20180831-中国银河国际证券-中国通信服务-00552.HK-1H_2018_results_key_takeaways._Growth_acceleration_and_5G_is_a_major_positive._3页_1mb

China Communications Services Corporation Limited (CCS) - 1H 2018 Summary

Core Content

China Communications Services Corporation Limited (CCS), listed on the Hong Kong Stock Exchange with a stock code of [0552.HK] and a share price of HK$6.04, is a leading provider of specialized telecommunications support services. The company supports major Chinese telecom operators and China Tower Corporation in building and maintaining telecommunications infrastructure, including base stations, fiber networks, and network management services. CCS also offers business process outsourcing (BPO) and applications, content, and other services.

Key Financial Performance (1H 2018)

• Total Revenue: RMB50,792.1m, up 13.2% YoY
• Core Business Revenue Growth: 17.1% YoY
• Cost of Revenue: RMB44,616.5m, up 13.9% YoY
• Gross Profit: RMB6,175.6m, up 8.2% YoY
• Gross Margin: 12.2%, down 0.5ppt YoY from 12.7% in 1H 2017
• SG&A Expenses: RMB4,661m, representing 9.2% of total revenue, down 0.5ppt YoY
• Net Profit: RMB1,595.5m, up 8.6% YoY
• Net Margin: 3.1%, down 0.2ppt YoY
• EPS (Basic): RMB0.43, up 8.6% YoY
• Dividend Yield: 2.87%, up from previous years
• PER (Price to Earnings Ratio): 12.4x, above historical average but not excessive compared to peers
• Market Cap: US$5,329m
• 3-Month Average Daily Turnover: US$4.6m

Business Segments

• Telecom Infrastructure Services (TIS):
  • Revenue: 55.8% of total revenue
  • Top-line growth: 17.7% YoY
• Business Process Outsourcing (BPO):
  • Revenue: 32.7% of total revenue
  • Top-line growth: 4.7% YoY
  • Core BPO (excluding distribution): 15.3% YoY growth
• Applications, Content and Other Services (ACO):
  • Revenue: 11.5% of total revenue

Strategic Highlights

• Shift to OPEX-driven business model: CCS has moved from CAPEX-driven to OPEX-driven operations, reducing the impact of reduced capital expenditures by telecom operators.
• Non-telecom Operator Business Growth: This segment is a key growth driver, with increasing project sizes and better margins compared to telecom operator business.
• 5G Development: Seen as a major positive, as 5G requires denser network coverage and opens up new applications like the industrial internet and IoT, which CCS is well-positioned to serve.
• SOE Reforms: CCS has been included in the "Double Hundred" candidate list for SOE reforms, which may drive long-term sustainable growth through internal reforms and mixed-ownership strategies.
• Market Share Gains: Management believes that even in the event of industry consolidation, CCS can benefit from increased market share.

Analyst View

• Top-line Growth: The acceleration of revenue growth is seen as a positive sign, easing market concerns about CCS's growth prospects.
• Net Profit Growth: While net profit growth is not as robust as that of equipment makers, CCS is viewed as a defensive stock with potential for long-term value.
• Share Performance: Shares have outperformed since the analyst's call on 1 Jun 2018.
• Valuation: CCS is currently trading at 12.4x PER, which is above the historical mean but not excessive compared to peers.
• Upside Potential: The analyst sees upside potential and views any post-results correction as a good opportunity to re-enter the stock.

Catalysts for Future Growth

• 2H 2018 Results
• News Flow on 5G Investment
• SOE Reforms Progress

Conclusion

CCS has demonstrated strong top-line growth in 1H 2018, driven by its diversified business model and strategic focus on non-telecom operators and 5G development. While gross margin and net profit margin have faced some pressure, the company's efficiency improvements and cost control have helped maintain net profitability. As a key player in the telecommunications support sector, CCS is well-positioned to benefit from the ongoing 5G rollout in China and the potential reforms of state-owned enterprises. The stock is currently viewed as a defensive name with upside potential.