CITIC Telecom International Holdings Limited (1883) Earnings Call Transcript & Summary

Ladies and gentlemen, friends of the investment community, welcome. Welcome to the CITIC Telecom International Holdings Limited 2024 Interim Results Announcement. I'm the emcee, Karis. Today, we will be going online as well as physical. And before the announcement, we have -- you would have already received the PPT. If you haven't, would you please contact the PR firm and -- for the copy. [Operator Instructions] First of all, I would like to introduce you Mr. Luo Xicheng, the Chairman of the company; Mr. Luan Zhenjun, the CFO of the company; the Executive Vice President of the company and CEO of CTM, Mr. Vandy Poon. And Mr. Brook Wong, Vice President of the company and CEO of CITIC Telecom CPC. First of all, we would have Mr. Luo Xicheng, the Chairman, to address us.

Ladies and gentlemen of the investment community, good afternoon to you. First of all, I would like to thank you for attending our 2024 interim results announcement. In the first half of 2024, with a number of external challenges, the group has demonstrated strong determination and resilience to develop according to the right course and innovating and forging ahead while continuing to consolidate our traditional telecoms business. We have also seized the opportunity to promote new generation of information technology and also deepen the integration of real economy with the digital economy to grasp such opportunities, and we have pushed forward with transformation and development of digital intelligence. In the first half of the year, the group's total revenue amounted to HKD 4,889 million, year-on-year decrease of 8.2%. Revenue from our principal telecom services amounted to HKD 4,160 million, year-on-year decrease of 11.3%, and profit attributable to shareholders amounted to HKD 455 million, year-on-year decrease of 36.9%. Basic earnings per share amounting to HKD 12.03, a year-on-year decrease of 36.9%. The group places a lot of emphasis on shareholders' returns, and the Board of Directors had declared an interim dividend of HKD 0.06 per share for 2024, in line with the same period last year. In the first half of 2024, the group and CTM formally joined the Open Gateway development project initiated by GSMA and won the first place in the Open Gateway Programming Marathon during the Mobile World Congress 2024 held in Shanghai. And this further underlines the group's technological accumulation and foundation and innovation, which has attracted the attention of the industry and of our partners. The group's DataMall business continues to expand and grow. CTM, a subsidiary of the group, actively consolidated our 5G+ broadband advantage and the scale and promoted technological upgrading with a focus on user value. As of June end of 2024, CTM's market share in Macau mobile market was over 50%, ranking first in the Macau market with 5G subscribers exceeding 620,000, representing a penetration rate of 87.9%. In July 2024, CTM launched the 5.5G commercial service, propelling Macau into the era of 5.5G and becoming one of the first cities in the world to commercially launch 5.5G. CTM continues to empower the digital transformation and upgrading of entities in the public, government, company, commercial, education, health care and financial sectors. As of the end of June, the group launched 9 5G private network solutions and launched 13 smart scenarios usage, contributing to the development of Macau as a smart city. The group continued to promote the convergence of cloud, network, smart and security with diversified products to enhance our competitiveness. CITIC Telecom CPC promoted the rapid development of new businesses and diversified revenue sources by cross-selling cloud, network, smart and security products. The group also focused on ICT smart empowerment strategy, integrating innovative technologies, such as big model artificial intelligence, data algorithm platforms, et cetera, to enhance the smart and intelligent capabilities of our core products and to create a differentiated competitive edge. The group further accelerated our market expansion in Southeast Asia by entering into a partnership with an internationally renowned key hardware provider in Singapore to provide server deployment for the local customers and completing a number of data center ICT projects in Malaysia. Looking ahead, when the new round of revolution in technology and industrial changes accelerating and with the digital economy well developing, there will be more and more room for opportunities and development in the industry. Our group has decades of development and experience in the industry and is widely recognized by the market. With our profound accumulation in the industry, the group will grasp the strategic opportunities brought by the new round of technology revolution and industrial changes in the information and communications industry. We will continue to promote the expansion in new areas of AI, data, Internet of Things, et cetera, and deepen the close cooperation with our strategic partners, carriers and research institutes so as to grasp market opportunities and deepen transformation, development, reform and innovation and also expand into new areas, expand into new markets and new customer groups, promoting long-term healthy, high-quality development for the group and create value for the shareholders and society. Next, CFO Mr. Luan will be giving you a detailed report on the interim results of our company for the year 2024.

Thank you. Friends of the investment community on-site and online, good afternoon to you. I'm very happy to have this opportunity to introduce to you the 2024 1st half interim results situation. In the first half of 2024, international telecom strategically overcomes challenges, and we were able to realize a revenue of HKD 4,160 million, which is a decrease of 11.3% year-on-year. And total revenue was down by 8.2% to HKD 4,889 million when compared with the first half of 2023. Profit attributable to shareholders of the company amounted to HKD 455 million, which is close to 37% or 36.9% when compared to the same period last year. Basic earnings per share declined 36.9% to HKD 0.123 for the first half. Interim dividend was HKD 0.06 per share, and stable operating cash flow was achieved. Total debt was HKD 3,924 million with a net debt of HKD 2,363 million, and net gearing ratio was 18%. And this compares to last year, which is a slight increase, and this is because we have a slight decrease in terms of the cash flow on hand. And last year, the gearing ratio was 17%. And this year, it has slightly increased to 18%. And at the end of June of this year, the group's total number of R&D headcount is 348 with accumulative total 17 authorized patents and 56 software copyrights. In the first half, the group newly obtained 4 authorized patents and 12 software copyrights. In this page of the PPT, I would want to report to you, in the past 5 years, the total revenue changes. I have mentioned just now for the first half compared to the same period of last year, there is a rather large decrease. But be so as it may, compared to 2022, 2021 for the same period, it is a slight increase. And later on, I would be doing an analysis as to why there is a decrease. For profit attributable to equity shareholders, it is HKD 455 million for the first half, which is decrease from the years before. As for EBITDA and liquidity, as of June of this year, EBITDA of the company is USD 1,040 million, which is a decrease of HKD 400 million same period of last year. Capital expenditure is HKD 149 million. Same period last year was HKD 120 million. So that's over HKD 29 million less. As for cash and deposits, it's HKD 1,561 million. Last year, same period was HKD 1,726 million. Total debt, I have already mentioned. Last year was HKD 3,934 million. This year first half, it's HKD 3,924 million. Net debt, I have also mentioned, stands at HKD 2,363 million, and the net gearing ratio has slightly increased to 18% from 17% same period of last year. Earnings and dividends per share. For the first half of last year and first half of this year, comparing, it was HKD 0.195, and for the first half of this year, just HKD 0.123. And for the first half of this year, the interim dividend is the same as that of last year, standing at HKD 0.06. And next, we will be looking at our gearing. For gearing -- net gearing ratio, it stands at 18%. In the last announcement, there were friends who asked a question. For next year in March, there will be a facility U.S. dollar-denominated coming to term. And what will we be doing for that when it matures? The management is very cognizant of this, and we have already signed committed credit facilities of approximately over HKD 7,000 million with several banks and financial institutions. The next page of PPT. So that, together with the cash on hand for the company, it will be more than sufficient for the CapEx going forward and also the maturing of the bonds in March of 2025, which is USD 450 million. Next page. As of the end of June of this year, for total borrowings of the group, 91.9% -- sorry, 91.1% is at fixed rate, and that includes the U.S. dollar-guaranteed loan. From currency risk exposure point of view, the group's main transactions are done in Hong Kong dollars, U.S. dollars and also Macau patacas. That's the denomination. And we all know that Hong Kong dollar, U.S. dollar and the patacas are all pegged. Therefore, for the company, there is no significant ForEx risk. But at the same time, we continue to closely monitor the situation for anything that may affect the exposure to exchange rate risks, and we can go into hedging arrangements where it is called for. In this PPT, I want to give you the performance of each of our segments. For international business, it includes a few areas. Mobile services in the first half, mobile services was HKD 510 (sic) [ HKD 510 million ]. That is an increase of 11.6%. And for Internet services business, it is HKD 737 million, the revenue, which is an increase of 4.5% from the first half of last year. For enterprise solutions, it is HKD 1,608 million, an increase of about 7%. Revenue from sales of mobile handsets and equipment increased significantly by 15% to HKD 729 million. Revenue from international telecom services decreased 36.6% to HKD 1,237 million. And for fixed line services, it is HKD 68 million revenue, decreasing 4.2% from same period of last year, and this is in line with the global drop in fixed line services revenue. And next PPT, we look at the past 5 years in terms of its change in international telecom services. And some customers have adjusted their businesses since the second half of 2023, and revenue from messaging services in the international telecom services has experienced a dip, a decrease. When this has impacted our messaging services revenue, there is a decline. And at the same time, there is the 1.0 version and 2.0 version for DataMall, and we basically offer upgraded DataMall packages, to offer customers more competitive products. At DataMall 1.0 and for DataMall 2.0, we expand the application service in areas such as IoT, IoH, et cetera, to capture opportunities in an emerging market. Secondly, we continue to strengthen our scale and quality of voice business so as to provide reliable and stable voice services to the customers around the world. Thirdly, we transformed the information service sales model and enriched our product system. Building upon the wholesale business model, we also introduced a B2B direct sales model to really fully unleash the potential of our internal enterprise customers, so that a wider range of customer groups can be served more directly. And we also enrich our product portfolio. For mobile services, we continue to increase our penetration of the 5G market in Macau and to build Macau into a smart city, and we further leverage the scale advantages of our 5G provision, focusing on user value to drive technological upgrades. We are 50% of the Macau market in terms of market share for CTM, and we are definitely in a top position. Customers exceeded 620,000 for 5G, and the penetration rate is 87.9%. And as of July of the year, CTM launched the first-in-Macau 5.5G service, marking Macau officially going into the 5.5G era and becoming one of the global pioneers in commercializing 5.5G service. And further, we enriched smart application scenarios, promoting Digital Macau 3.0 development. CTM has launched a total of 9 5G private network solutions and 13 smart scenario applications, contributing to building Macau as a smart city. Thirdly, for cross-border demand, it drives business revenue growth. We seized this opportunity, presented by Hong Kong and Macau residents traveling north for consumption and the growth in cross-border passenger traffic. The group has upgraded our platform technology and capabilities for service to facilitate this revenue growth. For Internet services, we continue to consolidate our broadband market leadership and optimize user experience with upgraded services. As of the end of this year, market share of CTM broadband reached 97%, ranking first in Macau. And the FTTR, that is Fiber-to-the-room, had been used, and we continue to promote user service upgrades. Average download speed of fixed-line broadband in Macau is ranked third globally at 235.74 Mbps. The expansion project of the headquarter data center is proceeding well as planned. The current cabinet rental rate remains high, and the project at the tower data center is progressing smoothly. For enterprise services, this is, for this year, a big share of our total revenue. And through promoting cloud network intelligence and security, we diversify and offer new products to enhance our competitiveness. And focus on the strategy of ICT-MiiND, CPC integrates core technologies, such as large -- LLM, Large Language Model, AI, data algorithm, et cetera, to enhance the automated and intelligence capabilities for differentiated competitive advantages. At the same time, we expand into new markets globally to fully explore new business opportunities in overseas operations. For Acclivis, our Southeast Asian company in Singapore, we partnered with a globally renowned major hardware provider to offer service deployment for local customers. And in Malaysia, Acclivis has successfully completed multi-data center ICT projects. Next, fixed line services. At present, the revenue and the -- fixed line services revenue had dropped, it's HKD 68 million in the first half of the year. That is a 4% decrease. And this is because in fixed line voice services, actually, it is only a very small proportion of our total revenue. It takes up only 1% or just over 1% of our total revenue. So what we can hope is to lower the decreased rate in terms of voice services revenue. For our company, we continue to embrace technological leadership to strengthen our innovation empowerment. We participated in the 2024 World AI Conference, and we showcased our latest achievements in AI, high-quality development and industry integration, digitalization and also Belt and Road initiative and the generation of new driving forces for cutting-edge innovative solutions. And further, on the 28th of June, we won the first prize in the Open Gateway Hackathon Competition in MWC Shanghai. Innovating capabilities of ours have been demonstrated. And further, CTM hosted a 5.5G Technology and Advanced Digital Transformation Solutions Showcase in April, and this is the 5.5 new opportunities plus IoT application scenarios for cell sites, carbon reduction technology, 5G private network solutions being on show. CTM also actively plans to launch new technology to build Macau as a 10-giga smart city. We actively deploy the most advanced 50G PON Internet access in order to achieve so. We continue to seize new opportunities for digital intelligence transformation. Upgraded product competitiveness have won a lot of awards. For example, the 5G Cross-Regional Private Network Solution received Innovation Award for CTM. For CPC, TrustCSI had won the award in Managed Security Service category. And further, CPC became a new VMware Cloud Service Provider Pinnacle Tier Partner. And at the same time, the China Entercom's Cloud-Edge Large Language Model Platform had also been given accolades and awards, and we have successfully been included in the intelligent application category of 2024 Case Studies of Demonstration Application of Foundation Models. And at the same time, we fulfill our corporate social responsibilities. We have organized the GreenTech ICT Open Day. And also, we continue to organize Youth Development Programme for the 11th consecutive year. And at the same time, we have won a number of ESG awards and accreditation, including Top HR Management Award and ESG Green Supply Chain Award from Energy Magazine. Thank you. This concludes my report.

Thank you very much for the sharing, company management. [Operator Instructions] Yes, the on-site investors first. The first question on-site please, anyone?

I just want to understand about the operation revenue for profit. There is over 30% decrease for net profits. What is the impact? What are the different impacts leading to this decrease? And also, had the worst situation been -- is it over? What about the second half of the year? And what about looking forward, what do you see as a situation panning out?

Thank you for your question. In the first half of the year, whether it is in revenue or equity profit attributable to equity shareholders, there have been a relatively big decline from the same period of last year. And the main reason, as you'll have mentioned and we have mentioned, it is the messaging revenue lowering, and that has caused the profit drop. And in my introduction, I have also mentioned that voice on fixed network, that has also been decreasing. But that has been happening for some time, as I have mentioned just now. And that also had brought down the revenue as well as profit. For the second half of the year and for the future, this is my view. In July of this year, there had been a warning for profits issued by our company. And then there were some of you who called up the company, and you all ask what's happened. But after looking at the announcement, you have received the answer to that question. And some of you have asked the same question. Has it troughed? Has it gone to the lowest level already? And in mid August, we will have the interim announcement coming out. And at the time on the phone, I said, we will have to wait til that time. I cannot answer some of your questions now, and they understood. Now for international telecoms business, for the main segments, as I have mentioned, our mobile services, Internet services, enterprise solutions, fixed line, from these different categories, we see that apart from international telecom and also fixed line voice services, the others are on the increase and normal. And even in international telecom services, if we segregate the different parts, for DataMall, for instance, it is growing rather rapidly. For international voice service, it is also growing rather rapidly. Because in the past period of time, this particular sector had been recognized as a main operator, and we have also fought some networks with international operators. So we are doing well in this particular part of the business. So international voice telecom services, we have been growing pretty well in the first half. But for fixed line voice, the base is relatively small, and also for DataMall, the contribution is relatively small still. And therefore, in the first half of the year, revenue and profits have both dropped rather significantly. This is the main reason, as I've explained just now. As for the future, as we know, in the past period of time, there had been a lot of rapid development in new technology. And for traditional industries, it is a challenge. For example, there are new products and also technological advancement, and that impacts profit as well as revenue. But at the same time, it gives us new grounds, new markets, new development opportunities for us. And it also provides our company the next round of opportunities for transformation and development. For the different segments that we have, we are exploring and studying transformation and how we do that as soon as possible. So that in the future, for our shareholders and the company, we bring more value. Thank you.

The next question please, the gentleman in the front.

I have 2 questions. First of all, returns to shareholders in the past, over 10 years, we have been growing in dividends in absolute terms. This year, we understand, for international telecom, there are some pressures how. So how do we consider this year's dividend payout? Will it be in terms of absolute amount? Is it going to be a growth? Or should we look at it on payout ratio for the entire year? Because for the first half, I see it is at par with the same period of last year. The second question is as follows. Concerning gross profit margin, in the second half of last year, international telecoms have been affected and the revenue had been lowered. So it was about HKD 600 million to HKD 700 million. But compared to the previous period, it was HKD 400 million. And then this first half, it had dropped. So how do you see this decrease? And if the revenue structure is more or less the same, what are the cost changes so that the gross profit margin had decreased? And in the future, how do we consider the trend of gross profit margin, please?

Yes, will answer the question, and thank you for the questions. And I would want to thank you your concern about the dividend policy of our company. And as you have mentioned, in terms of dividend payout, we have been consistent. You have noticed that the level is the same. Basically, it is the same at 75% to 77% payout ratio. And you have also noticed that because of our messaging business decrease, for our revenue and profit this year compared to same period of last year, there is a relatively big drop. But at the same time, we will be, together with our shareholders, sharing the fruits of our efforts in the first half of the year. Even though we have been adversely affected, but our dividends will be the same. It's the same as the same period of last year. And going forward for our dividend payout, we will continue to develop in new areas, open up new markets. And hopefully, with these new businesses, we will be able to supplement the messaging business drop. So please be assured, we will definitely, according to our profit situation, our cash flow and also our main areas of development in the future, to stabilize our dividend at a good level.

I'll answer the second question. Thank you very much. Your observation is very refined. And this year, in the first half, our total revenue had been about HKD 5 billion. And of that, HKD 700 million -- HKD 790 million was for handset sales. Compared to same period of last year, it is a growth of 15%. And we know that for handset sales, the margin is relatively thin. But handset sale is not the target. We want to actually grasp the -- and catch the customers so that our ARPU can be increased. There will be this value addedness because handset sales is only just one part of it, and it's diluted our gross profit margin. The other is international voice services. Last year, for messaging services, there was a big drop. And in the future, for our revenue, in order to decrease -- or cut the decrease for our international voice services, the growth has been quite significant in the first half. So overall, for the structure of revenue, it has really changed. And therefore, our gross profit margin had changed accordingly. For gross profit margin, the management is very -- puts a lot of efforts -- emphasis on it. It also has to relate to the enterprises development. In the past, it had been relatively higher because of certain business sectors. So we put a lot of emphasis on this. We want to explore new businesses built on our existing businesses. We want to grow certain new areas to stabilize our gross profit margin.

Other questions please.

I have a question about Macau, the concessionary agreement. What is the present situation with the negotiations with the government of Macau please, Mr. Poon?

For this question, actually, for CTM and the Macau SAR government had done a lot of work for the past period of time. And I have already shared with you previously that for the SAR government, in the past few years, they have always wanted to reform the telecoms market. For concession agreement, the government had said that in the future, it will be in a licensed model. And in the past few years, we have worked according to the government's wishes, and we have been cooperating with them. But you have to understand, we are in a supportive role, TCM, and in the driving seat is the Macau SAR government. In terms of progress for the SAR government, it has other areas of work that they have to put attention to. So I think 2 days ago, the Macau government had mentioned that there is a new announcement. And that is the -- this arrangement will take some time in the deployment of the asset and the arrangements. It would take a bit more time the government said. So you will understand that because for us, we work together with the government, we cooperate with them, and so for the conditions of this particular announcement is that the driving seat is really with the SAR government. They will definitely have a public announcement at some time. I cannot tell you too much, and I cannot forecast anything because the announcement have to be made before things become real. And you will see that for the SAR government in fixed network or fixed line license, there is an extension for 1 year, including that for CTM. So the concessionary agreement and the contract for fixed line, these are assets which are, of course, related. And in the past, the SAR government, because of progress and timing, they have done some short-term extensions with us. And for this period and 2 days ago, the Macau government had mentioned or announced that they want more time to do the work properly. And in particular, for CTM, we will definitely support the government well and do our work well. So personally, I would say there's no need for any undue concern. It's been done a few times, the extension. And further, for the first half of the year, we have made a lot of efforts to perform well. There had been growth. In the second half, we hope to have further growth so as to reward our shareholders as well.