Digiworld : Why does DGW adjust 53% of budgeted 2016 net profit?

Digiworld Corporation (HOSE: DGW) decided to amend the 2016 business plan with a decline of 27% in revenue and 53% in net profit, compared to the original plan.

Budgeted revenues for mobile phone business is down by 40%

Specifically, DGW sets target for 2016 revenue at VND 3,951 billion, declining 27% on the original plan which was approved in the 2016 AGM. Accordingly, targeted revenue from laptop is revised down by 16% to VND 1,947 billion; targeted revenue from mobile phones is adjusted by 40% to VND 1,388 billion and office equipment revenue down 22% to VND 576 billion. Net profit is targeted at VND 65 billion, down by 53% accordingly.

To clarify reasons for the revision, Mr. Doan Hong Viet - DGW's Chairman cum CEO revealed that the board of management was over-confident with the original business plan and has experienced objective risks while carrying out this plan during the first half of the year. Therefore, the adjustment must be made to fully reflect the risks.
Particularly, IT market (equivalent to DGW's laptop business) plunged more than expected (17% decline in the first 5 months of 2016 according to GFK), while mobile phone market grew 14% at the low-end segment. In addition, a vast amount of the advancement including the expenses of marketing, human resources and infrastructure has not been settled. The number of only 3 warehouses and 5 service centers in 2015 has well increased by 13 sub-warehouses and 13 service points so far.

Another factor for business plan revision is the risk of delay in product shipment caused by manufacturers. Mr. Viet stated that the plan of launching mobile phone brands missed the schedule. For instance, Obi was only launched in December last year and revenue from Intex only occurred from May 2016. Although mobile phones have been brought in good growth for DGW but not sufficient enough to maintain the original business plan.

In 2016, DGW will enjoy full year Obi and Intex revenue commencing from May. DGW has just signed a distribution contract with Freetel from Japan whose revenue is expected to arise from the 4th quarter of 2016.

No concern on retailers to import directly from Manufacturers

Ms. To Hong Trang - Member of the Board added, DGW's adjustment in laptop business was going along with the general market trend. About mobile phone business, the delay in product shipment has happened in many big international manufacturers not only those which DGW is distributing. Thus, DGW must adjust the annual plan conservatively to keep commitment.
Nevertheless, all of the scheduled activities to develop the mobile phone brands have been actively implemented. For example, Intex has just been launched but already covered 2,200 over total 6,000 points of Sales in DGW's distribution network.

Upon the concern on retailers to deal directly with manufacturers, Mr. Doan Hong Viet declared that some manufacturers may jump into retailers but not all of them. In Vietnam, manufacturers still have to distribute through distributors. DGW is able to act on behalf of vendors in the 5 services including: market analysis, sales, marketing, logistics and after-sales service. DGW will do all of these activities for manufacturers who cannot fulfill themselves and this indeed is the comparative advantage of DGW.

Regarding the retailers, Mr. Viet informed that their market share is about 50% of the general market, the remaining about 40% for small independent store chains. Digiworld balances out between manufacturers and small independent store chains with the advantage of 6,000 points of sales and the 5 services, marketing capability… to attract and maintain customers.

Besides, online channel currently occupies only 2% of the market, DGW has been partnering with online retailers like Adayroi, Lazada…, meaning that DGW has been making revenue from online retailers despite no own website.

Net profit to advance if excluding revenue of Nokia

In Q2/2016, DGW's revenue and profit both declined significantly year on year. However, according to Mr. Viet, DGW still experienced growth in revenue excluding Nokia.

Particularly, DGW's net revenue in Q2/2016 reached VND 940 billion, declining 19% year on year. In detail, revenue from laptops reached VND 462 billion, down 19%; mobile phone revenue advanced more than 300% and reached VND 339 billion and office equipment revenue was VND 139 billion, increasing 24%.

In Q2/2016, there was no revenue from Nokia/Microsoft while it was more than VND 403 billion last year. This is the prior reason for the slump in DGW's revenues. Total revenue excluding Nokia would advance 23%.

As a result, DGW achieved only VND 11.5 billion in net profit, dramatically declining 60% year on year. Similar to revenue, net profit excluding Nokia would in fact increase. DGW's gross profit margin achieved 6-7% this quarter.

In the first half of 2016, the accumulated revenue reached VND 1,751 billion and net profit reached VND 32 billion, declining 17% and 46% respectively in comparison with the same period last year./.