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 2020 interim results audio webcast. First, our management will present 2020 interim results and a Q&A session will follow. If you would like to raise questions during the presentation, please include them on the web page. I will read out your questions following our management's presentation. They will answer your questions and I will provide consecutive interpretation. Let me introduce our management, who are with us today. 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 hope you find this presentation helpful. Next, let's invite our Chairman, Zhang, to present the 2020 interim results overview.

Thank you, Terence. Good afternoon, ladies and gentlemen. Due to the coronavirus pandemic, this presentation is still conducted online. I hope we can meet you again at the next presentation after the pandemic 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 first half 2020, COVID-19 brought unprecedented impact to the macro economy, various industries and the company. Our operating results experienced short-term fluctuation. Facing the pandemic, we adopted multiple measures to promote resumption of work and production. As the pandemic stabilized domestically, our operation in the second quarter rebounded noticeably. Revenue increased by over 26% compared to the first quarter. Net profit in the second quarter also improved significantly versus the first quarter. We proactively seized opportunities from 5G construction by domestic operators, cultivated and leverage our edges in general contracting to consolidate our leading market position. Growth trend of domestic nonoperator market sustained, that the market continues to be the main growth driver of overall development, contributing over 40% of total revenues for the first time with improving development quality. We continuously increased R&D investment to upgrade our software service -- software service capabilities. ACO business maintains robust growth and contributed approximately 15% of total revenues. Our businesses and capabilities tally with new infrastructure and accelerated demand for digital upgrade of society and industries. We will seize the opportunities and promote a high-quality and continuous development. Next, let's look at overall results. Our results have been maintaining stable growth in recent years, which were affected by the pandemic in the first half. Revenue amounted to RMB 53.8 billion, decreased 4% year-on-year. Net profit amounted to RMB 1.6 billion decreased 7.2% year-on-year. Because of the pandemic most of our businesses could not be conducted normally, the progresses of project development and construction were affected and tendering was deferred, especially in February and March. Domestic nonoperator market and domestic operator market as well as various businesses showed downward trends. Revenue in the first quarter decreased by 15.3% year-on-year. Facing the challenges, we adopted various measures to actively promote resumption of work and production. On one hand, we adopted the supplemental measures such as online and remote to promote digital transformation of enterprises in which communication, marketing and operation go online as well as delivery management and security fulfillments becoming remote. We overcame the challenges of cross-regional delivery and marketing to fulfill the internal control and customer demand. On the other hand, we focused on new contracts, production volumes since work resumption, tender volume, key projects, key companies and major customers and strengthened project profits supervision. Meanwhile, we increased investment in R&D, enhance risk prevention, optimize operation and persisted in cost control to raise efficiency for development. With our continuous effort and relatively stable pandemic situation in China in the second quarter, revenue showed a noticeable rebound compared to the first quarter, up by 7.4% year-on-year, and the growth was higher than China's GDP growth in the same period. It also lays a solid foundation of good management and capabilities for long-term development. In the difficult external environment in first half 2020, though, the quick recovery in the second quarter could not fully mitigate for the fall in the first quarter, on the basis of less than 3 months effective operation, we managed to achieve commendable operating results Domestic nonoperator was the first that resumed positive growth and ACO business became the first growth driver -- the main growth driver, benefiting from increased investment in R&D, continuous investment and experience accumulation in the informatization for serving the society in recent years. We can say the deployment in recent years enabled us to better cope with the unfavorable conditions of relatively significant decline in domestic operator market, TIS and BPO businesses and maintain the steadily improving trend in operation. Amidst the pandemic, we insisted life come first and put the life, health and safety of our employees as the first priority. We achieved 0 transmission within the company and 0 infection in overseas business regions. The above achievement is not easy to come for our group with over 90,000 employees and its business in over 40 countries across the globe. We made a lot of contribution to pandemic prevention, which increased our costs substantially. However, we overcame this difficulty to control costs, enhance efficiency, such that various costs were reduced, obviously. Meanwhile, we assumed responsibility of a state-owned enterprise and hastened to the frontline of combating the pandemic with a united spirit. We ensure the construction of a series of infrastructure and smooth communication at Huoshenshan Hospital and Leishenshan Hospital in Wuhan ensured timely delivery of communications equipment and supplies to infected areas, leveraged Cloud, IoT, Big Data and other foundation platforms to develop over 40 smart applications for pandemic prevention and donated masks and other pandemic prevention supplies to supply -- to infected area. We overcame difficulties to control costs and enhance efficiency such that various costs were reduced, obviously. The pandemic prevention work fully reflects our organization capability, convening power, leadership and execution. While we see the short-term impact posed by the pandemic, we also see the defining changes on customer demand, operation model and people's lifestyle and vast opportunities brought by it. Chinese government vigorously promoted new infrastructure, including 5G, leading to the need for a general contractor of digital infrastructure to fulfill new market demand, which bring us ample development opportunities. According to different research institutes in the industry, new infrastructure will induce RMB 1 trillion or even RMB 10 trillion market potential. Currently, in the 7 key areas of new infrastructure, we have been deeply involved in construction of 5G and data centers and vigorously explore into opportunities in IoT and AI, [indiscernible] the integration demand and potential in digitalization and traditional infrastructure, such as extra high-voltage supply system in urban rail system. Meanwhile, new infrastructure also brings us huge opportunities, mainly on first, digitalization of traditional infrastructure and integration of new and traditional infrastructure; second, new infrastructure enables digital transformation of society and industries accelerate, facilitate new technologies such as AI to simply integrate with real economy, bringing the new market of intelligentization of social governance and applications of people's livelihood. Third, operators accelerated their transformation, general contracting service model in 5G and data centers, new operations and new business in cloud network integration bring new opportunities in digital services. In addition, overseas demand for communication in infrastructure, construction and digitalization construction is still very strong. In the future, we're positioned as New Generation Integrated Smart Service Provider and playing the role of builder of digital infrastructure, provider of smart products and platforms, service provider of data protection and guard of smart operation, we will focus on the 3 main tracks of development in domestic operator, domestic nonoperator and overseas markets to expedite value transformation. We believe the impact of our company by the pandemic is over -- only temporary. There is no change in the fundamentals and the long-term prosperity trend. There will be more opportunities than challenges. Our management team will insist development with competence, cultivate new opportunities, begin a new stage, work hard on development and transformation and facilitate the company in marching towards high-quality development. Above is the first part of the presentation, next, let's invite President Si to present the business review in the first half. Thank you.

Thank you, Chairman. Ladies and gentlemen, good afternoon. I will present the group's business performance for first half 2020. The table shows the revenues and growth rates of the 3 business segments and percentage to total revenues of each segment in the first half 2019 and first half 2020. In first half 2020, the impact posed by the pandemic on TIS business and supply chain in TIS BPO business was relatively obvious that the respective revenues declined. Maintenance and property management in core BPO remains stable. In recent years, we have increased investment in R&D consistently to forge smart product portfolio successfully, leading to the sustained double-digit growth in ACO business, in which the growth of software development and system support business was over 20%. In first half 2020, business structure and market structure will further optimize. On business competition portion of revenue from ACO business continues to rise and increased to approximately 15%. On market composition, portion of revenue from domestic nonoperators continued to rise and exceeded 40%. To seize opportunities from digital economy and smart society, in recent years, we consistently strive to look into the needs of customers in vertical industries, increase investment in R&D and early deployed in software and digital service capabilities. Amidst the pandemic, our effort is bearing fruit. Contributed by smart products and solutions, domestic nonoperator market was the first market which overcame the pandemic impact and maintained positive growth at 3.7% year-on-year, of which ACO business maintained a robust growth and was the main growth -- main revenue growth driver. Meanwhile, we achieved major breakthroughs in the field soft data center, emergency management, smart game, electricity and transportation. The proportion of new contracts in the domestic nonoperator market with the size of over RMB 100 million per contract increased from 8% in 2019 to 14% in the first half this year. Well, as you can see, the working period in the first half was [ eventually ] less than 3 months. The decline in gross profit margin of domestic nonoperator market further moderated and development quality of the market was further enhanced. The pandemic affected the overall development in the domestic operator market, in particular, the project construction. Revenue from the market declined -- the market declined 9.2% year-on-year. We continued strengthening dual growth process plus strategy. On one hand, we seized opportunities from 5G investment and cobuild and coshare by domestic operators. We have set up dedicated project management teams, strengthened our capabilities and expanded the 5G construction business by adopting a new general contracting model, leading to an increase in related project volume. On the other hand, we deeply penetrated the OpEx businesses while supporting the transformation of domestic operators with smart services and applications. As a result, BPO business was relatively steady and ACO business sustained growth in first half 2020. In first half 2020, development of major overseas projects was successful. Most projects in Nepal, Saudi Arabia, Mali, the Republic of the Congo generated revenue, contributed from Asia Pacific, Southeast Asia and the Middle East continues to increase. Revenue from overseas market resumed growth up 7.3% year-on-year. We will seize opportunities from in-depth promotion of the Belt and Road with a focus in key regions and projects to seek breakthroughs. Meanwhile, due to the severe pandemic situation overseas, we will further optimize business management, enhance capabilities in service and risk prevention. New infrastructure-led by 5G is making an impressive debut, as 5G integrates with various industries and develop. 5G relevant investment from domestic operators will increase gradually, of which, in short term, 5G construction investment will be mainly from domestic operators, which will induce domestic operator's CapEx to resume growth. To prepare for 5G construction growth period, we will implement the below measures. First, leverage 5G general contracting to forge the new EPC general contracting capabilities. We will leverage centralized procurement to procure at competitive prices to lower cost and enhance efficiency. Through general contracting, we will expand market share to consolidate our leading market position. Second, forge 5G plus capabilities. Domestic operators further accelerate business transformation. We will support them to connect with vertical industry by providing enterprises dedicated -- enterprise-dedicated network service and industrial smart applications. Third, explore cloud network integration opportunities. We will capitalize on the trend of cloudification of 5G network, help operators construct efficient network management and operation and maintenance system to seize new opportunities from smart maintenance of 5G and IoT. 5G network construction has very strong spillover effect, which will drive investment growth, boost digital consumption and further penetrate into various industries and sectors. Well, a few years ago we communicated with you that we will not only focus investment from operators, but also from industry. Also, the society's attention on digitalization was aroused by the pandemic, we will expedite -- which will expedite digital transformation of society and industries. To seize opportunities in post pandemic era, we set up China Comservice General Research Institute, increased R&D investment on foundation platforms, including CCSYUN, CCS IoT platform and network securities service platform. Based on foundation platforms, we will enhance middle platform construction, including R&D, digital and business middle platforms. We will coordinate resources and to core capabilities on middle platform and enhance our competitive advantages. In addition, we will continuously enhance internal and external symbiotic ecosystem, enlarge the cooperation in technology, products, channels and industry finance, strengthen [indiscernible] synergistic cooperation and leverage ecosystem to develop markets. Now we already have over 30 industrial solutions targeting different sectors, and industries. We will cross the window of opportunities to provide customers with standardized and customized comprehensive smart solutions, with a focus on key sectors such as government, transportation, electricity, games and emergency management. As a major constructor of data centers, we have been maintaining our leading market position. We provide data center construction and professionally integrated service for domestic operators and Internet companies, constructing about 1 million racks. We possess top industry qualification in design, construction and supervision and multiple patents. We utilize self-developed technologies to construct customized and standardized data centers through efficient deployment and help customers reduce energy consumption and costs. With years of experience in data center construction, we signed many credible data center projects with size over RMB 100 million in first half 2020. New contract amount grew strongly and doubled to over RMB 4 billion. Industrial Internet is one of the key areas of new infrastructure. We possess integrated service capabilities in that area. We formed industrial internet ecosystems alliance with our partners, starting from top level planning, we construct industrial internet of government, parks, industries and enterprises. We also participate in national innovative projects and undertake national standard formulation, deployment and planning on industrial Internet. For other new infrastructure, we focus on key industries and adopt flexible cooperation models, such as network plus AI application integration, to partake AI network infrastructure construction. On one hand, we timely capture the new development features of extra high-voltage rail transit and new energy vehicle by supporting the digital transformation of relevant enterprises, we explore the informatization demand. My providing -- by providing consultancy services, we explore new opportunities in related businesses. In the recent 2 years, we had many smart application cases, the integrated advanced technologies in transportation and electricity. As introduced by Chairman in the formal part, development in new infrastructure will need EPC general contractor of new digital infrastructure and customers will have keen demand on integrated services. In first half 2020, we provided 5G construction services through general contracting to domestic operators successfully. We will leverage 5G general contracting to enhance coordination capabilities, increase project value, restructure business model by establishing cross department and cross profession processes in design, construction, product, procurement, finance and subcontracting with an aim to forge EPC general contracting capabilities. We will expand our general contracting business in 5G, IDC, ICT and overseas, with a view to be the largest new infrastructure ICT area service provider in the PRC. As a New Generation Integrated Smart Service Provider, we will assume the below 4 responsibilities. As the builder of digital infrastructure, facing the opportunities from digitalization of traditional infrastructure, new infrastructure such as 5G and integration of new and traditional infrastructure, we will accelerate reconstruction of capabilities such as general contracting to provide digital infrastructure that fulfills development needs for society and industries. As a provider of smart products and platforms, leveraging foundation platforms such as CCSYUN and dispersed R&D, we'll expedite our own digital transformation and enable customized fragmented and quick iteration demand of society and industries. As the service provider of data protection, leveraging Big Data, we will coordinate internal and external data production processes. Playing the role of expert and consultant, we will serve and lead the production of customers and integrate into customer's value chain, innovation chain and ecosystem. In the internet of everything era, network maintenance and security businesses will be seeing an explosive growth. At the guard of smart operation, we will provide customers with multidimensional, integrated and efficient smart maintenance service as well as fast and comprehensive local support service. In sum, we're devoted to provide cross platform, cross connection, cross application, cross region, cross supplier for the life cycle comprehensive smart services for the society. For the society, industries and customers create -- to create greater value for customers. Above is the business overview. Next, let's invite the CFO, Madam Zhang to present the financial review in first half 2020.

Thank you, President Si. Good afternoon, ladies and gentlemen. I will now present the financial review for first half 2020. The table shows our key financial indicators such as revenue, cost and profit for your reference. In the first half, the company implemented multiple cost control measures, such that most costs decreased by different degrees year-on-year. In first half 2020, the company's cost of revenue accounted for 89% of total revenues, up by 0.2 percentage point compared with the same period of last year. Amid the pandemic, the company adopted multiple measures with strict control -- strict cost control and achieved favorable results in the first half. We utilized subcontracting resources effectively and controlled total staff number. Direct personnel cost as percentage of revenue kept declining. We continued to control the product distribution business, direct cost of product distribution continued to fall. The company continues to intensify for contracting management through in-depth digital analysis on subcontractors and strengthening the management and supervision over the host of contracting process. Subcontracting cost was controlled effectively with this growth as a percentage of revenue further moderated. The rapid growth of system integration business in domestic nonoperating market also showed increase in materials cost. Regarding operating efficiency, despite negative factors such as the pandemic and declining service value in telecom industry, we reduced cost and increased efficiency through steadily improving the development quality of domestic nonoperator market, optimizing business structure, strict cost control and business expansion through general contracting model. The decline of gross profit margin noticeably moderated and gross profit margin was 11%. The company continued to increase R&D investment to upgrade software service capability and enrich the portfolio of smart products. R&D expense as a percentage of revenue increased by 0.2 percentage points to 2.6%. The pandemic affected the operation of our businesses with some costs such as labor costs and certain SG&A expenses being relatively fixed in nature and also the cost increase related to pandemic prevention, net profit margin experienced a decline. In first half 2020, the pandemic posed a significant impact on the domestic macro economy, and we encountered more pressure in cost cash collection and payment as well cash flows, thus free cash flow decreased year-on-year. The pandemic delayed product -- project implementation and delivery, revenue recognition and billings were deferred and usual communication with customers were affected, thus payment by most of the customers had been slower than the past. Regarding accounts payables, we mostly continued to pay the contractors and SMEs strictly following the contract requirement of the government. And the pandemic also affected our pace for payment. Accounts payable turnover days increased with impact of the pandemic wearing off and taking our general cash flow [ present ] in the first half and second half into account, cash flow is likely to see a recovery in the second half. But given the relatively large uncertainty in the macro environment for the year and a larger need for working capital for the expansion of general contracting projects, such as 5G, we expect free cash flow for the year will face more pressure than the past. We will continue to adhere to the [ value proposition ] and principle and strengthen the management of working capital, endeavor to maintain healthy financial position. The table results, are the key indicators of company's balance sheet for your reference. As of 30 June 2020, our total assets were RMB 88.2 billion. Cash and deposits were RMB 17.5 billion. Liabilities to asset ratio and debt to capitalization ratio were 60.1% and 1.8%, respectively. We have always maintained low interest-bearing debt and net cash level. The company's financial position remains a solid, health -- and healthy, which enables us to withstand the challenges brought by the changes in macro environment, support the continuous business development and transformation as well as providing sound support for the advancement towards high-quality development. For more detailed financial position, please refer to our results announcement. Now we are very pleased to answer your questions. Thank you.