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Investment Overview for China Unicom (NYSE:CHU)
Mobile Service and Phones
- Average Monthly Mobile Revenue Per User: We expect this figure to increase from $6.5 in 2015 to about $8 by the end of our forecast period, primarily due the increasing mix of 4G subscribers in the overall base. However, there could be a downside of about 15% to our price estimate if the average revenue per user increases only to $7 instead. There could be an upside of about 15% if this figure increases to $9. This depends on the ability of the company to add 3G/4G and drive higher data usage by offering superior speeds.
- Mobile Service and Phones EBITDA margin: We expect this figure to decrease from 28% in 2015 to about 25% by the end of our forecast period mainly because of tariff regulation by the Government and potentially higher costs stemming from the company's tower leasing venture. However, there could be an upside of about 20% to our price estimate if the EBITDA margins declines only to 26%. There could also be downside of about 50% if EBITDA margins fall further to 20%. This largely depends on the level of subsidies and promotions that the carrier grants its subscriber base, the tariff restrictions imposed by the government and the broader competition in the Chinese wireless market.
- Average Monthly Broadband Revenue Per User: We expect this figure to increase marginally from $10.30 in 2015 to about $11 by the end of our forecast period mainly due to increasing initiatives by the company for the promotion of its broadband business. However, there could be a downside of about 10% to our price estimate if this figure decreases to about $8 instead. There could also be an upside of similar nature if the figure further increases to $13. This is largely dependent on the level of substitution of landline with mobile devices which will greatly affect the usage of landline broadband internet.
China Unicom is a telecom service provider based out of China. Most of its revenues come from providing mobile voice and value added services as well as fixed-line broadband services. It also sells mobile handsets at subsidized prices.
In addition, the company also offers landline phone services.
Broadband Internet and mobile businesses are expected to be the key growth drivers for the company in the future.
The Mobile Service and Phones division contributes the most to China Unicom's value because of the following reasons:
Large Customer Base
China Unicom had a customer base of around 286 million in its mobile division while its broadband internet subscribers were over 72 million by the end of December 2015.
High Average Revenue Per User
The monthly average revenue per mobile user was $6.6 in 2015 which is lower than the $10 that an average broadband user pays. However, mobile ARPUs are on the rise bolstered by data usage on 3G/4G connections, as opposed to broadband ARPUs.
Collaboration with China Telecom
China Unicom signed a multi-pronged strategic agreement with China Telecom in early 2016 to share resources, enabling the two carriers to cut costs and better compete with larger and better capitalized rival China Mobile. Notably, the two carriers will team up for their rural 4G network build out, allowing them to save on network equipment and operation costs. The two carriers have formulated projects for sharing about 60k 4G base stations and about 14,500km of transmission fibre cables.
Increasing smartphone adoption
China is now the largest smartphone market in the world by volume. According to Strategy Analytics, about 438 million smartphones were sold in China in 2015. Increasing smartphone adoption will help drive data revenues up since the average revenue per user generated from someone using a smartphone is higher than customers on feature phones, who only use text and voice services.
Increasing 4G adoption
Data consumption represents the basis for growth for wireless carriers and China Unicom has been deploying the latest network technologies to improve data speeds and throughputs, enticing customers to consume more data. As of September 2016, about 35 of the company's mobile billing subscribers (about 89 million users) were on 4G plans. Growing standards of living and an increasing supply of economical yet high-quality smartphones should drive the adoption rate up, and consequently improve data revenues.
Subsidies on mobile handsets
Like the other two Chinese carrier, China Unicom attracts customers with subsidies on the mobile handsets that it sells. The high subsidy costs put pressure on the company's mobile profit margins. However, in 2014 the Chinese government asked the three carriers to rein in spending on subsidies and advertising and it is likely that these costs could decline going forward. China Unicom's handset subsidy as a percentage of total revenue was down to 1% in 2015 from about 1.6% in 2014.
Tariff regulations by the Chinese government
Being state-controlled, China Unicom experiences frequent government intervention in its business in the form of tariff ceilings. Since prices are not decided by the market forces but by the government, we cannot identify a trend in market prices to forecast the risk. Government-mandated tariff adjustments may come without warning and affect profitability if the tariffs are lowered. Frequent regulations also serve to limit the company's flexibility to respond to changes in the environment and market conditions. The government has also pushing for data tariffs cuts and data carry forward features, as it pushes for an expansion of Internet access throughout the country.
Substitution of Landlines with Mobile Phones
Due to ease-of-use and convenience, 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.
Wireless subscriber growth is slowing
While there remains some potential for new subscriber growth in rural markets, the broader Chinese wireless market is slowing down. Wireless subscriber growth in China has slowed from 15%+ levels seen in 2008 and 2009 to levels of under 2% in 2015.
China had a total of about 1.3 billion wireless customers as of December 2015, just slightly below its population of roughly 1.4 billion.
Government-mandated restructuring in the Chinese Telecommunications Industry
The telecommunications industry in China is largely regulated by the Government. Restructuring initiatives were taken in 2008-09, leading to the merging and de-merging of landline and mobile businesses across companies. As a result of the shuffle, only three companies remained in the telecom sector and China Unicom acquired China Netcom's landline business but lost its high-growth CDMA business to China Telecom in the process. It's quite possible that such restructuring plans might also come up in the future. Frequent restructuring could meddle with the company's long-term plans and create uncertainty for equity shareholders.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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