China Unicom’s Profit Soars 47% On 3G And Broadband

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China Unicom‘s (NYSE:CHU) net profit soared 47% year-over-year (y-o-y) to RMB 10.5 billion ($1.7 billion) in 2013 on solid sales growth in 3G as well as fixed-line broadband services. 3G service revenues grew about 50% on account of rapid subscriber growth, even as average revenue per user (ARPU) saw double-digit declines. Subsidy costs declined as a percentage of 3G revenues to 8.7% as the carrier benefited immensely from its focus on low-cost smartphones. However, selling and marketing expenses increased over 20% for China’s second largest wireless carrier, as it competed against market leader China Mobile‘s (NYSE:CHL) aggressive 3G expansion and 4G launch, in addition to China Telecom‘s (NYSE:CHA) growth in 3G. [1]

In the fixed-line business, China Unicom’s service revenues grew by about 4% y-o-y to RMB 86.5 billion ($14 billion), driven by double-digit sales growth in broadband services. Even though the company aggressively expanded its fixed-line broadband and 3G services across the country, its capital expenditures (CapEx) declined by over 36% over last year to RMB 73.6 billion ($12 billion) on account of improving ‘CapEx effectiveness’. The carrier expects to keep CapEx under RMB 80 billion in 2014 by continuing its efficiency improvement strategies.

As part of its 2014 plans, China Unicom stated that it would launch limited 4G services (under TD-LTE standard) in the first week of March and hope for the Chinese government to award FDD-LTE 4G licenses soon. The FDD-LTE standard would help its existing 3G (WCDMA) subscribers to transition seamlessly to 4G, which is not possible with the presently available TD-LTE 4G license. Thus, the carrier is seeking FDD-LTE licenses from the government to effectively and extensively launch its 4G service for smartphones in the country.

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We are in the process of updating our $17 price estimate for China Unicom based on the company’s full year results that were announced on February 27.

See our full analysis for China Unicom’s stock here

Robust 3G Subscriber Growth Boosts Wireless Market Share

China Unicom’s 3G subscriber base grew by over 60% y-o-y to 122 million by the end of 2013, improving the carrier’s overall share in the Chinese wireless market by 120 basis points to about 23%. This was driven by several factors. Firstly, China Unicom’s 3G network is based on the more popular WCDMA standard, which offered subscribers a wider range of handset options than rival China Mobile’s SCDMA standard, thus making China Unicom a preferred choice (although this advantage was lost in the latter part of 2013 when China Mobile’s SCDMA standard overcame its chipset incompatibility issues). Secondly, China Unicom focused on low-cost smartphones to boost affordability and penetration of its high-speed network. Thirdly, the carrier improved on its 3G Internet speed through HSPA+ upgrades and launch of its 42M network, providing industry leading 3G browsing speeds of up to 42Mbps. Innovative marketing by the company and the focus on its “Big Customer Service” concept to improve user experience also played crucial roles in boosting subscriber growth.

Although China Unicom managed to improve its market share in 2013, there is expected to be a tough road ahead for the carrier this year. China Mobile is aggressively expanding its 3G and 4G networks and China Telecom is likely to add significantly to the competition. How China Unicom fares in the subscriber market in 2014 is going to depend on the carrier’s 4G strategy, as well as the government’s decision to award FDD-LTE licenses.

Overall ARPU Improves Despite Declining 3G ARPU

China Unicom’s 3G ARPU declined 13% from RMB 86 ($14.00) in 2012 to RMB 75 ($12.21) in 2013 on account of  the company’s focus on low-cost smartphones. Subscribers using low-cost smartphones tend to use less data on their devices than subscribers using high-end smartphones like the iPhone. Carriers generally charge users according to the amount of data used in a given month (or use tiered data plans), so subscribers using less data are ikely to generate lower ARPUs. Despite its declining 3G ARPU, Unicom’s overall ARPU improved from RMB 47.90 ($7.79) in 2012 to RMB 48.20 ($7.84) at the end of 2013. This is attributed to an improving 3G mix, which increased from about 32% in 2012 to about 44% at the end of 2013.

Unicom’s foray into 4G this year should give its ARPU levels a further boost, as the company will be able to charge more for the services. 4G networks are capable of reaching peak download speeds more than three times higher than those achievable on 3G, which would not only improve the user experience, but also encourage subscribers to use more data-intensive applications on their mobile devices. We believe Unicom will rapidly gain from 4G only after the Chinese government issues 4G licenses for FDD-LTE, which is the more easily implementable technology for the company in the near term.

Fixed-Line Broadband Revenues Growing Steadily

China Unicom has around a 35% share of the total fixed-line broadband market (by subscribers) in China. In 2013, its broadband subscribers increased over 10% to about 65 million, second only to China Telecom’s 100 million subscribers. China Unicom is gaining broadband subscribers steadily as it expands its high-speed fiber network (FTTH/FTTB) to more areas in northern China, where it maintains a near monopoly. On account of growing subscribers, improving Internet speeds (because of fiber network) and lack of competition, the carrier increased its broadband revenue by over 3% to RMB 46 billion ($7.5 billion).

Going forward, we expect broadband revenues to continue increasing consistently as the company expands its user base, especially on its high-speed fiber network. It may face some pressure on account of China Mobile’s recent entry into this market, but this is unlikely to significantly impact China Unicom’s market share in the near term.

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Notes:
  1. Press Release, China Unicom, Feb 27 2014 []