Digital China Announces FY2012/13 Interim Results Top Line and Bottom Line Achieved Stable Growth amidst Headwinds

HONG KONG, Nov. 20, 2012 /PRNewswire/ -- Digital China Holdings Limited ("Digital China"; Stock Code: 00861.HK), China's largest integrated IT services provider, today announced the unaudited consolidated interim results of the Company and its subsidiaries (collectively the "Group") for the six months ended 30 September 2012 (the "Period").

Results Highlights:

• For the six months ended 30 September 2012:
• The Group recorded turnover of HK$37,404 million, up 9.57% year-on-year as compared to HK$34,138 million for the corresponding period of last fiscal year. Turnover for the second quarter alone amounted to approximately HK$19,627 million, a record high for quarterly results.
• The Group timely liquidated inventories to avoid risks, resulting in an overall gross profit margin of 6.87%.
• Credit to stronger cost control measures, the expense ratio was lowered by 0.63 percentage point to 5.02% year-on-year.
• Profit attributable to equity holders of the parent amounted to HK$741 million, up 11.39% as compared to HK$665 million for the corresponding period of last fiscal year.
• Basic earnings per share were 69.39 HK cents, up 11.92% from 62.00 HK cents for the corresponding period of last fiscal year.

The Group meticulously advanced its Sm@rt City-focused operating approach and proactive customer development plans formulated earlier in the year. During the Period, the Group reported trend-bucking business growth overall. In particular, turnover for the second quarter achieved another breakthrough and recorded a record high for quarterly results. Owing to its comprehensive and balanced business portfolio, the Group reported stable growth which reflected its strong resilience in outperforming its peers despite ongoing volatility in the consumer market. The Group's Systems Business continued to reap additional market share by closely tracking demand for the construction of data centres and cloud computing centres. At the same time, the development of CES and e-commerce channels supported the positive growth of the Group's Distribution Business. The Supply Chain Services Business reported business value enhancements following continual initiatives in structural optimization. Meanwhile, the prudent advancement of the "Sm@rt City" strategy has cemented the foundation for the Group to carry on its service-oriented transformation in greater depth.

Financial Review

During the Period, the Group recorded turnover of approximately HK$37,404 million, a growth of 9.57% as compared to approximately HK$34,138 million for the corresponding period of last fiscal year.  Gross profit margin declined to 6.87% as the Group cleared its stocks swiftly in a judicious move to avoid risks amidst soft demand in the consumer market and increasing competition and uncertainties in technologies and products since the beginning of the fiscal year. Meanwhile the Group's expense ratio during the Period was lowered by 0.63 percentage point year-on-year to 5.02% due to stronger cost control measures in line with our persistent implementation of the operating principle of "prudent progress and streamlined establishment with enhanced efficiency". Other positive contributing factors included proactive stock clearance and enhanced trade receivables management. Profit attributable to equity holders of the parent during the Period amounted to approximately HK$741 million, up 11.39% as compared to approximately HK$665 million for the corresponding period of last fiscal year. Basic earnings per share were 69.39 HK cents, up 11.92% from 62.00 HK cents for the corresponding period of last fiscal year.

Since the beginning of the current fiscal year, risk control and cash flow management have been the Group's priority tasks for this fiscal year, fully considering the risks associated with market volatility. The Group's efforts have paid off well, assuring ongoing sound and stable business growth. Net cash inflow from operating activities amounted to approximately HK$338 million for the six months ended 30 September 2012 in sustained positive performance. Meanwhile, the Group stood at the industry's top levels in terms of working capital efficiency with further improvements, as represented by a cash turnover of 14.20 days for the period, being 1.35 days less than 15.55 days reported for the corresponding period of last fiscal 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.

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$3,958 million for the Services Business, up 12.25% as compared to approximately HK$3,526 million for the corresponding period of last fiscal year while gross profit margin remained at 15.92%. The Group assured stable growth in its Services Business by taking the initiative to reallocate resources, making the decision to dispose of its Telecom software business and focusing on the government corporation sectors instead where it had traditionally been a market leader as well as the fast-growing banking sector. The financial and government corporation sectors reported robust revenue growth of 71.18% and 38.91%, respectively.

During the Period, more projects streaming in for pure software as well as pure services and the transformation of Services Business continued to reach further depths. In the financial sector, the Group reported rapid growth in an emerging business known as "Financial Cloud Services," signing up more than 40 small and medium-sized financial institutions. In addition, the Group also secured important projects such as the core banking systems of Bank of Qinghai, Bank of Cangzhou, Bank of Beijing and China Merchants Bank and Enterprise Service Bus of Fujian Nongxin. Meanwhile, it maintained software development and testing service contracts with existing customers such as China Construction Bank, contributing to a substantial year-on-year growth of over 50% in contract amount from the financial sector. In the government corporation sector, new customers signed up for software and services projects included the Hebei Bureau of the State Administration of Taxation, Anhui Local Taxation Bureau, Ningbo Local Taxation Bureau, Shenyang Local Taxation Bureau and Tianjin Municipal Trade Union.

After years of development effort, the Group achieved steady progress of Sm@rt City. Contract signings for Sm@rt City solutions recorded year-on-year growth of 52%. As at 30 September 2012, the Group's Sm@rt City national footprint has extended to 69 cities and we have signed strategic cooperation plans with 14 cities. The Group continued to launch successful executions for numerous maturing business types in various cities across the nation. Further to growing sophistication of the operation of the meat- and vegetable- source tracking system since its introduction to Suzhou, Wujiang and Taicang, among others, the Group has recently added the cities of Changshu and Kunshan to its clientele for this system, signifying the Group's full-scale development in the urban food safety sector and its ability to grasp more opportunities in these sectors. Meanwhile, the citizen card business continued to enjoy stable development, underpinned by recently signed up projects such as citizen card operation services for Zhangjiagang, the Karamay citizen card project, etc.

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)

Against a notable slowdown in the overall demand from the consumer market since the beginning of the current fiscal year in line with the macroeconomic downturn, the Group effectively neutralised the impact of lower turnover from the notebook computers business due to a lacklustre market by its strategy of detailed channel development to capitalize on the growth opportunities in CES and e-commerce businesses. The Group's Distribution Business reported turnover of approximately HK$19,547 million during the Period, an 1.13% growth year-on-year. In the meantime, the Group adopted more proactive measures to avert potential business risks through a variety of marketing initiatives to clear stock, which resulted in the gross profit margin declining to 3.17% year-over-year.

During the Period, the Group enhanced the coverage of CES and e-commerce channels, which resulted in strong turnover growth of 48.31% year-on-year in its CES business. In addition, the Group built this business into another important source of revenue on the back of long-term working relationships with key e-commerce customers. In the meantime, the Group has secured a solid foundation for the Distribution Business to achieve sound results in the second half of the fiscal year by making active preparations and deployments in a bid to capture new growth opportunities driven by more diverse applications and lower prices in an emerging market landscape featuring multiple competing platforms, following the launch of Microsoft's new operating system.

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, the Group outperformed the industry and it expanded market share reflecting its dominance in the Enterprise Market and value-added distribution segments. Turnover amounted to approximately HK$13,350 million, an increase of 24.77% as compared to approximately HK$10,699 million reported for the corresponding period of last fiscal year, while gross profit margin was 9.01%. The Systems Business contributed significantly to the Group's achieving its overall results during the Period.

In view of the growing maturity of cloud computing technologies, the Group's Systems Business developed more sophisticated models for strategic cooperation with leading vendors in cloud computing such as CISCO, Oracle and IBM during the Period. By integrating the strengths of partners with those of our own, the Group rolled out close cooperation in research and development, consultancy, pre-sale operations to sale. In addition to focusing on cloud computing data centre solutions by introducing leading-edge large-scale data centre products and solutions to meet the growing demand for cloud computing data centres, such cooperation initiatives also aimed to explore jointly the market for industry systems products in the financial, telecommunications and government sectors to enhance our strengths in these sectors.

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)

At the start of the current fiscal year, the Group's Supply Chain Services Business took the initiative to adjust businesses commanding lower gross profit while actively developing new segments in the logistics business to snatch market shares. Meanwhile, the proportion of services increased substantially through strong demand for maintenance services. The Supply Chain Services Business reported turnover of approximately HK$550 million during the Period. Gross profit margin improved by 3.56 percentage points to 21.26% as compared to the corresponding period of last fiscal year. In particular, the logistics business reported overall revenue of approximately HK$206 million, representing a growth of 59.09% as compared to the corresponding period of last fiscal year. In addition, the Group vigorously developed its e-commerce storage (B2C) business, increasing cooperation with existing strategic partners while tapping new customers. Through business streamlining, we have also secured improvements in our gross profit margin. Turnover generated from the Group's service station business increased by 4.2% year-on-year, while its gross profit margin was substantially increased by 4.05 percentage points year-on-year.

Market Outlook

Mr. Lin Yang, CEO of Digital China, commented, "During the first half of the fiscal year, the Group strictly advanced the principle of 'prudent progress, streamlined establishment with enhanced efficiency, and with a focus on Sm@rt City'. Both our top line and bottom line achieved stable trend-bucking growth. In view of the complex market situation for the second half of the fiscal year, we will adhere strictly to the principle and actively prepare for various challenges arising from the volatile market. We will reinforce our current business foundation and actively identify new niches of business growth in order to mitigate the impact of macro-environment conditions and changes in the IT market. Meanwhile, we will also earnestly explore other models for Sm@rt City operations, with the aim of forging pilot cities in the near future. While engaging in prudent business progress, we will continue as always to strengthen risk controls and operating cash flow management, continue reforms of internal administrative mechanisms, optimise staff efficiency and enhance organisational effectiveness, with a view of accomplishing of 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 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.

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SOURCE Digital China Holdings Limited