China Tower Corp Ltd

HKEX:788

Earnings Call Transcript 2022-Q4

[Zhiyong Zhang, Executive Chairman]

Good evening, ladies and gentlemen. Welcome and thank you for joining us for China Tower's 2022 Annual Results Presentation. We would like to express our gratitude for your ongoing support of China Tower.

To begin with allow me to introduce the management team joining us for today's earnings call. Mr. Gu Xiaomin, Executive Director and General Manager; Mr. Gao Chunlei, Executive Director; Mr. Hu Shaofeng, Chief Accountant; Mr. Liu Guofeng, Deputy General Manager; Mr. Yin Wenkai, Deputy General Manager; and Mr. Zhao Jingbao, Deputy General Manager.

For today's presentation, I will begin with an overview of the company's overall performance in 2022. Following that, Mr. Gu Xiaomin and Mr. Hu Shaofeng will discuss the group's operational and financial performance respectively. Finally, we'll have a Q&A session where we will be happy to answer your questions.

In 2022 China Tower capitalized on development opportunities arising from the wider and deeper reach of 5G network, the faster development of the digital economy and ongoing shift towards green and low carbon economy and society. The company approached for synergetic development of its various business and maintained overall stable growth of its operating results.

Our operating revenue grew steadily with a year-on-year increase of 6.5% to RMB92.2 billion. Our profitability continued to improve with a net profit margin increase of 19.9% to RMB8.79 billion.

Also we generated abundance and stable operating cash flow of RMB65.1 billion, reflecting a year-on-year increase of 7.7%. Moreover our TSP business tenancy ratio was 1.74 tenants per site, increased by 0.04 tenants per sites over the same period last year, which highlights the steady growth in our co-location rates.

In 2022, we also leveraged our resources capabilities to make significant progress in implementing our One Core and Two Wings strategy, resulting in outstanding business performance in various segments.

In 2022, TSP business record stable growth with its revenue increased by 3.5% year-on-year to RMB83 billion, accounting for 90.1% of its total revenue. This indicates that the company's fundamentals and sustainable development have been further strengthened.

Our Two Wings business has been showing strong development momentum in 2022 and achieved a revenue of RMB8.9 billion, an increase of 45.2% from last year and accounting for 9.7% of our overall operating revenue, up 2.6 percentage points from the same period in 2021, proving that the company has a solid and growing multi-pillar development structure.

In 2022, we seized the opportunity presented by the deepening coverage of the 5G network and closely aligned ourselves with the TSP's construction plans. We coordinated and developed our resources continuously innovating our construction plans and service model to efficiently and effectively met the TSP's construction needs.

As of the end of December 2022, the company has cumulatively constructed 1.76 million 5G base stations of which more than 96% were built using existing site resources to meet the demand contributing to China's leading position in global 5G infrastructure.

In 2022, revenue from 5G tenants contributed 84.3% to the incremental growth of the TSP business revenue with an increase of 9.7 percentage points compared to the same period last year. This continues to drive our business forward.

As for the Smart Tower business, we seized the new opportunities presented by the development of the digital economy. We proactively integrated ourselves into the modernization of the national government system taking advantage of mid and high point site resources, we continuously improve the platform's ability to assess data from multiple sources, building multiple source and multiple dimension data fusion and analysis capabilities.

We also developed a leading algorithm for middle to high point monitoring scenarios continuously created industry application products that are close to user needs. Moreover, the company has also established a customer-centric companion-based operation system, which realized all-round share surface and open a new chapter in the company’s data information service field.

In 2022, Smart Tower business achieved a revenue of RMB 5.7 billion, representing a year-on-year growth of 40.5%. This growth rate is 5.3 percentage points higher than the 35.2 percentage growth achieved last year.

As for our energy business, we're actively aligned with the national Dual carbon goals. While drawing on our resource advantage and continuing to strengthen our core competency, we continuously deepen our presence and battery exchange market for food and parcel delivery, creating a large-scale operation based on sharing consolidating our low-cost competitive advantage and maintaining our leading position in the low-speed electric vehicle battery exchange market.

We also strengthened our 4-in-1 service capabilities of power backup, power generation, supervision, maintenance and continuously expanding the scale of power backup business.

Relying on the unified operational supervision system nationwide, we kept enhancing dedicated asset management and improving operational efficiency. Also, we promote smart customer service applications, optimized complaints handling and repair process, hence significantly improved our service capabilities.

Energy business recorded revenue of RMB 3.2 billion in 2020, representing a 54.5% increase from the previous year, showing a strong development momentum. In 2020, we focused on enhancing our capabilities on operation and management, technological innovation, customer service and reform and development honing to build solid foundation with multiple development approaches.

Firstly, we have strengthened the company's asset operating capabilities. We have accelerated platforms construction to efficiently support businesses development. Also, we are advancing intelligent operation and maintenance to improve the precision of operations and maintenance and to strengthen asset life cycle management and also to improve our efficiencies than returns. Secondly, our customer service competencies were improved by optimized service standards and from building, a standardized system with differentiation.

In addition, we did not only enhance our service quality and build static at service team. We had also implemented a transparent fully closed-loop produced to provide high-quality service. Thirdly, the company has improved its technological innovation competency by developing plans to scientific and technological innovation, which focus on key areas and leverage strategic leadership.

Our R&D investment has doubled compared to the previous year, and we continue to strengthen the research and development of key projects and improve our technological capabilities. Lastly, we further add our reform and development competencies by promoting full coverage of tenure-based contractual management and strengthened our incentive mechanism, plus implemented plans for talent development in the 14th Five-Year period to support the strong future of the company. We also deepened double-hundred-action reform in subsidiaries, to unleash and boost their vitalities.

The company always attach great importance to shareholder returns. We continue to maintain an active dividend policy, and are committed to sharing the fruits of the company's growth with our shareholders. After considering -- future development needs of the company, the Board has recommended a final dividend of RMB 0.03232 per share in 2022, representing a year-on-year increase of 23.2% equivalent to a payout ratio of 72%, of our annual distributable net profits.

Looking ahead, we will continue to bolster our growth momentum and profitability so that we can create greater value for our shareholders -- the company is facing new opportunities for future developments -- for the TSP business the construction of 5G network continue moving forward. It is expected that by the end of the 14th Five-Year plan period indoor 5G coverage will reach the same level as 4G coverage, driving greater demand for the construction of information infrastructure.

As for the Smart Tower business, the digital economy has a promising development prospects. There is an urgent need for different sectors to use digital means, to improve governance capability, which provides a policy dividend to the development of digitalized Smart Tower business that's based on mid- and high point site resources.

Regarding the Energy business, the acceleration of dual-carbon strategies has driven greater demand for electricity and the development of the economy and society, is transitioning to green and low carbon rates, bringing anomalous opportunities for the company to expand its new energy application service.

In the future, with our One Core and Two Wings strategy and three providers missions the company will strengthen the leading position of TSP business in the communication infrastructure industry, drive to open up a new space for digitization development of Smart Tower business. We're also building up the development momentum of energy business. The company is committed to maintaining stable operating revenue and fortifying lean management. to improve profitability and create greater value for shareholders, customers and society.

Next, our Executive Director and General Manager, Mr. Gu Xiaomin, will introduce the company's operational performance in detail.

[Gu Xiaomin, Executive Director & General Manager]

Thank you, Chairman. Now I'm going to talk about the company's operating performance in 2022. This table shows the company's revenue and changes of each business segments as well as the key operational indicators. I'll explain these in detail now.

In 2022, the company has continued One Core and Two Wings strategy and so has model pillar development structurally getting more mature and supporting the operating revenue growth. Compared with 2021, the company's overall operating revenue increased by 6.5% and or RMB 5.59 billion, where 50.7% of this increase, were contributed by TSP business, of which 24.1% came from the Tower business.

About 26.6% were from DAS business, which lift revenue up by 1.7 percentage points, and also show that DAS business act as the second growth engine has become more prominent. The Two Wings business achieved a strong growth with incremental contribution increasing to 49.6% resulted in revenue growth of 3.2 percentage points, specifically contributed from our Smart Tower business accounted for 29.4%, while LNG business accounted for 20.2%.

Next, I will talk about the development of our main businesses. For Tower business, we were able to grasp the characteristic of 5G construction demand, actively capture demand in low frequency network coverage and new site construction. By optimizing the construction service model, we promoted joint deployment of key projects with customers so that our connection with customers and comprehensive solution capabilities were improved.

Moreover, we had signed the commercial pricing agreement with the TSP's for a period of five years by further expanding the scope of cooperation and promoting sharing in win-win development within the industry, ensured a long-term stable development of TSP business. In 2022, our Tower business achieved a total revenue of RMB 77.2 billion, a year-on-year increase of 1.8%.

At the end of 2022, the number of TSP tenants reached 3.362 million, representing a year-on-year increase of 3.1% and or a net increase of 102,000 tenants compared to the end of last year. TSP tenant per tower site increased from 1.6 to 1.65 and the value of sharing was further released.

For DAS business, the company deepened coordinated development model of resources plus demand take up all DSA construction demand of key location scenarios and industries. We have also enhanced our professional capabilities. We offered a range of innovative shared DAS products and solutions, so that we could provide quality, green and low-carbon DAS solutions at a lower cost.

In 2022, the company's DAS business achieved a total revenue of RMB 5.83 billion, representing a year-on-year increase of 34.3%, indicating rapid and accelerated development. As of the end of 2022, DAS coverage and buildings increased by 2.4 billion square meters, which was 2.6 times more than the same period last year. Our DAS business also cumulatively covered 20,000 kilometers of subways and high-speed railway tunnels, indicating a continuously expanding DAS coverage.

On the development of Smart Tower business, is has gradually transformed into stage of providing optimization service from simple site leasing. For site sharing, it has been upgraded from leasing site resources to a range of comprehensive products, covering electricity supplies, maintenance, network, data support and applications.

Regarding tower monitoring, the group has strengthened product R&D in five aspects: platform, algorithm, terminal, operational and security, focus on key industries and release seven industrial applications, sub products to gradually build leadership of different products.

In 2022, Smart Tower business contributed to projects, including forest and grass fire control, safeguarding China's $1.8 billion mu of farmland, national pollution prevention and control, ecological restoration of rivers and lakes, earthquake response and rescue; effectively supporting government departments responsible for environmental protection, plant, forestry, water resources, emergency response and serving the national economy of people's likelihood.

In view of the structure of Smart Tower business, Tower Monitoring business contributed annual revenue of RMB 3.69 billion, accounting for 64.8% of the total segment revenue. Meanwhile, site sharing business generated annual revenue of RMB 2.01 billion, accounting for 35.2% of the total segment revenue, reflecting the progress made in digital transformation. The number of shared sites and tenant of Smart Tower business continue to grow, and the resources sharing scale further expand.

As for Energy business, the company sees opportunities from the national policy industry, development and technological upgrade. We also focus on two core business segments: battery exchange and power backup, to facility rollout of dual carbon strategy.

Firstly, we deepened our focus on the consumer battery exchange market, continuously increasing our market penetration rate; expand the scale of cooperation with business group’s users, explore opportunities to expand our service to vertical industries, strengthen leadership and consumer battery swapping market.

Secondly, we had also expanded and strengthened our power backup business by focusing on key industries such as communication and finance. Also, we provide customers with comprehensive solutions that includes power backup, power generation, monitoring and maintenance. Focusing on large-scale events and conferences impose a small and medium power backup scenarios and provide them with safe and reliable temporary power backup services.

In view of the energy business structure, battery exchange business contributed annual revenue of RMB 1.8 billion, representing a year-on-year increase of 44.8% and accounting for 56% of the total segment of revenue.

It has developed more than 900,000 users, up 47.4% year-on-year. As for Power Backup and Other businesses, it generated annual revenue of RMB 1.4 billion, up 69.1% from the same period last year and accounted for 44% of revenue of LNG business, a total of 64,000 power backup sites were built, up by 13.3% year-on-year. LNG businesses have seen remarkable increase in scale as well as improving professional service capabilities.

Now, our Chief Accountant, Mr. Hu Shaofeng will explain the company's financial performance in 2022.

[Hu Shaofeng, Chief Accountant]

Thank you, Mr. Gu. Next, I will walk you through the company's financial performance, in 2022.

This table contains our key financial indicators in 2022. Over the year, the company delivered good business performance with steady revenue growth. Profitability continued to improve and cash flow remains stable and robust capital structure and remained healthy.

In 2022 the company saw the high-quality development and continuously improves the accounting system for Single site audit. We accurately allocate causes and expenses, carried out actions such as asset repairs and maintenance, safety houses remediation and so on to improve asset service capabilities, enhanced site operation efficiency.

The total operating costs for the year were RMB 78.86 billion, an increase of 6.3% compared to previous year on a comparable basis. Regarding depreciation and amortization in 2022, the company adjusts the depreciation life of the cascade batteries from eight years to five years.

Based on the evaluation of the actual use status of the cascade batteries and the accounting estimate became more stable, and the changes thereof resorted and an increase RMB 640 million in depreciation for the year, benefiting from changes in the structure of TSPs, 5G construction of demand, the company's enhanced technological innovation, optimize construction plan, and extension of operating life of mature assets.

The depreciation and amortization for 2020 was RMB 49.53 billion, a decrease of 2.2% compared to the previous year on a comparable basis. And its proportion to operating costs decreased from 68% to 62.5%.

In terms of repair and maintenance expenses, the maintenance expenses for 2022 were RMB 7.59 billion, an increase of 31% year-on-year, primarily because the company allocated maintenance costs in a reasonable manner and show the operational safety of equipment and facilities and a continuous improvement of customer service quality through carrying out special campaigns, such as maintenance of assets and safety houses remediation with the increasing and useful life of assets.

In terms of employee benefits and expenses, the company deeply implemented the strategy of strengthening the enterprise with talent and further recruited high-quality talents and fields of communication technology, digital economy and new Energy.

A total of 1,398 new contract employees were recruited throughout the year, besides the company strengthened the performance-oriented remuneration and such remuneration location tend to be in favor of outstanding talent and key front-line positions.

Employee benefits and expenses for the year amounted to RMB7,940 million, up by 15.5% over last year, representing a year-on-year increase of 10.9% after considering the impact of reversal of amortized cost of restricted shares, accrued in previous periods in 2021 of RMB 285 million.

In 2022, the site operation and support expenses were RMB5.86 billion, representing a year-on-year increase of 13.5%, up by RMB700 million over last year, of which short-term site lease charges, electricity costs and other site operating expenses increased by RMB370 million over last year. IT service fee and planning and service fees, in respect of site operation increased by RMB390 million over last year.

Lastly, regarding other operating expenses, the other operating expenses were RMB7.94 billion, representing an increase of 38.4% over last year, up by RMB 2.2 billion over last year, driven by the rapid growth of the 2 wing business. The business development costs, including technical support service expenses. Market expenses and energy consumption expenses of business operating for the 2 wing business increased by RMB1.48 billion over last year.

Now turning to a prudent financing and capital management. The company actively expand low-cost financing channels and optimize the structure of interest-bearing liabilities. As such, total finance cost declined and net financing costs in 2020 decreased 22.7% year-on-year. In 2022, the company stick to coordinating and sharing of resources, allocating investment based on development and capabilities building needs.

Annual capital expenditure was RMB26.2 billion, an increase of 4% from previous years. Regarding new site construction and augmentation, the TSP structure changed in 2022, of which the proportion of demand met by using existing site increased. We also actively optimized our construction plans, control projects costs and improve effectiveness of investment, thus our CapEx for new site construction and augmentation decreased by 8.3% year-on-year to RMB14.66 billion.

Regarding site replacement and improvement with ensuring the health and continuous service capabilities of asset in mind, we arranged assets upgrade and replacement, rectifying safety cases, ensuring supply of battery backup capacity for important scenarios and upgrading and transforming intelligent operation and maintenance.

The CapEx for site replacement and transformation rose by 64.4% year-on-year to RMB6,049 million, which made up 23.1% of all CapEx versus 14.6% last year.

As for the towing business, we accelerated investment in infrastructure and platform construction to meet business development needs. The CapEx for Smart Tower and energy facilities was RMB3,860 million, up by 27.2% year-on-year accounted for 14.7% of total CapEx, while the proportion in 2021 was 12%.

Thanks to the effective support of various resource input for business development and the effort of guarantee the quality of asset operation, the company's operating profit grew at a similar pace as revenue.

In 2022, operating profit amount to RMB13.3 billion, an increase of 7% year-on-year on a comparable basis, affected by the comprehensive impact of changes in the cost structure, such as the increase in special maintenance costs due to rectification [ph] measurements of the company's EBITDA decreased by 0.3% in 2022 to RMB62.8 billion from the previous year, EBITDA ratio maintained at a relatively high level of 68.2%.

In 2022, the company's net profit amount to RMB8.79 million, a 17.6% increase on comparable basis, net profit margin widened by 0.9 percentage point year-on-year to 9.5% on comparable basis. The company's profitability continued to improve. Thanks to the continuous growth of revenue, the steady improvement of probability and supporting policy of national tax rebates, our cash flow remained healthy in 2022 with operating cash flow of RMB65.1 billion, an increase of 7.7%, our free cash flow was RMB38.9 billion, increased by 10.2% from last year. As of the 31 December, 2022, the company's liability to asset ratio was 36.6% and gearing ratio was 27.7%. The company maintained an overall solid capital structure.

In 2023, we will continue implementation of the One Core and Two Wings strategy, focused on developing a professional, intensive, dedicated, efficient and digitized operation system. We will also strengthen effective investment and lead management, continue to improve efficiency and effectiveness, so as to speed up sustainable and healthy growth of the company and create greater value for shareholders. Thank you.