UNISPLENDOUR(000938):GAINING FULL CONTROL OF H3C BODES WELL FOR EARNINGS IMPROVEMENT AND RERATING

类别:公司 机构:中信证券股份有限公司 研究员:HUANG Yayuan 日期:2023-01-09

  Core views:

      On Jan 3, 2023, Unisplendour announced that Hewlett Packard Enterprise (HPE) would sell its 49% stake in H3C, their joint-venture information and communications technology (ICT) equipment provider, to Unigroup International, a wholly owned subsidiary of Unisplendour, for a consideration equivalent to 15 times the after-tax profit of H3C after deducting nonrecurring gains and losses for the 12 months prior to Apr 30, 2022. Upon completion of the transaction, Unigroup International would hold a 100% stake in H3C. We believe that if Unisplendour manages to close the deal at a lower price, it would be conducive to increasing its profits and valuation. Besides, it can further improve the Company's incentive mechanism in the medium and long term and continuously drive up its competitiveness and earnings. We assign 30x 2023E PE to derive a target price of Rmb31 and reiterate the “BUY” rating.

      Abstract:

      Unisplendour acquires the remaining 49% equity in H3C. Currently, the Company holds a 51% controlling interest in H3C through Unigroup International; HPE Cayman holds 48% and its wholly owned subsidiary Izar Holding Co holds 1%. HPE recently issued a notice of exercise of put option to Unigroup International, in which HPE proposes to sell its 49% stake in H3C to Unigroup International. Upon completion of the proposed transaction, Unigroup International will hold 100% of the equity in H3C. The sale price per share shall be determined based on 15 times the after-tax profit of H3C after deducting nonrecurring gains and losses for the 12 months prior to Apr 30, 2022, divided by the number of all shares of H3C on the date of the exercise notice, as agreed in the Shareholders Agreement. The consideration shall be paid in cash. According to the announcement of Unisplendour, H3C recorded net profit of about Rmb3.6bn during 2Q21-1Q22, which translates into a valuation of Rmb54bn based on 15x PE and an estimated deal consideration of Rmb26.5bn based on simplified calculation per a 49% equity interest. At present, the Company is in the process of negotiating with relevant parties to determine the relevant terms of the formal agreement for the proposed transaction.

      H3C continues to expand in the domestic ICT equipment market and maintains a solid industry-leading position. In the first three quarters of 2022, the operating revenue of H3C reached Rmb36.719bn (+18.87% YoY) and the net profit was Rmb3.043bn (+12.99% YoY). During this period, H3C’s domestic government and enterprise business (2G/2B) and international business have achieved rapid growth, and dealings with domestic telecom operators have also grown rapidly. According to the China Quarterly Ethernet Switch Tracker (3Q22) released by data provider IDC, H3C Group ranked first in China’s enterprise network switch market with 36.6% market share. In addition, H3C maintains the first place in China's enterprise wireless local area network (WLAN) market throughout the years and ranks the second in China's enterprise network router and x86 server markets. We are optimistic that H3C will constantly increase its market share in the ICT equipment segment and make breakthroughs in the procurement of operators.

      After acquisition of the remaining equity in H3C, Unisplendour will see a significant increase in earnings and may embrace a rerating. In 2021, the attributable net profit (ANP) of Unisplendour was Rmb2.148bn, of which about 82% was contributed by H3C. In 2021, H3C recorded ANP of Rmb3.434bn, of which only 51% was booked by Unisplendour. A smooth acquisition of the remainder shares in H3C could significantly boost the earnings of Unisplendour. In addition, considering H3C's quality assets and core competitiveness, we believe the acquisition, once completed, will lift the overall valuation of Unisplendour.

      Group restructuring draws to a close, sending Unisplendour into a new stage of development. On Jul 11, 2022, Tsinghua Unigroup completed the registration procedures for industrial and commercial change, and 100% of its equity is registered under the name of Zhiguangxin, which has become the indirect controlling shareholder of Unisplendour, and the Company has changed into an entity with no actual controller (formerly the actual controller was the Ministry of Education). The uncertainty risk of group restructuring has been relieved, and the Company has entered a new development stage. If the remaining 49% equity of H3C is recovered, the subsequent incentive mechanism is likely to be further optimized. We believe that the Company, as a cloud computing infrastructure leader, will continue to benefit from the digital trend, and its competitiveness and market share are both likely to continue to increase.

      Potential risks: The progress of Unisplendour’s acquisition of the remaining equity in H3C falls behind expectations. The development of the domestic digital economy falls short of expectations. The digital transformation in the 2G/2B segment moves slower than expected. The trade frictions between China and the US intensifies. The increase of the Company's bid-winning share in operator ICT equipment is less than expected. Operator procurement prices are lower than expected. Cloud business development is not up to expectations.

      Investment recommendation: We believe that Unisplendour will significantly increase its earnings and valuation if it manages to acquire the remainder 49% stake in H3C at a bargain. Besides, it can further improve the Company's incentive mechanism in the medium and long term and continuously drive up its competitiveness and earnings. We trim our 2022E net profit forecast to reflect the high exchange loss in the year and slightly raise the 2023E-2024E forecast considering the Company’s long-term competitiveness, and eventually update our 2022E-2024E ANP estimates to Rmb2.382bn/2.929bn/3.621bn (from Rmb2.476bn/2.926bn/3.489bn). Using comps valuation as references-Wind consensus estimates of 27x 2023E PE for Ruijie Networks (301165.SZ)-and considering the competitive advantages of H3C and the anticipated deal, we assign a premium valuation multiple of 30x 2023E PE to derive a target price of Rmb31 and reiterate the “BUY” rating.