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 2025 interim results presentation. The presentation will be conducted in Chinese with simultaneous interpretation, and I will host the Q&A session later. [Operator Instructions] Let me first introduce to you our management who are with us today, Executive Director and Chairman, Mr. Luan Xiaowei; Executive Director and President, Mr. Cui Zhanwei; Executive Vice President, Mr. Xu Shiguang; Executive Director, Executive Vice President and CFO, Mr. Shen Aqiang; Executive Vice President, Mr. Zhang Hao. Thank you for coming, and I hope you will find this presentation helpful. First of all, I would like to invite Mr. Luan to present the 2025 interim results overview.

Good afternoon, ladies and gentlemen. Today's results presentation is divided into 3 parts. First, I will introduce the overview of our results. And next, Mr. Cui and Mr. Shen will present the business review and financial results, respectively. During the Q&A session, we will answer the questions that you may have concern about. In the first half of 2025, the company seized opportunities from the digital intelligence transformation across industries, driven by the rapid evolution of new generation information technology and AI technologies. We vigorously expanded strategic emerging businesses and the company's overall development is characterized by the following features: first, demonstrating resilience amid external challenges, realizing steady yet improving operating results; second, AI showing noticeable spillover effects and driving the company's business development; third, persisting in technological innovation-driven development and integrating AI technology with innovation; fourth, continuously expanding strategic emerging businesses to strengthen future growth momentum; fifth, proactively responding to external challenges and seizing fast market opportunities. Now let's review our financial performance. In the first half of the year, facing a complex external environment and numerous challenges, the company united its efforts, overcame difficulties and deepened transformation and upgrading and shifted momentum, achieving steady growth in operating performance with growth in both revenue and net profit. Total revenue amounted to RMB 76.9 billion, up 3.4% year-on-year. Net profit, RMB 2.1 billion, up by 0.2% year-on-year. Specifically, in the first half of the year, although factors such as reduced investment by major customers, cost control by customers and declining interest income exerted downward pressure on net profit, the company actively implemented cost saving and efficiency enhancement measures, including synergistic R&D, effectively reducing SG&A expenses. As a result, operating profit has sustained growth over the past 2 years and increased by 8.4% year-on-year in the first half of the year with operating profit margin steadily improving. In the first half of the year, on the market side, revenue from the continuous development of digital economy, coupled with Spillover Effects of AI drove the company's steady growth. On the market side, revenue from domestic operator market declined due to factors such as reduced CapEx by operators. However, by focusing on key sectors and intensifying efforts in expanding domestic nonoperator and overseas markets, revenue from domestic nonoperator market increased 12.9% year-on-year, while overseas market revenue grew by 8.7%, supporting the company's overall development. On the business side, we continued to advance transformation and upgrading, strengthening software development and digital service capabilities with revenue from application, content and other services or ACO business rising by 11.7% year-on-year. We enhanced service quality and reinforced infrastructure, construction and professional operation capabilities, leading to a 1.6% year-on-year increase in Telecommunications Infrastructure Services or TIS business revenue, while revenue from Business Process Outsourcing services or BPO business maintained steady growth. Specifically, the accelerating adoption of AI applications and the expediting digital transformation across industries have driven the construction demand for data centers and intelligent computing centers significantly boosting Telecommunications Infrastructure Services, TIS, in the domestic nonoperator market with revenue growing by 18.5% year-on-year, supporting steady growth of overall revenue in TIS. On the other hand, they have driven the demand for high-end consulting and smart services, resulting in sustained relatively fast development in application, content and other services ACO business with proportion to revenue reaching new high of over 21%. The company has always adhered to the principle that technological innovation being the primary productive force. In the first half of the year, we further advanced consolidation of R&D funding and improved R&D efficiency with R&D investment reaching RMB 2.2 billion and receiving nearly 100 prestigious technology awards. We accelerated the building of a technology innovation plus market dual-driven product supply system, developing nearly 100 smart products and several outstanding comprehensive solutions. Furthermore, we continued to strengthen cultivation of expert talents, having over 10,000 excellent technological innovation professionals in our team. Looking ahead, by continuously leveraging technological breakthroughs as the fulcrum and industrial demand as the guide, the company will empower traditional businesses while incubating products in cutting-edge fields, accelerate commercialization of technological innovation achievements and project outcomes and build an innovation ecosystem spanning from R&D to markets. Currently, AI is reshaping industrial development patterns. At this historic juncture, the company actively applies emerging technologies, particularly in AI sector. We realized transformation from technological accumulation to industrial empowerment, building AI full stack 5 major service capabilities of industrial policy advisory, full-stack infrastructure, construction and operations, data and governance, security and talent development. Focusing on key sectors such as government, data centers and emergency management, we have developed multiple AI plus flagship products covering over 20 provinces and over 200 customers nationwide. Going forward, the company will continue to center on customers' transformation and upgrading needs in digitalization, intelligentization, green and security. We'll accelerate development of projects with core competitiveness empowered by AI while persistently creating benchmark projects in digital intelligence. The company has identified specific scenarios and advantageous factors for deep cultivation, focusing on strategic emerging businesses for thorough development. In the first half of the year, the company's total new contracts amounted to about RMB 106 billion, of which strategic emerging businesses accounted for over RMB 42 billion, maintaining double-digit growth. The proportion of strategic emerging businesses to total new contracts increased to over 40% compared to over 35% last year. From a business mix perspective, digital infrastructure and smart city represented the largest shares and demonstrated solid growth in the first half of the year, serving as the primary drivers for new contract growth in strategic emerging businesses. In the field of digital infrastructure, new opportunities are emerging on the evolution from general computing centers to intelligent computing and supercomputing centers driven by AI, acceleration of integration of cloud computing and AI, accelerating deployment of 5G advanced industrial chains by telecommunications operators. The company actively transformed opportunities into growth momentum, continuously expanding into finance, Internet, intelligent computing centers and digital intelligence, new infrastructure and other sectors, achieving new contract growth exceeding 20%. Looking ahead, we will further ride on the AI development wave by targeting our businesses and fields such as intelligent computing, supercomputing, 5G advanced and 6G. By focusing on operators, energy, finance and Internet industries, we will strengthen our position as the national team and main force in digital infrastructure. In the field of smart city, the government set the goal to develop a group of distinctive, livable, resilient and smart cities by 2027. By July -- or in July this year, the central government convened a Central Urban Work Conference outlining 7 key priorities, including safe and reliable resilient cities, convenience and efficient smart cities, which set the development direction for smart city. Amid the accelerating upgrade of smart city, the company actively expanded its business in urban pipeline network renovation, county-level smart city, new infrastructure and low-altitude economy, achieving new contract growth of over 15%. Going forward, we will focus on 7 key areas, including innovative city, urban renewal, resilient city, county level digitalization, civilized city, livable city and beautiful city to contribute to the bright future of smart city development. Currently, both macroeconomic policies and industrial policies strongly support industry development, while intelligentization development and green and low-carbon transformation presents vast development opportunities. Facing changes and challenges, the company will firmly uphold its positioning as a new generation integrated smart service provider, continuously enhance its core competencies as 4 roles: deepen reform and innovation, accelerate corporate transformation, strengthen core competitiveness and balance high-quality development with high-level security to achieve sustainable, stable, healthy and high-quality long-term developments. Since its listing by actively expanding into new sectors and new markets as well as continuously promoting technological innovation, the company's revenue has become more balanced and diversified, driving sustained revenue growth. Going forward, we will further focus on key industries in the domestic nonoperator market and expand into new overseas regions. We will actively explore new opportunities in emerging sectors, including AI-driven intelligent computing centers, energy saving retrofits and upgrading for data centers as well as power and green energy sectors. We will seize customers' new demands for operation and maintenance support across various sectors, transforming traditional services into smart operation support services to strengthen our recurrent revenue sources. By further optimizing our diversified business model and broadening our diversified customer base, we will enhance profit stability and promote sustainable development. The above is the first part of the presentation. And now I would like to invite our President, Mr. Cui Zhanwei, to present the business review. Thank you.

Thank you, Chairman. Good afternoon, ladies and gentlemen. Let me present the company's business review in the first half of 2025. The above table of business revenue breakdown and the overall performance by business and market on the next slide show the revenues, growth rates and as a percentage to the total revenues of the 3 business segments and the 3 markets. In the first half of the year, the company leveraged its resource advantages, intensified market expansion and optimized business deployment to further diversify its revenue mix. On the business side, revenue from non-telecommunications infrastructure services, non-TIS business, accounted for over half of total revenues. The company's reliance on infrastructure investment-driven growth has gradually decreased. At the same time, application content and other services, ACO business, which is related to smart services, achieved relatively fast growth, becoming more noticeable as a driver to overall growth. On the market side, revenue from domestic nonoperator and overseas markets exceeded half of total revenue for the first time, mitigating the impact of changes in domestic operator market on the company's overall development. Next, I will present the key developments across the company's 3 major markets. In the domestic operator market, the company focused on addressing operators' transformation needs by accelerating the upgrade of traditional business models, including operations and maintenance, customer service and channels, while deepening strategic collaboration in areas such as computing power network construction, green upgrades of data centers, smart city and emergency management and security, supporting customers in upgrading their new infrastructure, expanding external industrial digitalization services and achieving internal cost reduction and efficiency improvements. In the first half of the year, revenue from the domestic operator market reached RMB 38.2 billion with ACO business in this market achieving relatively fast growth of 9.0%. In the first half of the year, new contracts in the domestic operator market exceeded RMB 56.5 billion, in which strategic emerging businesses grew by over 8%, particularly demonstrating strong growth in smart city and emergency management and security sectors. The company will maintain stability in traditional businesses while accelerating the expansion of strategic emerging businesses to ensure the stability of fundamentals in the domestic operator market. In the domestic nonoperator market, the company firmly seized new business opportunities driven by the AI wave and national policies, actively capturing growth potential from computing power infrastructure construction and empowerment of industry scenario applications. In the first half of the year, revenue from the domestic nonoperator market reached RMB 36.6 billion, representing a 12.9% year-on-year increase with both TIS business and ACO business achieving double-digit growth. In the first half of the year, new contracts in such market exceeded RMB 46 billion, in which strategic emerging businesses grew by over 8%, particularly showing relatively fast growth in digital infrastructure and smart city sectors. The company will focus on new opportunities arising from government's smart city policies and continue to deepen the development of strategic emerging businesses, providing customers with integrated full process services that incorporates cloud, AI, security and platform to drive the overall development of the domestic non-operator market. In terms of industry expansion of the domestic nonoperator market, the company further concentrated on key sectors with significant strategic importance, high economic value and close ties to people's livelihoods, including government, transportation, energy, emergency management, et cetera, as well as the company's advantageous strategic emerging businesses such as digital infrastructure, low carbon and emergency management and security. Regarding the major projects with contract value over RMB 100 million, each secured in the first half of the year, the proportion of digital infrastructure increased notably compared to last year, along with the acquisition of several benchmark projects across various industries and sectors in the smart city. As services becoming diversified and ecosystem becoming widened, the company's consolidated capability to deliver integrated comprehensive services for customers has strengthened. With the continuous accumulation of industry expertise and successful cases, the domestic nonoperator market presents vast potential for future development. In the overseas market, the company actively responded to the digital economy demands along the Belt and Road, continuously strengthened collaborative partnerships with go-abroad Chinese state-owned enterprises and effectively transferred and replicated its domestic expertise in fundamental network and computing power infrastructure construction while actively expanding into electricity and industrial digitalization sectors. Simultaneously, the company accelerated its overseas regional deployment, achieving breakthroughs in Latin America in recent years while continuing to deepen its presence in markets such as Asia Pacific and the Middle East. During the first half of the year, overseas market revenue grew by 8.7% year-on-year with sound development quality. The company will remain committed to its overseas market expansion strategy and accelerate the penetration and deployment in the market. Through business model transformation, enhancement of collaboration capabilities and ecosystem construction across the industrial chain, the company will balance high-quality development with high-level security and advance its overseas business development in a proactive, yet prudent manner. Pages 24 to 27 presents part of the company's benchmark cases in 4 strategic emerging businesses and AI plus applications for your reference. These cases demonstrate our practical results in data center intelligent transformation across government, finance, energy and emergency management sectors, showcasing our service model transformation and upgrade from traditional operations and maintenance to integrated system integration and operation and maintenance. In the field of AI applications, we have developed typical products, including the Grain Query Bot, AI intelligent customer service platform and AI data center energy efficiency monitor. These projects have created value for customers in areas such as operational efficiency improvement, energy conservation, cost reduction and risk early warning. Moving forward, the company will continue to drive industrial upgrading through technological innovation, accelerate the development of industry-leading technological innovation products and enhance our expertise-driven professional and smart consultant plus staff plus housekeeper services, making technological value quantifiable and perceptible. Looking ahead, the company will continue leveraging the positioning of new generation integrated smart service provider, further deepen the connotation of its 4 roles and adhere to its overall road map of value-driven, seeking steady yet progressive growth and high-quality development, focusing on opportunities from cutting-edge digital technologies empowering various industries and assisting enterprises in accelerating intelligent transformation. The company will capture the over trillions of RMB market potential cultivated by such opportunities. By leveraging our advantages of integrated full life cycle service capabilities, we will strive to achieve effective improvement in quality, reasonable growth in quantity to create greater value for our shareholders and customers. The above is part 2 business review. Next, let's invite our CFO, Mr. Shen Aqiang, to present the financial results. Thank you.

Thank you, President. Good afternoon, ladies and gentlemen. I will now present our financial results in the first half of 2025. The above table shows our key financial indicators such as revenue, cost, profit and cash flow for your reference. Next, I will introduce our key financial performance. The company intensified efforts in implementing cost reduction and efficiency enhancement to increase efficiency of operation and management. For direct personnel costs, the company consistently increases input/output efficiency of human capital by optimizing organizational structure and adjusting employee mix to enhance labor productivity. For material costs and subcontracting charges, the change in the company's service mode and the increase in business types drove the related expenditure of material costs and subcontracting charges higher. The company will utilize AI digitalization measures to strengthen whole process management across businesses such as consulting, design, construction and operations and maintenance while enhancing self-delivery capabilities and centralized procurement to strictly control material costs and subcontracting charges. The company's proactive management and control of SG&A expenses yielded significant results with proportion to revenue decreasing by 0.8 percentage points year-on-year. Furthermore, we intensified control over administrative expenses, achieving a 9.4% reduction in the related costs. The company continued to adhere to its operating philosophy of revenue with reasonable profit and profit with matching cash flow, enhancing financial value management to actively address external challenges. First, we prioritized resource allocation efficiently to support the company's transformation into new areas. Second, we facilitated commercialization of R&D results to develop flagship products and enhance business value. Third, we persistently promoted cost reduction and efficiency improvement while fully revitalizing existing resources to enhance operating efficiency. Through these multiple approaches and measures, the company ensured the stability of its overall profitability. The above table lists out the key indicators of the company's balance sheet for your reference. As of 30th June 2025, our liabilities to asset ratio and gearing ratio were 65.5% and 1.6%, respectively. Overall financial position remained solid. The company places high importance on market value management and shareholder returns and has formed multiple initiatives to enhance market value. We will continue to improve operational performance and development quality, intensify our efforts in technological innovation and market-oriented reforms, enhance investor relations management and improve quality of information disclosure and actively explore capital operation methods. These efforts aim to align the company's market value with its intrinsic value, safeguarding overall shareholders' interest and reinforcing investors' long-term confidence of the company. Now we are pleased to answer any questions you may have. [Statements in English on this transcript were spoken by an interpreter present on the live call.]