Competition Taking A Toll On China Unicom’s User Adds

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In another disappointing performance in the Chinese wireless market, China Unicom (NYSE:CHU) reported a gain of just 561,000 high speed (3G and 4G) subscribers in February 2015, marking its weakest monthly performance in over five years. This is about 75% lower than the carrier’s average monthly gains of 2.2 million in 2014 and 37% lower than the figure in January this year (884,000), which itself marked a new low in the carrier’s monthly user adds since February 2010. ((Operating Data, China Unicom, March 2015))

China Unicom’s performance was dwarfed by market leader China Mobile (NYSE:CHL) as well as smaller rival China Telecom (NYSE:CHA), which gained over 17.7 million and 1.8 million high speed subscribers in the same period, respectively. February 2015 was also the first month in the history of the company that its total mobile subscribers actually declined, which means that the gains in high speed users could not compensate for the loss of 2G customers. The carrier ended the month with 296.3 million subscribers, over 2.8 million less than its tally at the end of January. Since the beginning of the year, China Unicom’s overall share in the Chinese wireless market has declined by 27 basis points to 22.9%, with China Mobile and China Telecom gaining 16 basis points and 11 basis points in the same period, respectively. ((Key Performance Indicators, China Telecom, March 2015)) [1]

Until February, China Unicom offered 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 company was slowly testing and expanding its FDD-LTE 4G network on the back of a trial license granted in June last year. The Chinese government finally awarded full FDD-LTE licenses to wireless carriers China Unicom and China Telecom to operate 4G services across the country towards the end of last month. It will be interesting to see how the carrier utilizes this license and achieve its goal of 100 million 4G users by the end of the year 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 February 2015, with a 3G-4G mix of just over 50%. ((LTE Trial Expansion Press Release, China Unicom, Dec 17 2014)) [2] [3]

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Our current price estimate for China Unicom is $16, implying a premium of over 5% to the market price.

See our full analysis for China Unicom’s stock here

Factors For Dip In User Adds

The first, and perhaps the most obvious, factor for the steady decline in China Unicom’s high speed user adds in January and February was increased competition. Most of the carrier’s 2G customers may be adopting China Telecom’s and China Mobile’s 4G networks in light of the their discount offerings and the latter’s massive network expansion (Unicom’s net user base declined by 2.74 million in January and February). This argument is lent credence by the fact that China Telecom registered incredible gains in its total wireless subscriber base in the first two months this year, adding an average of 1 million users per month against a measly monthly average of 3,300 user adds last year.

The decline in user adds this year could also be a result of reduced company promotions and discounts in anticipation of being granted a full FDD-LTE 4G license by the government (granted on February 27, 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 10 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 over the next few months, 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 as well as China Telecom’s rapidly growing 4G subscriber bases month-over-month suggest that adoption rates for 4G are indeed rising and 2G/3G subscribers could shift to the higher speed network rapidly if low-cost devices and attractive service plans are offered to customers.

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Notes:
  1. Operation Data, China Mobile, March 2015 []
  2. Press Release, China Unicom, June 27 2014 []
  3. Press Release, China Unicom, Feb 27 2015 []
  4. Unicom 4G speed dual strategy, Sina.com, Nov 5 2014 []