China Unicom (NYSE:CHU), the second largest mobile carrier in China, has garnered more than 122 million 3G subscribers to date and still has room for growth, as 3G accounts for less than half of its total subscriber base. China Unicom, along with its smaller rival China Telecom (NYSE:CHA), has been at the forefront of the ongoing transition of mobile subscribers from 2G to 3G services. It currently has over 43% of its subscribers using 3G services, as compared to market leader China Mobile‘s (NYSE:CHL) 25%. However, China Mobile surpassed Unicom in net 3G subscriber additions by a huge margin in 2013. For the year 2013, China Mobile’s 3G subscriptions registered 118% growth over last year, as compared to Unicom’s 53%. This can be attributed to advancements in mobile chipset technology, which helped China Mobile mitigate most of the incompatibility issues faced by smartphones on its 3G TD-SCDMA network.
While Unicom has about a 22% share in the overall Chinese telecom market, its share in the 3G subscriber market is considerably higher at about 30%. China Unicom’s good performance in the 3G market can be attributed to the carrier’s aggressive marketing of 3G compatible smartphones in recent years. It was the first carrier to launch the iPhone in China in 2009. However, its focus has gradually shifted to low-cost smartphones in recent quarters, as it looked to boost its market share as well as rein in subsidy costs (see China Unicom Controls Subsidies Through Low-End Smartphones As 3G Adoption Grows). While this helped China Unicom’s overall average revenue per user (ARPU) strengthen due to rising 3G subscriptions, the focus on low-cost smartphones caused the carrier’s 3G ARPU to fall as the quality of new 3G subscribers declined. The carrier’s foray into 4G this year should help its ARPU stabilize in the medium to long term at significantly higher levels, but we will have to wait and see how aggressively the company pursues this market.
We maintain our price estimate for China Unicom at $19.77 , which is about 40% ahead of the market price.
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Overall ARPU To Increase Despite Declining 3G ARPU
China Unicom should continue to benefit from the growing adoption of 3G services since most of the growth is coming from data rather than voice, which has reached near-saturation. Adding 3G subscribers helps China Unicom increase its ARPU levels as 3G smartphone users consume huge amounts of data. For the full year 2012, China Unicom’s 3G ARPU was $13.6 (RMB 86), more than twice its 2G ARPU of $5.4 (RMB 34). The higher-speed HSPA+ network, to which the carrier has upgraded its 3G network, should help increase its ARPU levels further as subscribers use more data-intensive applications on their phones (see China Unicom Speeds Ahead In Smartphone Race With HPSA+ Rollout).
With the carrier’s 3G ARPU almost twice that of its 2G users, the transition to 3G has benefited Unicom’s top line, which grew by nearly 19% y-o-y in the first half of 2013. Unicom has also been fairly successful in keeping subsidy costs low because of its focus on low-cost smartphones. However, this affected its 3G ARPU, which declined from $13.6 (RMB 86) at the end of 2012 to about $12.4 (RMB 78) six months later. Despite declining 3G ARPU, we expect the overall ARPU to strengthen in the long run as voice declines stabilize and 3G mix improves further. Unicom’s 3G penetration increased from about 32% in 2012 to about 44% at the end of 2013.
According to our estimates, China Unicom could add 30-35% more subscribers to its current base of about 280 million by the end of our forecast period in 2020. This assumes a long-term CAGR of about 4.5%, as Unicom’s subscriber growth rate tapers off from about 20% in recent years to less than 2% in the outer years as the mobile market reaches saturation levels. If the declining 3G ARPU can stabilize at around $9-10 by then and the 3G mix improves to 80-90% of its total subscriber base, overall ARPU would stabilize around $8-9. A higher ARPU directly impacts the company’s top line, and we believe that the carrier can grow its mobile service revenues at double-digit rates in the near term and mid-single-digit rates in the long run.
4G Likely To Boost ARPU
Unicom’s foray into 4G this year should give its ARPU levels a further boost, as the company would be able to charge more for the services. This is because 4G networks are capable of reaching peak download speeds of nearly 10 Mbps, which is more than three times that achievable on 3G (3.1 Mbps). This would not only improve user experience, but also encourage subscribers to use more data-intensive applications on their mobile devices. 4G should help Unicom grow its data ARPU at higher than historical rates, but a lot depends on the carrier’s 4G strategy. Unicom is currently lagging China Mobile in building out its 4G LTE network. Until now, the government has issued only TD-LTE licenses, which don’t seem to be the best fit for China Unicom in the near term. With TD-LTE, Unicom won’t be able to seamlessly transition its 3G (WCDMA) subscribers to 4G in the near term due to incompatibility issues with the chipsets presently in use on its network . We believe Unicom will rapidly gain from 4G only after the Chinese government issues 4G licenses for FDD-LTE (Frequency Division Duplex-Long Term Evolution), which is the more easily implementable technology for Unicom in the near term. It is widely believed that the Chinese government will issue FDD-LTE licenses in 1-2 years.
China Unicom will look to use this new network as a means to not only improve ARPU levels, but also drive subscriber growth. Given China Mobile’s clout and dominance in the mobile sector, its return to strength in 3G/4G remains the most potent threat to Unicom’s growth in the coming years.Notes:
- China Unicom May Be A Winner As China Moves To LTE, SeekingAlpha, Dec 18,2013 [↩]