Digital China Announces FY2013/14 Interim Results

HONG KONG, Nov. 19, 2013 /PRNewswire/ --

Results Highlights:

For the six months ended 30 September 2013:

• Affected by lacklustre macro-economic and IT market conditions, the Group recorded turnover of approximately HK$33,629 million, decreased 10.09% year-on-year. Overall gross profit margin was 6.16%. Profit attributable to equity holders of the parent amounted to approximately HK$633 million. Basic earnings per share were 59.24 HK cents.
• Expenditure and operating expense ratio kept decreasing on the back of ongoing cost structure optimisation. Total operating expense decreased 9.15% year-on-year.
• Thanks to stringent risk control policies, net cash inflow from operating activities for the second quarter of the current financial year amounted to approximately HK$150 million, ensuring stable operation of the Group's business.

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

The continuous slowdown in China's macro-economic growth since the 2012/13 financial year has resulted in unprecedented challenges for each IT sub-segment market and exerted obvious impacts on the Group's operations. The Group's management has devised an operating strategy focused on "Stabilizing Fundamentals, Adjusting Structures and Controlling Risks". While seeking to reinforcing leadership in our traditional strongholds, we also made proactive moves to adjust our business structure, strengthen the operation of high-value businesses and step up efforts to foster new niches for business growth in the emerging sectors. Meanwhile, the Group continued to enhance its Sm@rt City servicing capabilities to drive implementation at cities which had signed up for Sm@rt City. During the Period, the final inspection of the Wujiang Meat and Vegetable Circulation Tracking System was completed, while the Foshan integrated citizen services platform has become a major channel of citizen services for the Municipal Party Committee and Municipal Government of Foshan. Also, the Group continued to enrich the contents of Sm@rt City business through cooperation at capital level and setting up a joint venture in Nanjing to operate the citizen card business. These developments have further reinforced the Group's leadership in Sm@rt City expertise. During the second quarter of the current financial year, the Group invested HK$170 million to increase in the shareholding of HC International, Inc. (Stock Code: 08292.HK) and became the latter's single largest shareholder. This investment will allow the Group to accumulate experience for the expansion of its Internet business, while facilitating future business cooperation between the two companies.

Financial Review

From the beginning of this financial year, competition was intensifying in an increasingly complicated IT market, where the profiles of products and competition were rapidly changing amid continued doldrums. Affected by such factors, the Group reported revenue of approximately HK$33,629 million for the six months ended 30 September 2013, a decrease of 10.09% as compared to the corresponding period of last financial year. Overall gross profit margin for the first six months of the current financial year was 6.16%. For the six months ended 30 September 2013, profit attributable to equity holders of the parent amounted to approximately HK$633 million, a decrease of 14.58% as compared to the corresponding period of last financial year. Basic earnings per share amounted to 59.24 HK cents. Excluding one-off gain arising from the disposal of a subsidiary, profit attributable to equity holders of the parent for the second quarter of the current financial year actually increased by 22.20% as compared to the corresponding period of last financial year.

The Group reported consistent reductions in expenditure following proactive measures in cost structure adjustment, stringent expenditure control and organisational optimisation. For the six months ended 30 September 2013, the Group's total operating expense was 9.15% lower than that for the corresponding period of last financial year. During the second quarter of the current financial year, selling and distribution expenses and administrative expenses decreased by 20.91% and 39.23%, respectively, as compared to the corresponding period of last financial year. During the Period, the Group's trade receivables turnover days was 58.74 days, being 2.46 days longer as compared to the corresponding period of last financial year. The longer turnover period was attributable to the adjustments of the Group's business structure and the increase of businesses that have longer credit term. The progress of collecting receivables was also affected by complicated inspection and acceptance procedures owing to the diverse nature of certain projects. Taking into full account risks associated with market volatility, the Group implemented its risk management policy in a persistent manner. Net cash inflow from operating activities for the second quarter of the financial year amounted to approximately HK$150 million, providing an effective protection 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 current financial year, there was a trend of postponing IT procurement among industry customers amidst a macro-economic downturn. The Services Business reported stable growth with the effective support of the Group's persistent drive of customer plans and ongoing market development efforts in the financial and government & corporations sub-sectors, for which notable results have been achieved. During the Period, the Services Business of the Group reported revenue of approximately HK$3,738 million, a decline of 5.56% compared to the same period of last financial year. Revenue for the second quarter of the current financial year increased by 5.53% compared to the corresponding period of last financial year. Revenue generated from the financial sector increased by 5.11%, as we continued to roll out core system projects with large banks such as China Development Bank and signed up regional banks such as Jilin Bank, Anhui Rural Credit Union and Shaanxi Rural Credit Union as new customers. Revenue from the government & corporations sector grew by 39.33% as we strengthened relationships with strategic customers such as the State Grid Corporation of China and made progress in the expansion of businesses with the local tax bureaus of Ningbo, Qingdao and Tianjin.

During the Period, in persistent efforts to advance business transformation, the Group's Services Business continued to expand into businesses commanding high values and a high degree of stickiness, such as IT consultancy, industry application software and warranty services, and achieved steady growth in the proportion of pure Software and pure Services businesses. Meanwhile, the Group kept fostering project management capabilities in response to market volatility and changes in customers' requirements to enhance the controllability of project delivery. The Services Business reported gross profit margin of 15.77% for the first two quarters of the current financial year, which was stable 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)

The IT Consumer Market remained in doldrums in the second quarter, marked by a further dwindled market for PC notebooks amid the accelerated transformation in the product profile. Affected by this development, revenue from the Distribution Business of the Group for the first half of the financial year amounted to approximately HK$17,218 million, representing a decrease by 11.91% as compared to the corresponding period of last financial year. Revenue from the notebook business (excluding CES channel) decreased by 19.31% as compared to the corresponding period of last financial year. Overall gross profit margin of the Distribution Business was lower as compared to the corresponding period of last financial year following proactive adjustment of the CES business. Gross profit margin declined to 2.03% in aggregate for the first half of the current financial year.

During the Period, the Group proactively reinforced its business structure adjustments. While securing our existing market shares in traditional products, we increased our efforts in the development of mobile device business and achieved breakthroughs in such emerging business sectors. Significant growth was reported for the sales of Microsoft's Surface Tablet and Apple products, contributing to an 85% year-on-year growth in the sales of our mobile device business (excluding CES sales) in the second quarter. Meanwhile, the Group was also identifying opportunities in the market of Taobao e-commerce customers, in addition to ongoing progress in e-commerce coverage and continuous enhancement in strategic cooperation with core e-commerce customers.

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)

With the beginning of the 2013/14 financial year, the domestic Enterprise Market for IT infrastructure facilities continued to decline. The rise of domestic brands threatened the existing market profile, for which major international vendors reported slower or even negative growth. Affected by such factors, the Group's Systems Business reported revenue of approximately HK$12,015 million for the six months ended 30 September 2013, a 10.00% decline as compared to the corresponding period of last financial year. Gross profit margin of the Systems Business was lower owing to escalating market competition, decreasing to 8.07% for the second quarter.

In response to complicated 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 continued to enhance its expansion into the package software and domestic brands. In the second quarter, revenue from package software recorded a growth of 18% as compared to the corresponding period of last financial year. Rapid growth was also reported for our business in domestic brands, as represented by Huawei. Sales of Huawei products have increased by 33% in the second quarter as compared to the corresponding 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 Services Providers, providing "one-stop" consultancy and execution in logistics, business flow, capital flow and information flow)

During the Period, the Group's Supply Chain Services Business seized opportunities arising from the rapid growth of the market for third-party logistics and made major moves to expand its logistics services business. Breakthroughs were achieved in the communications, automobile accessories and apparels sub-sectors, providing effective support for the substantial revenue growth of the Supply Chain Services Business. During the Period, the Supply Chain Services Business of the Group reported overall revenue of approximately HK$659 million, an increase by 19.85% compared to the same period of last financial year.

Our Supply Chain Services Business reported improvements in operating efficiency and business deployment as it continued to enhance its capabilities in warehousing, transportation, delivery and maintenance services. In the logistics business, we won the centralised logistics procurement bid from China Mobile's terminal company, securing business in 14 provinces including Guangdong and Zhejiang. Our outsourcing business with BYD increased to 60,000 square metres in terms of storage gross floor area and shifts in cities like Shenzhen, Shanghai and Beijing have been completed. In the maintenance business, we started Microsoft Surface tablet maintenance services during the second quarter, while signing up Xiaomi as customer. The maintenance cooperation with Yixun was also established. Meanwhile, our per-store profitability continued to improve with the number of profitable stores growing by 31% as compared to the same period of last financial year.

Market Outlook

Mr. Lin Yang, CEO of Digital China, said, "Given the enormous impact on the IT market of worsening macro-economic conditions in 2013, the Group's operations will continue to be adversely affected as a result. Against such complicated market conditions, we will review market developments and make necessary structural adjustments in line with new market trends and changes to accord with the long-term interests of the Company. At the same time, we will step up with the implementation of Sm@rt City in signed-up cities, while closely monitoring industry developments under the "Guidance for Facilitating the Healthy Development of Smart Cities" jointly prepared by 8 ministries and commissions to seize any opportunities for enriching its service contents that will benefit its overall objective of business transformation. We will also expedite the deployment of its Mobile Internet business and develop businesses with domestic brands in tandem with the changing profiles of the IT market, with the aim of mitigating the impact of market factors in order to assure sound business development and striving to enhance shareholders' value."

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About Digital China

Digital China (Stock Code: 00861.HK) is the largest integrated IT services provider in China. Digital China provides end-to-end integrated IT services for customers on the back of a complete IT services value chain that covers IT planning and consultation, IT infrastructure system 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 urbanization progress. As the largest integrated IT services provider in China, Digital China has comprehensive service capabilities 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 informatization, 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.

SOURCE Digital China Holdings Limited