Chinese Telcos Get Fat Margins Selling Cheaper Smartphones

by Trefis Team
-5.55%
Downside
17.49
Market
16.52
Trefis
CHU
China Unicom
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The Chinese telecom industry appears to be trending toward selling cheaper smartphones and actively promoting sales as opposed to higher-priced phones from Apple (NASDAQ:AAPL) and Samsung. According to DigiTimes while China Unicom (NYSE:CHU) has launched smartphones priced at CNY1,000 (US$158) recently, rival carriers China Telecom (NYSE:CHA) and China Mobile (NYSE:CHL) are also ready to enter the segment soon. [1]

Our $24 price estimate for China Unicom stock is about 25% above market price.

See our complete analysis of China Unicom here


Telcos trying to attract 3G subscribers

Chinese telcos, especially China Unicom first came out with the strategy of selling low cost smartphones to attract more 3G subscribers. 3G subscribers are typically heavy data users and helps China Unicom in increasing its Average Revenue per User (ARPU) levels. China Unicom, in particular, recently unveiled cheaper Android-based smartphones provided by ZTE, Huawei and Lenovo. [2]

More recently, China Telecom announced that it will procure 45 million 3G smartphones in the range of $111 to $316. [3] By selling cheaper smartphones, the telcos does not have to worry about paying higher subsidies associated with higher prices smartphones such as iPhones. At the same time, these companies benefit from higher data usage associated with 3G smartphones.

For instance China Unicom’s EBITDA margins for its mobile division have declined sharply in recent years from 42% in 2008 to about 24% expected by the end of 2011, mainly due to high level of subsidies associated with higher priced smartphones. By selling cheaper smartphones, these companies will be able to reduce their subsidy costs while keeping data usage and consequently ARPU levels intact.

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Notes:
  1. China market: Top-3 telecom carriers promoting CNY1,000 smartphones, DigiTimes, January 18th, 2012 []
  2. China market: China Unicom to launch mid-level smartphones for sale at below CNY1,500, DigiTimes, December 27th, 2011 []
  3. China Telecom to procure 45 million 3G smartphones in 2012, DigiTimes, January 18th, 2012 []
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