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Edited Transcript of 552.HK earnings conference call or presentation 27-Aug-19 6:00am GMT

Half Year 2019 China Communications Services Corp Ltd Earnings Call

Beijing Sep 5, 2019 (Thomson StreetEvents) -- Edited Transcript of China Communications Services Corp Ltd earnings conference call or presentation Tuesday, August 27, 2019 at 6:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Furong Si

China Communications Services Corporation Limited - President & Executive Director

* Wai Cheung Chung

China Communications Services Corporation Limited - Company Secretary & Deputy CFO

* Xu Zhang

China Communications Services Corporation Limited - Executive VP, CFO & Executive Director

* Zhiyong Zhang

China Communications Services Corporation Limited - Chairman

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Presentation

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Wai Cheung Chung, China Communications Services Corporation Limited - Company Secretary & Deputy CFO [1]

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Good afternoon, ladies and gentlemen. I'm Terence of China Comservice. On behalf of the management, I would like to welcome you to our 2019 Interim Results Presentation.

This presentation will be conducted in Mandarin with simultaneous English interpretation. I will provide consecutive interpretation in the Q&A session. Please switch off your mobile phone or have it on vibration. Thank you.

Let me introduce our management who are with us today. Chairman, Mr. Zhang Zhiyong; President, Mr. Si Furong; Executive Vice President, Mr. Liang Shiping; Executive Vice President and CFO, Mr. Zhang Xu. Thank you for coming. I hope you will find this presentation helpful. Next, let's invite our Chairman Zhang to present the 2019 interim results overview.

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Zhiyong Zhang, China Communications Services Corporation Limited - Chairman [2]

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Good afternoon, ladies and gentlemen. I'm glad to meet you all at China Comservice 2019 Interim Results Presentation.

Today's presentation is divided into 3 parts. First, I will introduce the overview of our results. And next, Mr. Si and Mr. Liang will present the business review and financial results, respectively. During the Q&A session, we will answer the questions that you may concern.

In first half 2019, we adhered to the overall road map of value-driven, seeking steady yet progressive growth and high-quality development against the backdrop of sophisticated and changing operating environment and declining revenue in telecom industry. Our overall results maintained steady growth. Development quality was sound with revenue mix optimized. Net profit continues to grow, and net profit margin remained stable.

In recent years, through deployment in domestic non-operator market and strengthening the development of OpEx business of domestic operator market, growth momentum noticeably transformed. Domestic non-operator market and OpEx business of domestic operator market have become major growth drivers. In addition, we enhanced software service capabilities effectively and further raised brand influence. Revenue from software-related business recorded rapid growth, which surpassed the growth rate of the industry. Adapting the trend of Cyberpower, Digital China, Smart Society and capturing digital transformation demand from society and industries will leverage on our competitive edges and experience to affirm the positioning of New Generation Integrated Smart Service Provider, which steers the company to ride on the trend of digital economy in order to realize high-quality development.

In first half 2019, revenue maintained a double-digit growth, amounted to CNY 56 billion, up 10.4% year-on-year. Net profit was CNY 1.7 billion, up 7.3% year-on-year. Net profit margin remained relatively stable.

In recent years, facing a negative impact from the declining investment in domestic telecom industry and decrease in industry revenue in first half, we adhered to value-driven principle, transforming momentum continuously and optimizing business structure and achieved preliminary positive results. Revenue and net profit sustained stable growth.

In first half 2019, growth momentum noticeably transformed. The 2 dual growth drivers: domestic non-operators and domestic operators; CapEx and OpEx, achieved favorable results.

Domestic non-operator market extended its rapid rising trend in the past 2 years and maintained double-digit growth, in which year-on-year growth of core businesses even exceeded 33%. Incremental revenue from such market surpassed domestic operators, and domestic non-operator market became the main growth driver. In recent years, we intensely developed OpEx-driven business and core BPO businesses became the main growth driver of the operator market. At the same time, we attached great importance to the transformation of operators and met new ICT business demand. ACO business of domestic operator market experienced accelerated growth and its revenue contribution increased further.

From the above chart, domestic non-operator market's contribution to the total incremental revenue in first half increased substantially to 89% from 45% in the same period last year and accounted for 37.6% of total revenues. Domestic non-operator market became the largest customer and the largest revenue contributor.

In recent years, we have enhanced software and smart service capabilities and cultivated numerous smart products and services for industries. Our status in the software industry was raised that we will rank 5th in the 100 Most Competitive Software & IT Service Enterprises 2019 by MIIT, up from 6th last year, only after Huawei and BAT. We were also ranked one of the top 10 leading enterprises in the Leading Enterprises of Information Technology Industry in 2019.

We achieved positive results in promoting smart products, driven by our consultation and planning businesses. With smart products embedded, CNY 100 billion scale projects kept emerging and newly signed contracts of smart products accounted for nearly 40% of total new contracts. Besides, growth of ACO major businesses, including system integration and software development, surpassed that of national software business revenue for consecutive years at 25% year-on-year in first half 2019.

In sum, our transformation has achieved initial positive results. New growth momentum from domestic non-operator market was formed and grew continuously. Our software and smart service capabilities have been enhanced and laid a solid foundation for the company to adapt to the new trend of 5G, IoT and AI and growth opportunities in Cyberpower, Digital China and Smart Society.

MIIT issued 5G licenses in June this year. As shown in the graph, 5G investment structure will be different from that in the past. On one hand, domestic operators will increase investment, and on the other hand, domestic operators will increase investment quickly, which will bring us fast opportunities in 3 main areas. First, 5G bring investment by domestic operators and we will benefit directly in network infrastructure construction. Second, technologies from 5G, including low latency, high bandwidth, big connectivity, especially network slicing, would change industry, operations and business model transformation. Industry digital transformation and industrial Internet will bring us new market on digitalization and intelligentization business and promote synergistic operation of our 3 segments. Third, as numerous industrial operators emerge, operator -- operation and maintenance support service demand will increase.

To prepare for the new changes in trends brought by 5G, we have cultivated a broad spectrum of smart products and solutions and accumulated a wealth of experience from providing operation and maintenance support services. We will expedite transformation according to customer needs to solidify our foundation.

In the past 13 years since our listing, we have been adapting to industry trend and changes in the industry to find the right of -- right market position. We have promoted innovation and transformation to ensure a development direction in line with market and become a CNY 100 billion listed SOE. As transformation further progresses, we build software and smart service capabilities and enrich Smart Society product portfolio. We have built unit -- unique informatization service capability, Consultant + Staff model, full coverage implementation capability and cross-region, cross-industry collaboration capabilities.

Going forward, we affirm the positioning of New Generation Integrated Smart Service Provider to adapt to digitalization trend in the society, seize opportunities from 5G, cloud computing and IoT and face end-to-end integrated smart service demand from customers. We'll leverage our advantage on servicing domestic operators, boost a new driver of domestic non-operators, strengthen the dispersed R&D centers of smart products, optimize platform ecosystem continuously, converge internal and external skills, products and resources, with an aim to build integrated smart service core competencies. We believe the new positioning will steer the company to better capture important strategic opportunities to realize high-quality development.

Looking forward, there are vast opportunities. GDP growth in China is steady and progressive, and digital economy has become a core economic growth driver. New technologies such as 5G, Big Data and AI expedite evolution, integrate deeply with economy, which will bring more new demands. SOE reform and Belt and Road would bring us valuable opportunities. Meanwhile, changes in macro environment bring uncertainties to economic growth and industry development, market competition intensifies and labor costs keep increasing. The transformation is determined to proceed. We must increase investment in preliminary introductory phase strategically and in R&D as well as striking a balance between short-term profitability and short-term -- lock short-term profitability and long-term development.

Facing the opportunities and challenges, we will expedite deployment in different markets. In domestic non-operator market, we will focus on key sectors, expedite foundation platform cultivation, optimize ecosystem continuously to enhance core competencies and raise brand awareness and influence in industry with an aim to ensure sustainable rapid growth. In domestic operator market, we will adhere to CapEx and OpEx dual driver strategy, satisfy upgrade and transformation demand from domestic operations and strengthen cooperation in new aspects, such as cloud network integration and IoT with an aim to achieve stable growth. In overseas market, we will focus on major projects, further optimize business structure, promote transformation of business towards EPC-plus model and promote the matured products in China to overseas to explore more opportunities. We will capture strategic opportunities to satisfy customer demand to further transform our business in the direction of high technology, high-quality, high-efficiency and high sustainability with building Smart Society, promoting digital economy, serving a good life as mission, thus ensuring high-quality development.

Above is the overview of our 2019 interim results. Next, let's invite President Si to present the business review. Thank you.

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Furong Si, China Communications Services Corporation Limited - President & Executive Director [3]

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Thank you, Chairman Zhang. Ladies and gentlemen, good afternoon. I will present the gross business performance for first half 2019. The table shows the revenues and growth rates of the 3 business segments and percentage to revenue -- total revenues of each segment in first half 2018 and first half 2019.

In first half 2019, TIS business benefited mainly from the fast growth in domestic non-operator market to record steady growth. Both core BPO and ACO businesses achieved double-digit growth, among which, ACO business increased by 21.6%, which was the fastest growing.

In first half 2019, we captured the digitalization and intelligentization demands from society and industries, accelerated development of the domestic non-operator market and deeply explored market potential in domestic operator market. Stable growth we're seeing in all our businesses.

ACO business sustained the high double-digit growth, driven by smart business with the promotion of Consultant + Staff business model, driven by integrated services with consultation and planning businesses as leading role and ACO smart products embedded. TIS and BPO business grew rapidly. Robust growth in the above businesses contributed to the sustainable rapid growth in domestic non-operator business at 28.5% year-on-year. With the further development of OpEx business and integrated into domestic operators ecosystem and transformation, BPO business grew steadily while ACO business grew rapidly, and thus, domestic operator market achieved stable growth.

I would like to elaborate more. We leverage on the advantage of abilities in operator market tap in -- to explore the non-operator market. In first half 2019, business structure and market structure were further optimized.

On business composition, portion of revenue from TIS business remained relatively stable. The portion of revenue from ACO business and core BPO businesses continued to increase at 28.2% and 12.7%, respectively, while that from product distribution business was further controlled.

On market composition, customer base was further diversified. A portion of revenue from domestic non-operators continues to rise, accounting for 37.6%, and became the largest customer group. By seizing the opportunities from Digital Economy and Smart Society and deeply penetrating into the demand from the informatization and intelligentization of key industries, we'll provide integrated solutions to customers and achieve favorable results in domestic non-operator market.

In first half 2019, revenue from domestic non-operator amounted to CNY 21.1 billion, up 28.5%, and the growth rate was 9.2 percentage points higher than the same period of last year. Among this, core business grew by more than 33% year-on-year. We enhanced integrated service capabilities, brand influence and status in the industry and optimized internal and external ecosystems. Through capabilities accumulation, enabling and expansion, collaborating capabilities in products, markets and R&D and other resources effectively, we successfully met end-to-end demand of customers.

Meanwhile, the new positioning of New Generation Integrated Smart Service Provider facilitates market development. Digital Economy is now booming with new technology, new business and new modes emerging continuously. Smart application scenarios are continuously enriched. To satisfy the rapid rising market demand, we penetrate into key industries, including government, transportation, electricity, parks, intelligent building to grasp opportunities and gain positive results.

In first half, with the support from ecosystem alliances such as Smart City, Cloud Computing, IoT and Network Security, we upgraded our smart solutions, such as Smart Cities, Smart Transportation and Smart Park and introduced new products such as Smart Justice, Smart Inspection and Smart Airport. Total amount of newly signed contracts was over CNY 30 billion, grew at over 36%. Among which, the top 5 industrial customers, government, transportation, construction, Internet and IT and electricity sectors, accounted for approximately 55%.

In recent years, we have accelerated the deployment in markets and products and cultivated over 30 smart products and solutions tailored to features and demand of various industries. In addition, we completed signature products -- projects, such as Smart Expo in Beijing Expo 2019 and Suzhou Smart Government Services across the country. China Comservice is one of the enterprises with the most comprehensive coverage of smart products in China, and we possess unique competitive edges in smart service.

We adhere to product-oriented projects, platform-oriented products and increased R&D investment through building dispersed R&D centers. Currently, we have over 20 smart product centers and formed several ecosystem alliances, including Smart City, Cloud Computing and IoT. Smart products and solutions are consistently enriched. At the same time, by expediting the building of our cloud, IoT and Big Data fundamental platforms, we fully leverage the advantage of dispersed R&D centers and strengthened capabilities accumulation, enabling and expansion system. By converging internal capabilities, market and resources, we respond quickly according to customer demand.

Our Chairman just introduced our new positioning of New Generation Integrated Smart Service Provider. Let me elaborate more here. In future, we will keep up with the times to satisfy new development needs, including new technologies, new demands, new services and new ecosystems. Through forming new philosophies and building new structure, enhancing new capabilities, we embrace changes in the market and industry. We will fully apply new technologies to create new values for customers. At strategic thinking level, we contribute our vision, planning and wisdom to customers. At execution level, we support customers with Big Data, integration and security. We will capture end-to-end demand from industries and customers, integrate new-generation technologies such as 5G, IoT, Cloud Computing and AI, build vertically-integrated services capabilities, including communications technology, information technology, data technology and operational technology with an aim to providing cross-connection, cross-application, cross-platform, cross-region, cross-supplier integrated smart services as a New Generation Integrated Smart Service Provider. What all these shows that we have unique competitiveness.

In domestic operator market, we adhered CapEx and OpEx dual growth driver strategies and firmly captured demand of traditional business while integrating smart business into traditional business. We proactively integrated in the domestic operators transformation ecosystem and to support that transformation. On the back of negative industry revenue growth in domestic operator market, 5G network construction investment being yet at scale and high revenue base in first half 2018, revenue in first half sustained steady growth and amounted to CNY 33.6 billion, up 2.1% year-on-year. Without the deployment in the past few years, maybe we would be the same -- the results would be the same as the industry.

In first half, domestic operator TIS business decline is affected by the adjustment of investment structure due to 5G licenses issuance. However, we believe domestic operators would gradually increase 5G network construction investment and domestic operator TIS business will have stable growth. We would fully support the 5G network construction of domestic operators. Through building up industry standards, strengthening subcontracting management, enhancing service quality and expanding market, we'll maintain our leading position in telecom infrastructure.

In first half, core BPO business revenue from domestic operator market was up by 12.2% and became the main growth driver of the -- of such market. We'll continuously to vigorously develop OpEx business of domestic operators, strengthen the synergistic operation on OpEx business to increase the revenue contribution by core BPO businesses.

We proactively integrate into domestic operators transformation ecosystem and develop ICT business. ACO business increased by 26.6% in first half 2019 and became the first fastest-growing business in domestic operator market. We will continuously follow the new demand from domestic operator market brought by 5G, strengthen cooperation in the fields of smart services, IoT, et cetera, to support their transformation. We will also enhance collaboration with domestic operators in the informatization market of government and enterprise customers to develop the market.

In first half 2019, overseas business experienced cyclical fluctuation because of the progress of new projects commencement. Revenue dropped by 7.4% year-on-year. We will capture opportunity brought by the Belt and Road and focus on sizable overseas projects, strengthen cooperation with domestic operators, suppliers and Go Abroad enterprises, optimize overseas market ecosystem to facilitate the transformation towards EPC+F+I+O+S model. We will extend the mature domestic products and business to overseas, thus facilitating the launch of smart products and smart applications. Meanwhile, we'll closely monitor changes in overseas environment, further increase risk prevention capabilities and enhance operation compliance.

Above the second part of business review. Next, we will have our CFO, Ms. Zhang to introduce the financial review of first half 2019. Thank you.

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Xu Zhang, China Communications Services Corporation Limited - Executive VP, CFO & Executive Director [4]

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Thank you, President Si. Good afternoon, ladies and gentlemen. I will now present our financial review for first half 2019. The table shows our key financial indicators such as revenue, cost and profit for your reference.

Next, I will introduce our key financial performance.

The company's cost of revenue in first half 2019 accounted for 88.8% of total revenues, up by 1 percentage point over the same period of last year. In recent years, revenue scale of the company continued to expand while we strictly controlled the total number of staff and utilized subcontracting resources adaptively. Direct personnel cost as a percentage of revenue kept declining while labor productivity increased 9.1% as compared with the same period of last year. The company continues to strengthen subcontracting management, and growth of subcontracting costs slowed down in first half 2019, with this growth as a percentage of revenue significantly moderated. Due to rapid growth of the company's domestic non-operator business, especially the increase of integrated turnkey projects, rapid growth in relation to construction business drove increase in material costs. At the same time, fast growth of system integration business also drove increase in material costs. The company continued to suppress the product distribution business. Proportion of direct cost of product distribution decreased by 1.1 percentage point.

Regarding operating efficiency, gross profit margin in first half 2019 decreased due to various factors, including the decrease in service price in telecom industry, the development of the domestic non-operator market still being in the preliminary introductory phase and increase in labor-related costs.

We continued to increase investment in R&D and enriched smart-type products to enhance software and smart service capabilities and accelerated ecosystem deployment in domestic non-operator market. SG&A experienced a faster growth in first half 2019. However, SG&A as a percentage of total revenue decreased and fell by 0.3 percentage point to 8.9% due to scale benefit. Net profit margin in first half 2019 was 3.1%, relatively stable compared with the same period of last year.

The company will persist in high-quality development continue promoting innovation and transformation, strengthen cost control, so as to maintain stability on overall efficiency. We have always adhered to the effective value-driven principle and continued to strengthen management on working capital, accounts payable (sic) [receivable] and accounts payables. In first half, accounts receivable turnover days continued to decrease, fell by 1 day to 118 days. Accounts payable turnover days increased by 1 day to 140 days. Due to the change in the pace on the settlement of accounts receivable and payment of accounts payable in first half 2019, especially the tightened requirements to pay private enterprise subcontractors and the funding -- and funding needed to develop sizable projects, free cash flow decreased year-on-year.

We have always put great emphasis on working capital management. The company's cash flow in first half and second half shows cyclical changes generally, and we expect the cash flow in second half to recover. Having considered there will be more funding need for our operation due to the acceleration of network construction by domestic operators in second half and the development on sizable scale projects in domestic non-operator market, we still believe free cash flow will return to reasonable range for year 2019 and by continuously strengthening working capital.

The table lists out the indicators of the company, including total assets, total liabilities and equity attributable to shareholders. As of June 30, 2019, our total assets were CNY 85.7 billion; cash and deposits were CNY 15.8 billion; liabilities-to-asset ratio and debt-to-capitalization ratio were 60.6% and 1.4%, respectively. We have always maintained low interest-bearing debt and at net cash level. The robust financial condition is favorable to the company's development and sufficiently prepares us for seizing future 5G and IoT development opportunities, expanding sizable scale projects, expediting deployment in smart products and industries, which further support innovation and transformation of the company. For more detailed financial information, please refer to our results announcement.