Competition Could Impact China Unicom’s Valuation By 10%

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CHU
China Unicom

China Unicom (NYSE:CHU) is the world’s fifth largest wireless carrier and China’s second largest wireless operator with over 292 million subscribers. With a market share of 22.5%, it is ahead of China Telecom (NYSE:CHA) but trails behind China Mobile (NYSE:CHL) in the Chinese wireless subscriber market. China Telecom and China Mobile have market shares of 14.6% and 62.8%, respectively. China Unicom is also the second largest provider of fixed-line telecom and broadband services in China. With almost 109 million fixed-line broadband subscribers and a market share of 34%, it trails behind China Telecom which controls 53% of the market, by subscribers.

In the Chinese wireless market, there is currently fierce competition for high speed (3G and 4G) subscribers with 4G networks (FDD-LTE and TD-LTE) being promoted and expanded in a big way in the country. By the end of April, over 170 million subscribers were using 4G services in China with about 85% of them on market leader China Mobile’s network. Although China Unicom does not reveal its 4G subscriber count separately, we estimate that its share is currently less than 5% of the overall 4G market in China. China Mobile has raced past the others in adding 4G subscribers in the last year because of its first mover advantage.

The Chinese government awarded TD-LTE 4G licenses in December 2013 which only benefited China Mobile since China Unicom and China Telecom intended to build and expand their 4G networks using the FDD-LTE standard. The lack of FDD-LTE licenses for China Unicom and China Telecom helped China Mobile grow its 4G subscriber base exponentially from just over 1.3 million users in February 2014 to 90 million in December 2014 to over 153 million users at the end of April 2015. The government only recently awarded FDD-LTE 4G licenses to carriers, and the smaller carriers – especially China Unicom – have had a relatively slow start to their 4G campaigns.

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In this article, we discuss the possibility of a fall in China Unicom’s market share and its impact on the company’s valuation. Our current price estimate for China Unicom is $16, implying a slight discount to the market price.

See our full analysis for China Unicom’s stock here

Decline In Wireless Market Share (-10% Valuation Impact)

China Unicom reported a gain of just 2.26 million high speed subscribers in Q1 2015, marking its weakest quarterly performance in five years. This is about half of the carrier’s average quarterly gains of 4.2 million in 2014 and 26% of the corresponding figure in 2013 (8.7 million). China Unicom’s performance was dwarfed by China Mobile as well as smaller rival China Telecom, which gained over 42 million and 3.9 million (January-February) high speed subscribers in the same period, respectively. ((Key Performance Indicators, China Telecom, May 2015)) [1] ((Operating Data, China Unicom, May 2015))

This was also the first quarter 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 first quarter with 294.75 million subscribers, over 4.3 million less than its tally at the end of fourth quarter 2014. This tally further declined to around 292 million at the end of April on account of rising competition. In the first four months this year, China Unicom lost about 7 million subscribers to rivals. This led to a decline of over 65 basis points in its share in the Chinese wireless market, with China Mobile and China Telecom gaining 40 basis points and 25 basis points in the same period, respectively.

In our current calculations, we estimate that China Unicom will reverse some of its market share losses since the start of the year and maintain its share around 2013 levels of 22.7% through the end of our forecast period. However, if the carrier is unable to take full advantage of the recently awarded FDD-LTE 4G license amidst continued aggressive promotions by China Mobile and China Telecom, its market share might suffer further declines. If China Unicom fails to arrest the fall in its market share and it declines 20 basis points year-over-year to below 21% by the end of our forecast period, there could be a downside of about 10% to our valuation of the company.

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Notes:
  1. Operation Data, China Mobile, May 2015 []