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Amid the overall decline in CAPEX from the domestic telecommunications operators in 2017, what were the measures taken by the Company to achieve sound overall operating results?
In 2017, the Group gradually transformed its growth momentum from CAPEX-driven businesses by the domestic telecommunications operators to both the domestic non-telecom operator market and OPEX-driven businesses by domestic telecommunications operators, and also from business driven by traditional infrastructure construction to business driven by integrated services and smart-typed products. Amidst the continued control on its products distribution business with low efficiency and the adverse factors such as overall decline in network construction investment in the domestic telecommunications industry and intensified competition, the Company still achieved steady growth, with the total revenues of RMB94,572 million, representing a year-on-year increase of 6.9% and profit attributable to the shareholders of the Company of RMB2,714 million, representing a year-on-year increase of 7.0%. The Company's free cash flow hit a record high at RMB6,118 million, representing a year-on-year increase of 40.3%. The favourable operating results and free cash flow have showcased robust development quality of the Group. With the transformation of the Company's growth momentum and gradual formation of its internal and external ecosystems, the Group's substantial development potential has been further demonstrated.

The long-existing development pattern of the Group had been changed from being driven by domestic telecommunications operator customers to being driven by the domestic non-telecom operator market, and domestic non-telecom operator market became the largest contributor to the Group's incremental revenue, with its revenue amounted to RMB26,656 million and increased rapidly by 12.4% as compared with the same period of the previous year, accounting for 28.2% of the Group's total revenues, representing an increase of 1.4 percentage points as compared with the same period of the previous year. Excluding the products distribution business in such market, the revenue from its Core Businesses increased by 26.5% year-on-year, accounting for more than 80% of the revenue from that market, with the gross profit margin maintaining a stable-to-rising trend. At the same time, driven by smart-typed core products such as Smart City, the Group's domestic non-telecom operator market development continued to accelerate, with the newly-signed service contract value exceeding RMB30 billion, which has not only effectively enhanced the Group's branding and business value in the industry, but also demonstrated sound achievements in its innovation and transformation.
In 2017, the rapid growth in the domestic non-telecom operator market supported the Company's overall growth, what development and breakthroughs did the Company put forward? What will be the business outlook for the domestic non-telecom operator market in the future?
In the domestic non-telecom operator market, the Group focused on key areas such as government, electricity, transportation, internet/IT and construction, etc., reinforced its marketing team construction, enhanced the products enabling through training camps for industry-leaders and talented staff in domestic non-telecom operator market, broadened its external cooperation while constantly building up its product series, including Smart City, Smart Security, Smart Park, Smart Transportation, Smart Safety, Smart Town and Smart Grid, thereby progressing the cross-region promotion of its products and capabilities and boosting the Group's development. During the year, the Group continued to expand its businesses into the power sector effectively, where 49 business development units for the power sector have been established nationwide and 172 business licenses in the power sector have been obtained. The Group also achieved breakthroughs in the transportation sector with the official launch of our "Smart Highway" solution by means of holding a nationwide summit, and the summit has significantly enhanced the Group's influence in the industry and drove the development of the platform and related integrated businesses.

For future development, the national Big Data strategy will drive innovative development through pushing forward Big Data industry, construct digital economy with data as the key element, leverage Big Data to improve the level of national governance, and safeguard and improve people's livelihood which will ultimately bring a new cycle of smart-typed services and informatization construction. Leveraging the Group's years of experiences and strengths in the informatization sector, our businesses have been transformed from being driven by traditional infrastructure to integrated services and smart-typed products through strengthening system construction, continuing product innovation, enhancing synergistic development, promoting integration of finance with industrial development, and improving internal incentives and rewards. The Group will continue to focus on key sectors to provide a series of turnkey smart-typed solutions, thereby achieving breakthroughs in key regions and sectors gradually. We believe the domestic non-telecom operator market will have massive opportunities and bring vast development space to the Group.
Amid the decline in CAPEX investment of domestic telecommunications operators in 2017, what were the reasons for achieving the steady growth in the domestic operator market? What will be the business outlook for the domestic operator market in the future?
In 2017, for the domestic telecommunications operator market, the Group insisted on leveraging both the "CAPEX and OPEX-driven" businesses and "the priority of service quality". Amidst the reduction of CAPEX in consecutive years for domestic telecommunications operators, the Group endeavoured to raise market share and deeply penetrated CAPEX market, while transforming growth momentum to develop OPEX business, and thereby greatly alleviating the impact of the fluctuation of domestic telecommunications operators' investment on the development of such market. The Group therefore have maintained sustained growth in overall revenue from domestic telecommunications operator market in recent years. In 2017, leveraging the Group's strengths in the integrated "construction & maintenance" and high-quality services, we supported our customers in constructing intelligent supreme network and seized the opportunities arising from the network construction and upgrade as well as the upgrade of fiber optic broadband networks by the domestic telecommunications operators, and the construction demand from China Tower. Revenue from domestic telecommunications operator market amounted to RMB65,080 million, representing a year-on-year increase of 6.9% and accounting for 68.8% of the total revenues of the Group in 2017. Among that, the revenue from China Telecom amounted to RMB41,568 million, representing a year-on-year increase of 2.4% and accounting for 43.9% of the total revenues. The revenue from domestic telecommunications operators other than China Telecom reported a year-on-year increase of 15.9% and accounting for 24.9% of the total revenues, representing a year-on-year increase of 2.0 percentage points. Among that, the Group exploited the new characteristics of China Mobile's centralized procurement and emphasized on maintaining a positive cooperative relationship with China Tower, strived to expand new businesses and enhanced market share, thereby supported the rapid growth of the related businesses and their aggregate incremental revenue accounted for more than 80% of the overall incremental revenue of that customer group.

The Group will continue to focus on both "CAPEX and OPEX-driven" businesses. We still insist on penetrating into CAPEX market deeply, while vigorously developing the growth momentum in OPEX market, and thereby ensuring the sustained overall growth in domestic telecommunications operators market. The Group will seize the opportunities in the transformation of domestic telecommunications operators, closely follow the needs of our operator customers along the national "Cyberpower" strategy and fully participate in the construction of 5G and IoT. While further penetrating the CAPEX-driven business to maintain the stable fundamentals of our operation, we will focus on the OPEX-driven business of our customers through further expansion of businesses in network integrated maintenance, Smart Home and IT operation and maintenance, in an attempt to establish a standardized service system for network maintenance, develop platform-oriented maintenance business and extend it to other customers.
How was the overall development in overseas market in 2017? What is the Company's future outlook in the development for this market?
In 2017, affected by cyclical fluctuations of its overseas projects and the Group's proactive control of low efficiency businesses, the Group's revenue from overseas market recorded a year-on-year decrease of 26.2% and amounted to RMB2,836 million, accounting for 3.0% of the total revenues. We have strengthened our risk prevention measures in our overseas businesses, and actively adjusted our overseas business operation and management structure. At present, the new management structure for China Communications Services International Limited has been established, under which we have accelerated the building up of our marketing team, resulting in improved capabilities in marketing. Meanwhile, overseas market was divided into five major business regions geographically, which is managed dynamically in a more flattened manner for business development. An overseas technical support centre was also established to centralize the allocation of resources and provide support to the expansion of our overseas projects.

The Group will focus on the national "Belt and Road" Initiative, strengthen its cooperation with domestic telecommunications operators and the "Go Abroad" Chinese enterprises, accumulate and integrate resources, leverage its advantages in consultation planning, network construction and market deployment, expedite the development of overseas turnkey projects, enhance its international operating capabilities, and make overseas market a new growth driver for the Group's business as early as possible. The Group will also strengthen the unified management of its overseas businesses and capitalize on its ICT core competence, accelerate its penetration into overseas electricity, education, healthcare and construction industries while maintaining the stability of its traditional telecommunications infrastructure businesses, continue to follow up large-scale turnkey projects such as "China-Africa Partnership Program in Trans Africa Information Superhighway" Project and accelerate the transformation and upgrade of overseas businesses.
How was the change in the mix of the Company's TIS, BPO and ACO businesses in 2017 and what were the reasons for the change?
In 2017, the Group continued to proactively control products distribution business with low efficiency, resulting in the revenue from such business decreased significantly by 33.6% year-on-year, and its proportion in total revenues decreased to 7.3%. During the year, the Group's revenue from the TIS services, Core BPO services, ACO services accounted for 92.7% of its total revenues, representing a year-on-year increase of 4.5 percentage points, and a continuously optimized business structure.

The Group's revenue from TIS services amounted to RMB50,511 million, representing a year-on-year increase of 10.1%, and accounting for 53.4% of the total revenues. We captured the important opportunities of the domestic telecommunications operators' network upgrade and the upgrade of fiber optic broadband networks as well as tower construction and the deployment of the IoT, and thereby reinforced our business from domestic telecommunications operators. Meanwhile, the Group continued to shift its products and capabilities to the domestic non-telecom operator customers market, resulting in the revenue of TIS services from this customer group growing at a significant year-on-year rate of 30.3%. The rapid growth of TIS services of the domestic non-telecom operator customers has greatly enhanced our ability to withstand the impact from the decline in the CAPEX of domestic telecommunications operators.

The Group's revenue from BPO services amounted to RMB32,763 million, representing a year-on-year increase of 0.7% and accounting for 34.6% of the total revenues. The Group's insistence on value-driven principle and proactive control of its products distribution business with low efficiency were the main causes for the slow increase in the revenue from this segment, whereby revenue from products distribution business for the year reported a significant year-on-year decrease of 33.6%. Excluding this factor, revenue from its Core BPO services reported a rapid year-on-year increase of 17.0%, demonstrating the favourable results of the Group's transformation of its growth momentum. Revenue from the network maintenance business increased by 20.1% year-on-year, indicating a remarkable acceleration as compared with the same period of last year, and revenue from supply chain service increased by 16.8% year-on-year, demonstrating the sound results of synergistic business operation.

The Group's revenue from ACO services amounted to RMB11,298 million, representing a year-on-year increase of 12.7%, accounting for 12.0% of the total revenues. We captured the business opportunities arising from the intelligentization transformation of domestic telecommunications operators as well as the flourishing demand of the domestic non-telecom operator customers for informatization construction and vigorously promoted our smart-typed products, thereby increasing the core competitiveness of this business segment. The Group unleashed its advantages for complement of differences and mutual interaction between ACO services and TIS services in integrated solutions, incubated smart-typed products and cooperated with the external ecosystems in Big Data, Cloud Computing and the Internet of Things ("IoT"), resulting in building up the Company's new capabilities, new image, and promoting its overall business development and market expansion.
The gross profit margin for the Company in 2017 was 12.9%, what were the reasons for the moderate declining trend?
In 2017, the Group's gross profit margin was 12.9%, representing a decrease of 0.3 percentage point from 13.2% in 2016 and a moderate decrease as compared with past years. During the year, the decrease in gross profit margin of the Group was due to various factors, including the decrease in service charge in certain businesses, the increase in labour-related costs. At the same time, the Group strived to optimize its business and customer structure, and achieved remarkable results. Revenue from Core Businesses as a proportion to our total revenues was 92.7%, representing an increase of 4.5 percentage points and thereby alleviating the impacts brought by the external environment on gross profit margin to a certain extent. Meanwhile, the Group leveraged its economics of scale and the full utilization of management capacity, thereby controlling SG&A costs. The Group's net profit margin was 2.9%, maintained the same as that of last year.
What were the reasons for achieving rapid growth in free cash flow in 2017? Could the favourable cash flow be continued going forward?
The Group's free cash flow hit a record high at RMB6,118 million, representing a year-on-year increase of 40.3% in 2017. The favourable operating results and free cash flow have showcased robust development quality of the Group.

The Group has always put great emphasis on working capital management and persisted to improve cash flow. The Group adhere to the effective value-driven appraisal principle and carry out working capital management initiative to strengthen management of accounts receivable, accounts payable, prepayment and project delivery. We believe that free cash flow will continue to be maintained at a relatively more reasonable and healthy level in the future.
What was the dividend for the financial year 2017? What is the dividend policy of the Company?
The Board has proposed to distribute a final dividend of RMB0.1176 per share for the financial year ended 31 December 2017, representing a dividend payout ratio of 30%. Moreover, in view of the Group's outstanding operating results and free cash flow for the year, as well as the business development needs, the Board has proposed to distribute a special dividend of RMB0.0235 per share for 2017. Taking into consideration of the above factors, the Company's total dividend for 2017 is RMB0.1411 per share, representing a total dividend payout ratio of 36%. (Please refer to "Dividend History" for more details)

The Company has been devoted to maintaining a relatively stable and sustainable dividend, and increase return to our shareholders in consideration of various factors including the results performance and the business development needs.

 

Basic Information

What kind of Company is China Comservice?
China Comservice (China Communications Services Corporation Limited) is a leading service provider in the informatization sector in the PRC, in commitment of "building world-class networks for the informatization services", providing integrated comprehensive solutions in the informatization sector. It is also the largest telecommunications infrastructure service provider in the PRC. Our services include telecommunications infrastructure services (TIS) covering design, construction, and project supervision and management; business process outsourcing services (BPO) covering management of infrastructure for information technology, general facilities management, supply chain and products distribution; applications, content and other services (ACO) covering system integration, software development and system support, value-added services and other services. (Please refer to "Corporate Profile" and "History" for more details)
When was China Comservice listed?
The Company was listed on the Stock Exchange of Hong Kong on December 8, 2006. The offering price was HK$2.20 per share. (Please refer to "Share Information Overview" for more details)
Who are the major customers of China Comservice?
All major telecommunications operators in China, namely, China Telecommunications Corporation, China Mobile Communications Group Co., Ltd., China United Network Communications Group Company Limited, and China Tower Corporation Limited are our customers. We also provide services to domestic non-telecom operator customers and overseas customers. In 2017, revenue from domestic telecommunications operator customers accounted for 68.8% of total revenues, revenue from domestic non-telecom operator customers accounted for 28.2% of total revenues and revenue from overseas customers accounted for 3.0% of total revenues.

While further developing domestic telecommunications operator market, the Group has also endeavored to expand the domestic non-telecom operator market. The Group proactively provides services, such as smart cities solutions, municipal infrastructure, intelligence building and cloud computing data center construction, to key customers such as government agencies and customers in the industries of transportation, electricity, internet & IT and construction, etc.

Other than China, the Group's business also covers dozens of countries and regions globally, and its overseas customers are mainly located in the emerging markets including Africa, the Middle East and Southeast Asia. (Please refer to "Our Business" for more details)
Who are the major shareholders of China Comservice?
China Telecommunications Corporation is our controlling shareholder which holds 3,559 million domestic shares, representing 51.4% of our total issued shares. In addition, China Mobile Communications Group Co., Ltd., China United Network Communications Group Company Limited and China National Postal and Telecommunications Appliances Co., Ltd. hold 608 million, 236 million and 131 million domestic shares, representing 8.8%, 3.4% and 1.9% of total issued shares respectively. The public holding is 2,391 million H share, representing 34.5% of our total issued shares. (Please refer to "Shareholding Structure" for more details)
What are the businesses under Telecommunications Infrastructure (TIS) Services of the Company?
The Group is the largest telecommunications infrastructure service group in the PRC, providing a full range of telecommunications infrastructure services to telecommunications operators in China and overseas. These services include planning, design, construction and project supervision for fixed line, mobile, broadband and support systems. The Group also provides integrated solutions for ancillary communications networks and integrated informatization solutions for domestic non-telecom operator customers such as government agencies, industrial customers and SME's, as well as overseas customers. (Please refer to "Our Business" for more details)
What are the businesses under Business Process Outsourcing (BPO) Services of the Company?
The Group is the largest integrated provider of business process outsourcing services in the communications industry in China. The Company can provide customers with all-round quality outsourcing services including management of infrastructure for information technology ("network maintenance"), general facilities management, supply chain and products distribution services. The target of our services includes domestic and overseas telecommunications operator customers, government agencies and enterprises customers. The Group focused on OPEX-driven business of domestic telecommunications operators, and strengthened the synergistic operation and brand building of OPEX-driven business. (Please refer to "Our Business" for more details)
What are the businesses under Core Business Process Outsourcing (Core BPO) Services of the Company?
Core BPO services of the Group are BPO services excluding products distribution service, i.e. management of infrastructure for information technology ("network maintenance"), general facilities management and supply chain services. In recent years, the Group has focused on "optimizing structure, sustaining growth, strengthening capabilities and enhancing efficiency" along the way of its business development, and further optimized the business structure by continuing to proactively control products distribution business with low efficiency.
What are the businesses under Applications, Content and Other (ACO) Services of the Company?
ACO means Applications, Content and Other services. The Group provides system integration, software development and system support, value-added services to the domestic telecommunications operators and domestic non-telecom operator customers, including government agencies, industrial customers and small and medium enterprises. (Please refer to "Our Business" for more details)
What are the businesses under Core Businesses of the Company?
Core Businesses of the Group include telecommunications infrastructure services, business process outsourcing services (excluding products distribution), as well as applications, content and other services. In recent years, the Group has focused on "optimizing structure, sustaining growth, strengthening capabilities and enhancing efficiency" along the way of its business development, and further optimized the business structure by continuing to proactively control products distribution business with low efficiency. In 2017, the Group's revenue from the Core Businesses achieved double-digit growth of 12.4% and its contribution to the total revenues recorded a year-on-year increase of 4.5 percentage points to 92.7%, demonstrating a high-quality development.

 

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Last Updated: 4 May 2018