China Unicom’s Profits Rise 26% On Robust Subscriber Gains

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China Unicom‘s (NYSE:CHU) net profit rose about 26% year-over-year (y-o-y) to RMB 6.7 billion ($1.1 billion) in the first half of 2014, on solid sales growth in the mobile and broadband businesses. Mobile service revenue grew by about 12% y-o-y to RMB 81.3 billion ($13.2 billion) driven by the net addition of over 40 million 3G and 4G subscribers in the one year period prior to June 30. Although the company registered robust bottom line gains, it stated that the recent decision of the government to impose a Value Added Tax (VAT) on telecom services negatively impacted its revenue and profit growth.

On the cost side, interconnection charges paid by the carrier to its peers China Mobile (NYSE:CHL) and China Telecom (NYSE:CHA) declined by about 24% to RMB 7.6 billion, owing to a favorable revision in interconnection fees at the start of the year. Subsidy costs also declined as a percentage of mobile broadband service revenues to 6.1% at the end of the first half of 2014 from 8.7% in 2013. This was primarily because of the carrier’s focus on low-cost smartphones to gain subscribers in the last few quarters as well as a phenomenal rise in mobile broadband service revenues (33%). However, it is important to note that the carrier’s selling and marketing expenses rose about 17% y-o-y to RMB 23.82 billion ($3.9 billion) in the same period on account of increasing competition. [1] [2]

China Unicom, the second largest carrier in China, launched 4G services in April and was the last among its rivals to enter into the expanding Chinese 4G market. It is difficult to estimate the impact of 4G on China Unicom’s top line considering that it is not reported separately by the company. However, we expect it to have played a significant role in expanding data revenue from 3G/4G handset users and data usage per 3G/4G handset user per month, which increased by 50% and 29% over the same period last year, respectively. We expect 4G to continue to play a significant role in the near future, especially in improving the carrier’s average revenue per user (ARPU). China Unicom’s mobile ARPU at the end of the first half of 2014 stood at RMB 47 ($7.63), down about 3% from the same period last year.

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In the fixed-line business, China Unicom’s service revenue grew by about 4.5% y-o-y to RMB 45.1 billion ($7.32 billion), driven by double-digit sales growth in broadband services. The total number of broadband subscribers grew 7.7% y-o-y to reach 67.4 million, aided by 2.78 million net subscriber additions in the first half of this year. Going forward, we expect the company to continue expanding its broadband network across the country as part of its commitment under the government’s ‘Broadband China’ plan.

Our current price estimate for China Unicom is $17, which is roughly in line with the market price.

See our full analysis for China Unicom’s stock here

3G-4G ARPU Declines Despite Increase in Data Usage Per User

China Unicom added 18.2 million 3G and 4G subscribers in the first six months of the year to take its total 3G-4G subscriber base to about 141 million. This translates to a 3G-4G mix of 47.7%, compared to 43.6% at the end of 2013. Gaining high speed users directly helps the company’s top line as 3G and 4G subscribers tend to use more data-intensive applications than 2G users because of the networks’ higher speeds, which helps generate more data revenue per user.

The carrier’s ARPU from high-speed users at the end of June was RMB 68.7 ($11.15), down about RMB 6.4 from 2013. 3G-4G ARPU declined in spite of an increase in data usage per user per month owing to reduced tariffs of 3G data services. The carrier’s overall ARPU (2G, 3G and 4G) also declined by RMB 1.2 to RMB 47 in the same period, as the impact of an improved 3G-4G mix was offset by the decline in 3G-4G ARPU. Going forward, we expect China Unicom’s mobile service revenues to continue their double-digit growth as the carrier expands its 4G coverage and encourages its 2G users to transition to its high speed networks. This will boost the carrier’s 3G-4G mix and ARPU as well.

Fixed-Line Broadband Continues Robust Sales Growth

China Unicom has around a 34% share of the total fixed-line broadband market (by subscribers) in China, behind China Telecom’s 52.6%. China Unicom added about 2.78 million broadband subscribers in H1 2014 compared to about 2 million in the previous six month period. This is a significant improvement and is likely driven by the company’s focus on expanding its high-speed fiber network to more areas in Northern China, where it maintains a near monopoly. The company also gained from growing acceptance of its “Smart Wo Home” service package, which provides bundled mobile and fixed-line broadband services to household customers. [1]

On account of increasing subscribers and improving Internet speeds, the carrier increased its broadband revenue by over 10% y-o-y to RMB 24.9 billion (around $4 billion) in H1 2014. Broadband service revenue as a percentage of total fixed-line revenue also improved from 52.2% in H1 2013 to 55.1% in H1 2014. Going forward, we expect broadband revenue to continue growing 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 the market, but that is unlikely to significantly impact Unicom’s market share in the near term.

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Notes:
  1. Press Release, China Unicom, August 7, 2014 [] []
  2. H1 Presentation, China Unicom, Aug 7 2014 []