China Unicom (NYSE:CHU) is currently the only telecom carrier that hasn’t launched fourth generation cellular (4G) service in China, after China Telecom‘s (NYSE:CHA) 4G service launch on January 14.  All three telecom carriers in China- China Unicom, China Telecom and China Mobile (NYSE:CHL) – received TD-LTE licenses in December last year to offer 4G services in the country. While China Mobile and China Telecom have already partnered with several global wireless equipment manufacturers such as Ericsson (NASDAQ:ERIC), Alcatel-Lucent (NYSE:ALU) Nokia (NYSE:NOK) and Huawei, China Unicom is still in the process of awarding contracts for its 4G network rollout.
It is not surprising that China Unicom is lagging behind the other carriers in rolling out its 4G network, as it has not been very clear about its 4G strategy from the beginning. Since last year, the company has been uncertain on whether to focus on the TD-LTE or FDD-LTE technology standards.  The 4G licenses issued by the Chinese government were based on the TD-LTE (Time Division- Long Term Evolution) standard, which unlike FDD (Frequency Division Duplex)-LTE, is incompatible with the chipsets currently in use on its network. We expect China Unicom to follow China Telecom’s lead, starting slow on a TD-LTE infrastructure build-up, and waiting for the government to offer FDD-LTE licenses. China Telecom is currently offering its 4G services only through data cards and wireless routers as opposed to market leader China Mobile, which caters to the 4G smartphone market.
We expect China Unicom’s mobile service margins to slightly decline going forward because of growing competition and its ambiguous 4G strategy. Its reported mobile subscriptions for the full year 2013 were also slightly lower than our expectations. Accordingly, we have reduced our price estimate for China Unicom by about 15% to $17, which is about 25% ahead of the market price.
China Unicom Should Focus On FDD-LTE And 3G
The 4G licenses issued by the Chinese government for all three network carriers in the country are based on TD-LTE technology. TD-LTE is a relatively unique 4G protocol, as most carriers outside of China use FDD-LTE. China Mobile has been at the forefront of the 4G/TD-LTE infrastructure build-up and trials, while China Unicom has remained indecisive with its strategy. This is because setting up TD-LTE network infrastructure is highly capital intensive and China Unicom’s 3G network, based on WCDMA technology, is more compatible with the globally accepted FDD-LTE technology standard than TD-LTE. Therefore, the most prudent strategy seems to be a dual 4G approach, which entails building a hybrid LTE network based on both TD as well as FDD standards.
Taking a cue from China Telecom’s 4G approach, China Unicom could launch TD-LTE 4G services through data cards and routers in the beginning and wait for the government to offer FDD-LTE licenses before expanding its 4G services to existing 3G (WCDMA) subscribers (see China Telecom Set To Enter 4G Telecom Market With A Hybrid LTE Network). It could also work on developing 4G-enabled smartphones which work on the TD-LTE technology standard to attract new customers. However, the carrier would have to work on a suitable technology which would enable its potential 4G subscribers using TD-LTE standard chipsets to be able to access 3G (WCDMA) and 2G services when its 4G network is unavailable.
Therefore, in addition to selectively launching TD-LTE/4G services in the near term, China Unicom will need to focus on incentivizing existing 3G subscribers to stay on its network. To encourage its existing 3G users to wait for the launch of its FDD-LTE/4G network rather than switching over to China Mobile’s 4G network, it will have to offer competitive pricing, better network quality and customer service. China Unicom currently has about a 23% share in the overall Chinese telecom subscriber market with about 281 million subscribers as compared to China Mobile’s 767 million subscribers. Given China Mobile’s clout and dominance in the mobile sector, its return to strength in 3G/4G remains the most potent threat to China Unicom’s growth in the coming years.
4G Likely To Boost ARPU
China Unicom has benefited from the growing adoption of 3G services, since more growth has been coming from data rather than voice, which has reached near-saturation. Adding 3G subscribers helps China Unicom increase its average revenue per user (ARPU) levels as 3G smartphone users consume huge amounts of data. The carrier’s ARPU increased from about $6 in 2010 to more than $7 by the end of 2012 as the company’s 3G penetration increased from about 8.4% to about 32% during the same period.
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. We believe Unicom will rapidly gain from 4G only after the Chinese government issues 4G licenses for FDD-LTE/ It is widely believed that the Chinese government will issue FDD-LTE licenses in the next few years.Notes:
- Press Release, China Telecom, Feb 14, 2014 [↩]
- Unicom Picks FDD 4G, China Mobile Counts Down To iPhone, SeekingAlpha, Dec 13 2013 [↩]