U.S. Markets closed

Edited Transcript of 762.HK earnings conference call or presentation 14-Aug-19 9:45am GMT

Half Year 2019 China Unicom Hong Kong Ltd Earnings Presentation (Chinese, English)

Hong Kong Aug 26, 2019 (Thomson StreetEvents) -- Edited Transcript of China Unicom Hong Kong Ltd earnings conference call or presentation Wednesday, August 14, 2019 at 9:45:00am GMT

TEXT version of Transcript

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

Corporate Participants

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

* Guohua Li

China Unicom (Hong Kong) Limited - President & Executive Director

* Kebing Zhu

China Unicom (Hong Kong) Limited - CFO & Executive Director

* Xiaochu Wang

China Unicom (Hong Kong) Limited - Chairman & CEO

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

Presentation

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

Unidentified Company Representative, [1]

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

Good afternoon, ladies and gentlemen. On behalf of the company's management, I would like to welcome you to China Unicom's 2019 Interim Result Presentation. Today, our presentation will be conducted via video conferencing and meet with our investors from Hong Kong, Shanghai and Beijing. The event will last for about 60 minutes. First, there will be a 20-minute presentation by our management, followed by a 20-minute Q&A session for Hong Kong. And lastly, there will be a 20-minute Q&A session for audience in Mainland China. The presentation will be conducted in Mandarin with simultaneous interpretation. Consecutive interpretation will be provided during the Q&A session. During the meeting, please kindly switch your mobile phone to silent mode.

First of all, please allow me to introduce the management present today: Mr. Wang Xiaochu, Chairman and CEO; Mr. Li Guohua, Executive Director and President; Mr. Zhu Kebing, Executive Director and Chief Financial Officer. Thank you all for coming, and we hope you will find this presentation informative.

Now let's invite Chairman Wang to talk about the company's 2019 interim results.

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

Xiaochu Wang, China Unicom (Hong Kong) Limited - Chairman & CEO [2]

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

Good afternoon, ladies and gentlemen. It's my great pleasure to discuss with you China Unicom's results. In today's presentation, I will report the company's overall result in the first half of 2019. And Mr. Li Guohua and Mr. Zhu Kebing will further discuss our operating and financial performance followed by the Q&A session.

Highlights of the company's results and development in the first half of this year are as follows: first, we deepened execution of the strategy of focus, innovation and cooperation to actively transform and overcome new challenges faced by the industry; second, we implemented mixed ownership reform in depth, bringing notable enhancement in both quality and return; third, our innovative businesses grew robustly and became the key revenue driver; fourth, we will capture new opportunities and create new value by nurturing and consolidating China Unicom's 5G and unique edges; lastly, we will speed up "Five New" establishment, striding for a new paradigm of high-quality development.

In the first half, the domestic telecom industry saw the short-term pain of revenue decline. Amid the complex external environment and new challenges faced by the industry, the company adhered to the strategy of focus, innovation and cooperation, drove reform and transformation, controlled costs and raised return. Our overall development remained healthy and steady.

Service revenue was down by 1% year-on-year. Profit continued to grow remarkably. Net profit increased by 16% year-on-year to CNY 6.9 billion. As the company deepened execution of the strategy of focus, innovation and cooperation and mixed ownership reform in past years, its transformation further sped up.

Industry Internet revenue grew robustly. Its contribution to the overall service revenue gradually increased to 12.6% in the first half of this year, driving further optimization of our service revenue mix.

Net profit grew remarkably every year. Free cash flow reached record high in the past 2 years and remained strong at CNY 15.8 billion in the first half as we sustainably enhanced our growth quality and return.

In the first half, facing speed upgrade and tariff reduction, market saturation, keen competition and diminishing 4G data bonus, the company persisted in differentiated and Internet-oriented operation, avoiding simple price competition to protect corporate value.

In the second half, the company will continue to pursue differentiated and Internet-oriented operation, strictly control customer acquisition cost and ultralow tariff clients. We will gradually leverage the edges of the new LTE 900 network, strengthen integrated offerings and strive to develop new customers and enhance customer value.

As the carryover effects of the cancellation of mobile data roaming fees subsides, the company will strive to drive steady to rising mobile service revenue. We are glad to see that local service revenue in July was up by 1.6% versus June. ARPU also went up.

In the first half, the company focused on capability development and scale expansion of innovative business. We promoted a new integrated sales model, combining "Cloud + Smart Networks + Smart Applications", focusing on key industry application products. We deepened business and capital cooperation with strategic investors and industry leaders. We also continue to optimize system, mechanism and talent development for innovative businesses.

In the first half, industry Internet revenue was up by 43% to CNY 16.7 billion. As its growth continued to accelerate, industry Internet has become the company's key revenue driver. In the future, the company will leverage scale benefits to progressively expand margins.

As we implemented mix ownership reform in depth, the company continued to deliver notable results in strategic cooperation and system and mechanism reform. Our innovative development continue to strengthen while our fundamental business was effectively lifted. Corporate vibrancy and efficiency continued to enhance, driving returns for both shareholders and employees.

Aiming to lift vibrancy, promote growth and control cost, we advanced system and mechanism reform on an ongoing basis. We executed organizational streamlining 2.0 and drove subdivision reform in all production units. We encouraged employees to move to innovative businesses and subdivided units, further optimizing organization and staff structure. We continued to enhance market-oriented incentives to activate the innovation and vitality of micro-entities.

Following the successful launch of our A-share company restricted share incentive scheme, we also established employee stock ownership schemes at subordinate companies.

Meanwhile, mixed ownership reform at subordinate companies is speeding up. Our Yunnan branch has contracted out all operations in the whole province to private companies. Two other subordinate companies, mainly our big data companies, Smart Steps and our IOV company, Smart Connection, have both raised capital from strategic investors.

Next, the company will actively explore mixed ownership reform at subordinate companies and leverage market forces to strengthen new energy for innovative development.

For 5G, MIIT granted in June to China Unicom the license to operate 5G services nationwide. The company will carry out focused, precise, effective and paced investment and strive for network co-build, co-share to enhance investment return.

In consumer markets, our network deployment will focus on major city clusters and other provincial capital cities with scale and quality, elevating our 5G brand influence and competitiveness.

Nationwide commercialization will begin from 2020 onwards with network architecture migrating toward SA. Meanwhile, for vertical markets, we have established 5G application innovation alliance and 5G joint innovation lab to unite various supply chain partners and develop new applications and revenues through open cooperation.

To enhance industry value and investment return, the company strives for 5G network co-build, co-share. Through co-build, co-share and better synergy, we could speed up 5G network deployment, save on CapEx and network operating cost, ensure that customers can experience seamless service upgrades in the regions of co-build co-share without replacing sim or mobile number for 5G service. And share resources to raise subscriber quality and let customers enjoy compelling experience. We will timely disclose once a cooperation agreement is reached.

5G will bring new business opportunities. We are well positioned and possess multiple 5G unique edges, including rich experience in open cooperation, well-established Internet mindset and operation experience and 5G spectrum value chain advantages. We can leverage the resources and edges of our 14 strategic investors and benefits from market-oriented system and mechanism reform.

Fast growth of our innovative businesses will also underpin future 5G application development and rollout. Furthermore, we have a track record of highly efficient and precise investment. Our big data analysis enable us to have the lowest cost among the industry.

Going forward, we are confident in capturing 5G opportunities with our partners to enhance our corporate value. In the second half, there will be both opportunities and challenges. The company will overcome the challenges, cease opportunities and actively practice new development philosophies. We will persistently execute the strategy of focus, innovation and cooperation, advanced Internet-oriented transformation and mixed ownership reform and shape critical capabilities, striving to establish our "Five New" and a new paradigm of high-quality development.

Next, we will have Mr. Li, Guohua to present the company's operating performance. Thank you.

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

Guohua Li, China Unicom (Hong Kong) Limited - President & Executive Director [3]

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

Thank you, Chairman Wang. Now let me share the company's operating performance in the first half. This table shows our revenue breakdown and changes. I will explain in further details in the following.

In the mobile business, the company insisted on differentiated operation to address the challenges faced by the industry, striving to drive steady to rising mobile service revenue. In the first half, our mobile service revenue declined year-on-year, but has stabilized sequentially since the fourth quarter of last year. In the second half, the company will step up promotion of new products, shifting towards high-quality growth. We will highlight our differentiated advantages like membership privileges and offer customized products through targeted marketing. We will also enhance customer value and retention. Furthermore, we will build a premium 5G and 4G network to better support business development, striving to drive steady to rising mobile service revenue.

Meanwhile, the company is preparing ahead for mobile number portability. We will deepen fixed line and mobile integration, widen the scope of bundling, step up LTE 900 network deployment and optimization and carry out targeted retention measures by using big data analytics in order to offer differentiated services and user experience for better customer acquisition and retention.

For broadband, the company is still facing very intense market competition. Broadband access revenue decreased by 4.1% year-on-year. Broadband subscriber increased by 2.5 million, better than first half last year. The company highlights quality, high-speed and smart home products advantages to actively counter competition. In key markets, we will promote gigabit high-quality broadband products to enhance competitiveness. We will further raise network utilization and deeply push forward cooperation with private capital in Southern China to enhance network capability. We will adopt new 2I2H and 2B2H broadband marketing models. We will also step up promotion of smart home products and strengthen integrated offerings to drive mutual development.

For corporate markets, the company fully leveraged cloud network integration advantages and promoted the mutual development of innovative business and fundamental business with an integrated model of "Cloud + Smart Networks + Smart Applications." In the first half, our corporates business achieved scale breakthrough. Corporate customer revenue increased by 14% year-on-year. Within that, cloud revenue increased by 167% and leased line service revenue increased by 17%.

The company continued to push ahead Internet transformation. For front line operation, we promoted Internet transformation in products, marketing and channels to create a new experience and value for customers. For back-end support, we promoted Internet transformation in network, IT and management to empower the front line and improve operational efficiency. As Internet transformation in various areas is deepened and Internet platform and [equality] are quickly established, the company's core competitiveness will be further strengthened.

In the first half, the company deepened cooperation with strategic investors. For touch points, we further expanded Internet touch points and privilege cooperation with Internet companies and make use of e-vouchers to launch cross-sector cooperation. 2I2C subscribers reached nearly 100 million.

In payment and finance, we partnered with strategic investors to promote WO Wallet, credit installment service, financial anti-fraud products and financial products based on credit risk control models.

In terms of content, we introduced quality content from iQiyi and Tencent Video to enhance product competitiveness. For smart home, we deeply integrated our telecom capabilities with the smart hardware and content applications of Internet companies to create new and competitive products.

For cloud computing, big data, IoT -- internet, industry internet, AI and telecommunications, we deepened the business and capital cooperation with strategic investors, consolidated our edges and resources to create a powerful alliance, so as to expedite innovative business growth and build up energy for our innovative development.

With the 5G license granted, 5G commercial service is poised to roll out. With regard to the supply of terminals, we expect 5G service will officially roll out in key cities in September.

At the initial stage, eMBB will be the key service. We will showcase the high-speed edge while enhancing other service scenarios. Eyeing on user demand and revenue growth, we will also actively create 5G capability platform and introduce featured services like VR/AR, HD video and cloud gaming, et cetera. Meanwhile, we will actively expand 5G industry applications.

For 5G innovative applications, we will create test beds of new blue ocean and incubate unicorns. We focus on key industries such as new media, industrial Internet, transportation, culture and tourism, et cetera, creating typical 5G showcase applications. Through 5G application innovation alliance, we will speed up industry product incubation and incorporate 5G+ ABC elements into existing industry solutions to create competitive advantages.

For network deployment, the company insists on precise investment with focus and cooperation. Full year CapEx budget, including 5G is about CNY 58 billion. We will prioritize investment to satisfy 5G and 4G premium network and innovative businesses and facilitate effective business growth.

In the first half, CapEx was CNY 22 billion. While capital investment were effectively controlled, our network quality and customers' perception in focused regions continue to rise. The company's 5G investment will be precise, efficient and demand driven. We strive for network co-build, co-share to reduce cost.

This year, we plan to build at least 40,000 5G base stations. Meanwhile, investment will be demand driven for 2B market with sound business models. Future 5G deployment will be focused, precise and dynamic with regard to technology advancement, market demand, et cetera, keeping in pace with the industry deployment.

In the second half, the company's priorities are as follows: to uphold cooperation and actively deploy 5G; to effectively penetrate subdivided markets to stabilize fundamental business; to build up innovative capabilities and strengthen innovative business; to regulate business practices and maintain healthy ecology; to build a comprehensive and customers-first servicing system; to strengthen network and IT support capabilities; and to fully unleash the system and mechanism advantages and reform. The company will devote itself to achieving breakthroughs in 5 new establishment and high-quality development.

Next, I will pass the stage to our CFO, Mr. Zhu, Kebing to talk about our financial performance. Thank you.

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

Kebing Zhu, China Unicom (Hong Kong) Limited - CFO & Executive Director [4]

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

Thank you, President Li. Now let me report our financial performance in the first half. Overall speaking, we maintained steady and healthy growth in the first half. The cost of telecommunication products sold declined by 18% year-on-year. Operating revenue was down by 3%. Due to good cost control, our operating profit rose by 10% year-on-year. Net profit increased by 16%. On the cost side, our interconnection charges was down by 14%. The cost of goods sold were also down by 16%. Selling expense was up by 6% but on a quarterly basis, the growth has slowed down.

On IFRS 16, excluding the impact of IFRS 16, depreciation was down by 5%, mainly driven by the good control of CapEx in recent years. Network cost decreased by 4.8%, mainly driven by the effective control of utility charges and maintenance costs, which was down by 17%. But due to the healthy free cash flow and the reduction in interest-bearing debt, our finance cost decreased by 56%.

On CapEx. Our CapEx in the first half was CNY 22 billion, of which 58% was spent on mobile network, and 15% was spent on fixed line and broadband and data. As of the end of June, the total number of 4G base stations, counting both outdoor macro sites and indoor DAS reached 1.35 million, of which 180,000 were LTE 900 base stations. Our 4G network significantly improved in terms of the depth and width of coverage. 200,000 NB-IoT base station are in operation, laying a foundation for IoT upgrade.

Our network is also VoLTE ready nationwide. We have deployed 17,000 5G base stations in the first half and kicked off friendly user trial. Furthermore, the full year CapEx budget is maintained at around CNY 58 billion. With a deepened execution of our corporate strategy and advantages of mix ownership reform being gradually unleashed, the company's financial position continued to strengthen. In the first half, our free cash flow remained robust at CNY 15.8 billion. On a comparable basis, our gearing ratio fell sharply from 61.4% in mid-2017 to 40.3% in June this year, which was also 3.5 percentage points lower than mid last year. The company's financial strength materially improve, laying a solid foundation for future business growth.

In the second half, the company will insist on high-quality development. We will enhance asset return benchmarking and total life cycle management. We will also continue to enhance compensation system with emphasis on value creation. We will deepen subdivision reform in all production units and optimize sharing of incremental returns. We will also continue to strengthen internal control to ensure regulated operations in order to drive efficiency enhancement and create greater value for our shareholders.

Thank you.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]