Key Data

Gem stock code:

8030

Issue price:

$1.05

52 week H/L:

$1.48/$0.97

Current price:

$1.11

No. of issued shares:

1,000,000,000

Market capitalization:

$1.11b

Estimated P/E:

FY00/28x FY01/14x FY02/11.2

Estimated EPS:

FY00/$0.04 FY01/$0.08 FY02/$0.10

Rating:

Outperform

Highlights

An early mover of system integration (SI) business in China and the booming of telecommunication and internet market provided a strong demand for the Group¡¦s expertise as an experienced network infrastructure integrator.

The Group possesses the capacities in project design, equipment procurement and project management and consulting for its PRC cable network and wireless transmission infrastructure projects.

The soft-launch of the Corp2Net portal and inauguration of iGreatLink represented the Group¡¦s strong commitments in sharpening itself into a cutting edge in the robust ASP arena.

The Group is envisaged to experience solid growth both in turnover and earnings in the next few years as its business expansion plan has penetrated the Greater China region.

Business

The Group is a leading back-bone network solution provider with a prominent presence in the PRC. While consolidating its role as a turnkey system integrator in the China power sector, Digitel also leverages on its business portfolio by expanding into the high growth ASP market first in the Greater China region and then worldwide.

Its core SI business has demonstrated a robust cash flow capability by strengthening its income statement by 500% to 600% in terms of net earning and turnover in 1H00. It is anticipated that the business will continue to flourish as the demand for communication infrastructure fueled up by fast-growing internet and telecom markets in the broadband era.

The Group has already secured construction contracts of cable and fabric optic network for Guangzhou Science Park in Guangzhou Economic and Technological Development District, and cities such as Jinjiang, Shunde and Zhongshan in Guangdong province are also confirmed while Dongguan is in the course of negotiation. The total contracts amounted not less than HK$300 million and pending to be completed in two to three years¡¦ time.

In the ASP side, The Group will continue to devote handsome resources to enrich the contents and application services of its BtoB Corp2Net portal. Unsparing efforts have spent on marketing in the Greater China region with an emphasis in Taiwan. Its marketing arm will soon reach Korea, Japan and the USA.

The Group at the moment has HKD 100 million cash on hand to look for synergistic acquisition and partnership opportunities, which it believes development through such means is a good way to enhance its asset base and add value to its shareholders.

After China¡¦s accession to the WTO, foreign enterprises may allow to virtually become investors to infrastructure networks and the Group has the advantages of being one of the first tier companies to grasp the opportunities.

Earning forecast

HK$m

1999

2000E

2001E

2002E

Turnover

42.7

150

300

350

Net profit

8.7

40

80

100

EPS (Cents)

4

8

10

PER

28

14

11

Opinion

In anticipation of vigorous development and growth potentiality of telecommunications and internet markets in Asia, in particular China, infrastructure network is set to be the backbone and fundamentals for such development. As the first mover in SI business, we believe the Group is able to secure more contracts in both network construction and upgrading. Also, IT outsourcing needs in SME create new business opportunities for its ASP and AIP services.

It is expected that the turnover and net profit will grow and outperform the market at an average CAGR of 50% in the next two years. We have a 12-month target of $1.50 for the counter and recommend investors to overweight at current level.

However, we would also like to emphasize that financial forecast of the Group is based on contracts on hand and those to be secured in middle-term. The Group might otherwise not be able to fulfil target figures in event of a change in market condition. Moreover, price performance of Gem stocks are more susceptible to market sentiment.