China Tower Corporation Limited (CTOWY) Management on Q2 2022 Results – Earnings Call Transcript

China Tower Corporation Limited (OTCPK:CTOWY) Q2 2022 Earnings Conference Call August 8, 2022 7:00 AM ET

Company Participants

Zhiyong Zhang – Executive Chairman

Xiaomin Gu – GM, General Counsel and Executive Director

Shaofeng Hu – Chief Accountant

Zhiyong Zhang

Good evening, ladies and gentlemen. Welcome to China Tower’s 2022 Interim Results announcement. Due to the COVID-19 pandemic, we conduct the event by means of conference call. Thank you for your continued support to Chinese Tower. It’s our pleasure to have you here.

Now I would also like to introduce the management attending today’s results briefing. Our Executive Director and General Manager, Mr. Gu Xiaomin; Executive Director; Mr. Gao Chunlei; Mr. Hu Shaofeng; and our Deputy General Manager, Mr. Liu Guofeng.

Today’s results briefing covers 3 parts. First, I will briefly explain our overall performance for the first 6 months of 2022 and Mr. Gu Xiaomin and Mr. Hu Shaofeng will introduce the operational and financial performance, respectively. At the end, we will have a Q&A session.

In the first half of 2022, the company seized the opportunities emerging from the development of 5G infrastructure, the digital China initiative and the progress being made towards China’s dual carbon goals, we kept promoting resource sharing and focusing on ways to drive development through innovation. Therefore, we maintained stable growth on our overall performance.

The company maintained an encouraging growth momentum and achieved healthy revenue growth of 6.6% over last year to RMB 45,480 million. Net profit up 22.2% year-on-year to RMB 4,220 million, showing a further enhancement on profitability, operating cash flow was stable and abandoned, reaching RMB 31,310 billion, a year-on-year increase of 29.2%. In addition, site co location rate steadily increased with tenancy ratio of 1.72 tenants per site representing a year-on-year increase of 2.4%.

The following aspects are the main reasons for the stable and favorable operating performance. The company maintained its strategic strength and promoted the sustainable development of One Core and Two Wings strategy by adhering to growth by sharing its philosophy. Our TSP business continued to grow steadily. In the first half, its revenue increased by 3.9% year-on-year to RMB 1,350 million, accounting for 90.9% of the overall revenue. This has further consolidated the value foundation for the company’s steady development.

The Two Wings business achieved a good development momentum and recorded revenue of RMB 4,010 million, up 46.5% year-on-year, accounting for 8.8% of our overall revenue, which kept on increasing and was 2.4 percentage points more than the same period last year and 1.7 percentage points more than the end of 2021. Two Wings business has become more prominent on driving the company’s revenue growth.

In the first half of 2022, 5G network deployments continue to expedite. The company fully leveraged its expertise in operations and service capabilities to satisfy network coverage demand of TSPs and contributed to the large-scale 5G network deployments in an efficient manner. As of the end of June 2022, the company undertook a total of 1.544 million 5G construction demand with more than 97% of them satisfied by sharing existing site resources, we provided strong support for the construction of cyberpower and Digital China Initiative.

In the first half of this year, the share of incremental revenue from 5G surface of our TSP business reached 84%, an increase of 20 percentage points from the same period last year, while the growth upon the second half of last year being 10 percentage points. 5G is gradually becoming the main driving force for TSP business.

For the Smart Tower business, the company seized the valuable opportunities brought by the in depth advancement of social digital governance, further increased investment in R&D and continuously improved platform operation capabilities. We continue to improve the industrial product applications and build a companion service system by understanding the demand and perception of customers. At the same time, we strengthened the industry cooperation and carried health strategic partnership to preliminarily build digital tower and industrial ecosystem.

The development capabilities of Smart Tower business have been further improved. In the first half, the Smart Tower business recorded accelerated growth and generated revenue of RMB 2,580 million, representing a year-on-year increase of 39.4% and a rapid increase of 4.2 percentage points compared to the full year of 2021.

Regarding the Energy business, the company sees the development opportunity arising from the dual carbon goals based on its own unique resource advantages, the company focused on battery exchange and power backup businesses. It increased R&D investment and technical cooperation to promote product optimization and iterative upgrade.

The company built an intelligent energy operation platform to promote digital transformation of the business, we also constructed a strong intelligent service system to achieve precise control and systematic management of service quality that continuously enhance the growth momentum of the Energy business.

In the first half, the scale of the Energy business continued to expand and the revenue from Energy business reached RMB 1,430 million, a year-on-year increase of 61.3%. — through promoting reform and innovation, the company’s core strengths have been further consolidated.

Enhanced asset operation management standard, the company assets are multifaceted and wide-ranging by applying one code through the whole asset life cycle and realizing dynamic monitoring of asset operation status and operation capability, the value management of assets throughout the life cycle was promoted through carrying out intelligent operation and maintenance, implementing business accounting on individual site as well as accurate positioning, maintenance and augmentation, asset life extension and operational efficiency improvement were achieved, strengthened capabilities in addressing key issues through technological innovation.

We formulated specialized plans for technological innovation, established 3 key labs for new energy, communication construction and AI as well as further increased R&D investment so as to support the technological transformation of the company, promoted the development of digital transformation, leveraging the self-developed unified operation and maintenance monitoring system to support a holistic business operation. The company has the national unified tower monitoring platform and the largest energy sharing platform across the society, which effectively supported the development of Two Wings business.

Deepened the mechanism reform, we have stimulated the vitality of the company through deepening the tenure-based contractual management and implementing specialized cultivation and retention schemes for talents. The company also promoted Double Hundred Action to speed up reform of the system and mechanism of subsidiaries.

In 2022, national strategies such as 5G infrastructure, digital economy and dual carbon goals have brought sport space for the development of the company. For example, with the deeper and wider 5G network deployments, the increasing construction demand further promoted the sustainable the steady growth of the company’s TSP business.

Moreover, rapid development of the digital economy was highly compatible with the company’s unique resource endowment, bringing great opportunities for speeding up the upgrade from telecom towers to digital towers. Meanwhile, the accelerated promotion of dual carbon goals, the transformation into green and low carbon production and people’s livelihood and the growing trend of electrification of transportation. All these positive factors also bring long-term benefits for the company to expand its new energy application services.

Looking forward, the company will further promote the One Core and Two Wings strategy, adhering to its positioning of becoming a service provider in 3 businesses. The company will promote to build an operating system that is professional, intensive, delicate, efficient and digitalized as well as develop the enterprise centering around sharing service, innovation, technology and value creation through deepening reform and innovation as well as strengthening advantages.

While consolidating the dominant TSP business, the company will further stimulate and scale up the growth of the Two Wings business. It will continue to enhance profitability and create greater value for its shareholders, customers and society.

Now I would like to hand over to our General Manager, Mr. Gu Xiaomin, he will explain the company’s operational performance in more detail.

Xiaomin Gu

Thank you, Chairman. Now I would like to report to you the company’s operating performance in the first half of the year and the business planning for the second half. 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 6.6% year-on-year, further strengthened its multi-pillar development structure to support operating revenue growth. In terms of the breakdown of incremental revenue, TSP business accounting for 54.8% of the total incremental revenue, driving revenue growth by 3.6 percentage points, among which tower business accounting for 31.0% contributed 2.0 percentage points to the overall revenue growth. DAS business contributed to 23.8%, increasing from 12.7% during the same period last year, driving revenue growth by 1.6 percentage points. DAS business is gradually developing into the second growth engine for the TSP business.

The contribution from Two Wings business kept growing to 45.4%, driving revenue growth by 3.0 percentage points, of which the share of Smart Tower business increased from 20.5% over the same period last year to 26.1%, driving the revenue growth by 1.7 percentage points. Energy business contributed to 19.3%, boosting the revenue growth by 1.3 percentage points.

Next, I will introduce the development of our business by sectors in detail. For the tower business, the company enhanced resource sharing and coordination, solving customer network coverage issues with professional strengths. It also leveraged its advantages in resource sharing to promote the rapid extension of 5G network coverage from cities to villages and towns. Furthermore, we developed an innovative service model to meet differentiated customer needs in a more flexible way and faster the cost-effective 5G construction.

In the first half, revenue from tower business amounted to RMB 38,590 million, grew by 2.3% year-on-year, reflecting a stable development trend. As of the end of June 2022, the number of TSP tenants was 3.302 million, representing a net increase of 2.3% year-on-year. TSP tenants per tower site increased from 1.59 over the first half of last year to 1.62, showing a stable improvement in site sharing.

Regarding the DAS business, the company seized the favorable opportunity arising from 5G into coverage expansion to indoor areas and leveraged on the advantages of resource sharing and coordination as well as industry synergy to deepened DAS cooperation with TSPs. It also offered innovative, diversified solutions for different scenarios, combining active and passive DAS in order to satisfy customers’ needs and accelerate the development of DAS business.

In the first half of this year, the revenue from DAS business reached RMB 2,750 million, representing a year-on-year increase of 32.0%. In the first half of this year, the DAS coverage in buildings increased by 980 million square meters, 2.8x of the first half of 2021. Additional coverage of subways and high-speed railway tunnel was approximately 667 kilometers and 703 kilometers, respectively. DAS coverage is expanding.

In terms of Smart Tower business, the company actively adopted technologies such as 5G, Internet of Things, and Big Data by virtue of its advantages on site at mid and high points by carrying various video terminals, Internet of Things sensors, and integrating AI algorithms and platform advantages. We provide customers with efficient and convenient videos, monitoring, data services and digital information solutions to serve social digital governance.

Over the first half of 2022, the company focused on 8 key industries and strengthened the research and development of industrial application products. It also promoted the transformation and implementation of key projects in sales such as straw burning ban, forest prevention, cultivated land protection river and lake management, fishing ban in Yangtze River, digital transportation, township, governance and management. For example, for the fishing ban project in Yangtze River, the company provided professional solutions to 305 districts and counties in the Yangtze River Basin, which effectively improved the efficiency of fishery law enforcement.

As of the end of June 2022, the total number of tower sites utilized in the Smart Tower business amounted to 209,000, a year-on-year growth of 22.7%. Its number of tenants steadily increased to 219,000, up 12.3% year-on-year. By business segments, revenue from tower monitoring was RMB 1,580 million, accounting for 61.3% of Smart Tower business total operating revenue, which grew by 10 percentage points compared with the same period last year, reflecting the achievement of digital transformation and development.

For the Energy business, focusing on core businesses such as battery exchange and power backup, the company valued customer demand in key industries and increased R&D investment in products and platform development. It also cultivated and consolidated differentiated competitive advantages. Further enhance delicacy operation and promoted rapid expansion of energy business.

For battery exchange business, the company has deeply cultivated markets such as takeaway and express delivery services, promoted product iterative upgrade, strengthened intelligent service standard and continuously improved users’ experience. Its leading position in the battery exchange market for light electric vehicle has been further consolidated.

For power backup business, based on its matured communication base station power security capabilities, the company focused on major industries such as communications and finance to provide featured services covering power backup generation, monitoring and maintenance as well as differentiated integrated power assurance solutions to cater customers’ demand. The company has strived to become a leading power backup and assurance solution provider in China.

In the first half of this year, revenue of battery exchange business amounted to RMB 802 million, accounting for 56% and up 61.4% year-on-year. it had accumulated more than 780,000 users with approximately 45,000 battery exchange site deployed. The advantage in scale has been further strengthened.

Power Backup and other businesses recorded a revenue of RMB 624 million, accounting for 44% and up 61.2% year-on-year. With approximately 41,000 power backup sites deployed, our professional service capability has been further enhanced.

Now I would like to hand over to our Chief Accountant, Mr. Hu Shaofeng. He will explain the company’s financial performance in the first half of this year.

Shaofeng Hu

Thank you, Mr. Gu. Next, I would like to explain our financial performance for the first half of 2022. The table shows the company’s key financial indicators in the first half of 2022. In the first half, we achieved a solid overall performance with healthy revenue growth. Profitability continued to increase and further improvement on cash flow was achieved.

In terms of cost management, based on the business accounting on individual site system and digitalized operation capabilities, the company managed and controlled the production cost in a reasonable manner. In the first half, the operating expenses increased by 5.7% year-on-year to RMB 38,319 million. And the operating expenses to revenue ratio dropped from 85.1% to 84.4%.

Depreciation and amortization increased by 0.2% year-on-year to RMB 24,870 million, mainly due to the decrease in the company’s newly added assets. As our existing assets became more durable with extensive life cycle and the changes on structure of 5G construction demand.

To strengthen the development of asset operation capabilities, the company fully tap the potential of assets, improved asset performance to ensure business expansion and service improvement. The maintenance expense is up 20.5% year-on-year to RMB 3,490 million. Site operations and supporting expenses up 7.0% year-on-year to RMB 2,510 million mainly due to year-on-year increase of RMB 200 million in site operation-related expenses on IT supporting services and site planning and management.

Other operating expenses increased by 40.1% year-on-year to RMB 3,750 billion. It was mainly driven by the rapid growth of 2 wings business, leading to an increase in business development costs such as technology supporting service fees, marketing expenses and business operation energy consumption, which amounted to RMB 720 million.

Benefiting from the enhancement in centralized fund management and multichannel low-cost fund raising, the company’s interest-bearing liabilities decreased year-on-year and its overall financing costs remained at a relatively low level. The company’s net finance costs for the first half of the year down by 14.0% year-on-year to RMB 1,600 million.

The company’s profitability improved consistently on the back of stable growth in operating income and effective cost management. In the first half, operating profit increased by 11.6% year-on-year to RMB 7,090 million. Operating profit margin increased by 0.7 percentage points year-on-year, and EBITDA rose by 2.5% y-on-year to RMB 31,960 million. The net profit grew by 22.2% year-on-year to RMB 4,220 million. Net profit margin increased to 9.3%, representing a year-on-year growth of 1.2 percentage points.

With regards to CapEx, we strengthened the effective allocation of assessment with the adherence to the principle of matching investment with business and capability development. In the first half of the year, CapEx was RMB 9,090 million, down by 12.3% year-on-year. It is primarily attributable to the increased proportion of 5G construction demand under TSP business, satisfied by augmentation of existing resources, leading to a decrease in average construction cost.

In addition, due to the shortage of materials and certain restriction at construction sites in some areas. The CapEx for our new site construction and existing site augmentation decreased by 21.7% year-on-year. Moreover, the company continued to focus on improving the long-term service capability of asset and orderly meeting the needs of both business development and asset life extension.

During the first half, the proportion of CapEx in asset replacement and improvement increased by 9.9 percentage points year-on-year. In the second half, as the epidemic is being controlled with increased construction and handover of TSP business orders.

More confirmed Smart Tower business contracts as well as accelerated investment and capacity expansion for battery exchange and charging businesses, the company will strive to accomplish the full year CapEx plan.

In the first half of the year, benefited by the decrease in CapEx increased VAT credit refunds and steady growth in profitability, our cash flow remained stable with operating cash flow of RMB 31,310 billion and free cash flow of RMB 22,220 million, a year-on-year increase of 29.2% and 6.1%, respectively. As of 30th June 2022, the liabilities to asset ratio of the company was 39.7%, a decrease of 1.7 percentage points over the end of last year. The gearing ratio was 31.1%. The company maintained a stable capital structure.

Looking ahead to the second half of the year, we will capture growth opportunities, focusing on the development of an operation system that is professional, intensive, delicate, efficient, and digitalized. We will also strengthen investment and cost management promote the continuous improvement of efficiency and effectiveness, accelerate the sustainable and healthy growth of the company and create greater value for shareholders. Thank you, everyone.

Question-and-Answer Session

End of Q&A

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