China Mobile Limited (941) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. Welcome to China Mobile Limited's 2019 Annual Results Presentation Briefing. We are now in a very special period under the impact of COVID-19 pandemic. And we are communicating our results by way of telephone conference this time. It seems that it's our first time to use this method to conduct analyst briefing since establishment of the company. It is a pity that we're not able to meet many of our old friends face-to-face this time. We'll make sure the briefing runs smoothly today, and we would appreciate your understanding on this. In today's presentation, I'll first give you an overview of our overall results and operating performance for 2019. Then Mr. Dong, our Vice President, will talk about our financial performance. Our major achievements in 2019 included the following 6 areas: First, we proactively overcame headwinds and obtained positive momentum in operating results. Second, we continuously drove business transformation and upgrade and so our value-driven operating practices generate initial results. Third, we focused on advance planning and targeted investments and steadfastly strengthened our basic capabilities. Fourth, we forged ahead with the 5G+ plan. We're happy to see that our 5G development achieved a very good start. Fifth, we further enhanced our management competence and achieve breakthroughs in reforms and innovation. Sixth, we strove to become world class by building a dynamic powerhouse and continuously creating value for shareholders. By way of reference, we have provided results of key performance indicators for 2019 in this table. I'll now elaborate on the numbers. We were confronted with a number of challenges in 2019, including the rapidly diminishing data traffic upside and ever-intensifying market competition. Coupled with this was the impact of the continued implementation of the speed upgrade and tariff reduction policy and the cost pressure arising from business transformation. However difficult these challenges might seem, we proactively overcame them and achieved positive momentum in operating results. In terms of customer acquisition, we put a special focus on customers and accelerated progress of integrated business development. We saw a continuous expansion of customer base. Mobile customers amounted to 950 million following a net add of around 25 million. Household customers total around 172 million after recording a net debt of around 25 million. Corporate customers amounted to 10.28 million, following a net debt of 3.1 million. IoT recorded a net debt of around 330 million customers, recording a total of 884 million. Turning to revenue. We make steadfast efforts to develop our 4 growth engines at full strength and continuously adjusted our business structure and practices. Our efforts brought fruit and realized a V-shaped rebound in revenue. As mentioned in our interim results presentation last time, our service revenue for the first half of the year recorded negative growth of 1.3%. In the second half of the year, service revenue increased by 2.6% year-on-year. On a full year basis, service revenue amounted to CNY 674.4 billion, representing an increase of 0.5% from 2018. The growth rate has returned to the positive territory. Returning to profit. We scaled up efforts to boost revenues and reduced costs besides launching measures to raise quality and efficiency. Although net profit went down by 9.5% year-on-year to CNY 106.6 billion, the rate of decline has significantly moderated from that of the first half and is now a single-digit figure. As mentioned in our interim results presentation last time, our net profit for the first half of the year was down by 14.6%. Our profitability continued to stay at the leading level amongst first tier international operators. On the strength of our scale advantage, we began to establish a value-driven operating system, focusing on the 3 elements of convergence, integration and digitization. We've seen positive initial results from this business transformation and upgrade. We have further optimized our revenue structure. The aggregate revenue from the home, business and new markets grew by CNY 21.2 billion, representing a growth rate of 13%. Aggregate revenue contribution from these 3 markets to overall service revenue also went up by 3 percentage points. Our new driving forces continue to gain traction with the ICT revenue going up by 48.3% to CNY 26.1 billion and international business revenue going up by 31.4% to CNY 9.5 billion. We also redoubled efforts to promote integrated development with full business bundling rate increasing by 33 percentage points to nearly 82.7%. At the same time, we've accelerated channel integration and built centralized operating platforms and smart mid-end platforms. Thanks to these endeavors, our customers and corporate values continue to edge up and we've remarkably strengthened our smart operations capabilities. We continue to put a strong emphasis on advance planning and targeted investment. We've taken a range of measures to continuously enhance investment efficiency and maintained our network-leading position. In 2019, we spent a total CapEx of CNY 165.9 billion, down by 0.7% from last year. We continue to refine our investment structure and strategically prioritize uses of resources mainly for building of 5G first-mover advantages, supporting 4G data traffic growth, promoting cloud-based networks and strengthening IT support. We plan to spend a total CapEx of CNY 179.8 billion for 2020. This would mean the growth rate of not more than 8.4% compared to the previous year. Out of this total CapEx budget, around CNY 100 billion will be 5G-related. CapEx will be spent mainly for building out a leading 5G network, constructing a cloud-based, strategic infrastructure and developing the CHBN 4 growth engines. We will strictly control this scale of investment, rationally deploy resources and make targeted case-specific construction. Our aims are to maintain the leading market position and strive to continuously increase efficiency of use of resources. We've been forging ahead with our 5G+ plan since June 2019, when we were granted the 5G license. Our efforts have delivered remarkable results. We continue to formulate toward coordinated development of 5G and 4G. We constructed and began operating more than 50,000 5G base stations and launched 5G commercial services in 50 cities. We have simulated AICDE technologies into 5G and developed more than 200 critical capabilities, in addition to making breakthroughs in over 100 5G joint projects. In terms of 5G+Eco, we aim to develop the ecosystem with other industry players. Through our 5G Innovation Centre and 5G Industry Digital Alliance, we attracted more than 1,900 partners. We also guided manufacturers to launch 32 5G devices. For the industry chain, we've done extensive work to promote a majority of 2.6 gigahertz, which now basically become same as that of 3.5 gigahertz. We expanded 5G+X and promoted wider applications of 5G by launching exclusive 5G packages and feature services, in addition to implementing various 5G+ cloud plus IDC industry application demo projects. Leveraging our forward-looking deployment plans and highly efficient execution we managed to build partnerships with a plethora of industries and constructively penetrate 5G services into different use cases. We're also proactively serving the mass market. We are pleased to see that our 5G development achieved a good start. Turning to the mass market. The number of 5G package customers amounted to 2.55 million in 2019. As of February 2020, the number of 5G package customers exceeded 15 million. Compared with the numbers before migration, ARPU and DOU of 5G customers has increased by 6.5% and 16.8%, respectively. Judging from these numbers, it is expected that advancements of 5G will provide us with new development upside. In terms of vertical sector, we have deep dived into 100 classic manufacturing scenarios and actively extending our footprints in a range of industries to develop our leadership in 5G smart manufacturing, 5G remote medical services and 5G automate mining amongst other industry applications demos. As 5G fully assimilates into AICDE capabilities and applications, it will propel our more pronounced multiply impact on an array of industries. Capabilities, collaborations and organizational vitality form the strong foundation for us to forge full-blown reforms. In this aspect with better progress in establishing a synergistic and efficient operating system across the organization. We further optimized our operating system to support market, corporate business and network operations. And proceeded with a number of reforms, including cloud-ifications of corporate services, development of smart home business, constructions of smart mid-end platforms and accelerations of business internationalization. We've also carried out our initiative to streamline operating mechanisms. At the same time, we initiated a new round of our share option scheme. Further, the implementation of the Double-hundred Action, took solid steps to build innovation and entrepreneurship demo centers and proactively explored and promoted great operations. These measures have effectively infused vitality into the company. As always, we pay attentions to both shareholders' issues and the company's future development. We strive to create better returns for our shareholders and share with them the fruits of our success while also securing shareholders' value and company's development in the longer term. The Board recommends a final dividend payment of HKD 1.723 per share for the year of 2019. Together with the interim dividend payment of HKD 1.527 per share, the total dividend payment for the 2019 financial year amounted to HKD 3.25 per share. The company attaches great importance to shareholders' returns and we maintain a stable dividend per share for the full year 2020, also giving overall consideration to its profitability and cash flow generation. Looking into 2020. We'll gear staff's efforts to work with a plethora of industry sectors and serve the mass market with a special focus on 5G. We'll continue to take a systematic approach to planning and steadily implementing our 5G+ plan. We'll speed up technology, network, application, operations and ecosystems upgrades, accelerate industry transformation by converging technologies, integrate data to strengthen information transmission in society, and introduce digitalized management to build the foundation for digital society development. By doing so, we will see more extensive 5G deployment, covering more sectors and creating greater efficiency and social value. We are now entering into a critical stage of business transformation and upgrade. We uphold our strategy of becoming world-class enterprise by building a dynamic powerhouse. We'll serve as a major force in the development of China as a cyber power, digital nation and smart society. Centered around our objective for high-quality growth, we will focus on business transformation and upgrade, while giving impetus to reform and innovation. We place emphasis on implementing our 5G+ plans, while forging conversions, integration and digitization across our operations and building capabilities, establishing collaboration and infusing vitality in the organization. In 2020, we strive to overcome the first impact of the COVID-19 outbreak on business development and 5G network construction. The epidemic has bolstered the growing demand of businesses and customers going online and using more digital and cloud-based services amongst other opportunities arisen. We'll leverage the 5G network to develop the information and communication service market. With concerted effort, we'll strive to maintain growth in such revenue and steady net profit. We'll also strive to maintain an industry-leading customer satisfaction. We'll also make great strides towards becoming a top-tier global telecommunications operator and continuously create greater value for our shareholders. Now I'd like to talk about the operating performance in 2019. In 2019, we continue to scale up efforts to promote a holistic development of the CHBN 4 growth engines, namely the customer, home, business and new markets in an all-round and coordinated manner. Our business development maintained good momentum overall. By way of reference, we've shown in this table, the revenue data of CHBN markets. I'll now talk about the latest development of these 4 markets in more details. Considering the rapid growth in data demand and squeeze data value in the customer market, we responded by further converging data access, applications and customer benefits in our operations. We obtained solid growth in customers and further strengthened our revenue base. 4G customers numbered 758 million with a penetration rate increasing to 79.8%, of which the number of VoLTE customers reached 521 million. We've also maintained an industry-leading mobile ARPU of CNY 49.1. We've spent great efforts to build out the 5G market. Focusing on customers. We've refined our 5G tariff structure and increased use value. We also launched the 5G personal applications and feature services such as ultra-high definition videos, cloud-based games and full-screen video connecting tones. It is pleasing to see that the number of 5G package customers recorded accelerated increases month-on-month. Turning to the home market. We focused on scale expansion, brand-building, ecology cultivation and value uplift and topped up efforts to develop multifamily business, resulting in robust growth momentum. Revenue from the home market increased by 27.5% to CNY 69.3 billion. We continue to encourage our customers to upgrade to mid- to high bandwidth products. As a result, 88.1% of our customers have subscribed to products with bandwidth of 100 megabytes, an increase of 21.1 percentage points from 2018 year-end. We've also enriched household content applications with penetration rates of set-top box, Mobaihe, reaching 70.9%. Household broadband blended ARPU grew by 2.7% to 35.3%. We've made every endeavors to construct smart family ecosystem. We have taken steps to expand the scales of various businesses, such as Mobaihe, smart home network deployment and family cloud, thus measuring new forces for the sustainable growth of the home market in future. The business market is a new revenue growth engine and a major driver of business transformation and upgrade. We strove to nurture new growth points by fully leveraging our cloud and network convergence advantages and building on our DICT capabilities, placing a focus on key industries. Coupled with our efforts to promote network plus cloud plus DICT smart services, both customers and revenue managed to realize rapid growth. Revenue from the business market increased by 10.4% to CNY 89.8 billion. The number of corporate customers increased by 43.2% year-on-year to more than 10 million. As to our key products, Mobile Cloud revenue grew by 59.3% to CNY 2 billion. IDC revenue rose by 46.8% to CNY 10.5 billion. IoT revenue increased by 17.5% to CNY 8.8 billion. ICT revenue grew by 163.5% to CNY 6.7 billion. In the new market, we continue to grow our 4 new areas: international business, equity investment, digital content and fintech. Our increased efforts has generated initial results. In 2019, our international business gained traction with year-on-year revenue growth of 31.4%, centering on the principles of value contribution, ecosystem formation and sector synergy with increased efforts to pursue equity investment and income from equity investments contributed 11.9% to our net profit. Monthly active users for MIGU Video and core functions of and-Wallet increased by 46.4% and 58.9% year-on-year, respectively. Facing a more homogeneous market where industry operators offer similar products and services. We endeavor to establish differentiated competitive edges. Our efforts have achieved visible results. First, we've progressively upgraded and drove returns of our 3 classic brands of GoTone, M-Zone and Easyown, each carrying a new brand story of their own, combined with the 5G feature services, these revamped brands are able to better satisfy customers' personalized needs with the new content and new customer benefits. Our relentless efforts also received wide recognitions from customers in all sectors of society. We won the Top 10 model brands of the year award at the 2019 Chinese Brand Power Grand Ceremony organized by the China Media Group. Second, we continue to drive transformation of sales and marketing practices. By encouraging wider use of the Internet, promoting electronic channels and exploring grid operations, we strengthen touch point operations and increased our ability to perform precision marketing. We also managed to infuse vitality into our base layers. At the same time, we proactively explored new channels to open new channels for business development so as to further mitigate operating risks. Third, we are committed to gaining market leadership in all 3 areas of networks, products and services. This was achieved by 3 ways. First, we made constant service improvements, especially in 4G networks, VoLTE service and household broadband installation and maintenance. These efforts have resulted in continuous enhancement to customer's experience. Second, we encouraged more products innovations. We listen to customer needs and then reached our product offerings. Our special services has also been placed on product planning for new growth areas. Third, we strengthened end-to-end customer services to more precisely answer customers' needs, leading to continuous improvements in service level. Looking into 2020, we will leverage our scale advantage and continue to foster value-oriented operating practices. We'll promote a holistic development of the CHBN 4 growth engines in a converged, integrated and coordinated manner. Collectively, we'll create a new blue sea for 5G. By way of reference, we list our targets of the 4 markets in 2020 on this PowerPoint slide. That basically concludes my part of the presentation. Now let me turn it over to Mr. Dong for financial performance.

Thank you, Chairman Yang. I'm delighted to present our 2019 annual financial results to you. In 2019, we continue to pursue transformational development with revenue realizing positive growth. Revenue from telecommunication services grew by 0.5% to CNY 674.4 billion. Revenue from sales of products increased by 8.5% to CNY 71.5 billion mainly due to the growth of sales in ICT equipment, IoT and smart products. Although we continue to strengthen cost management, we have appropriately increased our investments in supporting future transformation. The operating expenses increased by 2.8%. Interest and other income dropped by 2% year-on-year as a result of the declines in market interest rates. For the investments of associates, SPD Bank and China Tower also brought positive contributions to our return. In 2019, income from investments accounted for using the equity method reached CNY 12.8 billion decreased by 8.8% mainly due to the one-off gain resulting from the public listing of China Tower in 2018. Therefore, our net profit decreased by 9.5% to CNY 106.6 billion, with net profit margin of 14.3% in 2019. Our profitability continued to stay the leading level amongst first tier international operators. In terms of revenue growth, breakdown of business, the increase in telecommunication services revenue was mainly due to the growth of wireless data traffic, wireline broadband and applications and information services, of which the incremental revenue contributions from wireless data traffic, wireline broadband and applications and information services amounted to CNY 1.7 billion, CNY 14.6 billion and CNY 6.8 billion, respectively. Voice services revenue recorded a continuous downturn. From the revenue contributions of CHBN 4 growth engines, the incremental revenue contributions from home market and business market reached CNY 14.9 billion and CNY 8.4 billion, respectively. However, the revenue contributions from cost to market and new market declined. To promote enhancement to business structure and accelerate momentum shift, we consolidated customer market and actively strengthened efforts to expand the home market, business market and new market. We've applied a new accounting standard on leases starting 1st of January 2019, and there was a certain impact on cost structure. Please refer to Appendix 1 for details. Additionally, to better reflect core structure, we've optimized the presentation of operating expenses. The comparative information has been reclassified, making it consistent with that of the current year. Please refer to Appendix 3 for details. We will continue to promote low-cost and high-efficiency operations and uphold the principle of all costs are controllable. Our overall thinking of insisting on controlling total costs and lowering unit costs achieved positive results. In respect of the core structure, network operation and support expenses decreased by 12.1% to CNY 175.8 billion, which remained more or less the same as last year after excluding the impacts of the new accounting standard on leases, of which tower leasing fees on the previous basis was CNY 41.5 billion, up by 6.5%. Depreciation and amortization grew by 18.6% to CNY 182.8 billion. Also excluding the impact of the new accounting standard on leases, depreciation and amortization grew by 3.8% on the comparable basis year-on-year. We further promoted marketing transformation in order to facilitate convergence of online and off-line businesses and raise efficiencies in resource utilization. As a result, selling expenses dropped by 12.5% to CNY 52.8 billion. Other operating expenses rose by 13.4%. On one hand, we took efforts to raise assets quality, the scale of asset retirements and write-off increased accordingly. On the other hand, we further increased investments in R&D to promote innovation development. We promoted transformation and development. We further drove low-cost and high-efficiency operations by optimizing resource allocation and adhering to the principle of support, squeeze and control. In 2019, business cost per unit improved continuously. The average maintenance expense per base station decreased by 14.8%. The average electricity expenses per frequency network decreased by 1.4%. The average selling expenses per customer decreased by 15.4%. The company's cash flow remain to be healthy. In 2019, EBITDA increased by 7.4% to CNY 296 billion. Also excluding the impact of the new accounting standard on leases, EBITDA decreased by 1.6%. Free cash flow was CNY 81.7 billion. After excluding the impact of the new accounting standard on leases, the free cash flow increased by 52.4% to CNY 59.5 billion mainly because of an increase in the net operating cash inflow. Our capital structure maintained solid and corporate credit ratings are equivalent to China sovereign ratings, which obtained recognitions from credit rating agencies and built a solid foundation to respond to the changes of the market composition and future development. This is the end of our presentation and analysis on our 2019 annual results. [Statements in English on this transcript were spoken by an interpreter present on the live call.]