eyes on the ground it services · 2020-03-06 · eyes on the ground it services│china│march 3,...

Eyes on the Ground IT Services│China│March 3, 2020

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Digital China Group Co Ltd A digital transformation enabler ■ Digital China [000034.CH] is a China-based company, engaged principally in the

provision of information technology (IT) products, cloud value-added services, technology solutions and related services.

■ The Kunpeng ecosystem-related business and MSP operations are growth drivers. ■ Digital China is one of the less discussed digital transformation enablers. Shares may

see volatility, given its share price outperformance; its share price weakness offers a good revisit opportunity.

Leading information technology company in China Digital China's primary business is the distribution of consumer electronics and enterprise IT products. The Company leverages its expertise and resources built up from its IT distribution and value-added services business to expand its server, PC and cloud computing business. Its cloud computing products include cloud management services, purpose-built public cloud services, cloud operator, yunke series, and shangqiao online.

Cloud computing to boost growth Digital China is actively promoting its cloud computing strategy to meet the strong growth of the cloud computing business in China. The Company officially formed a “Cloud Business Group" (CBG) in Dec 2019, integrating its the Yungoal, DCcloud and all cloud-related businesses to build a new and better customer-oriented organization. The Company’s cloud computing business started with a cloud-managed service provider (MSP) in 2017 through the acquisition of Yungoal and quickly developed a firm footing in the marketplace. According to IDC, the Company ranked second in China's MSP market in terms of market share. The Company entered another two cloud segments: resale and digital solutions. In 2019, the Company launched an SaaS Hosting model to attract international SaaS products and help them enter the Chinese market.

Core partner of Huawei The cooperation of Digital China and Huawei started in 2011, and now Digital China is one of the Huawei’s core partners, with a scale more than Rmb10bn, representing a CAGR of over 40%. Digital China uses its large, extensive distribution network to distribute innovative Huawei products, such as the Kunpeng server. Digital China has become an important partner of Huawei Cloud, passing Huawei Cloud Certified Service Solution Partner (CSSP) Certification, and has kept deepening the cooperation. Digital China is engaged in strategic cooperation with Xiamen City to construct a Kunpeng supercomputing centre, which also involves cooperation with Huawei’s Xiamen Kunpeng ecological base. In 2018, Digital China proposed a “Big Huawei” strategy and formed a Huawei business unit to integrate all of its business with Huawei. Digital China will benefit from Huawei’s efforts to build a Kunpeng ecosystem in China. Digital China will construct two production bases in Xiamen, which will produce mainly Huawei’s ARM-based servers and PC products. The products based on Kunpeng architecture will be available in late 2020, and Digital China will gradually release its self-designed products in the coming years.

Strongest distribution channel network in China After 20 years of informatization in China, Digital China relies on an ecosystem of more than 30,000 partners to provide digital products, solutions and professional IT services to enterprises and consumers. It has established a remarkable toB marketing channel network with the widest domestic coverage in the industry.

SOURCES: CGIS RESEARCH, COMPANY DATA, BLOOMBERG

China

NON RATED Current price: Rmb28.30

Consensus Tgt Price: Rmb

Up/downside: N/A Reuters:

Bloomberg: 000034 CH

Market cap: US$2,657m

Rmb18,510m

Average daily turnover: US$79.34m

Rmb554.1m

Current shares o/s: 654.1m

Free float: 46.7%

Source: Bloomberg

Price performance 1M 3M 12M

Absolute (%) 24.3 54.9 111

Relative (%) 24.5 51.6 111.8

Major shareholders % held Mr Guo Wei 23.7

China Sigma Co Ltd 12.3

Mr Wang Xiao Yan 7.6

This Eyes On the Ground report represents a preliminary assessment of the subject company, and does not represent initiation into CGI's coverage universe. It does not carry investment ratings and CGI does not commit to regular updates on an ongoing basis.

Insert

Analysts

Mark Po

T (852) 3698 6318 E [email protected]

Wong Chi Man T (852) 3698 6317 E [email protected]

Key Financials

(in Rmb m)2015 2016 2017 2018

Revenue 456.1 40,531.1 62,216.0 81,858.1

Gross Profit 47.1 1,976.9 2,925.1 3,296.5

Gross Margin % 10.3 4.9 4.7 4.0

Net Profit 21.4 403.8 722.9 512.4

Net Margin % 4.7 1.0 1.2 0.6

EPS (Basic) 0.06 0.67 1.11 0.78

ROE (%) 12.1 28.5 24.1 14.3

Dividend Yield (%) - - 0.18 1.11

PER (x) 392.70 33.50 22.50 31.70

PBR (x) 45.10 5.80 4.90 4.20

Capex (m) (1.4) (49.7) (1,349.2) (1,430.8)

Free cash flow (m) (0.2) 113.8 (2,008.4) (1,728.3)

Net cash/(net debt) (m) 213.8 (7,446.9) (10,244.5) (12,192.6)

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IT Services│China

Digital China Group Co Ltd│March 3, 2020

Business

1) Cloud computing business (云计算业务)

Digital China is a leading domestic provider of cloud managed services and digital solutions, providing enterprise customers with a variety of products, services and digital solutions for IaaS, PaaS and SaaS. Its cloud computing business includes three main types of business: a) cloud resale, b) cloud managed service provider (MSP), and c) digital solutions.

a) Cloud resale business (云转售业务)

The cloud resale business includes public cloud resources, hybrid cloud platforms, software licensing, and SaaS services. Digital China can connect with mainstream cloud services, AI/IoT and big data vendors at home and abroad as a senior partner, providing the most abundant cloud computing and digital-related resources and products on the market, and providing customers with one-stop, diversified resource docking and resale services. Most large and medium-sized enterprises will choose multiple public cloud platforms and hybrid cloud architecture for deployment. Enterprise customers are more inclined to use the same cloud service provider to connect to multiple mainstream cloud vendors at the same time, with unified resource docking and resale. Extensive resource matching is the starting point and basis for reaching customers and providing services, laying a solid foundation for advancing cloud value-added services and digital transformation business. In the connection of cloud resources, the Company has established in-depth cooperative relationships with 80+ mainstream cloud vendors worldwide. The Company is (i) an Alibaba Cloud Diamond Partner, (ii) an Azure Gold Partner, (iii) an AWS Advanced Consulting Partner, (iv) a Tencent Cloud Strategy and Development Partner, (v) an Oracle Cloud MSP certified Greater China partner, (vi) a Huawei strategic partner, (vii) a VMware Vcan & Aggregator, (viii) a Red Hat CCSPD partner, and (ix) a strategic partner of Elastic China. At the same time, the Company focuses on Salesforce, SAP, Oracle, MS Office 365, Adobe and Autodesk, and has built a cloud resource pool that aggregates more than 120 mainstream SaaS resources and more than 500 cloud ecological partner resources. The Company's extensive cloud cooperation system can provide customers with mainstream and diversified choices, enabling customers to make optimal choices in consideration of cost, applicability, and expandability. In terms of cloud resale channel expansion, the Company assists and empowers traditional channel partners to transform to the cloud, and cumulatively generates cloud resale and value-added service business through more than 600 channel partners, with about 300 new channels added in 2018. Digital China is playing an increasingly important role in cloud services and digital transformation.

b) Cloud managed service provider (MSP) business (云管理服

务业务)

The cloud managed service provider (MSP) business is a series of full life-cycle services, including consulting, training, migration, implementation, operation and maintenance (O&M), support, optimization and security. It utilizes Digital China's self-developed cloud management platform to monitor, control risks and optimize costs in real time, and helps customers achieve one-stop management of multi-cloud and hybrid cloud resources. Through resource docking and resale, the Company can establish contacts with customers and understand their business needs and application scenarios.

As enterprise customers continue to deepen their access to the cloud, more and more data will be accumulated on the cloud. The rapid iteration of technologies such as AI/IoT and big data has resulted in a large number of customized development business requirements on the cloud. Digital China, as a traditional IT service management (ITSM) provider and managed service provider (MSP), is leading the transition to the cloud era.

At present, Digital China has IDC (Internet Data Center), ISP (Internet Service Provider), ICP (Internet Content Provider), and multi-party communication licenses. It has built data centres in Beijing and Guizhou; it has built a DC Clouds resource platform, integrating 14 types of cloud resources, connected with five public cloud resources (Alibaba Cloud, Microsoft Azure, AWS, Huawei Cloud, and Oracle); and it has introduced more than 120 SaaS application resources. It provides complete cloud services for more than 500 cloud ecological partners. In the field of public cloud MSP, Digital China has obtained 3A (AWS, Azure, Alibaba Cloud) TOP-level partner status, and obtained a number of professional certifications.

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Figure 1: China cloud managed service provider (MSP) competitive landscape

SOURCES: CGIS RESEARCH, COMPANY DATA

c) Digital solutions business (数字化解决方案业务)

The digital solutions business or the independent software vendor (ISV) business helps customers with cloud migration and adoption. Many of the Company's clients rank among the world's 500 largest companies, including retail, fast-moving consumer goods, automotive and other industries. The Company provides them with complete digital business solutions based on technologies such as the Internet of Things (IoT), big data, and artificial intelligence (AI). The digital solutions formed by the industry's top clients have high reproducibility and can be promoted in many industries.

2) IT distribution and value-added services business

(IT分销和增值服务业务)

Digital China is China's largest and most extensive distribution and value-added services provider in the IT industry. After more than 20 years of accumulation, Digital China has established a remarkable 2B marketing channel network with the widest domestic coverage (more than 1,000 cities in China), the largest ecological scale (more than 30,000 channel partners), and the highest operating efficiency (significantly higher-than-average inventory turnover rate, capital cost, etc.). This channel network has long served and deeply integrated domestic large-scale enterprise-level customers, with great resource value and high operating barriers. It is the preferred partner for domestic and foreign technology manufacturers to enter the Chinese enterprise IT market. This includes tens of thousands of IT products, including mobile office equipment, computer accessories, intelligent hardware, IoT equipment, notebook computers, display equipment, servers, storage equipment, and network equipment application software, which have been consecutively ranked at the top of the domestic IT distribution sector for more than 10 years. While providing a wide range of electronic products for enterprise customers and consumers, Digital China has provided more than 1m Chinese enterprises with products, solutions and services required for digital transformation. Facing the tide of digital transformation with cloud computing as an important component, the company's strong 2B marketing channel network and enterprise-level customer coverage capabilities are showing great value.

On-Premises

SaaS

PaaS

IaaS

Managed service provider (MSP) is not a new concept. A managed service provider (MSP) delivers services, such asnetwork, application, infrastructure and security, via ongoing and regular support and active administration oncustomers’ premises, in their MSP’s data center (hosting), or in a third-party data center. MSPs may deliver their ownnative services in conjunction with other providers’ services (for example, a security MSP providing sys admin on top of athird-party cloud IaaS). Pure-play MSPs focus on one vendor or technology, usually their own core offerings. Many MSPsinclude services from other types of providers. The term MSP traditionally was applied to infrastructure or device-centrictypes of services but has expanded to include any continuous, regular management, maintenance and support.

Based on Gartner’s definition, a public Cloud infrastructure MSP is a provider that offers bothprofessional and managed services related to infrastructure and platform operations for one or morehyper-scale integrated IaaS and PaaS providers.

New service provider: Dt Dream (数梦工场), Zhuyun/CloudCare (驻云科技), Anchnet (安畅网络), Nanyang Software (南洋万邦), Sinoage (信诺时代), eCloudvalley (伊云谷), Hand Vyung (汉得微扬), Bespin Global, Futong [0465.HK], Agilewing (敏捷云), Yunxi (云徙), Yun Strategy (云策科技), Silver Lining (冠闵)

IT consulting company: IBM [IBM.US], Accenture [CAN.US], Deloitte, Capgemini [CAP.FP]

Transformer of traditional IT distributors and service provider: Digital China [000034.CH] (ranked second in China MSP market in 2018 with a market share of 5.8% according to IDC), Lenovo [0992.HK], Teamsun[600410.CH], VSTECS [0856.HK]

Transformer of ISV/SI/ITO service provider: Chinasoft International [0354.HK], iSoftStone (软通动力), Infosys [INFY.US], Taiji Computer [002368.CH], DHC Software [002065.HK], AsiaInfo [1675.HK], Pactera (文思海辉), Beyondsoft [002649.CH], Connext [联蔚科技]

Transformer of data center service provider: GDS [GDS.US], Light2Cloud (光环有云), Yuanding (元鼎科技), Yovole (有孚网络)

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3) Kunpeng ecosystem enabler

In July 2019, the Xiamen government and Huawei signed a cooperation agreement. Huawei will construct its first Kunpeng ecological base and supercomputing centre in Xiamen for a total investment of about Rmb1.5bn. In Nov 2019, Digital China announced that it would engage in strategic cooperation with Xiamen in various fields such as the Kunpeng Supercomputing Center, innovative and trusted servers and PC production bases, and smart cities. The Xiamen government will support Digital China's construction of the Kunpeng supercomputing center and will use its services, and encourage enterprises in Xiamen to use the services of the supercomputing center. According to the latest news, Xiamen plans to procure at least three years of supercomputing services from Digital China.

Digital China’s production bases in Xiamen will produce mainly Huawei’s ARM-based products. The servers and PCs products based on Kunpeng architecture will be available in late 2020. Digital China will gradually release its self-designed products in the coming years. As we discussed in our updates on 05 Jun 2018 and 08 Jan 2019, ARM architecture is an option for China to achieve a breakthrough in the global server market even without strong support from overseas players. The global server market has been dominated by x86 architecture, which accounts for over 90% of the market. The x86 server market has been dominated by Intel, as the x86 ecosystem was developed more than 30 years ago, and upstream suppliers and downstream customers are used to the standards and software (software-defined networking and network functions virtualization). In Shenzhen in early 2019, Huawei unveiled an in-house-designed ARM-based processor, the Kunpeng 920. According to Huawei, the Kunpeng 920 is designed for applications like big data processing and distributed storage. The Kunpeng 920 is a 7nm ARM-based 64-core server chip clocked at 2.6GHz and paired with 8-channel DDR4 memory in a bandwidth. The Kunpeng 920 achieved better performance than some competing systems (25% higher score than the industry benchmark and 30% less power consumption), which is due to: a) optimized branch prediction algorithms, b) more OP units, and c) an improved memory subsystem architecture. Other onboard features of the Kunpeng 920 include two 100G RoCE ports and support for PCIe Gen4 and CCIX. Huawei also launched new servers in its TaiShan flagship series, powered by the Kunpeng 920. Huawei released three TaiShan server models in early 2019: a) one focusing on storage, b) one on high density, and c) one on both storage and high density. TaiShan servers with Kunpeng 920 processors are specially designed for high-performance, high-efficiency scenarios.

An x86-based server with 12, 16, 24 or more cores delivers increased performance by scaling up the speed and sophistication of each processor, using brute force speed and power to handle demanding computing workloads. An ARM server, using the scaling-out concept, employs many smaller, less sophisticated, low-power processors, which share processing tasks across hundreds of processors rather than channelling the workload through just a few processors. Therefore, ARM-based servers can improve performance per watt and performance per area vs. x86-based servers. The rise of cloud computing and hyper-scale data centres offers an opportunity for ARM architecture. These types of advantages will be more useful in the future, especially in the 5G era, when a more efficient computing architecture is required for handling new networking design. Due to increasing tension between China and the US, there is demand in China for self-developed components, hardware and software.

Huawei released its strategy for the computing market and its AI computing platform, Atlas 900 in Sep 2019. Huawei’s Intelligence Computing platform satisfies three requirements: a) brute force computing, b) ubiquitous computing (edge computing & IoT), and c) cooperative computing. Brute force computing involves trying all possibilities until the solution to a problem is found. It requires incredible computing power. Ubiquitous computing includes on-device computing, specialized edge computing, and brute force computing on the cloud, which together form the computing landscape of the intelligent world. Cooperative computing coordinates activities across the computing landscape. The Atlas 900 runs on a cluster of 1024 Ascend 910s, which is an AI computing chip for data centres. Huawei announced the Ascend 910, along with an AI computing framework called MindSpore, earlier this year. According to Huawei, the Ascend 910 is the world’s fastest AI processor, which consumes only 310W of power. Huawei mentioned that the Atlas 900 is the world’s fastest AI training cluster, as it finished the ResNet-50 model in 59.8 seconds, about 10 seconds faster than previous world record. Huawei also demonstrated an example of the work it is doing with the Shanghai Astronomical Observatory and the Square Kilometre Array (SKA) Organization to process epic amounts of data using the Atlas 900. Huawei announced the Huawei Developer Program in 2015, which empowers more than 1.3m developers and 14,000 ISVs around the world.

Huawei will invest US$1.5bn to attract as many as 5m developers in the computing ecosystem to capture the growth potential of the computing market (US$2tn by 2023).

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IT Services│China


Huawei will deploy the Atlas 900 on Huawei Cloud as a cloud service. Compared with some of its peers, Huawei’s AI computing platform has advantages in our view, since Huawei’s portfolio covers networks, devices and public cloud services. Huawei’s in-house-designed chips, including Kirin, Balong, Kunpeng, Ascend, Boudica and Honghu, can be applied throughout the whole computing ecosystem. Huawei developed the Da Vinci architecture, which is processor architecture that can support all scenario intelligence across devices, the edge and the cloud. Recall that Huawei also developed its own OS, Harmony, for devices. Huawei aims to build an open ecosystem to boost the performance of the AI computing platform.

Figure 2: Huawei's TaiShan Server


Figure 3: Huawei's Kunpeng 920 processor


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Figure 4: Huawei’s Intelligence Computing


Figure 5: Huawei’s AI portfolio


Figure 6: Huawei’s Da Vinci architecture

[ DblClick to Paste Table/Chart here ]


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Figure 7: Digital China turnover breakdown in 2016–2018


Figure 8: Digital China net profit in 2016–2018


Figure 9: Company structure and affiliates (as at the end of 1H19)


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Disclaimer

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REDUCE : The stock’s total return is expected to fall below 0% or more over the next 12 months.

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eyes on the ground it services · 2020-03-06 · eyes on the ground it services│china│march 3,...

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