DCHIY Digital China Holdings Ltd (PK)

HONG KONG, March 26, 2014 /PRNewswire/ --

Results Highlights:

Digital China (the "Group"; Stock Code: 00861.HK; 910861.TW), the largest integrated IT services provider in China, today announced its consolidated results for the nine months ended 31 December 2013 (the "Period").

Since the beginning of the FY2013, the slowdown in China's economic growth amid structural transition with the accelerated change in IT product profile and the industry's competitive landscape, each IT sub-segment market encountered unprecedented challenges which subjected the Group's operation to significant impact. Based on changes in market conditions, the Group adopted the three-pronged strategy of "Controlling Costs, Adjusting Structures and Identifying Breakthroughs". First of all, the Group sought to match its business progress with costs through "Controlling Costs" so as to withstand market volatility. Next, based on market analysis, we pinned down specific approach to "Adjusting Structures" and implemented step by step, after which the Group focused its efforts on "Identifying Breakthroughs" for building the Group's long-term competitive strengths. These three measures have started to yield initial results. Firstly, the Distribution Business has stabilised and pioneered in the industry in proposing the "Omni-Channel" marketing scheme. Secondly, the Systems Business was also drawing up strategies to address the challenge stemming from the rise of domestic brands.

The Sm@rt City business will be based on the Internet model. During the period, the Group realised breakthroughs in virtual image technology which is a foundation for Public Information Service Platform, and launched Public Information Service Platform 2.0 in Beijing in October 2013. The lauch has consolidated the Group's leading position in this field. Meanwhile, with 7 cities in total signed up for strategic cooperation during the financial year, Digital China's Public Information Service Platform will be promoted in these cities. Moreover, by the end of 2013, Integrated Citizen Service Platforms have commenced operation in Foshan, Fuzhou and Zhangjiagang. For 2014, the Group aims to extend coverage to more than 10 cities, by when Digital China's Sm@rt City initiative will have footprint across all major regions of China.

Finally, an array of capital market operations have seen productive outcomes. The Group's IT Services Business was listed in A-share market in late 2013, it has enabled IT Services Business extended development through investment and merger and acquisition. Meanwhile, the Group will continue to increase its investment in HC International Inc., and it planned to launch the micro-credit Internet financing business in partnership with HC International in the future.

Financial Review

During the period, the IT market displayed continued weakness, there were significant changes in product and competition profile and intensified market competition. Affected by such factors, the Group reported revenue of approximately HK$52,265 million for the financial year under review, a decrease of 7.78% as compared to the corresponding period of last financial year. The overall gross profit margin declined by 80 basis points to 6.46%, as compared to the corresponding period of last financial year. A one-off financial loss of approximately HK$549 million arising from the dilution of the Group's equity interest following spin-off of the IT Services Business, which was not a real cash outflow, was booked in December. The financial loss is slightly different from the HK$600 million loss announced by the Company on 27 January 2014. This is because in calculating the transaction costs for the absorption and merger of the IT Services, the fair value of the assets of the IT Services as at 30 April 2013 was used in the announcement published in January 2014, while the fair value of the assets of the IT Services as at 31 December 2013 was used when the financial loss was recorded in December 2013. In addition, the provision for employees' bonuses that was historically accounted for during the fourth quarter of the financial year were made and recorded earlier in December, due to the change of the financial year end date of the Company. As affected by the aforesaid factors, profit attributable to equity holders in the financial year amounted to approximately HK$84 million, a decrease of 92.82% as compared to the corresponding period of last financial year. Basic earnings per share amounted to 7.87 HK cents, representing a decrease of 101.77 HK cents from 109.64 HK cents reported in the corresponding period of last financial year. For the third quarter of the financial year (three months ended 31 December 2013, and hereafter), the Group reported revenue of HK$18,636 million, a decrease of 3.29% as compared to the corresponding period of last financial year. Gross profit margin was 7.02%, dropped by 99 basis points as compared to the corresponding period of last financial year. Excluding the impact of the two above mentioned one-off events, profit attributable to equity holders for the third quarter of the financial year under review would have been approximately HK$152 million.

Amidst declining results, the Group continued to report reduced expenditure following stringent cost control measures and adjustment to resources input. Since initiating human resources optimisation, the staff headcount of the traditional businesses (the Distribution Business and the Systems Business) has been reduced by approximately 1,600 employees. The Group's selling and distribution expenses and administrative expenses for the financial decreased by 6.45% and 12.09%, respectively, as compared to the corresponding period of last financial year. To address the changing market environment, the Group made proactive moves to adjust its business mix. While consolidating our fundamental business, the Group also increased its coverage of Mobile Internet products and e-commerce, and expanded into new business frontiers such as domestic brands, to develop a more comprehensive business exposure. Sales of Apple products and Microsoft Surface tablets continued to register significant growth, and the Group's Mobile Internet business unit in the third quarter of the financial year grew by 64% year-on-year. Its domestic brand business, highlighted by Huawei, also sustained substantial growth. Sales of Huawei products increased 64% year-on-year during the financial year. The Group continued to report net cash inflow from operating activities thanks to its implementation of a stringent risk control measures, taking full account of market volatility risk. Net cash inflow from operating activities for the financial year amounted to approximately HK$534 million, while net cash inflow from operating activities for the third quarter amounted to approximately HK$290 million, ensuring stable operation of the Group's business.

Segment Results

Business Review

Services Business (primary focus on the Industry Market, offering products and services in IT planning and IT systems consultation, design and implementation of industry application software and solutions, outsourcing of IT system operation and maintenance, as well as systems integration and maintenance)

During the financial year, in response to the decline in government investments and IT demand from customers, the Group persisted in advancing its customer plan and broadening industry diversification and regional coverage, while being prudent in selection of clients and businesses to ensure the quality of business. Expansion efforts were put to meet the needs of the financial, telecom carrier, energy, power, government & corporations and military sectors to ensure efficient coverage of target sectors and solid support for steady growth of the Services Business. Revenue from the Group's Services Business for the period increased to approximately HK$7,307 million, an 8.18% growth as compared to the corresponding period of last financial year. Revenue from the Group's Services Business for the third quarter of the financial year increased to approximately HK$3,570 million, a 27.62% growth as compared to the corresponding period of last financial year. Revenue from the financial sector for the period increased by 8.36%. Revenue from the government & corporations sub-sectors grew by 11.55%.

During the period, in persistent efforts to advance strategic transformation, the weightings of software, technology services, operation, proprietary brand equipment continued to grow year by year, generating a revenue of HK$2,535 million for the period, which was 12% higher compared to the corresponding period of last financial year, and contributing over 60% of the profit for an optimised profit structure. The Services Business continued to amass technologies and conduct R&D on industry application solutions, increasing customer stickiness and profitability of the business fundamentally. Meanwhile, the Group also enhanced its project management capabilities. Gross profit margin for the software and technology services parts of the Services Business was 26% for the period, which largely stays flat as compared to the same period of last financial year.

Distribution Business (primary focus on the SMB & Consumer Markets, engaging in the distribution of general IT products such as notebook computers, desktop computers, peripherals, accessories and consumer IT products)

Amid a dwindling PC market during the financial year, the Distribution Business was under pressure due to the fast-changing profile of consumer IT market marked by continuous decline in demand for traditional products and rapid adjustment of channel profiles, despite rapid growth of its e-commerce business which carried a much smaller weight than the traditional channels. Affected by this, revenue from the Distribution Business of the Group within the financial year amounted to approximately HK$26,254 million, down by 7.70% as compared to the corresponding period of last financial year. While assuring market share for traditional products, the Group made an effort to boost sales of consumer IT products and accessories. These two categories registered rapid growth of 34.39% and 18.51% respectively (excluding CES channel) during the third quarter of the financial year, driving a 1.56% year-on-year growth in the overall revenue of the Distribution Business to approximately HK$9,036 million for the third quarter of the financial year. The Distribution Business is among the first to implement human resources optimisation. Excluding the advanced provision of employees' bonuses, the business segment reported a 33% reduction in human resources expenses as compared to the corresponding period of last financial year.

While securing its existing market share in traditional products, Digital China continued to enhance development in the Mobile Internet sector. The Mobile Internet business achieved a significant year-on-year growth of 64% in revenue in the third quarter of the financial year, thanks to significant sales growth of Apple products and Microsoft Surface tablets. Meanwhile, the Group kept expanding its cooperation with core e-commerce customers like JD.com and Yixun, enlarging share of e-commerce channels in our total sales. In a bid to strive for breakthroughs in business models, Distribution Business proposed the "Omni-Channel" marketing scheme, a pioneer move in the industry that has won initial reorganization from partners.

Systems Business (primary focus on the Enterprise Market, offering value-added distribution of systems products such as servers, networking products, storage products and packaged software)

Since the beginning of this financial year, affected by macro-economic conditions, there was a notable slowdown in domestic enterprise IT infrastructure investments. In the meantime, domestic brands are rapidly expanding market shares in major areas such as networking, servers and information security, resulting a significant impact in market profile, to the extent that major foreign vendors reported negative growth. Affected by the stated factors, revenue from the Group's Systems Business within the financial year decreased to approximately HK$ 17,638 million, a 14.46% decline as compared to the corresponding period of last financial year. Revenue from the Group's Systems Business for the third quarter of the financial year decreased to approximately HK$5,624 million, a 22.65% decline as compared to the corresponding period of last financial year. Gross profit margin of the Systems Business decreased to 7.43% in the third quarter of the financial year, due to escalating market competition. Excluding the advanced provision of employees' bonuses, human resource expenses of this business segment in this financial year decreased 8% as compared to the corresponding period of last financial year.

In response to challenging market conditions, the Group's Systems Business assured its leadership in market shares for core product lines thanks to persistent efforts in market-share management. In the meantime, the Group expedited rolling out and expanding business with domestic brands, grasped growth opportunities in sub-segment markets, introduced domestic brand product lines in application areas such as information security, and optimized product profile continuously. The Group's domestic brand business, highlighted by Huawei, reported substantial growth. Sales of Huawei products grew by 64% year-on-year within the financial year. Moreover, sales of packaged software products for the third quarter also grew by 5.13% as compared to the corresponding period of last financial year, as the Group leveraged growth opportunities in the packaged software market. The Group was also identifying breakthroughs for its Systems Business with attempts to build its proprietary brand, in response to the long-term challenges stemming from the rise of domestic brands.

Supply Chain Services Business (primary focus on the markets of Hi-tech Industries, Branded e-Commerce Platform Operators and Branded Service Providers, providing "one-stop" supply chain consultancy and execution in logistics, business flow, capital flow and information flow)

During the Period, thanks to marketing and expansion efforts in a fast-growing market, the Group's Supply Chain Services Business reaped notable results and its servicing ability has steadily enhanced. The Supply Chain Services Business reported overall revenue of approximately HK$1,065 million for the financial year under review, an increase by 24.64% compared to the same period of last financial year. Revenue for the third quarter of the financial year amounted to approximately HK$406 million, an increase by 33.29% compared to the same period of last financial year. During the period, the Group achieved major breakthroughs in customer marketing for its logistics business as it has been fostering capabilities in centralised procurement tenders and total outsourcing services for large customers, and assumed a pole position in the market of logistics service providers for the telecommunication industry. The Group won the centralised logistics service procurement bid of China Mobile Terminal Company and accomplished business deployment in the carrier sector as planned at the beginning of the financial year. In connection with BYD, the Group completed taking over BYD's outsourced personnel and warehouses in various locations, providing a successful precedent in total logistics outsourcing and M&A. Apart from the logistics business, the Group was also closely monitoring potential opportunities presented by Mobile Internet products and e-commerce channels, making progress in expanding our brand maintenance service. Following the launch of nationwide maintenance services for Surface tablets, the Group also signed up Xiaomi in the Mobile Internet sector. The Group has started exploring new business models in Internet maintenance service with Yixun and Qihoo 360. Meanwhile, the number of profitable stores grew by 42% as the Group continued to focus on lifting per-store profitability.

Market Outlook

Mr. Lin Yang, CEO of Digital China, said, "Under the impact of macro-economic weakness coupled with adjustments in the market landscape, 2013 has been a difficult year for our traditional business. In the new financial year, we has revised its past management philosophy to better adapt to the fast-changing IT industry and further unleashed their productivity according to market changes. Looking forward to 2014, the management is of the view that initial signs of stabilization of Consumer IT market have been seen while demand in the Enterprise IT market, which is yet to stabilize, will pick up gradually and expect those factors to provide solid supports for the results. As market conditions likely remain complicated, the management will closely monitor new trends in the market as it continued to complete its business deployment, in a bid to maintain its long-term competitive strengths. In 2014, our IT Services Business will embark on a new journey, while our logistics business will also continue to see solid developments driven by e-commerce and Mobile Internet development. Meanwhile, at the senior official meeting of China-EU Partnership on Urbanisation Summit held at the end of last year, Premier Li Keqiang voiced his full support for Sm@rt City development, giving a detailed exposition of the objective, approach and critical points of Sm@rt City construction. This was in perfect resonance with our exploration all along. Together with a series of national policies on Sm@rt City development announced in 2013, this has given immense encouragement to the management. In the next three years, we will roll out our Sm@rt City operation business in full scale, with the aim of extending the scope of covered cities, driving our transformation to an Internet-based business model, in a bid to deliver greater value for shareholders."

About Digital China

Digital China (the "Company", stock code: 00861) is the largest integrated IT service provider in China. Digital China was listed on the main board of The Stock Exchange of Hong Kong Limited since 1 June 2001. The outstanding performance of Digital China has been widely recognized in the industry, as evidenced by its inclusion in "Forbes Asia's Fab 50," "Fortune China 500" and "Top 100 PRC Enterprises by Software Revenue."

Digital China has integrated global resources in the IT industry, having established working relationships with close to 300 IT vendors at home and abroad, including long-term strategic partnerships with a number of leading international IT players. Digital China has built a complete value chain in IT services that covers IT planning and consulting, integration of IT infrastructure, design and implementation of solutions, design and development of application software, outsourcing of IT system operation and maintenance, IT distribution, logistics and maintenance, providing integrated end-to-end IT services to its customers.

Leveraging strengths in the research and development of IT technologies and IT building in industries amassed over the years, Digital China has undertaken a number of national programmes and projects in key technologies, such as the "Technology Upgrade and Industrial Transformation Pilot Project" of the National Development and Reform Commission, the "National Information Security Project," "Project on the Internet of Things" as an important support of the "Outline for the Development of the Internet of Things during the 12th Five-Year Plan Period" of the State, the "863 Programme" and the "Technology Support Programme" of the Ministry of Science and Technology, and key technology projects of the Ministry of Industry and Information Technology including "CHB (Core electronic devices, High-end generic chips and Basic software)," "Electronic Information Industry Development Foundation" (a key project in the electronic information sector), "Conversion of National Technological Deliverables" and "New-generation Wireless Broadband Communications Network." "Digital China" is both the name by which we identify our Company and a mission that we charge ourselves with. In 2010, Digital China launched the Sm@rt Ctiy strategy which called for the integration of the urbanisation process and the informatisation process, seeking to identify further sub-segments in IT consumption and direct the development of the Sm@rt Ctiy on the back of its practical experience in IT services generated over the years.With the roll-out of its "Sm@rt City" strategy across the nation, Digital China has become China's leading Sm@rt City expert who boasts a forward-looking theoretical structure as well as having the largest stock of successful cases.

For additional information about Digital China, please visit the Group's website at www.digitalchina.com.hk.

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SOURCE Digital China Holdings Limited