Can China Unicom Get Its 4G Campaign Back On Track?

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China Unicom (NYSE:CHU), China’s second largest wireless operator, has been having a tough year so far, losing roughly 11 million wireless customers year-to-date (around 4% of its customer base). The carrier’s problems stem from hiccups in its 4G network roll-out, which has caused lucrative high-speed data customers to defect to rivals China Mobile (NYSE:CHL) and China Telecom (NYSE:CHA). Below, we look at what’s holding back its 4G plans and why the carrier should be able to eventually turn the tide.

We have a $15 price estimate for China Unicom, which represents a 20% premium to the current market price.

See our complete analysis of China MobileChina UnicomChina Telecom

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What’s Going Wrong With The 4G Rollout?

China Unicom set an ambitious goal of building out 4G coverage all across the country, much like its larger and better-capitalized rival China Mobile. However, according to Bernstein Research, the carrier could not afford the sort of density that China Mobile was deploying, causing it to take a hybrid 3G/4G approach, heavily leveraging its existing HSPA+ network. [1] This proved a mistake, since it was essentially spreading its 4G deployment too thin. In contrast, China Telecom focused on developing dense 4G coverage in key urban centers, where more the affluent customers and early adopters are likely to be found, and this strategy yielded solid results. China Unicom added just 18.6 million 3G/4G users through the first 8 months of this year, while China Telecom, a carrier roughly two-thirds its size in terms of total subscribers, added over 23 million users. China Mobile, the largest mobile operator, added a whopping 96 million high speed customers.

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Why There’s Hope For A Turnaround

Despite the lackluster performance thus far, the company certainly hasn’t missed the bus on 4G. Overall 4G penetration in China stood at under 25% as of August by our estimates, leaving plenty of room for growth. Moreover, the Chairmen of China Telecom and China Unicom recently switched places, and it is possible that Unicom’s new chairman, Mr. Wang Xiaochu, could carry forward Telecom’s strategy of focusing on more populous areas for 4G deployment. China Unicom’s network still accounts for 23% of all high-speed customers in China, owing to its strong 3G user base and it could benefit as it improves network quality and encourages them to migrate to 4G. The carrier could also benefit from the tower sharing joint venture that it is setting up along with rivals China Telecom and China Mobile. The move is expected to be particularly beneficial to Unicom and Telecom, being the smaller carriers,  since it could help to alleviate the shortage of prime sites for their 4G services roll-out, while possibly reducing capex outlays and operating expenses.

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Notes:
  1. Can China Unicom Stage A Turn-Around?, Barrons, September 2015 []