Weak 4G Uptake, Subscriber Defections Weigh On China Unicom’s Q3 Earnings

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China Unicom

China Unicom (NYSE:CHU), the second largest Chinese wireless carrier, had a challenging third quarter, likely weighed down by hiccups in its 4G network roll-out, which has caused subscribers to defect to rivals China Mobile (NYSE:CHL) and China Telecom (NYSE:CHA). While Q3 net income declined by about 70% year-over-year to RMB 1.191 billion ($190 million), based on figures we derived from the carrier’s 9-month results published on Thursday, revenues grew by about 2% year-over-year to about RMB 67 billion ($10.5 billion), driven by stronger product sales and improved revenues from the fixed line business. [1] While the carrier did not provide specific earnings commentary, we will discuss some of the possible trends that likely impacted results and take a look at what lies ahead.

Our $15 price estimate for China Unicom is roughly in line with the current market price.

See our complete analysis of China MobileChina UnicomChina Telecom

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Defection of High-Value Customers Hurting Wireless Results

While China Unicom set an ambitious goal of building out 4G coverage all across the country, it ended up spreading its 4G deployment too thin, since it could not afford the sort of density that its larger and more well-capitalized rival China Mobile achieved. [2] In contrast, its smaller rival China Telecom, which also received its full FDD-LTE licences during Q1 2015, focused on building dense 4G coverage in urban areas, where more affluent customers and early adopters are likely to be found. Unicom’s weaker 4G coverage resulted in valuable high-speed customers migrating to Telecom as well as China Mobile. Unicom lost a net of 1.8 million subscribers through Q3. In comparison, China Mobile added close to 6 million new subscribers during Q3, while Telecom added about 1.72 million subscribers in July and August. However, on a positive note, the rate of Unicom’s attrition has reduced significantly, as net monthly subscriber losses have almost consistently fallen from about 2.8 million in February 2015 to around 0.29 million in September. [3]

A Turnaround Is Possible

While the carrier’s 4G performance thus far has been lackluster, things could improve going forward for three broad reasons. Firstly, 4G in China is still in its early stages and we estimate that penetration stands at less than 30%, leaving plenty of room for growth. Additionally, 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 densely populated areas for 4G deployment (related: Can China Unicom Get Its 4G Campaign Back On Track?). Unicom should also benefit from the tower sharing joint venture that it is setting up along with China Telecom and China Mobile. The venture would give it access to a larger base of tower infrastructure, while also bringing in a healthy cash infusion (RMB 25.4 billion) in return for the assets that it is contributing to the venture (related: China Tower Transaction: Unicom Gains Most In Interim, Telecom May Be Long-Term Winner). The additional liquidity could allow the carrier to bolster its 4G campaign with better marketing and promotional offers.

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Notes:
  1. China Unicom Press Release []
  2. Can China Unicom Stage A Turn-Around?, Barrons, September 2015 []
  3. China Unicom Operating Data []