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

Good afternoon, ladies and gentlemen. I'm Terence of China Comservice. On behalf of our management, I would like to welcome you to our 2021 annual results audio webcast. First, our management will present 2021 annual results, and the 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. Executive Director and President, Mr. Huang Xiaoqing, Executive Vice President, Mr. Liang Shiping; Executive Director, Executive Vice President and CFO, Mr. Zhang Xu. Thank you for joining, and I hope you will find this presentation helpful. Next, let's invite our President Huang to present the 2021 annual results overview.

[Foreign Language]

[Interpreted] Good afternoon, ladies and gentlemen. Due to the pandemic prevention and control, we still cannot meet you in person that this presentation is conducted online. Today's presentation is divided into 3 parts. First, I will introduce the overview of our results. And next, Mr. Liang 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 the highlights of the year. In 2021, we seized the important opportunities arising from digital economy to accelerate strategic deployment and market development. Operating results achieved solid and progressive growth, with gross profit margin decline moderated and free cash flow continues to be healthy, showing an enhancement in development quality. Second, domestic [indiscernible] operating market and domestic operator market saw an enhancement in both scale and quality, with further breakthroughs achieved in industrial Smart solutions. Third, we increased investment in technological innovation, R&D to enhance core capabilities in key fields constantly, driving the relatively fast growth of our business. SOE Reform achieved substantial breakthroughs and strengthened our competitiveness and development momentum. Third, we increased dividend per share and raised the payout ratio to enhance shareholders' investment return. [ Six ], we will leverage differentiated advantages of one positioning for roles to seize the fast opportunities from Digital Economy. Next, let's look at overall results. In 2021, we seized opportunities arising from Digital Economy such as 5G, digital infrastructure and digitalization of the society to expand the market proactively. Revenue and net profit achieved favorable growth. Revenue amounted to RMB 134 billion, increased 9.2% year-on-year. Net profit amounted to RMB 3.16 billion, increased 2.5% year-on-year. Excluding the effect of depreciation in 2021, arising from the property acquired as the basis for the Smart production, operation and research and development, net profit was RMB 3.25 billion, increased 5.4% year-on-year. We continued to strengthen working capital management and achieved remarkable results, driving accounts receivable turnover days to hit 5-year low. Free cash flow was RMB 4.1 billion, maintained at a healthy level. Next, let's look at the performance by market and business in 2021. From the market perspective, we focus on digital infrastructure and industrial Smart solutions. Domestic-owned operator market maintained a double-digit growth, up by about 16% year-on-year, continuing to be the largest overall revenue growth driver. Domestic-owned operator market resumed growth and drove the acceleration of overall revenue growth, led by demand from 5G network construction and informatization services. From the business perspective, we captured opportunities, including 5G and digital infrastructure construction, which facilitated stable growth of TIS business. Supply Chain business maintained solid growth after consolidation and synergistic operation and drove the BPO business development. Moreover, we increased investment in R&D to further enhance our technological innovation capabilities, boosted ACO business to grow rapidly at 18%. In summary, development of all our businesses accelerated notably in 2021, driving overall revenue to achieve favorable growth. In addition to favorable revenue growth, development quality was also enhanced. We implemented various measures to reduce cost and enhance efficiency, striving to improve gross profit margin. Third, we balanced speed and quality of business development through a more rigorous screening for high gross profit margin projects. Second, we motivate the companies to develop projects of high gross profit margin through optimizing appraisal system; third, we deepened subdivision assessment, enhanced project management, subcontracting process management in centralized procurement. Driven by the above measures, the year-on-year increase in subcontracting charges and material costs, a decline in gross profit margin moderated in recent years, among which, the decline in gross profit margin narrowed from 0.8 percentage points in 2018 to 0.2 percentage points in 2021. Particularly in second half 2021, gross profit margin maintained at 11.4%, same level as in second half 2020, showing transitory stabilization. We persisted in increasing technological innovation R&D investment. R&D investment during the 13th 5-year plan period -- 5-year plan period, nearly doubled that in 12th 5-year plan period and reached RMB 14.7 billion, driving overall business growth, among which domestic nonoperating market and ACO business sustained double-digit growth over the years. During 14th 5-year plan period, we will focus on innovation of key technologies and applications, [indiscernible] positioning for roles with a market-oriented approach, with focus on targets of establishing R&D mechanism, incubating expertise, innovating technology and applications, [ forge ] products and building brands. Industrial Research Institute will coordinate the formation of proprietary capabilities [indiscernible] platforms, including R&D innovation with the platform, maintenance-digitalization platform and open IoT platform, solidifying proprietary quarter analogies in key fields, including network information security, blockchain and IoT to forge over 20 capabilities, platforms and vertical industrial products. Through constantly elevating technological innovation capabilities, we will embark on the path of transformation and upgrade towards a technology-oriented enterprise. Deepening reform is an important impetus for our sustainable development. By adhering to market-oriented approach, we drive reform by mixed ownership, increased vitality by reform, with an aim to optimize modern organizational system and enhance competitiveness. In 2021, we achieved substantive breakthroughs in deepening reform. First is on Double-100 Reform. We introduced State Grid [ RTT ] as a strategic shareholder and enhanced strategic cooperation, including projects such as commencement of business cooperation with State Grid in edge computing, station network construction over 26 provinces. Second is our mixed ownership reform. Our wholly-owned subsidiary, supply chain company introduced 4 strategic shareholders including Cosco Shipping and [indiscernible] International to enhance governance standard and promote business cooperation. Third is on optimizing incentive mechanism. We introduced share appreciation rights incentive scheme to optimize mid- to long-term incentive mechanism, fully motivate employees and incentivize their creativity, in order to support realization of our strategy. We will further strengthen reform impetus to enhance competitiveness, market influence and value-creation capability. First, we will deepen cooperation with strategic shareholders, actively explore collaboration opportunities in fields such as [indiscernible] goals and Smart grid. Second, we will strengthen consolidation of key businesses such as property management and further promote professionalization operation in supply chain company. Third, we will improve motivation and restraint and adhere to resource-oriented approach for talent selection and remuneration mechanism optimization. The State attaches great importance to Digital Economy development, enrolled in our plan for the development of Digital Economy during 14th 5-year plan, set the targets of added value of core industries and Digital Economy to increase to 10% of GDP. Digital infrastructure upgrade, digital transformation of industries, enhancement of digital public services, which brings huge potential and a wide range of opportunities to us. We will adhere to the position of new generation, integrated Smart service provider, leverage the advantages of [indiscernible] adhere to the overall roadmap of value-driven, seeking steady yet progressive growth and high-quality development to deploy strategically for seizing opportunities from Digital Economy. On the market aspect, we're focused on the 3 major markets of domestic operator, domestic nonoperator and overseas. Explore financial means to accelerate the synergistic development of organic growth and external development. On the technological innovation aspect, we will increase R&D investment, optimize R&D management team -- management system, strengthen the support for R&D through coordination of synergistic plus dispersed R&D mechanism, optimize the evaluation mechanism, forge flagship products, incubate talent teams and expedite the conversion of R&D to results. On digital transformation aspect, internally, we will leverage digital technology means to enhance management capabilities. And externally, we will enhance digitalization service capabilities to bolster market development. On forging-capabilities aspect, we will elevate capabilities of general contracting, R&D, professionalization and -- on operation, based on market-oriented services. On ecosystem aspect, we will further integrate into ecosystem of operators, center of industries to build ecosystem and consolidate partners' resources with a market-oriented approach. While deploying strategically, we will deepen reform, optimize system and mechanism and improve governance to further forge our competitive, differentiated [ advantages ]. The above is the blueprint of China Comservice one positioning for roles position, 4G capabilities and product portfolio. Facing Digital Economy opportunities will leverage the roles as a builder of digital infrastructure, provider of Smart products and platforms, service provider of data production and guard of Smart operation. Deeply-integrated communication technology, CT, IT, DT and OT capabilities and leverage their differentiated advantages. Together with our capabilities in network information security and emergency management, we will further press on breakthroughs in key sectors, including Smart operation and maintenance, industrial digitalization and digitalization infrastructure, as well as achieving enhancement in both scale and value in major markets of domestic operator, domestic nonoperator and overseas. In the past 10 years, through a successful strategic deployment in effective execution, revenue scale realized solid growth. Customers with more diversified business structure has been optimized, and operating efficiency continues to increase. Revenue in the past 10 years sustained upward trend and increased by 1.5x from over CNY 50 billion in 2011 to over CNY 130 billion. Domestic nonoperating market has become the largest customer group, while the portion of ACO business continued to increase. The initial success laid a solid foundation for seizing opportunities from Digital Economy development and dual common goals. Looking ahead in 14th 5-year plan, we're confident that revenue will maintain steady growth. Percentage of high-value business will increase steadily, gross profit margin will gradually stabilize and rebound. ROE and shareholders' return will increase steadily. We are determined to promote transformation towards professionalism and high end of value chain, move towards technology-oriented enterprise and start a new stage of high-quality development. Above is the first part of the presentation. Next, let's invite Mr. Liang to present the business review of 2021. Thank you.

[Foreign Language]

[Interpreted] Thank you, President. Ladies and gentlemen, good afternoon. I will present the Group's business performance for 2021. The table shows the revenues and growth rates of the 3 business segments and percentage to total revenues of each segment. The charts on the right show the growth driver of each business segment from different markets, so that you could have a complete understanding of the dynamics behind each business segment. In 2021, all the 3 businesses of the group realized stable growth, among which supply chain business had obvious contribution to overall revenue growth after consolidation. ACO business, which has been incubated over the years, maintained relatively fast growth. More details are showed in the following sections and appendix. In 2021, business structure and market structure were further optimized. On business composition, benefiting from consistent increase in R&D investment that drove business development. Portion of revenue from ACO business continues to rise and reached 16%. On market composition, domestic-owned operator market sustained rapid growth, with its portion of revenue close to 43%. Besides revenue from China Telecom, realized relatively fast growth at about 10% year-on-year. In the domestic-own operator market, focusing on Digital Economy, we capitalized on opportunities from industrial digitalization and digital infrastructure, accelerated market deployment, enhanced system establishment and exerted effort in developing key regions, key industries, high-quality customers and solutions, which strongly controlled low gross profit margin projects and continued to press on domestic nonoperating market to transform development towards high-value fields. In 2021, revenue from domestic nonoperating market increased 16% year-on-year, among which TIS and ACO businesses sustained relatively fast growth. First, penetrate high-value industries. We continue to penetrate key industries, including government, transportation, electricity, construction, internet and IT, expediting breakthroughs in fields of education, medical care and enhanced value-creation capability. Second, develop high-value businesses. We will leverage our core businesses to undertake digital infrastructure business and proactively develop key tracks such as cybersecurity and blockchain. And sectors including digital governance and -- government and emergency management. Third, we will focus on high-value regions, including the Beijing, Tianjin, Hubei area, [ Yasu River delta ], the Guangdong, Hong Kong, Macau area and the [ Chengdu ] area and leading customers in the regions and start in-depth marketing in [indiscernible] projects. In key fields, we focus on infrastructure and industrial Smart solutions demand and achieve breakthroughs in government transportation and electricity. In 2021, new contracts in domestic nonoperating market amounted to over [ RMB 76.3% ], up by more than 10% year-on-year, among which, projects with size over RMB 100 million amounted to over RMB [ 6 billion ] , apart from undertaking many data center projects. We also make breakthroughs in Smart card, Smart [ campus ] and intelligent building. As we further penetrated domestic nonoperator market, further accumulated industry experience and success of cases, provided customized and tailored, integrated Smart solutions to customers, we have completed many [ synergy ] projects across the nation, which gave us unique competitive advantages in Smart services. You can scan the QR code to further understand our Smart products in key fields. In domestic operator market, we effectively implemented CapEx plus OpEx plus Smart applications strategy. Revenue from domestic operator markets resumed growth in 2021, increased 5.5% year-on-year. On CapEx from domestic operators, as we seized 5G network construction opportunities, TIS business resumed stable growth with market share largely stable. On OpEx business, we have deepened the development of traditional businesses such as network maintenance and supply chain. BPO business realized solid growth and was the largest revenue growth contributor. Meanwhile, we keep -- we kept track -- close track on the transformation of domestic operators, fully supported the demand for informatization services from domestic operators and increased investment in industrial digitalization, thus driving ACO business to have fast growth, increased 21.5% year-on-year. In overseas market, the pandemic affected the implementation and development of overseas projects. The revenue decreased by 11.4% year-on-year. However, we remain confident in overseas development in face of challenges, proactively. During the year, we actively exported our successful experience again, domestically and Smart products, to overseas market. We continue to strengthen the synergistic development with Go Abroad Chinese enterprises, continued implementation of major projects in the Middle East and Southeast Asia. Going forward, overseas [indiscernible] market has great market potential as global 5G network construction accelerates and Digital Economy stimulates the surge of demand for Smart products. We will persist in seeking steady yet progressive growth strategy to make deployment in overseas market, strengthen collaboration with Chinese enterprises to foster safe and efficient development in overseas market. In the first section, we introduced the ample opportunities brought by Digital Economy. We now -- we will now look at how the -- they are reflected in our business and what capabilities we have to seize the opportunities. The following slides show our differentiated capabilities and projects in 5G, data centers, cybersecurity and Smart solutions. First, expediting digital information infrastructure construction. Being a major service provider in 5G network construction, we have served domestic telecom operators in China for over 60 years and are experienced in undertaking relevant projects. Second, deepening cloud network integration and expediting East to West computing resources transfer project. As a major constructor of data centers, we have served over 3,000 customers, covering telecom operators, internet companies, third-party IDC service providers, government and enterprise customers across the nation, providing them with IDC general contracting services. We possess industry-leading, innovative, green, energy saving, low-carbon technologies and applications. Third, forging cybersecurity defending capabilities. As a listed SOE with CNY 100 billion revenue scale, having security of over 2,600, we proactively implemented national cybersecurity strategy and provide cybersecurity services in many major projects. Fourth, promoting intelligent upgrade of infrastructure, enhancing digital public services, facilitating industrial digitalization -- digital transformation and industrialization of digital technology. We participated in top-level design, planning and implementation of over 200 Smart-city projects. But centering on 16 Smart areas, we forged over 30 Smart products and above 100 Smart solutions, accumulated much experience in intelligent translation. Our differentiated capabilities in the above 4 aspects proved our confidence, capabilities and determination on grasping opportunities from Digital Economy development. 2022 is a year of transformation for China Comservice. We will leverage the advantageous resources and capabilities of one position in [indiscernible], capitalized on our technological innovation reform, step up new digitalization capabilities incubation to forge 3 markets, 2 curves business structure of China Comservice in the 14th 5-year plan. While maintaining a stable development of our traditional businesses, we will strive to accelerate the forge of the second growth curve of digitalization businesses by providing customers with digitalization businesses such as digital infrastructure and industrial digitalization solutions. Through forging 2 growth curves, we promote sustainable enterprise development. Above is the business review, Next, let's invite CFO, Madam Zhang, to present the financial results in 2021.

[Foreign Language]

Thank you, Mr. Liang. Good afternoon, ladies and gentlemen. I will now present our financial results for 2021. 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 2021, the company's cost of revenue accounted for 89% of total revenues, up by 0.2 percentage points, compared with the same period of last year. In order to raise development efficiency, we endeavored to reduce costs and enhance efficiency through implementing measures, including whole process management of projects, subdivision assessment and digital management. For direct personnel costs, we strictly controlled total staff number and utilized subcontracting resources, which led to a continuous decrease in direct personnel costs as a percentage of revenue. For subcontracting charges, we continued to strengthen the supervision of full process on subcontracting through system control, IT control and personnel management, strictly control subcontracting scale such that of contracting charges portion to revenue fell notably. The portion of revenue of the above two costs further decreased by 1.8 percentage points in aggregate. For material costs, we forged our general contracting capability and proactively pursued the development of sizable projects with general contracting model, thus leading to an increase in material costs. Meanwhile, the rapid growth of construction, supply chain and system integration business also drove the faster increase in material costs in 2021. Regarding operating efficiency, we strictly implemented measures such as more regular screening for high gross profit margin projects, optimizing appraisal system to motivate subsidiaries to develop projects of high gross profit margin, strengthening project management and cost control constantly. In 2021, decline in gross profit margin moderated with notable acceleration in gross profit growth at 7.6%. We continued to increase investment in R&D to enhance our technological innovation [ call ] capability. R&D expenses increased 12% year-on-year, accounting for 3.2% of total revenues. We have been utilizing digitalization means to raise operation management efficiency. Excluding the effect of additional depreciation in 2021 from the property acquired, SG&A, as a percentage of revenue, in 2021, maintained relatively stable at 9.6%. In 2021, we continue to strictly control working capital and achieved notable results. Free cash flow was RMB 4.1 billion, cash conversion ratio was 143%, remained at a healthy level. During the year, we implemented multiple measures to control working capital through implementing effective measures, including strengthening project management by aligning receivables collection with project managers remuneration, carrying out dedicated tasks to collect and clear long-term accounts receivables, optimizing various management systems continuously such as accounts receivable and formed long-term mechanism. Accounts receivable turnover days decreased from 110 days in 2020 to 106 days, which was the lowest in the past 5 years. 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 flow level. We attach great importance to shareholders' return and have maintained a relatively stable and sustainable dividend policy. In 2021, in consideration of results performance, free cash flow level and future development needs, the Board has proposed a final dividend of RMB 0.1641 per share for 2021, increased 22.9% year-on-year. And the final dividend payout ratio increased from 30% to 36%. In addition, the Board has proposed a special dividend of RMB 0.0091 per share. Total dividend for 2021 is RMB 0.1732 per share, increased by 8.1% from last year. Dividend payout ratio, including special dividend, is 38%. The table lists out the key indicators of the company's balance sheet for your reference. As of 31st December 2021, our liabilities-to-asset ratio and debt-to-capitalization ratio were 60.4% and 2.1%, respectively. We have always maintained low interest-bearing debt and -- at the net cash level. The company's solid financial position is favorable for business expansion, which supports 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 are very pleased to answer your questions. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]