Digital China Announces FY2012/13 First Quarterly Results

HONG KONG, Aug. 29, 2012 /PRNewswire-Asia/ --

Results Highlights:

For the three months ended 30 June 2012:

• The Group recorded turnover of HK$17,777 million, up 10.84% year-on-year as compared to HK$16,038 million for the corresponding period of last fiscal year.
• Gross profit margin was 7.54%, maintaining at a stable level.
• Profit attributable to equity holders of the parent amounted to HK$401 million, up 12.16% as compared to HK$357 million for the corresponding period of last fiscal year.
• Basic earnings per share were 37.52 HK cents, up 13.35% from 33.10 HK cents for the corresponding period of last fiscal year.

Digital China Holdings Limited ("Digital China"; Stock Code: 00861.HK), China's largest integrated IT services provider, today announced the unaudited consolidated first quarterly results of the Company and its subsidiaries (collectively the "Group") for the three months ended 30 June 2012 (the "Period").

At the beginning of fiscal year 2012/13, the Group management calls for "prudent progress, streamlined establishment with enhanced efficiency, and with a focus on Sm@rt City" as the guiding principle of the Group's business operation. In line with this principle, the Group completed an organizational restructuring that led to more focused business units. In the Distribution Business, full coverage of business formats was implemented for traditional channels, chain electronic stores ("CES") and e-commerce. In the Systems Business, we capitalized on demand from corporate customers arising from cloud computing applications. Benefiting from the Sm@rt City strategy, the Services Business and Supply Chain Services Business continued to achieve business value enhancement, contributing to a balanced portfolio that allowed strong risk resistance against a volatile market. Meanwhile, for the first quarter, the Group achieved a stable revenue growth as well as a higher profit growth rate as compared to the growth in revenue, by adopting stringent cost and risk controls.

Financial Review

During the Period, the Group recorded turnover of approximately HK$17,777 million, a growth of 10.84% as compared to approximately HK$16,038 million for the corresponding period of last fiscal year. The Group's gross profit for the Period was up 9.54% year-on-year to approximately HK$1,341 million and its gross profit margin was maintaining at a stable level of 7.54%. In view of the increasingly difficult economic environment, the Group will introduce more cost management and control measures in more specific terms with enhanced execution. During the Period, the overall expense ratio was 4.90%, a decline from 5.37% for the corresponding period of last fiscal year. Profit attributable to equity holders of the parent for the Period amounted to approximately HK$401 million, an increase of 12.16% as compared to HK$357 million for the corresponding period of last fiscal year. Basic earnings per share amounted to 37.52 HK cents, 13.35% higher as compared to 33.10 HK cents for the corresponding period of last fiscal year.

Risk control measures have been implemented in a more rigorous manner since the beginning of the fiscal year, with a tighter grip over cash flows. Despite the complicated operating environment, the Group recorded sound cash flow performance by streamlining internal processes and enhancing receivables collection. Against the backdrop of tight liquidity in the market, our net cash inflow from operating activities amounted to approximately HK$132 million for the three months ended 30 June 2012, providing a strong backing for sustained healthy and stable growth of the Group's businesses.  While assuring sound cash flow, we also maintained our operating efficiency at the industry's top level, as represented by a cash turnover of 15.02 days for the first quarter.

Segment Results

*Restate: The Group started to make adjustments to business segments in the current fiscal year:

1. A sub-segment of the "Supply Chain Services Segment" will be devoted to the provision of professional supply chain management services including one-stop logistics and maintenance services, to hi-tech corporate customers and industry customers; another sub-segment will provide purchasing services to chain electronic stores (CES) for terminal products such as PC, notebook, smart devices, digital products, where CES is deemed as a retail format and an effective complement to the Distribution Segment which aims at a comprehensive coverage of all business formats. Therefore, this sub-segment has been reallocated to the Distribution Segment.
2. A sub-segment of the "Distribution Segment" will continue to focus on full channel coverage for all retail formats for IT products and devices, developing and supplying IT products and solutions of broader variety and higher value to consumer and SMB customers. Another sub-segment in the original Distribution Segment, covering products such as PC, servers, will become an important part of IT infrastructure building in line with the development of cloud computing, which will be more compatible with the business positioning of the Systems Segment, which aims to become a supplier of IT infrastructure products and solutions. Therefore, this sub-segment has been reallocated to the Systems Segment.

Business Review

Services Business (primary focus on the Industry Market, offering 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 products and services in systems integration and maintenance)

During the Period, the Group reported turnover of approximately HK$2,122 million for the Services Business, a growth of 18.58% as compared to approximately HK$1,790 million for the corresponding period of last fiscal year while the gross profit margin remained at 16.87%. The growth in profitability resulted from new inroads in financial and government corporation sectors, as well as the strides in business transformation. The financial and government corporation sectors reported robust growth in revenue of 89.51% and 67.56%, respectively.

Our Services Business continued to optimize its structure during the first quarter and further enhanced its business value through ongoing development of proprietary services, software and operational services. In the financial sector, we signed cooperation agreements for core banking systems with two new customers - Bank of Qinghai and Bank of Cangzhou, and old customers such as Jinshang Bank, Jiangsu Changjiang Commercial Bank, Qilu Bank, etc. We achieved business growth over 100% with joint-stock commercial banks and regional banks. Meanwhile, we also reported rapid growth in our "Financial Cloud Service" and achieved progress in business model innovation, through providing services for core-banking, payments, debit cards, international settlement, online banking and credit management for more than 30 township banks and other financial institutions. In the government sector, we signed up taxation service projects with the local tax bureaus of Hainan and Shenzhen. In the telecommunications sector, we received orders from China Unicom's Shanghai branch, China Mobile's Shenzhen and Inner Mongolia branches for our proprietary services.

The Group's business transformation was greatly driven by the consistent exploration of software and services businesses. The Group successfully expanded its Sm@rt City business all over the nation, with key solutions being implemented in a number of cities. The "Meat and Vegetable Source Tracking System" implemented in Suzhou last year was successfully replicated in Wujiang and Taicang during the Period. Moreover, the Group also signed up for software supply and services at Nanjing Sm@rt City Experience Centre and Qilin Eco-Technology City Planning and Demonstration Centre, and the "Citizen's Home" project of Wuhan and the Citizen Card project of Shunde, Foshan during the Period. These projects guaranteed steady progress of the Sm@rt City strategy for the Group.

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)

Despite a notable slowdown in the overall demand from the consumer market since the beginning of this quarter, the Group's Distribution Business focused on market share management. It reported turnover of approximately HK$8,805 million during the Period, relatively the same level as compared to the corresponding period of last fiscal year. Despite a slight decline in turnover from the notebook computers business, our e-commerce business still achieved substantial growth, by leveraging on the Group's refined channel development strategy in response to changes in business model of the retail business, and by enhancing cooperation with e-commerce and CES on the back of a rich variety of specialty products and consultancy services. In addition to effective risk controls, ongoing collaboration with Apple and proactive development of regional stores, the CES business achieved a stable revenue growth of 14.74% amidst a difficult market environment.Benefiting from close cooperation with manufacturers as well as stronger capability for channel building, the Group reported rapid growth in certain new accessory product lines, such as hard disk, monitors, etc., which contributed to a year-on-year turnover growth of 34.54% for the accessories sub-segment. In particular, the introduction of high-end products from existing branded partners has contributed to obvious gross margin improvement. Meanwhile, our business in relation to mobile internet recorded steady growth, as the Group continued to monitor developments in the mobile internet market and planned our marketing with the focus on mobile devices.

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)

During the Period, as the Group capitalized on cloud computing requirements from enterprises, the Systems Business outgrew vendors on all fronts and reported a turnover of approximately HK$6,597 million, an increase of 27.70% year-on-year, providing strong support for the achievement of the Group's overall results for the first quarter of the fiscal year. The Systems Business reported strong growth in its principal product lines thanks to effective market share management. Our storage business reported a strong year-on-year growth of 52.48% in revenue together with sound growth in gross profit margin for the first quarter, as it seized opportunities presented by virtualization requirements from enterprise customers. Our servers business also reported a 30.21% growth year-on-year in revenue for the first quarter on the back of enhanced strategic cooperation with core vendors. Turnover from the networking products business and the packaged software business increased year-on-year by 26.39% and 38.34% respectively, as our effective coverage of industries and regions drove rapid growth of these sub-segments. Meanwhile, the Group's Systems Business facilitated broader and deeper cooperation with channels by strengthening regional coverage. In the meantime, the Group promoted bundled product portfolio to our channels on the back of our rich product resources and effectively enhanced the adhesion of channels by providing relevant technical support.

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, the Group increased efforts to streamline its Supply Chain Services Business and it reported turnover of approximately HK$252 million and gross profit margin of 21.14%, an increase of 6.84 percentage points, as compared to 14.30% for the corresponding period of last fiscal year. By positioning its core operation as the logistics business, the Group took advantage of the continued growth of the logistics market by enhancing its core capabilities in storage, transportation and delivery as well as customer satisfaction. The B2C e-commerce storage service business set up during last fiscal year has become a major contributor to the revenue growth. Furthermore, there was a notable increase in the business volume of our out-of-warranty service, as our service station business endeavored to strengthen satisfaction with manufacturers and customers, as well as to optimize product and service structures. While seeking to maintain stable revenue growth, the service station business also started to shift its focus to SMB customers, with a view to building for future profit growth.

Market Outlook

Mr. Lin Yang, CEO of Digital China, commented, "2012/13 fiscal year will be a challenging year. Given the intricate conditions of the overall IT market in the current fiscal year, the management will act in resolute accordance with the guiding principle of 'prudent progress with a focus on Sm@rt City'. We will continue to invest in the research and development of Sm@rt City to further fortify our market leadership in China's Sm@rt City development. In view of weak sentiments in the market for retail customers, the Company will enhance management and exercise stringent risk control, striving to outperform the industry with a streamlined establishment and better efficiency; in the corporate market, which is a traditional stronghold for Digital China, we will seize the growth opportunities through effective sales and marketing management and close strategic cooperation with leading international manufacturers such as IBM and CISCO. We will put more emphasis on positive operating cash flow, stringent risk control and efficient staff establishment as it continues to closely monitor changes in the macro-economy and the IT market, so as to ensure the accomplishment of various business targets for greater shareholders' value."

About Digital China

Digital China Holdings Limited ("Digital China" or the "Group"; Stock Code: 00861.HK) is the largest integrated IT services provider in the Greater China area. Digital China provides end-to-end integrated IT services to customers on the back of a complete IT service value chain that covers IT planning and consultation, design and implementation of software solutions, outsourcing of IT system operation and maintenance, systems integration, IT distribution and maintenance.

With persist effort in carrying out "customer-focused and service-oriented" transformation, Digital China advocates Sm@rt City strategy and drives business development in five areas, including industry application software and IT infrastructure, smart devices and mobile solutions, enterprise application and infrastructure, Sm@rt City operation services and Sm@rt City collaborative industries. Leveraging urbanization and city informatization in China, the Group becomes a Sm@rt City expert with a forward-looking theoretical structure and most successful cases in Sm@rt City development.

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

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