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Digital China Group:Profitability Improving,Transformation Well Underway

发布时间:2016-08-31    研究机构:兴业证券

Company Profile.

Digital China Group Co., Ltd operates in the IT services industry. The Company operates cloud service,business to business, and online marketing platforms. Digital China also develops computerhardware, and offers technical services.

Events.

Digital China Group released the financial interim result of 2016, stating that the 1H operatingrevenue surged 5485.05% YoY to CNY 11.71 billion. The net profit attributable to the shareholdersreached CNY 252 million, up 1005.88% YoY. The net profit attributable to the shareholders afterdeducting non-recurring items was CNY 55 million, up 447.51% YoY.

Comments.

Earnings performance is in line with expectations, and profitability steadily improved.

In the second quarter, the IT distribution business was integrated into the company and startedcontributing revenue, which greatly increased its profitability and notably pushed up revenue andnet profit. In Q1, calculated with the HKD/RMB exchange rate on June 30, the company’s ITdistribution business contributed CNY 11 billion revenue/ CNY 53 million net profit before thetransaction. After the transaction, Digital China contributed CNY 11.6 billion revenue and CNY 104.3million net profit in Q2. As a result, the H1 revenue from IT distribution business totaled around CNY22.63 billion and net profit around CNY 157 billion. The consumer electronics business reportedrevenue of CNY 6.62 billion, accounting for 57% of total revenue; the gross margin was 3.82%; thecorporate IT product distribution business reported revenue of CNY 4.97 billion, accounting for 43%of total revenue; the gross margin was 7.87%. Investment returns generated from the disposal of thefive subsidiaries amounted to CNY 200 million. At the same time, the financial expense increasedCNY 30 million due to newly added loans of CNY1.81 billion for M&A (The loan rate was 4.99%). Thecompany has successfully returned to the A share market through backdoor listing. via ShenzhenShenxin Taifeng Group Co., Ltd. In addition to upgrading traditional IT distribution, Digital China iscurrently seeking new growth drivers in an attempt to recover its profitability.

IT distribution is upgrading, further gaining a competitive edge.

Following IT industry trend, the company upgraded its distribution business, which turned out to bevery effective. On the one hand, the company has constantly adjusted business strategies to ensuresolid profit foundation. In business IT product distribution unit, Digital China deepened thecooperation with brands including Huawei, Lenovo, Sugon and H3C to enlarge the sales scale. Inconsumer electronics, the company improved service and stepped up support for online salescompanies (such as JD.com and yhd.com) and CES retailors (such as Gome and Suning), creating andmaintaining a new down-stream customer structure. Meanwhile, the company further penetratedinto small city markets and boosted its business in smart hardware fields including VR, AR, smarthealthcare and mobile Internet. On the other hand, the company is shifting focus from offlinechannel to online platform. It is committed to building the largest domestic online B2B platform inthe IT field, offering information, transaction and services to all business users on all channels and building an ecological chain that connects products, service supplier, integrators, business users anddistributors. The company’s B2B platform, e-bridge.com.cn, has launched online consumerelectronics distribution business. It is estimated that the consumer electronics distribution businesswill completely go online at the end of 2016.

The company has made solid progress in transforming into a cloud computing platform andindependently controllable product providers.

Cloud computing is a key strategic focus of Digital China. The company unveiled plans for cloudcomputing through the acquisition of Yunke China Data Technology Limited. It intends to integrateglobal cloud industry resources and build a platform to provide cloud service for business whichoffers clients with abundant cloud computing resources, cloud applications and cloud special servicewith the help of Yunke ‘s IDC/ISP/ICP multi-communication licence, professional marketing andtechnological team and data center in Beijing and Guizhou, online Marketplace Yunkechina.com.

There are more than 60 cloud products and cloud applications from the company itself or the thirdparty, including Cisco, Microsoft, IBM, SoftwareAG. The company will seek mutual benefits withcloud products in the upper sector and business partners based on its strong brand influence andmarket capability. Besides, Digital China will develop plans on private cloud intellectual property rightmanagement platform. In this field, the company focused on segments like securities, storage andnetwork devices through self-development, dual brands and extension and has reached agreementwith famous corporations including EMC, NetScout, Oracle and Cisco. We can see the promisingfuture of cloud computing and independently controllable products.

Earnings Forecast and Investment Grading.

We made EPS forecast for the company at CNY 0.62 in 2016, CNY 0.67 in 2017, CNY 0.73 in 2018given the company’s competitive edge and great potential brought by transformation. Reiterate“Buy”.

Potential Risk: intensifying competition, exchange rate fluctuation, lower-than-expected progress innew businesses

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