The annual performance of China Communications Services in 2020 is in line with our expectations.
China Communications Services announced its annual results for 2020: revenue rose 4.5% year-on-year to 122.6 billion yuan, and net profit increased 1.1% to 3.08 billion yuan, mainly due to the orderly development of business after the epidemic was brought under control in the second half of the year. the company timely seized the opportunity of 5G, new infrastructure and social digital transformation, and the performance was in line with our expectations.
Trend of development
The impact of the epidemic weakened in the second half of the year, and revenue from telecommunications infrastructure services stabilized and rebounded. In 2020, the revenue from basic telecommunications services increased by 3.8% to 67.2 billion yuan compared with the same period last year, with a decrease of 5.7% in the first half of 2020 and an increase of 12.5% in the second half of the year. This is mainly due to the lag in bidding, construction and delivery of infrastructure projects caused by the epidemic in the first half of 2020. after the impact of the epidemic alleviated in the second half of the year, the company actively seized the opportunity of new social infrastructure and digital transformation to carry out business.
The contribution income of domestic telecom operators decreased 3.4% from the same period last year, of which the income growth rate from China Telecom Corporation became positive, up 2.8% to 41.8 billion yuan, accounting for 34.1% of the company's operating income; the income from China Mobile Limited fell 19.2% to 19.3 billion yuan from the same period last year, mainly due to China Mobile Limited's strengthening of his own supply chain, which led to a decline in service demand for China General Services. We believe that as the capital expenditure of telecom operators enters the upstream cycle, 700m co-construction and sharing accelerates the landing, and the company focuses on cultivating the comprehensive service capability of "cloud + 5G+DICT", we expect China Communications Services to take advantage of the general contracting service capability of EPC projects and promote the recovery of the company's revenue growth.
Deep ploughing vertical industry, non-operator business growth is strong. Driven by intelligent products and solution products, the company's revenue from non-telecom operators increased 18.8% year-on-year to 49.6 billion yuan in 2020, accounting for 40.4% of Prida's total revenue. The company's application, content and other services business (ACO) revenue increased by 13.2% to 18.2 billion yuan compared with the same period last year, of which 62.3% of the revenue came from non-telecom operator customers, which was the fastest growing business segment during the year. In the ACO business, system integration business revenue increased by 22.7% to 11.2 billion yuan. Through top-level design consulting and the introduction of ACO core products, the company provides integrated intelligent solutions for the government and industry leaders to promote the development of the whole business. Benefiting from the new opportunities in the field of new infrastructure, the value of new contracts signed by China's communications services in 2020 is about 70 billion yuan, of which the number of new contracts signed by the government and the transportation industry has increased by more than 20%.
The profit margin pressure still exists under the strict control of cost. 2020 the company's gross profit margin fell 0.46 percentage points year-on-year to 11.2%, and net profit margin fell 0.1 percentage points to 2.5% year-on-year, mainly affected by the epidemic and increased investment in transformation. We expect profitability to continue to improve as the impact of the epidemic weakens and the business structure continues to optimize.
Profit forecast and valuation
We keep the profit forecast for 2021 basically unchanged, while introducing a net profit of 3.79 billion yuan in 2022, and the current stock price corresponds to the price-to-earnings ratio of 6.1x / 5.5x in 2021. Maintain an outperform industry rating and a target price of HK $6.50, corresponding to 11.3 times 2021 price-to-earnings ratio and 10.2 times 2022 price-to-earnings ratio, with 84.7% upside compared to current share prices.
Risk.
There is uncertainty in the development of non-operator business.