Digital China Announces FY2013/14 First Quarterly Results

HONG KONG, Aug. 20, 2013 /PRNewswire/ --

Results Highlights:

For the three months ended 30 June 2013:

• Affected by lacklustre macro-economic conditions and IT market, the Group recorded turnover of approximately HK$16,013 million, decreased 9.92% year-on-year
• Gross profit margin was 6.81%
• Profit attributable to equity holders of the parent amounted to approximately HK$361 million, slipped 9.91% year-on-year
• Basic earnings per share were 33.77 HK cents, declined 9.99% from 37.52 HK cents year-on-year
• Thanks to ongoing optimisation of cost structure and stringent cost control, operating expense ratio for the financial year remained stable at 5.12%

Digital China (the "Group"; Stock Code: 00861.HK; 910861.TW), the largest integrated IT services provider in China, today announced its consolidated first quarterly results for the three months ended 30 June 2013 (the "Period").

With the beginning of the 2013/14 financial year, the Group's leadership in expertise in the Sm@rt City sector was further fortified as the Management persisted in this strategic choice and facilitated local implementation with increased investments to capitalise on development opportunities in Sm@rt City construction. The Group's capabilities in the research and development of "Sm@rt City" solutions were further enhanced. To counter the adverse impact of the continued slowdown in economic growth on IT market demand, the Group adopted the principle of "reinforcing fundamentals and pursuing prudent development" in its operations, seeking to maintain market leadership in its traditional business segments through proactive measures to optimise its cost structure and drive prudent business expansion plans, with a strong focus on risk control. During the first quarter, we concluded strategic cooperation agreements with Chongqing and Huizhou for full-scale cooperation in "Sm@rt City" construction, e-commerce and IT financial services, etc. based on the integrated citizen service platforms with a focus on the development of cloud computing and big data industries. These agreements have further reinforced the Group's leadership in expertise in the Sm@rt City sector and effectively driven its overall business transformation.

Financial Review

For the three months ended 30 June 2013, the Group reported quarterly revenue of approximately HK$16,013 million, representing a decrease of 9.92% as compared to the same period of last financial year, reflecting the impact of macro-economic conditions in the first half of 2013. Meanwhile, the escalating market competition has driven down the first-quarter gross profit margin of the Group to 6.81%. For the three months ended 30 June 2013, profit attributable to equity holders of the parent amounted to approximately HK$361 million, representing a decrease of 9.91% as compared to the same period of last financial year. Basic earnings per share amounted to 33.77 HK cents, representing a 9.99% decrease over 37.52 HK cents reported for the same period of last financial year.

Against the backdrop of escalating market risks and decline in revenue, the Group achieved effective control over costs and expenses by optimising its cost structure, formulating stringent cost management and control policies and streamlining its organisational setup. For the three months ended 30 June 2013, the Group's operating expense ratio was stable at 5.12% as compared to the same period of last financial year with decrease in the total amount of operating expenses, despite the increase in strategic investments. Meanwhile, the efficiency of resource utilisation was enhanced credit to persistent implementation of stringent risk control policies and ongoing efforts to improve business processes. Net cash inflow from operating activities for the first quarter of the financial year amounted to approximately HK$94 million, providing an effective buffer for the 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 period, due to seasonal fluctuation, the Services Business of the Group reported revenue of approximately HK$1,801 million, representing a decline by 15.15% as compared to the same period of last financial year. The Services Business was generally in stable operations, backed by the Group's persistent drive of customer plans and ongoing market development efforts in the financial and government and corporation sub-sectors. However, the progress of business lagged behind notably as compared to the same period of last financial year. This was due to the continuous decline of the macro-economy, reflecting mainly postponed IT procurement by major customers.

The Group's Services Business reported steadily enhanced profitability thanks to our persistent efforts in strategic transformation to increase the proportion of the software and services businesses, and enhanced project management and project delivery capabilities. Gross profit margin for the first quarter was 17.46%, an increase by 59 basis points as compared to the same period last 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)

Further slowdown in macro-economy led to a trend of declining demand in the consumer IT market since last year. In light of this background, revenue of the Distribution Business of the Group for the first quarter amounted to approximately HK$7,804 million, representing a decrease by 11.37% as compared to the same period of last financial year. In the meantime, the gross profit margin of the Group's notebook business slid to 3.03% under the pressure of escalating market competition, while the gross profit margin of the CES business was also substantially lower at -0.23% following the Group's proactive adjustments of the business. Under the impact of such factors, the gross profit of the Distribution Business declined substantially to 2.42% as compared to the same period of last financial year.

During the period, the Group adopted a strategy of "one reduction and two additions" to expedite business structure adjustment and diversify into new business sectors, while maintaining our market shares in traditional products in the meantime. We also actively adjusted our product mix to increase products based on the Mobile Internet, in a move to foster new growth niches. During the first quarter, we secured the commercial channel dealership for Microsoft's Surface Tablet, the sales of which are expected to show rapid growth and momentum. In addition, the Group was closely monitoring changes in business formats in the domestic market, as it enhanced its strategic cooperation with core e-commerce customers, in a bid to snatch up new market shares.

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)

There was a notable slowdown in IT investments in the Enterprise Market since the beginning of the financial year. Major vendors also reported declines in results for the China region in varying degrees. The Group's Systems Business maintained its pole position in the market and outperformed the overall market as it continued to advance strategic cooperation with core vendors in persistent market-share management efforts. For the three months ended 30 June 2013, the Group's Systems Business reported revenue of approximately HK$6,091 million, a 7.67% decline as compared to the same period of last financial year. Gross profit margin of the Systems Business was 8.68%, representing an improvement by 34 basis points as compared to the same period of last financial year.

Given the slowdown in demand from the Enterprise IT Market, the distribution of our business layouts was further improved as we adopted the strategy of "consolidation and strengthening" to consolidate our fundamental businesses on one hand and strengthen domestic brand development on the other. We continued to rank first in all product sub-segments in market shares thanks to persistent efforts of our Systems Business to advance customer plans in various sub-segments. Substantial growth was reported for software products as we capitalised on market opportunities available. Revenue from software products for the first quarter has increased by 17.62% as compared to the same period of last financial year. In the meantime, we were engaged in vigorous development of domestic brands while closely monitoring changes in the competition of the domestic systems market. Notable growth in sales revenue from Huawei products and other product lines was reported for the first quarter. For Huawei products, sales revenue grew by 171% as compared to the same period of last financial year.

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's Supply Chain Services Business reported substantial growth in results driven by active expansion in various sub-sectors capaitalising on opportunities presented by rapid growth in the emerging markets, coupled with efforts to optimise its business mix. As a result, the first quarter saw a significant increase in revenue. For the three months ended 30 June 2013, our Supply Chain Services Business reported overall revenue of approximately HK$318 million, increased by 25.90% as compared to the same period of last financial year.

The Group's Supply Chain Services Business continued to enhance its quality of operation while increasing its efforts in business expansion by improving its capabilities in warehousing, transportation and delivery. In the B2B logistics business, we signed new customers, including premium players in the communications, auto parts and IT sectors, such as China Mobile provincial branch companies and BYD. In maintenance business, the 4 service stations for Apple products were respectively established in Shanghai, Guangzhou, Fuzhou and Xiamen, during the first quarter, bringing the total number of our Apple service stations in China to 6. We were also actively expanding our product lines in the tablet and large panel monitor sectors, signing up BenQ and NEC as new customers for authorised repair and maintenance of their large panel monitor during the first quarter. The overall business mix of our Supply Chain Services has been optimised on an ongoing basis.

Market Outlook

Mr. Lin Yang, CEO of Digital China, said, "The Management is fully aware that worsening macro-economic conditions in 2013 have dealt the IT market a heavy blow, as evidenced by continued weakness in consumers' market demand, marked slowdown in investments in the corporate market and the postponing of industry customers' purchase plans. Against such grim market conditions, the Group management has formulated a prudent development strategy calling for ongoing efforts to drive market-share management and customer plan with a strong emphasis on risk control, with a view to consolidating its present fundamental businesses and maintaining its market leadership. On the other hand, the Management has also noted the discussion of measures to stimulate consumption in the IT sector at the State Council Executive Meeting in July 2013 and the submission to the State Council of the "Guidance for Facilitating the Healthy Development of Smart Cities" jointly by 8 ministries and commissions. These directive policies have further illustrated the path ahead for the IT industry, and have also boosted and assured the Group's confidence in its transformation towards the Sm@rt City business model. Meanwhile, the large-scale development of the Mobile Internet coupled with the swift rise of domestic brands has also afforded enormous growth opportunities for the Group's future. We will closely monitor the changes in the economic environment and IT market and endeavor to mitigate the impact of adverse market factors in order to achieve stable business development and continue to deliver value to shareholders."

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About Digital China

Digital China (Stock Code: 00861.HK; 910861. TW) is the largest integrated IT services provider in the Greater China area. Digital China provides integrated end-to-end IT services for customers on the back of a complete IT services value chain that covers IT planning and consultation, IT infrastructure systems integration, design and implementation of solutions, design and development of application software, outsourcing of IT system operations and maintenance, IT distribution and maintenance, etc.

Digital China is driving the Sm@rt City initiative in tandem with China's 12th Five-Year Plan. By facilitating consolidation and innovation through IT advances such as Cloud Computing, Mobile Internet and the internet of things, the Group seeks to advance China's new urbanisation progress with dedication in information consumption area. As the largest integrated IT services provider in China, Digital China's Sm@rt City business has comprehensive service capability and business coverage that ranges from Sm@rt City framework design and planning, Sm@rt City IT infrastructure implementation to Sm@rt City operational services. Leveraging on its extensive expertise and experience in informatisation, Digital China has become China's leading Sm@rt City expert that boasts a forward-looking theoretical structure and has 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