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

Good afternoon, ladies and gentlemen. I'm Terence from China Com Service. On behalf of the company's management, I would like to welcome you to our company's 2024 interim results presentation. The presentation will be conducted in Chinese with simultaneous interpretation, and I will moderate in the Q&A session later. Please put your phone on vibration mode or turn it off during the meeting. Please allow me to introduce the management present today. Mr. Liu Guiqing, Executive Director and Chairman; Mr. Yan Dong, Executive Director and President; Mr. Shen Aqiang, Executive Director, Executive Vice President and CFO; Mr. Zhang Hao, Executive Vice President. Thank you for your participation and hope this presentation will be helpful to you. Now first of all, I'd like to invite Mr. [indiscernible] to you the 2024 interim results overview.

Good afternoon, ladies and gentlemen. The results presentation will be divided into 3 parts. First, I will talk about the overview of our results. And next, Mr. Yan and Mr. Shen will present to you the business review and financial results, respectively. In a Q&A session, we will respond to your questions. In the first half of the year, we firmly grasp the opportunities from digital economy development, actively responded to the complex external environment and market competition and further enhanced the level of high-quality development of the company. First, Operating results were steady with enhancement and revenue and net profit grew steadily. Secondly, we implemented measures to improve quality and efficiency, and the gross profit margin continued an upward trend. Third, we achieved remarkable results in a strategic deployment and strategic emerging businesses have become a new driving force for growth. And fourthly, led by the technological innovation, the core competitiveness of the company has been greatly improved. And fifthly, we adhere to the strategy of high-quality development, accelerated the cultivation of new quality productive forces and strengthen core competitive advantages. Now I would like to show you the detailed results. In the first half of the year, we drove high-quality development is -- with effective improvement in quality and reasonable growth in quantity and our overall results was steady with a favorable trend. Revenue grew steadily, reaching RMB 74.4 billion, up by 1.7% year-on-year, of which service revenue increased by 3%. Secondly, the growth rate of the net profit continued to be higher than that of the revenue and net profit reached RMB 2.13 billion, up by 4.4% year-on-year, higher than the revenue growth rate by 2.7 percentage points. Firstly, gross profit margin continued as favorable change in the recent years, up by 0.2 percentage points year-on-year. We have seized the opportunities such as the accelerated development of the digital economy, construction of AI computing power and the further progress of digital economy. And we have actively integrated into the customer ecosystem such as the development of 3 major markets and 3 major business segments was stable and progressive. On the market side, we seize the strategic emerging business development opportunities, such as domestic and non-operator market led the overall growth rate, its revenue increased by 2.5% year-on-year. We have responded to the impact of the decline of CapEx by operating customer, domestic operator market remained largely stable. Overseas market business increased by 26% year-on-year. In terms of business, we continue to strength -- to strengthen our software and digital service capabilities and application content and other services continue to maintain relatively fast growth rates with revenue increasing by 6% year-on-year, which was the largest contributor to revenue growth in the first half of the year. In addition, we keep abreast of the demand of the computing power construction, renewable energy development, supply chain management, telecommunication infrastructure services remained largely stable and the business process outsourcing services, which is also called the BPO achieved steady growth. We resolutely implemented high-quality development strategy and the business quality was greatly improved. From the market perspective, the domestic non-operator market in the first half of the year was quite stable. The gross profit margin reached double-digit growth. From the business perspective, the revenue growth of the ACO business grew the fastest and the gross profit margin also reached double digits. We attributed that to the gross profit margin of software development and system integration business in ACO business. From the perspective of industry and technology, we have achieved good results in actively deploying strategic emerging businesses such as digital infrastructure, green and low-carbon smart city and emergency management and security, which have become our driving momentum. In the first half of the year, we signed a contract worth of [ RMB 108 billion ], up by 8% year-on-year, of which the new contract value of the strategic emerging business increased by more than 40% year-on-year. And its portion to the total new contracts increased from 27% last year to over 35% this year, becoming the major driving force for new contract growth. In terms of the customer mix of new contracts, for strategic emerging business, domestic nonoperating market accounted for the largest portion, about 66%, which is the main momentum for domestic non-operator markets. We target specific scenarios and some specific sectors for deep cultivation and penetration and continue to strengthen our strategic emerging business. In terms of digital infrastructure, we have served the industry for more than 70-years. We have profound accumulation of industrial experience, we have applied AI energy efficiency optimization and advanced green and low-carbon solutions to provide full-process and full professional integrated services. During the period, we undertook multiple intelligent computing, supercomputing center and AI computing power projects, new contracts from this field grew by over 35%. In terms of green and low-carbon, based on the extension of our capabilities and digital infrastructure we form full-process green and low- carbon solutions with consultation as the lead plus digital empowerment and product innovation and construction and operation and maintenance. We want to several bids with new contract value over RMB 10 million during the period. New contracts from the field grew by over 60%, and our growth was the highest among the strategic emerging business. In terms of smart city. We undertook multiple EPC general contracting projects with contract value over RMB 10 million during the period based on our profound accumulation of more than 10-years of experience and 3 core capabilities of top-level design, software, R&D and implementation and delivery. With the advantages of a [indiscernible] provincial municipal and country level services, we won large projects. New contracts from this field grew by more than 40%. In terms of emergency and management and security, we have seen 40% of new contracts compared to that of last year, much faster than that of last year. We promoted the technological innovation and we empower new quality productive forces with such kind of innovation. In the first half of the year, the revenue of software development and system support maintained double-digit growth, and we have seen the great benefits coming from technological innovation and the results continue to be very outstanding. In terms of the strategic emerging business, we target the intelligent security and scenario-based demands from customers, and we have forged more than 90 key industrial products. In terms of future-facing industries, we have developed more than 20 key products such as AI Applications, Internet of Vehicles and Low-Altitude Economy for key customers in sectors such as operators, governments and transportation. Looking into the future, we'll continue to adhere to the “"1 Positioning, 4 Roles" continue to deepen reform and transformation, accelerate the cultivation of new quality productive forces and strengthen the advantages of a steady development, industrial leadership quality service, safe development and expert talent. Firstly, about the strategic emerging business, we will actively integrate into the transformation of our operators and ensure that we maintain a leading position in this market segment. In terms of digital, infrastructure, smart city, green and low-carbon, emergency management and security, we will gradually achieve leadership. In terms of the overseas market, we will be more efficient. Secondly, we strengthened our core position of the technological innovation, accelerate the cultivation of inferential markets, [ smart product ] and solution and utilize technological innovation to drive the digitalization, cleaning and safety, transformation and upgrade of traditional business such as design and construction. Thirdly, we strengthened the professional capabilities of our 3 business segments. We have explored the systems and mechanism that connect the market management and professional capabilities, differentiating ourselves in terms of our capabilities. And we promote the transformation of enterprises towards professionalized high-end and achieve sustainable and high-quality development. And that's the first part of the presentation. Now, I would like to give the floor to Mr. Yan Dong to present to you the business review.

Thank you, Chairman. Good afternoon, ladies and gentlemen. Please allow me to present to you the group's business review in the first half of 2024. This table shows the revenue and growth rates of the 3 business segments and the percentage to total revenues of each segment. From the incremental revenue and growth rate, supply chain business in BPO contributed the largest portion, incremental revenue in the first half while software development and system support business in ACO Group at the fastest rate. Both of them have achieved double-digit growth. More details are shown in the following sections and the appendix. In terms of business, we focus on customers' demand and new infrastructure such as computing power and new energy. And we have strengthened our services in these regards. We have responded to the impact brought by the decline of CapEx of the operators, the TIS business remained quite stable. We have kept a breadth of the development opportunities such as the upgrade of digitalization, demand of the society, intensify market expansion efforts and achieve fast development in ACO business, which is up by 6% year-on-year. In terms of markets, revenue from operators and non-operators accounting for 50% each as dual growth drivers are our pillars. And later, we will give you more details. In terms of domestic non-operator market, we focus on key industries such as government, emergency management, transportation, energy and education. We have expanded our vantages business such as industrial digitalization, PV and [ NEV ] and data centers. The revenue from the domestic non-operator market was stable with enhancement, up by 2.5% year-on-year, of which ACO business grew by 12.5%. In the meantime, we'll focus on the business structure optimization, and we have tightly control the low growth profit margin business growth and the profit distribution business. The gross profit margin of domestic non-operator business increased significantly by 12.1%, which is much higher than the total revenue growth. In the first half, the new contract value from domestic non-operator market reached RMB 47 billion, up by 10%. New contracts from strategic emerging business in domestic non-operator market increased by more than 45%, accounting for more than half of the new contracts driving the overall development of the market. And we have enjoyed great prospects for this business segment. At this point, the digital transformation and upgrade of thousands of industries is accelerating, which is the new driving force for our business. In the first half, we have undertook a number of large-scale data center and intelligent computing center projects. We have also achieved breakthroughs in many fields such as new energy, smart education, smart transportation, digital government, enterprise digital transformation and emergency management. The number of sizable projects values over RMB 10 million. And we have over 700 of them and the total value exceeded RMB 23 billion, up by 33%. We have expanded domestic non-operator market and consistently accumulated industrial experience and successful cases. And we have a lot of solutions to our clients. In terms of domestic operating market, we responded to the changes in terms of investment and demand upgrade. We have overcome the challenges of CapEx declined. And we have [indiscernible] new business needs in computing power network construction, 5G network optimization, energy saving and carbon reduction as well as security development. And we have seen stable revenue growth. In the first half of the year, new contract in domestic operator business was more than RMB 58 billion, up by 6%, of which the new contract from strategic emerging business increased by more than 34%. Smart City, digital infrastructure, green and low-carbon projects contributed more than more to the contract growth, and we have enjoyed great prospects for these businesses. In the meantime, we continue to explore traditional business such as telecom network infrastructure. And we have maintained a very outstanding operational efficiency. We will continue to stabilize our traditional business while exploring strategic emerging business. In terms of overseas market, we actively responded to the demand from digital economy along the Belt and Road initiative, and we have achieved synergetic expansions with Go Abroad Chinese enterprises. And we have implemented a lot of projects in fields of communication, new energy and informatization. In the first half of the year, revenue from overseas market increased by 26% year-on-year. We will further seize the opportunity of overseas markets. And we want to focus on APAC, Middle East, Africa and Latin America. 4 key customer groups, including telecom, operators, energy and electricity clients, overseas governments and enterprises and Chinese enterprises. Four key businesses, including digital infrastructure construction, low-carbon and energy and electricity, smart products and services as well as industrial informatization services. We will continue to coordinate our development with safety and promote a safe and efficient development of overseas business. On Page 20 to 23, you will see our development and benchmark projects in 4 sectors of strategic emerging businesses, including digital infrastructure, green and low-carbon, smart city, emergency management and security. You can scan the QR code for more details. We are seeing waves of digitalization and informatization, digital economy is accelerating. The next-generation information technology is [ iterating ]. Digital infrastructure, green and low-carbon industrial digitalization, AI have continued to expand. We are seeing more demands coming from the clients for digital intelligent services, AI and industrial digitalization. Looking forward, we will step up our efforts in technological innovation, further leverage the advantages of our company and lead by consultation and design in comprehensive integrated services and accelerating enhancement of our differentiated service capabilities with continue to expand strategic emerging businesses in the domestic non operating -- operator market and assist our customers in domestic operator to innovate, transform and upgrade. We'll continue to strengthen and improve ourselves, focus on the strategic emerging business, reinforce our traditional business by improving quality and efficiency and enhance our competitiveness and achieve effective improvement in quality and reasonable growth in quality. And we will join hands with shareholders, customers and society to embark on the China Com Service new journey to high-quality development. I'll pass the floor to Mr. Shen Aqiang for the financial results.

Thank you, Mr. Yan. Good afternoon, ladies and gentlemen. I will now present to you our financial results for the first half of the year. On this page, you can see our key financial indicators such as revenues, cost, profit and cash flow. Now I would like to introduce to you our key financial performances. In the first half of the year, our gross profit margin continued the improvement trend in the recent years increased by 0.2 percentage points, reaching 10.9%, among which gross profit margin of the domestic non-operator market increased significantly, and the GP margin of domestic operator markets largely stabilized. Gross profit margin for consultation, design to system integration software have also increased and it's mainly because of the following measures that we have taken, thus, we focus on high-quality development and improvement of our core capabilities. We have strived to expand our high-value business sectors, and we have controlled the low gross profit margin business development. And secondly, we have optimized our revenue mix which is the technological innovation-driven business. And thirdly, we have strengthened cost control and we have control our costs and enhanced out efficiently. In terms of cost structure, we have carried out a number of measures to strictly control the cost and expenses, and we have seen great results. In terms of direct personnel costs, we have controlled the total number of employees by optimizing the employee mix and improving the labor productivity. As a result, the direct personnel costs continued to decline. For material costs and subcontracting charges, we have further strengthened the management of general contracting projects. We have increased the proportion of centralizer procurement and self-sufficient marketing and delivery capabilities. We have also consolidated our whole process management of some contracting, which results in a more reasonable material cost and subcontract charges. For SG&A, we continue to enhance our R&D investments. And the R&D expenses increased to 3.9%, excluding R&D expenses, SG&A expenses as a percentage of the revenue declined by 0.2 percentage points to 5.7%. SG&A continued to be well under control. We have seen an increase in the net free cash flow in the first half of the year, with account receivable increased to a certain extent. For free cash flow, the outflow in the first half was mainly due to the cyclical pattern in our business and cash flow in the first half and second half of the year. For account receivable, the total amount have increased, but the risk is within control. First, more than 90% of the account receivable is within 1 year of age, which is similar to that of last year. Secondly, the account receivable overdue for more than 3 years remained largely stable. Thirdly, the increase of the account receivable, 50% of them came from customers with good credit background and the risk is relatively low. We'll continue to adhere to the philosophy of a revenue with a reasonable profit and profit with matched cash flow and refined the mechanism of the assessment, reward and punishment mechanism of the account receivable management. And we will manage our account receivables in a scientific and technological way, and we expect that free cash flow for the whole year can turn positive, and we strive to safeguard the cash flow at a reasonable and healthy level. And here, you can see the key indicators of our balance sheet. As of June 30, 2024, our liabilities-to-asset ratio and debt-to-capitalization ratio was 65% and 2.0% respectively. The financial position remained solid, which would lay a solid foundation for the long-term sustainable development of the company. We finally believe that facing the rapid development of digital economy and the strong demand in vast market for digitalization, intelligentization and greening the company's value in the capital markets will continue to improve. And the reasons are as follows. Firstly, we continue to see stable financial position, which would be conducive to seizing the development opportunities of our emerging business. Secondly, we have a continued business transformation, and our operating efficiency have been improving in the past few years. And certainly, we have adapted to the market changes. We are very resilient when it comes to the adverse external impacts, and we have achieved high-quality operating results with steady growth. And fourthly, we continue to improve shareholders' returns, and we pay steadily dividends to our shareholders in an increasing manner in recent years. And we'll continue to -- the overall value-oriented seeking steady yet progressive growth and high-quality development. And we'll continue to cultivate and strengthen new quality productive forces deeply [ inspect ] strategic emerging business to achieve favorable growth in operating results with high-quality development and promote the continuous enhancement of the company's value in the capital markets. Next, we'll start the Q&A session, and we will be very pleased to answer any questions that you have. Thank you.