Earnings Call: H1 2024

Aug 14, 2024

Summary

H1 revenue fell 8.8% and the period recorded a CNY 70m net loss as operator negotiations delayed traditional-business contracts. Three New Business grew 10%; FY guidance calls for flat revenue and profit above FY 2023.

Investors, good morning. I am from AsiaInfo Technologies, Ivan, IR department. On behalf of the management, I would like to thank you all for attending the interim results announcement of AsiaInfo Technologies. In today's announcement, apart from having this event on site, we also have the webcast platform and also a conference call for this announcement. Online investors can go to our website and view our presentation materials. This presentation will be conducted in Mandarin with simultaneous interpretation. Please switch your mobile phone off or turn it to the silent mode. Let me introduce management in attendance today. Executive Director and CEO, Mr. Gao Nianshu. Senior Vice President and CFO, Mr. Huang Ying. In today's announcement, our CEO, Mr. Gao, will first present the company's results and operating performance. Then Ms. Huang, our CFO, will go through our financial performance, followed by a Q&A session. You are welcome to ask questions. Mr. Gao, please. Good morning, ladies and gentlemen. Let me go through our first half operations briefly so that we can leave more time for discussion. We can answer your questions. After that, my colleague, Ms. Huang, CFO, will go through our financial performance. From our report, you can see that in the first half, we came across operating challenges and there was huge pressure. Our operating revenue, CNY 2.994 billion, down 8.8 percentage point. Gross margin also came down because of revenue decline. There is a net loss of CNY 70 million in the first half. I believe that you will have a lot of questions. Later during our discussion, we can discuss what had actually happened. There is no need for panic. I think this is more like a cyclical issue. Later on we can discuss more. I would first report all the key facts, key points first. After that, based on points of interest, we can have more discussion. The reasons for the decline are mainly because of traditional business. Our business is divided into traditional business or BSS. There is a big decline of 18.1% in the first half. For Three New Business, there is a 10% growth. It rose from CNY 1.091 billion to CNY 1.2 billion. Overall speaking, because of decline in traditional business, our overall results came down. For new business, there is a 10% growth. Even though it is lower than expectation, there is still double-digit growth. For OSS, there is a 1.6% decline. This is about operators within new business. There is a slight decline by 1.6%. Digital intelligence-driven operation, down 1.9%. Looking at the past quarters, it has been rising. The decline is narrowing. This is a positive trend. Vertical industries digitalization, there is a big growth, 34.6%, but the absolute value is only CNY 470 million in the first half. It is not big, so growth rate is quite good. Looking at the first half, basically it is because of a decline in traditional business, then as a result, our results declined. We will explain why there is a decline in traditional business. You don't need to worry. It is not that we don't have business. The business is there, but the operators face huge operating pressure, so they'd like to suppress cost or control cost. In our communication, commercial negotiation was delayed. It is not that the business was canceled. Everything is there. All the development and operation is there. But operators came across big operating pressure. They would like to lower cost. They would like to suppress price. We said it is not okay to lower price. We just delayed the commercial negotiation, but the business is still there, so there is not the need for panic. It is just a cyclical issue. For orders or contracts that should have been signed in the first half, they were delayed. The delay was till the second half of the year. It seems that business has come down a lot. If you look at our BSS business, even though revenue is coming down, we still rely on some new technology to reinforce our traditional status. For our BSS business, we are leading in China. Our market share is the biggest. In order to reinforce our leading position in traditional business, we need new technology, we need investment, especially into AI and large language model to be injected into our BSS business to make sure that we have quality business. It is not easy to maintain this leading position. We have to have new things. LLM being injected into BSS and also OSS in that way, our traditional status can be reinforced. Otherwise, other people can snatch our position. In the past, we made quite a lot of investment into LLM. For LLM, in our pipeline, there are 56 projects related to BSS. 10 projects are related to OSS. This is a big investment in our company because we want to reinforce our status in traditional business. In application of new technology, we need to actively follow up to use LLM into CRM, BI channels, and also a network management system and so on, so as to further strengthen our position. For digital intelligence-driven operation, we have been improving the business. Looking at this chart, in the first half of last year, down 6%. In the second half, 2.9% down. In the first half this year, down 1.9%. It is improving. We hope to see a slight positive growth, and then we can go back to normal growth gradually. Last year, for this segment, why a decline? Early this year, we explained the reason. Because we have acquired iResearch Consulting, and for this team, they are trying to work in synergy with our original team in AsiaInfo. In the process, there has been some impact. Last year growth did not reach expectation. Last year, this cooperation or integration has been completed. The organizational structure has now been well integrated. We have gone through this painful stage already, so we are now back to the normal level. For this business, it is getting better for the whole year. We hope to see a positive growth. For digital intelligence-driven operation in telecom and non-telecom area, there is good growth, especially in non-telecom area. For example, finance, consumption, automobile. We are not only using big data of operators, we also use Internet, Ali, Huashan, and so on. We use their internet data, and we combine that with telecom data. In automobile, there are new energy vehicles. That is a big area. Sales has been growing, but who are their customers? How can we get the new customers? Where are these leads? We capitalize on the opportunities to use these data and help automobile companies to find potential buyers. This is a provision of leads. Cross-sectoral data to be injected into our operation, then we find the leads. For each lead, we will charge a certain commission. In the consumption area, no matter whether we are talking about the sale of apparel or shoes or anything else, no matter who the users are, we need to do data analysis and model analysis to know what or to whom these consumer goods are sold and what their preferences are. Then we can do precise marketing and sales. In these areas, we got rapid growth. Apart from telecom area, a lot more scenarios are being covered by our data or digital intelligence driven. Based on our understanding of data and scenarios, these data are getting more precise, and we get good return. In this business segment, there is higher share in terms of result-based charging. There is quite a big percentage already, a bigger share already. I have moved on to a later slide already. This business segment will go back to a normal level. In telecom area, this business is mainly in attributable operation. In the past, we helped operators to find new customers. Now there are no more incremental customers because they are in the area of retention management already. How can we offer better service? They are talking about cross-sectoral resource replacement. They pool resources or things from other areas to the telecom area. We are helping these operators to do this. Telecom and non-telecom areas, we have good progress. According to results-based charging, it is already at 26.7%. 26.7% means almost one-third of our revenue is from result-based charging. For vertical industries, 34.6% growth. The absolute amount is smaller, CNY 473 million this year. This is quite a good growth this year. In the future, we will see good growth as well. For vertical industries, what have we done? In terms of products and solutions, we have our standardized products. We don't want to do too many customization. We want to sell our standardized products and solutions. Besides, we focus on a few industries. We don't want to work on all industries. Energy, transport, government affairs, these are areas we invest more. These industries are such that we have industry-specific teams to work on them. For RPA, HAI, 5G private network, these are standardized products, and they are injected into energy transport, government affairs industries so that our share can continue to go up. In the future, we will continue to focus on these three major industries to promote our standardized products and solution. For 5G energy in these few years, for energy, we are improving our 5G private network coverage. For nuclear energy, PV, wind power, mining, these are areas with big progress, and the demand for 5G is bigger. When it comes to the base stations, we already cover one-third. For nuclear power, 5G private network, we are number one. For PV 5,000-plus, we already cover 600. 5,000-plus wind farms. We cover 200 wind farms already. We will continue to make investment, and starting this year, we will do more in terms of coverage of mines. 1,000 plus intelligent coal mines are now in China, and we have our own products and standardized solutions. In the future, in nuclear power, PV, wind power, and mining, we will increase our coverage with our 5G private network. We want to replicate faster because we have products, we have benchmark. In the future, we want to replicate to make sure the scale can increase. We will expedite the progress. For transportation, the market capacity is big enough. We are talking about highway intelligentization. If we look at digitalization, we are seeing a CNY 100 billion odd market potential. Then there are highways, railway, city, metro. We are talking about integrated hubs, and there are 20 international integrated transportation hub cities in China, and more than 18 national integrated hubs. We will increase for logistics. We are working for coal mine companies, steel and iron companies. These are bulk logistics. Without data exchange, you won't be able to lower their cost and improve efficiency. In these years, we have been making a lot of deployment to use railway, port, and aviation data, integrate this data so that the cost of transport can come down for various companies. We have made much investment. Market potential is huge. We have achieved some benchmark progress. In intelligent high-speed logistics, we will increase our investment. We have products, we have benchmarks. We need to expedite our replication. While we maintain safety of projects, we want to accelerate. At the beginning of this year, this year is the first year where we are making deployment in overseas. We have set up a company in Dubai in June. We have set up our company there. Our people are there already. What are we doing overseas? At the beginning, we do not do customized development. We sell standardized products, RPA products, Edge AI, 5G private network. We go to Middle East and Southeast Asia, and we also pay attention to UAE, Qatar, Oman, and so on. Then Singapore, Malaysia, Southeast Asia. We sell our standardized products. How? We do direct selling. We have a small selling team. Basically, we rely on local sales channels together with 10 odd companies. In the Middle East, we have built relationship with them. Through these top channels, we will bring in our products. We work with Chinese central enterprises and SOEs. We go abroad together to sell our standardized products. Simply put, we sell standardized products. We do very little customized development. We do direct sales, local channels plus Chinese SOEs and central enterprises, and we go abroad together. In our pipeline, there are already a lot of projects in the range of tens of millions of USD. We are progressing following our plan. In terms of products, we are also making much investment. In the first half, R&D expenses more than CNY 100 billion. Overall speaking, a big percentage in R&D. It has gone up. For general LLM, we made much investment. Then there is also professional LLM and industrial LLM. We introduce our AI as where LLM used in transport, energy, and government affairs. These are not known as general LLM. For general LLM, we need to work with others. We are working on industrial LLM. In telecom area, there are 66 related projects in our pipeline related to LLMs. 56 of them are in BSS, 10 are in OSS. Apart from telecom, in energy transport, government affairs, we are also promoting specific or professional LLM use. We pay more and more attention to international standard organization. In the past, we just followed, and now we are enhancing our leading position and our say in these organizations. We have joined 20 odd such organizations. There are 243 proposals on standards. In the first half, there are 30 additional such cases. We want to enhance our say in three major areas, cloud network, data, and IT. Well, for cloud network, we are internationally leading. This is not set by us. Well, some international organizations made that rating for Omdia and Gartner and so on. These are standard international organizations. They have their own product assessment mechanisms. In cloud network, we are internationally leading. In data area, we are leading in our country. Gartner, Forrester, these organizations have also gave us positive rating. For Gartner, for our telecommunication AI, well, they said that we are world leading. This is because of our 30 years of cultivation in the telecom area. We understand a lot about the applications. We have standardized products and cases. Gartner has included us as a Leading company. In the first half of this year, there is also some progress in terms of patents. For the whole year, for the second half, for BSS, in the first half, there is 18.1% decline in revenue. In the second half, this will narrow. For the whole year, BSS revenue may still see small decline, but the decline will narrow in the second half. In the second half, it will be better than first half. That's about BSS. Another thing is relying on our new business, where it can offset decline in traditional business. For the whole year, revenue will stay flat. By expanding revenue and controlling cost, then our profit can see significant improvement. For the whole year, our profit should be better than last year whole year. Last year, it's CNY 510 million to CNY 520 million of profit on the financial statements. This year, there should be a big improvement from last year in profit. We relied on two things. First, we need to increase revenue. In the second half, we hope that the weak revenue can improve so that revenue can stay stable this year. We also rely on offsetting in revenue decline, especially in development of the Three New Business. For BSS business, we will rely on LLM to offset decline in traditional business. Besides, we will accelerate our negotiation with operators. We hope that in the second half, we can catch up with the progress or catch up the delay in the first half. In the second half, we will put in more effort in commercial negotiation with operators to catch up with the progress. We also will rely on large, or LLM, to offset the price decline pressure for BSS. For vertical industries, and also digital intelligence operation, we hope these segments can improve. We are a very responsible company in terms of operation. Each of our small operating units, their operating situation, their performance, their financial performance, they are dynamically pegged to cost. I think many companies can't achieve that. We are of medium scale. We have 12,000 odd people divided into different operating units. Our main cost is staff cost. Staff cost is our biggest cost item. Management of staff cost is dynamically correlated with the human resources. How much resources you can use will be dynamically adjusted. That means it is closely related to financial performance. Over the past years, this is a system that we have built from system to process. As a result, our staff cost is closely related with the operation of each small unit. Then we can control cost. Apart from staff cost, there are other expenses too. We rely on a centralized management platform for all our cost and expenses, like business trip or the three major expenses, entertainment, dining expenses. All these are centrally managed. With this system, we are able to control cost. Our cost will not exceed our budget. All the cost and expenses will be closely correlated with the output of each project, and it is managed on our centralized platform. Over the past years, in terms of operation and management, we have accumulated much experience, and we have got our IT system to support it. As long as we can control cost, especially staff cost, then our projects, our expenses can be well controlled. It will be within our expectation. Then, for the whole year, our profit will be better than last year. In the long run, we pay attention to return to shareholders. Since listing, we undertake that dividend will be 40% of net profit. In 2024, we also said that dividend payout will be 40% of net profit. As said just now, our profit is better than last year on financial statements, so our dividend will be more or less the same as last year. Last year, 0.412 Hong Kong dollar of dividend, and it was paid in July already. This year, in 2024, we will continue to follow more or less the same dividend payout as last year. Then, for investors and everyone, this is an undertaking by us. Dividend payout will be stable. Over the long run, we attach importance to return to shareholders. This is our undertaking. Now let me defer to Ms. Huang to talk about financial performance. Thank you, Mr. Gao. Now, let me add some points. I won't repeat points made by Mr. Gao so that we can have more time for discussion. Now let me talk about cost. Page 16, cost. If you look at cost structure, it is rather stable. Operating cost up 5.5%. This is cost of sales. There are two reasons. First, traditional business cost. It has come down. Because revenue came down 18.1% for traditional business, its cost also came down. However, as Mr. Gao said, the work is still there. It's just that commercial negotiation was delayed to the second half. The work, the system cannot stop. Even though the orders are delayed, we cannot just let our people go. The decline in cost cannot be also 18%. Vertical industry segment went up by 30%, so there is new business growth. Overall speaking, our cost still went up slightly by 5.5%. Gross profit is very small. Overall speaking, I think the situation is controllable. R&D expenses came down 13.6%, but because revenue also came down, its share of revenue is 14.6%. This is within our expected 13%-15%. When the situation is difficult, it is important to maintain our strength and competitiveness. We still need to make investment into R&D, but we have to ensure that it is within a reasonable share of revenue, 14.6% of revenue this time. It has come down. Selling expenses came down a lot, 22.2% down. It is related with orders. All our businesses and expenses are governed by a whole system and mechanism. It is not manual mechanism. It is systematic. When orders are like this, then selling expenses, commissions, all match with the orders. There is a proportional decline. Administrative expenses up 9.9%, basically because of accounting calculation. All the staff costs, compensation, these are all included into administrative expenses. If you exclude this factor, administrative expenses should come down. Usually, it is within 4%-5% of revenue, a very low share of revenue. We are at 6.1% of revenue. Actually, if we exclude the factor I mentioned, the share of revenue is still at 4%-5%, which is relatively low. I just reported to you our expense structure. Let me talk about the second half of the year and also our cost control initiatives. We just gave a guidance. Many people will say, "Okay, in the first half you incurred a loss. How can you turn around in the second half? For the whole year, how can you achieve a better profit from last year?" For revenue, we have already explained, 70% of our revenue is from traditional markets. In traditional market, the business is still there. It is just that commercial negotiation is delayed. There is definitely pricing pressure. But we hope the pressure would be smaller. In the second half of the year, we will definitely secure the orders. For the price factor, we hope that it will be at a satisfactory level. We understand the operators' pressure. We are subject to the same pressure. So we want to minimize pricing pressure, and we want to secure the orders that we ought to have. For new business, there will be rapid growth. In the second half of the year, that is about revenue. For expenses and cost control, this is not only lip service. 80% of our costs are staff costs. As Mr. Gao said, our people, we cannot just fire people when there are no orders. This is just one-off layoff. If we do one-off layoff, then when business comes back, then we do not have the people to do the work. So we need to control costs in a reasonable way. Things are flexible. Every month it is on a rolling basis. We look at the relationship between people and business. Can we recruit people, or can we do replacement recruitment? These are very refined measures and policies. We have some systematic tactics. For all operating units, the data are transparent. There are clear breakdowns. We have confidence to have the means to achieve cost control. There won't be big ups and downs. In the first half, there is a reduction by 400 odd employees. This is cost control while not affecting our business. Other expenses like tax and so on. First of all, we do centralized procurements. Secondly, we have one-stop platform. In the first half of the year, it was online already. All the business trips, air tickets, hotel accommodation, car, dining expenses and so on, and also marketing expenses, they will be accounted for on that system. 12,000 odd employees, they are all covered. in April to May this year, this system was online already. We ask that in the second half of the year, there should be full coverage. All employees should be covered. 12,000 odd employees, all of them should use this system online. If you don't use it, there won't be reimbursement. You can't go on business trip. Secondly, all categories. All categories, all expenses items must be included in the system. We do have the ways, we do have the confidence to control cost. Please rest assured. We will increase revenue and control costs. It is not only lip service. Another point, it is not written on the slide. Right now, given the macro environment, I think you all think that it is now winter. Whoever can withstand it, then he can survive. For telecom business, pressure is huge, but it is still the best industry in China. It is a very good industry. It is the best industry. In the traditional area, we need to reinforce our leading position. We need to compare with our peers. We can't make mistakes so that other peers can surpass us. We have to maintain our leading position. New business needs to be developed. We need to make R&D expenses. First, we are in a good industry. Besides, we have confidence to maintain our leading position. We won't be inferior to others. Why do I have such confidence? Because I am well-prepared. We are a 30-year brand already. We have product capabilities, R&D capabilities. We won't be surpassed by others. Besides, I have a lot of funding strength, so I will be able to bear the winter. Besides, in these few years, we have built an internal management mechanism and system. I think management is something that cannot really be quantified. It is a competitive advantage. Our internal management system is very strong. Given all these factors, I think our company is still a very good and strong company. Of course, there are huge changes in the stock market. Our scale is not that big. I think we are significantly undervalued in the stock market. Before our disclosure, four odd dollar. Our NAV per share, HKD 7.5. Stock price is four-point-something. It is really big undervalue. Our dividend. Every year we pay dividend. You can compare A shares and H shares, which companies can give this dividend payout? If we do not include special dividend, every year almost 40 cents of dividend, then dividend yield 9%. Overall speaking, I would like to pass a message to you. AsiaInfo Technologies is a very good company. Even though this is winter, we are able to withstand the winter. Besides, our market value is significantly underestimated. Let's discuss together how we can make sure that our value as a good company can be realized. Thank you. You are welcome to ask questions. Thank you, management. Thank you for the presentation. Now we will proceed to Q&A. We will first take questions from investors on site, and then we will take questions from the phone. First question, please. Before you ask question, please tell us your organization and your own name. Thank you, management, for the presentation. I am Addison. I would like to talk about your confidence about recovery in the second half. Perhaps, how much will be from expense control? How much will be from revenue improvement? For revenue, there are three segments. Which will be a better improvement area? Now we are in mid-August already, and there are three more months to go before the end of the year. What are reasons behind your confidence? Can you elaborate? Thank you, Addison. Well, BSS in the second half will see better improvements. In the first half it's not good, not because of cancellation of business. A lot of things are deferred to the second half. In the first half, it came down 18.1%. In the second half, BSS will see a low level or a small decline. For the whole year, progress in BSS will mean a small decline already. In the first half, down 18.1%. In second half, perhaps a single-digit decline. We can catch up a lot. In traditional business, BSS, we can catch up. That's the first thing. Second, in vertical industries, in the first half, 34%. For the whole year, not that high growth. For vertical industries, we need long time of preparation and accumulation where for the whole year, double digit. New business will see high growth, double-digit growth, but it may not be as high as 34% growth. In the second half, it will continue to make contribution, but the biggest contributor will be BSS. A rebound in BSS so that we can catch up. We can narrow the decline. We will sign contract for things that should have happened in the first half. I think there won't be big problem. We are not too worried because we think that sooner or later, the orders will come back. It is cyclical situation. In the first half, we have done something already. In the second half, we will definitely try our best to secure the orders. We will expedite our work. In the coming months, we will catch up with things that ought to happen in the first half. For BSS, we have already done much preparation. Price is still coming down. In our pipeline, there are still many LLM-related things. We hope that there would be some offset to the price decline. That has to rely on new things. We have our own products and investment, and things are not the same as the past. We hope that we can catch up in terms of progress. With the new LLM being added to traditional area, then we can also alleviate the price decline or price pressure. For digital intelligence operation in the second half, growth will resume. In the first half, there is a small 1.6% decline. In the second half, I think we can get back that growth so that we will see positive growth, a weak positive growth. There won't be a large growth. We mainly rely on non-telecom industry like automobile and consumption. We have already seen many business opportunities. This is a more certain segment. Digital intelligence operation, there will be growth. For vertical industries in the second half, for LLM, we are working with top companies, Ali, Baidu. We will use their general models. General models and also specific application, there is a big gap. What we are doing is we use our background information about the industries and our understanding of general LLMs, then we can fill the gap. In the second half, there are many cases where LLMs are used in different areas, like airports, airlines, ports, transportation, energy sectors. They also use LLMs. Much effort will be put in, and together with top general LLMs, we will work together. We are their most important strategic partner. No matter whether we are talking about Ali or Baidu, we are their most important strategic working partner. In the second half, this is going to be our key focus. Overall speaking, we will catch up our progress in BSS. We will offset the decline. For cost control, we have been paying a lot of attention, but staff cost is our major cost. We cannot rely on a large-scale downsizing. Downsizing is a kind of dynamic adjustment, but we will not just lay off people in a large scale. In the first half, there is a decrease by 400-odd employees. It is just natural wastage. We have to also replenish our manpower. AI needs more people, so the net change is negative 440-odd, but it is just that some employees are replaced. Some are not appropriate, so we phase out some traditional business people, then we bring in people who are strong in AI. So the net is negative 400-odd. We still need so many people. We can either downsize or because pressure is larger and operators are cutting costs, as a result, each employee can only make less profit, so you should either downsize or there would be impact on your average profit. So this is a dynamic balance. Should I use fewer people to do the same thing or the same number of people, but each will be making less profit? So you have to strike a balance. So this is being managed by our system. If you cannot support so many people, then perhaps some have to be replaced. Now, if you have the business and orders, then you may have to replace some people. So we need our platform and system to manage. In terms of cost, we are doing quite a good job in cost control. In our company, we use some outsourced staff and we use third-party companies in outsourcing, and there is room to pass on the pressure to them. So in this way, we can also save some costs. Overall speaking, we are able to control costs. When orders can be secured, I think costs will not exceed our budget. We will not only rely on saving money. When orders come in, when revenue come in, our costs will not exceed budget, then I think we rely on our system to do management. Next question, please. Mr. Gao, Mr. Huang, I am from Citic Securities. I have a few questions. First, in relation to your core business, operators are cutting costs, so they may put price pressure on suppliers. Besides, looking at these operators, their R&D expenses and investment grow fast. For their self-development, they also have their KPIs and appraisal metrics. For suppliers, when they do this R&D work, there may be a permanent loss of market potential as a result. Have you done an assessment of this matter? Secondly, just now, Ms. Huang also said that now the industry is during winter time. About this problem, when you look at competition, how is competition like for BSS, OSS? Your market share is rather leading. There is still much room for OSS share expansion. In the market, there are still other players. Operators have been putting much pressure on you to improve your own operation. From your own point of view, given these circumstances, when the industry is not good, when there are certain reforms in terms of supply and demand, of course, you are cautious. You are not doing downsizing even though the industry is not good. Looking at your competitive advantages, can you snatch market share from the smaller competitors? Do you think you have these opportunities? These are my questions about your core business. Thank you for your questions. Your questions are good. When it comes to operators, your point is right. Now, because of the state's performance appraisal, there is big pressure on the operators. For telecom industry, 3% growth, only lower than GDP growth, so operators face huge pressure. They will try to pass on such pressure to their downstream. This is natural. Besides, they are also doing a lot of self-development. For self-development work, there is not much impact on my overall business. There may be incremental things. In the past, they used to do tendering. Now they will do their own work with their self-development effort. For incremental potential, there would be some pressure. They have to look at new things like data-related things, computing power. We invest a lot into computing power and also LLMs. In these new areas, I believe operators as national teams will not be too much concerned about applications. While other people can also work on applications, they would focus on big things like quantum computing power, general LLMs, and so on. In these areas, I think operators will move towards these areas which are not really possible for the smaller private companies. I think that is more like their direction. For the existing markets, if the operators come in, there won't be big value for them, not that meaningful. Because to their cost, they can't really save costs a lot, and they cannot benefit a lot. If they do it, and we do it, our cost control is better than them. How can they be cheaper than us? We have accumulated our experience for 30 years. For new markets and also future-oriented businesses or cutting-edge things, what they would like to do it, everybody will have the chance to compete, but I think this is just natural. They are huge companies. They are in the national team, so to speak. In terms of self-development, they will move towards cutting-edge product research. Their room will become smaller. I don't think there would be much impact on existing business. For competition, I think you have made the right point. During this difficult time, when product experience gets better, performance price ratio gets better, these are some advantages. Now, if you talk about price reduction, there are big and small vendors. Some vendors will just turn a blind eye to their cost. They just cut price by 10%, 15%. I will also agree unconditionally. For big vendors, they will have to look at their product quality. If my cost cannot be covered, if I cannot maintain my quality, then I will be very worried. If you lower price to the level that I may incur a loss, I will still do it if I am a small company. It is not meaningful to do that. One day, I believe the situation will turn around. When price goes to a level extremely low, then you will not be able to deliver quality. The systems may not be good to clients, even though the cost is low, the system may break down. The cost is much bigger than the savings. I think operators will understand this. You cannot just pick a cheap vendor in a price war. I think operators are rational. They will attach importance to value for money, and they have to make sure the safety, quality, performance have to be good. They will not only look at price. In this process, when operators resume rational, my product quality is good enough. It is tested during long time. In that way, I think we will be in better position than the small companies which just disregard quality. When operators take into consideration quality and price and everything else, then small companies will find it difficult to survive. If they only go for price, then small companies can survive. If they take complete consideration, then we will be able to grab share from small companies. I think right now, operators are much smarter than us. They know that both quality and price are important. We will have better position than small companies. We will have the opportunity to grab their market share. There is that chance. The point is, at a certain point in time, perhaps operators attach too much importance to price. That may happen, but in the long run, I think they will pay attention to product quality and product cost. Companies like us will enjoy an advantage. I would like to supplement. For operators, they are not only suppressing price. Yes, there is price suppression. Their order is at a lower price. I do agree with Mr. Gao. For our traditional business and self-development, it does not mean that there is no chance for joint development, joint R&D. Our company always works with other operators. We have made investment into R&D. We have made different deployments. Joint R&D is also an option. There are many opportunities about joint R&D, even though companies are doing their own R&D as well. Let me supplement. In new incremental business, like AI, some time ago, I talked to China Mobile people. So much has been done. How can you recover your investment and costs? China Mobile is looking into this area, and some of the overseas giants are considering this point. Apart from use of AI in vertical industries, you work with Ali and Baidu. Have you been working with operators? How do you choose your working partners? Just now, you said that with operators, you do joint R&D. In terms of AI use in vertical industries, how do you choose a model when you work with operators? Are there more chances to work together? For receivables, in the first half, receivables did not change much, but scale of revenue came down a bit. In terms of operators and clients, apart from the price factor regarding receivables, has there been much pressure on your credit terms? You said just now, telecommunication is the best industry. For new industries, their growth is faster. Many industrial customers experienced a receivable problem. In the past, your cash flow was very good. Now, since growth is faster in vertical industries, when it comes to credit period and also collection of cash, has there been any change? For LLMs, I said just now, we work with Ali and Baidu, and we work with them on general LLMs. Regarding general LLMs, there is no doubt that within China, they are in better position. They are leading. In general LLMs, we want to work with the best. When we work with them, we have our own understanding into these industries and business. If there is no industrial knowledge, if there is only technology, no use. At the ToB end, you have to combine things with scenarios and industry-specific knowledge. For ToB, if there are no scenarios, no use. We have better understanding about scenarios. We have professional business teams to work with Baidu and Ali to fill the gap. We use the general LLM technology, and in the middle, we do a refinement and adjustment of the models based on the scenarios. For example, in areas like transport, energy. When we work with Baidu and Ali, we are the important LLM working partner. Now, we are a major player in intelligentization operation. It is a very important AI use scenario. AI3 and so on, AI4, we are working in depth with operators to do joint R&D. AN is a very hot topic, so LLM used in network, digital intelligence and optimization. In the planning and operation process, how can we use LLM? We work deeply together with the three operators. Just now, for the operators' LLM, how can they be used in BSS? It is not a disruption of existing operation. It is really a big enhancement. If you talk about Copilot and also future technology, how can we use existing technology into future-oriented, where we want to improve existing experience so it is more user-friendly, cost is lower, we can save staff costs. For example, in customer service, in channel sales. We are not trying to abolish the whole existing system. We are not rebuilding the system all over again. That means a lot of cost. Now with LLM, we hope to improve experience, lower cost. They don't need to do so much training with their business people. I think this is a big improvement. We work with operators to shape these models. We work with them in depth. Each application is bundled together with operators in an in-depth way. It is not only our work. We work with both operators and non-operators. For non-operators, Baidu, Ali. In telecom area, we work with the operators to achieve iteration of these products. There is cooperation of both types. For receivables, let me supplement. Let me add a point first. You talk about other industries' receivables. There is fast development, but in terms of control and management, we make sure that projects are healthy. This is because we have got our experience in telecom already. For each project, we will look at the approval process. For the operating industry, the bad debts are very low. Credit worthiness is very high. For industries that we are not familiar with, we set a lot of conditions. For example, what is the source of funds, how big should be the payable, and also their credit trustworthiness. I would rather not do a project, but I want to make sure that all the projects are safe. We do not only go blindly for growth rates. We want to ensure project security or safety in terms of cash collection and so on. We do not want to fall into a trap. We have to know the source of funds, and there must be adequate share of prepayment, and then track record is important. If a project cannot go into our system or cannot get past our system, we will not do it. Let me give some figures. During this environment, we have to pay attention to risk of receivables. We have a very mature cash collection system. At present, based on our tracking, receivable quality is very controllable. That is our basic conclusion. 80% of our receivables are from operators. 80% from operators, telecom operators, and overall receivables based on age, 90% and above of receivables are within one year. Overall quality is very good. Third, operators and non-operators, we manage them separately. Operators are quality clients, and their credit period right now, their credit period has not worsened significantly. Their payment has not changed significantly. They are still quality customers. Then cash collection is also stable. That is the overall situation. In the first half, receivable turnover days have gone up by around 20 days. Just now, I said this is because of delay in orders and milestone delay as well, inspection delay. Another point of view is our financial statements are very substantial. Accounting standards are very prudent. Receivables, ECL, credit assessment model, bad debt preparation, these are all very sufficient. We make bad debt provision adequately. Objectively speaking, non-telecom operators, their credit period bad debt provision definitely are higher than operators. Thank you. Next, we will take questions from the phone line. Operator, can you give instructions? Thank you. If you would like to ask the questions, please press star 1. Thank you. This question is from CICC. Chu Siu Yung, please. Mr. Gao, Ms. Huang, thank you for the opportunity. I have two questions. First, for your Three New Business. All along, your strategies are forward-looking. You want to achieve faster development of the Three New Business. How much is their share of revenue, and what is the future plan in the future? How much contribution will be there for your business overall? In different businesses, your costs are different. In terms of developing these new businesses, you will pay attention to revenue expansion or do you want to ensure profit? My next question is about shareholders' return. As Ms. Huang said, she talked about valuation. Valuation has lowered, but you attach importance to shareholder return. You said dividend payout would be 40% of net profit, and then dividend per share stable as last year. Does that mean that if there are extreme situations, then dividend payout may go beyond 40%? What are you going to do to change your valuation? For Three New Business, we have got a guidance. By 2025, Three New Business should account for 50% of total revenue. This year, in the first half, 40% already. Comparing with last year same period, it has gone up. For Three New Business, to a large extent, it has driven our company's growth. I think in terms of its share, the higher the better. For operators, they account for a high share. If there is volatility in the operators market, then there will be big impact on the total. When Three New Business accounts for a higher share, that will offset our reliance on operators revenue. In the future, I hope Three New Business will account for a bigger share. Our guidance has been achieved already, and it is faster than expected in terms of Three New Business growth. That may be because of a decline in the traditional businesses. As a result, Three New Business share is higher than expected. This trend will still be there. For the Three New Business, it is about a balance. You go for fast growth in business scale or profit growth. If you go for profit growth, then it is difficult to do the Three New Business. In BSS, we have been working on it for 30 years. I have a good understanding of everything. Cost control, revenue, I have good understanding with 30 years of experience. For Three New Business, we started at a late stage, so in the long run, for revenue scale and profit, we still need to strike a balance between the two. In the long run, about Three New Business, like OSS and also digital intelligence operation, the profit of these two segments will be big. OSS will be more or less the same as BSS in terms of gross profit, because both are in the operator market. For digital intelligence operation, when the share of commission is getting higher, then it is similar with SaaS business. So, fees are result-based. When this share goes up, then profit will improve for digital intelligence operation. In the long run, profit of this segment should be higher than BSS and OSS. For vertical industries, I think profits will never be as high as operators' profit. The telecom industry is the best one, and when vertical industries non-operator profit margin, in the future cannot catch up with BSS profit margin, then in the future, for profit, it will be, number one, digital intelligence operation, then OSS, BSS, and then the last will be vertical industries. The pace and profits should be balanced for vertical industries. We should not simply go for development scale. We put in a lot of money to do adjustment because we want to ensure healthy development. There should not be bad debt. Profit margin should not be too low. If it is lower than a certain level, I won't do it. So we have to strike a balance. I would not go for development pace blindly. Otherwise, we will be doing a lot of projects and all those may be meaningless. This is irresponsible. So we are trying to get this balance. Shareholders' return, perhaps you can take it, Ms. Huang. Yes. Thank you for the question. Regarding shareholders' return, we have written a clear guidance for dividend payout. It is decided by board of directors and AGM, then management will implement. We have strong cash position. There won't be problem for us to execute the dividend payout. Our long-term guidance is 40% dividend payout. This year, we added one point. We will try our best to maintain dividend per share at the same level as last year. Given this guidance, the board has agreed to maintain flexibility and possibility. So at the end of the year, we will look at our final net profit and then do an overall consideration. It's not only about a 40%-plus dividend payout. There are other ways to give shareholder return. Whether there will be special dividend, it all depends on shareholders. Long-term dividend payout guidance is still 40%. Whether there are other special considerations will be determined by the actual circumstances. How can we improve or enhance? Well, I hope investors can visit our company and we can communicate. In our Beijing headquarters, we have a very good business showroom. Then our products, business scenarios, and cases can be showcased to everyone. It is a large showroom. Then you can visualize, you can have better understanding. Otherwise, you won't know what we are actually doing. For example, vertical industries business, digital intelligence business, what are they? I want to have more interaction with you, so I would like to invite interested investors to come to our company anytime. As long as I am in the company, then I will have in-depth communication with you, then you can have better understanding of our business progress. We can have more in-depth discussion. You will know what products we are working on and the cases that we are working on. So, we have been doing on 5G private network, RPA, Edge AI. We have actual specific products to show you, and also cases to show you. Then you will know, oh, we are working for the energy and transport sector on all these. So you are welcome to visit us. With better understanding, then you will have confidence. Otherwise, you won't believe in us. Okay. Next question from the phone, please. Thank you. Next question is from Sarah of UBS. Please go ahead. Thank you. Thank you for the opportunity. I have one question. Just now, you talked about various business segments' profit margin. You also said that for going overseas, and also LLM Application in different verticals, there may be certain development. In the future, in terms of gross profit margin and net profit margin, can you share with us the outlook? As such as now for net profits, we explained about our business, our overseas business. We sell standardized products. Our scale is very small. This year, the indication is $2 million. In the coming five years, we want to achieve annual sales of $100 million. This is the first year. We have to go through all the processes and set up the overseas companies, find the right channels, and in the back office, we have to make sure that all the systems are connected. So these are things that we are doing now. So within five years, we want to achieve sales of $100 million, and we are now in preparation stage for overseas development. LLMs, we have done adequate preparation. In the second half, there will be more opportunities. We will cooperate with strategic working partners. There will be more cases. But usually, we will not go ahead to announce everything too early. Next year, I think there will be more announcements. Overall speaking, in our pipeline, there are many opportunities. I gave a guidance about long-term profit margin. Long term means that before the business goes to a plateau, then the profit margin for digital intelligence business will be higher. OSS are only 15% share of the total. We hope OSS can account for 25%, 30% of market share. Right now, it's not enough. BSS, we are a leader, 50% market share. This is very good. But for OSS, we think that there will be room for expansion. Now we are not doing enough. There will be some reshuffling. We hope that it can go up to 25% to 30% market share. When it stabilizes, then digital intelligence, OSS plus BSS, and vertical industries. This year, for BSS, in the second half of the year, we will catch up with the progress. But the major trend in BSS is a price decline. Price will not be as high as in the past. For traditional business, profits will not be as good as before. For traditional businesses, they account for a big share, and if price comes down, it will cause big impact on us. So our net profit margin will be lower than last year for this reason. You raised a good point. Our net profit margin, it is impacted by traditional business. For new business, when vertical industries have a bigger share, then it will be negative as an impact on our net profit. We don't want to expand too much the vertical industry business because there is impact on profit margin. When a scale gets big, then there will be impact on profit margin. Overall speaking, this year net profit margin will be lower than last year. This is my answer. Okay. For these asks, digital intelligence business, I hope that it will grow faster, then it will offset the profit decline in BSS. Thank you. Because of time, we will see whether there are further questions on site. I have a question on your BSS business. You said in the first half, because of delay in contract, so the business is still there, but contracts have not been signed yet. So how much is this kind of contract value as a share of the total? Now there is a decline pressure. How big is that? Do you have any measures to offset the price decline for these core businesses? As such as now, our main business is in the second half. Usually, the split between first half and second half, 30 70%. So a split of 3 to 7. That's the usual case. So more towards the second half, the volume will be bigger. So that's the cycle. BSS profit margin may come down. It is not only because of contract delay, because there is pressure in suppression of profit margin. There is definitely the pressure. Operators will pass on their pressure downstream, and we try to limit the decline with new things. For example, our LLMs. We are working on so many LLMs because we want to offset the profit margin decline in BSS. LLM is a new thing, new investment. So things procured now will be different from the past. In LLM, investment is bigger. There are more new opportunities. At the same time, in terms of cost control, like BSS, profit margin is coming down, and definitely for development costs related to BSS, I will try to lower costs by means of, for example, manpower. For the high-end things, high-end people will work on high-end things. Low-end things will be done by low-end people, like coding. We will separate the costs. We will not adopt a broad-brushed approach. I will not employ an expensive person to do low-end work. I will exercise more refined management. Besides low coding tool, we have a TuringCoder. What is it for? It is to enhance efficiency of people. The tools can generate codes automatically, and then our people will check them. Then this can reduce manpower input. The major trend is downward, but then we would like to use engineering tools and also adjust or lower staff costs further to offset profit margin decline from BSS. Thank you for the answer. Because of time, we will end our event here. Thank you for coming today. If you have further questions, please contact our IR department. See you next time. Thank you. Thank you. Thank you very much.