Earnings Call: H1 2021

Aug 30, 2021

On behalf of the management, I would like to welcome you to our 2021 interim results audio webcast. First, our management will present 2021 interim results, and a Q&A session will follow. If you would like to raise questions during the presentation, please input them on the webpage. I will read out your questions following our management's presentation. They will answer your questions, and I will provide consecutive interpretation. Let me introduce our management who are with us today. President, Mr. Huang Xiaoqing. Executive Vice President, Mr. Liang Shiping. Executive Vice President and CFO, Ms. Zhang Xu. Thank you for joining, and I hope you will find this presentation helpful. Next, let's invite our President Huang to present the 2021 interim results overview. Good afternoon, ladies and gentlemen. Due to the pandemic prevention and control, we still cannot meet you in person, that this presentation is conducted online. As our Chairman, Mr. Zhang Zhiyong, felt under the weather today, he could not attend the results briefing today. He is sincerely apologetic and has asked me to hold the presentation and answer questions that you may concern, and we wish Mr. Zhang a speedy recovery. Today's presentation is divided into three parts. First, I will introduce the overview of our results. Next, Mr. Liang and Madam Zhang will present the business review and financial results respectively. During the Q&A session, we will answer the questions that you may concern. First, we look at highlights in the first half. In 2021, we seized the opportunities arising from economic recovery in the first half of the year, new infrastructure and digital transformation to accelerate market expansion and strategic deployment, achieving double-digit growth in results. Second, domestic non-operator market maintains strong growth momentum, continues to be the fastest-growing market, and achieved enhancement in development efficiency. Gross profit margin increased year on year, making further contribution in driving profit growth. Third, in domestic operator market, we persisted in CapEx and OpEx plus smart applications and implemented multiple measures to develop business. Revenue of the market resumes growth. Fourth, we continued to invest in technological innovation and R&D in recent years, and our capabilities were well recognized by the industry. The investment drove the continuous fast growth of ACO and other services. Fifth, we promote a state-owned enterprise reform by successfully introducing strategic investors and continue to promote comprehensive enterprise reform to unleash enterprise value and high-quality development. Six, we will continue to leverage the strategic advantages as a new generation integrated smart service provider and seize the fast opportunities from digital economy. Let's look at overall results. Revenue and net profit achieves robust growth. In 2021, we seized the favorable opportunities arising from the results in pandemic prevention and control and stable economic recovery. Focusing on important opportunities brought by 5G, new infrastructure, and digitalization of society to expedite development. In the first half, both revenue and net profit achieved robust growth. Revenue amounted to CNY 64.1 billion, increased 19.1% year-on-year. Net profit amounted to CNY 1.8 billion, increased 14.1% year-on-year. Net profit margin maintained relatively stable. Let's look at the performance of by market and business in first half 2021. From a market perspective, driven by new infrastructure and informatization construction, domestic non-operator market revenue growth accelerated to over 30% year-on-year. Such market continued to be the largest growth momentum. Despite impacted by the pandemic last year, 2-year CAGR of domestic non-operator market was still close to 18%. In domestic operator market, driven by businesses such as 5G network construction, OpEx business, and informatization construction, revenue of the market resumed growth at nearly 10% year-on-year. From the business perspective, driven by domestic non-operated and domestic operator markets, this business shrugged off the pandemic impact in last year and grew notably. In addition, ACO business maintains rapid growth at about 25%, showing our technological innovation and R&D capabilities. 2-year CAGR was also over 17%. In summary, development of all our businesses accelerated notably in first half 2021, driving overall revenue to achieve double-digit growth. Let's look at the reason behind the above results. First, we continued to vigorously develop domestic non-operator market. In first half 2021, both development speed and quality of domestic non-operator market were enhanced. Revenue from domestic non-operator market was approximately CNY 30 billion in the first half, and its portion to total revenues continued to increase and exceeded 45%. Such market maintains rapid growth in recent years, with its revenue growth rate reaching 34% in the first half. Gross profit margin of the market saw an increase in first half 2021, with gross profit growth reaching 42%, faster than revenue growth. At the same time, domestic non-operator market contributed over 80% of the growth in overall gross profit, driving the overall profit to grow notably. For business development, we possess over 30 group-level products, including industrial applications such as smart city, digital government, and smart highway. Driven by smart products and services, we achieved breakthroughs in major general contracting projects. The number of new projects with scale over CNY 10 million increased by over 27%, and the amount of those projects accounting for 43% of total amount of new contracts from the market. Second is development momentum of ACO business notably enhanced. We captured the construction demand for informatization construction and industrial applications from customers. In recent years, we have strengthened technological innovation in R&D, persisted in enhancing the R&D and platform construction in key fields such as IoT, cloud, and information security, and accelerated iteration and upgrade of smart products and solutions. The drive on business by increasing resources input in recent years was noticeable. ACO major businesses maintained relatively fast growth in recent three years, with its revenue growth surpass that of national software business revenue, and its portion to total revenues increased notably. The above performance shows prominent results on development from the drive of technological innovation and integrated capabilities on new generation digital infrastructure. For technological innovation capability, we continued to increase investment in R&D, and the investment during 13th Five-Year Plan period exceeded CNY 14 billion. We have almost 30 IT companies spreading across the nation and over 10,000 R&D and technology talents. We have built up core capabilities in fields such as 5G, new data center, network and information security, cloud, IoT and blockchain, and are well-recognized in the industry. Our industry awareness increased that we ranked fifth in the 100 most competitive software and IT service enterprises for two consecutive years. For new generation digital infrastructure capabilities, we possess the top qualification for the highest level and most comprehensive integrated delivery services in the informatization field, a full life cycle management service capability covering the consultation, design, software, and construction to satisfy the demand for integrated smart services that are full cycle, safe, and expert from customers. We would say technological innovation and integrated capabilities are crucial in driving the development of three markets and three business segments. In first half 2021, we had significant achievement on SOE reform. First is on overall reform. We introduced State Grid subsidiary, State Grid ITG Group, as strategic shareholder, holding 2.4% of our shares. We also entered into digital new infrastructure strategic cooperation agreement with State Grid ITG Group to capture opportunities from new generation information technologies, new infrastructure, and dual carbon goals in China. Second is on subsidiary reform. Our supply chain company introduced 4 strategic shareholders, including COSCO Shipping and Shenzhen International, which hold 20% of the shares of the supply chain company and raised CNY 900 million capital. The above 2 reforms are very important in unleashing enterprise intrinsic value, building supply chain company into a leading enterprise in the industry, establishing a more optimal market mechanism, and enhancing our strategic deployment in the fields of electricity and supply chain. The 2 reforms in first half 2021 is only the first step and 1 of the steps of comprehensive reform. In future, we will implement the details of cooperation with strategic shareholders and optimize governance structure in terms of the board structure and internal mechanism. In addition, we will promote overall reform by communicating with other potential strategic state-owned or private investors, pursue reform on other subsidiaries, and actively introduce share incentive scheme. Meanwhile, we will continue to progress on the reform of organizational production relations and internal system. Through comprehensive reform, we will enhance our competitiveness, market influence, development momentum, and profitability. Going forward, cyber power, Digital China, and smart society will bring fast opportunities to digital transformation of society. We will persist our position as a new generation integrated smart service provider and play the four roles of guard of smart operation, service provider of data production, provider of smart products and platforms, and builder of digital infrastructure, fully leverage our competitive edges in TIS, BPO, ACO services, and deeply integrates operational technology, OT, data technology, DT, information technology, IT, and communications technology, CT capabilities, strengthening our key capabilities of general contracting capability, centralized procurement capability, digital capability, and product R&D capability with a view to building a service-oriented, technology-oriented, and secured enterprise, transforming towards expert and high-end of value chain, and promoting high-quality development through both organic and external development. Above is the first part of the presentation. Next, let's invite Mr. Liang to present the business review of first half 2021. Thank you. Thank you, President. Ladies and gentlemen, good afternoon. I will present the group's business performance for first half 2021. The table shows the revenues and growth rates of the three business segments, and percentage to total revenues of each segment. In the first half, the three business segments recorded double-digit growth. In particular, ACO business grew by almost 25% year on year. It continued to be the fastest-growing business among the three business segments. The charts on the right show the growth driver of each business segment from different markets, so that you could have a complete understanding on the dynamics behind each business segment. Among which, in TIS business, domestic non-operator market accounted for nearly half of the business due to its rapid development in recent years, and the business growth was mainly driven by domestic non-operator market. Domestic non-operator market is also the main growth driver of ACO business, accounted for over 60% of the business. More details are shown in the following sections and appendix. In first half 2021, business structure and market structure were further optimized. On business composition, benefiting from consistent increase in R&D investment that drove business development, portion of revenue from ACO business continued to rise and exceeded 15%. On market composition, domestic non-operator market sustained rapid growth, with its portion of revenue exceeded 45%, increased over 5 percentage points year-on-year. In domestic non-operator market, we seized opportunities from digital economy, new infrastructure, smart society, 5G industrial applications, et cetera, to accelerate market deployment. First, we underscore consultant plus staff plus housekeeper service model, leveraging top-level design and planning and ACO core products. We provided integrated comprehensive smart solutions, including construction, operation, maintenance, and software development services to drive development of various businesses. Second, through synergistic plus dispersed R&D mechanism, we continuously promoted technological innovation and R&D, forged industrial applications, and underwent continuous iteration and upgrade of smart products. Third, we focused on key fields and customer demand, leveraged internal synergistic capabilities for swift replication of signature projects across the nation. The successful implementation of development strategies in domestic non-operator market led to continuous breakthroughs in major project development. In the first half, domestic non-operator market revenue increased rapidly by 34%, among which TIS business shrugged off the pandemic impact on businesses such as construction in last year with its revenue growth increased notably. ACO business maintained a robust growth. In key fields, we focused on digitalization and intelligentization demand and achieved breakthroughs in government, transportation, electricity, and construction. In first half 2021, new contracts in domestic non-operator market amounted to over RMB 38.5 billion, up by about 20%, maintaining good growth momentum. As we further penetrated domestic non-operator market, provided customized and tailored integrated smart solutions to customers, and further accumulated experience in successful projects, our integrated smart service capability has been recognized by customers. We have over 30 industrial solutions catered to different fields and have completed many signature projects across the nation, which give us unique competitive advantages in smart services. You can scan the QR code to further understand our smart products in key fields. We will continue to penetrate key fields such as government, transportation, electricity, and construction with an aim of increasing revenue scale and enhancing development quality of domestic non-operator market. In domestic operator market, we effectively implemented CapEx and OpEx plus smart applications strategy. In first half 2021, the three businesses drove the market development in concert. Revenue from domestic operator market resumed growth in first half 2021, increased 9.5% year-on-year. On CapEx from domestic operators, TIS business further demonstrates the drive of 5G network construction, increased by 5%. On OpEx business, we have deepened the development of traditional businesses such as network maintenance, property management, and supply chain. BPO business shows obvious growth contribution and was the largest revenue growth contributor. Meanwhile, domestic operators have been pursuing transformation and increasing investment in industrial digitalization. We fully supported demand for informatization services from domestic operators, thus driving ACO business to have fast growth. From customer perspective, despite CapEx from the three operators in China Tower declined in the first half, revenue from all operators recorded positive growth and ensured stability of the domestic operator market. In overseas market, in first half 2021, the pandemic affected the construction and delivery of overseas projects. The revenue decreased by 4.2% year-on-year. In the first half, we continued to penetrate key regions such as Southeast Asia and the Middle East, and achieved good progress in major projects such as broadband network in Saudi Arabia. In addition, we have leveraged successful domestic experience and exported smart products overseas. We continued to strengthen the overseas synergistic development with go-abroad Chinese enterprises, and obtained more projects in the fields of telecom network construction, data center, smart product, and electricity, such as smart meter project and smart exhibition hall in Saudi Arabia. Going forward, while preventing pandemic risk overseas, we will seize opportunities arising from the advancement of Belt and Road to develop overseas markets proactively and prudently. Currently, development momentum of digital economy is strong, with industrialization of digital technologies expanding and digitalization of various industries accelerating. Recently, the government promoted the development of digitalization, particularly in 5G, cybersecurity, data centers, and dual carbon target, which bring us important opportunities for future development. As CNY 100 billion SOE, China Communications Services has accumulated decades of experience, capabilities, and technologies in communication and informatization industries. We also possess unique 4T capabilities, namely Communications Technology, Information Technology, Data Technology, and Operations Technology. We are confident that we could leverage our core competitive edges to grasp development opportunities amid industry development. First is on 5G. The largest 5G network in the world was built in China, with 5G base station exceeded 700,000. Being one of the major service providers that construct the largest 5G commercial network in the world, China Communications Services has built over 300,000 5G base stations and possesses various industrial applications, solutions such as 5G+ smart electricity and 5G+ smart city, which enable 5G network construction and application innovation comprehensively. Second is on network security. We have a security team with over 2,500 members and multiple network security qualifications. We undertook security protection for major national events and national network information security projects and could provide customers with full life cycle integrated security services. Third is on data centers and dual carbon goals. Data centers are important infrastructure to support digital transformation of society. The three-year action plan announced by MIIT recently emphasized the target to move towards the development of new data centers, utilizing data technologies such as green, low carbon, and security to accelerate the transformation towards new data centers. By the end of 2023, annual growth rate of data center cabinet is to maintain at 20%, and PUE to drop below 1.3. As a major constructor of data centers, China Communications Services has been in an industry-leading position. Throughout the years, we have provided integrated professional services such as consultation and design, BIM construction management, and operation to over 3,000 customers, including telecom operators, internet companies, and industrial customers, and built approximately 1 million cabinets. We possess industry-leading green, energy saving, and low carbon technologies and applications, and completed many large-scale green and low PUE value center projects. In first half 2021, the amount of new contracts of data centers was over CNY 5 billion. We will seize opportunities arising from the development of new data centers and carbon peak carbon neutrality in China and accelerate our development. Going forward, we will adhere to the O4 roadmap of value driven, seeking steady yet progressive growth and high quality development. As a new generation smart service provider, we'll leverage the advantages of one positioning, four roles, focus on the three main tracks of development of domestic operator, domestic non-operator, and overseas to seize opportunities from the thriving digital economy and acceleration in digital transformation in society. We will expedite technological innovation, strengthen ecological cooperation, continuously pursue corporate reform, reinforce value creation, and promote sustainable, healthy, and high quality development. Above is the business review. Next, let's invite CFO, Madam Zhang, to present the financial results in first half 2021. Thank you, Mr. Liang. Good afternoon, ladies and gentlemen. I will now present our financial results for first half 2021. The table shows our key financial indicators such as revenue, cost, and profit for your reference. I will introduce our key financial performance. In first half 2021, the company's cost of revenue accounted for 89.3% of total revenues, up by 0.3 percentage points compared with the same period of last year. In order to promote high quality development and enhance development efficiency, the company further enhanced whole process management on projects and subcontracting management. Through strengthening centralized procurement, implementing division assessment, and digital management, the company is dedicated to cost control and management efficiency enhancement. For direct personnel costs, the company strictly controlled total staff number, utilized subcontracting resources adaptively to raise labor productivity, which led to a continuous decrease in direct personnel costs as a percentage of revenue. For material costs, we forge our capability of undertaking turnkey projects and proactively pursue the development of sizable projects with general contracting model, thus leading to an increase in material cost. Meanwhile, the rapid growth of construction, supply chain, and system integration businesses also drove the faster increase in material cost in first half 2021. We continued to enhance the full process management and subcontracting through system, technology, and labor management, and thereby subcontracting charges were effectively controlled, and its portion to revenue fell notably. Regarding operating efficiency, as operators strengthened cost control and led to decrease in unit price, gross profit margin was affected to some extent. However, as the company presses ahead with its transformation as a new generation integrated smart service provider, gross profit margin of domestic non-operator market in the first half of the year realized as transitory stabilization and improved, which alleviated the downward pressure on overall gross profit margin to a certain extent. We exercised stringent cost control through utilizing digital measures to enhance operating efficiency. SG&A, as a percentage of total revenues, fell by 0.3% to 8.6%. While controlling costs, we continue to increase investment in R&D to enhance our technological capability. R&D expenses increased 17% year on year, accounting for 2.5% of total revenues. Benefiting from effective cost control, the downward trend of net profit margin moderated and maintained relatively stable year on year. In first half 2021, we continued to strictly control working capital and achieved favorable results. Accounts receivable turnover days decreased from 128 days in first half 2020 to 115 days, which was even lower than 118 days in first half 2019. Due to the business and cash flow pattern of the company, there was a net outflow on a free cash flow of RMB 1.52 billion in first half 2021. In excluding the balance payment of RMB 660 million in relation to acquisition of property for our smart production operation in R&D in 2020, free cash flow would be a net outflow of RMB 860 million, indicating an improvement from the same period of last year. We will continue to adhere to the value-driven principle and strengthen the management of working capital, endeavor to maintain a healthy and reasonable cash level. The table lists out the key indicators of the company's balance sheet for your reference. As of 30th June 2021, our total assets was CNY 99.4 billion. Cash and deposits was CNY 19.7 billion. Liabilities to asset ratio and debt to capitalization ratio were 61.1% and 2%, respectively. We have always maintained low interest-bearing debt and the net cash level. The company's financial position remains solid and healthy, which is favorable for business expansion, which supports the company to capture opportunities from digital transformation, as well as facilitating long-term sustainable development. For more detailed financial information, please refer to our results announcement. Now, we're very pleased to answer your questions. Thank you.