China Unicom Still Struggling With 4G Subscriber Adds

China Unicom (NYSE:CHU) has been unable to make a dent in the Chinese 4G wireless market, and China Mobile‘s (NYSE:CHL) rapid expansion is only making matters worse. Last month, China Unicom reported a gain of just 691,000 high speed (3G and 4G) subscribers, marking one of its weakest monthly performances in over five years. This is about 70% lower than the carrier’s average monthly gains of 2.2 million in 2014 and about 10% lower than its average monthly gains in the first quarter this year. It is important to note that these figures are comparable to the carrier’s high speed user additions in Q4 2009 and Q1 2010, when it first launched its 3G service. ((Operating Data, China Unicom, May 2015))

China Unicom’s performance was dwarfed by market leader China Mobile, which gained about 10 million high speed subscribers in the same period. April 2015 also marked the first time in the history of the company that its total mobile subscribers declined for the third straight month, which means that the gains in high speed users could not compensate for the loss of 2G customers. The carrier ended the month with 292.2 million subscribers, over 2.5 million less than its tally at the end of March. In the first four months this year, China Unicom lost about 7 million subscribers to rivals. This led to a decline of over 60 basis points in its share in the Chinese wireless market, with China Mobile and China Telecom gaining 45 basis points and 18 basis points in the same period, respectively. ((Key Performance Indicators, China Telecom, April 2015)) ^[1]

In its first big announcement following the grant of full FDE-LTE 4G licenses in February, China Unicom recently said that it plans a pricing cut of 20% or more per megabyte of data by the end of this year. Considering that China Mobile and China Telecom also made similar announcements, it is likely to lead to a rapid rise in 4G adoption in China in the coming months. The price cuts should help China Unicom further improve its 3G-4G mix from current 52% levels, which is likely to have a positive impact on its ARPU (Average Revenue Per User) as well. However, it is still early to say whether these efforts will be sufficient to reverse its lost market share. ^[2]

Our current price estimate for China Unicom is $16, implying a discount of about 10% to the market price.

See our full analysis for China Unicom’s stock here

Factors For Sluggish User Adds

The first, and perhaps the most obvious, factor for the steady decline in China Unicom’s high speed user adds so far this year 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 their discount offerings and the latter’s massive network expansion. This is lent credence by the fact that China Telecom registered incredible gains in its total wireless subscriber base in the first three months this year, adding an average of over 2 million users per month against a measly monthly average of 3,300 user adds last year.

The decline in user adds for Unicom 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 8 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, with a high speed user base that is twice that of China Unicom, and it faced virtually no competition in the 4G market in 2014. 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, so achieving its goal will be very difficult. ^[3]

However, the fact that 4G is still in its developmental stages in the country means that adoption rates are still low. This is likely to change now that all players have announced plans to introduce significant price cuts in their data packages. China Mobile and China Telecom’s rapidly growing 4G subscriber bases suggest that adoption rates for 4G are indeed rising and 2G/3G subscribers are likely to shift to the higher speed networks rapidly with the availability of low-cost 4G-compatible devices and attractive service plans.

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1. Operation Data, China Mobile, May 2015 [↩]
2. China wireless carriers to slash contract prices, could spur 4G boom, Reuters, May 15 2015 [↩]
3. Unicom 4G speed dual strategy, Sina.com, Nov 5 2014 [↩]