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Investment Overview for China Unicom (NYSE:CHU)
- Average Monthly Broadband Revenue Per User: We expect this figure to increase marginally from $9 in 2012 to about $9.50 by the end of our forecast period mainly due to increasing initiatives by the company for the promotion of its broadband business. However, there could be a downside of about 8% to our price estimate if this figure decreases to about $8 instead. There could also be an upside of similar nature if the figure further increases to $11.50. This is largely dependent on the level of substitution of landline with mobile devices which will greatly affect the usage of landline broadband internet.
Mobile Service and Phones
- Average Monthly Mobile Revenue Per User: We expect this figure to increase from $6.7 in 2011 to $8.5 by the end of our forecast period primarily due the increasing mix of 3G subscribers in the overall base. However, there could be a downside of about 5% to our price estimate if the average revenue per user increases only to $7 instead. There could also be an upside of a similar nature if this figure further increases to $10. This depends on the ability of the company to retain its competitive advantage in terms of technology and its ability to add 3G subscribers.
- Mobile Service and Phones EBITDA margin: We expect this figure to decrease from 22% in 2011 to about 16% by the end of our forecast period mainly because of high level of mobile phone subsidies and tariff regulation by the Government. However, there could be an upside of about 20% to our price estimate if the EBITDA margins declines only to 18%. There could also be downside of about 13% if EBITDA margins fall further to 15%. This largely depends on the level of subsidies that the company keeps granting to its customers and also on its ability to grow its 3G subscriber base.
China Unicom is a telecom service provider based out of China. Most of its revenues come from providing fixed-line broadband services as well as mobile voice and value added services. It also sells mobile handsets at highly subsidized prices.
In addition, the company also offers landline phone services.
Broadband internet and mobile business are expected to be the key growth drivers for the company.
The Broadband Internet division contributes the most to China Unicom's value because of the following reasons:
Higher average revenues per user
China Unicom has a smaller customer base for broadband internet than its mobile services division. However, its monthly ARPU levels for broadband users is higher at an estimated $9 for 2011, compared to around $6.7 for mobile users.
Higher EBITDA margins
Also, its operational margins for the Broadband division are also higher at an estimated 46.4% for 2011, as compared to about 22% for the Mobile division.
Increasing smartphone sales
China is now the largest smartphone market in the world by volume, having crossed U.S. in the third quarter of 2011. Increasing smartphone adoption will help drive data revenues up since the average revenue per user generated from someone using a smartphone is far higher than any other phone.
Being a part of this huge market will help China Unicom leverage its subscriber base of almost 200 million to reap the benefits of a growing smartphone user base.
Increasing 3G adoption
3G adoption in China has so far been slow with about 15% penetration among mobile subscribers presently. However, China Unicom has been slowly but steadily adding close to 3 million 3G subscribers each month and closing the gap with China Mobile. Considering that the company has more than 160 million subscribers on the slower 2G network waiting for a low-budget smartphone to jump on to the faster 3G network, it gives the company a big area of growth in the future. Growing standards of living and an increasing supply of low-cost smartphones should drive the adoption rate up, and consequently, its data revenues. The addition of the iPhone 4S to China Unicom's armoury should also see an increase in 3G adoption.
High level of subsidies on mobile handsets
The company has been trying to attract customers with large scale subsidies on the mobile phones it sells. They also seek to launch newer varieties of 3G handset models and enhance it with subsidies. This has led to a huge dip in the mobile profit margins of the company.
Government-mandated restructuring in the Chinese Telecommunications Industry
Telecommunications industry in China is largely regulated by the Government. Restructuring initiatives were taken in 2008-09, leading to merging and de-merging of landline and mobile businesses across companies. As a result of the shuffle, only 3 companies remained in the telecom sector and China Unicom acquired China Netcom's landline business but lost its high-growth CDMA business to China Telecom in the process. Such restructuring plans might also come up in the future. In fact, policymakers in China are planning on converging television broadcast, telecom service and internet access networks next. Frequent restructuring will meddle with the company's long-term plans and create uncertainty.
Tariff Regulations by the Chinese government
Being state-controlled, China Unicom experiences frequent government intervention in its business in the form of tariff ceilings. Since prices are not decided by the market forces but by the government, we cannot identify a trend in market prices to forecast the risk. Government-mandated tariff adjustments may come without warning and affect profitability if the tariffs are lowered. Frequent regulations also serve to limit the company's flexibility to respond to changes in the environment and market conditions.
Substitution of Landlines with Mobile Phones
Due to ease-of-use and convenience, increasing number of people are substituting their landlines with mobile phones. Newer technologies like VoIP and wireless have ensured that a fixed line is no longer needed for voice services.
All the major incumbent telecom carriers, including China Telecom and China Unicom have been losing lines, as customers move on to VoIP or wireless services.
High Customer Growth Potential
There is high customer growth potential in Chinese telecommunications industry in all regions. Rural market largely remains untapped and has been recognised as a big potential for expanding customer base and increasing revenues. The Government’s initiatives for reform and development in rural areas further enhance company prospects.
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How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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