Jefferies reiterated its positive stance on Digital China Holdings Ltd. as the underlying fundamentals of the company's business look strong, particularly in the context of an uncertain macro environment.

Digital China's Chinese demand exposure, diverse revenue stream and market leadership should position the company to outperform in this environment. We would use recent pullback as an opportunity to add to positions, said Branden Chen, an analyst at Jefferies.

Based on the recent checks, he believes consensus expectations look low (his 2011 EPS estimate 1.16 Hong Kong dollar versus Street's estimate of 1.13 Hong Kong dollar and 2012 EPS 1.38 Hong Kong dollar versus Street's estimate of 1.33 Hong Kong dollar) and expects further upgrades over the course of this year.

He said this would be driven by strength in services and supply chain services. As a reminder, fiscal first quarter EPS beat consensus by 0.05 Hong Kong dollar and gross margin reached the highest level in 13 quarters on improving profitability across most business segments.

He expects Digital China to benefit from its growing pipeline in Sm@rtCity initiatives. He believes more contract wins will be announced in the near future.

Revenue from the public sector has shown very strong momentum in the past few quarters. In addition, the company's recent investment in Nanjing Service Center serves as proof-point of the underlying growing demands in services, he says.

Our checks indicate corporate IT spending remains strong post the fiscal first quarter results as corporates continue to focus on a replacement cycle in servers, networking, storage products, notebooks and desktops. This is consistent with our checks at Lenovo, which is seeing strength in commercial demand, says Chen.

He expects penetration into Chain Electronics Stores business will be a meaningful growth driver for Digital China as logistic and warehouses remain a bottleneck in China. Moreover, he believes Digital China will benefit from strong growth in B2C eCommerce, which requires logistic services.

The brokerage reiterated its buy rating on shares of Digital China with a price target of 16.25 Hong Kong dollar.

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