China Mobile Limited (941) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. Welcome to China Mobile Limited's 2020 Interim Results Briefing. To prevent the spread of COVID-19, we continue to communicate our results by way of telephone conference. We'd appreciate your understanding on this. In today's briefing, I'll first review on our overall results for the first half of 2020. Then Mr. Dong Xin, our Chief Executive Officer, will go through our operating and financial performance. Our business development environment displayed 3 characteristics in first half 2020. First, we didn't expect that the occurrence of COVID-19, not only created an enormous impact on the economy and society, but also cast a pall over our operations. However, we believe crisis and opportunity always appear at the same time. COVID-19's given rise to a surge in demand for informatization in every industry sector and created new growth opportunities for the company. Second, China's actively promoting the constructions of new infrastructure, and is undergoing further integrations of information communications technology into every aspect of the economy, society and people's livelihood. These developments have led to the further accelerations of digitalization of the economy and society. Third, competitions and cooperations from both inside and outside of the industry, alongside progressively clearer trend of industry convergence have conspired to create an increasingly complex and volatile competitive landscape, which requires us to take our operations to the next level. In the first half year, in response to complex and volatile business development environment, all employees at all levels have spent relentless efforts and the company's achieved good results. Highlights of our operating performance can be summarize in the following 7 areas: first, we took active that steps to tackle challenges and maintained stable operating results; second, we achieved remarkable strategic transformation and our growth drivers continue to gain momentum; third, we accelerated 5G development through implementation of the 5G+ plan; fourth, we turned negative into positives and seized opportunities amidst crisis, leveraging 5G to support COVID-19 prevention and control efforts; fifth, we made advanced planning and targeted investments and actively promoted the constructions of new infrastructure; six, we extended reforms to management mechanisms and systems and boost organizational vitality and inefficiency; seventh, we drove digital innovations across the board and established a world-class enterprise by building a dynamic Powerhouse. By way of reference, we provided results of key performance indicator for the first half of 2020 in this table. In the first half of 2020, we proactively tackled difficulties and challenges, working hard to seek opportunities from the crisis and turn negative into positives. Our overall operating results remained stable. Revenues from telecommunication services reached CNY 358.2 billion, up by 1.9% year-on-year. Quarter-wise, riding on the growth in the first quarter, our revenue continued to go up in the second quarter, recording an increase of 0.3 percentage points for the first quarter. Net profit amounted to CNY 55.8 billion, down by 0.5% year-on-year. Our profitability remained at a leading level amongst first-tier international operators. The company attaches great importance to shareholders' returns, and we maintain a stable dividend per share for the full year 2020, after giving over a consideration to its profitability and cash flow generation. In accordance with dividend guidance given at beginning of the year, the company will make an interim dividend payment of HKD 1.53 per share. We continue to step our efforts to drive our scale-based and value-oriented operation system and promoted the coordinated all around the development of CHBN markets. Our strategic transformations achieved remarkable results, and our growth drivers continued to gain momentum. Of the total service revenue, the proportion of revenue from home, business and new markets grew by 3.3 percentage points to 29.2%, representing growth rates of 15%. The proportion of revenue from non-traditional businesses increased by 1.4 percentage points to 16.2%, representing a growth rate of 11%. These changes reflected optimizations of revenue structure and further shifting of the revenue growth drivers. We are dedicated to taking a leading role in the development of smart home operations. Revenue from smart family value-added services reached CNY 8.05 billion, up by 28.8% year-on-year. With these development opportunities for the business market enforced the lift-up developments of Network + Cloud + DICT services. DICT revenue surged by 55.3% year-on-year to CNY 20.9 billion. We're fully implemented to 5G+ plan and kept a leading position in 5G development. On network development, as of the end of June, we've deployed and put to use 188,000 5G base stations accumulatively and provided commercialized services in over 50 cities in China. These developments have laid a solid foundations for our 5G operations. Regarding integrate innovations on new technology, we've announced a dedicated 5G network products and BAF brand-new business model, and constructed Jiutian AI platform. There are more than 160 mobile cloud products in total. For Internet of Things, OneLink and OneNET platform connections have exceeded 710 million and 170 million, respectively, and became one of the leaders in the industry. Turning to cooperations of industry players. We expanded our 5G circle of friends and lined up with over 2,100 partners through our 5G innovation center and 5G industry digital alliance. We also launched initiatives aiming at introducing RMB 10 billion ecosystem, and put forward a plan sharing the incremental revenues from selected businesses with a scale of CNY 10 billion as a way of encouraging the upgrade of the industry chain by fully unleashing the power of capital and funds. Based on our leading 5G network and ever-evolving Information Technology, in the mass market, we've launched key services, such as ultra high-definition live broadcasts, cloud-based games and cloud VR solutions. We've also carried out on-site product test on 5G messaging services. The number of 5G package customers exceeded 17 million. In the business market, we've maintained a leading position in promoting 5G downward applications in vertical markets. We delved into 15 segment industries and developed more than 100 industry-leading group-level demo projects and more than 1,400 province-level feature projects. We've proactively pursued win-win cooperation. In the first half of 2020, our parent company signed a collaborative framework agreement in relation to 5G construction and sharing with CDN. The next step, we're continuing to push forward with the cooperation plan and nail down the execution details. Since the COVID-19 outbreak, China Mobile is actively supporting and participating in COVID-19 prevention and control. We've devoted ourselves to providing reliable communications, maintain service continuity and taking comprehensive prevention and control measures. In the fight against COVID-19, we took only 36 hours to deploy and put to use 5G base stations in Leishenshan and Huoshenshan in Wuhan. We're the first operators to achieve this. We launched a thematic campaign to provide 24 hours round-the-lock customer services, and our 5G remote medical service system has widely been used in over 6,000 medical institutions nationwide. On resumptions of work and production, we're fully capitalized on 5G network advantage and provided 5G remote solutions, including cloud videos, city supercomputer big data, 5G remote education and 5G smart industry, meeting the surging customer needs resulting from resumptions of work and production during the late stage of COVID-19. Our operations, including network construction, customer development, the delivery and informatization projects and international roaming have all been hindered to various degrees during COVID-19, which drove to turn crisis into opportunity and accelerated the developments of online capabilities and feature services. Our 5G ultra high definition videos, cloud videos, remote, health care and remote education have all achieved rapid growth. We continue to make advanced planning and targeted investments and actively promoted the constructions of new infrastructure. In the first half of 2020, we spent an overall CapEx of CNY 101 billion. Major areas of investments included the constructions of a premium 5G network, cloud infrastructure and 3+3+X data centers as well as promoting smart transformations of our networks. Taking into consideration the factors such as market demand and construction costs, we are raising our target on the number of new 5G base stations for this year from 250,000 to 300,000 on the condition that our overall CapEx budget will remain basically the same as the one we guided the market at the beginning of the year. We plan to realize commercialization of 5G services into urban areas of cities at prefecture level and above, and promote the commercializations of SA core network within this year. We insist on building an organizational structure with effective coordination and continue to extend reforms to management mechanism and systems, further raising our organizational vitality and operating efficiency. For the first 5 incentives. We initiated a new route of incentives by offering 306 million share options to 9,914 backbone management members and core talents, reflecting our commitment to building the refined mid- to long-term incentive scheme that will nurture a culture of shared interest and risks. We initiated incentives projects and contracts targeting business areas such as 5G and AICDE and established the Ten-Hundred-Thousand technical expert system in order to stimulate business innovation and emerging talents from various levels of the corporate ladder. For grid operations reform, we've divided 20,200 grids across the country, we appointed 18,400 grid heads. We've also enhanced the alignment of responsibilities, authority and benefits, and optimized on inverted pyramid support structure to effectively stimulate the vitality of frontline staff. The economy and society are undergoing accelerating digital transformation and the new landscape characterized for 5 verticals and 3 horizontals have become evident. Development represents emergence of 5 key application scenarios, which are a result of rapid penetrations of information, technology in the economy and society. This specifically refers to the digitalizations of infrastructure, social governance, production, ways of working and lifestyle. The horizontals refer to the 3 common demands arisen from the digital transformation of the economy and society, namely online operations, intellectualization and cloudification. It is estimated that, by 2025, the growth of digital economy in China will reach CNY 60 trillion, and the revenue of software and information service industry will reach CNY 13.1 trillion. These [indiscernible] testament the huge market potential of the industry. Looking forward with certainty on the inevitable prosperous future of digitalization, China will want to strive for stable growth and implement a strategy of becoming a world-class enterprise by building a dynamic Powerhouse. Centering on the overarching strategy of high quality development, we will focus on transforming and upgrading our business, while devoting an ongoing effort to reform and innovate. Our emphasis will remain on implementing our 5G+ plan, forging convergence, integration and digitization across all of our operations and building capabilities, establishing collaborative relationships and infusing vitality into the organization. We'll work hard to expand our business from communication services to information services and to shift our business focus from personal mobile to the more encompassing CHBN's four growth engines: the customer, home, business and new markets. We will also adopt a new development approach, focusing on innovation-driven business transformation and upgrade instead of traditional growth driver that relied on resources. As we simulate digital innovations in networks, products, technology ecosystems in this 5G era, we're demonstrating our dedication to contributing our strength to economic and societal development, and continuously creating greater value for our shareholders. That basically concludes my part of the presentation. Now let me turn it over to Mr. Dong for operating and financial performance.

Thank you, Chairman Yang. I'm delighted to present our operating performance in the first half of 2020. In the first half of the year, we continue to scale our efforts to promote development of CHBN four growth engines in an all-around and coordinated manner and restored growth. By weight of reference, we've shown this table to revenue data of the CHBN markets. We now go through the latest developments of these 4 markets in more details. For the customer market, we actively promoted more rational industry competition. We've scaled our efforts to strengthen our network services and brand operations, striving to build differentiating competitive advantages. We have enhanced our customer management operations using cases and promoted value uplifts based on scale. In the first half of the year, our mobile customers amounted to 950 million. Although mobile ARPU decreased by 3.7% year-on-year to RMB 50.3, the decline rate was flattened from the same period last year. With a dual focus on both quantity and quality, we proactively promoted 5G development and placed a steadfast focus on tariff plans and devices. The number of 5G package customers reached 17.2 million, keeping us firmly as the market leader. Compared to numbers before migration, ARPU and DOU that 5G package customers have, on an average, moved up by 5.9% and 23%, respectively. It is expected that 5G will produce an increasingly upward value uplift impact to all customers as the number of 5G customers grows further. Turning to home market. We focus on driving customer growth by making quality enhancements to our household broadband products. Our household broadband customers reached 180 million, amongst them, Mobaihe registered a total of 130 million customers, representing a penetration rate of 72.1%. We stimulated value uplift by putting in extra efforts. So smart family operations, household broadband blended ARPU reached RMB 35.4, representing a year-on-year increase of 1%. In the first half of the year, we achieved enhancements to both customer value and scale. Revenue from the home market increased by 18.1% year-on-year to RMB 37.4 billion. Turning to the business market. We continue to enhance product R&D and service support systems of the business market, leveraging the advantages from cloud, network convergence and the leading roles of DICT services. We focus on key business areas to promote Network + Cloud + DICT services. In the first half year, revenue from the business market reached CNY 55.2 billion, up by 18.4% year-on-year. The number of corporate customers exceeded 11.29 million, up by 42.6% year-on-year. We pushed ahead of conversions of cloud and network, cloud and big data, cloud and edge, and cloud and intelligence to further enhance our resource utilizations capabilities and enrich our borderlines. Mobile cloud revenue leapt by 556.4% year-on-year to CNY 4.5 billion. In addition, in the first half of the year, IDC revenue grew by 61.4% to CNY 9.3 billion. ICT revenue increased by 37.7% to CNY 5.1 billion. For the new market, we continue to do proactively planning on expedited development of various business areas, including international business, equity investments, digital content and fintech. Our increased efforts have generated initial results. In the first half of the year, our international business grew by 26.1% year-on-year to CNY 5.7 billion. The monthly active users of the MIGU video platforms increased by 114.8% year-on-year. The number of users of video connecting tones exceeded 100 million, and the number of monthly active users of and-Wallet increased by 92.2% year-on-year. 5G is now part of a new smart era of the digital economy. Going forward, we will use the following 3 approaches expedite to integrations of 5G to every industry and every walk of life and maintain 5G leading position. First, we'll construct a premium 5G network. We speed up 5G network construction, enhanced 5G network performance and reception, and established a reputations for quality; second, we accelerate integrated innovations of new technologies, making use of unique 5G advantages in terms of network, capability and platform, will give full play to AI, IoT, cloud computing, big data and edge computing technologies, internally, enhancing our operating efficiency while externally achieving revenue uplift; third, we explore new business opportunities and operating models. For the customer market, we will make a redoubled effort on product innovation and delight our customers with our wide array of 5G products. For the business market, we strive to extend the launch of demo cases and directive to explore the setting up of a 5G dedicated network operations system and the new business model, and pave the way for diversifications of revenue stream and industry ecologicalization. Following our strategy of becoming a world-class enterprise by building a dynamic Powerhouse, we'll continue to promote digital innovation and achieve high-quality development. We continue to promote digital innovation and achieve high-quality growth and work hard to achieve our targets of maintaining growth in service revenue and stable net profit. By way of reference, we've listed our major full year targets of our businesses on this PPT slide. Now I'd like to talk about the financial performance in the first half 2020. In the first half of 2020, we continue to pursue transformation and developments with revenue realizing positive grow. Revenue from telecommunication services grew 1.9% year-on-year to CNY 358.2 billion. Revenue from sales of products down by 16.8% to CNY 31.6 billion, mainly due to the decline in sales in handsets resulting from COVID-19. Although we continue to strengthen cost management, we have appropriately increased our investments to support future transformation. Operating expenses increased by 0.3%. Interest and other incomes decreased by 6.3% year-on-year as a result of the decline in market interest rates. So the investments of associates, SPD Bank and China Tower, was both positive contributions to our return. Income from investments accounted for using the equity method reached CNY 6 billion. Therefore, our net profit decrease by 0.5% year-on-year to CNY 55.8 billion. Our profitability continue to stay at a leading level amongst first-tier international operators. In terms of breakdown of revenue growth by business, as shown in the financial statements, the increase in telecommunciations services revenues were 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 6.5 billion, CNY 3.5 billion and CNY 6.6 billion, respectively. Voice services, SMS and MMS revenue recorded a continuous downturn. As for breakdown of revenue contributions by CHBN four growth engines, the incremental revenue contributions from home market and business market reached CNY 5.8 billion, and CNY 8.6 billion, respectively. However, the revenue contributions from customer market and new market declined. Turning over to our enhancement to business structure and accelerating momentum shift, we've consolidated the customer market and actively put strength in efforts to expand the home market, business market and new market. Our ongoing efforts promote low-cost and high-efficiency operations uphold the principle of all costs controllable and adhere to control, total cost and lower unit costs have achieved positive results. In respect to updated cost structure, network operations and support expenses increased by 10.9% to CNY 108.8 billion. The increase was mainly due to the rapid increase in electricity expenses, resulting from the expansions of 5G network and data centers as well as increased investments to address the company's accelerating transformation as that relates to the smart family, DICT and construction of smart mid-end platforms. Depreciation and amortization dropped by 5.3% to CNY 86.6 billion. After excluding the impact of the revisions of the depreciable life of 4G wireless assets, depreciation and monetization grew by 6.1% on a comparable basis year-on-year. Employee benefits and related expenses increased by 8.8% to CNY 49.1 billion because we moderately enhanced our incentive scheme for attracting talents in the fields of 5G and AICDE research and development, business and new markets. On the leasing fee of Tower, we leased an additions of 10,000 new macro cell towers in the first half of 2020. Our leasing fees on a comparable basis went up by 7.3% year-on-year to CNY 21.8 billion. We further optimized surface resources of existing towers, classifying and coordinating constructions using the most economical approach. Tower leasing fee is expected to be controlled at about CNY 45 billion in 2020. Full year selling expenses, we promoted marketing transformation in order to strengthen the centralized online measurement system and raised resource utilization efficiency. Selling expenses decreased by 8.7% to CNY 31.4 billion. For the full year projection, these expenses will remain stable with expenses-to-revenue ratio will remain the lowest in the interest rate. The company's cash flow remains to be healthy. In the first half of 2020, EBITDA decreased by 3.6% to CNY 145.7 billion. Free cash flow increased by 44.1% to CNY 59 billion, mainly because of the increase in the net operating cash inflow. Our capital structure maintained solid in corporate credit ratings are equivalent to China sovereign ratings, which obtained recognitions from the credit ratings agencies and will build the solid foundations to respond to changes of the market competition and future development. This is the end of our presentation and analysis on our 2020 interim results. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]