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 annual results presentation. This presentation will be conducted in Mandarin with simultaneous English interpretation. I will provide consecutive interpretation in the Q&A section. [Operator Instructions]. Let me introduce the management who are with us today: Executive Director and Chairman, Mr. Liu Guiqing; Executive Director and President, Mr. Yan Dong; Executive Vice President, Mr. Liang Shiping; Executive Director, Executive Vice President and CFO, Ms. Zhang Xu. Thank you for coming, and I hope you will find this presentation helpful. Next, let's invite Mr. Liu to present the 2022 annual results overview.

Good afternoon, ladies and gentlemen. I'm pleased to meet you physically to have face-to-face communication. Today's results presentation is divided into 3 parts. First, I will introduce the overview of our results. And next, Mr. Yan 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 2022. We seized opportunities from digital economy proactively overcame impact from external environment and continue to accelerate innovation and transformation. Overall results hit record high. Second, our development quality continues to improve. Major indicators improved across the board, with gross profit margins stabilized and recovered. Third, results of technology R&D were gradually revealed and strongly driven by the trend of digitalization, ACO Services recorded relatively fast growth. Fourth, we proactively enhance shareholders' return by raising dividend payout ratio. Dividend growth reached double digit. Fifth, we accelerated the deployment in Cyberpower and Digital China construction and enhanced our core competitiveness with a view to forging the second growth curve, striving to promote sustainable and high-quality development of the company. Next, let's look at our results overview. In 2022, we deepened development of high-value businesses. Operating results achieved solid and progressive growth. Both revenue and net profit hit historical high. Major indicators of operating results, our efficiency and shareholders' return improved across the board. Among them, revenue reached RMB 140.7 billion increased 5% year-on-year. Gross profit margin increased 0.4 percentage points year-on-year. Net profit was higher than revenue growth for the first time, which increased 6.4% year-on-year. Net profit margin stabilized and improved. We continued to strengthen working capital management. Free cash flow was RMB 4.4 billion, increased by 7.2%, maintained at a healthy level. Free cash flow continued to be higher than net profit. ROE increased year-on-year to reach 8.5%. In 2022, we deepened the development of the 3 markets and achieved positive growth in all the markets. From the market perspective, we captured opportunities from the accelerated development of digital information infrastructure construction and industrial digitalization. Revenue from domestic operator market and domestic nonoperator market continued to maintain stable growth, increased 4.6% and 5.5%, respectively, playing in an important role on stabilizing the fundamentals of revenue and driving growth. From the business perspective, ACO business, which is closely related to industrial digitalization, increased 15.3% year-on-year, becoming the new growth momentum of our revenue growth. We persisted in high-quality development and quality and efficiency improvement. Gross profit margin increased 0.4 percentage points year-on-year to 11.4%. We strengthened quality development by vigorously developing high-value businesses and high-margin projects. On delivery side, we strengthened the contracting management intensified centralized procurement and deepened project management to continuously implement cost reduction and efficiency improvement. On management side, we optimize appraisal and incentives mechanism to fully stimulate development vitality of the company. In terms of value contribution, domestic non-operator markets gross profit growth reached 14.2% higher than it's revenue growth. The market's contribution to overall gross profit growth reached 63% and the market became an important contributor to the value increase of the company. We attach great importance to shareholders' return and have been paying sustainable and relatively stable dividends. We steadily improved shareholders' return by increasing dividend appropriately based on factors such as resource performance, cash flow and future development needs to share the results of the company's development with shareholders. In 2022, based on the company's good operating performance, the Board of Directors proposed to further increase the dividend, optimizing the dividend policy such as normalizing special dividend in the past and increasing the final dividend payout ratio. Total dividend payout ratio was increased from 38% to 40% with dividend per share at RMB 0.1939 per share, increased by 12%. We pursued high-quality development as a principle and value creation as a focus, adhering to the philosophy of revenue with reasonable profit, profit with matched cash flow and achieved favorable results creating value for customers, the company and shareholders. We target to be a first-class smart service innovative enterprise adhering to the strategic positioning of one positioning 4 rows will strive to become the main force in digital infrastructure construction, the Vanguard in Smart City services, the leading enterprise in industrial digitalization services and a trusted expert in smart operation. We continuously enhance market competitiveness with better quality, superior technological innovation capability for better products, stronger reform impetus more valuable synergistic capability in ecosystem and more effective risk control capability. We will focus on strategic emerging industries, including digital infrastructure, smart city, green and low carbon emergency management and security to speed up market development. Persisting in technological innovation-driven development, we enhance our technological innovation capability consistently by scaling up R&D investment consistently. Cumulative R&D investment since 13th 5-year plan period amounted to RMB 25 billion. In 2022, the investment was about RMB 5 billion increased by about 17%. We adopted a customer-centric and market-oriented approach to launch a series of industrial products and applications on industries such as digitalized applications, emergency management, security, digital infrastructure and green and low carbon enforced R&D platforms to enhance R&D capabilities we then aim to develop core products. We persisted in proprietary R&D and innovation and accelerated the conversion of R&D to results to facilitate the fast business growth. In 2022, new contracts in both Smart City and Digital Infrastructure Industries were over RMB 10 billion, while that of Cybersecurity and Emergency Management reached RMB 3.1 billion and RMB 1.3 billion, respectively. Software Development and System Support revenue increased by over 31% year-on-year. Moreover, our technological innovation was recognized by industry as we ranked fourth in China Software 100 awards for 2 consecutive years. We actively engaged in the Digital China construction. By means of top-level planning, consultation, general contracting, general integration, construction, operation and maintenance, we have participated in 70% of municipal level smart city construction. In 2022, new contracts of the relevant business amounted to RMB 16.7 billion increased by 35%. We will actively integrate ourselves into the big picture of digital economy development. We will penetrate 2 major areas, namely: Developing efficient and collaborative digital government affairs building an inclusive and convenient digital society; step-up our effort in industries and businesses such as smart city top-level planning consultation, city brain/ digital government, safe city, urban public emergency management, smart transportation, smart park actively integrate ourselves into digital economy development, aiming to empower the construction of Digital China with intelligence striving to become the Vanguard in Smart City services. As a key foundation of digital china construction, digital information infrastructure will strongly drive the sustainable construction demand growth of cloud computing, data center and supercomputing centers. We will continue to enhance our capabilities of integrated general contracting, general integration and operation and maintenance actively provide full process, full life cycle service for data center construction. We have built cumulatively over 1 million racks covering 8 hubs 10 clusters for East to West computing resources transfer. In 2022, data center new contracts amounted to over RMB 10 billion. We undertook the project of a supercomputing center in the city with PUE value as low as 1.09. We were capitalizing on our advantages of integrated general contracting services for cloud computing and IDC supporting the digitalization and intelligent retrofit of traditional infrastructure. We strive to become the main force of digital infrastructure construction. Green is the important element of Digital China construction. We focus on 4 industries, including information and constructions -- information and communications, energy and electricity, industrial, manufacturing and transportation developed 5 major businesses, including new infrastructure energy saving, new energy construction, energy saving and carbon reduction platform, energy management contract, consultation service and training certification to contribute to green intelligence of Digital China. In 2022, dual carbon new contracts amounted to over RMB 10 billion. We will fully leverage the advantage of dual carbon Industrial Research Institute strengthened the technological innovation of green and low carbon to satisfy customers' diversified demand and forge new development momentum. Recently, the government issued guideline of building Digital China, giving a clear deployment in overall framework 2522 of Digital China. We will combine our capabilities and resources to continuously step up our effort in interconnecting digital infrastructure, building a trustworthy and controllable digital security war and empowering the development of the economy and society aiming to seize strategic opportunities from Digital China construction. While promoting value enhancement of traditional businesses, we will fully capture the trend of in-depth integration of digital economy and real economy and vigorously develop industrial digitalization market, to realize fairly breakthrough in the emerging industries expedite the drafting of the second growth curve and drive sustainable and high-quality development of the company. In 2022, we sped up high-quality development of the company. We have reasons to believe China Comservice value in the capital market could be enhanced? First, the enormous room of development brought by Digital China and Industrial Digitalization. We will continue to penetrate strategic emerging industries to accelerate our core competitiveness enhancement. Second, gross profit margin stabilized and rebounded. Our profitability and ROE have been improving in 2022. Third, Free cash flow has been maintained at a healthy level, which enables us to pay sustainable and stable dividend to shareholders. Fourth, traditional businesses will grow steadily and emerging businesses will grow fast. We'll strive to be a first-class smart service innovative enterprise. All of the above four points show the potential of the company's high-quality development to achieve value enhancement. A bright future could be expected. Above is the first part of the presentation. Next, let's invite Mr. Yan Dong to present the business review of 2022. Thank you.

Thank you, Mr. Liu. Ladies and gentlemen, good afternoon. I will present the group's business performance for 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 and appendix. In 2022, we focused on industrial digital upgrade demand expanded into markets such as retrofit and intelligent upgrade of new infrastructure facilities, accelerated iteration and development of smart products and solutions, which drove the growth of related businesses. We overcame the negative impact of the changes in macro environment in various regions, plus all 3 major markets achieved growth to a different extent. In particular, we promoted business transformation and expedited conversion of R&D results. ACO business maintained relatively fast growth, increased 15.3% year-on-year, with its portion to total revenue continued to rise and reached 17.6%. In terms of market development, we maintained a diversified revenue structure with revenue from domestic operator and non-operator accounting for 50% each. Two motivators drove sustainable growth of the company. In the following slides, we will highlight the development of the 3 major markets. In domestic non-operator market, we focused on opportunities from digital transformation of society and industrial digitalization and continued to optimize business structure with revenue increased 5.5% year-on-year. We focused on expanding high-value projects, such as gross profit margin improved significantly. Gross profit increased 14.2% year-on-year. We accelerated deployment in strategic emerging industries. In the field of digital infrastructure, we focused on industries such as data center and cloud computing and seized the strategic opportunities of East to West computing resources transfer. In the field of Smart City, we forced many smart city projects industries such as government, transportation, park and health care and enhanced the full process integrated general contracting service capability. In the field of green and low carbon, we focused on information and communications, energy and electricity, industrial manufacturing and transportation to accelerate the buildup of service capabilities for dual carbon products and solutions. In the field of emergency management and security, we firmly cross the opportunity of public safety emergency management construction by strengthening the proprietary R&D of core products to accelerate the deployment of resources and markets. In key industries of domestic operator market, we focused on industrial digitalization and new digital infrastructure demand and achieved good results in industries such as government, electricity, transportation and internet and IT. New contracts in domestic non-operator market was over RMB 82.2 billion, increased by about 8% year-on-year. Among which, new projects with size over RMB 100 million amounted to over RMB 7 billion, increased 15% year-on-year. Apart from taking many cloud computing and sizable data projects, we consistently made breakthroughs in several industrial applications such as smart city, smart transportation, smart campus and smart construction. As we further penetrated domestic non-operator market, further accumulated industry experience and successful cases, we could provide abundant integrated smart solutions to customers, which give us unique competitive advantages in smart services. In domestic operator market, though 5G investment of operator customers reached its peak, we consistently shifted development momentum, enhanced surface value, deepened cooperation with operator customers in many sectors. The markets revenue maintained steady growth, increased 4.6% year-on-year among which, ACO revenue continues to grow fast at 23.9% year-on-year. We persisted in CapEx plus, OpEx plus, smart applications development strategy actively deployed in the below sectors and achieved favorable results. First, we penetrated traditional businesses such as cloud network construction, integrated installation and maintenance and enhanced internal digital upgrade and reform to improve efficiency. Second, we created new growth catalysts in emerging sectors were collaborating with domestic operators to expand into industrial digitalization sector to serve demand such as digitalization of new infrastructure facilities and cloud migration. Third, we assisted domestic operator to achieve green and low carbon while supporting 0 carbon data center construction green retrofit of all machine rooms and dual carbon and energy saving platform construction. In overseas market, we overcame the impact of the macroeconomic environment and the pandemic in overseas regions. We made steady progress in the implementation of overseas projects in Saudi Arabia and UAE and the Philippines and other regions. Revenue of the market increased 9.3% year-on-year. We believe with the deepening of Belt and Road initiative. There are enormous opportunities in overseas markets and huge potential in collaboration with all of broad Chinese companies. We will further optimize our deployment overseas penetrate high-quality regions focused on key businesses such as digital infrastructure, data centers, power and new energy, smart products and solutions and strengthen risk control with a view to achieving safe and effective development in our overseas markets. Our revenue scale has been increasing since our listing, increased from about RMB 50 billion in 2011 to the present over RMB 140 billion. Domestic non-operating markets revenue proportion and profit contribution continues to rise in the portion of ACO revenue increased steadily. In 2022, we [ preliminary ] achieved the targets at the beginning of 14th 5-year plan period with revenue maintaining steady growth percentage of high-value businesses increasing steadily, ROE and shareholders' return increasing steadily. We are confident and determined to promote the 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 business review. Next, let's invite CFO, Madam Zhang Xu to present the financial results in 2022.

Thank you, Mr. Yan. Good afternoon, ladies and gentlemen. I will now present our financial results for 2022. The table shows our key financial indicators such as revenue, cost, profit and cash flow for your reference. In 2022, the company's revenue grew by 5% year-on-year, while gross profit and net profit grew by 8.1% and 6.4% year-on-year, respectively, which were higher than revenue growth. In addition, the amount of free cash flow was higher than net profit. Next, I will introduce our key financial performance. The company took several measures to strengthen cost control across the board with the cost of revenue accounted for 88.6% of total revenue in 2022 which decreased by 0.4 percentage points year-on-year. For the rent personnel costs, we proactively control the total staff number, which led to a continuous decrease in direct personnel costs as a percentage of revenue. For material costs, the rapid growth of system integration businesses drove relatively fast increase in materials cost. The company will continually strengthen the control of material costs by digitalizing procurement and increasing the proportion of centralized procurement. For subcontracting costs, the company proactively controlled the total staff number optimized the business structure and other top major projects with general contracting model, which led to an increase of subcontracting costs. The company will continually enhance the full process management capabilities on subcontracting to control subcontracting costs through enhancing digitalized financial control, strengthening cost analysis as well as compressing the number of subcontractors. In 2022, the company focused on efficiency improvement and strive to enhance operating efficiency, by elevating the value of business and controlling operating costs, gross profit margin stabilized and recovered. The company continued to increase its investment in R&D, which increased the R&D expenses as a percentage of revenue to 3.5%. However, SG&A expenses as a percentage of revenue, excluding R&D expenses reduced to 6.4%. SG&A continues to be well under control. The above measures improved the operating efficiency significantly, with operating profit increased by 10.2% year-on-year. Net profit growth accelerated higher than revenue growth. In 2022, SMEs were under greater financial pressure due to the impact of the change in macroeconomic environment. The company actively fulfilled its social responsibility by making timely payments in strict accordance with the terms of the contract. At the same time, the company took multiple measures to strengthen the collection of accounts receivable continuously enhanced the management of long-term accounts receivable, driving a significant improvement in free cash flow in the second half of the year, realizing a free cash flow of RMB 4.4 billion for full year. The cash conversion ratio was 146% continued to be at a healthy level. The company will adhere to the philosophy of revenue with reasonable profit, profit with matched cash flow and strive to maintain cash flow at the reasonably healthy level. The table lists out key indicators of the company balance sheet for your reference. As of 31st December 2022, our liabilities-to-asset ratio and debt-to-capitalization ratio were 62.3% and 2.1%, respectively. The solid financial position would lay a solid foundation for the sustainable and high-quality development of the company. 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.]