China Unicom Reports Mixed 2014 Results On Slowdown In Subscriber Adds

China Unicom‘s (NYSE:CHU) net profit rose about 16% year-over-year (y-o-y) to over RMB 12 billion ($1.92 billion) in full year 2014, on modest service revenue growth and lower costs. Mobile broadband service revenue from high-speed subscribers (3G and 4G) grew by 18% y-o-y to about RMB 106 billion ($16.9 billion) driven by a net addition of 26.5 million high speed subscribers in 2014. This increase in 3G-4G subscribers was about 40% lower than the corresponding figure in 2013 (46 million). Although the company registered robust bottom line gains, the company’s overall revenues witnessed a decline of 3.5% owing to a 30% drop in telecom product sales, partially offset by a low single-digit rise in service revenues. ^[1] ((2014 Results Presentation, China Unicom, March 3 2015))

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 28% to RMB 14.6 billion, owing to a favorable revision in interconnection fees in January last year. Mobile subsidy costs also declined by a significant 40% in 2014 to RMB 4.7 billion ($750 million), primarily because of the carrier’s increased focus on low-cost smartphones to gain subscribers.

In the fixed-line business, China Unicom’s service revenue grew by 2.3% y-o-y to RMB 88.5 billion ($14.1 billion), driven by almost double-digit (9.2%) sales growth in broadband services. The total number of broadband subscribers grew 6.4% y-o-y to reach 68.8 million by the end of the 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 slightly ahead of the market price.

See our full analysis for China Unicom’s stock here

Focus On Low Cost Smartphones Hurts Wireless ARPU

China Unicom added 26.5 million 3G and 4G subscribers last year to take its total 3G-4G subscriber base to over 149 million. This translates to a 3G-4G mix of almost 50%, 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, which helps generate more data revenue per user.

The carrier’s ARPU from high-speed users at the end of December 2014 was RMB 63.6 ($10.13), down about RMB 11.5 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 4.1 to RMB 44.1 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 Reports Consistent Growth

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 over 4.1 million broadband subscribers in 2014 compared to over 6 million last year. This is a significant decline and was likely driven by the growing popularity, availability and affordability of wireless broadband in the country. 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 Family” 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 service revenue by about 9.2% y-o-y to over RMB 50 billion ($8 billion) in 2014. Broadband service revenue as a percentage of total fixed-line revenue also improved from 53.2% in 2013 to 56.7% in 2014. This helped the company slightly improve its fixed-line broadband ARPU to RMB 62.2 ($9.93) y-o-y in the same period. Going forward, we expect broadband revenue and ARPU 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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1. Press Release, China Unicom, March 3 2015 [↩]