China Unicom’s (NYSE:CHU) focus on 3G and its early bet on the iPhone is starting to pay off. The nation’s second largest wireless carrier said at its annual shareholder meeting Wednesday that it is poised to see 3G revenues exceed 2G for the first time this year.  The prediction could very well come true since 3G’s contribution is inching toward 50%, having accounted for about 43% of service revenues last quarter, up from 24.4% in Q1 2011. It also expects its 3G business to turn a profit this year as service revenues start to offset subsidy pressures.
With 2G subscriber growth slowing and 3G still at early stages of penetration, there is significant growth potential for China Unicom. We have a $23 price estimate for China Unicom stock, which is more than 60% ahead of the current market price.
3G Market in China is an Equitable Mix
3G penetration in China stands at a low but steadily growing 17%. This gives smaller wireless carriers such as China Unicom ample opportunity to compete on even ground with the otherwise dominant China Mobile. 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.
China Mobile runs its 3G network on a proprietary homegrown TD-SCDMA standard and that 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.
Higher ARPU levels
In order to accelerate 3G penetration, China Unicom started promoting 1,000 RMB smartphones last year and plans to drop the price to 700 RMB this year. The proliferation of affordable 3G smartphones has helped China Unicom have the upper hand in the 3G race, with China poised to become the biggest smartphone market by the year-end. Its newly launched higher speed HSPA+ network should also help it lure more users into adopting 3G and maintain its lead.
Leading the 3G race is proving beneficial for China Unicom because most growth is coming from data rather than voice, which has reached near-saturation. Adding 3G subscribers is helping China Unicom increase its ARPU levels as 3G smartphone users consume huge amounts of data. For the first quarter of 2012, China Unicom’s 3G ARPU was RMB 94, almost three times as much as its 2G ARPU of RMB 35. The launch of the higher speed HSPA+ network will help it further increase ARPU levels as users use more data-intensive applications on their phones.
However, China Unicom will be wary of China Mobile for the iPhone could well be on its way to the world’s largest wireless carrier by the year-end. (see Qualcomm Paves the Way for an Apple-China Mobile iPhone Deal) But the fact that China Unicom has been offering the popular smartphone for close to three years now and now has a higher speed 4G network should help it hold its own. (see China Unicom Speeds Ahead In Smartphone Race With HPSA+ Rollout)Notes:
- China Unicom Says 3G Sales To Pass 2G As Largest Revenue Source, Bloomberg, May 29th, 2012 [↩]