China Unicom (NYSE:CHU) is expected to release its first quarter earnings on Thursday, April 23. The second largest wireless carrier in China reported mixed results in 2014 with net profit rising 16% year-over-year (y-o-y) to RMB 12 billion ($1.92 billion). 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))

When the company releases its first quarter results, we expect its wireless business to continue to remain under pressure due to increased competition and lackluster performance in adding subscribers. However, it is also likely to be impacted by the introduction of value added tax (VAT) on telecom services by the government. In the wake of aggressive expansion in the 3G/4G space by the market leader China Mobile (NYSE:CHL), who added over 150 million high speed wireless subscribers in the twelve month period ending March 2015, China Unicom reported an increase of just 19 million high speed subscribers, compared to about 44.5 million in the same period in 2013-14. We also expect the company’s average revenue per user (ARPU) for wireless services to be slightly lower y-o-y on account of the company’s focus on low-cost smartphones in recent quarters.

In the fixed-line broadband business, we expect China Unicom to report robust revenue growth on a solid increase in the number of subscribers in the last twelve months. China Unicom has around a 34.5% share of the total fixed-line broadband market (by subscribers) in China, with the largest share (53.5%) being held by China Telecom(NYSE:CHA). ((Operating Data, China Unicom, March 2015)) ((Key Performance Indicators, China Telecom, March 2015))

Our current price estimate for China Unicom is $16, which is about 10% below the market price.

See our full analysis for China Unicom’s stock here

3G-4G Mix And ARPU In Focus

China Unicom added about 19 million high speed subscribers in the April 2014-February 2015 period. This helped the carrier improve its 3G-4G mix from about 46% at the end of Q1 2014 to over 51% by the end of March 2015. This means that out of the carrier’s total 295 million subscribers, over 151 million are on the faster 3G and 4G networks.

Gaining 3G and 4G users directly helps the company’s top line growth, as they 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 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.

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 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. ^[2]

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. It will be interesting to see whether the company revises its 100 million 4G device sales goal in the upcoming earnings release or shares its strategy to achieve the same.

Fixed Broadband Sales On Steady Growth Path

China Unicom has around a 34.5% share of the total fixed-line broadband market by subscribers in China, behind China Telecom’s 53.5%. China Unicom added about 3.2 million broadband subscribers in the April 2014-March 2015 period, taking its total fixed-line broadband subscriber count to about 70 million. 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 full year 2014. Therefore, we expect strong sales growth for the first quarter of 2015 as well. It is also likely to be driven by improving broadband ARPU, driven by the expansion of its high speed fiber network (FTTH/FTTB).

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1. Press Release, China Unicom, March 3 2015 [↩]
2. Unicom 4G speed dual strategy, Sina.com, Nov 5 2014 [↩]