China Telecom Corp Ltd

SSE:601728

Earnings Call Analysis

Company Advances with Strong Digital Growth

In the first half of 2023, the company focused on digitalization, achieving a 6.6% year-over-year (Y-o-Y) service revenue growth and a 10.2% increase in net profit, outpacing the industry. China Telecom Cloud, integral to this strategy, soared by 63.4% in revenue to RMB 45.9 billion, stepping closer to the RMB 100 billion full-year target. The company's technological advancements bolstered its competitive edge, evident in various cloud market leadership positions. Capital expenditure (CapEx) reached RMB 41.6 billion, with 28% allocated to digitalization efforts, reflecting a commitment to future growth. A 65% profit payout ratio was proposed, signaling strong financial health and shareholder value, with plans to increase it even further. The company's emphasis on digital transformation and industrial digitalization led to 16.7% growth in relevant sectors, backing this digital ascent.

Company Overview and Management Introduction

At the 2023 interim results presentation, management welcomed shareholders and provided an overview of the company's half-year performance. The attendees included Mr. Ke Ruiwen (CEO), Mr. Shao Guanglu (COO), and other executives.

Dividend Proposal and Shareholder Commitment

The Board announced a dividend of RMB 0.1432 per share, representing 65% of the profits attributable to the company's shareholders for the first half of 2023. Further, there's a commitment to proposing an increase in cash distribution to above 70% for the full year during the annual general meeting.

Financial Performance Highlights

The company has reported a 6.6% year-over-year increase in service revenues, marking a decade of consistent growth. A significant contribution came from Industrial Digitalisation, reaching nearly 30% of the total revenue. Net profit saw a double-digit growth, up by 10.2% from the previous year, with the net profit margin rising by 0.2 percentage points.

Advancements in Technology and Innovation

Key technological areas such as cloud networking, big data, AI, security, and quantum technologies have seen substantial progress. Investments in R&D jumped by 27%, and R&D personnel increased by 21% compared to the previous year. Proprietary IT systems and business platforms accounted for nearly 40% of operations.

Infrastructure and Operational Efficiency

Investment in Industrial Digitalisation was increased, resulting in a 28% share of the capital expenditure, up 4.1 percentage points year-over-year. The company focused on developing a high-speed, reliable, and green digital infrastructure to support its operations and services.

Core Business Development

Mobile and broadband services continued to witness steady growth, with the mobile average revenue per user (ARPU) reaching RMB 46.2 and broadband ARPU climbing to RMB 48. High speed and the ubiquitous network are strengths maintained by the company, with a 73.4% penetration rate for 5G package users.

Cloud and AI Services Expansion

China Telecom Cloud grew rapidly, winning 22,000 projects with a contractual value of RMB 26.4 billion. AI applications contributed significantly to digital transformation in various industries, supporting over 500 projects. Cybersecurity revenue from the product Cloud Dam was up 38.8% year-over-year.

Emerging Business and Digital Platforms

China Telecom's digital platform business exhibited rapid growth with independent development of 110 industry-leading digital platforms. The Internet of Things (IoT) revenue surged by 75.7% year-over-year, and the company made significant strides in 5G B2B services by integrating AI, big data, cloud, and ICT, with the contracted amount of 5G applications up by 92% compared to the previous year.

Investment Strategy and Financial Stability

The company maintained precise investments to support growth areas, manage operating expenses effectively, and attract high-performance personnel. EBITDA increased by 5% year-over-year, and the company sustained a high AAA credit rating. The company aims to strengthen its cloud network operating capabilities and build core competitiveness for the future.

Earnings Call Transcript 2023-Q2

[Unknown Executive]

Good afternoon, ladies and gentlemen. On behalf of the company's management, I would like to welcome all of you to our 2023 interim results presentation. This presentation will be conducted in Mandarin with simultaneous interpretation. The Q&A section afterwards will be hosted by a moderator and provided with consecutive interpretation. Please be reminded to switch off your mobile phone or set to silent mode during the presentation.

First, may I introduce our management attending today. Mr. Ke Ruiwen, Executive Director, Chairman and CEO; Mr. Shao Guanglu, Executive Director, President and COO; Mr. Liu Guiqing, Executive Director, Executive Vice President; Mr. Li Yinghui, Executive Director, Executive Vice President, CFO and Secretary of the Board. Thank you for joining us, and I hope you will find this presentation helpful.

Now, please welcome Chairman, Ke, to give us an overview of the company's 2023 interim results.

[Ruiwen Ke, executive]

Good afternoon, ladies and gentlemen. Welcome to our 2023 interim results presentation, and thank you for your long-term care and support. This presentation has 2 sections. I'll provide an overview first. Then, Mr. Shao Guanglu will go through the business review and financial performance. In the first half of 2023, the company had the following 6 development highlights.

One, Implemented Cloudification and Digital Transformation fully and deeply to achieve steady growth in operating results. Two, insist on the leading role of sci-tech innovation to elevate corporate core competitiveness. Three, China Telecom Cloud maintained rapid growth and AI continued to strengthen in capability of intelligence empowerment. Four, precision investment with structure optimized and solidify digital information structure. Five, digital transformation as the setup steadfast mainline to enhance quality and efficiency and facilitate value creation. Six, deepen reform and open for cooperation and accelerate the building of world-class enterprise.

In the first half of the year, the company firmly and fully implemented Cloudification and Digital Transformation strategy with a customer-oriented approach. The company actively expanded the infomatization services for individuals, families, government and enterprises and achieved steady growth in operating results. This table shows the key financial data in the first half, among which revenue, EBITDA and net profit achieved favorable growth.

The company's operations achieved new results in the first half. Service revenues increased by 6.6% Y-o-Y, higher than industry growth and maintained growth for 10 consecutive years. The revenue contribution of Industrial Digitalisation continued to increase to nearly 30%. Net profit maintained double-digit growth by 10.2% Y-o-Y and net profit margin increased by 0.2 percentage points. Sci-tech innovation continued to make breakthroughs as China Telecom Cloud, the source of our regional technologies achieved multi-chip architecture in one cloud with full stack proprietary technologies, while R&D in AI and quantum also delivered meaningful results.

Corporate reform continued deepening and the company was awarded Grade A in the key emissions assessment of the 3-year action for reform of central enterprises in 2022. The company formed the cycle of technology, product and industry and accelerated achievement conversion to forge new momentum and new advantages for development. The company stepped up R&D input by increasing R&D expenses by 27% Y-o-Y and number of R&D personnel by 21% versus in 2022, accelerated the layout of strategic emerging businesses and achieved breakthroughs in key areas such as cloud network, big data, AI, security and quantum, strengthened the research on key core technologies and accelerated the transfer of innovation achievements. The proportion of proprietary IT systems and business platforms was nearly 40%, while number of items in proprietary achievements lease grew by 124%.

In the first half, the revenue of China Telecom Cloud reached RMB 45.9 billion, maintaining high-speed growth of 63.4% Y-o-Y, and we strive to achieve the full year goal of RMB 100 billion. China Telecom Cloud possesses competitive advantages shaping the National Cloud framework, such as proprietary full stack technologies, industry-leading computing power layout, diverse and high-quality product capabilities, secure and reliable operation capabilities and open and collaborative national cloud ecosystem.

China Telecom Could maintained leading market position for ranking #1 in government public cloud infrastructure and #3 in PRC's public cloud IaaS and public cloud IaaS and PaaS markets, #1 in PRC's Desktop-as-a-Service and the world's largest telco cloud. China Telecom Cloud accounted for 60% in the first batch of 40 industrial public cloud projects of SASAC.

The company seized opportunities from AI and continued to deepen [indiscernible] by taking the Xinghe platform as the core and leveraging the advantages of cloud network integration. The generative large language model, TeleChat was launched, while the Xinghe visual foundation model was upgraded to Version 2.0 and then algorithm warehouse and ecosystem with 5,500 scenario-based algorithms was built. Some of these algorithms, even the industry leading.

All these satisfied the company's need of accelerating internal digital transformation and injecting intelligence into digital life, while at the same time, empowering the numerous applications in areas in thousands of industries. In the first half, the company's CapEx was RMB 41.6 billion. and structure was further optimized by further increasing proportion on Industrial Digitalisation to 28%, up by 4.1 percentage points year-on-year, effectively strengthening the momentum of Industrial Digitalisation.

The company focuses on the construction of intelligent and integrated digital information in infrastructure, featuring high-speed and ubiquitous aerial-ground in one, cloud-network intelligent and agile, green and low-carbon secure and controllable. In the first half, intelligent computing power increased by 62%, while general computing power increased by 19%.

Number of IDC cabinets serving external customers reached 534,000. Network architecture continued to optimize centering around data centers and cloud by building and East-West, North-South low-latency network for enhancing the capabilities of cloud network integrated green and low-carbon computing power infrastructure.

Gigabit fiber network continued to expand coverage. 5G and satellite networks were strengthened toward building a high speed and ubiquitous aerial ground in one network. The company and China Unicom continued to promote 5G core co-building and co-sharing. In the first half, number of 5G base stations amounted to over 1.15 million and the 4G mid-spectrum networks were comprehensive co-shared with 4G base stations amounted to over 2 million.

The company fully leveraged AI, big data and other technologies and data to drive internal digital transformation and to multiple measures to promote cost reduction and efficiency enhancement and to maintain double-digit growth in net profit. In particular, the proportion of selling expense to revenue. The proportion of low sales stores, the electricity cost per 4G/5G base station and unit carbon emission decreased year-on-year, which promoted cost saving environmental protection and energy conservation.

The proportion of intelligent customer service revenue, tower sharing ratio of overall FTTH port utilization ratio and wireline terminal recovery rate increased year-on-year, contributing to the enhancement of operating quality and efficiency. I would like to thank all shareholders, investors and analysts for your support and attention to the development of the company. The company will continue to work hand-in-hand with you and share the development results.

The Board proposed a dividend of RMB 0.1432 per share for the first half of 2023, implying 65% of the profit attributable to shareholders of the company. Adhering to the commitment during A-share offering, the company will propose a general meeting to increase the profit to be distributed in cash for 2023 to above 70% of the profit attributable to shareholders of the company for the year.

The company will continue to comprehensively deepen corporate reform, including accelerating reform of sci-tech innovation mechanism, fully promoting the restructuring of organizational process, stepping up market-oriented reform and strengthening ecological integration and innovation to further unleash new momentum for corporate development.

The company will follow the 2522 overall framework of Digital China seize opportunities of digital economy; firmly, fully and deeply implement the cloudification and digital transformation strategy; accelerate the development of a service-oriented, technology-oriented and secured enterprise from technology; establishing world-class enterprise and share development results with shareholders, customers and society.

I will now pass the floor to Mr. Shao Guanglu to walk you through the business and financial performance of the company.

[Guanglu Shao, executive]

Thank you, Chairman, Ke. Good afternoon, ladies and gentlemen. I will now go through our business and financial performance in the first half. In the first half, the company's business performance continued to do well. This table sets forth the revenue and key financial indicators of various businesses. Now, I'll go into details about the business and financials. In the first half, all major businesses of the company achieved good growth, of which Industrial Digitalisation maintained rapid growth with revenue increased by 16.7% and continued to be the main driver of revenue growth by contributing RMB 9.87 billion to incremental revenue.

Mobile Communications Service and Wireline and Smart Family contributed RMB 2.65 billion and RMB 2.15 billion of incremental revenues respectively. In the first half, Mobile Communications Service, Wireline and Smart Family businesses developed steadily with revenue growing by 2.7% and 3.6% respectively. Mobile and broadband user structures continued to optimize as the penetration of 5G package users increased to 73.4%, while debt of gigabit broadband users increased to 20.3%, both maintaining industry leadership position.

User value of fundamental businesses increased for 3 consecutive years as mobile ARPU increased to RMB 46.2 and broadband ARPU increased to RMB 48.2. The company achieved remarkable results in integrated development with increasing revenue and revenue contribution. Mobile value-added and applications revenue grew by 19.4% Y-o-Y, further accelerating from 17% in 2022. Smart Family revenue increased by 15.7% Y-o-Y. Mobile value-add and applications contributed RMB 6.5 to mobile ARPU up 14% Y-o-Y, whilst Smart Family contributed RMB 8.5 to broadband blend ARPU up 9% Y-o-Y.

Standard digital products and diverse scenario basing solutions extended from individuals and families to communities and villages saw robust momentum with rapid growth in scale. The strong market demand for this innovatively integrated fundamental services formed the robust driving force for the long-term growth of the company's fundamental businesses.

In the first half, the company's Cloud, AI and Cybersecurity businesses developed well. China Telecom Cloud achieved remarkable results in market expansion, winning 22,000 projects with a contracted amount of RMB 26.4 billion, while the number of industrial customers increased by 17.4% to over 3.5 million. The company's competitive advantages in the government and enterprise market continued to consolidate as its number of government customers exceeded 600,000 with revenue contribution of 27.8%.

The company actively explored cloud demand in government, industrial, culture and tourism, finance and other sectors continued to build benchmark projects and accelerate replication and promotion, driving the rapid growth and enhancing market position of China Telecom Cloud. The company's AI business developed rapidly with competitiveness enhanced on independent R&D capabilities, AI, large models, talent teams and industrial system.

The company created end-to-end integrated AI services on internal quality and efficiency enhancement programs such as empowering digital customer service and base station energy saving and external provision of AI products and services such as Internet of Video Things, IoVT, and communication assistant to the market. Based on TeleChat and Xinghe visual foundation model, the company empowered the AI applications for various industries, supported more than 500 industrial digitalization projects and help accelerate the digital transformation of the economy and society.

For cybersecurity, the company provided integrated products and services covering cloud, network, edge and terminal. In the first half, the revenue of the benchmark product, Cloud Dam amounted to approximately RMB 1.2 billion, up 38.8% Y-o-Y.

In the first half, the company's digital platform business developed rapidly with 110 industry-leading digital platforms independently developed and continued to empower vertical sectors such as municipal, rural, health care, finance and campus. The company stepped up construction of fundamental capacities and capabilities of fundamental capacity platform were used 1.1 billion times, up 31% Y-o-Y. The company's IoT revenue increased by 75.7% year-on-year, further accelerating from 40.2% in 2022.

IoVT expanded rapidly as the number of users increased by 11 million to over 57 million, equipped by 76 open capabilities in 10 categories and connecting with over 30 industrial platforms in security, emergency and other industries. Smart Communities and Digital Villages flourished with a network of 14,000 communities and 38,000 villages servicing respectively, while relevant [indiscernible] were continually enriched to meet the needs of residents and livelihood and governance.

Leveraging integration in new region, the company continued to strengthen and expand 5G 2B services by deep empowerment of digital application use cases with AI, big data, cloud, ICT and other elements with an aim to provide customers with better and more comprehensive solutions and to continuously create high-value and replicable benchmark projects.

The company's 5G 2B business has accelerated after incorporating these new elements covering more than 100 key industrial use cases and has accumulated more than 1,000 benchmark projects. In the first half, the number of 5G industrial application projects increased by approximately 6,000, reaching a total of 20,500. The contracted amount of 5G applications increased by 92% Y-o-Y, and the accumulated contract amount exceeded RMB 21 billion, reflecting the strong demand for China Telecom's 5G plus ABC plus ICT innovative integrated services.

In the first half, the company maintained precise investment to enhance corporate competitiveness and support high-quality development. Operating expenses increased by 7.3% Y-o-Y, with growth rate decreasing for 3 consecutive years. To seize development opportunities of the digital economy, input was moderately increased on high-growth areas such as industrial digitalization and smart family. The company continued to allocate resources to personnel with strengthened introduction of sci-tech and innovative type tenants and appropriately increase of incentives of high performance teams, while control over network operating costs and SG&A expenses was enhanced.

The company's financial strength continued to enhance with EBITDA increasing by 5% Y-o-Y to RMB 73.3 billion. Total debt increased by 26.1% gearing ratio remained stable at 46.5% and corporate credit rating remained the highest AAA. The company will continue to promote high-quality development by strengthening sci-tech innovation to become stronger, better and bigger adhering to customer-oriented principle to continuously enhance operating level, accelerating the upgrade of digital information infrastructure and continuously strengthening cloud network operating and servicing capabilities as well as accelerating the development of strategic emerging industries and building core competitiveness for the future.

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