holdings will be raised to 81%. The listed company plans to purchase 29% of its shares in Xinhua 3 from HPE Cayman through a wholly-owned subsidiary, Ziguang International, and purchase 1% of its shares from Izar HoldingCo through cash payment, for a total of 30% of the shares in Xinhua 3. After the acquisition of 30% of the shares in Xinhua 3 is completed, the proportion of shares held by listed companies indirectly in Xinhua 3 will increase to 81%.

Transaction amount: The total amount of this transaction was US$2.143 billion, corresponding to approximately RMB 15.177 billion.

Delivery date: The expected delivery date is August 31, 2024, and the end date of the grace period is October 21, 2024.

Funding source: The funding source for this transaction is the listed company's own capital and bank loans. The listed company currently plans to apply for a loan of no more than RMB 10 billion or the equivalent in US dollars from the bank.

At the same time, the company announced the termination of the issuance of A-shares to specific targets in 2023.

After the transaction is completed, there is a forward processing plan for the remaining 19% of Xinhua 3's shares. After the transaction is completed, there are various forward disposal arrangements for the remaining 19% of Xinhua 3's shares, mainly including:

(1) Ziguang International will relinquish the priority purchase rights for the remaining 19% of the shares in Xinhua 3, and HPE Cayman has the right to sell all 19% of the shares in Xinhua 3 at once to third parties that meet specific conditions.

(2) Ziguang International grants HPE Cayman a sale option for the remaining 19% of the shares in Xinhua 3. HPE Cayman may choose to exercise the sale option from the first day of the 16th month after the completion of the 30% share transaction of Xinhua 3, but no later than the end of the 36th month after completion of the delivery, requiring Ziguang International to purchase the remaining 19% of the shares in Xinhua 3.

(3) HPE Cayman grants Ziguang International a purchase option for the remaining 19% of Xinhua 3's shares. Ziguang International may choose to exercise this purchase option from the first day of the 16th month after the settlement of the 30% share transaction of Xinhua 3 is completed, but no later than the end of the 36th month after completion of the delivery.

(4) The 19% equity transaction price triggered based on the exercise of options corresponds to US$135,712.88 million.

(5) When Ziguang International exercises the purchase option, it may appoint a third party to purchase 19% of the shares (HPE Cayman has the right to decide whether to approve the third party transferee candidate, but such approval must reasonably be refused, delayed, or additional conditions attached to it).

The completion of this transaction will help increase the performance and profit levels of listed companies. As a leader in digital solutions, Xinhua 3 will deeply lay out the entire “cloud-network-compute-storage-end” industry chain, and has comprehensive digital infrastructure capabilities such as computing, storage, networks, 5G, security, and terminals. Xinhuasan comprehensively lays out AIGC business, vigorously develops domestic operator business, and accelerates the expansion of overseas markets.

In 2023, Xinhua achieved operating income of 51.94 billion yuan, an increase of 4.3% over the previous year, and achieved net profit of 3.41 billion yuan. In the context of the digital economy and AIGC development, Xinhua 3 is expected to have strong competitiveness and growth potential.

After the completion of the acquisition of minority shares in Xinhua 3, the proportion of shares held by listed companies indirectly in Xinhua 3 will increase from 51% to 81%, which will increase the net profit scale of the listed company attributable to the shareholders of the parent company, further improve the financial situation of the listed company, and consolidate and enhance the listed company's ability to continue operating.

Profit forecasting and valuation

Since the transaction has not yet been settled, without considering the impact of this transaction, we expect the net profit of Ziguang Co., Ltd. to be 24.4 billion yuan, 28.6 billion yuan, and 3.34 billion yuan, respectively, corresponding to 24-26 PE multiples of 26, 22, and 19 times, respectively, maintaining a “buy” rating.

Risk warning

Progress in the acquisition of 30% of the shares in Xinhua 3 fell short of expectations, and there is uncertainty about the acquisition of the remaining 19% of shares, etc.