China Tower Corp Ltd

HKEX:788

Earnings Call Transcript 2021-Q2

[Jilu Tong, executive]

Good evening, ladies and gentlemen. Welcome to China Tower's 2021 Interim Results Announcement. As the COVID-19 pandemic is still raging, we conduct the event by means of a conference call. Thank you for your continued support to China Tower. It's our pleasure to have you here.

Now I would like to introduce the management attending today's results briefing: our Executive Director and General Manager, Mr. Gu, Xiaomin; Chief Accounting, Mr. Gao, Chunlei; Deputy General Manager, Mr. Liu, Guofeng; and Deputy General Manager, Mr. Zhang, Quan. First, I will explain the company's overall performance for the first half of 2021. Then Mr. Gu, Xiaomin and Mr. Gao, Chunlei will explain the operational and financial performance, respectively. At the end, we will have a Q&A session.

In the first half of 2021, the company grabbed opportunities arising from 5G new infrastructure, digital economy and new energy development and continued to promote resource sharing and focus on ways to drive development through innovation. This resulted in good progress in all our businesses, contributing consistent and steady growth in the financial results. The company's operating revenue increased by 7.2% year-on-year to RMB 42.67 billion, indicating satisfactory growth. Meanwhile, profitability increased consistently with a net profit of RMB 3.46 billion, representing a year-on-year growth of 16.1%.

The company adhered to its sharing philosophy and forged ahead with the One Core and Two Wings strategy, and thus has further reinforced its multi-pillar development plan. During the reporting period, we continued to deepen resource sharing within the industry to expedite large-scale construction of 5G network in a cost-effective manner. Our TSP business continued to grow steadily and healthily. Revenue increased by 4.5% to RMB 39.81 billion for the first half of 2021, accounting for 93.3% of our operating revenue. This has laid a solid foundation for the company's healthy development in the future.

The company also actively promoted the sharing of social resources and built up digital towers and intelligent energy application to rapidly scale up its Two Wings business. In the first half of the year, revenue from the Two Wings business surged by 73.3% year-on-year to RMB 2.74 billion, accounting for 6.4% of our operating revenue in the first half of the year, up from the 4.0% in the same period of 2020. That business has become an increasingly powerful driving force behind the growth in our overall revenue and profit. The company made full use of its existing tower sites and social resources to innovate the solution for 5G network construction and the service model. This enabled the company to deploy its resources with precision and to support TSP's rapid 5G network deployment cost effectively.

In the first half of the year, the company completed the infrastructure of approximately 256,000 5G projects, of which 97% were completed by sharing of existing resources. The impact of 5G on improving our revenue has begun to show its effects. In the first half of the year, 5G contributed to 64.1% of the incremental revenue in the TSP business. To expedite the development of its TSSAI business, we stepped up the effort to transform telecommunications towers into digital towers, focusing on video surveillance. The company continued to enhance capabilities in digital information, services and integrate multisectors within the ecosystem, and thus build a nationwide unified platform for video surveillance, information systems, standardized Tower Monitoring products.

We have officially launched our Tower Monitoring service in a wide range of customers across sectors relating to the national economy and people's livelihood, including environmental remediation, disaster relief, eco conservation and village governance, et cetera. The Tower Monitoring business has begun a new chapter in the company's digital information services and has added impetus to the rapid development of TSSAI business, thus laying a solid foundation for the company's development into an information application service provider with core competencies.

In energy business, the company gave its professionalized power supply and backup capability, full play, focusing on its core businesses segments of battery exchange and power backup. The company consistently expanded the scale of its operations and improved its delicate management approach as it aimed to build up its core competencies of being the largest industry player with the best-in-class services, creating smart energy applications with China Tower characteristics to satisfy people's daily needs and serve our community. All this can contribute to the country's high quality and rapid development, and at the same time enable the company to develop itself into an energy application service provider with core competencies.

5G new infrastructure is in full swing as our country pursues its cyberpower strategy. The transformation of digitalization accelerated its penetration into various industry and sectors, and the development of new energy sector also means more room for our business development in intelligent energy application. All these developments present good and strategically important opportunities for the company in the future. We will leverage our unique advantage of resources to actively grab such opportunities.

On the one hand, we will facilitate 5G network construction at low cost and high efficiency and consolidate the leading market position of our TSP business. On the other hand, we will speed up the development of our Two Wings business so as to drive growth in both the revenue and profit. All this is aimed at developing the company into an enterprise with the best potential for shared growth and value creation among its peers in the world. Looking ahead, the company will take the initiative to adapt to the changing business environment, keep strengthening its innovation capabilities and core competencies in order to ensure its healthy development.

In terms of the innovation in application of technology, we will further step up the effort in integrated wireless communications coverage solutions according to the characteristics of 5G technology so as to enable 5G network construction in a cost-effective way. We have also actively begun the innovation in the application of the Two Wings business, with emphasis placed on the innovation and upgrading of its platform and algorithm so as to enhance its technical support to its business development and operation.

In terms of operational and management innovation, the company continued to improve its intensive and effective management mechanism and promote digitalization and intelligelization (sic) [ digitization and intelligentization ] to empower its asset operation and management. The company also forged ahead with its platform strategy and enhanced unified support capabilities for its business. All this has enhanced both the efficiency and effectiveness of the company's business operation.

In terms of the innovation in systems and mechanisms, the company actively promoted the 10-year system and contract management of executive team, explored the way of mixed ownership reform in subsidiary level, optimized incentive and remuneration mechanism with the aim to motivate employees to simulate vitality of the group. The company will keep pushing forward with its One Core and Two Wings strategy, ceaselessly consolidate its leading position in the telecommunications, infrastructure industry and facilitate the steady and sustainable development of its TSP business.

The company will also make an all-out effort to break new ground and foster new growth drivers so as to achieve better and faster growth of the Two Wings business. In the second half of the year, the company will step up its lean management and raise the standard of its asset operation, while maintaining stable growth in its operating revenue. Such moves can enhance the company's profitability consistently and increase its cash flow steadily to create greater value for our shareholders.

Now I would like to hand over to our Executive Director and General Manager, Mr. Gu Xiaomin. He will explain the company's operating performance for the first half of the year in more details.

[Xiaomin Gu, executive]

Thank you, Chairman Tong. Now I would like to report to you the company's operating performance in the first half of 2021 and our major task for the second half of the year. This table shows comparable data on the company's various business revenue and key indicators. I will explain them in detail.

In the first half of the year, the company's operating revenue increased by RMB 2.88 billion or 7.2% year-on-year, showing a sound growth. In terms of the breakdown of revenue growth by business segments, TSP business contributed to 59.6% of the total operating revenue growth with 4.3 percentage point revenue contribution. Meanwhile, the Two Wings business accounted for more than 40% of the increment in revenue, showing an increasing contribution to the revenue growth at a rate of around 3 percentage points.

Now I would like to explain the development of our business by sectors in detail. The company adhered to market-oriented approach, further enhance resource sharing and strengthened its core competitive advantages of providing low cost, high efficiency and quality services. Our tower business continued to develop steadily, and our industry leadership has been enhanced. In the first half of 2021, revenue from the tower business increased by 3.7% year-on-year to RMB 37.72 billion. As of the 30th of June 2021, the number of TSP tenants increased by 3.3% year-on-year to 3.228 million, representing a net increase of 53,000 from the end of 2020. The TSP tenancy ratio reached 1.59, showing a steady improvement in site colocation level.

In the first half of the year, the company employed multiple measures to provide efficient and quality service to support 5G network construction. Firstly, to capitalize on the massive construction of 5G infrastructure, the company exerted its advantage in resource coordination and actively harnessed the information of 5G supporting policies. We also managed to coordinate site entry in key scenarios, thus laying a solid foundation for 5G infrastructure construction.

Secondly, focusing on customer needs. The company further promoted innovation on construction service mode and made full use of social resources and deepened comprehensive sharing so as to enhance resources, utilization, efficiency and promote 5G infrastructure construction at low cost and high efficiency. Thirdly, the company kept abreast of the evolution of 5G technologies and clients' networking strategies. We stepped up investment on innovation and research to promote the application of innovative products, including low-cost tower and ancillary facilities for power supply as well as the sharing solution of 5G passive DAS, all with an aim to expedite the massive 5G network deployment at low cost.

With regard to our DAS business, the company focused on 5G DAS in key scenarios and leveraged advantages in coordinating site entry. It promoted the development of DAS sharing an innovative, diversified solutions for different scenarios, combining active and passive DAS, thus providing customers with flexible and differentiated indoor coverage solutions. These resulted in the continuous expansion of our DAS business.

As at the end of June, we cumulatively covered buildings with an additional area of 350 million square meters. Additional subways and high-speed railway tunnels under DAS coverage was 561 kilometers and 1,167 kilometers, respectively. In the first half of 2021, revenue from our DAS business increased by 21.3% year-on-year to RMB 2.09 billion, indicating a healthy growth momentum. The company actively promoted innovation on products and business model and launched Tower Monitoring, shifting from providing solutions based on single product to providing standardized products and unified business model.

Through the establishment of a nationwide unified video surveillance platform, the company kept improving its digital information service level. In the first half of the year, TSSAI business recorded a revenue of RMB 1.85 billion, up by 46.6% year-on-year, among which revenue from Tower Monitoring amounted to RMB 940 million, accounting for 51% of the TSSAI business, while revenue from sites leased was RMB 910 million, accounting for 49%. The company kept accelerating the transition from providing simple resource leasing to information services and promoted the scale development of the TSSAI business.

Leveraging the company's competitive advantage in mid- and high point monitoring, the Tower Monitoring business provides smart video surveillance service to customers with standardized products through unified technology standards, service specifications, platform support and operation management, products with a wide variety of functions. Tower Monitoring provides over 160 professional functions, including video preview, alarm and locating. It supports on-demand menu selection, and it's easy and quick to install, flexible and convenient networking methods. It allows flexible cost region networking. Users can also integrate Tower Monitoring with their own business management process, enhancement on platform algorithms.

Our innovative algorithms database takes in and integrate the leading function algorithms. In the future, the company will concentrate its efforts on the development of Tower Monitoring by stepping up innovation, research and development, building up the industry ecosystem and enhancing marketing capability. We will make an all-out effort to develop digital tower and contribute to the development of the digital economy. In the first half of 2021, the energy business sped up its development in key business sectors and stepped up its sales and marketing effort. This resulted in a rapid business expansion with revenues surging by 180.6% year-on-year to RMB 880 million.

For battery exchange business, we recorded a revenue of RMB 500 million over the first half of the year, accounting for 57% of energy business revenue. As of the 30th June 2021, we have already deployed business in 260 cities in Mainland China and built a cumulative total of 35,000 battery exchange sites, serving nearly 460,000 customers in the logistic industry, such as couriers and takeaway drivers. The number of users increased by 200% over the same period last year, achieving a development breakthrough and ranking #1 in terms of the number of cities under coverage, battery exchange sites and users.

In terms of power backup business, leveraging the well-developed capability and ensuring base station power supply, we provide customers with integrated power supply and backup solution that encompass power backup, power generation, monitoring and maintenance service. In the first half of the year, power backup business recorded revenue of RMB 320 million, accounting for 36% of energy business revenue. As of the 30th June 2021, the business had developed a cumulative total of nearly 20,000 power backup sites, serving diverse industry and sectors, including finance, health care and transportation.

For the coming half year, the company will actively exert its strength in resources sharing and collaboration, enhance innovation on products, technologies, systems and mechanisms and consistently raise the level of its delicate operations so as to facilitate the rapid and high quality development of the energy business. As an enterprise that operates with an asset-heavy business model, the company adheres to value creation and adopts a flat lean, centralized, efficient and internet-enabled operation management model, which embodies its all-out effort to drive development with digitalization and to manage and use its assets in a practical way, all these aim at driving growth through both business development and asset operation.

Firstly, by carrying out individual site audit, the company strengthened the effective allocation of resources and unleashed their potential value so as to enhance assets' ability in creating income and profit. Secondly, by means of digitalization, the company promoted digitalized management of its assets throughout their entire life cycles. It also adopted unified system to code its assets. The individual code will follow the asset throughout its life cycle. These enabled the dynamic monitoring of asset operation and effective integration of resources.

Thirdly, the company kept improving its centralized and unified platform for operation monitoring and enhance its big data analysis function. This enabled the visible, manageable and controllable assets and resources management and promoted smart and precise repair and maintenance work. In the second half of the year, the company will stay the course regarding its strategy and concentrate on its major task with the aim of expediting its high quality and sustainable development. The key measures are as follows. Firstly, we will further deepen the resource sharing and collaborative development, innovate construction and service model to meet customer needs at low cost and high efficiency, all with an aim to promote steady revenue growth of TSP business. Secondly, we will concentrate our efforts on promoting Tower Monitoring. By stepping up innovation and enhancing the data and information services capability, we aim to boost scale development of the TSSAI business.

Thirdly, we will accelerate the development in key sectors, focus on delicate operations and consolidate our core competitive advantages to establish leadership in energy business. Fourthly, we will enhance asset operation to promote development driven by digitalization and intelligence so as to improve the efficiency and effectiveness of the company's overall operation. Fifthly, we will encourage innovation in both systems and processes so as to drive the company's development by innovation and to motivate internal corporate development vitality.

Now I would like to hand over to our Chief Accountant, Mr. Gao Chunlei. He will explain the company's financial performance.

[Chunlei Gao, executive]

Thank you, Mr. Gu. Now I would like to explain the company's financial performance in the first half of 2021. This table shows the key financial indicators of the company for the first half of 2021. In the first half of the year, the company maintained satisfactory financial performance. It achieved a rapid growth in revenue, an increase in profitability, a more effective control of CapEx with healthy cash flow. In the first half of the year, the company continued to step up digitalization of asset operation management and effectively controlled its expenses by benchmarking of individual tower sites, thus improving the utilization efficiency of our capital and resources.

The operating expense to revenue ratio decreased to 89.5% from 90.5%. In the first half of the year, the company's operating expenses increased by 7.0% year-on-year to RMB 36.32 billion, of which depreciation and amortization increased by 6.8% year-on-year to RMB 24.83 billion due to the construction undertaken to expand the 5G network. Repairs and maintenance expenses decreased by 3.6% year-on-year to RMB 2.89 billion as the company continuously improved its hierarchical and delicate maintenance system to allocate maintenance resources precisely that enhance the utilization efficiency of the repairs and maintenance.

Employee benefits and expenses increased by 3.0% year-on-year to RMB 3.57 billion in the first half of the year. If a provision for the amortization after restricted shares was excluded, the employee benefits and expenses would have increased by 6.2% year-on-year. Other operating expenses increased by RMB 800 million year-on-year to RMB 5.02 billion in the first half of the year due to the scaling up of tower sites and the development of the Two Wings business. Specifically, the expenses for developing the Two Wings business increased by RMB 330 million year-on-year in the first half of the year.

Site operation and supporting expenses, including short-term site lease charges, recognized in accordance with the accounting standard on leases, IT service expenses, site planning expenses and et cetera, increased by RMB 250 million year-on-year. Benefiting from the multichannel low-cost fundraising and centralized fund management, the company maintained its overall financing cost at a low level. Its average interest-bearing liabilities also decreased year-on-year. In the first half of the year, net finance cost decreased by 9.6% year-on-year to RMB 1.87 billion in the first half of the year.

The company's profitability improved consistently on the back of the stable growth in operating revenue and effective cost control. In the first half of the year, the company's operating profit increased by 8.8% year-on-year to RMB 6.35 billion. In the first half of the year, EBITDA rose by 7.2% year-on-year to RMB 31.18 billion, with an EBITDA margin of 73.1%. Excluding the impact of the adoption of IFRS 16, EBITDA increased by 9.2% year-on-year and EBITDA margin increased by 1 percentage point year-on-year to 59.0%.

In the first half of the year, the company's net profit grew by 16.1% year-on-year to RMB 3.46 billion. Net profit margin rose by 0.6 percentage points to 8.1%. In the first half of the year, the company ensured that investment matched its development. It pressed ahead with the transformation of the construction mode. With the focus on the characteristic of 5G network construction, it also stepped up the coordination of the existing resources and social resources. All this enabled it to come up with more economical and differentiated products to meet customer needs flexibly.

The CapEx decreased by 27.6% year-on-year to RMB 10.36 billion and was equal to 24.3% of the total revenue. Specifically, the maintenance CapEx decreased by 12.5% year-on-year to RMB 1.28 billion. In the first half of the year, cash flow remained sound and healthy. Net cash generated from operating activities amounted to RMB 24.24 billion. Free cash flow increased by 8.6% year-on-year to RMB 13.88 billion. EBITDA maintenance CapEx continued to improve and increased by 8.2% year-on-year to RMB 29.90 billion.

Meanwhile, EBITDA maintenance CapEx accounted for 70.1% of the total revenue and achieved steady growth. As at the 30th June 2021, the company's asset-liability ratio was 44.2%. The company maintained a stable and healthy capital structure, with a gearing ratio at 37.0%. In the second half of the year, the company will press on with its One Core and Two Wings strategy and continue to grab the opportunities for development. It will also strengthen its lean management and work to increase both its profitability and cash flow so as to create greater value for our shareholders.

Thank you.