China Tower Corporation Limited (788) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. Welcome to China Tower's 2020 Annual Results Announcement. As the COVID-19 pandemic is still raging, our announcement can only be held by means of a conference call. Thank you for your support to China Tower. It's our pleasure to have you here. Now I would like to introduce the management attending today's results briefing: Our Executive Director and General Manager; Mr. Gu, Xiaomin; Chief Accountant, Mr. Gao, Chunlei; Deputy General Manager, Mr. Liu, Guofeng; and Deputy General Manager, Mr. Zhang, Quan. Today's results announcement covers 3 parts. First, I will briefly introduce the company's overall performance for the year 2020. Then Mr. Gu, Xiaomin and Mr. Gao, Chunlei will introduce the operational and financial performance, respectively. At the end, we will have a Q&A session. This slide shows the key financial indicators of the company in 2020. We will explain in details accordingly. In 2020, we proactively coped with the challenges posed by the outbreak of COVID-19 pandemic to the operational and management of the company. In view of the mast construction of 5G network and the pressure on promoting cost efficiency within telecom industry, we furthered resource sharing to promote quality and efficiency enhancement. Overall, the company has achieved stable operating performance with improving operation efficiency. In 2020, the company's operating revenue achieved stable growth to RMB 81.1 billion, up by 6.1% over the last year. Meanwhile, profitability increased rapidly with a net profit of RMB 6.43 billion, representing a year-on-year increase of 23.1%. The company has focused on its One Core and Two Wings strategy by leveraging its advantages of resources and strengths. The company adhered to its resource sharing philosophy and consistently improved its performance in customer service, operation and management to implement One Core and Two Wings strategy in a stable and sustainable way. Our TSP business grew steadily over the year. Its revenue increased by 3.8% year-on-year to RMB 76.9 billion, accounted for 94.8% of our operating revenue. Meanwhile, our Two Wings business achieved rapid and scaled development, recording a revenue of RMB 3.94 billion, which accounted for 4.9% of our operating revenue, while the same for last year was only 2.7%. In 2020, in view of the scaling up of 5G construction, we strengthened resource sharing by making full use of both existing sites and social resources and innovated product solutions to promote large-scale 5G construction at low cost. These enabled us to support TPS (sic) [ TSPs ] rapid 5G network deployment in an efficient way. As at the end of December in 2020, the company had received 770,00 5G construction demand, among which over 97% was satisfied by sharing of existing sites. The company stepped up its effort to foster its capabilities for expanding Two Wings business. Focusing on core products and key sectors, we aimed to create differentiated development advantages. For TSSAI business, we focused on key sectors and leveraged our site resources across the country to further social resource sharing. We developed integrated operations platform as well as information applications in products to provide resource sharing and data information services to clients in key sectors relating to national economy and people's livelihoods, such as forestry, water resources, environmental protection and et cetera. The business achieved rapid development in scale. With regard to the energy operation business, the company focused on key business segments, such as battery exchange and power backup and enhanced support to products and operations to accelerate its roll-out in major cities and regions across the country. We have become the industry leader in battery exchange business. In 2020, the Two Wings business maintained good development momentum with a revenue growth of 89.4% year-on-year, showing a consistent strong growth. Revenue growth contribution from the Two Wings business increased rapidly from 18.6% in 2019 to 39.8% in 2020. The Two Wings business has become an important driver for revenue growth and is playing an increasing important role in contributing to the company's profits. The company continued to enhance and develop its core competitive advantages, and thus further strengthened its capability for sustainable development. In-depth implementation of resource sharing. We continued to deepen resource sharing within the industry to create a win-win situation with customers. We also expedited the sharing of telecommunication towers and social poles to increase the value of resource sharing. Enhanced resources, collaboration and integration capabilities. With over 2 million tower sites, we enjoy a well-established market position with abundant social resources reserved. This laid a solid foundation for leveraging our advantages of coordinating resources and intensive construction. Strong government and favorable policy support. As for now, most local governments have provided us with access to more public resources and launched favorable policies to support 5G network construction. By proactively converting policy benefits to our own development advantages, the company is well recognized as a strategic coordinator in the telecommunications infrastructure construction industry. Improved innovation capability for future development. The company proactively developed and promoted low-cost and high efficiency 5G construction solutions to achieve a win-win situation for all parties. We also enhanced products innovation for the 5G and the Two Wings business to satisfying customers' differentiated demand. Centering on improving efficiency, the company continued to enhance its management foundation to support sustainable development in a superior way. Promoted platform operations. The company upheld the intensive and efficient operation. With the unified nationwide energy service operation platform and the accelerated development of a centralized and unified video surveillance platform for TSSAI business, the company is forming its new platform, Operations Model. Meanwhile, by strengthening integrated operational IT support, leveraging and advantages in managing priming platforms and enhancing supporting capacity to platforms of various businesses, our operation efficiency continued to improve. Improved the level of delicate management. The company promoted full and efficient utilization of resources through stringent control of overall cost. We also kept on optimizing the assessment system and incentive mechanism to boost corporate vitality. By improving our management of the digitalized operations, the company's efficiency was further enhanced. Reinforced risk management. The company strengthened risk management in view of the asset demolition and damage risk that might caused by urban renewal and site integration. We also improved the compliance system and internal control management system and strengthened all-round and regular audit supervision to promote stable development. The company places great importance on shareholder returns and adopts a proactive dividend policy. The Board of Directors recommends payment of a final dividend of RMB 0.02235 pretax per share, equivalent to a payout ratio of 68% of our annual distributable net profit. In the future, we will strive to enhance the company's profitability and improve shareholder returns. As 5G deployment enters the stage of large-scale construction, the digital transformation of the whole society is accelerating. The wide application of technologies such as Big Data, AI and new energy will be the main driving forces to promote industrial transformation and upgrading. Therefore, the company has an ample room for future development. Moreover, the company enjoys unique resource advantage and platform operation and innovation capabilities derived from iterations over time. In the future, the company will fully leverage these comparative advantages and seize growth opportunities to explore scope of development and to achieve economies of scale. Going forward, we will further implement the One Core and Two Wings strategy, adhere to resource sharing and efficiency improvement and consolidate the strategic dominant status of TSP business to promote high quality and sustainable development. As our Two Wings business, we will further unleash its potential and explore new markets to achieve large-scale development. Looking ahead, the company will strive to develop itself into an enterprise with the best potential for growth and value creation among the international peers. For 2021, we expect to maintain a steady operating revenue growth with a stable development on TSP business and substantive growth on the Two Wings business. Based on the management of investment and cost, investment scale will be effectively controlled and the percentage of operating expenses to operating revenue will continue to decrease. Moreover, the level of cash flow shall improve steadily with increasing profitability. With the improvement on profit, the company will continue to create greater value for our shareholders. Now please welcome our Executive Director and General Manager, Mr. Gu, Xiaomin, to introduce our 2020 operating performance in more details.

Thank you Chairman, Tom. Now I would like to report to you the company's operating performance in 2020 and major business strategies in 2021. This table shows the revenue and changes of the company's various business segments as well as key performance indicators. I will explain them in detail. Based on the steady development of our TSP business, the company further implemented One Core and Two Wings strategy to develop multiple businesses to support operating revenue growth. In 2020, the company's operating revenue increased by RMB 4.67 billion or 6.1% year-on-year. A breakdown of the revenue growth by business segment shows that non-tower businesses, including DAS and Two Wings businesses, contributed significantly to the growth in the total operating revenue, accounting for 57.9% of the increase, and thus boosting the total revenue growth contribution by 3.5 percentage points. Now I would like to explain the development of our major business segments in detail. In 2020, the company further enhanced resource sharing by utilizing existing resources and social resources. This enhanced the company's core competitive advantages of low cost, high efficiency and quality service. As a result, the company was able to meet customer needs while maintaining stable growth in its TSP business. The Tower business maintained stable growth and its revenue increased by 2.8% to RMB 73.37 billion. As at 31st December 2020, the total number of TSP tenants was 3.175 million, representing a net increase of 112 million tenants from the end of 2019. TSP tenancy ratio reached 1.57, showing a steady improvement in site co-location rates. Facing a massive construction of the 5G infrastructure, the company gave full play to its advantage in resource coordination, push forward sharing within the industry and sped up innovation to drive development. All this expedited the 5G network deployment economically and efficiently with the transformation of construction load regarding customers' needs. The company realized the potential of its existing towers and gave full play to its capability to coordinate social resources. It was able to innovate economical models of towers according to specific requirements in different scenarios so as to satisfy customer needs economically and efficiently. The company ceaselessly innovated products and modes of services to keep up with the evolution of 5G telecommunications, technology and fit-in with telecommunications, service providers, strategies for network deployment. It also expedited the development of such innovative solutions, including the construction of 5G, power supply, infrastructure, the passive DAS, energy saving and no-emission solutions and innovative towers and masts. All these formed a comprehensive 5G solution which expedited the massive 5G network deployment at lower cost. For DAS business, the company relied on its advantage in coordinating site entry and focused on major business scenarios, such as high-speed railways, subways, large venues and commercial complexes. It also strengthened its resource allocation to leverage passive DAS business' advantage of low cost to provide customers with differentiated indoor network coverage solutions. The scale of DAS business kept on expanding. As at 31st December 2020, the additional DAS coverage in buildings totaled 1.49 billion square meters. We also covered subways and high-speed railways tunnels with an additional coverage of approximately 2,511 kilometers and 1,503 kilometers, respectively. Revenue from our DAS business increased by 32.7% to RMB 3.53 billion in 2020. For TSSAI business, the company took full advantage of the booming social digitalization. Focusing on key clients in important sectors relating to national economy and people's livelihoods, such as forestry, water resources, environmental protection and lands, we proactively promoted external corporation, optimized product portfolio, strengthened platform operations and information service capability to serve high-quality growth of TSSAI business. As at 31st December 2020, the TSSAI business tenants reached 186,000 and the operating revenue grew by 59.2% to RMB 3.004 billion. The company seized the opportunities in digital economy and social information service and sped up the transformation from providing site resource service to integrated information service. Based on our advantages on widespread telecommunication towers and cabinets across the country, we will make use of technologies such as Big Data, Cloud Computing, IoT and AI to continuously increase our capability in information processing. The company also accelerated the development of digital tower operations and supporting platform, focusing on developing visual tower products by leveraging the ubiquitous citing of our telecommunications tower to provide natural advantages for mid- and high-level surveillance business. The company played an important role in the national economy and people's livelihoods as well as social informatization. By the end of 2020, we formed extensive collaborations with external parties to explore new business opportunities. In terms of the TSSAI business, we established strategic collaborations with a range of governmental organization, including the Ministry of Agriculture and Rural Affairs, the Ministry of Water Resources, the China Earthquake Administration, China Meteorological Administration and the National Forestry and Grassland Administration. By doing so, we helped enhance governance systems across society and support the development of digital economy. For energy operation business, the company gave full play to its strength in sharing and collaboration so as to meet the massive demand for battery exchange and power backup in key business areas. It promoted product's and platform's advantages so as to develop competitive advantages of low-cost and product differentiation, thus forming new growth drivers. The energy operation business recorded a revenue of RMB 940 million, achieving considerable breakthrough of scale. For the battery exchange business, facing the growing low-speed vehicles' battery exchange demand, we accelerated building service network and enhanced large scale development. As at 31st December 2020, the company had already built a cumulative total of 24,000 battery exchange sites, operated the battery exchange business on a considerable scale in major cities of China and have thus established its industry leadership. Our battery exchange business has cumulated over 300,000 paid users and became a market leader in China. In terms of power backup business, we developed our product portfolio and strengthened platform support to satisfy power backup demands under various scenarios. We also strengthened the cooperation with commercial banks, medical institutions, transportation departments and petroleum and petrochemical companies to promote integrated power supply and backup solutions. The scale of power backup business was therefore expanded. 2021 marks the beginning of the company with regards to China's 14th Five-Year plan, and it's also important for the company to achieve high-quality development. The company's major business strategies are: For Tower business, the company will adhere to sharing and collaborative development to promote steady revenue growth of the tower business. It will also further its profit-oriented strategy to maintain rapid growth of the DAS business. For Two Wings business, the company will strengthen product support to promote market expansion of the TSSAI business. It will also optimize the development model to boost rapid growth of the energy operation business. Regarding business operation and management, the company will enhance asset operations and promote risk management on asset loss to consistently improve profitability. The company also encourages innovative development and seeks breakthroughs in the innovation of technology, business management as well as systems and mechanisms to boost corporate vitality. Now I would like to hand over to our Chief Accountant, Mr. Gao, Chunlei. He will introduce the company's financial performance.

Thank you, Mr. Gu. Now I would like to introduce the company's financial performance in 2020. The key financial indicators of the company are listed in this table. In 2020, the company remained strong financial performance and achieved steady revenue growth, rapid profitability increase and adequate cash flow. In 2020, the company continued to improve its cost management system based on individual site audit. We normalized individual site benchmarking analysis in our daily operations to promote the precise control of construction and operating costs. Meanwhile, the input/output level of individual sites continued to improve. In terms of construction cost, the company stepped up the construction cost control of individual sites and promoted integrated coverage solutions by enhancing resource sharing and precise allocation of site resources. This led to a 2.1% decrease in the construction cost of individual site over the last year. In terms of site operating lease charges, the company strived to acquire site resources at low cost to improve site efficiency. We also effectively controlled the site operating lease charges of contract renewed sites. As a result, the site operating lease charges of individual sites decreased by 1.5%. In terms of repair and maintenance expenses, we actively took forward the digital management of repair and maintenance projects, which led to a 5.5% year-on-year drop in repair and maintenance expenses on individual sites. In 2020, the company's operating expenses increased by 6.0% over the last year, of which depreciation and amortization were RMB 47.52 billion, representing an increase of 4.6% year-on-year, accounted for 58.6% of the operating revenue, representing a decrease from 59.4% last year. Repairs and maintenance expenses were RMB 5.81 billion, down by 3.1% over the last year. Its capability on providing quality service at low cost has been further enhanced. Employee benefits and expenses amounted to RMB 6.12 billion, up by 4.3% over the last year, including the reverse of RMB 130 million related to the cost of the first phase restricted shares amortized in 2019. The company recruited professional talents for development of 5G and Two Wings business in order to support the development of the Two Wings business. Meanwhile, we further reinforced the market-oriented remuneration incentives for the Two Wings companies and thus, employee benefits and expenses increased accordingly. Other operating expenses were RMB 9.65 billion, up by RMB 1.78 billion over the last year. Due to rapid business growth, marketing expenses for the Two Wings business increased by RMB 893 million over the last year. Site operation and supporting expenses, including IT service expenses, site planning expenses and short-term site lease charges recognized in accordance with the accounting standards on leases, increased by RMB 647 million over the last year. Benefiting from the company's multichannel fundraising with low costs while enhancing centralized fund management, our capital efficiency continued to improve. In 2020, the company's net finance cost decreased by 14.7% over the last year. Company's profitability improved rapidly on the back of the stable operating revenue growth and effective cost control. In 2020, the company's operating profit increased by 6.5% year-on-year to RMB 12.01 billion. Excluding the impact of the adoption of IFRS 16, the operating profit increased by 8.3% year-on-year. Our EBITDA rose by 5.0% over the last year to RMB 59.53 billion with an EBITDA margin of 73.4%. Excluding the impact of the adoption of IFRS 16, the EBITDA margin increased by 0.4 percentage point to 58.3% compared to that of last year. In 2020, the company's net profit grew by 23.1% to RMB 6.43 billion. Net profit margin rose by 1.1 percentage points to 7.9%, showing a rapid improvement in profitability. In 2020, we proactively supported the TSPs on their large-scale network deployment and promoted the rapid roll-out of the Two Wings business. Our CapEx amounted to RMB 37.12 billion, which is higher than our expectation at the beginning of the year. The overall CapEx structure was in line with our business development, of which the company fully supported TSP's network construction. During the year, we built 200,000 extra sites and the demand for 4G increased by more than 50% compared with the plan. At the same time, we increased investment in strategic projects relating to high-speed railways and subways. Therefore, the overall investment scale was higher than our expectation at the beginning of the year. The capital expenditure on the construction of new sites and renovation of existing sites reached RMB 25.92 billion, with its proportion to the total CapEx remained at a similar level of the previous year. Meanwhile, we further promoted the rapid expansion of our Two Wings business, which resulted in an increase in related investment. In 2020, its CapEx reached RMB 3.37 billion, and its proportion to the total CapEx rose from 3.2% in the previous year to 9.1%. By strengthening asset operation, management and accurately carrying out renovation for equipment and facilities, the site repair and maintenance CapEx in 2020 decreased by 11.2% over the previous year to RMB 3.73 billion. Cash flow remained sound and healthy in 2020. Net cash generated from operating activities was RMB 57.55 billion, up by 15.2% over the last year. However, due to the increase in CapEx, free cash flow for the year 2020 decreased by 10.5% year-on-year to RMB 20.43 billion. EBITDA maintenance CapEx continued to improve, increasing by 6.3% year-on-year to RMB 55.80 billion. Meanwhile, EBITDA maintenance CapEx accounted for 68.8% of the total revenue and achieved steady growth. In 2020, the company maintained a healthy financial status with stable capital structure. As of the end of 2020, the company had interest-bearing liabilities of RMB 112.87 billion, down by RMB 74.8 billion over the last year. The liabilities-to-asset ratio was 44.8%, a decrease of 1.2 percentage points from the beginning of the year. The gearing ratio was 36.7%, decreased by 1.8 percentage points from the beginning of the year. In 2021, the company will adhere to its One Core and Two Wings strategy, deepen resource sharing and further strengthen the management of cost and CapEx to promote a continuous increase in profitability and cash flow, thus to create greater value for our shareholders. Thank you all. [Statements in English on this transcript were spoken by an interpreter present on the live call.]