China Unicom Leverages The iPhone To Tap Growing 3G demand

China’s second largest wireless service provider, China Unicom (NYSE:CHU), said last week that it added 3.52 million subscribers in March that took its total tally close to 210 million. ^[1] The demand for 3G-capable smartphones continued to scale up as the carrier saw almost 85% of its net adds in 3G and matched the behemoth China Mobile’s (NYSE:CHL) 3G net adds as well. It seems China Unicom is making most of the unavailability of Apple’s (NASDAQ:AAPL) iPhone 4S on China Mobile’s network while it lasts.

We have a $24 price estimate for China Unicom stock, which is about 35% ahead of the current market price.

See our complete analysis of China Unicom here

3G Market in China is an Equitable Mix

With close to 670 million subscribers, China Mobile is the largest wireless carrier in the world and has twice as many subscribers as China Unicom. But when it comes to 3G, the difference is not nearly as wide. As of March 2012, China Mobile had around 60 million 3G subscribers, only about 22% ahead of 49 million that subscribe to China Unicom’s 3G network. Low 3G penetration of about 15% in China is giving smaller wireless carriers such as China Unicom ample opportunity to compete on an even ground with the otherwise dominant China Mobile.

Moreover, the fact that China Mobile runs its 3G network on a proprietary homegrown TD-SCDMA standard has proved to be a big deterrent in securing smartphones that are compatible with its network. Even the iPhone, which has already been launched on the other two carriers in China, hasn’t made its way to China Mobile yet.

Taking advantage of this, China Unicom has been closing the 3G gap with China Mobile by adding at least an equal number of 3G subscribers every month. In February, it added more than 2.8 million 3G subscribers compared to China Mobile’s 2.65 million. In March, however, both added almost the same number of 3G subscribers. The addition of 4S in January has definitely bolstered China Unicom’s 3G portfolio and the carrier will be looking to make the most of it before the popular smartphone arrives on China Mobile’s network. (see Qualcomm Paves the Way for an Apple-China Mobile iPhone Deal)

Low-Cost Smartphones to Co-Exist with the iPhone

China Unicom has also been promoting low-cost 3G smartphones to leverage the growing demand for 3G services. It recently came up with a strategy to sell low-cost smartphones made by ZTE, Huawei and Lenovo that run on its 3G network. (see Chinese Telcos Get Fat Margins Selling Cheaper Smartphones) It’s likely that a TD-SCDMA compatible iPhone arrives on China Mobile after the Qualcomm announcement. And it bodes well for China Unicom as it has not been banking on the iPhone alone to boost its 3G subscription.

By selling cheaper smartphones, the carrier will not have to worry about paying higher subsidies associated with high-priced smartphones. At the same time, it stands to benefit from higher data usage associated with 3G smartphones. While data usage on a cheaper smartphone may not be as high as on the iPhone, it helps create demand among first-time 3G users, who might eventually upgrade to higher-end smartphones later on.

China Unicom’s EBITDA margin for its mobile division has declined sharply in recent years, from 42% in 2008 to about 24% by the end of 2011, mainly due to the high level of subsidies associated with smartphones. But its ARPU levels have also increased sharply since 2009 when it first started selling the iPhone.

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