Here we look at some trends affecting China Unicom’s (NYSE:CHU) equity value. China Unicom is an integrated telecom service provider offering both mobile and landline services to its users in China and competes with market leaders China Mobile (NYSE:CHL) in its mobile business and with China Telecom (NYSE:CHA) for both mobile and landline business.
Our price estimate for China Unicom stands at $22, roughly implying a 15% premium to the market price.
See our complete analysis of China Unicom stock here.
1. Substitution of Landlines with Mobile Phones
Due to ease-of-use and convenience, an increasing number of people are substituting their landlines with mobile phones. Newer technologies like VoIP and wireless have ensured that a fixed line is no longer needed for voice services. All the major incumbent telecom carriers, including China Telecom and China Unicom have been losing lines, as customers move on to VoIP or wireless services.
Landline phone users in China declined from 110 million in 2008 to 97 million in 2010. China Unicom’s average monthly revenue per user has also taken a hit as it fell from $6.40 in 2008 to $5.20 in 2010.
2. High Level of Subsidies on Mobile Handsets
The company has been trying to attract customers by offering large scale subsidies on mobile phones. Revenues from the sale of mobile phones have increased from $100 million in 2008 to $1.1 billion in 2010. This is because the company has launched many models of strategically customized handsets with the focus on innovation and price. Subsidies on handsets have further increased as the company is aiming to create a class of mid-and-low-end smartphones. They also seek to launch newer varieties of 3G handset models and enhance it with subsidies. These subsidies adversely affected the company’s profit margins.
3. Surging Competition in the Telecom Industry in China
In 2008, the Chinese government undertook massive restructuring of the telecom industry in China. It allowed telecom providers to offer both mobile and landline services.
After merging and de-merging, 3 companies emerged as a result of this process: China Mobile, China Unicom and China Telecom. The government wanted to create companies of comparable scale and standing, and it also set a maximum limit for the level of tariffs that could be imposed on the people, making the industry highly regulated. Mobile number portability was also allowed as a part of this restructuring process.
This has led to increase in the competition in the Chinese telecom industry and will further increase with the government’s view of converging television broadcast, telecom service and internet access networks.
4. High Customer Growth Potential
The number of mobile phone users in China is expected to cross the 1 billion mark by early 2012. This is primarily because the rural market still remains largely untapped and has been recognized by the company as a big opportunity for the expanding customer base and increasing revenues.
Moreover, the smartphone penetration in China stands at only 15%, and the increasing popularity of smartphones due to the ease of use and convenience makes better growth prospects for the industry as a whole.
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