Earnings Call: H1 2020

Aug 11, 2020

Good afternoon, ladies and gentlemen. Welcome to China Tower's 2020 interim results announcement. Given the spread of the COVID-19 pandemic, this presentation can only be held through a conference call. Now I'd like to introduce the management attending today's results briefing. Our Executive Director and General Manager, Mr. Gu Xiaomin. Chief Accountant, Mr. Gao Chunlei. Deputy General Manager, Mr. Liu Guofeng, and Deputy General Manager, Mr. Zhang Quan. Here are three sections of today's interim results announcement. Firstly, I will briefly introduce the company's overall performance in the first half of 2020. Then Mr. Gu Xiaomin and Mr. Gao Chunlei will introduce the operational and financial performance respectively. At the end, we will have a Q&A session. In the first half of 2020, facing the outbreak of COVID-19 and the complex yet ever-changing external environment, the company responded to multiple development challenges proactively. Through further implementing the One Core and Two Wings strategy, the company seized opportunities arising from the scaling construction of 5G networks and the informatization of society, exerted full efforts to promote high-quality developments, carried out quality enhancements, and maintained favorable development speed and quality. Meanwhile, the company has achieved stable operating performance with improving operation efficiency. Operating revenue was CNY 39,790 million with a stable growth, up by 4.8% year-on-year. Benefited from the stable growth in revenue and the delicacy management, operating efficiency was steadily improved. EBITDA of the company reached CNY 29,100 million, up by 4.6%. Profit attributable to owners of the company reached CNY 2,980 million, up by 16.9% over the same period last year. Cash flow was sound and healthy. Net cash generated from operating activities was CNY 27,080 million, up by 30.2% year-on-year. In the first half of the year, the company overcame the impact caused by the pandemic. Facing challenging requirements from the large-scale 5G rollout, the company coordinated resources to ensure the schedule of ongoing constructions during the pandemic. Regarding 5G network deployments in key areas, the company proactively improved the schedule of 5G construction to meet customers' 5G network construction demand. As of the end of June, we outperformed 5G construction schedule with a completion rate of 108% for deliverable 5G construction demand. The total number of 5G sites built within the first half year was 215,000, while over 97% of 5G construction demand was satisfied by sharing of existing sites. While furthering site colocation in telecommunications industry, the company leveraged its advantages on vast resources and capabilities to promote resource-sharing service to all sectors of society. By providing service to sectors related to public wellbeing and the informatization of society, our resource-sharing philosophy was further extended. The Two Wings business has accumulated development impetus and is becoming the new growth driver of the company. For TSSAI business, the company adhered to its dual driving forces of platform plus ecosystem and accelerated its transition from providing site leasing service to offering integrated information service. Focusing on key areas, the company continued to enhance its products for industrial application and formed a batch of standardized solutions, showing positive initial results on the platform operation. For energy operation business, focused on power backup, power generation, battery exchange, and charging businesses. The company continuously upgrading products and enhancing operation. The company has launched energy operation business comprehensively in major first and second-tier cities across the country, and the business is ready for large-scale development. The company has recorded accelerated quarter-on-quarter growth in the business revenue. In the first half of 2020, revenue from Two Wings business showed strong growth and surged to CNY 1,579 million, up by 87.3% over the same period last year. Proportion of Two Wings business revenue to total revenue grew rapidly from 2.2% to 4%, up by 1.8 percentage points over the same period last year. As a major pillar in the telecommunications infrastructure construction sector, the company maintained healthy and sustainable growth by strengthening the development of its sharing and innovation capabilities, as well as leveraging advantages on resource collaboration and intensive construction. Enhanced collaborative and sharing capabilities. With the acceleration of 5G development, to support 5G construction, a majority of local governments provide the company with access to public resources and related policy support from governments. At present, the company has over 2 million tower sites, representing its advantages on the scale of tower sites and social resources. Besides, the company furthered the content of sharing by promoting two-way conversion of telecommunication towers and social poles, and integrating resources to improve the value of resource sharing. Enhance innovation capabilities. The company strengthened technological innovation by innovating tower construction plan and accelerating innovation on 5G DAS and power supply to support 5G construction with high efficiency and low costs. To development innovative service model, the company promoted the implementation of integrated wireless communications coverage solutions. This further reduced the overall construction costs and gained recognition from customers. The company also sped up its platform innovation by setting up the visualized manageable and controllable supervision system, and the Internet of Things, an internet platform that served the whole nation. Its capability on platform operation was enhanced gradually. To improve overall efficiency and effectiveness, the company continued to enhance management fundamentals, strengthen incentive system to stimulate vitality. This initiative supported sustainable development of the company. Promote integrated operation support. Leveraging advantages on resource collaboration and professional expertise, the company strengthened support on integrated operation and maintenance of One Core and Two Wings business, and achieved intelligent transformation. To enhance support on integrated platform, the company accelerated the construction of integrated network management based on the unified field supervision system. The company fully leveraged its advantages on management of first-level platform and improved its platform support capabilities for our business. Enhanced delicacy management. The company strengthened cost control over the entire process to promote more efficient use of resources. Through accelerating the promotion of standardized management, the company's operation and management efficiency has been improved. Strengthened internal control. The company reinforced risk management in key areas such as procurement, construction, and maintenance, enhanced financial risk prevention, and improved capabilities on early warning. The company also improved its compliance system and internal control management mechanism to achieve standardized and healthy development. Promoted evaluation and motivation. The company optimized its performance appraisal system and strengthened the importance of value creation to enhance the impact of performance evaluation. Moreover, the company further leveraged the incentive impact of salary distribution and strengthened positive motivation by improving the linkage between salary growth and operating efficiency to stimulate vitality for corporate development. The company spared no effort to fulfill its obligation on supporting emergency communications during the first half year. It has always been committed to giving back to the community and performing its corporate responsibilities. Facing the outbreak of COVID-19 pandemic at the beginning of the year, the company worked closely with TSPs to ensure smooth communication network. The company constructed required emergency communication sites in the shortest time and devoted plenty of resources to ensure the stable operation of key sites during the pandemic. Regarding the severe floods in southern China since June, the company provided strong infrastructure support on delivering commands for flood prevention and emergency rescue, as well as securing unimpeded communication networks. At present, new technologies are widely used. New industries are accelerating their distribution while new business types and models are emerging. The digital economy is impacting into multiple industries, leaving the escalating demand for information consumption. The new 5G infrastructure construction has stepped into an accelerating phase. It is believed that it will become the main driving force for the transformation and upgrading of various industries in the future. Therefore, the telecommunications infrastructure industry has ample room for growth, and the company still has favorable opportunities for strategic development. Through the in-depth implementation of the One Core and Two Wings strategy, the company's comprehensive strength has been enhanced, while its future development foundation has become increasingly solid. The company will give full play to its advantages on scale of tower sites, policy support, innovative resource sharing, status as market leader, strong brand image, and intensive yet efficient operation mechanism, actively explore market opportunities, and promote business growth. Looking ahead, the company will proactively adapt to market trends and leverage core competencies to develop the company into a growth and value creation enterprise. Promote strategy-oriented development. The company adheres to the One Core and Two Wings strategy while focusing on efficiency and innovation. The company promotes market and customer-oriented strategy while speeding up transformation and upgrade to achieve high-quality development. Enhance deep transformation. The company drives transformation of construction models to create more value with superior services. Moreover, it boosts upgrading of products and services to better cope with customers' differentiated needs. Drive development with innovation. The company furthers innovation in technology and management to strengthen core corporate competencies. Besides, the company encourages innovation in both systems and processes to boost corporate vitality. Forge core capacities. The company develops platform operation capabilities proactively to empower the development of Two Wings business and enhances collaborative and sharing capabilities to consolidate competitive advantages. The company will strive to achieve high-quality development and generate higher returns for shareholders continuously in 2020. Maintain steady revenue growth. Maintain steady and sustainable growth of One Core business while promoting fast revenue growth in Two Wings business. Profit growth higher than revenue growth. Gradually increase in operating profit and achieve a faster net profit growth. Continue to improve profitability. EBITDA continues to grow. Maintain stable EBITDA margin. Now, please welcome our General Manager, Mr. Gu Xiaomin, to introduce our operational performance in the first half of 2020. Thank you, Chairman Tong. I will introduce the company's operational performance in the first half of 2020 and the key priorities in the second half of this year. This table presents comparable data on the company's various business revenue and key indicators, which I will explain in details. With the implementation of One Core and Two Wings strategy, the company incrementally developed multi-stream revenue to support growth. In the first half of 2020, the company's operating revenue increased by CNY 1,810 million year on year, up by 4.8% year on year. In terms of revenue growth structure, non-tower businesses, including DAS and Two Wings businesses, made outstanding contribution, together accounting for 69% of total operating revenue growth, with 3.3 percentage points revenue contribution. Next, I will introduce the developments of business by sector in more details. In the first half of 2020, the company continued to deepen resource sharing and coordinated the utilization of self-owned and social resources. Additionally, we developed innovative products and solutions to support TSPs in setting up wireless networks. Tower business maintained stable growth. In the first half of 2020, Tower business recorded revenue of CNY 36,370 million, representing an increase of 1.6% year-on-year. As of the end of June, we achieved a net addition of 61,000 TSP tower tenants compared to the end of last year, bringing the total number to 324,000, up by 60.6% year-on-year. TSP tenancy ratio reached 1.55, showing a steady improvement in site colocation level. The company adhered to the innovation-driven 5G construction model. Through enhancing innovation capabilities on providing superior service with low costs, the company improved its differentiated competitive advantages to promote large-scale 5G construction. Through adopting innovative construction model, the company transited from building single site towers to promoting the implementation of integrated wireless communications coverage solutions, which boosted large-scale 5G construction. Besides, the company strived to make technological breakthrough and enhance innovative cooperation by launching low-cost solutions for 5G DAS, 5G power, and sharing of tower sites. By doing so, the company improved operation efficiency, met customer needs, and saved 5G investments for the industry. With regard to the DAS business, the company emphasized advantages on comprehensive services and costs through resource coordination. Based on user features under specific scenarios, the company implemented customized DAS construction plans. Meanwhile, we enhanced development efficiency of DAS business by intensifying the promotion of key scenarios, leveraging advantages in site colocation, and focusing on both new construction and renovation of existing facilities. As of 30th June 2020, the additional coverage of buildings was 550 million square meters, and the length of additional coverage at subways and high-speed railway tunnels was 1,457 kilometers and 804 kilometers respectively. Our DAS revenue for the first half of 2020 increased by 37.2% year-on-year to CNY 1,720 million, showing a remarkable growth. In the first half of 2020, the company continued to optimize product system to cope with the two major service demands on resource sharing and data and information. The company actively developed standardized industrial solutions in fields like site leasing, video surveillance, field supervision, et cetera. The company also promoted initiative marketing in key sectors, including environmental protection, water conservancy, agriculture, forestry, transportation, petroleum, et cetera, and achieved effective breakthroughs. By further aggregating industrial chain resources and extending external cooperation, the company bolstered win-win cooperation among various parties. As of 30th June 2020, the total number of TSSAI tenants reached 189,000, up by 25.2% year-on-year. In the first half of 2020, operating revenue of TSSAI business amounted to CNY 1,260 million, up by 49.9% year-on-year. In the second half of 2020, the company will continuously improve the product system construction, strengthen supporting capability on platform operation, and accelerate the transformation from single site lease to offering integrated information service to promote the large scale and high-quality development of TSSAI business. For energy operation business, the company adhered to sharing and collaboration philosophy. Focusing on key sectors, the company accomplished effective business deployment and formed four core businesses, including power backup, power generation, battery exchange, and power charging based on previous operation and exploration. The company further enhanced operations management by unifying subsidiary business brands and strengthened marketing expansion to initially establish the brand image of energy operation business. Meanwhile, the company continued to optimize the product platform, sped up the commercialization and standardization of key businesses, built a centralized and unified energy service platform, and cultivated products competitiveness to lay the foundation for future sustainable development. In the first half of 2020, energy operation business achieved effective breakthroughs in development with an operating revenue of CNY 320 million. Battery exchange business has around 43,000 ToB customers and 110,000 ToC customers. In the second half of 2020, the company will continuously optimize its product system to gain a reputation for high-quality services and enhance brand influence to promote the rapid large-scale development of energy operation business. In the second half of 2020, the company will spare no effort to stimulate high quality developments and create greater value for shareholders. To summarize, it is to ensure stable growth, strengthen impetus, provide superior service, and enhance capabilities. First is to accelerate sharing and collaborative development, promote market and customer-oriented philosophy, and provide innovative products and solutions to meet TSPs network coverage demand on large scale 5G construction. The company will accelerate the expansion of DAS business to boost the steady growth of TSP business. Second is to further leverage synergy advantages, focusing on key sectors and customers. The company will strengthen products operation and platform support to enhance new growth engines for Two Wings business. Third is to further promote quality-oriented development and enhance delicacy management to improve profitability and promote high quality development of the company. Fourth is to enhance well-rounded customer service, promote service innovation, boost service efficiency, and further improve service perception level. Fifth is to reinforce core competitive competencies on tower site operation, R&D, and innovation, enhance basic management, and constantly increase operating efficiency. Next, please welcome our Chief Accountant, Mr. Gao Chunlei, to introduce the company's financial performance. Thank you, Mr. Gu. I will introduce the company's financial performance in the first half of 2020. In the first half of 2020, the company upheld its philosophy of shared development, actively implemented the One Core and Two Wings strategy, and promoted delicacy management. Therefore, the company achieved a stable financial performance with strengthened profitability and healthy cash flow. The company has adopted IFRS 16 since 1st January 2019. Excluding the impact of the application of IFRS 16, as of 30th June 2020, operating expenses increased by 4.7% year-on-year, while operating profit increased by 5.1%, which was higher than the revenue growth. EBITDA accounted for 58% of the total revenue, flat from the same period last year. In the first half of 2020, based on individual site audit, the company further promoted standardized management and continued to improve the level of delicacy management on costs and expenses. As of 30th June 2020, operating expenses amounted to CNY 33,950 million, up by 4.9% year-on-year. Excluding the impact of the application of IFRS 16, as of 30th June 2020, operating expenses increased by 4.7% year-on-year. Among them, for depreciation and amortization, the company has adopted IFRS 16 since January 1, 2019. The increased right of use assets under IFRS 16, due to a higher proportion of sites with long-term leases. The depreciation and amortization were CNY 23,260 million, up by 4.8% year-on-year. The depreciation and amortization of right of use assets were CNY 5,590 million, up by 5% year-on-year. On repairs and maintenance, the company further promoted the delicacy management of maintenance and repair operations and enhanced the control of maintenance costs. As of June 30, 2020, repairs and maintenance costs were CNY 3,000 million, down by 3% year-on-year. On employee benefits and expenses, to optimize staff structure and to establish and develop a long-term incentive mechanism, the company recruited industry talents to fulfill urgent business development needs in the second half of 2019. These costs will be fully reflected in this year's report. Also, the company further implemented the restricted share incentive scheme. As of June 30, 2020, the employee benefits and expenses totaled CNY 3,470 million, a year-on-year increase of CNY 410 million. If we take out the expenses in increase in number of staff and implementation of restricted share incentive scheme, the employee benefits and expenses only increased by 4.2% year-on-year. For other operating expenses, with the rapid development of TSSAI and energy operation business, the company's other operating expenses increased CNY 210 million year-on-year. While other operating expenses actually decreased by 3.3% over the same period last year, when excluding the TSSAI and energy business operation costs. For net financial costs, benefited from the company's active low-cost financing through multiple channels, we maintained sound capital management and controlled financing costs effectively. As of June 30, 2020, net financial expenses were CNY 2,060 million, decreased by 11.4% year-on-year. Benefited from the steady growth in operating revenue and the effective control of operating expenses, the company's profitability improved steadily. In the first half of 2020, operating profit amounted to CNY 5,840 million, a year-on-year increase of 3.8%. Excluding the impact of the application of IFRS 16, operating profit increased 5.1% compared to the same period last year. As of June 30, 2020, EBITDA reached CNY 29,100 million, increased by 4.6% year-on-year. Excluding the impact of the application of IFRS 16, EBITDA grew 4.8% and EBITDA margin was 58%, remained stable compared to the same period last year. As of June 30, 2020, the company achieved net profits of CNY 2,980 million, representing an increase of 16.9% year-on-year. Net profit margin was 7.5%, increased by 0.8 percentage points over the last year. In 2020, the company leveraged on utilization of self-owned and social resources and continued to promote the comprehensive coverage solutions to meet development demand for large-scale 5G network construction, as well as in an economical and efficient way. The capital expenditures was CNY 14,300 million in the first half of 2020, up by CNY 5,400 million year-on-year. The maintenance CapEx was CNY 1,470 million, down by 7.5% year-on-year. The company stuck to centralized funds management, improved the revenue management efficiency, and reduced the occupation of funds to enhance funds efficiency. In the first half of 2020, the company maintained healthy cash flow with an operating cash flow of CNY 27,080 million, up by 30.2% over the last year. EBITDA minus maintenance CapEx continued to improve, reaching CNY 27,630 million, up by 5.4% year-on-year. The company maintained a solid capital structure. The interest-bearing debt was CNY 113,950 million, decreased by CNY 6,400 million over the beginning of the year. Liability to asset ratio was 45.5%, down by 0.5 percentage points over the beginning of the year. Gearing ratio was 37.5%, down by one percentage point over the beginning of the year. The stable financial structure provided solid safeguard for the sustainable development of the company. In the next second half, the company will further implement the One Core and Two Wings strategy, continue to promote delicacy management, and improve profitability to create greater value for shareholders. Thank you.