VSTECS Holdings Limited (856) Earnings Call Transcript & Summary

Good afternoon. Welcome to VSTECS Holding company for annual results announcement. The meeting will be conducted in a hybrid mode. [Operator Instructions] Please allow me to introduce the management present here today, we have Mr. Li Jialin, Chairman and CEO; Mr. Ong Wei Hiam, Executive Director and Group CFO; [indiscernible] Group CTO; Mr. Chan Hoi Chau, Executive Director; and Mr. Li Yue, Executive Director. First, I would like to share with you a short video of the company. [Presentation]

Thank you very much for watching the video. [indiscernible] to talk about the company's AI and cloud services.

Good afternoon. Today, I would like to talk about our own product. And the performance in 2024 and also our outlook for 2025. We continue to deepen our products and services in cloud, and we also increased the AI application in our products and services. Today, in cloud service, we are top 5 in the self multi-cloud management market. And we now have 2 R&D center for cloud management service and we have more than 1,035 engineers. And we also have invested a lot in our own product which can help us consolidate our resources upstream, and downstream and to provide integrated services and solutions to our upstream and downstream clients and enhance our overall ability. In terms of AI technology service, we have partnered with Huawei execution our leader and other top vendors to provide before and after sales service and will also provide a whole cycle technology as a service, and in cloud computing, we partnered with VMware, Huawei Cloud and AWS and Ali Cloud and others to provide consultation service and the data services for their clients. Now we have more than 1,000 engineers nationwide to provide such services. And in AI we have 10 years in building up our ecosystem, as you can see in the map, we have covered the application layer, the AI technology layer, large model there and the fundamental layer. And on the top layer, you can see the applications into multiple industries, and we have lots of partners. And we also provide work of a product for the execution of our technologies. And in terms of our product R&D, we have started the intelligent computation management back in 2020. And in 2024, we have made major progress. And by the end of 2024, we have acquired more than 30 cloud computing centers among the 40 in China and 9 of them are national grade. We provide computing power scheduling and large model services to these centers, starting from last year, we help Huawei and also other vendors execute their products in major cities. We have also integrated DeepSeek after Chinese New Year. And now we are talking with different computing centers and see how we can execute the DeepSeek model in different centers. And we will also integrate its operations and service models. And we have a very mature, large model, and we also have a lot of demands among our 30 products. We plan that within this year, we will launch a DeepSeek all-in-1 machine under the brand of VSTECS, now we are working on the R&D and also the adaptation together with our partner. And in a few months, we will launch this new product to the market. DeepSeek models and the management system will also be integrated in the machine. Within the year, we can have 100 to 300 million of revenue contributed by this all-in-one machine. We have several cases that I would like to share with you. The first one is the Shanghai public computing power service platform. We are one of the first to connect the computing power centers, we are connected in Xi'an and Shanghai computing power centers. It is like connecting different power generation stations to the grid. And this project was launched in January 2023, and we'll continue to deepen this project. And last year, we have already included more remote and heterogeneous resources. In 2024, we partnered with Huawei as a software provider to provide AI large model services to Dunhuang and Huadu large model service centers. And it helps with the service model, such as the asset market model gateway and performance monitoring, et cetera. And in 2025, we plan to expand the model service of DeepSeek to 30 computation service center. And we have also applied AI into our own office system. And this is a SaaS office automation system, and we have already applied AI to the knowledge library assistant and we have already provided such kind of service to 5,800 enterprises. In terms of cloud service, we have a partner with a lot of public and private cloud providers and SaaS providers. We can provide the distribution service consultation, migration, operation and maintenance data management and value-added service. We are on the map, and we will utilize our in-house multi-cloud management platform to provide a better service. The multi-cloud management platform was a project that we kick started in 2016, with years of iteration, we continue to optimize its capabilities. This product was widely used in state-owned companies, such as our National Grid. National Grid is one of the biggest multi-cloud environment. And we have covered 27 provinces and cities. And we have integrated the resources of more than 100,000 enterprises. And we have also strategic partnership with Huawei cloud integration Baidu and Smart X and many others. Apart from National Grid, we have also acquired projects such as [indiscernible] and many others. In 2025, first, we will utilize our experience and capabilities accumulate in the state-owned company segment and spend in other similar companies. And a lot of our partners such as Huawei and Smart X are expanding the overseas markets. And that's why in 2025, we will also launch our products that targets over these markets, together with the partners, we go global. And as we know that the cloud service in China is a very mature. Apart from the top clients, we are seeing more demand from the small and medium-sized companies, and that's why we have the lighter cloud self-service platform products that target the cloud. And in terms of the partnership with the major cloud providers, as you can see, we have partnership with Ali Cloud. We are the largest general distributor for Ali Cloud, we have a partner with them for more than 7 years, and our CAGR has been 60%, and we are the highest in the industry and in the Huawei Cloud ecosystem, we have 4 titles. We are the general distributor for Huawei Cloud. We are also the solution provider, the training and empowerment partner as well as the service partner for Huawei Cloud. And we ranked #3 in terms of the business among Huawei Cloud. And for the partnership with Amazon Cloud, we are the promoter for Amazon Cloud value-added service provider. And we have been awarded AWS the best partner for 2 years. And for VMware, we are the exclusive distributor for China and Southeast Asia market. And starting from last year, we have helped VMWare to switch to a subscription-based model and the overall business has exceeded our expectation. Next, I would like to share with you some key projects that we obtained last year, together with Ali Cloud, we obtained the Draji project. As we know that Draji is one of the most popular tea beverage brand, and we helped them to manage their orders at the peak and tough period. We help them with their mini app and application response, and we provide them with the private cloud system, and we help them also migrate their system to Ali Cloud. And we think our peers and advantages such as our professional service and our own product which can enable data analysis. And we also have a very professional observation system, which can help us to observe the data usage and we also have the V+ industrial cloud platform which set us apart from our competitors. For the partnership with AWS, we have helped Hong Kong ES to migrate its system to AWS last year. There are many difficulties to overcome. For example, we need to make sure we satisfy the need of high stability and high security, and we also need to make sure there's no lagging effect in the migration of the system, and we have helped Hong Kong ES successfully migration the transactional system. And together with Huawei, we have secured the iFlytek product. As you know, iFlytek is a well-known intelligent voice and AI listed company, and the migration of their system involves more than 100 applications and different resources and the complexity of the resources was one of the challenges. We help them to streamline the business structure and also help them to redo the overall cloud native system. In summary, for our own products and services, we have a planning for 2025, we'll continue to deepen our partnership together with Ali Cloud, Huawei Cloud, VMWare and AWS. And we will -- any trades more lower-tier cities and markets such as the government services, based on the DSL cloud and we will also upgrade our database for information and innovation segment, and we will also segment our product based on the V+ industrial cloud platform. And in terms of the AI investment, we plan to invest more than 50% in R&D and as I have mentioned earlier, this year, we will have the large model machine launch under our own brand and it will help us to increase more than 100 million to 300 million of revenue [indiscernible] of our products.

[Operator Instructions] We also welcome questions from our investors online. we have gathered some question from the investors. The first question is about DeepSeek, has brought among a lot of dividers and individualization. The company has also made a lot of preparation before. Is there any new planning for AI-related business?

Let me respond to this question. We have been surprised by DeepSeek. And DeepSeek has brought a lot of changes to our clients several years ago, I would say that a lot of clients are buying computation power service, but mainly from the government clients. But after DeepSeek's launch, a lot of clients are more active in purchasing AI servers and they started to use DeepSeek and try to integrate DeepSeek into their business scenario to enhance their business efficiency and service to the customers. And we are seeing more and more similar projects. And one of the most common scenario is in the data center, the large models, can be combined with DeepSeek, such as Llama, and there is a popularity for the DeepSeek machine. And we are also working with our partners to optimize the DeepSeek model and also develop AI agents so that we can help the clients with the digital transformation. For example, for our Nanjing software company is hiring large model service personnel because some enterprises have higher requirement for security, and they're not willing to deploy the system on the cloud. That's why they want to deploy the large model on-premise, and they have some difficulty in hiring their own talent, and that's why we have been very busy in this regard.

Next question.

[indiscernible] Securities. From the data we can see 70% increase for Southeast Asia business. Can you please break it down for us? And can you also share with us more about overseas business?

The 70% business growth is not a regular growth, but there are 2 special factors that contributed to the high growth. First in Malaysia last year and also in Singapore. There were a lot of international companies deploying the AI data center, which push the business growth for us. And in the Philippines, we had 40% of the stake in the JV. Last year, we added 2 extra percent of the stake, and we had become the major shareholder and that gives us extra business in the Philippines. But all in all, the Southeast Asia market has been growing quite well. For example, in Thailand, we used to be top 3, but now we are top 1 in a market. And for Indonesia, the past 4 to 5 years, we had in #2, but we used to be 30% of #1. And now we are 80% of the #1 player. So we have been growing continuously. Cloud is one of the digital infrastructure. Cloud infrastructure is using the same devices, storage and servers, so we do not have a very precise breakdown for such kind of products. But for private cloud, for example, VMware, we have been their exclusive distributor in China and Southeast Asia market, and that gives us a lot of growth too. Any other questions?

Next question, which is about the dividend payout. A lot of our cash on the balance sheet, would you increase the dividend payout?

No, the dividend payout is around 30% to 35%. We are a company to focus on high growth. As you have seen in the video, in the past 10 years, our profitability grew by 5x from 100 million to 500 million. We need a lot of fund to support such kind of high growth. And as we have not raised any money from the market, we will continue to reinvest in our industry. We need money to grow the market. So between the growth and dividend payout we need to maintain a balance and after years of the discussion, we believe the reasonable level is around 35%. And of course we are not a company with high dividend payout. Do we have one last question from online or onsite?

The next question would be the 2025 development goals and plans for the year?

We are very lucky if we were in the real estate industry, it will be devastating us, but we are very lucky that we are in the ICT industry. It is a market of massive prospects and continuous growth, in the past few years the growth is mainly driven by the upgrade of information and technology. We grew faster than the industry average. For example, we acquired ECS and ECS used to be #6 and #1 was Digital China around 40 billion. The second one around 30 billion. And from #3 to #5, it was quite similar. But at that time, we only had a revenue of 7 billion. But now we are only second to Digital China. Changzhou digital -- Digital China is now also quite worried about the competition from us. But what I'm trying to say that we have made the biggest progress in the industry. Ingram Micro in Singapore is larger than us, but they have changed their CEO, because just like churns, administration there were lots of volatility for other competitors. Not for us, we are the most professional and most stable company. And a lot of clients are willing to partner with us for the long term. For Hewlett Packard, they have been exploring their model from offline to online. And they're very willing to partner with us is because we have a very stable team, just like the Chinese market. Despite many problems, our Chinese market has been growing the fastest and we have seen excellent growth for our Southeast Asia markets, much better than our competitors. In the future 3 years, I expect 20% annual growth roughly. We have already overcome the biggest challenge in the past years in the Chinese market. For PST, we have lost the market share in hard disk because nobody was doing this business. And there was only some security companies that are still purchasing our hard disk. 7 to 8 years ago, 80% of our business in China came from foreign brands such as Microsoft, but because of the battling and the conflicts between China and U.S. there has been a localization trend for IT systems, that's why our revenue related to foreign brands has seen drastic decline. For enterprise clients, last year, it only accounted for 20% of our total revenue. And we believe that there might be a minor decline in the future, but it will not be very big. There are some foreign clients enterprises and individual customers that do not have high requirements for confidentiality, they will still use the foreign brand. But for government-related clients, they have a security concern and they will utilize the Chinese brands. The reason why foreign brand business declined so much, and we have continued to grow is mainly because we have increased our market share for innovation and in related business. We are, for example, the biggest distributor for Kingsoft. For cybersecurity products we are also bigger than #2 to #5 are combined. We have prepared ourselves very early for this market segment, for example, [ Tianjin ] have been their partner, the first year, the independent -- they became independent from 360. And there's another company called [ Zha Tian ] company, who is a Shanghai-based company. Our business from them is more than 1 billion. And we have been the most loyal partner for a lot of small clients, and we have benefited from such long-term partnership. So that's why we have been growing continuously and I believe that the market share for foreign brands will become stable, and in the future, 3 years is either 15% to 20% annual growth.

We have received another question from online. We have seen a decline for the gross profit margin in 2024, why? Is it because the gross profit margin in Southeast Asia is lower, and do we have any M&A plans?

Yes, we do have M&A considerations and plans. For example, in Southeast Asian market, Vietnam is still a blend market for us, and we have some considerations for M&A. The gross profit margin decline is due to 2 reasons. First is the decline in foreign brands business. For information and innovation-related products, we had to join the fierce competition, for example, for the noble products. We had to lower the gross profit margin and market share. But we believe that the gross profit margin will be more stabilized in the future. And for Southeast Asia, our business grew by 70%. Our gross profit margin did not grow accordingly, it's mainly because we focused on AI service such as the Hewlett-Packard AI servers. It has been very popular. The client would have to pay in full, upfront and wait for the shipments of the AI server. There is no upfront cost, but clients also think that we did not invest too much, and that's why the gross profit margin was very low, maybe around 1%, and that's why we have lower gross profit margin, but it is not a general trend. It is mainly because of the product structure. I believe in the future, 3 years, the gross profit margin will be optimized, and we will see the overall growth for gross profit margin. And actually, for Southeast Asia, the gross profit margin declining is mainly because of product mix difference.

Thank you very much for the response and thank you very much for attending the VSTECS 2024 annual results announcement. This is the end of the briefing, thank you again for participation and for your long-term support for the company and we look forward to seeing you next year.