Earnings Call: H2 2024

Mar 27, 2025

Summary

FY24 revenue reached CNY 150bn and net profit CNY 3.61bn; gross margin and free cash flow improved. Strategic emerging contracts grew over 30%, while overseas revenue rose 22.3%.

Good afternoon, ladies and gentlemen. I'm Terence of China Comservice. On behalf of the management, I would like to welcome you to our 2024 annual results presentation. This presentation will be conducted in Mandarin with simultaneous English interpretation. I will host the Q&A session later. Please switch off your mobile phone or have it on vibration. Thank you. Let me introduce our management who are here with us today, Executive Director and Chairman, Mr. Luan Xiaowei. Executive Director and President, Mr. Cui Zhanwei. Executive Director, Executive Vice President and CFO, Mr. Shen Aqiang. Executive Vice President, Mr. Zhang Hao. Thank you for coming, and I hope you will find this presentation helpful. First of all, I would like to invite Mr. Luan to present the 2024 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, and next, Mr. Cui and Mr. Shen will present the business review and financial results respectively. During the Q&A session, we will answer the questions that you may concern. In 2024, we seized new opportunities driven by new generation mobile information technology, AI, and other frontier technologies, actively address complex external challenges and market competition, and achieve the following highlights. First, we continue to promote high quality development with steady yet improving operating results. Second, we have deepened quality and efficiency enhancement measures with stable improvement in indicators such as gross profit margin and cash flow. Third, strengthened technological innovation with application, content, and other services, ACO, driving the overall growth for three consecutive years. Fourth, deepened expansion of strategic emerging businesses to lead future growth of the enterprise. Fifth, accelerated AI deployment to build new industry advantages. In 2024, we adhere to the principle of effective improvement in quality, responsible growth in quality to drive high quality development, achieving steady growth. In terms of effective improvement in quality, net profit reached CNY 3.61 billion, up by 0.6% year-on-year. Gross profit margin rose to 11.7%, up 0.1 percentage point year-on-year. Free cash flow reached CNY 5.2 billion, up over 20% year-on-year. In terms of reasonable growth in quantity, the company's technological innovation-driven businesses and strategic emerging businesses drove overall revenue growth. Revenue scale reached the milestone of 150 billion, up by 0.9% year-on-year. New contracts from strategic emerging businesses exceeded CNY 78 billion, up over 30% year-on-year. In 2024, we deepened various measures to improve our quality and efficiency. Multiple efficiency indicators improved steadily, with gross profit margin rising for three consecutive years, free cash flow sustaining at a relatively high level for multiple years, and cash conversion ratio consistently remained at a favorable level. In 2024, we seized opportunities in computing power infrastructure construction, digitalization, intelligentization, and green transformation of society, achieving stable progress across three major customer markets and business segments. On the market side, we effectively addressed the impact of declining capital expenditure from the domestic telecom operator customers, achieving a 2.3% year-on-year revenue growth in the domestic operating market. We adhere to value-oriented approach and solidify the quality of projects in the domestic non-operating market. With revenue experiencing a slight decline in such market, we strengthened the development competence by accelerating the expansion of overseas projects, achieving 22.3% year-on-year revenue growth in the overseas market. On the business side, the ACO business respectively grew by 8.4%. We continue to strengthen the software and digital service capabilities. For telecommunication infrastructure services, the company actively supported domestic and international customers in computing power infrastructure construction. However, due to customers' cautious investment and the company's proactive control of low-value projects, revenue recorded a slight year-on-year decline. In terms of the BPO business, the low margin product distribution business continued to be effectively controlled. Excluding this business, revenue maintained a steady growth. We unwaveringly advanced technological innovation, driving significant growth in industrial digitalization business. Revenue from ACO business has increased year-on-year with a compound annual growth rate exceeding 14% over the past decade, accounting for over 20% of total revenue. We continuously strengthened the deep integration of technological and industrial innovation based on infrastructure construction of digital infrastructure and a capability middle platform to solidify its technological foundation. We developed leading products and solutions in fields such as smart city, green and low carbon, and emergency management and security. For future industries and key technologies, we focused on frontier areas including AI Plus and low altitude economy, building AI product portfolio. These efforts drove the continuous emerging of technological innovation results and sustained incubation of new achievements. During the year, our R&D investment exceeded CNY 5.5 billion. We received over 30 major technology awards and ranked number 4 in the China Software and IT Services competitiveness top 100 for four consecutive years, which was held by the China Federation of Electronics and Information Industry, earning industrial-wide recognition. To meet customers' needs for intelligentization, security enhancement, and scenario-based solution, we aggregated advantageous resources to accelerate the commercialization and scaled replication of our technological innovations and established several market competitive technological innovation products with contract values over CNY 100 million each, which we are deploying in key sectors such as smart sports, smart PV, and smart construction, effectively enhancing enterprise operational efficiency. We deeply developed specific market segments and core areas of strengths, and strengthened and optimized strategic emerging businesses, which will drive our future growth. In 2024, we signed new contracts worth about CNY 211 billion, up approximately 3% year-on-year, among which new contracts from strategic emerging business surged over 30% year-on-year, accounting for over 37% of the total contracts. Compared to 30% last year, making it a new growth engine for high-quality development. From the customer mix of strategic emerging businesses, domestic non-operator market accounted for the largest portion, serving as the primary driver of its growth momentum. In the field of digital infrastructure, leveraging innovative AI energy efficiency optimization technologies and the industrial leading green and low carbon consulting and solution capabilities, we actively undertook intelligent computing center and super-computing centers projects across the industries such as telecommunication, finance, internet, and manufacturing. New contracts in this field surged over 30% year-on-year, and we secured 21 projects with contract value exceeding CNY 100 million each. In the field of green and low carbon, we actively engage in the synergistic development of computing power and green electricity to drive the green transformation of society and economy. By leveraging integrated capabilities in design, consulting, construction and operation, we accelerated the development of comprehensive and customized green solutions. New contracts from this field increased over 25% year-on-year. In the field of smart city, we explore innovative applications of AI, IoT, and big data across industries. Supported by three-tier province, city, county specialized local teams, we aggressively expanded businesses such as digital government, smart hospital, safe campus, low altitude economy, and smart ports. New contracts from this field rose over 40% year-on-year. In the field of emergency management and security, we have deeply expanded various sub-industries in the field of emergency management and cybersecurity, accelerated the commercialization of our proprietary products. New contracts from this field grew by over 30%. With the accelerated maturation of the domestic AI industrial chain, particularly the recent open sourcing of industrial leading domestic AI large model, the commercialization of the AI market is poised for a new wave of rapid growth. As a top-tier digital infrastructure services provider in China, we will seize the opportunity to accelerate strategic deployment in AI business. Our two TIS subsidiaries are expected to benefit from a surge in demand for computing power center construction. Design institutes and applications and ACO subsidiaries will focus on customers' needs for private AI deployment, building a four-in-one data service framework covering data planning, governance, storage, and maintenance. In addition, we will strengthen R&D innovation in AI large model applications to develop tailored AI solutions and deliver capabilities targeting strategic emerging customers. We attach great importance to shareholders' return. In the past ten years, the overall dividend has remained stable with moderate enhancement. In 2024, after comprehensive consideration of the macro environment, capital market dynamics, our operating performance, and future development needs, particularly the vast opportunities in digital economy and AI that required continued capacity building and resources allocation in strategic emerging business, the board of directors has proposed a final dividend of CNY 0.2187 per share, representing a dividend payout ratio of 42%. We have strengthened our commitment to corporate responsibility, and we have elevated our ESG standard. First, we proactively adapt climate change and advocate green operations by accelerating the adoption of new technologies and green technologies, supporting customers in energy conservation, emission reduction, and low-carbon intelligent operations. Second, we fulfill the social responsibility and care for employees, actively undertake emergency rescue and disaster relief operations, participate in rural revitalization and livelihood enhancement initiatives, and provide a safe and healthy working environment for employees. Third, we refined corporate governance and persist in compliant operations by continuously strengthening the board governance system, enhancing risk management and control, and ensuring the group's healthy and sustainable development. Our robust governance capabilities have been widely recognized across sectors, earning multiple accolades. At present, digital transformation across society, industries, and customers is accelerating, expanding the potential of digital intelligence services. Facing these challenges and opportunities, we are deepening our reform and innovation, accelerating corporate transformation, and deepening the strategic essence of one positioning for us to forge new industrial leading advantages. First, we aim to accelerate becoming a comprehensive service provider for new infrastructure, including new generation information communications, general-purpose data center, intelligent computing center, and supercomputing centers, offering general contracting and integrated solutions. Second, we will strengthen the core capabilities in software consulting, development, and implementation to deliver intelligent cloud-based digital platforms and industrial-specific application products. Third, we will speed up the integration of cutting-edge technologies such as big data and AI for industrial digitalization solutions, empowering different industries. Fourth, we will leverage new generation communications technologies to transform traditional services into intelligent operation support services, ensuring long-term, stable, healthy quality development. This is the first part of the presentation. Now, I will give the floor to President Mr. Cui Zhanwei to present the business review. Thank you, Chairman. Good afternoon, ladies and gentlemen. Now, please allow me to present to you the group's business review in 2024. The table of the business revenue breakdown and the overall performance by business and market in the next slide show the revenue's growth rates and as percentage to the total revenues of the three business segments and the three markets. More details are shown in the following sections and appendix. On the business side, we focus on customers' demand for new infrastructure, such as computing power and new energy, actively strengthened services, and responded to the impact brought by the decline in CapEx of operators. We seized the development opportunities, such as the upgrade of digitalization and intelligentization, demand of the society, intensified market expansion efforts, resulting in relatively fast growth in ACO business, which is up by 8.4% year-on-year. On the market side, revenue from domestic operators and domestic non-operators accounting for 50% respectively as dual growth drivers that drive our sustainable development. In the following slides, we will highlight the development of the three major markets. In the domestic operator market, we continued to deepen strategic collaboration with operator customers, keep close track on the new demands for the transformation, such as computing power infrastructure construction, and industrial digitalization. By fully leverage differentiated service strengths, we supported customers in upgrading new infrastructure and expanding industrial digitalization business. Revenue from this market grew 2.3% year-on-year in 2024, among which ACO business in domestic operator market increased by 9.4% year-on-year, driving revenue growth. In 2024, new contracts in the domestic operator market reached approximately CNY 111 billion, being stable with improvement. Among which, new contracts from strategic emerging businesses rose over 29% year-on-year, with rapid expansion in key sectors such as digital infrastructure and smart city. While stabilizing traditional business, we will accelerate the development of strategic emerging businesses to maintain the stability of market fundamentals. In the domestic non-operator market, we prioritized high-value industries and the businesses with strategic significance, high economic value, and close ties to people's livelihoods, strictly controlled the project risks and consolidated development quality. While overall revenue from this market experienced a slight decline, gross profit margin remained stable, among which ACO business within the domestic non-operator market also have achieved fast growth. In 2024, new contracts in the domestic non-operator market reached around CNY 93 billion, up over 6% year-on-year. Among which, new contracts from strategic emerging businesses surged over 32% year-on-year. We will further penetrate strategic emerging sectors, actively explore areas such as low altitude economy, AI, and intelligent computing centers, super computing centers, and deliver integrated and whole process solutions, integrating cloud, AI, security, and platform to drive overall growth in domestic non-operator market. In addition, we focused on advantageous sectors such as government, emergency management, healthcare, education, transportation and energy. New contracts in key industries reported relatively fast growth, up by 15% year-on-year, accounting for 41% of the total new contracts in domestic non-operator market. During the year, we undertook multiple larger scale data center and intelligent computing center projects, achieving breakthroughs in new energy, smart construction, digital government, and emergency management. The number of sizable projects with values exceeding CNY 10 million each with over 1,400, totaling CNY 43 billion, up 16% year-on-year. As we further deepen market deployment and consistently accumulate industry expertise and successful cases, the domestic non-operator market is expected to maintain robust growth potential. In the overseas market, we actively responded to digital economy demands along the Belt and Road by strengthening collaborations with SOEs who are expanding overseas. Together, we build overseas ecosystem. We replicate our proven capabilities in foundation network and our computing power infrastructure construction, extended expertise into electricity and industrial digitalization sectors, and we have successfully secured multiple high-value projects. Our overseas market revenue grew 22.3% year-on-year in the year, in which ACO business surged 59%. We remained committed to overseas expansion, accelerating market penetration with a focus on our four key regions, such as Asia Pacific, the Middle East, Africa, and Latin America. Four key customer groups, such as telecom operators, energy and electricity customers, overseas governments and enterprises, and Chinese companies. And four key businesses, such as digital infrastructure construction, new energy, smart products and services, and industrial informationized services. By coordinating development and safety, we aim to achieve safe and effective development in overseas markets. 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 25 to 28. You can scan the QR code for the details. In retrospect, since our listing in 2006, we have actively responded to the evolving societal demands and industrial transformation. By deepening innovation and transformation, increased R&D investment, we have developed a series of competitive, integrated, smart solutions. We have consistently enhanced our development and growth quality, and we have steadily expanded revenue scale and continue to optimize our business mix in the recent years. Looking ahead, we will focus on strengthening and optimizing our three major markets and deepen the cultivation and expansion of strategic emerging businesses, and persist in driving growth through technological innovation. We will enhance core competitiveness, advance reforms in key sectors to ensure sustainable and steady development of the company, and collaborate with shareholders, customers, and the society to embark on a new journey of high-quality development for China Communications Services. Above is the business review. Next, I will give the floor to our CFO, Mr. Shen Aqiang, to present to you the financial results. Thank you, President. Ladies and gentlemen, good afternoon. Now, I will present to you the financial results in 2024. The above table shows our key financial indicators, including the revenue, cost, profit, and cash flow. Now I would like to talk about the financial performance highlights. In 2024, our gross profit margin has increased for three consecutive years and reached 11.7%, representing an increase of 0.1 percentage point year-on-year. The gross profit margin continued to rebound, mainly due to the following measures. First, we implemented high quality development strategy by focusing on improvement of core competencies and effectively controlling the development of low gross profit margin businesses. Secondly, we optimize our business mix by strengthening the drive on development from technological innovation and increasing the proportion of revenue with high gross profit margin. Thirdly, we strengthen measures for quality and efficiency enhancement by intensifying project marketing and delivery management, and improve operational efficiency with digital tools. We carry out a series of measures to control our costs and expenses, and we have seen great results for quality and efficiency enhancement. In terms of the direct personnel cost, we have continued to optimize our employee mix and reasonably control the number of employees, such as the per capita labor and cost. The labor productivity was enhanced. For material costs and the subcontracting charges, the company further strengthened the management of general contracting projects, increased the proportion of centralized procurement focused on strengthening self-sufficient marketing and delivery capabilities, and strengthened the whole process management of subcontracting. We have seen the reasonable growth of material cost and subcontracting charges. SG&A is continued to be under control with stable portion of total revenue. in 2024, we have strengthened working capital management and we have full process of business control. Free cash flow reached CNY 5.2 billion for the full year, and our overall cash flow remained healthy and sound. Our principle is revenue with reasonable profit with matching cash flow. We will intensify efforts to enhance management of project delivery, long-term accounts receivable, and cash collection and payments, striving to ensure cash flow to be maintained at a reasonable and healthy level. Here you can see the key indicators for our balance sheet. As of December 31, 2024, our liabilities to asset ratio and gearing ratio were 65.9% and 1.5% respectively. The financial position of the company remained solid. Moving forward with innovation, sustain longevity with quality, we will continue to adhere to our one positioning as the new generation integrated smart service provider and continue to deepen the essence of four roles, which are builder of digital infrastructure, provider of smart products and platforms, provider of industrial digitalization, guard of smart operations. Adhering to our overall roadmap of a value-driven, seeking steady yet progressive growth and high quality development, we will continue to cultivate new quality productive forces while consolidating high quality development with high safety standards and to strive to achieve effective improvement in quality and reasonable growth in quantity. Now we will proceed to the Q&A session. Thank you.