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25 April 2007 DMX Technologies

Initiate Coverage

High-margin player aims higher BUY

DMX is an IT systems integrator which is repositioning itself for

explosive growth in digital media and interactive television while

maintaining its core competence in ?IT infrastructure enabling?.

As infrastructure enabler, DMX provides telecom operators, cable TV

operators and broadcasters with network integration, network

security and other conventional IT services. In the new business of

?Technology Provisioning?, DMX is marketing digital video software

which enables enhanced television experiences e.g. video on

demand, news on demand, electronic program guides, personal

video records, and other interactive value-added services such as

TV shopping. Target customers are television service providers,

especially in China - its core market, accounting for 70% of sales.

Significant earnings impact from marketing digital media solutions

may materialise in later years. Meanwhile, IT Enabling will continue

providing the bulk of revenue and profits.

DMX has been a relative underperformer despite being profitable

every year since listing and consistently achieving superior ROE. At

9.4x FY06 earnings, it is under-valued relative to peers whose PE

ratios are in the 20s or higher. This is likely due to lingering

disappointment with FY06 results when earnings grew 18% against

30% expected growth. For FY07, we are forecasting 17.4% earnings

growth, in line with 18% projected revenue growth.

Based on relative and historical valuations, we believe the stock

should trade between S$0.56 and S$0.75. As it is currently trading

on the low side of the range, and given its track record and

interesting corporate direction, we are initiating coverage with a

?Buy? recommendation.

Current: S$ 0.575

Target Price: $0.75

MAIN ACTIVITIES

A systems integrator that

provides solutions which cover

the entire IT spectrum. The

Group is repositioning itself to

play a bigger role in providing

digital media solutions.

ISSUE STATISTICS

No of shares: 460.960m

Market cap: S$278.88m

Year Hi/Lo: S$1.06/S$0.50

Listing Bourse: SGX-Mainboard

Listing Date: December 2002

(on SESDAQ). Upgraded to

Mainboard in April 2005.

SHARE PRICE v STI

0

20

40

60

80

100

120

140

Apr-06 Jul-06 Oct-06 Dec-06 Mar-07

Returns

DMX STI

Source: SIAS Research

SIAS Research

Financial Summary

USDm (Y/E Dec) FY05 FY06 FY07F FY08F

Turnover 129.2 160.7 189.8 220.4

Net profit 15.1 17.8 20.9 24.8

Dil EPS (USDcts) 4.04 4.05 4.53 5.36

EPS Growth (%) 71.2 0.3 11.8 18.4

P/E (x) 9.4 9.4 8.4 7.1

P/BV (x) 1.4 1.1 1.0 0.9

Div yield (%) - 1.7 1.7 2.1

ROE (%) 16.5 13.4 12.0 12.8

Net Gearing Cash Cash Cash Cash

Current ratio (x) 2.8 4.0 5.1 4.9

Refer to last page for important disclaimer

FUNDAMENTALS

GOOD

VALUATION

ATTRACTIVE

NEUTRAL

TECHNICALS

DMX Technologies ? Initiate Coverage Page 2 of 30

TABLE OF CONTENTS

Company 3

Industry Outlook 10

Investment Merits 12

Risks 14

Financials 17

Forecasts 20

Valuations 20

Financial Tables & Ratios 23

Appendix I? Digital TV 24

Appendix II? PE Band 26

Appendix III? Implications of PE Band 27

Appendix IV? Key Management & Shareholders 28

Disclaimer

DMX Technologies ? Initiate Coverage Page 3 of 30

DMX provides

end-to-end IT

infrastructure

solutions

Bulk of

revenue from

China, despite

geographical

spread

DMX is

reorganising

business

segments in

2007

COMPANY

Founded in 1999 by a group of former senior executives of Datacraft

Asia, DMX Technologies specializes in providing end-to-end IT

infrastructure solutions, which include network integration, network

security and other value-added IT services. Providing end-to-end

solutions means that DMX offers a wide range of products that

addresses its customers? needs, from start to completion of an IT

project.

Over the years, the Group has built up an extensive network of

operations in the Asia Pacific region. With a staff of about 340

professionals, DMX currently operates in seven countries ? China,

Hong Kong, Indonesia, Korea, Macau, Malaysia and Singapore.

Future plans might include expanding into India and Thailand.

Despite the geographical diversity, the bulk of DMX?s revenue is

derived from China.

Figure 1: Revenue by geographies

% FY06 FY05 FY04

China 71 65 80

Non-China 29 35 20

Source: Company

Figure 2: Revenue by geographical region

FY 06

(USD '000)

FY 05

(USD '000)

North East

Asia 130, 642 81.3% 102,957 79.7%

South East

Asia 29,960 18.7% 25,937 20.1%

Others 129 - 262 0.2%

Total 160,731 100% 129,156 100%

Source: Company

Apart from operating in various countries, DMX also has a diversified

customer base. Its customers include big players in the finance

industry, sizable utilities companies, educational institutions,

telecommunication companies, media operators, and government

bodies. Sales from telecommunication projects, however, account

for most the Group?s revenue.

In response to rapid changes in the IT industry, DMX is reorganizing

its business segments as of 2007 to better capitalize on shifts in

market opportunities.

Prior to 2007, DMX operated three business segments: Digital

Infrastructure, Digital Fixed Media and Digital Mobile Media. The bulk

of sales came from Digital Infrastructure. This segment contributed

68.8% of FY06 revenue.

DMX Technologies ? Initiate Coverage Page 4 of 30

DMX is placing

greater

emphasis on

market for

digital media

From 2007, these three segments were grouped into a single

segment ?

Provisioning

Group?s technological development in digital video software.Infrastructure Enabling. A new segment, Technology, has been set up to extend the market reach of the

Figure 3: Reorganization of business segments

Source: Company

The reorganization of the Group?s business segments marks a major

shift in strategy. Although infrastructure solutions are likely to

continue constituting the bulk of DMX?s revenue in the near future,

the Group is enlarging its focus and placing a greater emphasis on

the market for digital media. For DMX, this would mean expending

more resources on enabling telcos, service providers, cable

operators and media companies to provide advanced digital video

and feature-rich multimedia services. (Refer to Appendix I for more

information on Digital TV)

This shift in strategy is reflected in the falling proportion of revenue

that is derived from the digital infrastructure segment. From FY05 to

FY06, revenue from digital fixed media and digital mobile media

segments grew 76.8% and 50.2% respectively.

DMX Technologies ? Initiate Coverage Page 5 of 30

Figure 4: % revenue from digital infrastructure segment

Source: SIAS Research

Figure 5: FY06 revenue by business segments

Revenue USDmil Contribution Change from FY05

Digital Infrastructure 110.6 68.8% 15.1% increase

Digital Fixed Media* 26.0 16.2% 76.8% increase

Digital Mobile Media 18.2 11.3% 50.2% increase

Services 5.9 3.7% 5.5% decrease

Total 160.7 100% 24.4% increase

* Including revenue from digital video software

Source: Company, SIAS Research

78.5%

21.5%

74.4%

25.6%

68.8%

31.2%

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

FY2004 FY2005 FY2006

Other Segments

Digital Infrastructure

Segment

DMX Technologies ? Initiate Coverage Page 6 of 30

DMX believes

its market

share for

Infrastructure

solutions will

continue to

grow

DMX is

focusing on

the digital

media market

as its main

growth driver

in future

DMX has made

several

inroads into

China?s digital

media market

Infrastructure Enabling Segment

The infrastructure enabling segment comprises integrated solutions

that enable telecom operators, cable TV operators, media

corporations and enterprises to offer secured and enhanced services.

The two main offerings provided by this segment are

Infrastructure solutions and Digital Media solutions.

Infrastructure solutions

security solutions, value added services (VAS) such as network

optimization, and network integration services. These solutions have

traditionally been the mainstay business of DMX.

The increase in demand for broadband services from both existing

and new customers has been a central growth driver for

infrastructure solutions. In future years, more emphasis will be

placed on security and value added services. Network integration

services will complement the solution offerings. Although DMX is

actively pursuing new avenues of growth in digital media, the

management has expressed optimism that DMX?s market share for

Infrastructure solutions will also continue to grow.consists of the full range of network

Digital Media solutions

enable broadcasters, Cable TV operators, and telecom operators to

offer digital TV, Internet Portal TV (IPTV) or mobile TV services.

Combining the Group?s advanced Digital Video Software platform

with superior products from a diversified base of technology vendors

around the globe, DMX is able to provide end-to-end digital media

solutions.

DMX is focusing on the digital media market as its main growth

driver in future. Digital Media solutions are thus expected to have a

greater impact on DMX?s bottom line in the years ahead. In FY2006,

DMX conducted an IPTV service trial in Indonesia and secured a

digital broadcast project with Vietnam Multimedia Corporation, the

nation?s leading national broadcaster and operator in digital

broadcasting. Securing the contract with Vietnam Multimedia

Corporation provides DMX with the opportunity to tap into the vast

potential offered by Vietnam?s digital TV market.

China?s digital media market, however, still remains the most

important one for DMX. In FY2006, DMX increased its penetration in

the Cable TV (CATV) sector. The Group secured the first optical

backbone network contract for the digitization of the CATV industry

in Central China. It also secured ZTE, China?s largest

telecommunications equipment provider, as a customer for their

Internet Portal TV (IPTV) projects. Going forward, the Group

believes it has a strong pipeline in the digital media segment.consist of integrated solutions designed to

DMX Technologies ? Initiate Coverage Page 7 of 30

Figure 6: Infrastructure Enabling segment

Business Segments

in 2006

Business Segment

in 2007

Growth Drivers

Digital

Infrastructure:

Consists of

solutions for the

broadband network

infrastructure of a

Telco or an

enterprise.

Infrastructure

Enabling -

Infrastructure

Solutions

Designs and builds

the nextgeneration

network

through which

service providers

and enterprises

can deliver

multimedia

services that

integrate voice,

video and data

communications.

Escalating broadband

demand

Heightened push

towards business

continuity planning

Growing need to ensure

network security

Growing networking

requirements of

businesses which are

extensively global in

operations

Digital

Fixed Media:

Consists of

solutions for the

provision of digital

video services for

cable TV operators,

Telcos and satellite

companies.

Increased adoption of

digital TV (DTV) and

internet portal TV

(IPTV)

Digital

Mobile Media:

Consists of

solutions for the

provision of digital

video and other

multimedia

services of mobile

operators and

mobile content

providers.

Infrastructure

Enabling ?

Digital Media

Solutions

Allows telcos,

service providers,

cable operators

and media

corporations to

deliver advanced

digital video and

multimedia valueadded

services.

Increased mobile

penetration rate

Mobile operator

upgrading and

expanding service

coverage

Source: Company, SIAS Research

DMX Technologies ? Initiate Coverage Page 8 of 30

The Group?s

digital video

software will

be marketed

internationally

under a

subsidiary,

BEE MediaSoft

Ltd

The solutions

provided by

BEE benefit

both viewers

and TV service

providers

BEE?s

solutions

minimize

capital and

operational

overhead of

TV service

providers

BEE offers a

broad range of

end-to-end

solutions that

allow for the

provision of

enhanced TV

services in a

cost-effective

manner

Technology Provisioning Segment

Anticipating huge growth potential in digital video services delivery,

the Group has spent the past three years developing a suite of

digital video software. The suite of software provides digital service

providers with applications that would allow them to deliver

enhanced video and interactive value-added services. The

Technological Provisioning segment operates under

Ltd

internationally market the digital video software to television service

providers.

With TV service providers and viewers needs in mind, BEE MediaSoft

offers solutions designed to fulfil the business needs of TV service

providers, and also to provide the experience fitting the lifestyle of

viewers.

For viewers, BEE?s solutions allow for an array of enhanced television

experience including electronic program guides, video on demand,

time-shift TV, pause-live TV, personal video records, news on

demand, as well as interactive value-added services such as TV

shopping, voting, and other information services.

With regard to TV service providers, BEE?s offerings would allow

them to enjoy seamless and effortless management of content,

services, subscribers, and billing. For example, the operation support

system solution enables TV service providers to visualize subscriber

behaviours, demographic characteristics and lifestyle. The

information will allow TV service providers to introduce effective and

targeted marketing strategies.

As BEE?s solutions are designed with high Customer-Premise-

Equipment (CPE) and bandwidth efficiency, they minimize the capital

and operation overhead of TV service providers.

Besides having an attractive user interface, a comprehensive

supporting back office suite is indispensable for a successful digital

service operation. BEE?s product portfolio thus consists of a broad

range of end-to-end solutions from middleware to asset

management and operation support at back office. All these allow for

the provision of enhanced TV services in a cost-effective manner.

BEE?s product portfolio consists of three flagship solutions:

TV

Operating Support System).BEE MediaSoft, a separate subsidiary set up by DMX to further develop andVision, Vision AMS (Asset Management System), and MOSS (Media

Vision TV

solution designed for TV service providers to offer enhanced digital

video services through broadband, cable, satellite and terrestrial

broadcasts. Middleware refers to software that connects two or more

software applications. It often serves as a solution to the problem ofis a comprehensive, tightly integrated middleware

DMX Technologies ? Initiate Coverage Page 9 of 30

linking new applications to older legacy systems.

Vision TV offers a complete range of advanced and interactive TV

functions which include:

?

browse and view broadcast TV programs to be recorded or

retrieve recorded programs from the Personal Media Library

at their fingertips.Full functions interactive video program guide for viewers to

?

Trick-play refers to using controls such pause, instant replay,

rewind, etc. It is referred to as ?trick-play? because these

functions can also be performed while watching live

programs.Supports full trick-play for Video-on-Demand (VoD) service.

?

(PVR) and VoD services via devices like PC, and wireless

devices such as mobile phones. PVR schedule can be set and

related program information can be received through email or

SMS.Allows remote management of Personal Video Recording

?

like gaming, TV shopping, or even billing enquiry though the

user interface.Enables TV viewers to enjoy innovative interactive services

Vision AMS

service providers to control and manage on-demand digital content

(the assets) effectively. Vision AMS enables TV service providers to

repurpose content according to the requirement of the system

platform and to stage and store the content until served to viewers.

To repurpose content means to convert it into another format. By

allowing a certain piece of content to be repurposed in various ways

and distributed to service subscribers through different means,

Vision AMS helps TV service providers maximize the return on digital

content.is an asset management system which allows TV

MOSS

enables TV service providers to benefit from the convergence of

voice, data, and video services over various transmission mediums

such as mobile networks or cable. Built on platform neutral

architecture, MOSS supports hassle-free deployment on a variety of

hardware platforms and provides the functions matching the unique

needs of multimedia service providers. The scalability of MOSS

allows for the provision of enhanced TV services to an expanding

subscriber base. It also maximizes average revenue per user and

achieves a high degree of operation manageability.

The Technology Provisioning segment is expected to enjoy

significantly higher margins than DMX?s traditional infrastructure

business (where gross margins have been eroding due to stiffer

competition). If successful, the payoff of this strategy is only likely

to be felt over the long term. The Technology Provisioning segment?s

impact on the bottom line is not expected to be material in FY07.is a next-generation Media Operating Support System which

DMX Technologies ? Initiate Coverage Page 10 of 30

IDC expects

the network

equipment

market in Asia

Pacific to grow

about 10% in

2007

INDUSTRY OUTLOOK

In October 1998, Merrill Lynch ran full-page advertisements in major

newspapers across America with the title ?The World is 10 years

Old?. This new world, which ushered in a new era of globalization,

was born with the fall of the Berlin Wall in 1989.

As described by Thomas Friedman in