Embattled Huawei is resetting its priorities due to U.S. sanctions and will focus on its higher-end Huawei phones rather than the Honor brand which is aimed at young people and the budget conscious, they said.
The assets to be sold have yet to be finalised but could include Honor's brand, research & development capabilities and related supply chain management business, two of the people said.
The deal may be an all-cash sale and could end up smaller, worth somewhere between 15 billion yuan and 25 billion yuan, one of the people said.
Digital China, the main distributor for Honor phones, has emerged as the frontrunner but other prospective buyers include Chinese electronics maker TCL and rival smartphone maker Xiaomi Corp, the people said, declining to be identified as the talks were confidential.
Huawei, the world's biggest telecoms equipment vendor and No.2 smartphone maker, declined to comment as did TCL. Digital China and Xiaomi did not respond to requests for comment.
The Honor brand was established by Huawei in 2013 but the business mostly operates independently from its parent.
'A WIN-WIN SITUATION'
Kuo Ming-chi, an analyst at TF International Securities, has said that any sale by Huawei of the Honor smartphone business would be a win-win situation for the Honor brand, its suppliers and China's electronics industry.
"If Honor is independent from Huawei, its purchase of components will no longer be subject to the U.S. ban on Huawei. This will help Honor's smartphone business and the suppliers," he wrote in a research note last week.
The U.S. government last year moved to prevent most U.S. companies from conducting business with Huawei, saying the tech giant was ultimately answerable to the Chinese government. Huawei has repeatedly denied being a national security risk.
In May, Washington announced new rules aimed at constricting Huawei's ability to procure crucial chips that it designs for 5G networking gear and smartphones.
The Honor brand, which sells its phones online through its own sites and via third-party retailers, competes with Xiaomi, Oppo and Vivo in the market for lower-end phones in China. Its phones are also sold in Southeast Asia and Europe.
Honor brand smartphones accounted for 14.6 million, or 26% of the 55.8 million smartphones Huawei shipped in the second quarter of this year, according to estimates from research firm Canalys.
But margins for lower-end phones can be razor thin, and Honor booked less than 5 billion yuan in net profit on revenue of about 70-80 billion yuan last year, said one of the people.
If successful in its bid, Digital China, which also partners with Huawei in cloud computing and other businesses, plans to finance the bulk of deal with bank loans and is set to secure the financing in the coming weeks, the people said.
Shares in Digital China initially rose by their maximum daily limit of 10% but later pared gains to stand 3% higher on Wednesday afternoon, giving the Shenzhen-listed company a market value of around $2.9 billion.
($1 = 6.7389 Chinese yuan)
(Reporting by Julie Zhu in Hong Kong; Additional reporting by David Kirton in Shenzhen; Editing by Sumeet Chatterjee and Edwina Gibbs)
By Julie Zhu