Huawei had in recent days denied recent speculation about the sale, which would effectively end its aspirations to continue dueling Samsung for the title of the world's largest smartphone maker.
Facing new US export measures limiting its access to key components, Huawei apparently is choosing to focus on the higher-margin, premium smartphone market instead.
If Honor becomes independent from Huawei, then the lower-end smartphone business also will be able to procure parts unaffected by US trade measures against Huawei, Chinese sources have quoted analyst Ming-Chi Kuo as observing.
Huawei introduced the low-budget brand to compete with the success of Xiaomi's Redmi offering. In 2014, Xiaomi was China's largest smartphone maker, but the two rivals have competed intensely since for a shrinking Chinese domestic smartphone market.
The lower-end smartphone market is known for quite thin margins, with Honor last year not quite producing 5 billion yuan ($744 million) in net profit on revenues of between RMB70 billion ($10.4 billion) and RMB80 billion ($11.9 billion).
In the last quarter, Honor smartphones made up 26% of Huawei's smartphone sales.
Huizhou-based electronics company TCL and Honor's rival Xiaomi had both reportedly shown interest in acquiring Honor, as well.
Digital China reportedly plans to finance the purchase with bank loans in coming weeks. The company is listed on the Hong Kong stock exchange, after a 2001 spinoff from the Legend (later Lenovo) Group.
Wan Biao, Huawei consumer business group chief operating officer, will reportedly take over as Honor's chief executive.
The Shenzhen-based Chinese multinational in 2011 introduced the Honor brand, which in 2013 became a subsidiary. As well as Xiaomi, it competes with Oppo and Vivo in the lower-end smartphone segment domestically, and also sells overseas in Southeast Asia and Europe.
The new US trade measures require any chipmakers using American design tools or equipment to apply for a license from the US Commerce Department.
Major chip manufacturers including Samsung, MediaTek, Qualcomm and Micron have stopped their shipments to Huawei. Taiwan's TSMC says it will abide by US law.
The question remains of exactly which of Honor's assets would go with it to the new buyer. The deal could extend to its brand, research and development capabilities, and supply chain management business.
As well as allowing Honor to access chips more easily, an independent Honor would be free to develop more premium, flagship offerings outside of the Huawei galaxy.
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— Padraig Belton, International Editor, Light Reading