China Unicom‘s (NYSE:CHU) net profit shot up 74% year-over-year (y-o-y) to RMB 3.3 billion ($536 million) in Q1 2014 on solid sales growth in the mobile and broadband businesses. Mobile service revenue grew by over 15% y-o-y to RMB 40.7 billion ($6.62 billion) driven by net addition of 45 million 3G and 4G subscribers in the one year period prior to March 31. On the cost side, interconnection charges paid by the carrier to its peers China Mobile (NYSE:CHL) and China Telecom (NYSE:CHA) declined by over 22% to RMB 3.72 billion, owing to a favorable revision in interconnection fees at the start of the year. Subsidy costs also declined as a percentage of service revenues to 6.7% in Q1 2014 from 11.6% in the first quarter of 2013. This was primarily because of the carrier’s focus on low-cost smartphones to gain subscribers in the last few quarters. 
China Unicom, the second largest carrier in China, launched 4G services last month and was the last among its rivals to enter into the expanding Chinese 4G market. The impact of 4G on the company’s Q1 2014 results was likely minimal considering that it was launched in the latter part of the quarter. However, we expect it to play a significant role in the near future, especially in improving the carrier’s average revenue per user (ARPU). China Unicom’s mobile ARPU at the end of the first quarter stood at RMB 47.6 ($7.74), up marginally from the prior quarter.
In the fixed-line business, China Unicom’s service revenue grew by about 6% y-o-y to RMB 22.9 billion ($3.72 billion), driven by double-digit sales growth in broadband services. The total number of broadband subscribers reached 66.4 million, aided by 1.8 million net subscriber additions in Q1. Going forward, we expect the company to continue expanding its broadband network across the country as part of its commitment under the government’s ‘Broadband China’ plan.
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Our current price estimate for China Unicom is $17, implying a premium of more than 20% to the market price.
Expanding 3G-4G Subscriber Base Drives Mobile Revenues And ARPU
China Unicom added 9.7 million 3G and 4G subscribers in the first three months of the year to take its total 3G-4G subscriber base to 132.3 million. This translates to a 3G-4G mix of 45.6%, compared to 42.2% at the end of the previous quarter. Gaining high-speed users (3G & 4G) directly helps the company’s top line, as 3G and 4G subscribers tend to use more data-intensive applications than 2G users because of the networks’ higher speed, which helps generate more data revenue per user.
The carrier’s ARPU from high-speed users in Q1 2014 was RMB 70.3 ($11.43), down about RMB 1.2 from the prior quarter. However, owing to an improvement in the carrier’s 3G-4G mix, its overall mobile ARPU improved to RMB 47.6 from RMB 47.1 in the same period. Going forward, we expect China Unicom’s mobile service revenues to continue their double digit growth as the carrier encourages its 2G users to transition to its high-speed networks and further improve its ARPU.
Fixed-Line Broadband Registers Solid Sales Growth
China Unicom has around a 35% share of the total fixed-line broadband market (by subscribers) in China, behind China Telecom’s 53%. China Unicom added about 1.8 million broadband subscribers in Q1 2014 compared to just over 500,000 in the previous quarter. This is a significant improvement and is likely driven by the company’s focus on expanding its high-speed fiber network to more areas in Northern China, where it maintains a near monopoly. On account of increasing subscribers and improving Internet speeds, the carrier increased its broadband revenue by 11% to RMB 12.44 billion (around $2 billion) in Q1 2014. Broadband service revenue as a percentage of total fixed-line revenue also improved from 51.8% in Q1 2013 to 54.3% in Q1 2014.
Going forward, we expect broadband revenue to continue growing as the company expands its user base, especially on its high-speed fiber network. It may face some pressure on account of China Mobile’s recent entry into the market, but that is unlikely to significantly impact Unicom’s market share in the near term.Notes: