TravelSky Technology Limited (OTCPK:TSYHY) Q4 2019 Results Conference Call March 30, 2020 4:30 AM ET
Company Participants
Conference Call Participants
Operator
Good afternoon. Thank you for joining us. So we have our members of management in attendance. Our Company Secretary will go through the results highlights and company’s business operations for you.
Unidentified Company Representative
Good afternoon. Thank you very much for joining. Last Friday, we announced our results already. So today, I think it is a very good time for us to have an exchange on issues or topics that you are interested in. So because of the epidemic, there has been very big impacts on the civil aviation industry. The impact was even bigger than during the SARS outbreak in 2003. So the impact has been bigger, wider and the loss cost was even bigger.
So actually, if you look at the past one month, there was a projection about the total loss in the industry. Originally, the estimated loss was $25 billion. However, later on, it was being revised upwards to $252 billion. And in terms of the income or revenue for the industry, it will actually be down 44%. So in fact, our company’s business was impacted very, very significantly. And on the March 20, we already announced our operating results in the first two months. And as of the month of February, if you look at the Chinese airlines, the number of passengers actually was down 83.55% and for overseas, foreign airlines, they are down 94.83%.
This epidemic has dealt a very heavy blow on the industry as well as our company. However, all our teams, all our employees and staff members have been working very hard together. If you look at our Beijing industrial park and also all our overseas branches and offices, there is zero case of the disease and there is also zero infection. And we are operating around the clock on 7×24 basis. And our resumption — work resumption rate has been 100%. And because we are operating a system and there is no disruption to our system operation, even though our business volume has come down. So we are more than happy to take your questions here together with our Chief Accountant. So now, operator, can you explain the Q&A procedures, please, and get the first question in.
Question-and-Answer Session
Operator
[Operator Instructions]
Unidentified Analyst
So, I would like to know, first of all, whether you have felt any pressure in relation to your unit price, the average selling price, because now the impact from the epidemic is very big. In 2003, you had got that experience already once and then in 2009 — 2008, ’09, you did not cut the price. In fact, you — there was the acquisition of ACCA, and so price actually went up. But then do you have any policy to help the airlines, for example, by reducing price? Or if not, if you are not going to reduce price, are you going to pay more dividend to your mother company so that your mother company can offer some kind of supportive measures or assistance to airlines?
Unidentified Company Representative
First of all, we have got agreements in place which are standardized. So, in terms of these standardized agreements and terms, we are not going to change the policies. The policies will remain unchanged. We understand that the downstream travel agents are experiencing huge pressure, and we can feel that pressure ourselves as well. The government has put forth some requests about concessionary policies from information — informatization enterprises, and they also encourage us — the government encourage us to offer to airlines and travel agents some concessions.
So, in fact, according to the standardized agreement, there would be some fees and charges on cancellation or revert of tickets. For example, on no-show, if tickets are bought but then the passenger did not got the flight, then still there is a fee involved that has to be paid. But now we are thinking of offering concessions in the cases of no-show and also cancellation or change of flights and so on.
And for downstream travel agents, many of them are quite small in scale and they also suffer from cash flow problems. So for the smaller travel agents, we are thinking of some kind of concessions in terms of the system connection and also data network fee. So we may be offering some concessions in these areas.
Given the epidemic, we ourselves are under very huge pressure, and we have been dealt a heavy blow as well. So concerning giving support or help to the downstream, we also have to assess our own capabilities in doing so. We also have to take into consideration the healthy development of the industry and also our own operation situation.
Unidentified Analyst
My question — next question is about staff cost. You did quite well in staff cost in 2019 because there was no increase. What about the future? Last year, there was — is it because last year, there were some one-off factors? And this year, do you see some pressure in relation to staff cost? There might be bonus and so on. So will there be a year-on-year decline in this area?
Unidentified Company Representative
This year, there was an increase in staff cost of 2.4%. This is because in 2018 there were 2 companies Hainan and other company, which are not — which are no longer in our shareholding. So the comparison basis has been different. And this time, we think that the staff cost increase will be bigger than 2.4%, but still a single-digit increase.
Operator
[Foreign Language]
Unidentified Analyst
Well, I would like to talk about the aviation volume in terms of the volume — the number of passengers. Just now you mentioned that you are going to assess your own ability before offering concessions to downstream airlines as well as travel agents. So this year, how much drop do you need to see in the number of passengers before your company is going to suffer from a loss?
Unidentified Company Representative
So, I think it will be very difficult for me to comment on the percentage of decline that will affect our company’s profit and loss, as from our cost structure, there are a number of fixed cost items. So, we have the staff cost and also technology, innovation cost, product innovation cost, these are rather fixed, they will not come down and there is depreciation and amortization which is also fixed. So, even though the number of passengers comes down, these costs will not come down.
Of course, we have to look at the actual development of the epidemic. On the 20th of March, we already announced the figures for the first two months, you can see that our number of passengers really declined very rapidly. In the month of February, if you look at Chinese airlines, there is already a drop of 83.55% in number of passengers and for foreign airlines, 94.83% decline. Well, right now, the epidemic has been sort of under control in China. However, the situation is worsening in other countries. So, yesterday, the authority announced that for international flights and also for foreign airlines, there would be further travel restrictions. So, in that case, the number of passengers will decline further. So, it all depends on the epidemic. Of course, we hope that in the coming one to two months, the situation will improve. In the 2003 SARS outbreak, the experience was that the situation resumed normal in July. This time, we hope that within the short period of time, everything will resume normal.
Unidentified Analyst
You said that many of your costs are fixed cost, but there are also some non-fixed cost, for example, commissions, promotion fees, R&D fees. Do you have any measures to control these nonfixed cost? And then does the government offer you any support in terms of effective tax rate? I can see that it was quite low in 2019. What is the reason why? And in the future, what will be the effective tax rate?
Unidentified Company Representative
So let me comment on our commissions, promotion fees and also R&D fees. There are some differences between these expenses. If you look at commissions and promotion fees, they are expenses related to marketing and also the — our development of our market and technology businesses. And this is also positively correlated with the number of passengers being handled by us. So in other words, it is also correlated to the increase or decrease of our revenue.
So next, when I turn to R&D, well, actually, that will also involve technology support fees. And over these past few years, we attach a lot of importance to new product development and utilization, application of new technologies. So we have been investing into these areas, and they are our priority focus. So in the past few years, we had been making investment, and so that there is an increase by double digit.
As regards R&D investment, well, we need to actually satisfy market needs and so far, we have not seen any change in the customer’s demand for R&D investment. So that’s why we think that we still have to continue to increase investment. And so in terms of financials, we don’t think that there would be any change in this area.
If you look at our other expenses, we have actually enhanced our control over other expenses like administrative expenses. So you can see a decline in 2019 in our other expenses. We have been very determined in our cost control efforts. And you have already seen the effect and the outcome of our cost control work. We will continue to do more in this area.
Unidentified Company Representative
You mentioned effective tax rate. In 2019, we made use of government policies in relation to a deduction in — of R&D expenses and other related concessionary policies. So as a result, our effective tax rate came down, and this is also very good highlight in our business results.
Unidentified Company Representative
As such as now, we enjoyed some concessionary policies from the government. And then as a result, well, our effective tax rate being at 15% and we also enjoy a refund of 5%. So in 2019, actually, if you look at the amount of refunds being received, the amount is bigger than that in 2018. So this has given us a very positive impact in relation to our effective tax rate.
Unidentified Company Representative
In relation to government support, apart from tech, we had contacted various departments and authorities asking for any concessionary measures or policies after work resumption. But so far, we have not received any from the government.
Operator
[Foreign Language]
Unidentified Analyst
So, first of all, congratulations on your very good results. My question specifically is related to CapEx. In 2019, CapEx was 2.4 billion, 660 million was for the operating center. And well, the actual CapEx was 1 billion and out of which 400 million was spent on the operation center. In 2020, is it true that there is still a remaining 260 million of CapEx to be for the operation center? And then the daily maintenance expenses will be around 600 million. Can you give some guidance on future CapEx?
Unidentified Company Representative
In 2019, the planned CapEx was 660 million, actual was 236 million. In 2020, that would be remaining 400 million of CapEx for the operation center. In fact, Phase 1 has already been completed. And in 2019, actually, the CapEx would be 968 million. In the past 5 years, the average CapEx has been around 1 billion.
Unidentified Analyst
I have a question about your income, your revenue. Last year, in the second half, in relation to your data network revenue, there was a decline by about 9%. What is the reason why? And this year, do you think that it will — I mean, the revenue growth will accelerate in, for example, the second half of this year or next year?
Unidentified Company Representative
So, for our data network income, in the past few years, it has been stable. So, there isn’t a big change in our scale. If you compare 2019 and 2018, there is a decline by 5%. It is because of the two subsidiary companies that we mentioned just now, especially the Hainan and then it is being merged with the Company. So the revenue base has changed. And there is going to be — continue to be a decline. And if you took into — take into consideration the travel agents, we believe that there would be a slight decline.
Unidentified Analyst
So concerning the data network income, in 2019, actually, there is — apart from the two subsidiaries you mentioned, should be a portion in the amount of CNY 1.35 billion, which has increased 6.4%. So this is mainly related to the data center income. I want to know in the future, what will be some driving forces behind this income?
Unidentified Company Representative
So first of all, there is one item of income in relation to the leasing of our plant room and it increased a lot in 2019. But at the same time, we also have other businesses. For example, our payments business. In 2019, revenue increased quite significantly. And the platform operating volume had already exceeded CNY 100 billion. And then we also have data service revenue and also revenue from cargo transport, logistics and also travel transport and so on — traffic and so on. So all these areas of businesses being added together generate a double-digit revenue growth for us.
Unidentified Analyst
As such is now during the epidemic, there would be a big change in terms of the volume of transportation and aviation. I want to know how much impact will there be on your system integration business?
Unidentified Company Representative
Because of the epidemic, for our system integration work and projects, well, some contracts have been signed. However, that would be delayed in terms of implementation. So these projects will be subject to some impact. However, right now, work resumption has been accelerating.
Unidentified Company Representative
So the driving forces, the main driving force behind the system integration business is the building of airports. So in the short run, if the epidemic is going to be under control or if the situation can improve, then we think that there won’t be much impact in the long run trend in relation to passenger volume. So we think that in the mediumto long-term, the income of our system integration business will not be much impacted. It will be positive.
Unidentified Analyst
I — my next question is about your stock option incentive scheme. In January, you announced this scheme, and the market has responded to it very positively. Can you give more details in relation to the execution of this scheme? And then do you think that the epidemic will cause any impact to the completion of the first phase in 2021?
Unidentified Company Representative
Concerning the stock option incentive scheme, there are a number of indicators. The first one is the average net profit yield rate. So, there is a rule or a requirement on that. And at the same time, we have to benchmark it with our counterparts in the industry. The second is the three year CAGR of our revenue. The third indicator is the economic value added, and that is related to profitability. And for all these indicators, the requirements are rather stringent. So, it would be quite difficult.
When this scheme was formulated, at that time, that was not the epidemic. However, with the epidemic now in place, there was big impact on our financial and also operation data and indicators. But the indicators that I mentioned just now, they are fixed. They will not change. So actually, we hope that the market can resume normal as soon as possible, and we hope that we can fight or we can win the battle out of this epidemic. Of course, we will work very hard towards the indicators and the targets.
Unidentified Analyst
First question is, because of the epidemic you have done a lot of other work in response to the epidemic. So, are there any extra cost arising from these additional initiatives? And if there is an additional cost, to what extent? The second question is, you mentioned that you will waive the fee in case of, for example, no-show or cancellation or change of flights and so on. Is this arrangement only for the initial period? So when the epidemic is going to gradually phase off or if the situation improves, then in the later stage, are you going to keep this waive — fee waiver arrangement or are you going to resume charging these fees?
Unidentified Company Representative
So first of all, we have done some work to fight the virus. At the same time, we have done work to help the overall industry. We have developed, for the civil aviation industry, a health declaration system. At the same time, there is also the epidemic information system for the same flight segment for customers. And then there is also the inbound travelers anti-epidemic inquiry system. So these systems and services are provided free of charge. They do not generate new income for us. We are using IT, technology and data to serve the country and to help the industry helping, we will recur as soon as possible.
So concerning when we are going to charge the fee cancellation or flight change is hard to tell, because it is a concessionary arrangement following the announcement of the Civil Aviation Ministry on the 23rd of January. So it started at that time after their announcement or notification and then it will continue all the way depending on the judgment of the central government when it should end. So I think it will also depending — it will also be dependent on the epidemic development. So if the central government is of the view that the epidemic is more or less under control and that the situation is quite okay, then we can start charging the fees according to the standardized agreement.
Unidentified Company Representative
So my question is about the average selling price of an increase by around two points. So is this because of an increase in proportion of the foreign airlines? Or is it because of an accounting loss and gain? And if I only look at domestic airlines price, then how much is the price decline? Thank you.
Unidentified Company Representative
If you look at our AIT business, last year there was an increase in price because of the inclusion of foreign airlines. And last year, we got a positive gain because of U.S. dollar FX. So there is a 4% increase or impact because of FX, foreign exchange. Apart from this factor, the ASP will be more or less related in the same way with increase or decrease in passenger volume. We believe that this segment is rather stable. So there will not be any significant upside or downside change.
Unidentified Company Representative
Last year, if you look at our volume of operation, there are comparatively more international flights than domestic flight segments. And so the ASP for international flights is usually higher than that of domestic flights. So that’s why there is this price change or impact on our AIT overall, average selling price, which is rather positive.
Unidentified Analyst
So, last year, we saw quite rapid growth in your system integration business. So, is it because of the recognition of some large-scale assets or project revenue?
Unidentified Company Representative
Last year, we saw quite fast or big increase in our system integration business revenue. You mentioned some large-scale assets. Well, in fact, those are developed by our self-owned capital. So, they did not cause much impact on our system integration revenue. However, there are also some other supporting projects that will generate income for our system integration segment. At the same time, in many different airports, we also have some non-airport revenues and businesses. So, because of these factors, last year, our system integration revenue rose quite a lot.
Unidentified Analyst
Next question is around — is about NDK which is actually a new data structure. So, I want to know what will be the opportunities and difficulties arising from it for your company. I know that some of the companies also are into this area. So overall speaking, what will be the impact on your company?
Unidentified Company Representative
Regarding NDC, in the past few years, we have been working in accordance with IATA new standards. And then for the distribution channels, there is a new model. So, airlines can participate more in the distribution, and they will become closer to the consumers. And there are now more ways available for airline to offer not only tickets but also some other services. So the service is now richer to the consumer.
So actually, there is going to be a change in relation to channels, technology and also products. But then together with the Chinese airlines in the past all along, we cooperated with them and we also serviced them by means of an overall package. So the distribution, cargo clearance and settlements and so on are all included in the package. And NDC represents a product technology change. So at the present moment, this will not affect our income from the airlines.
Operator
[Foreign Language]
Unidentified Analyst
So first of all, I have to thank you for being able to answer our questions during this difficult period, and we are also more than happy to work with you to ride out all the difficulties together. So my first question is about the airlines data and statistics. Based on their information, in China, there is already a recovery of the aviation volume. So if you look at your reservation and bookings, has there been an improvement? And what will be the future trends look like?
Unidentified Company Representative
If you look at the epidemic in Mainland China, it is true that recovery is faster than in other parts of the world. As regards whether we are optimistic about the future, it all depends on the development of the epidemic. Comparing with the SARS outbreak in 2003 now the epidemic is much more serious and the impact cost is much, much bigger. As I said at the beginning, it is estimated that global aviation profit will come down by 44%. So you can see from this that the epidemic is really doing a very heavy blow to the industry.
Regarding the mid- to long-term, in terms of number of passengers, well, in fact, we do have the confidence that it will grow, especially when it comes to people’s desire to travel with the hard work and effort of the whole world together and also with further advancement in health care capabilities, in vaccine development and also in development of the anti-epidemic drugs. I believe that after the epidemic, people’s desire to travel will recover. And this is going to be optimistic, and we will see fast and strong growth after the epidemic.
Unidentified Analyst
So right now, given the reservation volume has come down, so has there been a rise in ASP? If so, what is the percentage increase?
Unidentified Company Representative
The pricing is something that is rather rigid and fixed, and it is the same for all airlines. You mentioned that the number of reservations has come down, but then our overall pricing has been very stable.
Unidentified Company Representative
Right now, we only have reservation volume of two months. So the sample is not big enough. There are not enough samples. We have to look at the whole year. In 2003, during the SARS outbreak, the situation recovered in July. So, actually, in 2003 in August to December, in some months, there is a year-on-year increase by up to 30%. So, we have to look at whole year. If we only look at two or three months’ samples, that is not enough.
Unidentified Analyst
Do you have any measures to increase your revenue? For example, is there any way to increase monetization?
Unidentified Company Representative
We are really thinking of different methods to expand revenue. However, because our business is closely related with aviation, so we will continue to make an effort. However, in the short run, we don’t think that there would be a lot of good effects or outcomes in terms of revenue expansion. So, we will consider more about cost. So, as I said just now, the number of passengers growth rate is rather slow. And as a result, commission amounts can come down. Administrative expenses, travel expenses and also conference, meeting expenses and so on will see some room for decline. And there are some new technologies that we can apply. So, in these ways, we will be able to save some cost. At the same time, we want to also try to excavate some money out of our internal operations. For example, we have plant rooms, and we are thinking whether we really will use the whole plant room ourselves. So, we are thinking of opening up some areas for outside users, and we are trying to identify some new users in the market. So, by doing all these, we hope that we will be able to save costs, and we can ride out the current epidemic in a smooth way.
Unidentified Analyst
Well, we can see that there is a big increase of the software and hardware cost because of the operation of the large-scale assets. So usually, according to the contract, first of all, the cost will be entered and then followed by revenue. So in the future, is it true that there will be some revenue contribution, but then the revenue contribution may not be entered into your system integration revenue, but only the costs are included. Is that the case?
Unidentified Company Representative
First of all, this is a new business model for us, and the revenue will be realized in the AIT revenue. As regards cost, well, in the agreement with the Capital International Airport, well, the cost will be in the format of commission and promotion expenses. But right now, the processing volume is still very small, and there are some merchants that are yet to be confirmed. So in the future, later down the road, you’ll be able to see the realization of our cost and revenue.
Unidentified Analyst
Then what is the reason behind the 60% increase in the software and hardware cost?
Unidentified Company Representative
Last year, there were quite a number of projects in relation to the airports as well as other industries. So they involve the system integration service contracts being delivered. And different — in different contracts, the ratio of software and hardware is not the same. And for one reason, the base figure was rather low. And so the system integration revenue has gone up and cost also has increased. But then it all depends on individual projects, the proportion, the ratio of software and hardware included and also the profit margin of different projects.
Operator
[Foreign Language]
Unidentified Analyst
My question is about Umetrip. I want to know the monthly users and also the revenue for this and also the progress of reorganization or restructuring? And then what about the reorganization of Hainan Airlines? What is the impact on your company?
Unidentified Company Representative
Regarding Umetrip, the number of users, we have not actually made any public or external announcement, but the number is above 40 million, and the accumulated number of users is rising. And in relation to the restructuring or reorganization of shareholding structure, the Board has been proceeding with it. And there has been a number of discussions on this matter, and the potential investors are now in deliberation.
Unidentified Company Representative
Concerning the reorganization of Hainan Airlines, this is in progress. And so far, there has not been any definite information or news that we can tell. However, so far, if the operation is stable, then we will benefit from cash flow receivables and also future potential revenue. So, it will be a positive impact on us.
Unidentified Analyst
I want to know whether you have considered the possibility of building an aviation cloud because you have so many data centers and you have strong data processing capabilities. So, have you made any innovation in this area?
Unidentified Company Representative
So, actually, concerning cloud, we have been making an effort for a long period of time already, basically in two areas infrastructure and applications. Regarding the infrastructure platform, we started at a very early stage, but for applications, we started quite late. For the applications, they are mainly for our self use. They are to enhance our flexibility in operation and to lower cost. And then for the infrastructure, we are developing the cloud in the direction of private cloud and hybrid cloud. However, we won’t be developing public cloud. So far, our development pace has not been fast. We have to consider our own unique characteristics, and we are mainly considering the B type of customers. So, for example, all the SOEs, the governments and also — this customer is also an example that we will be working on. Overall speaking, the cloud will not be accounting for a big percent of our revenue.
Unidentified Company Representative
We will extend this meeting to 6:10 p.m. because we won’t be able to meet investors face-to-face. So when you ask questions, please try your best to be concise. Thank you.
Operator
[Foreign Language]
Unidentified Analyst
So my question is regarding the new capital airport. So it is a new business, and it will be accounted for under AIT. So who will you be charging the fees, to the airport or to the airlines? And second question is about your AIT. So you said that in case of a no-show or a cancellation or a change of flight, you are now offering some concessions to the airlines. So regarding such fees, how much of the share of the total AIT is it? And the third one is about TFS. Is it Mainframe or Linux?
Unidentified Company Representative
So for the airport, well, we will offer a departure system service so we can charge a fee. And at the same time, we have to pay a special rights of concession fee. So that is in the form of commission and promotion expenses for us. This is the way how it is being reflected under AIT segment.
I think in relation to the fees for a no-show or a flight cancellation and changes, it is something dynamic. During the epidemic period, there is a fast increase in such cases. And when there is no epidemic, there isn’t much of this kind of fee. So there is not much revenue coming out of it. And so there won’t be much impact on us on the original income or revenue.
Unidentified Company Representative
So your question about the TFS system, well, it is based on both Mainframe and an open platform. For the Mainframe, it is safe and it is closed. But then the efficiency is a bit inferior. With an open platform, it is more flexible, intra-operability will be better, but then we have to invest more in terms of safety. So we will divide the operation into many modules,comprising both open platforms as well as Mainframe. So they will coexist. And this is also in line with the international arrangement. Other suppliers are using the same model.
Unidentified Company Representative
I want to supplement, concerning the new capital airport, well, because it is being developed with our own funds and also the equipment is being invested by us, so as a result, there will be depreciation expenses arising from it, and it will be one of the cost items from this project.
Unidentified Analyst
I want to know, is there any time limit for the special concession rights that you mentioned just now in concerning TFS? I know that in one of the cases, they have already migrated to Linux. Or is it true that there are still some operations based on Mainframe?
Unidentified Company Representative
The term is — or the tenor is 10 years, and we also have based on this to do our calculations.
Unidentified Analyst
My question is about the ASP for AIT business. For this year, the volume have declined so much. Will there be an increase in ASP as a result?
Unidentified Company Representative
Mathematically speaking, I agree with you, that is, for AIT, when volume comes down, then if you think of a staircase, a step model, then when volume comes down, ASP will rise. However, this also involves a dynamic consideration because a lot of the terms in the agreement had not been realized yet. For example, in terms of the flight cancellation, no-show or flight change expenses and fees, they did not — they were not charged because of the concessionary policies. So, we cannot assess the situation by only looking at ASP. There are also other costs involved in relation to the airlines, so we must take an overall consideration of the whole picture.
Besides, there are 2 other factors that will affect ASP. First of all, the foreign exchange rates between U.S. dollar and RMB. If there is a lot of volatility, then there would be a big impact on the ASP. And the next factor is that if there is a sharp increase in the international flights and also in the number of foreign airlines flights, then again, there would be impact on ASP.
Unidentified Analyst
Is the pricing criteria or pricing standards are the same for international flights of domestic airlines and also for the domestic flights?
Unidentified Company Representative
This question was asked every time. So if you compare, actually, the international flights of domestic airlines is usually higher than the domestic flights, but the ASP is even higher for international airlines because it is based on a market-oriented pricing.
Unidentified Analyst
This question is about your other income. In the past five years, if we do not include data network business, the CAGR is quite fast for your other income growth. It is double-digit growth rate. And last year, it slowed down quite a lot. So what is the reason behind? In the future, what will be the growth rate or your target?
Unidentified Company Representative
So you have been quite detail-minded in analyzing our other business’ growth rate. In the past few years, it has increased quite a lot because of some new business introduced. For example, the leasing of our plants room and also third-party payment services. So these used to have 0 base. So as a result, there is a big growth from 0 base. And if you look at both the CAGR and also the annual growth rate, they are very fast.
In 2019, we did not enjoy a double-digit growth rate for our other income. This is because in the past two years, these business segments had already entered a stable period. In the future, there will be some more new businesses coming in, and they will become new growth drivers to drive up the revenue of other businesses.
Unidentified Analyst
Can you summarize the reasons why in 2019 revenue growth has slowed down in terms of the settlements business?
Unidentified Company Representative
So I think this is related to our settlement and clearance business. In 2019, because of the overall processing volume of our cargo has decreased, and so its growth rate has come down. And if you look at BSP, actually, the growth rate is less than that of other business segments.
Operator
[Foreign Language]
Unidentified Company Representative
Thank you. Thank you. Goodbye.
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