China’s second largest wireless service provider China Unicom (NYSE:CHU) added 3.3 million subscribers in April, down from 3.5 million added in March.  The company now has about 213 million mobile subscribers, up 1.6% from the prior month. China Mobile (NYSE:CHL) and China Telecom (NYSE:CHA) also released their monthly subscriber adds. Both of them showed a healthy number of 3G subscriber additions, but fell well short of China Unicom’s net 3G adds.
Our $23 price estimate for China Unicom stock is about 50% above the current market price.
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3G Market in China is an Equitable Mix
With more than 670 million subscribers, China Mobile is the largest wireless carrier in the world and has twice as many subscribers as China Unicom. But when it comes to 3G, the difference is not nearly as wide. As of April 2012, China Mobile had around 62 million 3G subscribers, only about 20% ahead of 52 million that subscribe to China Unicom’s 3G network. Low but a steadily growing 3G penetration of about 17% in China gives smaller wireless carriers such as China Unicom ample opportunity to compete on an even ground with the otherwise dominant China Mobile.
Moreover, the fact that China Mobile runs its 3G network on a proprietary homegrown TD-SCDMA standard has proved to be a big deterrent in securing smartphones that are compatible with its network. Even the iPhone, which has already been launched on the other two carriers in China, hasn’t made its way to China Mobile yet.
Taking advantage of this, China Unicom has been closing the 3G gap with China Mobile by adding at least an equal number of 3G subscribers every month. In February, it added more than 2.8 million 3G subscribers compared to China Mobile’s 2.65 million. In March, however, both added almost the same number of 3G subscribers. And in April, it added about 26% more 3G subscribers than China Mobile and contributed more than 40% of the total 3G net adds in the country.
The iPhone 4S’ addition in January this year is definitely providing a boost to China Unicom’s 3G ambitions, and the carrier is looking to make the most of it before the popular smartphone arrives on China Mobile’s network. (see Qualcomm Paves the Way for an Apple-China Mobile iPhone Deal)
So, what happens when the iPhone arrives on China Mobile eventually?
The next-generation iPhone will, in all likelihood, have LTE capabilities and, currently, China Mobile is the only carrier ‘testing out’ its TD-LTE network in China. However, it is unlikely that the 4G network will be up and running in a meaningful number of cities across China any time soon. This gives China Unicom enough time to market its recently launched faster HSPA+ network as 4G and drive the sales of iPhones and in turn promote 3G. (see China Unicom Speeds Ahead In Smartphone Race With HPSA+ Rollout) This also helps it maintain a competitive edge over China Telecom – the only other Chinese carrier to offer the iPhone currently.
The reason why carriers like China Unicom are increasingly trying to promote 3G is because most growth is coming from data rather than voice, which has rather reached near-saturation. Adding 3G subscribers will help China Unicom increase its ARPU levels as 3G smartphone users consume huge amounts of data. Higher speeds from the use of its HSPA+ network will also see users increasingly use data-intensive applications on their phones, driving data ARPUs further. However, margins will be impacted by the sale of subsidized 3G phones such as the iPhone, but the carriers are betting on making their money back over the term of the contractual period.Notes: