Earnings Alert: FY21 earnings below market expectations; expect gross margin to stabilise and gradually rebound
- FY21 net profit grew 2.5% y-o-y, below market expectations
- Domestic non-operator market expanded 15.9% y-o-y, accounting for 42.9% of total revenue
- Expect gross margin to stabilise and gradually rebound
- Maintain BUY for an attractive dividend yield of c.6% despite a lower TP of HK$4.64
FY21 results highlights
Revenue increased by 9.2% y-o-y to Rmb134bn in FY21, driven by 15.9% y-o-y growth in the domestic non-operator market, with revenue contribution expanding 2.5ppts to 42.9%. By business segment, telecommunications infrastructure (“TIS”) services, business process outsourcing (“BPO”) and applications, and content and others (ACO) grew by 7%, 9%, and 18% y-o-y, respectively.
Gross profit increased by 7.6% in FY21 to Rmb14.8bn with gross margin slightly contracting 0.2ppt to 11%.
Net profit increased by 2.5% y-o-y to Rmb3.2bn in FY21, below market expectations. Net profit decreased by 10% in 2H21 due to slower revenue growth and a lower operating margin. The board has proposed a final dividend of Rmb0.1641 per share and a special dividend of Rmb0.0091 per share, totaling Rmb0.1732 per share for FY21 (FY20: Rmb0.1602), representing a final dividend payout ratio of 36% (FY20: 30%).
Outlook
The domestic telecom operator market could benefit from the higher capex and opex from the domestic operators in FY22. The total capex budget for FY22 of the three domestic operators increased by 4% y-o-y to Rmb353bn. The total number of 5G base station net additions is 600k, which is similar to that of FY21. Apart from the construction of the 5G network, domestic operators also targeted to build more data centre cabinets under the national policy of transferring computing resources from east to west (“????”). We expect the domestic non-operator market to remain the key growth driver. The company has secured new contracts worth more than Rmb76.3bn from domestic non-operator customers in FY21, an increase of more than 10%, mainly pertaining to informatisation infrastructure construction, new infrastructure (data centre), and smart parks.
The company has conducted more rigorous screening for high-gross margin projects in FY21. With the increasing proportion of high-value business and better cost control, the gross margin has been stable at 11.4% in 2H21, the same as in 2H20. We expect the overall gross margin to stabilise and gradually rebound. According to the Share Appreciation Rights Incentive Scheme proposed in Nov 2021, the company targeted to achieve an ROE of at least 8.25%, 8.4% and 8.65% for FY22, FY23 and FY24 respectively.
We cut our earnings forecast by 6% and 2% for FY22 and FY23, respectively, mainly due to a lower revenue assumption of TIS business. We forecast earnings to grow by 6.1% and 7.5% for FY22 and FY23, respectively. The stock is trading at a c.7x FY22PE, c.2SD below its historical average. With an attractive dividend yield of c.6% and moderate earnings growth rates, we maintain BUY on CCS with a TP of HK$4.64. Our TP is based on an 8x FY22 PE (unchanged), 1SD below the historical average.