Earnings Call: H2 2023

Mar 27, 2024

Good afternoon, ladies and gentlemen. I'm Terence of China Comservice. On behalf of the management, I would like to welcome you to our 2023 annual results presentation. This presentation will be conducted in Mandarin with simultaneous English interpretation. I will provide consecutive interpretation in the Q&A section. Please switch off your mobile phone or have it on vibration. Thank you. Let me introduce our management who are with us today. Executive Director and Chairman, Mr. Luan Xiaowei. Executive Director and President, Mr. Yan Dong. Executive Director, Executive Vice President, and CFO, Ms. Zhang Xu. Executive Vice President, Mr. Zhang Hao. Thank you for coming, and I hope you will find this presentation helpful. Next, let's invite Mr. Luan to present the 2023 annual results overview. Good afternoon, ladies and gentlemen. Today's results presentation is divided into three parts. First, I will introduce the overview of our results. Next, Mr. Yan and Madam Zhang will present the business overview and financial results respectively. During the Q&A session, we will answer the questions that you may concern. In 2023, our overall development demonstrated the features of strong resilience, stable growth, favorable return. First, amid the increasingly complex and changing external environment, our operating results continued to improve. Second, corporate development efficiency and quality were enhanced with gross profit margin continued to rise and free cash flow remained healthy. Third, we strengthened the drive of technological innovation and industrial digitalization business-led overall development. ACO business continued to be the leading contributor of revenue growth. Fourth, we actively cultivated new growth momentum by focusing on deploying in strategic emerging businesses. Growth momentum gradually emerged. Fifth, our financial position remained healthy, which supported the continuous increase in dividend. Next, let's look at results overview. In 2023, we adhered to effective improvement in quality and reasonable growth in quantity to lead our high quality development, improving both efficiency and quality and achieving four continuities. First, revenue continues to grow steadily. Revenue reached RMB 148.6 billion, up 5.6% year-on-year, higher than last year's growth rate. Second, net profit growth rate continued to be higher than revenue growth rate. Net profit reached RMB 3.58 billion, up 6.7% year-on-year. Third, gross profit margin rose for two consecutive years, up 0.2 percentage points year-on-year. Fourth, free cash flow continued to maintain at a healthy level, reaching RMB 4.33 billion. In 2023, we seized the opportunities arising from the acceleration of digital economy development, digitalization, intelligentization, and green development of society to proactively integrate ourselves into the ecosystem of customers. All three major markets and three major businesses maintained steady growth trend. On the market side, development of domestic non-operator market showed improving development and led overall development. Revenue growth accelerated from the first half of the year, increased 6.3% year-on-year. Domestic operator market maintained stable growth, with revenue grew at 4.7% year-on-year. On the business side, we closely followed the construction demand for computing power and photovoltaic new energy. Telecommunications infrastructure service achieved favorable growth with its revenue increased 4.4%. We strengthened software and digital service capabilities such that ACO business maintained relatively fast growth, up 16.8% year-on-year, making it the leading contributor to revenue growth. We strengthened the lead from technological innovation, ranking the fourth in China Software 100 for three consecutive years, and it effectively drove the industrial digitalization business growth. ACO business revenue nearly quadrupled in the past decade. The proportion to total revenues continued to increase and reached 19.5% in 2023. Among which, software development and system support maintained rapid growth, increased by 25.1% year-on-year. We proactively deployed in strategic emerging businesses, including digital infrastructure, green and low carbon, smart city, and emergency management and security to forge new momentum. In 2023, total new contracts grew by over 8%, in which new contract value from strategic emerging businesses increased by over 30%, accounting for nearly 30% of total new contracts, increased significantly year-on-year. Over 85% of new contract growth contributed by strategic emerging businesses. From the customer mix of strategic emerging businesses new contracts, domestic non-operator market accounted for the largest portion at 65%. It is the major growth driver of domestic non-operator market. In the field of digital infrastructure, we have been serving the industry for over 70 years. With a profound accumulation of industry experience, we integrated the new generation of digital intelligence and green technology to develop a unique digital new infrastructure solution to provide whole process and full professional integrated services. During the year, we undertook several intelligent data center projects with contract value over RMB 100 million each. New contracts from the field grew by about 30%. In the field of green and low carbon, we extend our capability in digital infrastructure and formed whole process green and low carbon solutions with driving development, with consultation, plus digital empowerment, plus product innovation, plus engineering construction, plus operation and maintenance. New contracts from the field increased over 50%, making it to be the largest contributor to the new contract growth among the four fields. In the field of smart city, based on over 10 years' experience accumulated and leveraging our three-tier service capabilities covering provinces, cities, and counties, we undertook several EPC general contracting projects with contract value over RMB 100 million each. New contracts from the field grew by over 20%. In the field of emergency management and security, we utilized technologies such as artificial intelligence, big data, 5G, Internet of Things, to develop several benchmark products and provided high-quality industry planning and top-level design services. New contracts from the field achieved steady growth. We consistently increase investment in R&D to enhance level of technological innovation continuously. In 2023, invested about RMB 5.6 billion in R&D, which has maintained double-digit growth for three consecutive years. As a result, technological innovation results enhanced core capabilities. Revenue continued to increase, and our technological innovation capability was recognized by industry. Meanwhile, we closely followed customers' needs to innovate on application technologies. First, we set up group-level industrial research institutes on blockchain, sport and game, emergency management and security, and digital infrastructure to drive business development. Second, we fully consolidated resources to coordinate and forge leading group-level products and solutions in digital infrastructure, industrial digitalization, emergency management, and security. Third, we conducted R&D on industry PaaS platform, industry AI model, and digitalization middle platform to solidify our proprietary technical capability foundation. We attach great importance to shareholders' return. In the past 10 years, we have adhered to the policy of continuous growth, steady enhancement to pay dividend. In 2023, in consideration of the company's operating performance, free cash flow, and future development, the board of directors proposed to increase the dividend payout ratio. Dividend payout ratio increased from 40% in 2022 to 42% in 2023, with dividend per share at RMB 0.2174 per share, increasing by 12.1% year-on-year, higher than growth of basic earnings per share. We proactively fulfill the corporate mission of building smart society, boosting digital economy, serving a good life, and constantly elevate ESG standard. First, strengthen environmental protection. We set up green and low carbon development strategy, widened the application of new technologies and green technologies to support customers on energy saving and consumption reduction and low carbon intelligent operation. Second, fulfill social responsibility. We give full backing to communications support for major events, proactively undertake emergency rescue and natural disaster relief, emergency support, care about employees adopting people-oriented approach. Third, optimizing corporate governance. We enhance corporate governance, strengthen management, and prevent risk to ensure the company's healthy and sustainable development. The company's sound governance capability and willingness to take responsibilities received recognition and won multiple accolades. Facing the vast market opportunities brought by the acceleration in digital transformation of society, by positioning itself as new generation integrated smart service provider, China Comservice will develop technology capability that adapts to high-quality development, solidify cornerstones of key talents, digital capability, and organize high-quality development and high safety standard to realize effective improvement in quality and reasonable growth in quantity. We will persist in revenue with reasonable growth and profit with matched cash flow. We will maintain our leading position in domestic operator market, forge new growth engine in domestic non-operator market, promote safe and effective development in overseas market, focus on strategic emerging businesses to accelerate deployment, speed up the pace of technological innovation, reform and transformation to realize sustainable, healthy, and high-quality development. Above is the first part of the presentation. Next, let's invite Mr. Yan Dong to present the business review of 2023. Thank you. Thank you, Chairman. Ladies and gentlemen, good afternoon. I will present the group's business review for 2023. The table shows revenue and growth rates of the three business segments, and percentage to total revenues of each segment. More details are showed in the following sections and appendix. On the business side, we focus on construction needs of digital infrastructure, such as computing power and new energy to enhance our services proactively. TIS business maintained steady development, increased by 4.4% year-on-year. We kept abreast with opportunities such as the upgrade of digitalization demand to further develop the markets, and ACO business recorded fast growth, up 16.8% year-on-year. On the market side, revenue from operators and non-operators accounted for 50% each as dual growth drivers that drive our sustainable development. In the following slides, we will highlight the development of the three major markets. In domestic non-operator market, amid the recovering macro economy, we continuously optimized business mix, focused on strategic emerging businesses such as industrial digitalization and photovoltaic new energy construction. Full year growth of domestic non-operator market revenue accelerated increased 6.3% year-on-year. By controlling lower-gross margin businesses, gross profit margin continued to increase. Gross profit increased 7.5% year-on-year. ACO business increased 13.2% year-on-year. New contract value from domestic non-operator markets was about RMB 87 billion, increased over 8% year-on-year. Among which, new contracts from strategic emerging businesses increased about 19% year-on-year, accounting for 90% of new contract growth of the domestic non-operator market, being the major growth momentum. Among the strategic emerging businesses, green and low carbon and smart city projects had relatively strong momentum, which have favorable growth development prospect. We achieved new results in industries such as government construction, Internet and IT, transportation, and electricity. New projects with contract value over RMB 100 million each amounted to over RMB 6 billion. Among which, the proportion from strategic emerging industries was approximately 75%. Apart from undertaking several sizable data center and intelligent data center projects, we consistently make breakthroughs in several areas such as new energy usage services, electricity infrastructure, and ancillary facilities, digital government, and smart agriculture. As we further penetrated domestic non-operating market and further accumulated industry experience and successful cases, we could provide abundant integrated smart solutions to customers, which give us unique competitive advantages in smart services. In domestic operator market, we seized opportunities from computing power construction demand and computing power empowering industry applications to fully leverage advantages in integrated general contracting, give full support to transformation and upgrade of operator customers, and collaborate with operator customers to develop industrial digitalization business. Revenue from domestic operator market continues to grow steadily, up 4.7% year-on-year. Among which, ACO business achieved rapid growth, increased 20.7% year-on-year, remained as a major growth driver of the market. New contracts in domestic operator market was about RMB 110 billion, up over 8% year-on-year. Among which, digital infrastructure and smart city projects were the main drivers, which have favorable development prospect. We constantly penetrated the traditional business opportunities such as telecommunications, network infrastructure construction, and comprehensive installation and maintenance, while improving the operating efficiency to stabilize the fundamentals of domestic operator market. In overseas market, we actively responded to the needs of digital economy along the Belt and Road by strengthening collaborative expansion and ecological cooperation with go-abroad Chinese enterprises. We have made steady progress in the implementation of overseas projects and overseas market achieved rapid business growth up 15.3% year-on-year with development quality enhanced continuously. We will further seize global post-pandemic development opportunities in overseas market, focus on four key regions including Asia Pacific, the Middle East, Africa, Latin America. Four key customer groups including telecom operators, energy and electricity customers, overseas governments and enterprises, and Chinese companies. And four key businesses including digital infrastructure construction, dual carbon, energy and electricity, smart products and services, industrial informatization services. We will coordinate our development with safety, further enhance marketing, project management, ecological collaboration, risk management and control with a view to achieving safe and effective development. Our development and benchmark projects in four sectors of strategic emerging businesses including digital infrastructure, green and low carbon, smart city, emergency management and security are shown on page 22 to 25 for your reference. You may scan QR code for case details. Since our listing in 2006, we have experienced the construction cycles and industry development from 3G, 4G to 5G, and also the era from informatization, digitalization to artificial intelligence and green transformation, and actively responded to changes in demand in the society and reform in industry development. Through deepening innovation in reform and increased investment in R&D, we have forged competitive, integrated, comprehensive solutions in recent few years. Our revenue has been on a steady rising trend since our listing for 17 years. Development quality have continued to increase. Gross profit margin rebounded, and shareholders' return has increased steadily. Going forward, with the accelerating emergence of new quality productive forces that integrate digital technologies such as cloud computing, big data, and artificial intelligence, the digital economy has become a crucial pillar for creating new development paradigms, offering vast market opportunities through societal digital transformation. We will persist in value add, as well as innovation and transformation-driven approach, enhancing the quality and efficiency of traditional businesses, continuously enhance our core competitiveness. To realize continuous business growth and steady improvement in efficiency, we will join hands with shareholders, customers, and the society to embark China Comservice's new journey of high-quality development. Above is the business review. Next, let's invite CFO, Ms. Zhang Xu, to present the financial results in 2023. Thank you, Mr. Yan. Good afternoon, ladies and gentlemen. I will now present our financial results for 2023. The table shows our key financial indicators, such as revenues, cost, profit, and cash flow for your reference. Next, I will introduce our key financial performance. In 2023, gross profit margin improved for two consecutive years, increased 0.2 percentage points year-on-year, reaching 11.6%. All the three major markets gross profit margin improved, among which domestic non-operator markets gross profit margin continued the upward trend, while gross profit margin of domestic operator markets stabilized and increased. Meanwhile, gross profit margins of a number of businesses improved during the year, including consultation and design, construction, and network maintenance. The continuous recovery of gross profit was due to the following measures. First, we implemented high-quality development strategy, which effectively managed and controlled the development of low gross profit margin businesses and strengthened efficient development. Second, we optimized business mix by enhancing the technological innovation to drive business development and increasing the proportion of revenue with high gross profit margin. Third, we strengthened cost control by strengthening project management, which effectively controlled materials cost, subcontracting charges, et cetera, and promoted cost control and efficiency enhancement persistently. In terms of cost structure, the company carried out a number of measures to strictly control the cost and expenses, and implemented various work to improve the quality and efficiency, and achieved favorable results. For direct personnel cost, the company reasonably controlled the total number of employees while optimizing the employee mix and improving the labor profitability continuously. As a result, the direct personnel cost as a percentage of total revenues continued to decline. For materials cost, the proactive undertaking of general contracting projects by the company drove a relatively fast growth in materials cost. The company further strengthened the management of general contracting projects and centralized procurement, as well as increasing the proportion of centralized procurement to reinforce the management and control of materials cost. For subcontracting charges, the company was devoted to strengthening self-sufficient capabilities in marketing and delivery, as well as enhancing the whole process management of subcontracting continuous, thus resulting in an effective control of subcontracting charges. Making the subcontracting charges as a percentage of revenue reversed the upward trend and declined year-on-year. For SG&A, the company continues to increase the investment in R&D, and R&D expenses as a percentage of revenues increased to 3.7%, excluding R&D expenses, SG&A expenses as a percentage of revenue declined to 6.3%, which continued to be under well control. In 2023, the macroeconomic recovery was in progress, while some customers faced strained conditions in funding, which brought challenges to our working capital management. On one hand, the company took multiple measures to strengthen our management over accounts receivables, such as strengthening appraisal assessment and utilizing IT measures. On the other hand, the company actively fulfilled its social responsibilities by making payments in strict accordance with the terms of contracts. During the year, free cash flow amounted to RMB 4.3 billion, with cash conversion ratio of 149%. Cash flow remained at a healthy level. The company will adhere to the philosophy of revenue with reasonable profit with matched cash flow, and strive to maintain cash flow at reasonable and healthy level. The table lists out the key indicators of the company's balance sheet for your reference. As of December 31, 2023, our liabilities to asset ratio and debt to capitalization ratio were 64.1% and 2% respectively. The financial position remained solid, which would lay a solid foundation for the long-term sustainable development of the company. In 2023, the company continued the high-quality development trend and showed the following three qualities. First is strong resilience. The company has deeply involved in the field of communication and information sectors for over 70 years. The rich experience and leading position in the industry are beneficial for the company to adapt to changes in market demand and withstand external impacts. Second is stable growth. The company has strong capabilities in operation and management, and its revenue has been rising for 17 consecutive years since its listing. The inflection point of profitability improvement has emerged since two years ago, and the gross profit margin has stabilized and increased for two consecutive years. Indicators such as net profit margin, ROE, and cash flow have improved across the board. Third is favorable return. The company has a solid financial position and good cash flow. Its dividend has been increasing year by year in the past 10 years, enabling the company to provide shareholders with relatively attractive and increasing dividend returns year by year. In summary, the country accelerates the construction of Digital China and new industrialization. A new round of scientific and technological revolution and industrial revolution bring greater opportunities for the company's sustainable development and value enhancement. The company has great potential for high-quality development. We are confident that the company's valuation in the capital market has room for improvement. Now we are pleased to answer any questions you may have. Thank you.