China Communications Services Corporation Limited (552) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. I'm Terence of China Comservice. On behalf of the management, I would like to welcome you to our 2019 annual results audio webcast. First, our management will present 2019 annual results and a Q&A session will follow. [Operator Instructions] I will provide consecutive interpretation. Let me introduce our management who are with us today. Chairman, Mr. Zhang Zhiyong; President, Mr. Si Furong; Executive Vice President, Mr. Liang Shiping; Executive Vice President and CFO, Ms. Zhang Xu. Thank you for joining, and I hope you will find this presentation helpful. Next, let's invite our Chairman, Zhang, to present the 2019 annual results overview.

Good afternoon, ladies and gentlemen. Due to the coronavirus epidemic, we cannot meet you in person, and the presentation is changed to audio webcast. We can meet you again at the next presentation after the epidemic ends. Today's presentation is divided into 3 parts. First, I will introduce the overview of our results. And next, Mr. Si and Madam Zhang will present the business review and financial results, respectively. During the Q&A session, we will answer the questions that you may concern. First, we look at highlights. In 2019, against the backdrop, where overall macroeconomy faced downward pressure and domestic telecom industry witnessed slowdown in growth, overall results maintained stable growth and business value further manifested. First, fundamentals in domestic operating markets were stable, despite 5G construction by domestic operators has yet to come in scale. Revenue from domestic operator market maintained stable, increased by 3.9% year-on-year. Second, domestic nontelecom operator market, i.e., domestic nonoperating market sustained its robust growth and increased by 25% year-on-year. It served as the main growth driver with rising gross profit contribution. Third, remarkable results achieved in development of smart projects with accelerated development in smart services and sped up deployment in new fields, riding on industry trend. The details will be shared by Mr. Si later on. Fourth, software capabilities gained wide recognition. We increased investment in R&D, accelerated smart product development and iteration of products, drive and force of ACO business noticeably strengthened with its year-on-year growth at 17.3%. Fifth, pinpointed new positioning of New Generation Integrated Smart Service Provider. We initiated value transformation to further realize the value of our integrated smart service. Next, let's look at overall results, mainly on 3 indicators: in 2019, revenue maintained a double-digit growth, amounted to RMB 117.4 billion, up 10.6% year-on-year; net profit was RMB 3 billion, up 5.1% year-on-year; free cash flow was RMB 4.2 billion, up 17.4% year-on-year. Now let's look at the reasons of achieving the above results. First, we persisted in first transforming growth momentum by accelerating deployment in domestic nonoperator market and driven by smart businesses. Incrementing revenue contribution from such market surpassed domestic operators. Revenue from the core businesses in the domestic nonoperator grew by nearly 30%, and such market is the main growth driver. We penetrated into domestic operating markets and accelerated the implementation of Dual Growth Drivers Plus' strategy, among which, core BPO businesses continued to be the main growth revenue driver. ACO business kept a relatively fast growth as domestic operators transformed, leading to increased demand for smart applications and services. This business remains stable due to investment structure adjustment by domestic operators, and 5G investment has yet to come in scale. Second, driving force of ACO business noticeably strengthened. In recent years, ACO major businesses recorded rapid growth, with the proportion to total revenue gradually increased to 12% in 2019. And the driving force noticeably strengthened, among which, ACO major businesses from domestic operator market and domestic nonoperator markets grew relatively fast. In particular, the CAGR of revenue from 2015 and 2019 from domestic nonoperator market reached 24%. The high-growth was mainly a result of the continuous increase in R&D investment by the company, and continuous emergence of smart products and industrial solutions. For example, CCSYUN cloud and CCS Open IoT Platform have been recognized by the market. Our share -- our software and smart service capabilities have been enhanced and gained wide recognition. Third, value of domestic nonoperating market gradually manifested. The chart show revenue breakdown, incremental revenue contribution, and gross profit of domestic nonoperator market. You can see in recent years, domestic nonoperator markets value gradually manifested and the contribution from the market to the company kept on increasing as we penetrated into the market. First, the contribution to total incremental revenues increased significantly from 24% 5 years ago to nearly 80% in 2019. It became the largest contributor to the total incremental revenues. Second, the revenue structure of the domestic nonoperator market kept improving. Proportion of revenue from product distribution business continues to drop, while debt from Core Businesses kept increasing to 92.4% in 2019. Besides, the quality of revenue from domestic nonoperator has been improving. Driven by smart products and services, we continued to make breakthroughs in 20 projects and achieved synergies among business segments. Gross profit contribution from the market increased. As you can see from the chart, both revenue and gross profit from the market increased by 25% in 2019, whereas gross profit growth was slower than that of revenue in 2018. The change indicates gross profit margin in domestic nonoperating market was largely stable, and the market's contribution to the company's gross profit increased noticeably. Fourth, press on with growth momentum, transformation and initiate value transformation. A few years ago, we already foresaw situations that may happen in domestic operating markets, such as reduction in investment and decline in service value in the telecom industry, and put forward the 2 Dual Growth Driver strategies that are CapEx and OpEx, domestic operators and domestic nonoperators. On one hand, we developed OpEx business of domestic operators. On the other hand, we deployed a new market arising from industrial informatization and digitalization. From the chart, we can see, we successfully adapted to negative factors, such as decline in domestic operators' CapEx and maintained stable growth in the past 4 years. Now 5G and other technologies accelerated the digitalization progress of society and industries. Production and lifestyle will have significant changes. In 2019, in order to ride on the new trend and capture new opportunities, we put forward the new position of New Generation Integrated Smart Service Provider and initiate value transformation. We will increase value through reconstruction -- reconstructing businesses, organizations, capabilities, ecosystems and mindset. Meanwhile, we will deepen reform and step up the advancement of SOE Reform Double-hundred Action and the return to work. Lastly, going forward, first, we would highly ride on the trend and give full play to our core advantages. We ride on the macro trend that Chinese economy will prosper in long term and digital economy will account for high weight in GDP. Ride on the trend that new infrastructure such as 5G will accelerate integration of emerging technologies with the new real economy -- with the real economy and demand for digitalization from society and industries is booming. Ride on the trend of customer demand for integrated, tailored products, applications, full cycle integrated smart services. We will take advantage as a listed SOE with CNY 100 billion revenue scale; unique 4T capabilities, including communications technology, information technology, data technology and operational technology; decades of experience and technologies in telecom and informatization industries as well as technology capabilities, platform capabilities, service and product capability. Meanwhile, we will take advantage on our neutral market position to construct in biotech ecosystem in order to provide integrated smart service to our customers and create greater value. Looking ahead, we will ride on the trend that give full play to our core advantages. Second, we will continuously promote transformation to achieve value enhancement. We'll explain -- expand new markets, explore new models and build new ecosystem to promote high-quality development. First, increase investment in R&D, accelerate the development and iteration of smart products, enhanced quality and quantity of smart products, increase capital investment by means of capital to construct symbiotic ecosystem and enhance analogical strength, technology and service capabilities. Second, accelerate reform, promote diversity of share ownership, optimize incentive mechanism and stimulate the company's long-term momentum, capability and vitality. Third, a salary deployment in markets and business development based on the positioning of new generation integrated smart service provider and market demand. Fourth, strengthen the building of ecosystems, optimize internal and external ecosystems to support our development. Fifth, build up talent teams, construct various expertise that adapted to future development. We believe with the above measures, the company can enhance the value to the society, enterprises -- values of the society, enterprises, shareholders, customers and employees and create larger value. Above is the first part of the presentation. Now next, let's invite President Si to present the business review of 2019.

Thank you. Ladies and gentlemen, good afternoon. I will present the group's business performance for 2019. The table shows the revenues and growth rates of the 3 business segments and percentage to total revenues of each segment in 2018 and 2019. In 2019, both TIS and ACO businesses recorded double-digit growth. In TIS business, revenue from domestic operator markets remained stable, while that from domestic nonoperating markets grew rapidly. Growth of ACO business continued to be robust and that of core BPO business remained steady. In 2019, we vigorously developed the domestic nonoperator market and promoted Consultant + Staff + Housekeeper model to provide integrated smart service solutions with consultation and planning services as leading role and ACO smart products embedded, driving the development of TIS and BPO businesses. Revenue increased rapidly by 25.2% year-on-year. In 2019, revenue growth of domestic operator markets remained stable, up 3.9% year-on-year. Because we deeply penetrated into OpEx business, BPO business achieved stable growth. In addition, we supported the transformation of operators and captured the ICT intelligentization service demand. Fast growth in ACO business sustained. In 2019, business structure and market structure were further optimized. On business composition, portion of revenue from ACO business continues to rise and reached 13.7%, while that from product distribution business was further contained. On market composition, portion of revenue from domestic nonoperators continues to rise, accounting for 35.5%, and became the largest customer group for the first time. To capture opportunities from digital economy and smart society, we continue to increase investment in R&D to build platform capabilities of foundation platforms, such as cloud and Industrial Internet and enrich smart products, enhance integrated smart service capabilities by building internal and external ecosystems, strengthening synergistic collaboration, develop operating mechanism that is adaptive to market development and customer demand by optimizing organizational structures continuously. Develop expertise and strengthening incentive mechanism, enhance market influence by cultivating the Smart Comservice brand image continuously. Through implementing multiple measures to strengthen development of domestic nonoperator market and sizable projects and accelerate deployment in key fields, we maintained robust and healthy growth of the market. In 2019, revenue from domestic nonoperator market increased by 25.2%, and Core Businesses grew by about 30%. In market development, we focused on digitalization and intelligentization demand to make breakthroughs in various factors, such as government, transportation, electricity and park. The amount of newly signed contracts in the domestic nonoperator market exceeded RMB 58 billion, increased by over 26%, indicated a strong momentum in the future. Newly signed contracts are directly reflected in over 800 newly-signed group level smart product projects, mainly on smart city, data center and cloud computing, public safety, intelligent building and smart transportation, and indirectly reflected in the drive on integrated businesses, such as construction of new generation network and informatization system integration by smart products. It demonstrates the synergies brought by smart products on the related businesses and value enhancement resulting from strengthening customer loyalty and raising bargaining power. For sizable project development, by focusing on the intelligentization demand of the government, society and industries, we have been constructing an industrial ecosystem and penetrating into key industries, including electricity, transportation, airports and sport gain as well as increasing investment in R&D, decelerate the deployment and iteration of smart products. Led by consultation and design, we have made remarkable achievements, including the Smart Game for the 7th CISM Military World Games, and the digital government project of Guangdong province in the form of Consultation plus Software (Smart Government Services) + Integration. As we further expand our deployment in domestic nonoperator market and accumulate experience and successful cases in industries, our integrated smart service capabilities will be recognized by customers continuously. In recent years, sizable projects at RMB 100 million level scale -- RMB 100 million scale increase substantially, which lays a solid foundation for us to deeply penetrate into key industries and fields and realize high-quality development. In new field deployment, we ride on the trend to leverage on our unique advantages to accelerate deployment in key fields to seek breakthroughs. The first field is network information technology. It is the strategic foundation for execution of cyberpower national strategy. Market potential is fast with an industry scale expected to exceed RMB 200 billion by 2025. The second field is emergency management, which is a pressing demand in China. In 2018, after the establishment of the Ministry of Emergency Management, demand has increased. The recent epidemic outbreak pushed the demand for emergency management mechanism and system and related products. The third field is Industrial Internet, which is supported by government policies and industry. In 2019, we established China Comservice Industrial Internet Big Data research institute to strengthen development in industrial Internet technology. Currently, we have accumulated certain experience and completed certain projects in the above fields. We will expedite deployment to seek new breakthroughs. In recent years, in light of future development, we adhere to symbiotic philosophy by leveraging on our completely neutral position as an integrated smart service provider to enhance internal and external symbiotic ecosystems to satisfy customer demand. First, continue to enhance internal ecosystem, utilize flexible organization to support product R&D and brand building. Second, enrich industrial ecosystem, bring in new partners from government, industries and R&D institutions to strengthen industrial alliances. Third, emphasize talent ecosystem, enhance various expert teams in China and Comservice craftsmanship systems with the feel to accumulating adequate reserves of diverse talents. We believe integrated smart services cannot be provided by a single company. We will build new generation integrated smart service symbiotic ecosystem with all partners to drive development and create value. In domestic operator market, we adhere to Dual Growth Drivers Plus development strategy to proactively integrate into the domestic telecom operator ecosystems. On one hand, we grasp the opportunities from domestic operators' traditional business demand. On the other hand, we supported that transformation by integrating traditional business and smart services. Against the backdrop of subdued growth of domestic operators' revenue, decline in service value and last year's high base, revenue from domestic operator markets still achieved stable growth at 3.9% year-on-year. In 2019, we built up our strength in 5G technology and talent and proactively undertook 5G network construction projects from domestic operators. However, as 5G network investment has yet to come into large-scale, TIS business growth from domestic operators remained stable, increased by 2.1% year-on-year. We continued to penetrate into OpEx business of domestic operators. BPO business achieved steady growth and played a critical role in maintaining stable growth in domestic operator market. Meanwhile, we captured opportunities from transformation, smart products and services demand from ICT market of domestic operators, driving ACO business, increased by 16.2% year-on-year. We believe as domestic operators intensify their development in 5G this year, in coming 1 to 2 years, we'll have more opportunities from network construction, operation and maintenance as well as smart application. In 2019, we focused on overseas key project development. Overseas business maintained stable growth with its revenue increased by 3.6% year-on-year. We were awarded the Excellent Enterprise for the Belt and Road 2019 Information Technology Industry by China Information Technology Industry Federation. The 4G project in Nepal, the National Broadband Project in Saudi Arabia, and the Optical Cable Backbone Network Project in Tanzania were awarded the top 100 Outstanding Belt and Road cases for the 2019 Information Technology Industry. Demonstrating our business strength and brand awareness have received wide recognition in the market. We will grasp the opportunities arising from the advancement of Belt and Road, focused on the overseas demand for network infrastructure and digital services to promote overseas business development. Meanwhile, the group will strengthen collaboration with domestic telecom operators, Go Abroad Chinese enterprises and local partners to expand overseas market and explore new development potential. Commercial use of 5G commenced last year. 5G technologies further integration with industrial development will bring us vast opportunities. First, 5G brings investment by domestic operators and will benefit directly in network infrastructure construction. Second, technologies from 5G will change industry operations and business model, such as accelerating digital transformation of the society and industries, such as industrial Internet development. These will bring us new markets on digitalization and intelligentization business. Third, as numerous industrial operators emerge, operation and maintenance support service demand will increase further. As affected by COVID-19 epidemic early this year, the government and related departments have already clearly stated the need to expedite. The new infrastructure construction, including 5G data centers and industrial Internet. Despite being impacted by the epidemic now, we will capture the demand and opportunities arising from the endemic and turn the crisis into an opportunity. We'll promote value transformation and promote high-quality development. Above is the business overview. Next, let's invite CFO, Madam Zhang, to present the financial review.

Thank you, President Si. Good afternoon, ladies and gentlemen. I will now present our financial review for 2019. The table shows our key financial indicators, such as revenue, cost and profit for your reference. Next, I will introduce our key financial performance. The company's cost of revenue in 2019 accounted for 88.3% of total revenues, up by 0.4 percentage points over the same period of last year. We have strictly controlled the total number of staff and utilized subcontracting resources adaptively. Direct personnel cost as a percentage of revenue kept declining, while labor productivity increased 14.3% year-on-year. The company continues to intensify the contracting management through in-depth data analysis on cost of contracting and strengthening the management and supervision over the whole subcontracting process. Subcontracting cost was controlled effectively with this growth as a percentage of revenue significantly moderated. Apart from the growth of integrated 20 projects, the rapid growth of construction business in domestic nonoperator market and system integration business also drove the relatively fast increase in materials cost. The company continues to contain the product distribution business. Proportion of direct cost of product distribution extended its downward trend. Regarding operating efficiency, despite facing continuous negative factors, such as declining in service price in telecom industry, with the increase in business value of domestic nonoperating market and positive driving force by increase in gross profit contribution from such markets, the company's overall gross profit margin and net profit margin in 2019 were 11.7% and 2.6%, respectively. The decline trend of the margin moderated. We continued to increase investment in R&D to enrich smart type products and enhance software and smart service capabilities. R&D expense as a percentage of revenue increased by 0.2 percentage points to 2.8%. Meanwhile, SG&A, as a percentage of total revenue, fell by 0.2 percentage points to 9.8% due to cost control and scale benefit. We have always adhered to the effective value-driven principle on assessment and strengthen management of working capital, accounts receivable and accounts payable. In 2019, free cash flow amounted to RMB 4.243 billion, up 17.4% year-on-year. Cash flow remained at a healthy level. Cash conversion ratio was 158%. Due to repeated notices from the government to settle payables due to private enterprises, we paid private enterprise subcontractors based on tighter requirements. As a result, accounts payable turnover days decreased by 2 days to 132 days. Meanwhile, although more funding was needed to develop sizable projects, accounts receivable turnover days decreased by 1 day to 110 days due to more effective accounts receivable management. In consideration of the favorable results, free cash flow level in 2019 and our confidence for future development, the Board has proposed a final dividend of RMB 0.1321 per share for 2019, and the dividend payout ratio is 30%. In addition, the Board has proposed a special dividend of RMB 0.0264 per share. Total dividend for 2019 is RMB 0.1585 per share, increased by 5.1% from last year. Dividend payout ratio, including special dividend, is 36%. The table is all the indicators of the company, including total assets, total liabilities and equity attributable to shareholders. As of 31st December 2019, our total assets were RMB 87.5 billion. Cash and deposits were RMB 21.7 billion. Liabilities asset ratio and debt-to-capitalization ratio were 60% and 1.5%, respectively. We've always maintained a low interest-bearing debt and net cash level. The robust financial condition is favorable to the company's development and sufficiently prepared us for seizing 5G network, and new infrastructure construction opportunities, expanding sizable scale projects and expediting innovation and transformation of the company. As a listed state-owned company with revenue exceeded RMB 100 billion, China Comservice possesses unique comprehensive integrated service capabilities with its strategic mindset with foresight and effective execution, the company achieved stable growth in revenue and net profit under the challenging environment in the past few years by having insight in to new market opportunities, seeking continuous innovation and enhancing core capabilities. In 2020, based on its positioning of New Generation Integrated Smart Service Provider, the company will grasp new industrial opportunities arising from the vast market potential brought by a smart society and new infrastructure, such as 5G. We will accelerate value transformation and enterprise development to increase shareholder value. Now we are very pleased to answer your questions. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]