China Unicom’s Profits Rise 26% On Subscriber Gains, Lower Costs

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China Unicom

China Unicom‘s (NYSE:CHU) net profit rose over 26% year-over-year (y-o-y) to RMB 10.6 billion ($1.73 billion) in the nine month period ending September 2014, on consistent subscriber gains in mobile and fixed-line broadband as well as lower costs. Mobile broadband service revenue from high-speed subscribers (3G and 4G) grew by 24.3% y-o-y to about RMB 80.4 billion ($13.1 billion) driven by a net addition of over 34 million high-speed subscribers in the one year period prior to September 30, 2014. Although the company registered robust bottom line gains, the government’s recent decision to impose a Value Added Tax (VAT) on telecom services is likely to have negatively impacted its revenue and profit growth. ((Press Release, China Unicom, October 24, 2014))

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 26% to RMB 11.1 billion, owing to a favorable revision in interconnection fees at the start of the year. Mobile subsidy costs also declined by a significant 33% in the first three quarters to RMB 3.9 billion ($640 million), primarily because of the carrier’s increased focus on low-cost smartphones to gain subscribers as well as a phenomenal rise in mobile broadband service revenues.

In the fixed-line business, China Unicom’s service revenue grew by about 3.2% y-o-y to RMB 67 billion ($11 billion), driven by almost double-digit (9.7%) sales growth in broadband services. The total number of broadband subscribers grew 6.8% y-o-y to reach 68.5 million, aided by 3.8 million net subscriber additions in the first nine months 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.

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Our current price estimate for China Unicom is $17, which is about 15% ahead of the market price.

See our full analysis for China Unicom’s stock here

3G-4G Mix Improves, 3G-4G ARPU Declines

China Unicom added 23 million 3G and 4G subscribers in the first nine months of the year to take its total 3G-4G subscriber base to about 146 million. This translates to a 3G-4G mix of 49%, 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 September was RMB 65.7 ($9.86), down about RMB 10 from 2013. 3G-4G ARPU declined, likely due to a higher proportion of low-cost smartphones in China Unicom’s overall user base and also due to reduced tariffs of 3G-4G data services. The carrier’s overall ARPU (2G, 3G and 4G) also declined by RMB 2.7 to RMB 45.5 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 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 Subscriber Adds Fall

China Unicom has around a 34% share of the total fixed-line broadband market (by subscribers) in China, behind China Telecom’s 53%. China Unicom added about 3.8 million broadband subscribers in the first three quarters of 2014 compared to over 5.5 million in the same period last year. This is a significant decline and was likely driven by the growing popularity, availability and affordability of wireless broadband in the country, compared to fixed-line broadband. Going forward, we expect subscriber adds to improve as the company expands its high-speed fiber network to more areas in Northern China, where it maintains a near monopoly. The company is also likely to gain from growing acceptance of its “Smart Wo Home” service package, which provides bundled mobile and fixed-line broadband services to household customers.

On account of increasing subscribers and improving Internet speeds, the carrier increased its broadband revenue by about 10% y-o-y to RMB 37.5 billion ($6.13 billion) in the nine-month period ending September 2014. Broadband service revenue as a percentage of total fixed-line revenue also improved from 52.7% in the first three quarters of 2013 to 56.1% in the same period this year. 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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