Currently, DVN is the market leader for digital STBs. This leadership position stems from its early entry into the market, its emphasis on providing innovative solutions to the industry, and its pioneering role in pushing for the mass digitalization model as exemplified by its Qingdao rollout. DVN's STB sales accelerated in 2004, with the number of STBs sold in 2004 increasing almost seven times year-on-year to 242,198. STB sales were particularly strong in Qingdao, with DVN selling 153,345 STBs.

1st quarter demand remains strong, rising 7.5 times.
DVN's improved prospects are further reflected in DVN's first quarter STB sales. During the first quarter of 2005, DVN manufactured or DVN STBs licensed to other manufacturers were distributed to 170,016 new subscribers, an increase of 7.5 times compared to the first quarter of 2004. Given the improved prospects for digitalization, DVN expects competition to increase, resulting in some margin pressure. However, DVN expects the greater sales volume to more than compensate for reduced margins.

DVN and Qingdao have proven the feasibility of the mass digitalization model.
DVN's success in promoting the analog cutoff model in Qingdao demonstrates the feasibility of this model and the potential for this model to quicken the pace of digitalization in China. So far, including sales in 2005, DVN has sold 220,000 digital STBs in Qingdao. The city's goal is to have a total of 600,000 subscribers on digital by the end of 2005. In this model, the cable operator buys the STB and gives it to the subscriber for free, with only a moderate rise in the subscription fee. The old analog service is then cutoff.

According to SARFT, switching to digital has become the paramount opportunity for the radio and television industry. As telecom operators compete with the cable network through the launch of internet protocol (IP) TV services, SARFT realizes that it must make the transition to digital as quickly as possible, and has set 2015 as the date when the analog service is to be completely cut off. More urgently, SARFT would like to have a significant portion of the population receive digital signals in time for the Beijing Olympics in 2008. "Given these urgencies, DVN expects cable operators to become increasingly more aggressive in promoting digital cable," said Mr Terry Lui, President of DVN.

STB deployments throughout the country have been below SARFT's original targets set in 2004 as many localities waited for the results from the Qingdao digital rollouts. However, DVN believes 2004 was a significant turning point for the industry as 600,000 STBs were distributed throughout the country. With SARFT seeking to cutoff the analog signal to all 100 million cable subscribers by 2015, there is significant upside. Given Qingdao's successful rollouts, more localities are expected to emulate Qingdao in 2005. SARFT stated in March 2005 that China will encourage large scale deployments at the provincial level. Beijing, for example, will stop analog TV transmissions by the end of 2007 so that it will be able to broadcast the 2008 Olympic Games in digital. Beijing's goal is to migrate 500,000 households to digital in 2005.

Financing has been one of the major obstacles to mass deployment of STBs, but the China Development Bank has committed to provide RMB20 billion in loan credits to operators. Furthermore, to support the deployment of digital TV, the National Development Reform Commission has agreed to invest RMB120 million this year to assist network operators. In addition, SARFT has offered digital TV carriers in second and third tier cities exemptions from sales tax as an incentive.

DVN's relationship with Motorola continues to strengthen, and work together to become China's leading supplier of digital equipment and services. To date, Motorola has invested US$15 million in DVN for a 20% equity stake. In March 2005, DVN and Motorola jointly introduced a new digital STB, the Motorola Digital Video 800 (MDV800), which is designed specifically for the Chinese market. The MDV800 offers multiple applications, including a programming guide and advanced middleware that supports gaming, VOD, Internet access and local weather service. Leveraging its partnership with DVN, Motorola will offer the MDV800 to cable operators throughout China.

About DVN
DVN (Holdings) Limited (SEHK: 500) is the largest digital TV broadcasting systems integrator and terminal products provider in China. It operates R&D and after-sales services centres in Hong Kong, Shenzhen, Shanghai and Suzhou. It has so far installed more than 40 digital broadcasting systems in all 26 provinces, with its patented products extensively deployed. On the back of its digital TV broadcasting platform, the company is now seeking to develop and roll out a range of value-added solutions, including e-government, TV commerce, online games and TV SMS services. er which pay TV services, programme contents, related value-added services and applications to end-users are delivered.

DVN's STB is well recognized in China for its quality and extensive usage. A nationwide survey report conducted by the Academy of Broadcasting Science, SARFT of China in 2002 ranked it the most widely adopted STB by TV operators in the country. In 2004, DVN received the "Best Set Top Box" award in the first Digital TV Public Survey, as well as a "Top Quality Brand" honour in the STB category in the first China Consumer Products Quality Survey. In 2005, DVN was further named by SARFT as one of the country's "Top Ten Broadcasting Enterprises". Based in Hong Kong and listed on the Stock Exchange of Hong Kong in 1989, DVN has been operating in the technology sector since 1982.