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Edited Transcript of 861.HK earnings conference call or presentation 2-Sep-19 8:30am GMT

Q2 2019 Digital China Holdings Ltd Earnings Call

HONG KONG Sep 18, 2019 (Thomson StreetEvents) -- Edited Transcript of Digital China Holdings Ltd earnings conference call or presentation Monday, September 2, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Chun-pong Wu

Digital China Holdings Limited - Director of Investment

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Conference Call Participants

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* Stephen Yin

Crédit Suisse AG, Research Division - Associate

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Presentation

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Operator [1]

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(foreign language) Good afternoon, ladies and gentlemen. Thank you for joining us today at the Digital China Holdings Limited 2019 Interim Results Announcement Conference Call. Our management team and team leaders of different business centers will walk through the interim results with us.

The company will first introduce and explain the 2018 annual results in English, then Q&A session will be conducted in Mandarin and English.

(foreign language)

First of all, let's welcome our Investment Director, Mr. Davin Wu.

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Chun-pong Wu, Digital China Holdings Limited - Director of Investment [2]

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Hello? Good afternoon, ladies and gentlemen. I'm Davin Wu. I'm in charge of

(technical difficulty)

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Operator [3]

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Mr. Wu, please begin your call. Thank you.

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Chun-pong Wu, Digital China Holdings Limited - Director of Investment [4]

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Yes. Well, in the first half of 2019, we see remarkable results in both Smart Industry Chain and Sm@rt City Business. I will skip the introduction of our company and go straight to our 2019 interim financial review, starting from Page 6 to 9 of the presentation.

So on Page 6 to 9 of the presentation is a summary of our key financials, performance indicators in the first half of 2019. Although, we have seen profit increase across all business line, with performance improvement. The group overall revenues rose 7.7% year-on-year to HKD 7.5 billion, and gross profit improved by 4.7% year-on-year to HKD 1.36 billion. Revenue growth of Smart Industry Chains and Sm@rt City are especially pronounced, growing by 44% and 38%, respectively. So it's very important to highlight that we have seen a remarkable profit turnaround for Smart Industry Chain or IT Logistic business, with a segment profit of HKD 43 million. This compared to HKD 8.7 million loss last year.

So DCITS is increasingly focused on fintech business to drive profitability. We have seen revenue and gross profit drop a little bit, but this is mainly due to foreign exchange. Excluding the FX impact of revenues and gross profit of DCITS, flat from last year.

For Other Business, we see revenue and gross profit go up mainly because of improvement in rental and occupancy of our technology parks across the countries. In term of bottom line profit, profit attributable to equity holders of the company amounted to HKD 264,000. This is a substantial improvement as compared to HKD 200 million recurring loss last years.

Okay. Let's move on to look at our business segment-by-segment and start with Page 12 Industry Chain business.

In the past 2 years, we have seen rapidly improving earning of IT Logistics or (foreign language). The business has gone through a transitory period and our early investment has progressed into substantive financial returns. IT logistics successfully broke-even in second half of last year. And in the first half of 2009 (sic) [2019] it generated a segment profit of HKD 43 million. This is mainly driven by increasing business penetration with eB2B customers, such as Xiaomi, ZTE, Geely, and also rising B2C volumes and the successful implementation of Human + Robot collaboration work models. So with business volume keep risings and further rollout of robotic technology across the countries, we expect earning uptrend to sustain in the second half and also into 2020s.

So moving to Page 30 -- 13, IT Logistic, or (foreign language) in Chinese, today is a leading players in B2B and B2C Industry Chain services with more than 1 million square warehousing areas, serving more than 50 Fortune 500 customers, with an average daily volume of 400,000. So what differentiate us from the competition is that we are running the Industry Chain service with big-data-driven product to add value to our customers.

On Page 14 is an overview of the Industry Chain service with KX-DATA platform as the key big data product. We run the Industry Chain business based on AI and big data technologies. We have multiple online and offline channel to support sales and other demand from both business and consumer customers.

So KX-DATA platform is able to capture data from every aspect of Industry Chain process, helping our customers which sales prediction, procurement, inventory management and logistics planning. So today KX-DATA, we are able to coordinate upstream and downstream Industry Chain enterprise, helping ourself and the customers to figure out the best way to secure a wide range of services, including transport, warehouse, post-sales and finance, et cetera.

Moving to Page 15 to 16, it is our robotic technologies used in the warehouse. Robotic technology are very important elements of our operations and these are very key to cost-reduction initiative. Our (foreign language), our Human + Robot work collaboration model could deal with high volume at a peak season by combining robotic operation. We preprogram manual process. We can save up to 40% manpower, 50% warehouse space and raise sorting efficiency per staff by 2 to 3x.

As we keep rolling out our robotic technology across the warehouse in our country, we are driving profitabilities. We are targeting to achieve a cost saving of HKD 30 million in 2019.

So moving to Page 16. We have recently upgraded our robotic technology to Human + Robot 3.0 versions at Chongqing warehouse. It is the first intelligent shopping program integrating B2B and B2C operations. The work models adapt 2 storage and sorting methods and combine high-density storage layout and AGV reuse, so that we can save our labor and robotic costs significantly by about 30% and reducing storage base by another 30%.

Moving to Page 17. We have seen remarkable trading results for our e-commerce business between the supply chains, which has a set of comprehensive e-commerce services for leading brand in the world, driven by expanding online and offline business with existing customers as well as overseas expansion. We have seen e-commerce business revenue growing by 64% and gross profit increased by 14%. Our business volume growth with Dell technologies and Huawei Honor series cellphones have been very impressive. This year, we have accelerated our overseas expansion, helping our customers expand into the Belt and Road countries. We've won multiple warehouse business with ZTE in Malaysia, setting up new online storefronts in Lazada, an online marketplace in Southeast Asia, and also launching new Huawei business in Russia.

Moving on to Page 18. Our self-developed logistics software (foreign language) Digital China Gold Storage, support cloud service models and real-time data interface. The profit of the software business has been on the uptrend.

In 2019, we have started selling the product to external customers, and generally, received very positive feedback. Some Fortune 500 companies, such as Shell, such as Panasonic and more customers have signed up for the software subscription.

Because of the cost, the marginal cost of selling the software under SaaS format is very low. We expect this to be a new source of profit with very high profit margin in 2019 and 2020s.

Let us move on to Page 20 of the presentation and take a look at the Sm@rt City business. For Sm@rt City, we see a very spectacular revenue growth in the first half of this year with revenue growing by 38% year-on-year. This is driven by our flagship data extraction product, Yan Cloud DaaS, as well as our Sm@rt City 3.0 business model.

It's very important to highlight that underlying technology for Yan Cloud DaaS was awarded the first prize of National Technology Invention Award (foreign language).

We received the award from Chinese President, Xi Jinping, in January 2019. So what differentiate us from the competition is that Yan Cloud DaaS is able to connect different legacy systems and achieve real-time data flow even in a very complicated and challenging deepware system involvement. It could save up to 90% of communication time and 50% of the project implementation time. The product has been widely applied in government system and national defense.

On Page 22, the chart shows that we have been able to apply Sm@rt City 3.0 version and also Yan Cloud in a number of location across the country and integrate other management, citizen and industry altogether.

We have to highlight 2 very important flagship project on Page 23, in Tangshan and also Changchun. In March 2019, we have signed a contract with Changchun government with a contract value of RMB 174 million to help construct Digital New District for Changchun. Our data extraction product, Yan Cloud DaaS and IoT technology, will be very crucial element to do this project.

And also in July 2019, we have signed another contract with Tangshan government with a contract value of RMB 140 million. In Tangshan, we will act as a general manager in managing the Sm@rt Cities, providing a wide range of solution to manage a city efficiency.

So we expect, going forward, Sm@rt City solution built around Yan Cloud DaaS, will become very important earning driver for the segment as well as for the company.

Let's move on to take a look at the DCITS business on 26 -- Page 26. DCITS business has been very much focused on financial technologies. This year, in the first half, we see revenue drop 4% due to depreciation of Renminbi, but excluding the FX effect, the revenue is pretty much flat from last year. DCITS generated a profit of HKD 157 million for the first half of 2009 (sic) 2019 . This is a 22% increase from last year. We have seen very impressive result and a number of new customers signing up for our core banking system and distributor platform. With contract signing rising by 100% compared to last year, we have been able to maintain a leading position in a bank system market.

On Page 27, it is our latest customer list. Our service coverage cover all tiers of financial institutions with a customer base exceeding 700 starting from policy banks, the top 6 commercial banks and all the way down to city-level commercial banks and rural credit unions.

DCITS has been helping many bank to transform their business into an internet format. And on Page 28, we highlight an example that we recently helped aiBank or (foreign language) set up by Deutsche Bank. We have helped them launch its virtual banking operations with our core banking system and distributed platform. The features of the new platform is that it is highly scalable, is able to deal with high transaction volumes and a very low operation cost for the virtual bankings. It's also very easy to develop new application around the core banking system.

Okay. Moving on to Page 29 is a summary of our progress in Quantum Communication Business of DCITS. This is a very new and growing business, and we are leading the market in term of use case and technologies.

As of today, more than 20 financial institution have made use of the nationwide Quantum Communication network and metropolitan area that were built by DCITS, which has combined quantum technologies and business system in the financial institutions.

And this also include Renminbi cross-border collection and payment system of People's Bank of China and the banking information supervisory body of China banking regulatory commissions.

Let's move on to Digital China health on Page 31. So DC health has been building the largest oncological database in China with their exclusive license, we got the exclusive access to oncological hospitals and a number of health care, big data analytic products have been developed, and they are very attractive to pharmaceutical companies as well as insurance companies.

In 2018, we completed Series A financing with a post-money valuation of RMB 3.2 billion and bringing a large number of institutional investors. And in 2019, we launched a distant cloud-based medical platform SHINEFLY 2.0 together with Philips, a major milestone in clinical oncological treatment. We are also leading the national project to research AI-assisted clinical decision-making in major hospitals.

Let's move on to iSESOL, our leading industrial internet platform covering industrial machines in 26 provinces and 161 cities. In the first half of 2019, iSESOL has seen the number of connected industrial machines rising by 48% year-on-year to 28,000. iSESOL has become the first 5 industrial Internet platform certified by the alliance of industrial Internet and also setting -- okay, setting the beginning to make us a licensed operator in the future.

So moving on to second half of 2019. And our objective is to reinforce our strategy to become a leading big-data operation service group with a focus on improving the financial returns from Sm@rt City and Smart Industry Chains. We will use digitalization, integration of resources and internationalization to empower Sm@rt urban developments and digital transformation of all industries. So looking ahead in 2019, based on our observation year-to-date, the earning to improvement will be even more pronounced in the coming quarters.

So -- and this is at the end of the presentation, we will move forward to Q&A section.

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Questions and Answers

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Operator [1]

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(foreign language)

First, Mr. Wu, now is the Q&A session. (Operator Instructions)

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Unidentified Analyst, [2]

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Unidentified Company Representative, [3]

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Operator [4]

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Operator [7]

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(foreign language) Our next question comes from Stephen Yin with Crédit Suisse.

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Stephen Yin, Crédit Suisse AG, Research Division - Associate [8]

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Unidentified Company Representative, [9]

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Stephen Yin, Crédit Suisse AG, Research Division - Associate [10]

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Operator [12]

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(foreign language) Next question comes from George (inaudible)

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Operator [21]

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Unidentified Company Representative, [23]

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Okay. (foreign language)

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Operator [25]

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Hello? (foreign language)

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Unidentified Company Representative, [29]

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Operator [30]

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Unidentified Analyst, [31]

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Thank you very much. And thank you very much for the presentation results. Congratulations on it, by the way. I just wanted to ask several questions. First and foremost is, would your group consider selling some noncore assets such as real estate and manufacturing to improve the returns to your shareholders?

And the second question that I wanted to ask is, how do you -- do see any other further technological applications that you guys plan to invest into? And if so, what's your strategy? What's your criteria on these investments?

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Unidentified Company Representative, [32]

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So for the second question, I can answer you. We continue to invest on a lot of technologies in, let's say, okay, AI, big data in logistic area.

And also we would like to, okay, invest some big data in Sm@rt City area. So we continue to invest a lot of, okay, technology and also look for technology partners in this area.

For your first question, I'm not getting on it. Can you repeat it? According to the real estate...

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Unidentified Analyst, [33]

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No. The first question is basically, are you guys looking to sell some of your noncore assets, something like in the real-estate sectors, just to improve your returns to potential -- to shareholders?

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Unidentified Company Representative, [34]

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Okay. Okay. Okay. So for your -- you mean the building likes. At this moment, okay, we are looking for better returns. I think this year, we are not thinking to sell any property at the moment because according to the market, it's pretty quiet.

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Unidentified Analyst, [35]

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But any other sectors that you're planning to exit?

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Unidentified Company Representative, [36]

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Some is our not our core ecosystem, we are planning to exit some. We are also looking for it. And then focus more on our ecosystem for the Sm@rt City and smart supply chain business.

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Operator [37]

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(foreign language) (Operator Instructions) (foreign language)

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Operator [42]

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Unidentified Company Representative, [43]

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(foreign language) Bye-Bye.