IT & Software Sector China January 214 Produced by: - 1 -
Table of Contents I. Sector Overview 1. Sector Highlights 2. Sector Importance 3. Chinese IT Market 4. Investments 5. Retail 6. Industry Forecast 7. Government Policy II. Hardware 1. Subsector Highlights 2. Hardware Market Segmentation 3. Computer Industry 4. Computer Industry Employment & Output 5. Computer Penetration 6. Computer Prices 7. Computer External Peripheral Equipment Industry 8. Peripherals Industry Employment & Output 9. Industrial Production 1.Exports & Regional Position III.Software & IT Services 1. Subsector Highlights 2. Software Revenues 3. Software Market Segmentation 4. IT Services Market Size & Segmentation 5. Software & ITS Labour Market 6. Industry-oriented Software Market 7. Cloud Computing 8. IT Outsourcing 9. IT Security IV. Main Players 1. Great Wall Technology Company Limited 2. Great Wall Technology Company Limited (cont d) 3. Digital China 4. Digital China (cont d) 5. TPV Technology Limited 6. TPV Technology Limited (cont d) 7. Neusoft Corporation 8. Neusoft Corporation (cont d) 9. Inspur Group Co., Ltd. 1.Inspur Group Co., Ltd. (cont d) V. Regional Distribution 1. Software Sector Regional Distribution - 2 -
I. Sector Overview - 3 -
Sector Highlights Development The IT industry is seen as one of the pillars among the emerging industries in China and a key factor for the country's overall economic development. While China's progress in recent years has been significant, there is a lot of hidden potential in the IT industry and with favourable government policies in place coupled with the ever-increasing need for industry upgrades, the prospects for the next few years look promising. Disparity China is the country with the largest number of both internet users and mobile users in the world, yet due to its lower starting point and the uneven rate of modernisation of different regions, large parts of the country remain technologically underdeveloped. Some of the country's major cities are among the global leaders in the IT industry, while smaller towns and rural regions as well as regions in the central and western part of the country are lagging far behind. However, the government seems to be determined to bridge this gap, and its efforts are expected to open new areas for development in the industry on which Beijing relies heavily for increasing the nation's productivity and, ultimately, growth. Challenges While rising disposable incomes are pushing the industry forward, a number of challenges remain in place. Some general economic uncertainties continue to weigh in on IT investment decisions of local businesses, particularly small and mid-sized ones, who are also the hardest-hit by the profit pressures throughout the sector. Furthermore, China has for a long time been notorious for its problems with intellectual property rights protection and software piracy, and these issues continue to take their toll on the sector development. In spite of current reforms, the regulatory climate still requires major improvements. - 4 -
Sector Importance Sector Importance 28 29 21 211 212 213e IT Market Value, RMB bn n/a n/a 625.9 689.2 764.2 832.6 GDP, RMB bn 31,45 34,9 4,151 47,31 51,894 57, Share of GDP n/a n/a 1.55% 1.48% 1.48% 1.46% Internet Users, mn 298 384 457 513 564 n/a Mobile Internet Users, mn 118 233 33 356 42 n/a Internet Penetration, % 1.2% 2.3% 3.% 3.6% 4.2% n/a China Software Exports, USD bn n/a 18.5 2 3.4 36.8 n/a Total Exports, USD bn n/a 1,22 1,578 1,898 2,49 n/a Software Exports as Share of Total n/a 1.54% 1.27% 1.6% 1.8% n/a Comments In 212, China was the fourth-biggest spender on IT in the world, behind the United States, Japan and Germany, and is expected to have risen to second place within 213. While the market size remains about a third of that in the United States, the industry growth rate in 213 of approximately 8.3% is double that of the U.S., and is expected to reach double digits in 214. Source: BMI, National Bureau of Statistics, General Administration of Customs - 5 -
Chinese IT Market IT Market Size, RMB mn 9, 8, 7, 6, 5, 4, 3, 2, 1, 125,188 75,113 42,563 38,38 144,724 86,145 44,913 41,246 165,34 99,351 44,962 44,962 185,484 113,986 43,713 47,978 344,769 372,133 49,655 441,395 21 211 212 213 (est) Networked Readiness Index 213 IT Services Software Other Hardware Servers PC Index Value Global Rankiing Political & Regulatory Environment 3.97 56 Business & Innovation Environment 3.78 15 Infrastructure & Digital Content 3.46 83 Affordability 5.82 4 Skills 5.1 53 Individual Usage 2.96 83 Business Usage 3.86 35 Government Usage 4.58 38 Economic Impacts 3.8 83 Social Impacts 4.29 42 Oveall Index 4.3 58 The Networked Readiness Index indicates the ability of countries to make use of opportunities offered by information and communications technology on a scale of 1 to 7. In 212, China lost 7 positions in terms of networked readiness, dropping to 58 th place and sliding behind Russia, thus losing its lead among BRIC countries. According to the Global IT Report of 213, China s institutional framework and especially its business environment present serious shortcomings that stifle entrepreneurship and innovations. Another major issue is the limited or delayed availability of new technologies (17 th position globally) despite the presence of pockets of technological excellence in certain sectors and regions of the country. The report also notes the disparity between IT usage among individuals, only 4% of whom use internet on a regular basis, vs. the business sector, which uses IT extensively and is among top 4 of the world in that aspect. Source: BMI, World Economic Forum's Global Information Technology Report 213-6 -
Investments Fixed Asset Investments (in RMB bn) Foreign Direct Investments 1,375 1,695 8,451 7,174 8,432 6,585 695 795 1,32 7,38 3,358 2,775 2,247 2,487 2,699 1298 1,286 1,81 136 114 1341,46 993 135 926 184 39 5 68 85 28 29 21 211 212 Computer, Communications & Other Electronic Equipment FAI Software and Information Technology Services FAI 28 29 21 211 212 Computer, Communications, & Other Electronic Equipment, USD mn Info Transmission, Computer Service & Software, USD mn Computer, Communications, & Other Electronic Equipment: Number of Contracts Info Transmission, Computer Service & Software: Number of Contracts Comments Amid the global economic slowdown, foreign investments have been fluctuating as international investors lost their grip on disposable funds for investment. The overall level of investments in China, however, has remained largely unchanged, as the increasingly complicated IT infrastructure and the market s intense dynamics and competition have left enterprises little choice outside of upgrading their businesses by investing in IT. Source: National Bureau of Statistics, Ministry of Commerce - 7 -
Retail IT Retail Revenues IT Retail Finances (in RMB bn) 16 14 12 1 8 6 4 2 14 39.9% 16 32.2% 28.1% 21.5% 76 63 62-1.4% 28 29 21 211 212 5% 4% 3% 2% 1% % -1% 28 29 21 211 212 Current Asset 16.1 19.1 25.9 31.5 37.6 Total Assets 19.9 23.6 31.8 37.7 46.5 Total Liabilities 12.3 14.8 2.8 24.5 3.8 Revenues, RMB bn Growth y/y Shareholder Equity 7.5 8.9 11. 13.2 15.6 2 1.5 1.5 IT Retail Profits 1.7 122.7% 1.5 1.2 1.3 45.4% 3.9%.6-11.6% -52.9% 28 29 21 211 212 15% 1% 5% % -5% -1% Cost of Sales 58.1 57. 7. 97.9 129.6 Financial Expenses.2.2.3.3.5 Total Purchases 65.6 62.8 75.7 113.8 152.4 Total Purchases: Imports.1.3.4.4 1.3 Profits, RMB bn Growth y/y Inventories 5.7 7.1 7.4 9.7 1.7 Source: IT Retail Revenues - 8 -
Industry Forecast IT & Software Industry Forecast 25 2 15 1 123 11.1% 137 11.3% 11.8% 153 12.2% 172 12.4% 193 13% 12% 12% 11% 5 11% 212 213 214 215 216 1% Revenues, USD bn Growth y/y Comments Research firm Technavio expects the overall IT market in China to grow at a CAGR of 11.9% over the forecast period. Business upgrades, growth of IT talent and implementation of new technologies, often backed by the government, are to remain the major growth drivers in the industry, together with rural regions, 2 nd and 3 rd -tier cities rising demand, the wider adoption of e-commerce and the ongoing modernization in education and healthcare, among other sectors. Source: Technavio - 9 -
Government Policy Informatisation Development Plan Five-Year Plan Government vs. Piracy In October 213, the MIIT unveiled the Informatisation Development Plan, a joint policy for the implementation of the12th Five-Year Plan for National Economic and Social Development (211-216) and the National Informatisation Development Strategies (26-22). According to the plan, by 215 the country is to make substantial progress in integrating IT with industrialisation and promoting its use in all aspects of its social and economic development. China is aiming at bringing its National Informatisation Index to a level of.79 by 215, up from.77 in 21. According to the 12th Five-Year Plan on the Development of the Software and IT Service Industry, released in June 212, software revenues are to reach over RMB 4 trillion by 215, growing at over 25% a year, and software exports are to exceed USD 6 trillion. The focus of sector development is to fall on infrastructure software, industrial software and industry solutions, embedded software, data security software and services, information systems integration services, information technology consulting services, digital content processing, service outsourcing, services for emerging information technologies, and integrated circuitry design. The Chinese government has taken an active stance against the widespread use of pirated software. Between 21 and April 213, it undertook a campaign which included the purchase of 3.23mn units of office software and a series of extensive inspections among government agencies on central and provincial level. Besides, in August 213 it posted a circular which urged governments at all levels to use legitimate software in computer systems. The main body regulating the IT industry is the Ministry of Industry and Information Technology (MIIT), which in 28 replaced the Ministry of Information Industry. The ministry regulates wireless, Internet, broadcasting, communication, software and electronic goods markets. Source: USITO, People's Daily, Sina Tech, Xinhua - 1 -
II. Hardware - 11 -
Subsector Highlights Leading IT The hardware subsector dominates China's IT industry, accounting for nearly two-thirds of the total market value and still offering many investment opportunities, thus remaining a major driver for overall industry growth. Government Role The government subsidies for purchases in rural areas has had a strong positive impact on demand of personal computers. Also, the public sector reform aimed at enhancing the country s administrative capabilities by means of implementing new technologies is also widely supportive for the sector. Tablets & Laptops A notable shift from desktop PCs to laptops & tablets is one of the defining characteristics for the subsector. Sales of tablets more than doubled over 212. Meanwhile, mobile computing is also gaining further ground against more traditional platforms. Servers The demand for servers in China is also rising with the major reason for that being the large number of new small and medium enterprises in the economy which have spurred as a result of prolonged economic growth and whose business activity requires increasingly complicated data processing and network capacities.. Printers Foreign companies dominate the printers segment in the country, with Hewlett-Packard Co., Epson Corp., and Canon Inc. among leading names. - 12 -
Hardware Market Segmentation Hardware Segmentation by Market Share, 212 Hardware Segmentation by Product, 212 Others 52% Servers 15.9% Network Equipment 12.1% Storage Devices 1.1% HP 1% Dell 1% Peripherals 19.9% Lenovo 29% PC 42.% Comments Hardware industry in China is rather concentrated, with the three major players controlling almost half of the market. All major companies in the subsector are foreign, with the notable exception of market leaders Lenovo. Source: Technavio - 13 -
Computer Industry Computer Industry Revenues & Profit Computer Industry Financial Data, in RMB bn 22.9% 1,956 2,168 2,32 28 29 21 211 212 1,713 1,591 Total Assets 582.3 761.3 891.5 883.8 939.5 8.6% 1.8% 6.2% Total Liabilities 4.5 524. 611.6 595.8 636.2 Cost of Sales 1,45.5 1,492.7 1,841.6 2,29.3 2,22.8-7.1% 36 5 64 41 79 28 29 21 211 212 Total Taxes Paid 6.8 6.7 14.7 16.4 23.5 VAT Paid 6.2 6.1 13.8 14.1 2.4 Revenues, RMB bn Revenues Growtth, y/y Profits, RMB bn Delivery Value for Export 1,194.5 1,195. 1,478. 1,69.7 1,724.4 Comments In 212, China became the largest PC market in the world by volume, overtaking the former leader USA. Intense competition is squeezing profits of Chinese computer manufacturers, whose margins are currently about 3% on average a level which, according to researchers BMI, compares to around 4% for the Asian markets. Source: Ministry of Industry and Information Technology - 14 -
Computer Industry Employment & Output Employment Output & Sales Value 2 1.8 1,585 1,69 1.66 1.9 1.85 1,8 1,6 2,273 2,187 2,186 2,158 1.6 1,457 1.51 1,4 1,917 1,9 1.4 1.2 1.4 1,29 1,273 1,2 1, 1,529 1,49 1,599 1,562 1.8 8.6 6.4 4.2 2 28 29 21 211 212 28 29 21 211 212 Average Number of Employees, mn Number of Enterprises Gross Industrial Output, RMB bn Industrial Sales Value, RMB bn Source: Ministry of Industry and Information Technology - 15 -
Computer Penetration Average Number of Computers per 1 Urban Households 15 13 11 9 7 5 3 27 28 29 21 211 212 Computer penetration in China remains low by developed country standards and is expected to resume its growth into the next few years, although inevitably losing some momentum mostly due to the increased use of smartphones. Smaller towns and rural regions remain significantly underpenetrated and will likely see the highest growth over the next new years. In 212, the amount of computers per urban household in first-placed Shanghai municipality (144.4) was more than 2.5 times greater than that of the central Qinghai province (55.7) which took the last place in the ranking. National Shanghai Guangdong Beijing Fujian Zhejiang Hebei Sichuan Yunnan Qinghai Source: National Bureau of Statistics - 16 -
Computer Prices Tablet Computer Average Price Desktop PC Average Price, RMB 2,535 4,3 4,25 4,2 2,349 4,15 2,288 4,1 4,5 4, H1 212 H2 212 H1 213 Average Price, RMB 36 Cities Major Brand Desktop PC Average Price, RMB Comments The drop in prices since early 212, clearly seen on the charts above, is largely due to the increasing competition in the markets, as well as the trend of shifting consumer preferences towards low- to mid-range tablets and mobile devices, which is expected to remain a major factor in the industry for some time to come. Another key moment is the influence of 2 nd and 3 rd tier markets where vendors are competing for consumers with less purchasing power than those in major cities. Source: GFK, National Bureau of Statistics - 17 -
Computer External Peripheral Equipment Industry Peripheral Equipment Industry Revenues & Profit Peripheral Equipment Industry Financial Data, in RMB bn 1 6.% 9 821 47.5% 876 5.% 28 29 21 211 8 7 716 4.% 3.% Total Assets 277.5 329.5 443.9 417.1 6 557 2.% Total Liabilities 164.2 191.1 281.5 25.9 5 4 3 2.1% 6.7% 1.%.% Cost of Sales 548.3 513.5 769.4 816.3 2-1.% Total Taxes Paid 3.7 3.3 1. 6. 1-22.2% 17 25 29 2 28 29 21 211-2.% -3.% VAT Paid 3.5 3.1 9.5 4.8 Revenues, RMB bn Revenues Growtth, y/y Profits, RMB bn Delivery Value for Export 471. 41.7 661.6 693.8 Source: Ministry of Industry and Information Technology - 18 -
Peripherals Industry Employment & Output Employment Output & Sales Value 1.2 1 1,5 1,121 1,125 1.5 1.12 12 1 83 825 95 892.89.8.81 854 8 69 59 55 535.6 6.4 4.2 2 28 29 21 211 28 29 21 211 Average Number of Employees, mn Number of Enterprises Gross Industrial Output, RMB bn Industrial Sales Value, RMB bn Source: Ministry of Industry and Information Technology - 19 -
Industrial Production Industrial Production 28 29 21 211 212 213 Jan-Nov Computers, mn n/a 194.1 254.8 35.2 384. 335.8 Computer Workstations, th n/a 123.8 184. 154. 149. n/a Notebooks, mn 11.3 15.1 185.9 244.1 252.9 241.6 Micro Computers, mn 147. 182.2 245.9 325.5 354.1 313.5 Monitors, mn 133.6 13.2 138.5 126.3 127. 12.9 Flat Panel Display Monitors, mn n/a 79.3 16.6 85.5 74.3 n/a Servers, th n/a 1,876.5 2,99. 8,338. 1,279. n/a Printers mn 43.3 36.4 6.7 55.2 7.6 66.8 Hard Disk Memory, mn n/a 126.6 148.4 154.9 183.3 n/a Semiconductor Memory Disks, mn n/a 81.6 56.6 52.8 141.7 132.7 Source: National Bureau of Statistics - 2 -
Exports & Regional Position Hardware Product Exports (in units mn) Asia-Pacific Hardware Market by Share of Total Value, 212 27 28 29 21 211 212 Personal Computers 8.7 13 12.8 23 13.1 34.1 Japan 3.6% India 7.8% South Korea 6.5% Notebook Computers 72.7 98.8 11.5 138.1 169.7 29.5 Hard Disk Drives 22.3 5.2 27.9 4.6 119.6 286.3 Rest of Region 17.9% Monitors 114.9 84.7 87.1 69.4 63.2 52.4 Printers 9.8 1.8 1.2 17.5 16.4 31.4 China 37.1% Comments With the huge number of IT companies native to China, the country s imports of IT hardware and software products are essentially negligible. On the other hand, China is the leading hardware exporting country in the world. Source: General Administration of Customs, Marketline - 21 -
III. Software & IT Services - 22 -
Subsector Highlights Importance While still only accounting for 34.6% of total industry a level much lower than developed nations where it dominates over hardware the software & IT services subsector is gradually increasing its importance and this trend is only to deepen in the years to come. Big Cities Concentration In 212, 55% of the software industry s revenues came from 15 major cities across the nation whose contribution amounted to a total of RMB 1.36 trillion. The gap between major cities and the rest of the country has widened as their annual growth in 212 reached 31.4%, compared to a national average of 28.5%. Demand Big data, cloud services, mobile computing and social networking have established themselves as the main current sources of consumer demand in the subsector. In addition, the increasing need for software & IT services customization is expected to further boost demand. Pressure The chief difficulties encountered by companies in the segment include fierce competition, receding demand from international markets and the significant disparities in the level of development between the different regions within China. - 23 -
Subsector Highlights Expected Consolidatio n The IT subsector is expected to further consolidate over the next few years as it remains lacking in core technologies and consistent high quality software products. As far as high-end software products are concerned, foreign companies dominate the market with a share of over 7%. IT Services Development Although the IT services segment is a relatively new one in China, its expansion has been taking place at a rapid rate with an annual growth of 6.8% over the last five years. Yet it only accounts for about a fifth of IT investments in China, which is about half the levels common for developed countries. Business Demand Business has dominated heavily on the demand side of the industry in China. According to Euromonitor, by 212, enterprises accounted for as much as 94% of total demand for IT services in the country. - 24 -
Software Revenues Software Industry Revenues Top Companies by Software Business Revenues (212) 5, 4,5 4, 3,5 3, 2,5 2, 1,5 1, 5 31,624 28,327 22,788 2,719 2,52 2,53 18,1 1,847 1,336 951 28 29 21 211 212 35, 3, 25, 2, 15, 1, 5, Sales Revenues, RMB bn Number of Software Enterprises Company Revenues (RMB bn) 1. Huawei 11.8 2. Haier 37.9 3. Inspur 9.5 4. Founder 9.5 5. Nanjing Nari 7.4 6. Nanjing Lianchuang 7.2 7. Neusoft 6.9 8. China UnionPay 6. 9. Aisino 5.7 1. Digital China 5.6 Comments While far from being narrowly specialized in software, Huawei has retained its leading position in China in terms of revenues from software business for a 12 th consecutive year. The threshold of minimum revenues for the top 1 companies in China has risen by 29% in 212, reaching RMB 779bn. The total revenues of the leading 1 has increased by 7.8% to RMB 366.7bn. As much as 76.3% of the software revenues in 212 came from the Eastern China region, which was slightly less than its contribution of 77.% in 211. Source: Ministry of Industry and Information Technology, China Electronics News Agency - 25 -
Software Market Segmentation Software Segmentation by End-users, 212 Software Segmentation by Product, 212 Telecom 18.3% Manufacturing 16.2% Banking, Financial Services & Banking 24.1% Government 1.3% Healthcare 5.7% Power 5.1% Oil & Gas 4.1% Transportation Utilities 2.6% 1.7% Madia & Communicatio n 1.9% Others 1.% System Software 22.23% Software Products 31.12% Embedded Software 17.45% Design and Development 9.36% Others 18.84% Software Market Brand Structure, 212 Comments Others 72.4% Digital China 5.6% China National Software & Service 1.1% IBM 5.5% Mircosoft 3.1% Yonyou 2.8% Neusoft 2.6% Oracle 2.5% SAP 1.6% Baosight 1.6% Inspur 1.2% Low regulation and benign growth perspectives both in the subsector and the country s economy in general have been attracting an increasing number of new players to the Chinese software & IT services industry, which is one of the friendliest for foreign companies. As a result unlike the hardware segment the subsector s degree of fragmentation is very high, with a large number of participants, none of whom enjoys a dominant market presence. Source: Technavio - 26 -
IT Services Market Size & Segmentation IT Services Segmentation, 212 Market Size IT Outsourcing Services 15.9% System Integration 2.2% Maintenance & Support 12.3% Network Services 22.3% IT Consulting 1.5% Education & Training 8.8% Other Services 1.% 2 18 16 14 12 1 8 6 4 2 185.5 15.6% 165.3 144.7 14.2% 125.2 12.2% 21 211 212 213e Market Size, RMB bn Annual Growth 18% 16% 14% 12% 1% 8% 6% 4% 2% % Comments With the market being fragmented and very competitive, the four largest firms account for only 18.2% of total revenues in the IT services, and the largest 1 companies for about 3% of total. Out of about 9,8 providers of IT services, by far the largest part of enterprises operating in the industry consists of small or medium-size local companies, providing low-cost services to the public. Source: Technavio, BMI - 27 -
Software & ITS Labour Market Employment Info Transmission, Software & ITS 1.5 1.6 1.74 1.86 2.13 2.23 2.24 27 28 29 21 211 212 Jan-Sept 213 3 25 2 15 1 5 47,7 69.91 54,96 86.28 58,154 99.62 64,436 117.17 7,918 147.56 8,51 176.94 58,892 13.85 27 28 29 21 211 212 Jan-Sept 213 9 8 7 6 5 4 3 2 1 Info Transmission, Software & ITS Number of Employees, mn Total Wages, RMB bn Average Wage, RMB Comments One of China s major strengths in the IT market is the abundant internal sources of IT talent. The number of universities offering courses in IT is increasing and the quality of specialists is generally high, just as is their appeal to many companies in the industry, including those from developed countries. Also, besides university, a number of foreign companies have also started their own programs aimed at preparing large numbers of Chinese IT professionals for future employment. Source: National Bureau of Statistics - 28 -
Industry-oriented Software Market Market Size Segmentation by Product Type, RMB bn 8 7 6 5 4 3 2 1 72.9 18.3% 61.6 52.3 17.8% 16.7% 21 211 212 Market Size, RMB bn Annual Growth 19% 18% 18% 17% 17% 16% 16% 8 7 6 5 4 3 2 1 38.6 3.1 6.8 45.5 3.6 8.3 8.2 9.8 4.8 5.7 211 212 Embedded Industrial Software Coordination & Integration Software Product Control Software Product Management Software Segmentation by End-users, 212 Comments Large Enterprise 44.7% Medium Enterprise 3.% Small Enterprise 25.3% China has become the major driver of global growth in the industry-oriented software segment. The main growth factors for the segment include, on one hand, the upgrades and transformations taking place within the industry, and on the other, the efforts on part of local companies to actively exploit their competitive strength of offering localized software services to Chinese enterprises. Source: CCID Consulting - 29 -
Cloud Computing Public Cloud Computing 7 6 5 4 3 2 1 6.3 73.% 4.8 3.5 36.% 32.% 212 213 214E 8% 7% 6% 5% 4% 3% 2% 1% % In China, cloud computing is only making its initial steps and is largely underdeveloped. It is being used mostly internally by local companies, and under the current regulatory framework it would be extremely difficult for foreign companies to offer cloud computing services. Public Cloud Computing Market Size, RMB bn Market Segmentation in 212 (RMB mn) Annual Growth Most of the revenues in the segment of public cloud computing are generated by online platforms such as Alibaba s marketplaces Taobao and Tmart, Tencenet s Weixin (Wechat) social networking platform and Sina s microblogging platform Weibo. SaaS 2,8 IaaS 511 PaaS 184 Cloud computing currently accounts for only around 5% of software & IT services spending, but its share is expected to expand in the proximate future. Source: Ministry of Industry and Information Technology, Vyom Tech - 3 -
IT Outsourcing Market Size 14 12 1 8 6 4 2 13.8 11.4 8.9 7.6 6.2 5.1 212 213 214 215 216 217 China-Based Offshore Software Development Market Size, USD bn Boosted by strong government support, the segment has been one of the fastest growing ones over the last five years. The country is aiming at taking over India s global leading position. However, factors such as China s problematic security and intellectual property protection, as well as the squeeze in the global outsourcing market brought about by the slowdown of leading economies have so far hampered the country s ambitions. Exports of outsourced IT services grew up by 54% in 212, with their contribution to overall export growth in the subsector reaching as much as 6%. That is comparable to a growth rate of 4.3% in 211. According to a survey of Duke and Jiaotong universities, small companies of up to 5 employees account for 87% of the market, and most outsourcing service providers (79%) have been in business for less than 1 years. The strength of the RMB on the foreign exchange markets remains unfavourable for companies in the sector. Source: IT Outsourcing China, CIO - 31 -
IT Security Market Size Product Segmentation, 212 3,5 3, 2,5 12.9% 12.7% 12.5% 12.6% 11.9% 11.3% IT Security Appliances 51.3% 2, 1,5 IT Security Services 24.5% 1, 5 211 212 213 214 215 216 217 Market Size, RMB mn Annual Growth IT Security Software 24.3% Comments IT security largely outperformed the other segments in the industry in 212. However, the amount of spending in the segment was as low as about 1%. As demand for IT security products is massively bolstered by the spread of social networking which exposes consumers to a number of risks, the prospects for the future growth of the segment are solid. Source: IT Outsourcing China - 32 -
IV. Main Players - 33 -
1,46 624 1,934 1,7 5,167 1,74 5,199 748 6,355 127 22,528 37,85 14,932 95,24 95,884 Great Wall Technology Company Limited Financial Performance Highlights Great Wall Technology Co., Ltd. (GWT) was established in Shenzhen in on 2 March 1998. The company was listed on the Hong Kong Stock Exchange on 5 August 1999. 28 29 21 211 212 Revenues, RMB mn Gross Profit, RMB mn Net Income, RMB mn Total operating expenses, RMB mn Other Financial Data 28 29 21 211 212 816 1,735 4,41 5,221 7,675 Cost of revenue, RMB mn 21,482 35,151 99,765 89,825 89,529 Total assets, RMB mn 1,336 36,415 42,278 45,411 52,678 Total liabilities, RMB mn 3,885 22,625 26,42 29,99 37,31 Total stockholders' equity, RMB mn 6,451 13,79 15,877 15,421 15,377 Earnings per share.3.33.54.13 -.14 The company s business scope covers the research and development, manufacture and sale of personal computers, information terminal products, as well as storage products, power supply products, monitoring terminals, LCD TV products and EMS business. The decline in 212 net profit was attributed chiefly to the impacts of the European sovereign debt crisis, the drop in global market demand and consumers willingness to purchase, the lower prices of certain products, the rising labour costs, currency exchange rate fluctuations and the provisions made by one of its subsidiaries. China Electronics Corporation (CEC) controls 62.11% in GWT. Source: Company data, Reuters - 34 -
Great Wall Technology Company Limited (cont d) 9, Expenses, RMB mn Revenues Distribution, 212 8, 7, 6, 493. 1,894. Finance costs Monitors 42.6% Electronic parts & components 2.3% 5, 4, 3, 155. 878. 2,119. 2,397. Research and development expenses Administrativ e expenses Computers 3.2% Property investment.2% Others 8.4% 2, 1, 2,224. 3,383. Selling and distribution costs TVs 25.3% 211 212 Source: Company data - 35 -
2,959 69 3,3 874 3,912 1,56 5,36 1,339 5,371 1,519 Digital China 42,326 5,178 Financial Performance 56,84 7,319 Other Financial Data 73,499 FY29 FY21 FY211 FY212 FY213 Revenues, RMB mn Gross Profit, RMB mn Net Income, RMB mn Total operating expenses, RMB mn FY29 FY21 FY211 FY212 FY213 2,523 2,755 3,97 4,116 4,79 Cost of revenue, RMB mn 39,368 46,879 52,892 65,13 68,128 Total assets, RMB mn 11,546 15,67 19,946 26,822 28,48 Total liabilities, RMB mn 8,315 1,996 13,375 19,298 19,737 Total stockholders' equity, RMB mn 3,14 4,673 6,571 7,523 8,671 Earnings per share.67.83.96 1.16 1.28 Highlights Digital China is the largest integrated IT services provider in China. The company has been listed on Hong Kong Stock Exchange in 21 after a spin-off from Legend Group in 2. The company is primarily engaged in the sale and distribution of general information technology and systems products, as well as provision of supply chain services and IT services. The company was ranked 83 rd in Forbes Top-5 Chinese Companies for 213, moving two places up compared to 212. In October 213, Digital China launched the country s first city public information service platform, which was essentially the first core support system for Smart City construction. The company is concentrating its strategic efforts towards segments such as cloud computing, mobile internet and internet of things. Digital China s reputation suffered a blow in February 213 when the Ministry of Finance imposed a fine on the company because of falsified materials it submitted when applying to participate in a government smart city equipment tender. Source: Company data - 36 -
Digital China (cont d) Revenues by Segment (in HKD mn) Expenses (in HKD mn) 8, 4,5 7, 6, 9,13. 1,211. 7,892. 1,147. Services 4, 3,5 1,354.9 1,419. Others 5, 25,618. 23,248. 3, 4, Supply Chain Services 2,5 2, Staff Costs 3, 2, 37,657. 38,32. Systems 1,5 1, 2,124.6 2,17.4 Promotion and advertising expenses 1, Distribution 5 253.9 37.2 Sales Expenses FY212 FY213 382.5 335.6 FY212 FY213 Source: Company data - 37 -
TPV Technology Limited Financial Performance 9,247 8,32 Total operating expenses, USD mn Other Financial Data 28 29 21 211 212 348 35 57 648 986 Cost of revenue, USD mn 8,819 7,562 11,7 1,382 11,76 Total assets, USD mn 3,354 4,155 5,127 5,257 6,449 Total liabilities, USD mn 1,977 2,647 3,331 3,429 4,549 Total stockholders' equity, USD mn 11,632 11,4 11,975 428 47 624 658 899 98 142 159 111 83 28 29 21 211 212 Revenues, USD mn Gross Profit, USD mn Net Profit, USD mn 1,376 1,58 1,796 1,827 1,899 Earnings per share.5.7.7.5.5 TPV Technology Limited is the world s largest PC monitor and fourth largest LCD TV manufacturer. The company is based in Hong Kong and was listed in Hong Kong and Singapore in October 1999. Since 25, TPV Technology is the owner of part of Philips' monitor and entry-level flat screen TV business. TPV Technology also distributes its products globally under AOC and Envision brands. The company is expanding its business into emerging markets. In 213, TPV turned its India operations into a wholly owned subsidiary, TPV Technology India Pvt Ltd, investing some INR 2mn in Indian operations. Meanwhile, the company reported solid growth of its business in Eastern and Central Europe, Argentina and Brazil, and especially in Russia and Turkey, where revenues have more than doubled in 212. In 213, the company has suffered some decline related to the slowdown of economic growth in most emerging markets and the steep depreciation of their currencies against the US Dollar. Source: Company data - 38 -
TPV Technology Limited (cont d) Shipments by Product, in units mn (212) Expenses, in USD mn 8 7 1.3 1.7 1,2 6 5 4 59.1 56.2 AIO 1, 62. 3 2 1 12.7 14.2 211 212 Regional Distribution (212) Monitors LCD 8 6 12.1 124.5 283.6 26.9 Finance costs Research and development expenses PR China 28.6% North America 16.4% South America 11.9% 4 214.9 Administrative expenses Rest of the World 13.% 2 38.5 496.1 Selling and distribution costs Europe 3.1% 211 212 Source: Company data - 39 -
491 641 485 417 456 1,356 1,454 1,554 1,746 2,23 Neusoft Corporation 3,711 4,166 Financial Performance 4,938 5,751 Other Financial Data 6,96 28 29 21 211 212 Revenues, RMB mn Gross Profit, RMB mn Net Income, RMB mn Total operating expenses, RMB mn 28 29 21 211 212 89 837 1,15 1,342 1,7 Cost of revenue, RMB mn 2,355 2,712 3,384 4,5 4,73 Total assets, RMB mn 5,593 6,29 6,859 7,925 8,51 Total liabilities, RMB mn 2,186 2,211 2,579 3,251 3,382 Total stockholders' equity, RMB mn 3,47 3,998 4,28 4,675 5,119 Earnings per share.4.52.39.34.37 Highlights Neusoft Corporation is a leading provider of software engineering services, IT services, product engineering services, IT education and medical equipment in China. The company was founded in 1991 and is based in Shenyang, Liaoning province. Currently, Neusoft has set up six software bases, eight regional headquarters and a marketing & service network in over 4 cities across China, with subsidiary companies in North America, Asia, Europe and the Middle East. The company has over 2, employees. In 213, Neusoft signed a business contract with a Dalian-based subway company to undertake a contract project for communication systems in two subway lines in Dalian for RMB 53mn. The project is to be completed before June 3, 214. In another major deal, in October 212, Neusoft signed a joint contract with Shanghai Huahongjt Smart System Co Ltd to supply automated fare collection (AFC) system integration for a Dalian city project for RMB 18mn. Neusoft Medical Systems, a subsidiary of Neusoft Corporation, increased its stake in a in a joint venture with Dutch Royal Philips Electronics from 49% to 74%. Source: Company data, Reuters - 4 -
Neusoft Corporation (cont d) Revenues (RMB mn) Expenses (RMB mn) 8, 2,5 7, 91.5 6, 117.3 893.6 Others 2, 468.5 R&D Expenses 5, 83.4 1,5 323.5 78.6 4, 23.6 Finance Costs 3, 5,975. Medical Systems 1, 82. 985.9 2, 4,83.5 5 Administrative Expenses 1, 211 212 Software & System Integration 497.9 635.1 211 212 Sales Expenses Source: Company data - 41 -
514 498 462 528 57 Inspur Group Co., Ltd. Inspur International Ltd. Financial Performance Highlights 1,842 2,156 2,337 2,222 334 253 178 2,41 28 29 21 211 212-99 Revenues, HKD mn Gross Profit, HKD mn Net Income, HKD mn Inspur International Ltd. Other Financial Data Total operating expenses, HKD mn 48 28 29 21 211 212 213 274 351 549 668 Cost of revenue, HKD mn 1,327 1,657 1,875 1,693 1,894 Total assets, HKD mn 1,419 2,74 2,422 2,355 2,335 Total liabilities, HKD mn 619 634 735 516 63 Total stockholders' equity, HKD mn 8 1,441 1,687 1,839 1,75 Earnings per share.51.37.24.7 -.11 Inspur Group Co. Ltd., formerly known as Langchao, is a leading Chinese IT company, based in Jinan, Shandong province. Inspur is one of the oldest IT brands in China. Inspur Group has three listed subsidiaries, Inspur Information, Inspur Software and Inspur Intl. The company s business covers the three major industrial groups of system and technology, software and services and semiconductors, and provides IT products and services for more than thirty countries and regions. Inspur Group s strategy for 213 included focusing on the development of businesses with technical advantages, pursuing active market expansion strategies and consolidating its presence in current regions. Inspur has recently been aggressively expanding its business in Southeast Asia and has set up representative offices in seven countries in the region. One of its major recent projects was supporting the construction of smart cities in Indonesia. Source: Company data - 42 -
Inspur Group Co., Ltd. (cont d) Inspur International Revenues (HKD mn) Inspur International Expenses (HKD mn) 3, 7 2,5 6 6.1 2, 1,5 1, 5 188.5 124.5 492.2 457.9 481. 675.8 1,239.5 963.4 211 212 Software Outsourcing Software Developmen t Sales of IT peripherals & Software Sales of IT components 5 4 3 2 1 15. 275.9 241.7 313.4 276. 211 212 Finance costs Selling and distribution cost Administrativ e and other operating expenses Source: Company data - 43 -
V. Regional Distribution - 44 -
Appendix: Software Sector Regional Distribution Software Sector Regional Distribution Northwest China Number of software enterprises (212): 1416 (5% of total) Software Industry Revenues (212) 2.4% of total North China Number of software enterprises (212): 3749 (13.2% of total) Software Industry Revenues (212) 17.2% of total Northeast China Number of software enterprises (212): 458 (15.9% of total) Software Industry Revenues (212) 9.9% of total East China Number of software enterprises (212): 1114 (38.9% of total) Software Industry Revenues (212) 42.8% of total Southwest China Number of software enterprises (212): 1597 (5.6% of total) Software Industry Revenues (212) 7.9% of total South Central China Number of software enterprises (212): 643 (21.3% of total) Software Industry Revenues (212) 19.9% of total Source: Ministry of Industry and Information Technology - 45 -
Contact: Corporate Headquarters Nestor House Playhouse Yard London EC4V 5EX UK Voice: +44 27 779 8471 Fax: +44 27 779 8224 Americas Headquarters 225 Park Avenue South New York, New York 13 US Voice: +1 212 61 29 Fax: +1 212 61 295 Asia Headquarters Eucharistic Congress Bldg. No. III 4th Floor, 5 Convent Street Mumbai 4 1 India Voice: +91 22 22881123 Fax: +91 22 22881137 Disclaimer: The material is based on sources which we believe are reliable, but no warranty, either expressed or implied, is provided in relation to the accuracy or completeness of the information. The views expressed are our best judgment as of the date of issue and are subject to change without notice. EMIS and Euromoney Institutional Investor PLC take no responsibility for decisions made on the basis of these opinions. A Euromoney Institutional Investor company. About EMIS Insight EMIS Insight is a unit of EMIS that produces proprietary strategic research and analysis. The service features market overviews, industry trend analysis, legislation and profiles of the leading sector companies provided by locally-based analysts. About EMIS Founded in 1994, EMIS (formerly known as ISI Emerging Markets) was acquired by Euromoney Institutional Investor PLC in 1999. EMIS works from over 15 offices around the world to deliver electronic information products, by subscription, to institutional customers globally. EMIS provides hard-to-get information covering more than 1 emerging markets. Its flagship products are EMIS Intelligence and EMIS Professional. EMIS clients include top investment banks, corporations, law firms, consultants, investment and insurance companies, universities and libraries, multilateral organizations, and others. - 46 -