China Unicom (Hong Kong) Limited (762) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. I'm Jacky, Company Secretary of China Unicom. Welcome to our media conference call. First of all, please allow me to introduce the management present today. Mr. Wang Xiaochu, Chairman and CEO; Mr. Li Fushen, Executive Director; Mr. Mai Yanzhou, Senior Vice President; Mr. Liang Baojun, Senior Vice President; Mr. Zhu Kebing, Executive Director and CFO; Mr. Fan Yunjun, Executive Director and Senior Vice President; Mr. He Biao, Senior Vice President. Now let's invite Chairman Wang to talk about our performance in the first half of 2020.

Good afternoon, ladies and gentlemen. It's my great pleasure to discuss with you China Unicom's results. Due to the coronavirus outbreak, unfortunately, we can't meet in person in Hong Kong today but to discuss via a teleconference. Stay safe and healthy, everyone. In today's presentation, I will summarize our overall results in the first half of 2020 and Mr. Zhu Kebing will then discuss our financial performance. Lastly, the management will take any questions you have. Highlights of the company's results in the first half are as follows: we sustainably enhanced growth quality and profitability through active transformation and in-depth mix ownership reform; the adjustments in mobile development priority delivered initial success; fixed-line business reignited rapid growth by empowering government and enterprise customers; innovative businesses continued to grow robustly, with huge value embedded; we successfully achieved 5G network "co-build co-share", effectively enhancing edges and return; and we will push forward comprehensive digital transformation to further promote high-quality development. In the first half, the company proactively responded to the challenges brought by the COVID-19. By accelerating comprehensive digital transformation and innovating communications services offering, we strived to turn adversity into opportunities. Our business continued to improve. Our service revenue increased by 4% to CNY 138.3 billion, which was faster than the industry revenue growth of 3.2%. The company's profitability further enhanced. Net profit was CNY 7.6 billion, up by 10% year-on-year. The company remains determined with the strategy of focus, innovation and cooperation. We continue to push forward proactive transformation. Our growth quality and return kept improving in recent years. Our service revenue mix was further optimized. Industry Internet revenue contributed to 16% of our total service revenue in the first half. Benefiting from sustained control -- sustained good control of CapEx and efficient operation, we have generated free cash flow of over CNY 100 billion over the past years. Our net profit continued to grow robustly. The company maintains strong fundamentals. Facing new challenges in the industry development, the company was determined to proactively adjusting the development priority of mobile business. We shifted focus from subscriber scale to quality and value, and strengthened Internet-oriented transformation and innovative differentiated operations. We also stepped up 5G customer acquisition in a paced and targeted manner. These efforts have delivered initial success, driving value enhancement. Adjustment inevitably come with short-term pain. In the first half, we sold nearly 9 million mobile subscriber loss, and mobile service revenue declined by CNY 2.2 billion. However, our selling and marketing expenses decreased by CNY 2.6 billion. Our mobile service revenue and ARPU rebounded sequentially in the second quarter by 3% and 4%, respectively. On a year-on-year basis, our mobile business was also trending well. Our mobile service revenue growth has been improving month-by-month since April and rebounded to positive growth year-on-year in June and July. The company continued to promote consumption upgrade through 5G innovative applications. We leveraged privileges, content and financial tools to improve product value while strongly enhancing pan-integration penetration. We optimized performance management system and deployed Big Data analytics to enhance targeted marketing and customer retention. Going forward, with accelerated 5G network deployment, proliferation and declining price of 5G terminals as well as more prevalent innovative applications, our 5G subscriber growth is expected to accelerate in the second half, driving sustainable growth in mobile ARPU and service revenue. "New Infrastructure" policy and COVID-19 further boosted demand for digitization, cyberization and intelligent transformation of the economy and society. The company seized the opportunities and pushed forward the integrated development of innovative and fundamental businesses for mutual promotion. We actively leveraged proprietary resources and the edges in network, service and mixed-ownership reform for operation, et cetera, to empower government and enterprise customers and enhance family customer experience and value. In the first half, the rapid growth of broadband access, smart home products, IDC and cloud computing, et cetera, drove our fixed-line service revenue to grow by 14% year-on-year. The company expedited capability development and scale expansion in industry Internet business. We continued to strengthen our foundation, focus on key areas and proactively establish leading edges. In the first half, industry Internet maintained strong growth momentum, with revenue reaching CNY 22.7 billion, up by 36% year-on-year. It has become our key revenue growth driver. Going forward, the company will deeply push forward industry cooperation, speed up product standardization and scale replication, and actively nurture innovative 5G plus vertical applications, endeavoring to deliver faster growth in the new digital era. The company is -- through our integrated services, combining IDC, cloud, networks and application, we can offer a total solution to customers. Our rich network of 551 IDCs nationwide yield significant scale benefits with centralized operations. We plan to invest CNY 2 billion, focusing on high-value and high-demand areas this year. Over half of the new cabinets will be located in Tier 1 cities. The number of cabinets in operation is expected to reach 280,000 by the end of this year. In the first half, the average utilization of our cabinets exceeded 60%. Our IDC revenue was CNY 10.1 billion, up by 22% year-on-year. For the government and enterprise business, the company promoted the mutual development of innovative business and fundamental business with "cloud + networks + smart application.” We focused on key areas and key regions, built lighthouse projects and explored innovative 5G business models. We built centralized platforms for replicated use of fundamental capabilities, and enhanced R&D centralization and product standardization in order to push forward scale development and efficiency improvement. In the first half, cloud computing revenue rose by 82% and leased line service revenue rose by 3%, effectively driving government and enterprise revenues to grow by 14%. In the first half, the epidemic prompted demand for broadband network deployment and speed upgrade. The company showcased its high-speed and smart home products advantages. We adhered to rational and disciplined competition while promoting "3 gigabit integrated products" in the incumbent regions in Northern China and provincial capitals in Southern China. We deeply pushed forward broadband cooperation in Southern China and advanced the promotion of smart home products, facilitating the rapid growth of broadband access and other revenue. We focused on creating new edges such as integrated operation of marketing, maintenance and service, synergized operation of business and new -- and network. In the first half, our broadband access revenue and ARPU continued to climb. For 5G network deployment, the company maintained a focused approach while advancing 5G network "co-build co-share" with China Telecom in a coordinated manner. In the first half, our 5G CapEx was about CNY 12.6 billion. We added about 150,000 5G base station with China Telecom, with the total number of 5G base stations reaching 210,000, and achieved contiguous 5G coverage in about 50 cities. In addition, we are actively pushing forward 5G network upgrade to SA, assuring commercialization in the fourth quarter. The company conducts dynamic investment with due regard to technology advancement, value chain maturity, market and business demand, et cetera. Full year 5G CapEx budget is CNY 35 billion. We strive to add 250,000 5G base station with China Telecom, targeting to complete by the end of the third quarter. Then we will have over 300,000 5G base stations in service, covering all cities nationwide. Through 5G network "co-build co-share", we have effectively sharpened our network edges and investment return. Our 5G network deployment pace, coverage and speed all doubled, boosting our customers' experience and partners' confidence. The 2 operators altogether saved over CNY 40 billion in CapEx and substantial OpEx, including tower usage fee, network maintenance costs and energy charges. To magnify "co-build co-share" benefits, the company has expanded network sharing with China Telecom. We are driving 4G network sharing in scale to fast rectify network shortcoming economically. We are also promoting "co-build co-share and co-maintenance" of transmission resources such as pole lines, pipelines, et cetera, to facilitate more efficient use of resources. In the first half, in the 5G consumer market, 5G application is still a bottleneck. We introduced featured services such as HD/4K/8K video, AR/VR, cloud gaming, et cetera. We promoted extensive value chain cooperation to build 5G pan-smart device ecosystem. We focused on 5G touch points and O2O integration to enrich content offerings and simplify the sign-up process. In the second half, our 5G subscriber growth is set to accelerate as 5G network, terminals and applications gain maturity. For 5G enterprise and government markets, the company focused on industrial Internet, smart cities, health care, et cetera; accelerated industry product incubation; and incorporated 5G+ABC elements into industry solutions to create unique competitive advantage. We also promoted the industry system growth with the solid development of "China Unicom 5G Application Innovation Alliance.” In the first half, the company developed 162 5G lighthouse customers, signed 92 commercial contracts and completed 70 showcase projects, successfully commercializing 5G industry applications. Going forward, the company will fully exploit and leverage its 5G unique edges, including: 5G network "co-build co-share"; centralized IT system, which can support open cooperation; potential collaboration with 14 strategic investors and benefits from market-oriented system and mechanism reform, leveraging mixed-ownership reform; well-established Internet-oriented mindset and operation experience; and established long-term relationship with government and enterprise customers as well as innovative business capabilities. We believe these unique edges will effectively drive our revenue growth and value enhancement in the future. In the second half, seizing the epidemic window, we will strengthen our fundamentals and push forward company-wide digital transformation. We will lay a solid foundation, improve efficiency and enhance vitality, unveiling a new paradigm of high-quality development for China Unicom. Next, I will invite our CFO, Mr. Zhu Kebing, to talk about our financial performance in the first half of 2020.

Thank you, Chairman Wang. Now let's discuss our financial performance in the first half of 2020. In the first half, operating revenue was up by 3.8%. Operating profit was up by 5.5%. Net profit increased by 10%. The company's growth quality continue to enhance. Let's take a look at the detailed analysis next. The company's operating expenses increased by 3.7%, which is slightly lower than the operating revenue growth, of which, depreciation and amortization dropped by 1.1% year-on-year, mainly because of a good control of CapEx in the past years. Selling and marketing expense fell by 14.8% year-on-year, mainly -- which mainly benefited from our business model transformation to rigorously control customer acquisition costs. Handset subsidy plummeted by 99.3%, mainly due to our innovative business model of not offering handset subsidies in general. We continued to promote incentive mechanism reform to strengthen performance-based compensation and develop innovative talents. Employee benefit went up by 9.2% year-on-year. G&A and net operating expenses grew by 42.1% year-on-year. A detailed analysis is on the next slide. The company capitalized on the opportunities of digital transformation and appropriately stepped up cost initiative to promote scale development and capability enhancement of innovative businesses. G&A and other operating expenses increased by CNY 5.8 billion, mainly due to higher technical support expense and cost of IT services, which, together, increased by CNY 4.2 billion, but they fueled a CNY 6 billion increase in industry Internet revenue and further enhanced our product capabilities. In particular, the cost of IT service, it went up by 37% year-on-year, driving IT service revenue to grow by 39% year-on-year. Going forward, the company will progressively raise the profitability of innovative businesses through scale development. For network deployment, the company continued to conduct precise and efficient investment and strengthen the synergy between business and network in order to create value. Total CapEx for the first half was CNY 25.8 billion. Network quality and customers' perception kept rising in focused regions, and our network latency performance was the best in the industry. In the second half, the company will continue to strengthen network support capability so as to enhance customers' perception. For mobile network, we will deepen "co-build co-share" and 4G, 5G synergy and promote 2G, 3G network simplification by regions to lower network operating costs and refarm spectrum. For broadband network, we will focus on gigabit access deployment, while maintaining leading-edge network edges, maintain leading network coverage in Northern China and expanding the scale through private capital cooperation in Southern China. At the same time, we will expedite intelligent upgrade by advancing SDN, NFV and cloudification. With the deepened execution of our corporate strategy and advantages of mixed-ownership reform being gradually unleased, the company's financial position was further optimized. We maintained healthy free cash flow ever since the inception of mixed-ownership reform 3 years ago. The amount of our interest-bearing debts continued to decline to only CNY 20.5 billion. Our liabilities-to-assets ratio kept falling to 39.9%. Our financial strength significantly enhanced, making us well positioned to capture new 5G opportunities and creating new value. In the second half, the company will insist on high-quality development. We will strengthen cash flow management and promote transformation of resources allocation and use to enhance productivity of all essential factors. We will deepen network and business integration with precise investment to enhance the edges of cloud-network integration. We will accelerate operating model transformation to foster pan-market coordinated operation and high-quality development. We will strengthen centralized IT operation and data governance to boost overall at efficiency. We will continue to promote value management, leveraging innovative revitalization of operating assets and enhancement of tenant performance in order to drive quality and efficiency enhancement and create greater value for our shareholders. [Statements in English on this transcript were spoken by an interpreter present on the live call.]