DC Holdings’ 1H 2019 results were weaker than expected, given: a） its share oflosses from HC Intl [2280.HK], b） DCITS’s [000555.CH] projects delay, and c） lowerother income.
The Smart Industry Chain and Sm@rt City divisions showed improvement inprofitability and will drive near-term growth for DC Holdings.
We expect DCITS to report a HoH improvement in performance, given the pick-up intoB and toG business with clients such as telecom operators.
DC Holdings and DCITS are well-recognized IT-related names and are expected tobenefit from the decoupling from overseas suppliers.
We cut our net profit forecasts for 2019F and 2020. But we maintain our ADD rating,with a new target price of HK$5.15, based on 22x 2020 P/E （shift from 2019 P/E）。
Major improvement in Smart Industry Chain division
DC Holdings’ Smart Industry Chain division reported a 43.9% YoY increase in turnover,from HK$1,664m in 1H2018 to HK$2,350m in 1H2019. The Smart Industry Chain divisionreported segment profit of HK$43m in 1H2019, a turnaround from a segment loss ofHK$9m in 1H 2018. The OPEX ratio of Smart Industry Chain dropped from 13.4% in1H2018 to 10.6% in 1H2019. IT Logistics （ITL）， under Smart Industry Chain division, isone of the leading end-to-end warehousing solutions providers in China, especially inindustries such as IT products, telecommunications and fast-moving consumer goods.
ITL operates 231 warehouses across China, and its clients include telecom servicesproviders Huawei, BYD and Geely. ITL is a strategic partner of the Cainiao Network. ITLhas rapidly developed its overseas logistics business along the Belt & Road. We expectITL’s gross margin to improve in 2019F, 2020F and 2021F after the heavy investmentphase in the past several years and improvement in utilization.
Sm@rt City business to make a positive contribution in 2019
Sm@rt City reported revenue of HK$89m in 1H2019, up 38.3% YoY, and segment lossesfell from HK$70m in 1H 2018 to HK$34m in 1H2019. According to management, the‘Yanyun DaaS’ big data solution, recognized by the Central Government as atechnological breakthrough, has been successful in gaining government orders,especially given current direction of decoupling from overseas suppliers. DC Holdings’Sm@art City solutions have advantages over its competitors, as DC Holdings is a totalsolutions provider, not just a hardware provider or systems integrator. DC Holdings has agood track record, as it has implemented over 100 Sm@rt City projects.
DCITS to pick up in 2H2019
DC Holdings reported a net profit of about HK$264,000 in 1H2019 vs. HK$139m （arecurring loss of HK$201m） in 1 2018. DCITS realized revenue of approximatelyHK$4,831m in 1H2019, a decrease of 4.18% YoY from HK$5,042m in 1H2018 becauseof the FX impact and delays in some projects. DCITS reported a 53.0% YoY drop insegment results, from HK$329m in 1H2018 to HK$155m in 1H2019, which was due tonon-recurring gains of HK$199m from the partial disposal of Digital China Financial CloudServices in 1H2018. Excluding one-off gains, DCITS reported a 21.7% YoY increase inrecurring profit in 1H2019. We expect DCITS to report improved HoH performance.
Net profit cut for 2019F and 2020F
We cut our net profit forecasts for 2019F and 2020F after factoring in slower turnovergrowth, lower other gains and income, and a loss from HC Intl. Maintain ADD.