Digital China Announces FY2012/13 Third Quarterly Results

HONG KONG, February 27, 2013 /PRNewswire/ --

Results Highlights:

For the nine months ended 31 December 2012:

• The Group achieved trend-bucking growth in business and recorded turnover of HK$56,674 million, up 6.83% year-on-year.
• Gross profit margin for the third quarter was 8.01%, reversing the decline in the first half of the year.
• Profit attributable to equity holders of the parent amounted to HK$1,171 million, up 11.43% year-on-year.
• Basic earnings per share were 109.64 HK cents, up 11.75% from 98.11 HK cents for the corresponding period of last fiscal year.
• Credit to resolute implementation of stringent cost management and control policy, the operating expense ratio was substantially lower at 5.30 % as compared to 5.65% reported for the corresponding period of last financial year.

Digital China, China's largest integrated IT services provider, today announced the unaudited consolidated third quarter results of the Company and its subsidiaries (collectively the "Group" ; Stock Code: 00861.HK) for the nine months ended 31 December 2012 (the "Period").

In response to uncertainties and challenges in the macro-environment as well as various market sub-segments in 2012, the Group continued to implement the guiding principle of "prudent progress, streamlined establishment with enhance efficiency and with a focus on Sm@rt City" and was able to report trend-bucking stable growth in revenue and profit amid intense market competition thanks to its comprehensive and balanced business distribution which also enabled stable and healthy development in results under overall macroeconomic weakness. Market share management was enhanced in Distribution Business and Systems Business, while close cooperation with core vendors was maintained to sustain stable market share. Supply Chain Services Business reported improvements in business value thanks to ongoing optimization of its business mix. Our Services Business increased effective coverage of sub-segment industries by increasing the proportion of software and services business. The steady progress of the "Sm@rt City focus" strategy provided an effective driving force for the Group's transformation to a services-oriented business.

The Group launched the nation's first integrated citizen services platforms in Fuzhou and Foshan in December of the current financial year with the benefit of its focus and vision in the development of Sm@rt Cities. Meanwhile, the Group was included in "Forbes Asia Fab 50" for the fourth year in a row, reflecting ongoing recognition from the capital market.

Financial Review

During the Period, the Group recorded turnover of approximately HK$56,674 million, a growth of 6.83% year-over-year. Against the slowdown in market growth, all business units reported stable revenue growth as the Group adopted the approach of "progress subject to stability" and explored the depth of the market to identify new business opportunities by continuously strengthening our ties with vendors and channels / customers. Meanwhile, on the back of ongoing efforts by our business units to optimize their business mixes with a strong focus on gross profit margin improvement, the Group reported gross profit margin of 8.01% for the third quarter of this financial year to reverse the decline in the second quarter. Profit attributable to equity holders of the parent for the nine months ended 31 December 2012 of the current financial year amounted to approximately HK$1,171 million, sustaining a double digit growth of 11.43% as compared to approximately HK$1,051 million for the corresponding period of last financial year. Basic earnings per share amounted to 109.64 HK cents, representing an 11.75% growth compared to 98.11 HK cents for the corresponding period of last financial year.

Management of the Group continued to implement a stringent policy in risk management and control. Key tasks in risk management and cash flow management were effectively implemented with measures to optimise business flows and enhance management of receivables. The Group's net cash inflow from operating activities amounted to approximately HK$615 million for the nine months ended 31 December 2012. Net cash inflow from operating activities for the third quarter amounted to approximately HK$276 million in sustained positive performance. Meanwhile, in view of the slowdown in revenue growth, the Group further strengthened stringent cost management and control policies formulated at the start of the year, making constant improvements to our resource utilisation efficiency by streamlining our product lines and staff positions. The Group's operating expense ratio for the nine months ended 31 December 2012 was substantially lower at 5.30% as compared to 5.65% reported for the corresponding period of last financial year with total operating expense achieving zero growth for the year.

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. In order to provide a more appropriate presentation for the Group's operating segment information, the Group reallocated this sub-segment from the "Supply Chain Services Segment" to the "Distribution Segment" at the start of this financial year and the relevant results for the corresponding period of last financial year have been restated accordingly;

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. In order to provide a more appropriate presentation for the Group's operating segment information, the Group reallocated this sub-segment from the "Distribution Segment" to the "Systems Segment" at the start of this financial year and the relevant results for the corresponding period of last financial year have been restated accordingly.

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 Services Business reported turnover of approximately HK$6,755 million, up 30.21% year-over-year. Turnover from the Services Business for the third quarter increased by 68.31% year-over-year, reflecting realisation of deferred customer demand. Management of the Group made proactive adjustments to its business strategies in response to volatility of industry market and succeeded in orchestrating substantial growth for the Services Business as a whole by integrating the Group's resources and strengthening business development in the government corporation industry and the financial industry to capture opportunities arising in these sub-segments. During the Period, the financial and government corporation sectors reported strong growth rates of 56.97% and 57.37%, respectively.

The Group continued to drive its transformation to a services-oriented business and to enhance the development of pure software and pure services businesses in various industry sub-sectors. Related to the financial industry, a new business model of "Financial Cloud Services" has been widely accepted by the market and customers, as more than 50 township banks have been signed up for the provision of operational services such as core business systems, credit systems and Internet banking systems. Moreover, in addition to ongoing provision of software and services to the State Administration of Taxation, our taxation business continued to sign up new customers including the Shandong Local Taxation Bureau, Ningbo Local Taxation Bureau, and Hainan Local Taxation Bureau. Breakthroughs in tax payment services have also been achieved with the successful implementation of online tax payment at Guizhou Local Taxation Bureau, Guizhou Bureau of the State Administration of Taxation, Shaanxi Bureau of the State Administration of Taxation, Gansu Bureau of the State Administration of Taxation and Anhui Local Taxation Bureau.

With the benefit of its focus and vision in the development of the Sm@rt City, the Group launched the nation's first integrated citizen services platforms in Fuzhou and Foshan on a pilot basis in December 2012. The platforms marked a change of the role of the Group in its Sm@rt City business from a solution provider to an operational services provider, and further reinforced its position as an expert in Sm@rt City. For the nine months ended 31 December 2012, the Sm@rt City business operated in 69 cities across the nation and the contracts signed for solutions and projects increased by 41%, with solutions being implemented in numerous cities across nation. Following the growing maturity and successful implementation in various cities of the citizen card project and meat and vegetable source system, data application solutions were also implemented in Wuhan, Lanzhou and Xinjiang, while cloud computing solutions were successfully implemented in Lanzhou and Zhangjiagang, with exponential growth in contract amount signed.

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)

There was a notable decline in the businesses of our principal products of notebook computers and peripherals in 2012 as the impact of the macroeconomic slowdown became evident on demand in the IT consumer market. The effect of new products and technologies launched in the third quarter of the financial year as a driving force for the consumer market has yet to be recognized. During the Period, the Group was increasingly concerned with stable and healthy business development, as it resolutely strengthened the implementation of its business strategy of "streamlined establishment with enhanced efficiency." Through stringent management over the input of business resources and corresponding output, proactive measures were taken to streamline and cut back product lines with low output, while continued efforts were made to enhance in-depth cooperation with vendor-ends and the channel-ends. These efforts have resulted in the retention of stable market share. During the Period, the Group's Distribution Business reported turnover of approximately HK$28,445 million, a slight decrease compared to the corresponding period of last financial year. Gross profit margin for the third quarter improved significantly subsequent to a temporary decline in the second quarter owing to stock clearance measures to avert potential business risks.

During the Period, the Group's coverage of CES and e-commerce channels was enhanced by further breakdown of channels and close monitoring of changes and development in retail formats. The Group continued to enhance cooperation with large-scale retail hypermarkets. In particular, we have strengthened cooperation with Gome and Walmart in connection with Apple products. During the Period, CES business reported rapid growth of 45.63% year-over-year. In connection with e-commerce, the Group strengthened strategic cooperation with core customers such as 360buy, 51buy and Suning, etc to leverage growth opportunities in the e-commerce industry and sustain rapid growth for e-commerce business, so that it will provide another important source of revenue in addition to the traditional IT product channel and CES channel.

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)

The Systems Business of the Group effectively capitalised on opportunities arising from market growth in the first half of the year and reported significant growth. During the Period, turnover amounted to approximately HK$20,620 million, up 13.48% year-over-year, while gross profit margin also increased by 53 basis points to 9.19%, offering effective support to the achievement of the Group's overall results. While demand in the Enterprise Market was affected by the growth slowdown of macro-economy in the third quarter of this financial year, profit growth for our Systems Business remained robust thanks to our efforts to increase our quarterly gross profit margin and stringent internal management control.

During the Period, The Group's Systems Business worked closely with key vendors. Through effective market share management, cooperation in existing businesses was fortified to secure stability and growth in market share for major areas. Moreover, we also worked with key vendors to monitor developments in novel areas such as cloud computing and big data, commencing strategic cooperation with leading players in cloud computing such as Cisco, Oracle and IBM, etc in a joint effort to plan for cloud computing data centre solutions as well as industry systems solutions for the telecommunications, financial and government sectors, etc.

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)

The Group's Supply Chain Services Business took the initiative to adjust businesses commanding lower gross profit as part of its ongoing efforts to optimise our business mix and improve business distribution. Through persistent monitoring and in-depth analysis, new business development endeavours were made in the logistics segment in relation to industrial sectors, while the proportion of the services business increased in relation to the service station segment. Such efforts drove ongoing growth in the overall profitability of the Supply Chain Services Business. Our Supply Chain Services Business reported turnover of approximately HK$854 million for the nine months ended 31 December 2012. Gross profit margin increased by 145 basis points to 20.72%, as compared to the corresponding period of last financial year. The logistics business reported overall revenue of approximately HK$328 million, sustaining rapid growth with a 57.90% increase year-over-year. Services station business continued to optimise business mix and strengthen station management to enhance profitability through servicing ability. The Group sustained healthy growth in revenue from the services station business and the gross margin of services station business was 624 basis points higher as compared to the corresponding period of last financial year.

Market Outlook

In 2012, the economy embraced a cycle of sluggish growth. Since the beginning of the fourth quarter, there has been increasing volatility and challenges in the sub-segment markets. More adverse conditions are expected overall as there are few signs of recovery in the consumer market, while the Enterprise Market is also facing a slowdown. In terms of general strategy for the final quarter of the current financial year, the Group management will continue to implement the guiding principle of 'prudent progress, streamlined establishment with enhanced efficiency and with a focus on Sm@rt City' proposed at the start of the year, and will also closely monitor market changes, remain flexible and respond resolutely. In terms of business strategy, management will reinforce its existing business foundation through market share management, customer planning and increased efforts to develop new industries and customers for new business growth niches. In terms of the Sm@rt City business, we will continue to implement the trial operation of integrated citizen services platforms and actively investigate operating models for the Sm@rt City, while enhancing our marketing efforts for Sm@rt City solutions. In connection with management and control strategy, the Company will continue to strengthen management of risk management and operating cash flows to assure healthy and stable business growth. Management will endeavour to overcome unfavourable factors for business operation in the fourth quarter, striving to accomplish business targets and to continue delivery of value to shareholders.

About Digital China

Digital China (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 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 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 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.