VSTECS Holdings Limited (856) Earnings Call Transcript & Summary

[Audio Gap] [ 30 billion ]. Cloud computing, 7% increase to [ 3 billion ]. In terms of geographical segments, North Asia decreased by 6% to [ 56 billion ]. Southeast Asia, up by 2%, reaching [ 17 billion ]. And without the foreign exchange factor, our revenue growth remained flat. This page shows you our net debt to total asset ratio, which remained at a very healthy level, 0.14%. Working capital days, as you can see, inventory days, 59 days, account receivable days 72 days, account payable days are 78 days. Working capital days, 53 days. To show you a detailed introduction of the company, I would like to present to you a video clip. [Presentation]

Thank you for your attention.

Now we will start the Q&A session, and we welcome any questions from you. Please state your name and organization before you raise your questions. Our participants online, please feel free to enter your questions with your name and organizations as well. The first question, please.

First of all, I would like to congratulate you on the fine performance. I have several small questions for Elon Musk. And our product has exceeded the market. Can you please share with us the overall progress and the development over the year?

So, first of all, we have been lucky. [ Shengyi ] approached us and talked about the partnership, and we concluded the deal in 2 years. They sent a consulting company to survey on the SAT business in Southeast Asia, and we reached an agreement on a phone call, but it involves the national security for Shengyi -- covers 4 countries -- Malaysia, Philippines and Indonesia, have agreed Shengyi's involvement in the communication network, and we signed an agreement with them for Malaysia. It was delivered last month, around 1,000 units. And the price was USD 500. The General Manager of Malaysia expected 10,000 units of sales. So, the total value would be around USD 5 million. And the Indonesian manager told me that the expected sales would be around 100 million. And the low expectation for Malaysia is mainly because of the unstable supply of the project. We have just started the project, and we find it hard to predict the supply. But I can share with you that the right products have been sold out. But for Indonesia, as you know, consists of many small islands, that's why the general manager of Indonesia expect USD 100 million of sales for this year. Shengyi also asked us whether we can partner in Mongolia, but Mongolia is a very small country. We used to do business in Mongolia. So, we cover in Mongolia for the sales of network security products. For the 4 countries in Southeast Asia, we are the exclusive distributor. But for Mongolia, we're not so sure yet.

We have a question online, Mr. Yu, which is about business overseas. Our downstream partners have considered going abroad to expand their business. What kind of support you can provide to the downstream partners?

You mean our clients? Our downstream partners. I'm not sure if I understand the question. My downstream refers to end clients and distributors. If our upstream partners would like to go abroad, we can provide support. For example, the IT service providers in China. So, you're referring to our competitors in China?

Yes, that's correct.

So well, for Southeast Asia, maybe I can say a few words. For Southeast Asia business, we started in the beginning of 2008. Now we have branches and offices in 5 countries -- Singapore, Malaysia, Philippines, Indonesia and Thailand. We have 400 million of profit contribution from Southeast Asia. So, for 14 years, the profit coming from Southeast Asian countries grew like 10x. Now we are the biggest IT products distributors in Southeast Asia. So, we have snowballed our business. For example, for Thailand, we have become #1. 3 years ago, we were #3. So, in our last quarterly meeting, I asked my managers why we have grown so fast? We have several advantages. First, for our IT supply chain, the commercial processes are quite important for big dealers, are all international players. For example, Ingram Micro or other world's biggest players -- and socially, it's also a very big one. They said that most of the companies are centrally managed, and it is very hard for them to go through the commercial processes. Our second advantage is stable management. They have very unstable mid-level and top-level management. So, we have a very stable management team in Southeast Asia. Secondly, we have very flexible commercial processes because we have localized team. We also have a very responsive team, and we can change our incentives and other aspects, commercial terms in a very flexible manner. And for other competitors, they might have changed their management and then their business will drop from #1 to #3 for example, in Thailand. So, similar situation can be witnessed in different countries. And I asked why the general managers are willing to achieve such results and make best efforts, and they said it's because of the trust from me. Trust is a valuable resource. A young leader might have great trust in their subordinates, but not so much when they grow old. So, for me personally, I believe that I can trust them because I have enough control over my business. But of course, there are other factors. I would say that we have entered a virtuous cycle for our business in Southeast Asia. We have the scale effect. We have the brand, in fact, we also have the platform scale. And that's why Shengyi approach us. And some projects might have several distributors, but for us, we are the general agent of some brands, for example, for VMware and [ Burton ]. One quarter ago, they have decided to give us the sole distributorship for all countries in Southeast Asia. We have also expanded our business goal. We sell not only computer products, and we also sell, for example, the inverters for LONGi in solar panel industry. For us, we are the biggest network partner for Huawei, the biggest for Lenovo in Southeast Asia. OPaL mainly works with a Chinese partner and also some JV. And for the Philippines, we are very strong, and that's why we have become the exclusive general agent for OPaL in the Philippines. And for [indiscernible], it's the same. We are the distributor for [indiscernible]. So, we have a very good channel and network. And for Southeast Asia, they sell products of [indiscernible] brands. This is different from China. For companies, such as Lenovo, they have a regional agent. But when they enter Southeast Asia, they have to rely on the network of the general agent, and that's why we help sell products for American brands and Chinese brands; we are the best channel for them. This gentleman, please.

I have 2 questions. The first one -- what do you think of the consumer electronics this year? What's your strategy? And secondly, you mentioned that you are very good…

Yes, we are the biggest partner for Huawei overseas.

Can you please share with us some details?

For Huawei in China, we -- for their Korea network business, they do direct sales. And for enterprise business, 70% is done through agencies and distributors. We've become the distributors for Huawei very late. Huawei requires high compliance from the distributors. But for us, we sell very competitive products. In the first beginning, Huawei said that we cannot sell ZTE's products if we want to sell their products. And if we want to sell Huawei's products, we cannot sell HTC's. So that's why we were not the dealer for Huawei. But then for some reason, we did not sell -- we stopped selling HTC's products, and that's how we got into the dealership for Huawei. We are a latecomer in the Huawei system. So, we do not sell their teleconference system, but for other products, we have covered. We are the general agent for consumer electronics for Huawei. But due to some reason, they have chosen [indiscernible] companies to do that. But we are the general agent for their enterprise products. We are also a supplier to Huawei. Huawei has high requirements for software suppliers, higher than the national standards, because Huawei is susceptible to hackers' attack. Maybe I will pass this question to my colleague.

Our software products, such as AI computation resources scheduling, we have become a supplier of Huawei. And in the 25 provinces and cities, we partnered with Huawei to build up our computation center. We provide AI resources scheduling pool. And in some state-owned company projects and governmental projects such as Shanghai and Guiyang government projects, we also provide multi-Cloud management products to Huawei, and we have been awarded with the best supplier for Huawei's business partners. For Southeast Asia, as we know that Huawei's business has been sold quite well in China, but not in overseas countries. Huawei's products cannot sell in Vietnam, for example. For other countries, if the relationship between that country and China is good, then Huawei's product sells a lot. And a lot of companies go abroad, and they are also more inclined to buy Huawei's products. But for Huawei – but for Southeast Asia, the overall sales scale is limited. I would say that Huawei is top 3 contributor to our business revenue.

Any other questions from on-site? A question from Huaxi Securities.

AI and applications has been a hot topic. Who have you partnered with for AI? And what do you think of the challenges and opportunities brought by AI?

AI is not a buzzword. AI is -- the trained AI will have deep and profound impact on human's life. AI computation power is key for its adoption. We are the general agent of AMD and NVIDIA. We're the biggest for AMD in China. For NVIDIA, the dealership is based on products. In the past 5 years, NVIDIA's products were hard to sell, mainly some mining projects will require NVIDIA's products. So, NVIDIA was not very popular because it's not a general product, it's quite specialized. For example, for image and graphic cost, it's quite product-based. A lot of companies can source from NVIDIA. In Southeast Asia, we are the general agent for NVIDIA, in Chinese Mainland, we are one of the distributors. For AMD, we are the biggest distributor for them in China. For example, for [indiscernible], we are the exclusive distributor for [ Dingaways's ] GPU, they sold directly. We are also one of their partners. So, this is for CPU. In terms of service, for AI, we have partnership with all major manufacturer, Dell, HP, HTC, Xiaowei. And in China, we have a partnership with several companies such as Inspur, [indiscernible] -- which is established by ex-Huawei people, and 7 Huawei related businesses also have a partnership with us. So, all there are 7 partners, 5 of them are our partners, actually. So, this is for hardware. In terms of software, we are mainly talking about the application, we have a partnership with SenseTime, IFITech and several others. For, IFITech we are the exclusive partner for their 2C business. For IFITech, we grew together for their 2C business. We partner on ecosystem level. All the cost of IFITech is transparent to us. We also have a transparent pricing system, and we design products together. And we have the highest trust with IFITech because we are ecosystem partners. And we are the distributor of hardware and software for major companies in each sector. We also have AI algorithm and computation scheduling software. And we supplied to 20 out of the 30 provinces who have an AI algorithm center.

Hello, Mr. Li. I'm Alex. I have several questions. The first one is about Cloud. So, what do you think of the business development would be for Cloud in Chinese Mainland? And for Southeast Asia, the digitalization has been speeding up. Is there any opportunity, any new business or products for Southeast Asia?

China, at the first beginning, had a lot of foreign participants in terms of Cloud products. And then we know there were Alibaba and Huawei and now China Mobile; China Unicom have also joined the game. And the U.S. has banned China from using the Cloud products from foreign brands, and that's why we have seen a lot of local players joining the market. So, if without America's censure, the development of Cloud system might be even faster. Last year, NVIDIA cannot sell their GPU to China, and that's why we lost an order of 7 billion. What's your question about the Southeast Asia?

A lot of data centers have been set up in Southeast Asia. Is that correct?

To give you an example, for example, in Singapore, there's a National AI Computation Centre and we supply to the government Yes, the market is full of opportunities in this regard. For the first -- well, the revenue for Singapore last year was 3 billion. For the first 2 months of this year, Singapore reached HKD 2 billion in terms of sales. But of course, maybe we have been lucky for the first 2 months, but it's mainly driven by the building of the data center and the computation center. Apart from the 5 countries in Southeast Asia, in Myanmar and Laos and Cambodia, we have set up offices. But for some countries, the political situation has been unstable or the market business model hasn't been very mature. But in terms of enterprise systems, we have been the biggest. For the 5 countries, we are the biggest in terms of the enterprise systems as well as consumer electronics. And if there's opportunity in the market, it's more possible for us to seize the opportunity instead of others.

What is your expectation for the Southeast Asian business this year?

We are the biggest in Southeast Asian market already. So, our growth would be on par with the industrial average. We do not have a target for Southeast Asia growth. The macro environment in the whole world is not very ideal. Most of the competitors have seen 20% decline for their business, but we have seen positive growth because we have expanded into new product categories, such as Google phones and Shengyi this year and well as Apple business. So, we have a lot of newly added business, which has boosted our business in Southeast Asia. But all the markets in Southeast Asia have been quite saturated. Some people say, ‘Oh, these markets in Southeast Asia have been quite prosperous.' But this is imaginary. In Southeast Asia, Google, HP, Dell, their decline is the same as their business in the Chinese market.

One question from Shanghai Hainan Securities. What is the expectation for gross profit margin in 2024? And where do you see the highlights for the 3 business segments?

It's very hard for me to have such a forecast. For consumer electronics in 2024, we expect a positive growth because in 2021 because of the pandemic, we have seen an outburst of growth because everybody had to stay at home, to entertain themselves. And also, there was a lack of supply. And that's why in 2021, we have benefited from the pandemic and to make a record high in terms of gross profit margin as well as sales because of the high demand. The laptops or printers and PCs in 2021, have seen growing rise in 2021, and the sales has been adjusted down in the past 2 years. But consumer electronics, I believe, has a bottom out. AI-based PC may appear in the market, open-source AI might enable more powerful computers. So, we might see a lot of replacement. The consumer electronics sales was down in 2023. It's mainly because of the high sales in the past 2 years. We would see great sales for service. This is part of our enterprise system. But for other parts for enterprise system, it's very hard for me to forecast. The economic outlook is not very ideal for all countries. So, under such circumstances, we would not set a too ambitious target, but I would say at least we can achieve flat growth. AI servers would definitely see positive growth. But for each segment, we have several tens of thousands of products. So, it's very hard for me to forecast. But we expect double-digit growth for this year, judging from the figures in the first 2 months this year, 10% growth. The profit growth also reached 10%. Last year we have a major highlight. China borrowed a lot of U.S. dollars and then we paid back USD 40 million. And we suffered a loss of USD 40 million because of the foreign exchange -- and if interest rate remain flat, it will also have a big impact on our business because we paid [ 200 million ] extra for the interest. Without interest and foreign exchange affect us, our profit would reach around [ 1.1 billion ], [ 1.2 billion ]. And the current result is affected negatively by foreign exchange and interest hike. If it's the same as 2021, we would have [ 1.2 billion ] of profit. It should be our second-best year. If the interest rate would go down or it would not go up, I believe that we can achieve a double-digit growth. Next question, please .

Do we have any question from online participants? Thank you for your questions and thank the management for their response. So, this concludes today's briefing. Thank you again for your participation, and thank you for your support for the company. We look forward to seeing you next time. [Statements in English on this transcript were spoken by an interpreter present on the live call.]