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Edited Transcript of 0788.HK earnings conference call or presentation 18-Mar-20 12:00pm GMT

Mar 19, 2020 (Thomson StreetEvents) — Edited Transcript of China Tower Corp Ltd earnings conference call or presentation Wednesday, March 18, 2020 at 12:00:00pm GMT

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Good evening, ladies and gentlemen. Unfortunately, affected by the pandemic, this announcement can only be held through a conference call.

Welcome to China Tower’s 2019 Annual Results Announcement.

Now I would like to introduce the management attending today’s results briefing. Our Executive Director and General Manager, Mr. Gu Xiaomin; Chief Accountant, Mr. Gao Chunlei; Deputy General Manager, Mr. Liu Guofeng; and Deputy General Manager, Mr. Zhang Quan.

Here’s the agenda for today’s annual results announcement. Firstly, I will briefly introduce the company’s overall performance in 2019. Then Mr. Gu Xiaomin and Mr. Gao Chunlei will introduce the operational and financial performance, respectively.

At the end, we will have a Q&A session.

2019 is the first year for China to put 5G into commercial use and is also the first year for our company to carry out its One Core Two Wings development strategy. Over the year, we reinforced the philosophy of resource sharing, maintained an overall stable business development and continuously improved our quality and efficiency.

Performance highlights of 2019 are as follows: first, overall performance remained stable, efficiency improved continuously; second, sound implementation of corporate strategy furthered resource sharing; third, optimized business structure, distinguished competitive advantages; fourth, deepened reform and innovation strengthened business development momentum.

In 2019, the overall performance of our company maintained steady growth with sound business momentum. Thanks to the continued and stable growth of revenue, our operating efficiency enhanced steadily. EBITDA reached RMB 56.7 billion, increased by 6% year-on-year on the comparable basis. Net profit reached RMB 5.2 billion, up by 97.1% year-on-year. Driven by stable revenue growth and effective cost control, operating profit increased steadily to RMB 11.28 billion, increased by 12.6% year-on-year on a comparable basis.

The company further implemented its sharing strategy. The average tenants per tower site increased to 1.62, showing further improvements in the level of site colocation.

Adhered to the One Core Two Wings strategy. We actively promoted resource sharing and win-win philosophy to boost the development of our TSP business. Through leveraging the scale of our resources, we accelerated to expand our Two Wings business.

We continue to maintain overall stable and healthy revenue growth and optimize the business structure. In 2019, we recorded an operating revenue of RMB 76.43 billion, up by 6.4% year-on-year.

Revenue from tower business increased by 4.1% year-on-year, contributing 93.4% of the total revenue. While revenue from non-tower businesses including DAS and Two Wings businesses, contributing 6.6% of total revenue, up by 2.1 percentage points year-on-year.

In 2019, we further promoted resource sharing within the industry, promoted the construction of 5G network to support the national strategies.

The colocation level further improved, with the site colocation ratio of new tenants reached 80%. While accelerating the resource sharing within the industry, we further extended our sharing philosophy to the wider society and promoted the mutual sharing of telecommunication tower and public utility tower.

On one hand, we promoted the sharing of social pole resources within the industry and strengthened access to and utilization of social resources to reduce construction costs. At present, 84% of the company’s newly built small cells were fulfilled by social resources. While the same for macro cells were 17%. On the other hand, we promoted the multiple users of towers and poles and promoted the sharing of telecommunication tower with a wider society to serve the information application of various sectors.

Meanwhile, aware of the energy supply demands in society, we extended the sharing philosophy to energy industry and actively deployed energy services. In addition, by delivering solutions from traditional single site colocation to integrated site sharing of towers, shelters, transmission, power supply and maintenance, we have deepened the scope and content of resource sharing and enhanced its value.

The company consolidated and further expanded its core advantages, which strengthened its overall competitiveness. As of the end of 2019, we managed a total of 1,994,000 tower sites, holding an absolute dominant market position with over 97% market share. In addition, the company has over 1.3 million of shelters and cabinets equipped with ancillary resources. And nearly 12 million reserved social pole resources, which highlighted our advantage on the scale of resources.

The company strived to seize favorable external development environment by actively pursuing policy support from government. China Tower has been recognized as a strategic coordinator in the telecommunications infrastructure service industry. With the acceleration of the 5G rollout, local governments have successively introduced policies to support China Tower in coordinating 5G site planning.

Meantime, the company has developed extensive cross-industry cooperation, with power grids, railways, real estate and municipal transportation entities to achieve a win-win situation.

Adhering to the Internet-based management model, the company achieved intensive and delicacy management of assets and resources. In terms of the number of sites managed per employee, the company also outperformed its international peers.

Our company adhered to market-oriented development in 2019, and accelerated the innovation and transformation in key sectors to stimulate its internal vitality for development.

In terms of dynamic institutional systems and mechanisms, we set up Two Wings business subsidiaries to achieve more professional operation and management. We optimized organizational systems and workflow to better meet business development needs and implemented the restricted share incentive scheme to improve market-based incentive mechanism and boosted organizational vitality.

In terms of efficient and rational allocation of resources by optimizing the budget and performance management system, strengthening the classification and management of our prefectural level companies by benchmarking and improving precision management of the entire investment process, we achieved highly efficient resources utilization. In terms of building innovation systems, we sped up the process of shifting business development from investment-driven to innovation-driven. Promoted 5G product innovation and united counterparties to refine R&D system. This provided strong momentum for the company’s high-quality development.

The company places great importance on shareholder returns. We paid our first final dividend in 2018, the first year after the company’s listing. Taking full consideration of the company’s profitability, cash flow and future capital expenditure requirements, the Board of Directors proposed to increase the distributable dividend payout ratio to 60% and recommended the payment of a final dividend of RMB 0.01455 pretax per share in 2019.

In the future, we will strive to enhance the company’s profitability and improve shareholder returns.

As we speak, the fast approaching 5G era is driving the transformation and upgrading of the whole information and communications industry, accelerating the promotion of national strategies such as cyberpower and Digital China. This presents enormous opportunities and market space for the company to tap into.

Looking ahead to 2020, the company will focus on leveraging our core advantages and further resource sharing. We will accelerate the collaborative development of One Core Two Wings and strive to promote high-quality, more efficient and sustainable development of the company.

For TSP business, facing the scaling up of 5G network construction, we strive to deliver excellent services in the low-cost and high-quality manner, so as to promote sustainable and stable development of TSP business.

For Two Wings business, we gave full play to our advantages in resources and various capabilities, focusing on the collaborative development of Two Wings business and TSP business.

With regard to TSSAI business, we will focus on key industries to strengthen product innovation, consolidate our platform advantages and build ecology by collaborating with other players in the industry to promote high-quality growth. As to energy operation business, we are profit oriented. We will focus on key sectors and create differentiated competitive advantages to drive business growth.

5G will be put into large-scale commercial use in 2020. It is also a crucial year for the company to implement its One Core Two Wings strategy.

We will strive to maintain steady growth in operating revenue and the profit growth rate to outpace revenue growth rate. By achieving new breakthroughs in terms of business scale and enhancing our comprehensive strength, we are able to improve our profitability and to create greater value for shareholders.

That’s all for my brief introduction of the company’s overall performance in 2019.

Now please welcome our General manager, Mr. Gu Xiaomin, to introduce our operational performance.

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Xiaomin Gu, China Tower Corporation Limited – GM & Executive Director [2]

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Thank you, Chairman Tong. I will introduce the company’s operational performance in 2019, and the key operational strategies in 2020. This table presents comparable data on the company’s various business revenue and key indicators, which I will specify next.

With the implementation of One Core Two Wings strategy, our multistream revenue growth structure has been gradually formed. In 2019, the company’s operating revenue increased by RMB 4,610 million year-on-year. In terms of revenue growth contribution, tower business was still the dominant driver, accounted for 61% of total operating revenue growth with 3.9 percentage points revenue contribution.

In the meantime, revenue growth contribution from non-Tower business of DAS, Two Wings and other businesses gradually rose to 39%, among which DAS accounted for 18.2%, while Two Wings and other business accounted for 20.9%, driving a total of 2.5 percentage points revenue contribution.

This show an optimized revenue structure.

Next, I will introduce the development of business by sector in more detail. In 2019, we reinforced our sharing strategy within the industry and leveraged on the utilization of self-owned and social resources.

Additionally, we developed innovative products and solutions to satisfy the wireless network coverage demand from TSP. Tower business maintained steady growth. Tower business recorded operating revenue of RMB 71.41 billion, representing an increase of 4.1% year-on-year. As of the end of 2019, we achieved a net addition of 226,000 TSP tower tenants over 2019, bringing the total number to 3,063,000. TSP tenancy ratio reached 1.54, showing a steady improvement in site colocation level.

With regard to our DAS business, we have promoted innovative active and passive DAS construction model, which provided differentiated construction solutions to the customers by exerting our advantage at site planning coordinator and fully leveraged our integrated cost advantage and strengthened external cooperation to achieve rapid and scale growth on DAS business.

As of the end of 2019, the coverage of buildings increased by 1.11 billion square meters, and the length of covered subways and high-speed railway tunnels increased by 483 kilometers and 942 kilometers, respectively.

The annual DAS revenue increased by 46.1% year-on-year to RMB 2.66 billion, showing an expanding growth momentum and drove the sustainable and steady growth of TSP revenue. As the construction of 5G has been commenced, the company deepened its resource sharing strategy and fully embrace 5G construction demand through strengthening 5G coordination and planning, accelerating acquisition of 5G resources and promoting innovative 5G technologies to support TSPs with the official commercial use of 5G.

In 2019, we have received 265,000 5G base station demand and built 161,000 5G base stations. Of which 97% were expanded and upgraded based on existing site resources.

For TSSAI business, by leveraging our towers, shelters and cabinets, power backup and maintenance resources, facing the customer demand in case of service sectors like emergency, ecology and environmental, transportation, petroleum and satellite positioning. The company focused on areas such as video surveillance and monitoring, edge computing, information and data collection and smart community by developing industrial solution and promoting its application, TSSAI business achieved rapid expansion.

By the end of 2019, the total number of TSSAI tenants reached 176,000, increased by approximately 35,000 over the last year. The annual TSSAI operating revenue amounted to RMB 1.89 billion, up by 54.4% year-on-year.

In 2020, the company will further integrate industrial chain resources, launch a batch of standardized products and promote application across the industry to achieve healthy and rapid growth of TSSAI business.

For energy operation business, the company established Energy Tower Corporation Limited in 2019 to promote professional operation of energy business. The company adhered to sharing and collaboration philosophy through leveraging advantages on the strong brand of China Tower, sat resources, relationships with property companies, capabilities on construction and maintenance and the visible controllable supervision platform. We provided diversified energy services, including power backup, power generation, charging and battery exchange to the wider society. Following the principle of pilot project first before gradually rolling out, energy business was steadily promoted and got off to a good start.

The company is committed to focusing on customer-centered services, knowing what our customers’ concerned. We strengthened our service and supporting level by enhancing customer service, strengthening delicacy management and improving maintenance capabilities. Focused on the improvement of service capabilities and enhanced customer service, operating quality was further improved compared with 2018. Focused on the improvement of profitability and strengthened delicacy management, the company managed the use of electricity, site leasing fees and maintenance costs, et cetera, to facilitate quality and efficiency improvement.

Focused on the enhancement of efficiency and improved maintenance capabilities, the company implemented standardized and intelligent maintenance procedures. The company also established a maintenance system to support One Core Two Wings business development.

Looking back over the past year, the company has maintained orderly operation with optimized business structure and further improved site colocation level. Our revenue maintained steady growth. In 2020, we will boost high-quality development with full vigor to create greater value for shareholders.

Our key tasks include the following 5 aspects: first, we will deepen the collaborative development of resource sharing and devote to meet the wireless network coverage demand on scaling up 5G construction to ensure the steady growth of TSP revenue; second, focusing on key sectors and key customers, we will further leverage competitive advantages to strengthen Two Wings business and rapid nurture of new growth engines; third, we will further improve service quality, operating efficiency and profitability, strengthen delicacy management and promote high-quality development; fourth, we will enhance customer services in an all-round way. Through actively promoting service innovation and boosting service efficiency, we aim to provide well-rounded quality service and further raise customers’ confidence; fifth, we will strengthen our core competencies in R&D and innovation, cement basic management and constantly improve operating efficiency.

Next, please welcome our Chief Accountant, Mr. Gao Chunlei, to introduce the company’s financial performance.

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Chunlei Gao, China Tower Corporation Limited – Chief Accountant [3]

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Thank you, Mr. Gu. I will introduce the company’s financial performance in 2019. The key financial indicators of the company are listed on this table. In 2019, the company insisted in strategy oriented to enhance the sharing philosophy and promote delicacy management. Throughout the year, operating performance remains solid, profitability continued to grow, cash flow remained healthy and capital structure remains stable, laying a foundation for the company’s sustainable and healthy development.

In 2019, the company persisted in delicacy management of individual sites, while reducing costs by benchmarking. Excluding the impact of the application of IFRS 16, operating expenses increased by 5.5% year-on-year. Among them, for depreciation and amortization, the company reduced construction costs by optimizing tower construction plans, benchmarking management of cost and providing integrated solutions for wireless network coverage. Meanwhile, we enhance the equipment’s daily maintenance and repair to improve the efficiency of existing assets and the effective control of construction investment.

The depreciation and amortization were RMB 45.42 billion, increasing by 4.2% year-on-year on comparable basis. For site operating lease charges, the company highly valued the management of site leasing contracts renewal benefited from actively acquiring site resources at low-cost and effective control site leasing charges. The annual site operating lease charges were RMB 640 million, representing an increase of 4.1% year-on-year on comparable basis.

On repairs and maintenance, the company continuously enhanced the intensive operating mode of centralized monitoring and local maintenance. The company also enhanced its precision maintenance capability and strengthened the control of maintenance costs. The annual repairs and maintenance costs were RMB 5.99 billion, representing a decrease of 2.8% year-on-year.

On employee benefits and expenses, the company recruited outstanding industry talents to fulfill its business development needs for Two Wings business, and initially activated and implemented restricted share incentive scheme. The annual employee benefits and expenses totaled RMB 5.86 billion, increased by RMB 950 million year-on-year.

For other operating expenses. Other operating expenses for the year were RMB 7.24 billion, representing an increase of RMB 820 million year-on-year on comparable basis.

The main reasons are the increase of RMB 456 million on business development costs for Two Wings business as its scale kept expanding, and the recognition of RMB 395 million on allowance for credit losses in a prudent manner.

Benefiting from the steady growth in operating revenue and efficient control of operating expenses, the company’s profitability grew steadily. In 2019, operating profit amounted to RMB 11.28 billion, a year-on-year increase of 12.6% on comparable basis.

Meanwhile, in 2019, EBITDA reached RMB 56.7 billion, increased by 6% year-on-year on comparable basis. The EBITDA margin was 57.9%, which continued to maintain at a high level. In 2019, the company achieved net profit of RMB 5.22 billion, representing an increase of 97.1% year-on-year.

Net profit margin was 6.8%, increased by 3.1 percentage points over the last year.

In 2019, by means of the promotion of integrated solution for wireless network coverage, the company underwent further in resources sharing and leveraged on utilization of self-owned and social resources to satisfy customers’ needs for constructions with low cost and high efficiency.

Meanwhile, the company persistently enhanced asset management throughout their life cycle and efficiently monitored and controlled the scale of investment. In 2019, the capital expenditures were RMB 27.12 billion and accounted for 35.5% of the revenue, decreased from 36.9% over last year.

The maintenance CapEx was RMB 4.2 billion, decreased by 10% over 2018.

The company insisted on centralized management of funds and accessed low-cost funding through multiple channels. The comprehensive finance costs remained at a relatively low level. Through effective allocation of funds and improving its service efficiency, cost of funds were gradually reduced.

In 2019, the company enjoyed healthy cash flow with the operating cash flow reached RMB 49.94 billion, decreased by 15% over the last year on comparable basis. Key reasons are: first, refunded excess VAT paid reduced by RMB 3.31 billion over the last year; and second, collection period of operating revenue receivables was extended in controllable range. EBITDA maintenance CapEx continued to improve, reaching RMB 52.49 billion, showing a year-on-year increase of 8% on comparable basis.

The company maintained a solid capital structure, which effectively supported the company’s sustainable and healthy development. The interest-bearing debt was RMB 120.35 billion, decreased by RMB 3.89 billion over the beginning of the year on comparable basis.

Liability to asset ratio was 46%, down by 1.1 percentage points over the beginning of the year. Leverage level was further reduced, which was beneficial to the company’s profitability and shareholder returns.

Gearing ratio maintained at a relatively low level of 38.5%. The stable financial condition provided solid safeguard for the sustainable development of the company. In 2020, the company will further implement the One Core Two Wings strategy, continue to promote delicacy management and improve the profitability of the company to create greater value for shareholders. Thank you.

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