China Unicom Earnings Preview: Expanding Subscriber Base In 3G, Broadband To Drive Revenues

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China Unicom

China Unicom (NYSE:CHU), the second largest wireless carrier in China, witnessed an impressive 47% year-over-year (y-o-y) increase in earnings in 2013 on the back of solid sales growth in 3G as well as fixed-line broadband services. 3G service revenues increased by about 50% y-o-y to RMB 90 billion ($14.6 billion) on the back of strong subscriber growth. The carrier increased its subscriber base by about 42 million last year, with an average monthly increase of about 3.5 million users. In the fixed-line business, it reported consistent mid-single-digit growth in revenues with the expansion of its high speed fiber network across the country.

The company is expected to release its first quarter earnings on Tuesday, April 15, and we expect its wireless business to continue to show strong growth on account of an expanding subscriber base and an improving 3G mix. However, it is likely to be impacted by the company’s comparatively lackluster performance in adding new wireless subscribers in Q1 2014 compared to the same period last year. In the wake of aggressive expansion in the 3G/4G space by market leader China Mobile (NYSE:CHL), China Unicom reported an increase of just 4.7  million wireless subscribers in the first two months of this year, compared to about 6.8 million in the same period in 2013. We also expect the company’s average revenue per user (ARPU) in wireless services to be slightly lower y-o-y on account of the company’s focus on low-cost smartphones in recent quarters.

In the fixed-line broadband business, we expect China Unicom to report robust revenue growth on the back of a strong recovery in subscriber additions in the first two months of the year. China Unicom has around a 35% share of the total fixed-line broadband market (by subscribers) in China, with the largest share (53%) being held by China Telecom (NYSE:CHA).

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Our current price estimate for China Unicom is $17, implying a premium of over 20% to the market price.

See our full analysis for China Unicom’s stock here

Improving 3G Mix, Expanding Subscriber Base To Drive Revenues

China Unicom added about 6.4 million 3G subscribers in the January-February period this year. This helped the carrier improve its 3G mix from 43.6% at the end of 2013 to 45.2% in February 2014. This means that out of the carrier’s total 286 million subscribers, 129 million are on the faster 3G network.

Gaining 3G users directly helps the company’s top-line growth, as 3G subscribers tend to use more data-intensive applications than 2G users because of the network’s higher speed, which helps generate more data revenue per user. The carrier’s average ARPU for 3G subscribers in 2013 was RMB 75 ($12.21) per month, which was more than two times its ARPU for 2G subscribers (RMB 31.60). While we estimate that the carrier’s 3G ARPU is likely to be lower this quarter compared to its average last year, its overall wireless revenues are likely to increase on the back of a larger 3G subscriber base and improving 3G mix.

Fixed Broadband Likely To Report Robust Results

In 2013, China Unicom’s fixed-line broadband subscribers increased over 10% to about 65 million, second only to China Telecom’s 100 million subscribers. However, this increase was not spread out evenly throughout the year. Net quarterly additions in fixed-line broadband subscribers decreased from about 2.4 million in Q1 2013 to just over 500,000 in Q4 2013. In comparison, China Unicom added over 1 million fixed-line broadband users in the first two months of Q1 2014.

The company is gaining broadband subscribers as it expands its high-speed fiber network (FTTH/FTTB) to more areas in northern China, where it maintains a near monopoly. The high-speed FTTH/FTTB networks also help in increasing the company’s broadband ARPU as the higher Internet speed encourages users to consume more data. The carrier’s fixed-line revenues are likely to witness a strong jump this quarter driven by robust expansion of its high speed fixed-line broadband network and an improving broadband ARPU.

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