China Unicom Starts 2015 With Record Low Monthly User Adds

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In another listless performance in the Chinese wireless market and a rather unpleasant start to the new year, China Unicom (NYSE:CHU) reported a gain of just 883,000 high speed (3G and 4G) subscribers in January 2015, marking its weakest monthly performance in over five years. This is about 60% lower than the carrier’s average monthly gains of 2.2 million in 2014 and 20% lower than the figure in November (1.1 million), which marked the carrier’s lowest monthly user adds last year. 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 12 million and 2.1 million high speed subscribers in the same period, respectively.

China Unicom 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. China Unicom recently announced plans to sell about 100 million 4G devices this 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 150 million at the end of January 2015, with a 3G-4G mix of just over 50%. ((LTE Trial Expansion Press Release, China Unicom, Dec 17 2014)) [1] [2] ((Key Performance Indicators, China Telecom, Feb 2015)) [3]

Our current price estimate for China Unicom is $16, implying a slight discount to the market price.

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See our full analysis for China Unicom’s stock here

Factors For January Dip

An obvious explanation for the sudden dip in China Unicom’s high speed user adds in January could be increased competition. Many of the carrier’s 2G customers may be adopting China Mobile’s 4G network in light of the latter’s discount offerings and massive network expansion (Unicom’s 2G user base declined by 801,000 in January). However, this argument discounts the fact that this was not China Mobile’s best monthly performance, as opposed to China Unicom’s worst.

Operating data of the Chinese carriers for the month of January 2015 shows that both China Mobile and China Telecom performed in line with their performance in the last 3-4 months but China Unicom suffered a sudden decline in adds. Although one month is not a large enough time period to draw conclusions about a carrier’s strategy (or lack thereof) but the dip in subscriber adds last month could be a result of reduced company promotions and discounts in anticipation of being granted a full FDD-LTE 4G license by the government (expected in the first half of 2015). Regardless, the sharp dip in user adds definitely raises doubts about the company achieving its ambitious goal of selling 100 million 4G devices in the next 11 months.

Ambitious 4G Plans For 2015

A report last year stated that China Unicom planned 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 behemoth China Mobile registered 90 million 4G subscribers in 2014, 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 sometime this year (when full FDD-LTE licenses are granted), 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 also suggest that adoption rates for 4G are indeed 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, Feb 2015 []
  3. Operation Data, China Mobile, Feb 2015 []
  4. Unicom 4G speed dual strategy, Sina.com, Nov 5 2014 []