Digital China to Build IT Eco-System Through New Joint Venture

Digital China Holdings Limited (“Digital China” or “the Company”) (Stock code: 00861.HK), a leading IT distribution and services company in the PRC, with Suzhou Ventures Group Co., Ltd. (“SVG”), are pleased to announce the establishment of the jointly invested Digital China Information Technology Services Company Limited (“DCITS”).

Commenting on the joint venture, Guo Wei, Chairman and CEO of Digital China said, “The establishment of the Joint Venture (the “JV Co.”) indicates that the development of Digital China’s IT service business has stepped up to a new stage. Digital China will take this opportunity to build an IT service eco-system to spur the IT service market in China.”

DCITS was established on 3 July for investment by SVG and its subsidiary, Infinity I-China Fund in the ITS business. SVG and its subsidiary, Infinity I-China Fund, will make a capital investment of RMB500 million in total into DCITS adopting a 4+1 method. SVG will make a capital investment of RMB400 million into the JV Co. at the initial stage. When this is completed, the shareholding structure of DCITS will be 80.49% owned by Digital China, 16.58% by SVG, and 4.65% by Infinity I-China Fund. Within the next year, SVG will make further capital contribution of RMB100 million to DCITS. When this second phase is completed, the shareholding structure of DCITS will be 76.75% owned by Digital China, 18.60% by SVG, and 4.65% by Infinity I-China Fund. Digital China will remain as the largest shareholder of DCITS. The JV Co. will offer comprehensive IT services, including application development as well as IT outsourcing and consulting for the financial and telecom industries and government and public service sectors across China.

Lin Xianghong, Chairman and President of SVG said, “The JV Co. will be the largest IT service provider in China with obvious competitive advantages and strong potential. We believe it will become a new model for the industry.”

The market is very optimistic about the outlook for IT services. The compounded annual growth rate of IT services in China was estimated at 22% in recent years, with a market size expected to reach USD 9.6 billion in 2010 (IDC estimate). The golden time for IT service development will be the coming 5 to 10 years, as predicted by experts. The financial and telecom industries as well as the government and manufacturing sectors account for approximately 70% of the IT services market. Digital China is well positioned in these sectors, ranking first in government, second in the financial sector and fourth in the telecom industry.

The Company’s profit margin in IT services improved substantially thanks to enhanced local R&D, standardization of application software, products and outsourcing of product support, operation and maintenance. The financial results for Q12008 showed that corporate clients signed HK$1.525 billion in contracts, a 60.28% increase over the same period last year. Income from IT services was HK$27 million, the second consecutive year of profits following a recorded HK$47 million in the previous year, when the business turned profitable after years of losses. This is strong evidence of a successful transition into an IT service provider.

The 3rd Digital-China Annual Innovation Conference was also held in Jiangsu province at the same time. A specific theme is highlighted each year. It is an important platform for dialogue and interaction amongst IT service providers in China.

The Company launched and displayed a series of solutions that include a Regional Emergency Response Center for Government, Hotel Networking and a Digital Family. Visitors were invited to experience the convenience and user-friendliness of these IT service solutions. The Citizen Card is an example of an integrated and cross-industry innovation. The Citizen Card has many functionalities: it can used as an ID card, social security card, civil affairs account, education account, pension fund account and small-sum cash card such as a public transportation card. The technology used for the Citizen Card is maturing. The Group has been working with many cities in China to apply solutions.

Dong Qiqi, Senior Vice President of Digital China and Executive Director of DCITS, said in an interview that “the Citizen Card requires a cross-industry integration of IT services. Nowadays, the one-stop solution is more and more in demand by our clients. This has been the strategic orientation of Digital China in recent years.

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