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

Good morning, ladies and gentlemen. I'm Terence of China Comservice. On behalf of the management, I would like to welcome you to our 2020 annual results audio webcast. First, our management will present 2020 annual results and a Q&A session will follow. If you would like to raise questions during the presentation, please input 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. Zhiyong Zhang; President, Mr. Huang Xiaoqing; 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 2020 annual results overview.

Good morning, ladies and gentlemen. Due to the coronavirus pandemic, we will have to conduct this meeting online and cannot meet you in person. Hope we can still meet you again at the next results briefing. Today's presentation is divided into 3 parts. First, I will introduce the overview of our results. And next, Mr. Huang 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 2020, the novel coronavirus pandemic had a significant impact on the overall social economic development, and we encountered great pressure and challenges in our operation. Facing the pandemic, we proactively fulfilled social responsibilities by participating in the pandemic prevention and control and promoting resumption of work and production in an orderly manner. We strived to overcome the impact brought by the pandemic and ensured stable development of the company, thus realizing positive growth in revenue and net profit for full year. Second, we seized opportunities from new infrastructure, leveraged and optimized our advantages on the general contracting capabilities for digital infrastructure and achieved breakthroughs in 5G and data center general contracting business. Third, we have been increasing R&D investment in recent years and achieved initial results. Industrial applications and Smart Solutions underwent swift iteration and capabilities were enhanced effectively, which became important growth drivers. Fourth, as the major growth driver of our total revenues, domestic nonoperator market extended the rapid growth trend in recent years with its revenue contribution exceeded 40% for full year. Fifth, among the 3 businesses, ACO business has been the fastest-growing business for 4 consecutive years, with its revenue contribution further increased to approximately 15%. Sixth, we adhered to the strategic position of New Generation Integrated Smart Service Provider and seized opportunities from digital transformation. Besides, we made progress on our state-owned enterprise reform and continued to promote corporate reform, including establishing the General Research Institute and advancing on mixed ownership reform of our supply chain company. Next, let's look at overall results. In 2020, we seized the opportunities of 5G, new infrastructure and social digitalization to endeavor to minimize the impact from the pandemic. Our results in the second half rebounded significantly. The full year revenue and net profit resumed positive growth. Revenue amounted to RMB 122.6 billion, increased 4.5% year-on-year. Net profit amounted to RMB 3.1 billion, increased 1.1% year-on-year. Free cash flow was RMB 2.6 billion, remained at a healthy level. If the CapEx on purchasing the property for our smart production operation and R&D is excluded, and on a [ Audio Gap ] basis, free cash flow would be RMB 5.2 billion. Next, let's look at the performance of our markets and businesses in 2020. From the market perspective, domestic nonoperator market resumed rapid growth driven by new infrastructure, represented by informatization, construction and data centers, that revenue growth of such market was over 30% in the second half. Meanwhile, revenue from domestic operator market resumed positive growth in the second half as domestic operators expedited network construction such as 5G. From the business perspective, driven by domestic nonoperator and domestic operator markets, TIS and BPO businesses resumed growth in the first half. On the backdrop of social digitalization acceleration, ACO business maintained relatively fast growth for full year, with growth rate accelerated in the second half. In summary, our major businesses rebounded or accelerated to different extents in the second half, which stimulated our full year overall results to resume positive growth of 4.5% year-on-year. Last year, stimulated by 5G network construction, TIS revenue from China Telecom and China Tower increased by about 19% and 26% year-on-year, respectively, in the second half. For data centers, they -- domestic nonoperator market and domestic operator market had quite strong demand for TIS. And new contracts secured during the year, including several projects with size over RMB 100 million, totaled about RMB 11.5 billion, increased by over 50%. Last year, our general contracting key capabilities of digital infrastructure were enhanced, and we undertook 5G network construction projects with a general contracting model and extended such model to IDC general contracting, ICT general contracting and overseas general contracting. Last year, R&D has gradually become an important impetus of our growth. R&D investment in recent 3 years totaled about RMB 10 billion. Smart products and solutions have been enriched, that we have over 30 group level products currently. We have gained brand influence and industry recognition that we continue to direct TIS in 100 Most Competitive Software and IT Service Enterprises 2020. R&D also drove the rapid growth of our overall business, in which the growth rates of domestic nonoperator market and ACO business were the most significant. Meanwhile, we have been optimizing synergistic plus dispersed R&D mechanisms. During the year, we established General Research Institute, which leads to planning, development and promotion for applications and products in key industries of strategic importance. In summary, we overcame the impact brought by the pandemic, seized the opportunity of new infrastructure and accelerated the transformation and development. We successfully achieved a target of 13th 5-year plan at the end of the period. During the 13th 5-year plan; period, both the company's revenue and quality were enhanced, that revenue scale exceeded RMB 100 billion and CAGR of net profit was higher than that in 12th 5-year plan period. Revenue mix by customer and business continued to optimize with revenue contribution from domestic nonoperator market increasing significantly to over 40%, and the market becoming the largest customer group. Revenue contribution of ACO Business also increased notably to approximately 15%. We could say during the 13th 5-year plan period, our innovation and transformation have entered a new stage and development has entered a new phase. Which laid a foundation for a sustainable, high-quality development. Looking forward, there will be acceleration in the social digitalization, fiberization, intelligentization and digital transformation of industries. Single product and single service could no longer fulfill customers' requirement. Instead, the trend of demanding for full cycle continuously iterated safe and expert integrated Smart Solutions will prevail. In future, we will adhere to the road map of fellow driven, seeking steady yet progressive growth and high-quality development. And persist to the position as a New Generation Integrated Smart Service Provider. By seizing the opportunities from digitalization and the development trend, we will leverage the full growth of got of smart operation, service provider of data protection, provider of smart products and platforms and builder of digital infrastructure and focus on the key technology application strengthen ecological cooperation in technology, fully leverage our competitive edges in TIS, BPO and ACO services, deeply integrate our Operational Technology, OT, Data Technology, DT, Information Technology, IT and Communications Technology CT capabilities with a view to achieving breakthroughs in data production security, service and construction, satisfying customer demand and creating value for them. Since the establishment in 2006 what has been developed -- we have been deepening reform and innovation. We integrated changes in the industry and social demand, extended our experience and capability in serving domestic operators to domestic nonoperator markets and focused on forging smart products with an aim to transforming towards smart and digital service, and realizing increase in both revenue scale and quality. We will start the new development stage, practice the new development philosophy, adhere to the principle of customers as center, technology as core, service as fundamental, value as direction to deepen reform comprehensively and expedite innovation and transformation. We will attach equal importance to organic growth and external development and deepen ecological cooperation and build a link of ecosystem with partners in areas of strategy, industry, business and capital, so as to co-develop social informatization market with them. We will turn a new page of high-quality development in 14th 5-year plan and accelerate the formulation of new development landscape. Above is the first part of the presentation. Next, let's invite President Huang to present the business review of 2020. Thank you.

Thank you, Chairman. Ladies and gentlemen, good morning. I will present the group's business performance for 2020. The table shows the revenue and growth rates of the 3 business segments and percentage to total revenues of each segment in 2019 and 2020. In 2020, we strove to minimize the negative impact brought by the pandemic to ensure the stability and sustainable development of markets and businesses. On the business side, the 3 segments grew by different extents, among which ACO business sustained double-digit growth at 13.2% year-over-year. Its revenue contribution increased to nearly 15% and is the fastest-growing market for 4 consecutive years. On the market side, revenue from domestic operator and overseas market declined slightly, but domestic nonoperator market continued its fast growth, with its growth rate at double-digit for 4 years -- for 4 consecutive years. Revenue contribution from domestic nonoperators continues to increase to over 40%. In domestic nonoperator market, we seized the opportunities from digital economy and social -- and smart society to expedite the market deployment. On one hand, we seized opportunities from new infrastructure such as 5G and data centers and developed market space in integration, in traditional and new infrastructure, which enabled us to expand our share in the market. On the other hand, by focusing on customer demand in key industries, we leveraged consultants in planning as well as smart products to deeply penetrate into the market by providing integrated Smart Solutions to integrate construction, operation, maintenance and software development. The above has simulated the overall development of our different businesses. Revenue from domestic nonoperator market increased 18.8% year-on-year, in which both TIS and ACO businesses were up by over 20%. For new contracts, we achieved good results in key industries such as government, construction, Internet and IT, transportation and electricity, which has become the foundation of rapid growth in domestic nonoperator market. Driven by the key industries, total amount of new contracts in 2020 was close to RMB 70 billion and a sustained strong growth momentum with year-on-year growth of over 18%, among which, we continued to achieve breakthrough in sizable projects. For new contracts with size over RMB 10 million, over 1,000 projects were secured, and both a number of new contracts and contract amount increased by over 30%. Its proportion to total amount of new contracts increased to over 44%. In recent years, we have been increasing R&D investment and optimizing synergistic dispersed R&D mechanism. We have built the core platforms such as cloud, IoT and network security, accelerated iteration and development of smart products and solutions, established smart product portfolio and strengthened synergistic delivery of smart products. With all these measures, we expanded our market coverage, satisfied industrial digitalization demand, thus supporting our digital transformation. Currently, we have forged cumulatively over 30 group level smart products and solutions and accomplished a portfolio of signature projects across the country, which were resuscitated quickly. We have accumulated much industrial experience, forged many smart products and solutions and we possess unique competitive advantages in smart service. With domestic operator market, owing to the pandemic, our bidding and tendering process, construction and delivery and project settlement of relevant projects were delayed, which resulted in the volatile performance in such market. Full year revenue from the market decreased slightly by 3.4% year-on-year. We persisted in the CapEx and OpEx plus smart applications strategy to seize network construction opportunities such as 5G, and endeavored to support the transformation and upgrade of domestic operators with an aim to ensuring the stability of domestic operator market. For the domestic operator CapEx, by undertaking 5G network construction with a general contracting model, we have enhanced our qualification and key capabilities, forged general contracting capability and enhanced business value. Meanwhile, we seized the data center construction opportunities from cloud network integration to accelerate business development. For operator's OpEx business, we have deepened the development of traditional businesses such as maintenance, property management and supply chain to expand our share. Our supply chain company undertook major 5G equipment delivery in 5G general contracting projects of domestic operators and formed new growth points. During the year, the Board approved the mixed ownership reform of China Com's Service Supply Chain Management Company Limited to boost the business development through capital measure by introducing strategic investors. Meanwhile, we have also proactively integrated into the ecosystem of operator customers' transformation by cultivating our service and product capabilities in cloud + 5G + DICT service. We have explored areas such as 5G industrial applications, 2B business of domestic operators and network information security. In 2020, the pandemic has severe impact on product delivery, project delivery and business development of overseas markets, which resulted in volatility of revenue declined by 5.2% year-on-year. During the year, the project execution in Southeast Asia and the Middle East had good progress. Meanwhile, we make breakthroughs in the electricity industry and operators communications tower maintenance business in certain countries, thus expanding the source of revenue in overseas market. Going forward, we will focus on overseas demand of infrastructure construction and digitalization service to capture the opportunities arising from the advancement of the Belt and Road. We're focusing on fields such as overseas new infrastructure, data centers, maintenance business and electricity business, will strengthen collaboration with domestic operators and go abroad Chinese enterprises, export the domestic material products and capabilities through capabilities enabling and accelerate the breakthrough in transformation. Going forward, digital economy is an important impetus in driving high-quality economic development. As the underlying support of digital economy, the development of new infrastructure has been accelerating. The integration of new technology such as 5G, big data and AI with real economy has been quickening and digital transformation of industries has been moving forward. All of the above will bring us ample opportunities. As a New Generation Integrated Smart Service Provider, we focus on the 3 main development tracks; further increased R&D investment; deepen reform, innovation and transformation; leverage organic growth and external development to forge a service-oriented, technology-oriented and safety-oriented enterprise. We'll further build our new generation capabilities for continuous migration towards professionalism and high-end in value chain. We'll assume the responsibilities of the 4 roles, leveraging key capabilities in consultancy and design, general contracting, supply chain, software development and deeply integrating our advantages in CT plus IT plus DT plus OT; we'll expand ecological cooperation to provide cross platform, cross connection, cross application, cross region and cross supplier; full cycle integrated smart service to create greater value for customers. Above is the business review. Next, let's invite CFO, Madam Zhang, to present the financial results in 2020.

Thank you, President Huang. Good morning, ladies and gentlemen. I will present our financial results for 2020. The table shows our key financial indicators such as revenue, cost and profit for your reference. Next, I will introduce our key financial performance. In 2020, the company's cost of revenue accounted for 88.8% of total revenues, up by 0.5 percentage points compared with the same period of last year. We have strictly controlled the total number of staff and utilized subcontracting resources adaptively. Labor productivity increased 5.6% year-on-year. Due to the pandemic, the government granted to enterprises with certain preferential and relief measures, which led to a decrease in direct personnel cost as a percentage of revenue. The company continued to intensify subcontracting management through data analysis of subcontracting and strengthening the management and supervision over the whole of contracting process. Subcontracting cost was effectively controlled, and there was a drop in its portion to revenue. The company undertook more general contracting projects, which drove the increase in material costs. At the same time, the rapid growth of TIS business and domestic nonoperator market and system integration in ACO business drove the relatively fast increase in material cost. Regarding operating efficiency, we faced larger pressure on the gross profit margin and net profit margin in 2020 as most business of the company could not be carried out normally in the first quarter due to the pandemic, and recurred more anti-pandemic expenses while rigid costs persisted. Besides decreased service value in telecom industry and investment for transformation, also affected the margin. Through multiple measures, including steadily optimizing business structure, strict cost control and business expansion through general contracting model, the company endeavored to alleviate the impact of the unfavorable factors. We continued to increase investment in R&D to enhance software service capability, support transformation and drive business development. R&D expense increased by 15% year-on-year, and as percentage of revenue increased by 0.3 percentage points to 3.1%. In face of the pressure brought by the pandemic, the company exercised stronger cost control through utilizing digital measures such as online, remote and enhancing operating efficiencies. SG&A as a percentage of the total revenue fell by 0.2 percentage points to 9.6%. In 2020, free cash flow amounted to RMB 2.6 billion. Excluding the CapEx on acquisition of property for our smart production operation and R&D, free cash flow would be RMB 5.2 billion, up 22% year-on-year. Cash conversion ratio was 177%, remained at a healthy level. In 2020, the pandemic posed significant impact on the domestic macro economy, and we encountered more pressure in cash collection and payment as well as cash flows. But thanks to our continuous enhancement on cash management, especially on the special actions taken to collect and clear long-term accounts receivable in second half as well as our enhancement of payment management and reasonable payment arrangements, the company cash flow continued to be favorable for the full year. Accounts receivable turnover days maintained at the same level as last year at 110 days, while accounts receive -- payable turnover days -- accounts payable turnover days increased by 3 days year-on-year to 135 days. We will continue to adhere to the value-driven principle and strengthen the management of working capital endeavor to maintain a healthy and reasonable cash level. In consideration of the favorable results, free cash flow level in 2020 and the confidence for future development, the Board has proposed a final dividend of RMB 0.1335 per share for 2020, and the dividend payout ratio is 30%. In addition, the Board has proposed a special dividend of RMB 0.0267 per share. Total dividend for 2020 is RMB 0.1602 per share, increased by 1.1% from last year. Dividend payout ratio, including special dividend, is 36%. The table lists all the key indicators of the company's balance sheet for your reference. As of December 31, 2020, our total assets were RMB 94.5 billion. Cash and deposits were RMB 23.9 billion. Liabilities to asset ratio and debt to capitalization ratio were 60.6% and 1.9%, respectively. We have always maintained low interest-bearing debt and at the net cash level. The company's financial position remains solid and healthy, which is favorable for business expansion. Meanwhile, the company will strengthen the capital utilization to expand ecosystem and enhance joint collaboration, accelerate the pace of external growth and support the company to capture opportunities from digital transformation as well as facilitating long-term sustainable development. For more detailed financial information, please refer to our results announcement. Now we're very pleased to answer your questions. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]