U.S. Markets open in 4 hrs 10 mins

Edited Transcript of 0788.HK earnings conference call or presentation 7-Aug-19 12:00pm GMT

Half Year 2019 China Tower Corp Ltd Earnings Call (Chinese, English)

Aug 22, 2019 (Thomson StreetEvents) -- Edited Transcript of China Tower Corp Ltd earnings conference call or presentation Wednesday, August 7, 2019 at 12:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Edgar Fu

China Tower Corporation Limited - Head of IR

* Tong Jilu

China Tower Corporation Limited - Executive Director & Chairman

* Gu Xiaomin

China Tower Corporation Limited - Executive Director & General Manager

* Gao Chunlei

China Tower Corporation Limited - Chief Accountant

* Liu Guofeng

China Tower Corporation Limited - Deputy General Manager

================================================================================

Conference Call Participants

================================================================================

* Danny Chu

BofA Merrill Lynch - Analyst

* Rama Maruvada

Daiwa Singapore - Analyst

* Bing Duan

Nomura - Analyst

* Gary Yu

Morgan Stanley - Analyst

* Bin Liu

Citigroup - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Edgar Fu, China Tower Corporation Limited - Head of IR [1]

--------------------------------------------------------------------------------

Good evening, ladies and gentlemen. This is Edgar Fu of China Tower. Welcome, everyone, to China Tower's annual results briefing conference call for the first half of 2019. First and foremost allow me to introduce the members of management joining us tonight: Mr. Tong Jilu, the Executive Director and Chairman; Mr. Gu Xiaomin, the Executive Director and General Manager; Mr. Gao Chunlei, the Chief Accountant; and Mr. Liu Guofeng, the Deputy General Manager.

Please be reminded that the results presentation can be downloaded at our IR website and this call will be conducted in Mandarin with consecutive translation. (Operator Instructions). (Spoken in Mandarin). Without further ado I would like to transfer the call to Mr. Tong Jilu, Chairman of China Tower. (Spoken in Mandarin).

--------------------------------------------------------------------------------

Tong Jilu, China Tower Corporation Limited - Executive Director & Chairman [2]

--------------------------------------------------------------------------------

(Interpreted) Ladies and gentlemen, good evening. Welcome to the conference call of the interim results announcement 2019 of China Tower. Tomorrow will mark the one year anniversary of the IPO of the Company and in the past one year since our IPO we help have won the support and recognition of our investors, shareholders and also the wider community. We thank you for all of this.

Since the beginning of this year, the Company continued to implement the development philosophy of sharing and also we implemented our One Core, Two Wings strategy. The overall performance of the Company is very stable.

The overall performance of the company remains stable and our operating efficiency keeps improving. And the development and also our business structure continues to be optimized and our market-leading position continues to be consolidated. And we continue to implement and push forward the One Core, Two Wings strategy. And we continue to improve in terms of the -- and innovate in our management institution and mechanism and implement a lean and delicacy management.

For the first half of the year the operating revenue totaled RMB37.9 billion, that is a growth of 7.5% year-on-year. And EBITDA numbered RMB27.82 billion, an increase of 5.3% year-on-year. And net profit reached RMB2.55 billion, that's an increase of 110.6% year-on-year. And the tenancy ratio for tower business reached 1.58 from 1.47 a year ago.

Since the beginning of the year the operating environment of the business both inside and outside has changed dramatically. It also provides a huge opportunity for the further development of our business. With the awarding of the 5G license, the 5G network construction is now being implemented and this brings us great opportunity for development. And the further in-depth application of IT in various sectors of the society provides growth room for our TSSAI business.

In terms of energy business, there has been huge demand from the market creating huge opportunities for us. As the next step forward we are going to focus on our core advantage and further implement the One Core, Two Wings strategy.

In terms of the TSP business, we are going to further implement and reinforce the idea of sharing and consolidate our leadership position in the market. And in terms of our Two Wings business, we are going to fully leverage our advantage in terms of our resource and capability to achieve scaled up developments of the Two Wings business.

The year 2019 witnessed the rollout of 5G construction in China and it's also the year zero for the implementation of One Core, Two Wings strategy of our Company. For this year we are going to try to maintain a steady growth of our operating revenue and ensure that our profit growth rate outpaced the revenue growth rate. And we are going to try to achieve breakthrough in terms of the scaled up development and the overall development of our capability in order to create great value for our shareholders.

Thank you. We are now ready to receive your questions.

--------------------------------------------------------------------------------

Edgar Fu, China Tower Corporation Limited - Head of IR [3]

--------------------------------------------------------------------------------

Okay, operator, we are ready to take questions now. Thank you.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions). Danny Chu, Bank of America.

--------------------------------------------------------------------------------

Danny Chu, BofA Merrill Lynch - Analyst [2]

--------------------------------------------------------------------------------

(Spoken in Mandarin).

--------------------------------------------------------------------------------

Unidentified Company Representative [3]

--------------------------------------------------------------------------------

The questioner is Danny Chu from Bank of America. He has two questions. Firstly, he thanks the management team for the presentation. The first question is regarding China's 5G development.

As we understand, the Chinese government already issued the 5G license in early June to the [3G] three TSPs. And at the same time we have the ongoing trade war between China and the US. So, what is the management's view on the development of 5G in the second half of the year? Do they think that in the second half of the year the three TSPs are going to speed up their investment in the development of 5G? And if that's the case, will the Company benefit significantly from their efforts?

The second question is, during the results announcement the management team mentioned that in the Company's TSSAI business it carried out procurement services for some of its customers. The question is, in the future will this service as part of TSSAI have some impact on the working capital of the Company?

--------------------------------------------------------------------------------

Tong Jilu, China Tower Corporation Limited - Executive Director & Chairman [4]

--------------------------------------------------------------------------------

(Interpreted) Regarding your first question, indeed the three TSPs have already implemented the rollout of the 5G construction. And so far we have received more than around 65,000 requests -- base station requests. For the year as a whole the base station request is going to be around 100,000. We believe that the real upscale production will be commence next year, which will bring development opportunity to the Company.

So, in terms of current 5G construction, around 90% of that is actual remodeling of existing base stations. So, there won't be some significant increase. And also, if you look at the revenue from this 5G from the three TSPs, the charging scheme is if a new system is being added to the existing site, we charge the TSP 0.1 unit of the tenant charge. And if a new platform is added then we charge 0.3 unit of the standard tenant charge.

So, you can see there is no overall increase in the number of tenants. And you can calculate for yourself in terms of the revenue contribution from these different systems and platforms. So, according to our estimate of the 100,000 base stations we look at for the whole of this year, only 5% of that total will be new construction. However, we'll be increasing our scale up of the 5G network in China. There will be more opportunities for new construction.

In terms of the development of our TSSAI business, I'd say the overall department strength is very healthy and fast with a growth rate of more than 1.25 times.

And in terms of the question you just mentioned for the procurement for our customers and also construction for our customers under TSSAI, actually we recognized the net revenue in the accounting for that or in booking. So we'd say this part of the service won't have any negative impact on the quality and also the trend and profitability of our business. And we are fully confident that our revenue from our TSSAI business will grow faster compared to the first half of the year.

--------------------------------------------------------------------------------

Operator [5]

--------------------------------------------------------------------------------

Rama Maruvada, Daiwa Singapore.

--------------------------------------------------------------------------------

Rama Maruvada, Daiwa Singapore - Analyst [6]

--------------------------------------------------------------------------------

I have a (inaudible) question and some follow-up questions (inaudible). Firstly, could you clarify that I heard this right? You talking about building -- looking at 100,000 base stations for 2019 and (inaudible) 95% is the existing size. And did I hear you right that you would be [filling] it out to uplift that is in each of (inaudible)?

--------------------------------------------------------------------------------

Unidentified Company Representative [7]

--------------------------------------------------------------------------------

Excuse me, Rama, could you speak a little bit clearer? We can't hear you well at this end.

--------------------------------------------------------------------------------

Rama Maruvada, Daiwa Singapore - Analyst [8]

--------------------------------------------------------------------------------

Could you clarify --? Sure. My question is with regards to 5G. Did I hear it right that you have 100,000 2019 base stations planned, and 95% of that would be existing sites? And out of which, for each existing site you would get an ARPU uplift? And each of these 5G base stations would count as 1.1 unit per tenant? Could you clarify that?

The second one is with regards to site readiness. How many of your 1.954 million tower sites are 5G ready? And what is the kind of CapEx that you require to make each site 5G ready on average? Thank you.

--------------------------------------------------------------------------------

Unidentified Company Representative [9]

--------------------------------------------------------------------------------

Okay, let me confirm with you the questions before I translate them to ensure that I get them correct. So, your first question is regarding 5G. So, you talk about the revenue recognition mentioned just now by Mr. Tong, because it's about that 0.1 and 0.3, right? You want Mr. Tong to clarify on that?

--------------------------------------------------------------------------------

Rama Maruvada, Daiwa Singapore - Analyst [10]

--------------------------------------------------------------------------------

That is correct.

--------------------------------------------------------------------------------

Unidentified Company Representative [11]

--------------------------------------------------------------------------------

That is your question, correct?

--------------------------------------------------------------------------------

Rama Maruvada, Daiwa Singapore - Analyst [12]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Unidentified Company Representative [13]

--------------------------------------------------------------------------------

And your second question is -- you asked about the existing 1.95 million sites here under China Tower. And obviously some of them are 5G ready. So, your question is to ensure that all the stations are 5G ready how much CapEx is needed?

--------------------------------------------------------------------------------

Rama Maruvada, Daiwa Singapore - Analyst [14]

--------------------------------------------------------------------------------

Correct.

--------------------------------------------------------------------------------

Unidentified Company Representative [15]

--------------------------------------------------------------------------------

Okay. (Spoken in Mandarin).

--------------------------------------------------------------------------------

Tong Jilu, China Tower Corporation Limited - Executive Director & Chairman [16]

--------------------------------------------------------------------------------

(Spoken in Mandarin). To answer your second question first, to ensure that the existing 1.95 million base stations are -- sorry, 1.95 million sites are 5G ready, we need an additional CapEx of RMB2.5 billion to RMB3 billion.

And regarding the breakdown of the share of either 0.1 or 0.3, because it's still ongoing we can't give you a definite number yet. So, maybe we can share it with you later.

Regarding this 0.1 and to 0.3, it is basically a multiple on the basis of the average revenue from each individual tenant at the moment.

--------------------------------------------------------------------------------

Unidentified Company Representative [17]

--------------------------------------------------------------------------------

One thing I would like to clarify a bit, which is about the CapEx spend for the 100,000 5G base station already -- not ready, but demand from the TSPs. Mr. Tong just mentioned that we need about RMB2.5 billion to upgrade and (inaudible) our existing sites for these 100,000 5G base stations. For the future, 1.954 million sites we don't have the CapEx yet. Thank you.

--------------------------------------------------------------------------------

Operator [18]

--------------------------------------------------------------------------------

Bing Duan, Nomura.

--------------------------------------------------------------------------------

Bing Duan, Nomura - Analyst [19]

--------------------------------------------------------------------------------

(Spoken in Mandarin).

--------------------------------------------------------------------------------

Unidentified Company Representative [20]

--------------------------------------------------------------------------------

The questioner is from Nomura. He actually has four questions. The first question is regarding accounts receivable of the Company. Apparently there is a total sum of RMB7 billion which is an increase over the previous period. How is that? Is it because the three TSPs have been falling down in making the final dividend? And what is -- the final payment? And what is the management's view regarding the trend for the second half of the year or even next year?

The second question is regarding accounts payable. Because we understand that many of the vendors or suppliers of the Company are private businesses, and apparently the Chinese government has made some requirement to the Company to step up its payment to these companies. Does this have any impact on the business?

Thirdly, it is regarding the 5G base stations. Because the government encourages and requires infrastructure sharing in the 5G construction, will that have any impact in terms of the demand for 5G stations to the Company? And also, with the joining into the playing field the forecasting of the radio and television network, will there be additional requirement for 5G sites or locations?

Fourthly, it's regarding the DAS business of the Company, because the tenant and also the five members are not mentioned in the [PPT] this afternoon. So, perhaps some management team can share those numbers now.

--------------------------------------------------------------------------------

Tong Jilu, China Tower Corporation Limited - Executive Director & Chairman [21]

--------------------------------------------------------------------------------

(Spoken in Mandarin) Okay, for your questions regarding accounts receivable, the market and also DAS, I'm going to ask our General Manager, Mr. Gu, to answer them. And then for accounts payable, I'm going to ask our Chief Accountant, Mr. Gao, to answer it.

--------------------------------------------------------------------------------

Gu Xiaomin, China Tower Corporation Limited - Executive Director & General Manager [22]

--------------------------------------------------------------------------------

(Interpreted) Thank you for your questions. For the accounts receivable, we have been watching it very closely and we'd say our accounts receivable is at a reasonable level at the moment. In fact, around 79% of the accounts receivable are happening within three months. And in the second half of the year we are going to set up our management work in order to reduce the total sum of accounts receivable.

Regarding the 5G base station construction, yes, there is this sharing requirement. But we don't see any major impact in terms of the demand for our service at the moment. As Chairman Tong just mentioned, by the June 30, we have received a total number of 65,000 individual demands. And regarding the requirement from the radio and television network, we haven't received any demand from it yet.

And regarding your third question on the number of DAS channels, yes, we did disclose the number for DAS tenants at the end of last year, which stood at 31,400. But based on our practice, we realize that it will be a much more effective measure to use the coverage area as a measurement. So, that's why, if you look at our presentation this afternoon, we used the indoor coverage space and also the covered [camera lens] as a measure or metric to reflect our [development] of DAS.

So, if you look at our revenue from DAS business for the first half of this year, it's JPY1.254 billion, that's an increase of 52% year-on-year from RMB824 million a year ago. And in terms of the increased indoor coverage of DAS in the first half of this year, the number stood at 450 million square meters. And according to our forecast, the number for the second half of the year is going to be [on top].

And also in terms of our DAS business, we have our advantage in the coverage of key locations. In fact, the state government encouraged us to carry out our work in the coverage of key locations and also encouraged us to take a leadership position in coordinating the development.

And that wraps up my answers in the time of interest. And then Mr. Gao is going to answer your question regarding accounts payable.

--------------------------------------------------------------------------------

Gao Chunlei, China Tower Corporation Limited - Chief Accountant [23]

--------------------------------------------------------------------------------

(Interpreted) So first of all I need to clarify that the Company won't allow the accounts receivable to impact our accounts payable. In terms of accounts payable we have a quantified approach respectively for projects and daily operations. We understand that the accounts payable effective management is really important for the fostering of a low cost industrial chain for the Company.

We understand that many of our vendors and suppliers along the industrial chain that [are offered] with China Tower are small and medium-sized private businesses and there our financing cost is quite high. So, by effectively managing our accounts payable we can help them control or lower their finance costs.

So, at present the average account age for our accounts payable for the project type of account is around three months and that's for the operating or operation type of account is -- the average account age is two months. So, you can see that in terms of the accounts payable for China Tower, it is on a declining trend.

--------------------------------------------------------------------------------

Operator [24]

--------------------------------------------------------------------------------

Gary Yu, Morgan Stanley.

--------------------------------------------------------------------------------

Gary Yu, Morgan Stanley - Analyst [25]

--------------------------------------------------------------------------------

(Interpreted) This is Gary Yu from Morgan Stanley. The question is still about 5G. The first question is, as was mentioned by the management earlier, so far they have received demand totaling 65,000. So, the forecast is that by the end of this year the number is going to be 100,000. So, what is the breakdown here between macro and small and the DAS? Does it mean that the majority of this demand is on macro cells or are there any small or DAS requirements?

The second question is again regarding 0.1 and 0.3 in the charging scheme. So, you mentioned that for adding a new platform the multiple or the factor is 0.3 of the average tenant charge. But my understanding is that for 5G there will be mostly new platforms. So, does it mean that the majority will be 0.3 rather than 0.1?

--------------------------------------------------------------------------------

Tong Jilu, China Tower Corporation Limited - Executive Director & Chairman [26]

--------------------------------------------------------------------------------

Again I'm going to ask Mr. Gu, our General Manager, to answer your question.

--------------------------------------------------------------------------------

Gu Xiaomin, China Tower Corporation Limited - Executive Director & General Manager [27]

--------------------------------------------------------------------------------

(Interpreted) So, to answer your first question regarding the 65,000 demand, yes, the majority of them are for macro cells. For DAS we have carried out pilot project in three cities on their metro system. So, to see a major pickup in terms of demand for small cells and DAS we think it's going to be somewhere next year.

Regarding the 0.1 and 0.3 issue, so obviously we implemented this based on the commercial pricing contracts we signed with three TSPs. And as I mentioned earlier, for each new addition of a new system, the charging factor or multiple is 0.1 and for the addition of a new platform it's 0.3. My understanding is that we have both 0.1 and 0.3 at the moment. I do not have the exact breakdown here.

--------------------------------------------------------------------------------

Operator [28]

--------------------------------------------------------------------------------

Bin Liu, Citigroup.

--------------------------------------------------------------------------------

Bin Liu, Citigroup - Analyst [29]

--------------------------------------------------------------------------------

(Spoken in Mandarin).

--------------------------------------------------------------------------------

Unidentified Company Representative [30]

--------------------------------------------------------------------------------

The gentlemen from Citigroup has two questions. The first question is regarding TSSAI. Earlier Mr. Tong mentioned a growth rate of more than 120%, so he would like Mr. Tong to clarify that -- on that. What does he mean? Does it mean the TSSAI business is going to grow faster in the second half of the year than the first half of the year?

The second question is regarding the number of tenants for small cells, does the management have the number to share here?

The next question is again about 0.1 and 0.3. The gentleman's understanding is that if the 5G antenna is combined with 4G antenna or in other words the 4G antenna is remodeled to (inaudible) 5G, then the factor or not is going to be 0.1. However, if it's going to be a brand-new 5G antenna the factor is 0.3. Is that the case? And what will be the percentage of the likelihood of 5G combining with -- 4G combining with 5G antennas?

--------------------------------------------------------------------------------

Tong Jilu, China Tower Corporation Limited - Executive Director & Chairman [31]

--------------------------------------------------------------------------------

(Interpreted) So, first I need to clarify that the revenue from TSSAI in the second half of the year is going to be higher than that of the first half of the year. But it doesn't mean that [cities] are higher than 125%. So, for the existing tenants, whether it is 2G, 3G, 4G tenants, if we add at 5G, if it's a system then the factor 0.1, if it is a platform it is 0.3.

For our small cell tenants it increased by 38,000 for the first half of the year. In terms of sites it increased by 13,000. And the average revenue from one individual small cell is RMB6,000 per annum. Thank you.

--------------------------------------------------------------------------------

Operator [32]

--------------------------------------------------------------------------------

(Inaudible).

--------------------------------------------------------------------------------

Unidentified Analyst [33]

--------------------------------------------------------------------------------

(Interpreted) Three questions. The first question is regarding the 5G power supply. So, I understand that there will be some retrofit that's needed to ensure the power supply for your 5G business. So, what will be the comps we are looking at?

Second question is we understand that the Company procured lots of secondhand leasing battery for backup power, so how is this going so far? Do you have any plans to procure some new batteries?

Thirdly, in terms of your energy business, who are your major customers, if it's convenient for you to share? And what is the possible revenue contribution from these customers?

--------------------------------------------------------------------------------

Tong Jilu, China Tower Corporation Limited - Executive Director & Chairman [34]

--------------------------------------------------------------------------------

(Interpreted) I'm going to ask Mr. Gu to answer your first question regarding the retrofits of the parts system, and Mr. Liu Guofeng to answer your second question and third question regarding the battery and also the energy business customers.

--------------------------------------------------------------------------------

Gu Xiaomin, China Tower Corporation Limited - Executive Director & General Manager [35]

--------------------------------------------------------------------------------

(Interpreted) (multiple speakers) is 2.5 to 4 times of that 4G, so it involves two things here. One is the retrofitting of the power system, the other is backup power.

In terms of the power system retrofitting, according to the commercial pricing contracts the cost will be passed on. So, at present, based on the demand of the TS piece, we mostly work on the size of systems that have favorable conditions. But in the future we have to have to stop our work in this regard.

For the exact cost, it varies according to each specific situation and scenario. So, for the current backup for 4G our practice is 3 hours. For the power backup for 5G, we are still considering the solution based on different scenarios and the possibility of power shut down. Okay, so that's my answer to your question.

--------------------------------------------------------------------------------

Liu Guofeng, China Tower Corporation Limited - Deputy General Manager [36]

--------------------------------------------------------------------------------

To answer your second question regarding battery for backup power, so at present we mostly use power batteries retired from hybrid or electric vehicles. I'm referring to the new adds and also the retrofit ones. For the retired leasing for batteries, they have [a price] performance advantage over the traditional land-based battery.

While improving the power backup power backup capability, it also helps save on the operating cost. For the first half of the year the total capacity of retired power battery is 2 gigawatt hours. Its performance is very stable, very reliable and very good.

Thirdly, I'm going to answer your question regarding our energy business, the customer type and also the future development trend.

There is huge market potential in terms of energy service and energy guarantee. We have set up a subsidiary that is the energy tower company and we have carried out private work in terms of backup power, power generation, battery exchange and also power sales or energy sales in different parts of the country. And in terms of the backup power, our (inaudible) customers are mostly financial branch officers, the traffic signal system, medical institutions and also schools.

And in terms of the customers of our emergency power generation, they are mostly financial branches, supermarkets and shopping malls, catering services, outdoor activity -- major outdoor events and also the emergency response for electric vehicles. And in terms of our battery exchange services, we mostly offer it to customers in around 50 cities in the country. Mostly they are courier services and express delivery services that run on a smooth beat electric vehicle.

All these trials have had good experience in terms of business models and services. So, as the next step forward we are going to continue to innovate in our business models in (technical difficulty) products and build up a support platform so as to develop our energy businesses.

--------------------------------------------------------------------------------

Tong Jilu, China Tower Corporation Limited - Executive Director & Chairman [37]

--------------------------------------------------------------------------------

(Interpreted) So, in the interest of time may I suggest that we wrap up today's conference call? For your information, tomorrow at 8:30 in the morning we are going to have another investor and analyst meeting here in Hong Kong. I understand that our results have just been published this afternoon. So, if you have any query or questions, feel free to contact our Board office or our IR here in Hong Kong.

We thank you for your interest in and also for following our Company very closely and we really appreciate your questions. And we look forward to more exchange and communication with you in the future. Thank you.

--------------------------------------------------------------------------------

Editor [38]

--------------------------------------------------------------------------------

Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.