China Unicom (NYSE:CHU) derives more than half of its value through mobile services and broadband internet that account for 38% and 30% respectively of our $22 price estimate for the company’s stock. The company offers both mobile voice and value added services like SMS, caller ID, mobile Internet. Landline services though offered by the company are in decline because of its increasing substitution with mobile phones. Revenues from broadband internet facilities, however, are rising because of initiatives in the form of network expansion and greater marketing spend taken by the company. The company faces intense competition not only from market leaders China Mobile (NYSE:CHL) but also from China Telecom (NYSE: CHA).
See out full analysis of the China Unicom
Here, we highlight 3 of the most important drivers for China Unicom’s stock and the upside/downside potential.
- Average monthly mobile revenue per user: China Unicom generated $6.10 revenues per user through its mobile phone services in 2010.
- Mobile services and phones EBITDA margin: EBITDA margins of the company’s mobile services and phones division has fallen drastically from 42% in 2008 to 29% in 2010. Though also faced with declining margins, competitor China Mobile, in stark contrast enjoyed margins of 51% in 2010.
- Average monthly broadband revenue per user: China Unicom had average monthly broadband revenues per user of $8.50 in 2010.
Strong iPhone Demand in China
China Unicom has the exclusive right to sell iPhones on its mobile network in China. The increasing popularity of smartphones and its penetration being as low as 15% in China, could boost the company’s market share in the future.
China has now the become fastest growing market for Apple’s iPhone. In its second quarter, Apple saw 250% y-o-y increase in iPhone sales from China compared to 155% growth in the U.S. [1] And along with Apple, China Unicom’s revenues from handset sales are growing as well.
33% Upside Scenario | $29 Trefis Price Estimate
1. Higher average monthly mobile revenue per user (+10%):
The company presently has the license to operates its mobile networks using the WCDMA technology, which is superior to those used by its competitors in terms of both price and speed. Average monthly mobile revenue per user has increased from $5.80 in 2008 to $6.10 in 2010, and we currently forecast that it shall increase to $8.30 by the end of the Trefis forecast period mainly because of superior technology and larger adoption of the company’s 3G business.
However, with increasing popularity of smartphones and greater mobile data usage, the company is also taking initiatives to develop new and more innovative applications. This could represent a 10% upside to the Trefis price estimate.
2. Maintain margins (+15%):
Mobile phone sales of the company have increased from $0.1 billion in 2008 to $1.1 billion in 2010, growing at more than 200% yearly. This boost has come because of the high level of subsidies being offered to attract users. The corresponding negative impact is visible on the margins which have declined at a steady rate.
We currently forecast that margins will fall to 17.5% by the end of the Trefis forecast period. However, there could be an upside of 15% to our price estimate if the company manages to regain some of its lost margins by reduction of subsidies or increasing market share by curbing competition.
3. Average monthly broadband revenue increases at a faster rate (+8%):
Average monthly broadband revenue per user has increased from $8.50 in 2010 to $9.10 in June 2011 owing to the large scale capital expenditure incurred by the company in developing its broadband networks enhancing both coverage and speed. We currently forecast that this figure will increase to $10.20 by the end of our forecast period due to increasing affordability of computers and greater internet usage.
There could be an upside of 8% to the Trefis price estimate if the company is successful in capturing this increased internet usage through its marketing and bundling-of-services initiatives.
38% Downside Scenario | $14 Trefis Price Estimate
1. Average mobile revenue begin to fall (-15%):
China Mobile, market leaders in the Chinese telecom industry have been facing declining average revenues per user which is expected to continue primarily because of tariff setting by the government and also low usage pattern of new customers. China Unicom, on the other hand, has seen an increase in these numbers due to greater usage of 3G business by its users generating higher level of revenues.
If average mobile revenues per user starts falling due to spectrum unavailability or failure to leverage on technological advantages, there might be a 15% downside to our price estimate.
2. China Unicom margins continue to decline (-15%):
Keeping in mind its quest to create a group of mid and low end smartphones users, the company is enhancing subsidy models, we currently forecast that EBITDA margins will fall to 17.5% by the end of the Trefis forecast period.
If these margins continue to decline owing to similar or higher level of subsidies and the company is unable to recover the large expenses borne in relation with network expansion, there could be a 15% downside to the Trefis price estimate.
3. Greater substitution and competition decrease broadband revenues per user (-8%):
There has been an increasing trend of landline substitution with mobile phones. If China Unicom’s broadband division suffers a hit due to increased switching to wireless broadband and internet facilities, the average revenues per user might start declining. Also, any adverse tariff setting policies that the government may execute shall harm the company further.
China Unicom might not be able to curb competition from mobile internet as well internet services offered by cable companies. Thus, there could be a downside of 8% to out price estimate.
Understand How a Company’s Products Impact its Stock Price at Trefis
Notes:- China Spurts to Top of Apple’s iPhone Growth Chart, Allthingsd, April 21, 2011 [↩]