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 2022 interim results audio webcast. First, our management will present 2022 interim results and a Q&A session will follow. [Operator Instructions] I will read out your questions, following our management's presentation. Then I will answer your questions and I will provide consecutive interpretation. Let me introduce the management who are with us today. [ Executive ] Director and Chairman; Mr. Liu Guiqing; Executive Director and President, Mr. Huang Xiaoqing; Executive Vice President, Mr. Liang Shiping; Executive Director, 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 Liu to present the 2022 interim results overview.

Good afternoon, ladies and gentlemen. I'm pleased to present the results presentation to communicate with you after taking up the position of Chairman of China Comservice. Today's results 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 results highlights in the first half. We overcame impact brought by the pandemic and seized opportunities from digital economy, thus, operating results achieved favorable growth. Second, we accelerated performance in digital economy by adhering to 1 Positioning, 4 Roles strategic positioning to promote high-quality development. Third, we enhanced technological innovation capability continuously and facilitated the commercialization of R&D which resulted in ACO business becoming the major driver of revenue growth during the period. Fourth, we seized new opportunities from East-to-West Computing Resources Transfer, industrial digitalization, cybersecurity and 0 carbon to bring new drivers for sustainable development. Fifth, we elevated reform impetus to stimulate new vitality for development. Development of Supply Chain Company was fast after mixed-ownership reform. Next, let's look at overall results. In 2022, we [ got ] the important strategic opportunities from digitalization revolution in society and economy, proactively leveraged the advantages as a new generation integrated smart service provider and realized a good [ start ]. Revenue and net profit growth in first quarter 2022 grew by high single digits. Despite the impact caused by the concurrent spread of the pandemic in multiple regions and the projected impact of the pandemic in some key areas in the second quarter, we achieved good operating results in the first half, benefiting from the effective operation management measures. Revenue amounted to RMB 69.3 billion, increased 8% year-on-year. Profit for the period, including noncontrolling interest, amounted to RMB 1.96 billion, increased 7.4% year-on-year. Net profit amounted to RMB 1.9 billion, increased 4.6% year-on-year. We implemented multiple measures to elevate quality and efficiency. As a result, the decline in gross profit margin moderated and net profit margin remained largely stable. In first half 2022, we focused on digital economy, industrial digitalization and digital infrastructure opportunities to enhance capabilities of market competitiveness and technological innovation and achieved good results. From the market perspective, we seized opportunities from East-To-West Computing Resources Transfer to change the focus of domestic operator customers from traditional network infrastructure construction to new digital infrastructure construction and then moved to accelerate the development of new businesses such as industrial digitalization, thus making domestic operator market as a major growth driver with its revenue increase 9.2% year-on-year. From the business perspective, revenue from ACO services, which has the closest relation with industrial digitalization, grew rapidly at 29.7% year-on-year, making such business the most crucial growth driver of our revenue. Basing the ample opportunities from digital economy development, increasingly competitive markets and uncertainties brought by the pandemic, China Comservice adhered to the strategic positioning of 1 Positioning, 4 Roles. Recognized the trend and reacted by accelerating the deployment in digital economy. We fully enhanced for 5 capabilities in market competitiveness, technological innovation, reform, impetus ecosystem collaboration and risk control and forged ahead with value enhancement in conventional businesses to realize value breakthrough in new areas. First, expedited market deployment, focused on 3 markets to promote the use of financial tools to accelerate business development; second, increased R&D investments to enhance market penetration from R&D; third, bolstered digital transformation deployment by elevating quality and efficiency internally and exporting capabilities externally; fourth, strengthened capabilities deployment by enhancing capabilities of general contracting, product R&D and professional logistics operations; fifth, enhanced ecosystem deployments to achieve win-win situation with business partners, meanwhile, we forged ahead on enterprise reform and controlled risk. China Comservice is committed itself to implementing the national strategy of technology, strengthens technological innovation capability continuously and enhance market competitiveness. Aggregate R&D investments in 13th Five-year Plan period exceeded RMB 20 billion, driving ACO business to grow at a CAGR of over 15% in recent years. In 2022, as directed by market and customers, China Comservice adheres to direction according to strategic planning to increase R&D investments in order to forge competitive products. R&D investment was over RMB 1.9 billion, increased 18% year-on-year in first half 2022. We paid attention to establish rolling plans and elevated the deployment in technological innovation to follow blueprint of major deployment comprising industry-oriented Industrial Research Institute platform or industry digitalization that enables capabilities of R&D and digitalization, industrial applications covering industrial digitalization sector, network information security and emergency management. We announced strategic products and platforms such as cyberspace asset surveying and mapping product portfolio, maintenance cloud, open IoT platform and R&D innovation middle platform. Meanwhile, we based on innovation middle platform to gradually realize the target of digitalized management and logistic production of technological innovation. China Comservice drove the development of cybersecurity by technological innovation focused to build the brand CCS cybersecurity. Currently, our cybersecurity team has over 1,600 [ staff ]. With the synergistic development in recent years, we have gradually built up a system of cybersecurity products and services, including security capability, security operation products, data security, security services and integrated services. In recent years, our cybersecurity business has expanded rapidly. In first half 2022, value of contracts signed regarding cybersecurity exceeded RMB 2.1 billion, up 13% year-on-year. Revenue was RMB 1.4 billion, up 48% year-on-year. Brand image of CCS cybersecurity was enhanced significantly. In first half 2022, we were implemented in 10 subcategories in 2022 China Cybersecurity Industry Panoramic Map. Through strengthening integrated service capability that serves digital economy and forging digital industrialization platform, China Comservice enhanced competitiveness of industrial digitalization businesses supporting digital economy development. In first half 2022, we're paying close attention to the demand of industrial digitalization upgrade. The group developed markets such as those for digital transformation and upgrading of infrastructure through intelligentization, strengthen the iterative development of smart products and solutions, expedited the commercialization of R&D results, thus leading to the growth of related businesses. Revenue of ACO businesses amounted to RMB 12.67 billion, increased 29.7% year-on-year, among which value of new signed contracts of several key industries realized revenue growth, including property and construction increased 51.7%, Internet and IT increased 11.5%, education increased 26.6%. China Comservice [ grasped ] new opportunities from East-To-West Computing Resources Transfer to build a leading position in digital infrastructure, becoming a frontrunner of integrated general contractor of IDC. We leveraged capabilities in 3 major areas, including integrated general contracting, full life cycle BIM management and green and low carbon to actively commit ourselves to the national strategy of East-To-West Computing Resources Transfer. In first half 2022, value of new contracts signed for data [ consensus ] amounted to RMB 7.6 billion, up 36% year-on-year. Among which, domestic operators increased 23% and domestic non-operators increased 48%. The data center with China Comservice contribution in construction spread all around China, covering many industries. For example, China Telecom Zhejiang Information Industrial Park, Xiangyang Internet + Innovation and Entrepreneurship Industrial Park and Bank of China Head Office Financial Technology Center project. China Comservice introduced State Grid ITT Group as a strategic shareholder last year. We possessed professional capabilities and accumulated much experience in electricity, design, construction and supervision. We accumulated new progress in cooperation with State Grid, China Southern Power Grid and 5 major power grid companies in fields such as electricity, informatization, new energy and digital energy saving. Leverage the capabilities accumulated and enhancements from cooperation with State Grid, China Comservice further developed 5 capabilities in Dual Carbon services. We extended our reach to expand into Dual Carbon in 4+1 sectors, including energy and electricity, property and construction, industrial manufacturing, transportation, information and communication. This brought us new growth potential. The below table lists up selected cases in cooperation with State Grid, China Southern Power Grid and domestic non-operators in electricity engineering, electricity informatization, new energy and digitalized energy saving management. We believe the continuous promotion of Dual Carbon strategy by the state and enhancement of our capabilities in Dual Carbon will bring us more growth potential. Apart from introducing State Grid ITT Group as our strategic shareholder, Supply Chain Company, our subsidiary, implemented mixed-ownership reform last year and introduced 4 strategic investors, which facilitated the faster growth of Supply Chain Company. In the first half of 2022, results of Supply Chain Company achieved double-digit growth, where growth in domestic operator markets reached 30%. Increase in number of customers was also significant that we acquired over 20 new core communications equipment manufacturer customers. We also built an extensive warehouse and distribution network nationwide. In addition, Supply Chain Company deepened enterprise reform, strengthened technological innovation and induced vitality for development. We further enhanced our competitiveness to promote our high-quality development. Above is the first part of the presentation, let's invite President Huang to present the business review of first half 2022. Thank you.

Thank you, Chairman. Ladies and gentlemen, good afternoon. I will present the group's business performance for first half 2022. The table shows the revenues and growth rates of the 3 business segments and percentage to total revenues of each segment. More details are shown in the following sections in the appendix. In first half 2022, by paying close attention to the demand of industrial digitalization upgrade, we developed markets such as those for digital transformation and the upgrading of infrastructure through intelligentization, strengthened the iterative development of smart products and solutions, expedited the commercialization of R&D results, thus leading to the growth of related businesses. Amid the concurrent thread of the pandemic in multiple regions, the 3 major businesses achieved growth to different extent. Among which, we forged ahead business reform -- business transformation, enhanced driving force of technology, commercialized R&D results [indiscernible] revenue growth driver. ACO business sustained fast growth, reaching 29.7%. Portion of revenue from ACO business continues to rise, reaching 18%. In terms of market development, we maintained a diversified revenue structure with revenue from operators and non-operator accounted for 50% each. 2 motivators drove sustainable growth of the company. In the following slides, we will highlight the development of the 3 markets. In domestic non-operator market, we continued to transform towards high-value field and optimize business structure proactively. Amid the negative impact brought by the pandemic in first half 2022, revenue of domestic non-operator market grew steadily at 6.5% year-on-year. Riding on the social and technological development trends, we stepped up investment in R&D and the commercialization of R&D results. To this end, we utilized the advantages of Consultant + Staff + Housekeeper service model and the strength of its integrated capabilities in Platform + Software + Service to grade and conduct the iteration of its integrated smart services continuously with focus on mature sectors such as digital government, smart city and smart transportation, resulting sustained fast growth of ACO business at 26.1%. ACO business became a major growth driver of domestic non-operator market. In addition, we penetrated the data center market and achieved good progress by actively developing new businesses such as Dual Carbon and digital transformation of enterprises, which brought new growth momentum for sustainable development. We could see the half-on-half growth of revenue in first half 2022 compared to that in second half 2021 has turned to double digits, indicating an improving trend. In key fields, we focused on demand for industrial digitalization and digital infrastructure and achieved new progress in government, electricity, transportation, Internet and IT. As we optimized business structure, undertook fewer traditional infrastructure projects and focused on new infrastructure, new contracts in domestic non-operator market amounted to over RMB 40.9 billion, up by about 6% year-on-year in first half 2022. Among which, projects with size over RMB 100 million amounted to over RMB 3.6 billion. Apart from undertaking many cloud-computing projects and data centers, we also made breakthroughs in smart park, smart campus and smart city. As we further penetrated domestic non-operator market, further accumulated industry experience and successful cases, provided customized and tailored integrated smart solutions to customers, we have completed many signature projects across the nation, which gave us unique competitive advantages in smart services. In domestic operator market, we persisted in CAPEX + OPEX + Smart Applications strategy. Despite domestic operator investment in 5G network has peaked, we seized opportunities from East-to-West Computing Resources applications, the change of focus of domestic operator customers from traditional network infrastructure construction to new digital infrastructure construction and the move to accelerate development of new businesses such as industrial digitalization. Revenue growth of domestic operator markets accelerated in first half 2022 increased 9.2% year-on-year. We enhanced general contracting service capability and technological innovation capability. We deeply participated in businesses such as cloud network construction, supported key businesses such as data centers, green transformation and old machine rooms and 5G customized network and forged competitive advantages to maintain relatively stable market share in this business. On OPEX business, we have deepened the development of businesses such as network infrastructure and supply chain. We actively expanded services such as comprehensive maintenance service, which drove the steady growth of BPO business. In addition, we seized opportunities from domestic operators expedited development in government and enterprise business and industrial digitalization business such as ACO business group accelerated reaching 38.8%. In overseas markets, we endeavored to overcome the impact of the protracted pandemic as well as the political and economic risk overseas, conducted businesses safely and prudently in this overseas market. We gradually and safely promoted the implementation of major projects such as telecom and broadband network construction as well as the smart meter projects in regions, including the Middle East and Southeast Asia. Revenue from the overseas market increased 12.7% year-on-year. We believe opportunities and challenges coexist in overseas markets. On one hand, there are [ ample ] opportunities from Belt and Road Initiative and cooperation with Go Abroad Chinese enterprises. On the other hand, slowdown of global economic growth and protracted pandemic bring challenges. We will further optimize deployment overseas, penetrate targeted markets, strengthen cooperation with domestic operators and Go Abroad Chinese enterprises and also enhance risk management to promote safe and effective development in the overseas market. Looking forward, we will leverage the resources and capabilities of 1 Positioning, 4 Roles having technological innovation and reform as impetus. While maintaining a stable development of our traditional businesses, we will focus on the 3 markets to seize opportunities from digital transformation to accelerate the [ force ] of the growth curve of digitalization businesses by providing customers with digitalization businesses such as digital infrastructure and industrial digitalization solution. Through [ fortune 2 ] growth curve, we promote sustainable enterprise development. Above is the business review. Next, let's invite CFO, Madam Zhang, to present the financial results in first half 2022.

Thank you, Mr. Huang. Good afternoon, ladies and gentlemen. I will now present our financial results for first half 2022. The table shows our key financial indicators such as revenue, cost and profit for your reference. In first half 2022, total revenues and cost of revenue increased 8% and 8.2%, respectively. Free cash flow was mainly affected by the pandemic and dynamics of macroeconomic environment, causing an increase in net cash outflow. Next, I will introduce our key financial performance. In first half 2022, the company's cost of revenue accounted for 89.5% of total revenues, up by 0.2 percentage points compared with the same period of last year. We endeavored to control costs by continuously strengthening measures to reduce cost and enhance efficiency through measures including whole process management on project, subdivision assessment and digital management. With direct personnel costs, we strictly controlled total stock number in an active manner and utilize external resources reasonably to raise stock productivity, which led to a decrease in direct personnel costs as a percentage of revenue. For material costs, we changed business model and undertook more projects with general contracting model. In addition, system integration businesses grew rapidly, causing material costs to increase at a relatively fast rate. We established internal procurement system and implemented measures such as centralized procurement to control -- continue to raise the proportion of centralized procurement, enhancing control on material costs. For subcontracting charges, as we actively controlled the total staff number and undertook more major general contracting projects, the mode of cooperation with our partners became more diverse. Through optimizing management system, strengthening capability of IT system and cost and analysis and optimizing full process management on subcontracting, we endeavored to control subcontracting charges. In first half 2022, we implemented efficiency enhancement measures to strive to raise operating efficiency. First, we practiced high-quality development strategy, managed projects with low gross profit margin and optimized appraisal system to actively motivate subsidiaries to develop high product -- high margin products. Meanwhile, we strengthened project costs control to alleviate pressure brought by the pandemic and macroeconomy. So the decline in the overall GP margin moderated. Second, we enhanced control on selling and administrative expenses and utilized digital measures to raise operational efficiency. SG&A as a percentage of revenue was 8.5%, which has been on the downward trend in recent years. Third, we enhanced capital management and tax planning to increase interest income and reduce tax burden. The above measures resulted in profit margin, including noncontrolling interest, to be at 2.8%, maintaining largely stable year-on-year. The table lists all the key indicators of the company's balance sheet for your reference. As of 30th of June 2022, our liabilities to asset ratio and debt-to-capitalization ratio were 62.1% and 2.1%, respectively. The company's solid financial position can support the company to capture opportunities such as digital economy, digital industrialization and 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. [Statements in English on this transcript were spoken by an interpreter present on the live call.]