20160201-中国银河国际证券-神州控股-00861.HK-Transformation_deserves_a_re-rating.Initiate_with_BUY_23页_1mb

Digital China [0861.HK] Summary

Core Content

Digital China (DC) is a leading IT services provider in China, spun off from Legend Group in 2000. The company is undergoing a strategic transformation by divesting its hardware distribution business and focusing on IT services, logistics solutions, and new growth areas such as internet-based financial services and smart city operations.

Main Business Segments and Growth Drivers

• IT Services:

  • DCITS [000555.CH] is the core of DC's IT services business, shifting from systems integration to higher-margin areas like software development and technical services.
  • Gross margin of the IT services division improved to 19% in 1H 2015, up 2.7ppt YoY.
  • DCITS has a strong client base across financial, telecom, government, energy, and manufacturing sectors.
  • The company is leveraging cloud computing, big data, and platform operations to enhance competitiveness in the IT services market.

• Logistics Services:

  • DC operates under the "Instant" brand, offering comprehensive supply chain management services.
  • The logistics division accounted for 35% of DC's top line in 2015 and is expected to grow at a CAGR of 25-30% over the next 3-5 years.
  • The division is expected to contribute significantly to revenue growth, with a 90% YoY increase in 1H 2015.

• Internet-Based Financial Services:

  • DC has obtained various financial licenses and is focusing on micro-credit, factoring, and leasing services.
  • The financial services division is expected to generate HK$143m, HK$172m, and HK$206m in revenue for 2015-2017 respectively.
  • High gross margin (over 60%) in this segment indicates strong profitability and efficient use of working capital.

• Smart City Operations:

  • DC has initiated 10 Smart City projects and signed agreements with 44 local governments.
  • It is expected to have 16, 42, and 100 platforms operational in 2015, 2016, and 2017 respectively.
  • The Smart City platform serves as an entry point for other O2O services, creating high traffic flow and potential for growth.

• Agricultural Informatization:

  • DC is a key player in the rural information-related services segment, with a 20% market share.
  • The company has acquired Zhongnong Xinda, a leader in rural land information services, which is involved in land rights confirmation and registration platforms.
  • The government is pushing for agricultural informatization, which includes rural e-commerce and smart city projects.

Key Financials (in HKDm)

Investment View

• Buy Recommendation: The report recommends initiating a "Buy" rating with a target price of HK$9.97, based on a 20x 2016E PER for continuing operations plus the special dividend of HK$3.2.
• Valuation: The current valuation of 14.2x 2016E (after adjusting for special dividend) is seen as a re-visit point.
• Catalysts:
  • Declaration of a special dividend of HK$3.2 per share.
  • Breakthroughs in agricultural and healthcare informatization.
  • Growth in internet-based financial services and smart city operations.

Risks

1. Increasing competition in the IT and logistics sectors.
2. Cost over-runs in project execution.
3. Potential forex losses due to exposure to foreign currency-denominated loans.

Strategic Moves

• Disposal of Hardware Distribution Business: The hardware distribution business was sold to Shenxin Taifeng for RMB4.01bn, with 75% of proceeds used for a special dividend.
• Expansion into New Markets: DC is focusing on developing internet-based financial services, smart city operations, and agricultural informatization.
• Partnerships and Acquisitions: DC has acquired Zhongnong Xinda and holds a 15% stake in Cuncunle, a rural social network and classified ad O2O company.

Market Position

• DC is a leading player in logistics services with an estimated market share of less than 5%.
• The company is well-positioned to benefit from the growth of cloud computing, big data, and smart city initiatives in China.
• Agricultural informatization is expected to grow significantly due to government policies and rural e-commerce expansion.

Outlook

• The IT services market in China is under-invested and has potential for growth.
• DC's shift towards higher-margin services and new business models is expected to drive profitability and long-term value.
• The company is expected to deliver solid net profit growth of 25.4% in 2015E, 19.6% in 2016E, and 12.6% in 2017E (excluding non-cash forex loss).