China Unicom Still Struggling With Subscriber Adds, 4G Key In 2015

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China Unicom‘s (NYSE:CHU) sluggish gains in the Chinese wireless market continued in November, with the carrier registering less than 1.1 million high speed (3G and 4G) user additions, its lowest count in over three years. This was almost equal to the 1.15 and 1.13 million user adds registered by the carrier in October and September, respectively. The carrier currently offers 4G services in select cities on a mixed network using both the TD-LTE and FDD-LTE standards. The license for offering TD-LTE 4G services was granted by the government in December 2013, and the FDD-LTE 4G network is being slowly tested and expanded on the back of a trial license granted in June this year.((LTE Trial Expansion Press Release, China Unicom, Dec 17 2014)) [1] [2] ((Key Performance Indicators, China Telecom, Dec 2014)) [3]

China Unicom’s performance was dwarfed by market leader China Mobile (NYSE:CHL) as well as smaller rival China Telecom (NYSE:CHA), which gained about 16 million and 2 million high speed subscribers in the same period, respectively. Increased competition in the 3G/4G market, aggressive 4G network expansion by China Mobile and a dual 4G strategy seem to be weighing on China Unicom’s performance. China Unicom recently announced plans to sell about 100 million 4G devices next year. It will be interesting to see how it plans to do this considering that its 4G user base is currently negligible. China Unicom’s total high speed subscriber base stood at 148 million at the end of November, with a 3G/4G mix of about 50%.

Our current price estimate for China Unicom is $16, implying a premium of about 20% to the market price.

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See our full analysis for China Unicom’s stock here

China Unicom’s 4G Strategy In 2014

When the government awarded TD-LTE licenses last year, China Unicom was unsure on whether to use the home-grown TD-LTE standard or wait for the FDD-LTE license to launch 4G services. Eventually, the carrier chose to selectively launch 4G services on the TD-LTE standard by building the required network and wait for FDD-LTE licenses to expand further. With the FDD-LTE trial licenses awarded in June, the carrier now has approval to expand its network to 56 cities across the country. [1]

The company could not extensively expand its 4G offerings on the TD-LTE standard because its existing 3G network (WCDMA) was compatible only with the FDD-LTE 4G standard (rather than TD-LTE), which would not have allowed a seamless transition of its existing 3G user base to 4G. In contrast, market leader China Mobile’s 3G network (TD-SCDMA) was fully compatible with the TD-LTE standard, which is the reason for its rapid 4G expansion and subscriber gains in the last eleven months.

Ambitious 4G Plans For 2015

A recent report stated that China Unicom plans to sell 100 million 4G devices in 2015, spending about RMB 5 billion ($815 million) in subsidies. This is a very ambitious goal considering that the behemoth China Mobile has managed to register only about 71 million 4G subscribers in the first eleven months this year, when its high speed user base is twice that of China Unicom and it faced virtually no competition in this market. When China Unicom goes full throttle on its 4G campaign next year (FDD-LTE 4G licenses are expected to be granted in early 2015), it will likely face intense competition from China Mobile as well as China Telecom, making the task of achieving its goal very difficult. [4]

However, the fact that 4G is still in its developmental stages in the country means that adoption rates are still low. This could change when the smaller players get aggressive with their 4G promotions. China Mobile’s rapidly growing 4G subscriber base month-over-month and a decline in its 3G users in October and November also suggest that adoption rates for 4G are rising and 2G/3G subscribers could shift to the higher speed network if low-cost devices and attractive service plans are offered to customers.

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Notes:
  1. Press Release, China Unicom, June 27 2014 [] []
  2. Operating Data, China Unicom, Dec 2014 []
  3. Operation Data, China Mobile, Dec 2014 []
  4. Unicom 4G speed dual strategy, Sina.com, Nov 5 2014 []