China Unicom Sees Net Add Slowdown As It Awaits FDD-LTE Licenses

+14.02%
Upside
6.03
Market
6.88
Trefis
CHU: China Unicom logo
CHU
China Unicom

China Unicom‘s (NYSE:CHU) consistent gains in the Chinese wireless market continued in April as it added over 2.1 million high speed (3G & 4G) subscribers, taking its total 3G/4G subscriber count to over 134 million. Although the carrier’s high speed user adds were consistent with its performance in the prior months, its net subscriber additions (2G, 3G & 4G) declined drastically to about 900,000 in the month, owing to the loss of about 1.2 million 2G users. In comparison, the carrier gained over 8.7 million subscribers in the first three months of the year with a monthly average of close to 3 million additions. [1] ((Key Performance Indicators, China Telecom, April 2014)) [2]

China Unicom’s performance was dwarfed by market leader China Mobile (NYSE:CHL), which gained over 3.5 million subscribers in the same period, but was far better than smaller rival China Telecom (NYSE:CHA), whose overall subscriber base declined by over one million users. Increased competition in the 3G market and aggressive 4G network expansion by China Mobile seem to be weighing on China Unicom’s performance. However, we expect the company to recover from this monthly drop in user adds, owing to its competitive plan tariffs and fast HSPA+ 3G network. Although China Unicom entered the 4G market a couple of months ago, we expect it to make significant gains only when the government awards FDD-LTE licenses to carriers. Reports in the media suggest it could be within the next few months.

Our current price estimate for China Unicom is $17, implying a premium of over 10% to the market price.

Relevant Articles
  1. Is The Market Undervaluing Chinese Telcos: A Comparison With Verizon & AT&T?
  2. Will China Unicom Be Able To Shake Off Revenue Headwinds In 2020?
  3. China Unicom’s Revenues Should Trend Steadily Higher, Driven By Wireless Business
  4. A Look At China Unicom’s Subscriber Performance Over The First Half Of 2019
  5. China Unicom’s Earnings Grow On Lower Costs, Rising Wireless Subscriber Base
  6. What To Watch As China Unicom Reports FY’18 Results

See our full analysis for China Unicom’s stock here

FDD-LTE Licenses Likely To Provide Necessary Push

The Chinese government issued 4G TD-LTE licenses to carriers in December, but has yet to award FDD-LTE licenses. Initially, China Unicom was unsure on whether to use the homegrown TD-LTE standard or wait for the FDD-LTE license to launch 4G services. The carrier has chosen to selectively launch 4G services on the TD-LTE standard by building some of the required network itself and leasing some from China Mobile until the government issues FDD-LTE licenses. On the other hand, China Mobile is focusing completely on TD-LTE for its 4G network expansion, and China Telecom categorically informed investors that it will lease TD-LTE infrastructure from rivals in the near term to launch 4G and focus on FDD-LTE to expand its service to smartphones going forward.

The government’s decision to hold back FDD-LTE licences, and its reluctance to even provide a tentative issue date, has discouraged investors in telecom companies such as China Unicom. The carrier is currently unable to register significant gains in the 4G market because the existing 4G standard (TD-LTE) is incompatible with the carrier’s WCDMA 3G technology. We expect the issuance of 4G FDD licenses to provide China Unicom the necessary push to rapidly gain in the 4G subscriber market as its existing 3G subscribers would be able to seamlessly transition to 4G.

The government’s recent decision to introduce a value added tax (VAT) in the telecom sector has also raised concerns over an increase in tax liabilities for China Unicom and its impact on profitability in the near term.

Network JV Likely To Help 4G Expansion

All three major Chinese wireless carriers are in preliminary discussions for a network infrastructure joint venture. [3] If the JV is established, it might enable China Unicom to lease out TD-LTE 4G network infrastructure with relative ease, compared to the present situation where the carrier has  to deal with China Mobile individually or build the infrastructure itself. The JV is also likely to allow China Unicom to increase its network coverage (2G, 3G and 4G) without the necessary capital costs, which could provide the carrier an edge over China Mobile in terms of maintaining profitability and gaining high speed subscribers. Despite rapid user additions, China Mobile’s net profit declined over 9% year-over-year in Q1 this year. [4]

See More at TrefisView Interactive Institutional Research (Powered by Trefis)

Get Trefis Technology

Notes:
  1. Operating Data, China Unicom, April 2014 []
  2. Operation Data, China Mobile, April 2014 []
  3. China Mobile says sharing agreement could be inked in 2014, Telecom Paper, May 27 2014 []
  4. More Policy Headwinds for China Mobile, WSJ, May 5 2014 []