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 management, I would like to welcome you to our company's 2026 interim results presentation. The presentation will be conducted in Chinese with simultaneous interpretation and I will host a Q&A session later. [Operator Instructions] Please allow me to introduce the management present here today. Mr. Luan Xiaowei, Executive Director and Chairman; Mr. Shen Aqiang, Executive Director, Executive Vice President and CFO; Mr. Zhang Hao, Executive Vice President; Mr. Gui Xiaoqing, Executive Vice President. Due to other important duties, Mr. Cui Zhanwei, President of the company is unable to attend the person-in-person in Hong Kong. We hereby apologize to everyone. Now I would like to give the floor to our Chairman, Mr. Luan Xiaowei to present to you the 2026 interim results overview.

Good morning, good afternoon, ladies and gentlemen. The results presentation is divided into 3 parts. First, I will introduce the overall of our results. In the first half of 2026, innovation in AI technology has entered an unprecedented epic phase. The company focused on deepening its presence and strategic deployment in high-value business and continue to advance modernization of our governance systems and capabilities and we have shown the following features. First, taking active initiative and adapting to changes maintaining overall stabilities in fundamentals; secondly, continuously strengthen quality and efficiency improvements, providing support for profitability; third, forward-looking deployment delivering initial results of which growth engines driving transformation. Fourth, AI-driven dividends materializing with computing infrastructure business, achieving robust growth. Fifth is the strategic positioning of one positioning for roles, helping us to seize important opportunities in new markets. First, about our financial performance, we will face up with a complex and challenging external environment. We focus on strengthening our operation, made a forward strategic deployment, and we have maintained a very stable fundamentals. So revenue amounted to RMB 74.5 billion. AI dividend gradually become the primary driver of deployment. ARDC revenue grew by 63% year-on-year accounting for nearly 10% of our revenue by market breakdown, revenue from domestic operator market stabilized and rebounded grew up by 1.9% year-on-year. For domestic nonoperating market, we have actively controlled the low-quality and high-risk projects, and we have been focusing on high-value businesses for sustainable development. Overseas market maintained a compliant effective development, achieving 7.4 year-on-year growth. We have continued to drive quality and efficiency improvements. And for the first half of the year, the net profit amounted to RMB 1.97 billion, and we have controlled the key SG&A expenses, achieving steady growth in operating profits. We have followed closely the external environment and upgrades in the customer demand, and we have demonstrated results in transformation and development. We have focused on new trucks of 6 major growth areas to build the new growth drivers for high-quality development. In the first half of this year, our total new contracts amounted to RMB 100.4 billion, of which new contracts from the 6 major growth areas business reached RMB 34.4 billion, representing 11% year-on-year growth. The proportion of new contracts of 6 major growth area business accounted 34% of our total new contracts increased from 29% in the same period last year. Significant growth was achieved across key areas, including IDC, application CCS smart maintenance and low outage economy, the new economy momentum has been released. We have seized the market opportunities brought by the booming development AI in the first half of the year. New contracts in the AI plus sector amounted to RMB 12.3 billion, representing a year-on-year increase of 30% with revenue reaching RMB 7.4 billion, up by 62%, accounting for 10% of our company's revenue. Among which, the company accelerated the large-scale delivery of AIDC with new contracts in the AIDC business, growing by 33% year-on-year. We are focused on our advantageous vertical industrial scenarios to develop centralized products with a new contract in AI applications growing by 109% year-on-year. The company adheres to tinological innovation is a key driver. We have deployed AI innovation capabilities to build a new total intelligence foundation for the company. In terms of AIDC capability, we have strengthened our integrated planning, construction maintenance and operation service capabilities. We have a standard leadership delivery excellence and integrated construction maintenance approach with which we have leveraged our leading EPCO integrated services capabilities to our customers with full life cycle professional services. In terms of AI products and service offerings, we have focused on central state-owned companies and vertical industries, and we have responded to the AI initiative on 19th centrally owned enterprises, and we have achieved a replication of solutions across more than 10 industries including transportation and energy. And we have cover food chain AI data services and through the development of city-level transit cloud platforms and regional data hubs that progressively transform data assets into a new engine for sustainable growth. In terms of AI talent development, we have set up our end-to-end training systems, including train and bases, full-stack circular, curricular and [indiscernible] systems. We have strengthened our ability to attract talent and retain talent. We focus on building core capabilities that contribute to sustainable development. We have driven the integration of technological innovation and industrial innovation in smart services sector, promoting to develop new quality productive process driven by neurological innovation in the intelligent infrastructure sector. And we focus on the core technologies, strengthen market synergy and build an open system and innovate incentive mechanism. We drove continuous breakthroughs and value creation in our technological innovation. We strengthened the transformation and acceleration of our innovative capabilities. We have establish a 3-tier new paradigm of scientific research a transformation with the national level key initiatives and the core technology breakthroughs are plus localize innovation. We have a 5 innovation basis in low [indiscernible] dual carbon, data elements, cybersecurities and quantum. And for R&D investment, in the first half of year, it amounted to RMB 2 billion and investment in AI smart applications accounted for more than 45%. And our government allocated funding secured by the company has doubled the total amount for the -- compared to the whole year 2025, and we have flash-through major national level projects for the first time. We have accelerated our deepening of reforms and corporate government capabilities. First, we strengthen the advantageous business segments such as telecommunication infrastructure, driving the capability leap of EPC general contracting towards full cycle EPCO. Second, so we deepen reforms in specialized segments such as supply chain management achieving the extension of value-added maintenance and operation services. Third, we comprehensively different our synergistic operations, increasing the centralization of resources in key areas such as procurement, finance and funding and audit as well as legal affairs. Fourth, we have strengthened risk prevention in key areas and enhance the management of people, finance and resources. And fifthly, enhance government efficiencies through AI empowerment promoting the deployment of AI-powered digital employees focusing on high frequency and high-value scenarios to provide digital impetus for the modernization of our governance systems and capabilities. This year marks the 20th anniversary of our company's listing since going public, that we have advanced innovation and the transformation with reform-driven development. And we have 4 new sectors, new markets, and we have achieved a high-quality sustainable growth. At present, the advancement of AI and the green transition has brought a point as vast opportunities. China is actively advancing the construction of 6 networks, creating significant market opportunities for new infrastructure and implementation construction and this aligns with our company's full chain service capabilities. We will further strengthen our competitiveness and empower the digital intelligence transformation of the society Industries and the customers. We will continue to defend the commutation of one positioning and 4 roles and accelerate our development into a service provider to AI service providers. We will strengthen our new quality productive forces built new relationships of a production tailored to new, quality productive forces and drive our company towards new opportunities and excellence. We attach great importance to our shareholders' return in the past 10 years. Our dividend payout ratio has remained quite stable with enhancements to enhance the credibility of dividends, we have made the dividend return plan for the next 3 years. Dividend payout ratio for 2026 to 2028, will increase from 43% in 2025. By the 2028, we expect the dividend payout to be no less than 46%. And creating long-term value for shareholders. This is the first part of our presentation. Now I will invite Mr. Shen Aqiang to present the rest of the presentation.

Thank you, Chairman. I will present to you 2 parts of our presentation. First is the performance in the first half of 2026. And here, you can see the business revenue breakdown and the overall performance of our markets, which have shown the overall performance of our 3 business segments and 3 markets. And from the business and the market structure, so you can see that our revenue has become more diversified, and we have a showcase of resilience in our business. And now I would like to talk about the key developments in our 3 major markets. First, about the domestic operator markets. We focus on the customers' demands in the new type of digital information infrastructure. to respond to the impact of the decline in traditional business. In the second half of the year, revenue from domestic operating markets stabilized and rebounded reaching RMB 38.9 billion, representing 1.9% of year-on-year growth. We will see the opportunities of operators demand and investments into new computing infrastructure and we'll cultivate business opportunities in traditional areas, such as energy saving, retrofit of existing data centers and operations as well as maintenance and we support operators in serving and integrating into new communication network and national integrated computing power network construction. For the domestic non-operator market, we have been impacted by the base impact of some customers' investment pace. And we have focused our resources on the new areas in the first half of the year, revenue from domestic nonoperator reached RMB 33.2 billion. We will give track of the RMB 1 trillion market potential brought to a point by the 6 networks and urban renewal as well as the accelerated growth in the emerging sectors, such as AI computing, electricity, correlation and CGS smart maintenance and our aim is to strive to achieve a steady growth in domestic non-operator market. For the overseas market, we have responded actively to the "Belt and Road" Initiative. We focus on Asia Pacific, and communication fundamental businesses and infrastructure businesses. And we have secured several key projects in AIDC. In the first half of the year, revenue from the overseas market reach RMB 2.3 billion, representing 7.4% year-on-year. Asia Pacific grew by nearly 40% being the primary driver of our overseas business. And we will enhance our project development and operation capabilities, and we'll focus on the transformation and upgrading of AIDC, new energy and other areas and we will actively support a central state-owned companies in the compute power expansion overseas accelerated their replication of domestic capabilities and in how digitalization of our overseas business. And in the Chairman's introduction, the first thing you mentioned about our focus on 6 major growth areas. So I would like to elaborate on that. In AIDC, we supported and serve the national level intelligent computing hub and the construction of nationwide integrated computing power network. Our footprint has covered 8 national computing hubs. And we have built a full-stack service model, featuring EPC general contracting plus green liquid cooling was intelligent computing power and maintenance plus computing electricity condition to provide customers with comprehensive infrastructure service support. And the value of the new contract signed in this sector amounted to RMB 10.9 billion, representing 3% of growth. And here, you can see a benchmark case in AIDC and we have completed the delivery of 60-megawatt civil and M&E works for [indiscernible] data center project in just 167 days. And we have spend on only like half of the days compared to traditional schedules. This project also adopted Alibaba 5.0 liquid cooling standards with the construction center reaching the highest level in the industry. In CCS, smart maintenance sector, we are focused on 60 technologies, and we're focused on landlord buildings in central cities change operators, IDC operation and maintenance as well as data governance. And we have those standards and replicable capability systems. And in the first half of year, new contracts from this sector recorded RMB 15.6 billion, 13% growth year-on-year. Here, you can see another example in CCS smart maintenance, and we have focused on the smart mentee capabilities in AIDC and our capabilities towards full stack more maintenance or liquid intelligent confusing. And in terms of compute electricity collaboration, we focus on source grade, low storage and coordinated dispatch of power. We have integrated service of compute electricity collaboration and full chain general contracting. And we have several key projects in the dual carbon and power distribution networks. And here, you can see the benchmark cases in the dual carbon and power distribution network sectors. And they represent a benchmark project in energy storage, zero carbon buildings compute electricity carnation and our green electricity plus compute power, green electricity direct connection models. And in low [indiscernible] economic sector, we have in partnering with key customers in translation, transportation, government and management and other sectors. And we have played a leading role in consulting these businesses with consulting and design equipment procurement plus implementation delivery. In the first half year value of new contracts grew by 66%. For the second half of the year, we have 5 levels, including transformation and development with home and renewal technological innovation and talent, strengthening and safety enhancement and we have the confidence to maintain stability for our whole year revenue and the new newly contracts. And we are confident to achieve a rapid growth in the sixth both major growth areas in AIDC. And in terms of what improvements we can expect growth for net profit and revenue and stable growth for gross profit margin as well as improved cash flow. And here, you can see our financial performance in first half of the year. And here, you can see the key financial indicators of the company. We have continued to deepen our quality and enhancement to drive improvement in our profitability. For the subcontracting charges and material costs, we have utilized to strengthen our penetrated more product management but enhance our self-delivery rate and cost saving rates from centralized procurement. In terms of R&D expenses, we have focused on areas such as digital infrastructure and the synergy management R&D and ensure R&D delivering results. And in SG&A, we have controlled quite hardly and we have seen a decline in SG&A. In terms of direct personnel costs, we have optimized our resources allocation and enhance our operational efficiency. And the per capita wages have been quite stable. And in terms of the events management, we have -- is that the control of SG&A spend is, our operating profit margin has improved steadily. We will place greater emphasis on quality development and product quality as well as cash conversion so that our gross profit margins can recover over the medium to long term. In the first half of the year, we have seen impact on our net profit from the journal environment. And after excluding the noncomparable factors of dividend income. The change in net profit on a comparable basis is in line with the trend in revenue growth and net profit margin remained quite able. We continue to drive our quality and efficiency enhancement. And we will achieve a stabilization and recovery in full year net profit. We'll continue to manage our working capital and focus on the accounting revolts and cash flow. And we will continue to hit the philosophy of revenue with reasonable profit, our profit with net cash flow and enhance our management on project delivery, accounts receivable, cash collection and payment. And here, you can see the company's balance sheet. Our gearing ratio is very stable at a variable level. Our financial position is solid. Going forward, we will achieve to the principle of value-driven, seeking steady yet progressive growth and high-quality development coordinate high-quality development with high-level security and drive to achieve effective improvement in quality and reasonable growth in quantity to create greater value for our shareholders. And now we are very pleased to answer any questions you may have.