It is proposed to acquire 30% of Xinhuasan's shares in cash to boost computing power and connect the two major AI core tracks
On May 24, 2024, Ziguang Co., Ltd. announced the “Significant Asset Purchase Plan”. It plans to acquire 30% of Xinhuasan's shares through a wholly-owned subsidiary, Ziguang International through cash payment. The total share purchase price in this transaction is US$2.14 billion, corresponding to approximately RMB 15.2 billion. The source of funding for this acquisition transaction is the company's own capital and bank loans. The company plans to apply for a loan of no more than RMB 10 billion or the equivalent in US dollars from the bank. We believe that after the implementation of this acquisition plan, the profits of listed companies will be significantly increased, and the company's operating efficiency and competitiveness are expected to be further improved. We expect the company's net profit to be 26.45/32.10/3.629 billion yuan, respectively. Based on the SOTP valuation method, the target market value is 83.507 billion yuan, and the target price is 29.20 yuan, corresponding to PE 31.57x in 24, maintaining the “gain” rating.
The profits of listed companies are expected to increase significantly after the implementation of the acquisition plan. Xinhua 3, a subsidiary that accelerates the expansion of the business of Xinhua 3, is the core asset and main source of profit for listed companies. In 2023, the company achieved net profit of 2.03 billion yuan to mother, net profit of Xinhua 3 billion yuan, and Xinhua 3 contributed 83% to the net profit of listed companies. After the acquisition is completed, Ziguang Co., Ltd.'s shareholding ratio in Xinhua 3 will increase from 51% to 81%. According to estimates in the company's “Significant Asset Purchase Plan”, the net profit of Xinhua 3 is expected to reach 3.8 billion yuan in 2024. We expect that if the acquisition is completed as scheduled, the profit contribution of Xinhua 3 to the listed company will increase from 1.9 billion yuan to 3.1 billion yuan in 2024. Furthermore, in August 2023, Xinhuasan and HPE signed a new strategic sales agreement. The agreement stipulates that Xinhuasan will operate and fully sell H3C brand products globally, and the company's international business is expected to expand at an accelerated pace.
The share of Ethernet in AI networks is expected to increase further, driving the company's computing network business demand, and Nvidia said at its 1QFY25 performance conference that Nvidia will begin to launch a new Spectrum-X Ethernet solution, and the company expects Spectrum-X to jump to a multi-billion dollar revenue product line within a year. We believe that Nvidia's focus and investment in Ethernet solutions shows that the application and market share of Ethernet in AI networks is expected to further increase. As a leading enterprise in the field of Ethernet switches in China, Xinhua 3 continues to deepen its “AI in ALL” strategy. Its product and technical competitiveness is outstanding, and it is expected to benefit from the future trend of increasing Ethernet market share in intelligent computing networks. According to IDC statistics, 4Q23's market share in the domestic Ethernet switch field has reached 30%.
Profit is expected to continue to grow, maintaining the “Overweight” rating
We are optimistic about the company's growth potential as a leader in the ICT sector. Without considering the 30% shareholding factor of Xinhua3, we expect net profit to be 26.45/32.10/36.29 billion yuan for 24-26, respectively. We expect its network equipment/server and memory/software and system integration/cloud computing/IT distribution sector to contribute net profit of 12.77/6.48/1.06/3.73/240 billion yuan respectively in 24 years. Based on the segmented valuation method, each sector's business will be given a 24-year PE 35/28/27/38/15 times, corresponding to the company's target market value of 83.507 billion yuan and a target price of 29.20 yuan, maintaining the “gain” rating.
Risk warning: 1) The company's self-developed chip progress falls short of expectations or has invested too much; 2) the development of innovative business falls short of expectations; 3) the new business market falls short of expectations.