China Unicom: There’s Reason For Optimism Despite Mixed Year-to-Date Performance

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China Unicom

China Unicom (NYSE:CHU), the second largest wireless and fixed line operator in China, has had a relatively tough year so far, amid rising marketing and network costs for its wireless operations and sluggish wireline broadband subscriber growth. However, despite the recent headwinds, we remain bullish on the stock, with a $14 price estimate, which represents a 21% premium over the current market price. Below, we outline some of the key near-term positives for the stock.

See our complete analysis for China Unicom

Collaboration Should Eventually Bring Down Costs 

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China Unicom’s network expenses have increased (up 32% year-over-year for the first 9 months of 2016) amid higher tower usage fees, post the transfer of the firm’s tower assets to the China Tower JV, formed along with peers China Telecom and China Mobile. While this is having a near-term impact on profitability and EBITDA margins, there is scope for cost reduction going forward as the sharing ratio improves, with more base stations (from the three participating carriers) being housed on each tower. Seperately, Unicom is also deepening its collaboration with China Telecom to improve its network. It has formulated projects for sharing roughly 60k 4G base stations as well as about 14,500 km transmission fiber cables and this could bode well for costs going forward.

ARPU Has Significant Scope For Growth With 4G Migration

China Unicom’s 4G adds have been accelerating, driven by its network build out and promotions. In September, 4G net adds touched a record high of about 6 million customers, compared to an average of under 5 million adds per month during previous eight months. Moreover, the firm’s 4G penetration as a percentage of its overall base stands at just about 34%, compared to 57% for China Mobile and 51% for China Telecom, leaving plenty of room for user migration to higher speed services. This should bode well for ARPU growth, as the firm’s 4G ARPU is roughly 70% higher compared to its blended ARPU (RMB 79 vs. RMB 47). Additionally, data consumption per user has also been trending higher (up 102% y-o-y over H1).

Other Non-Operational Factors

There are other non-operational factors that could give the carrier a boost as well. Firstly, China Unicom has indicated that its parent company could be selected for China’s mixed-ownership reform program. While the details are not yet clear, this could allow the firm (which is currently state-run) to invite private strategic investors, such as Internet companies, giving it an opportunity to differentiate itself, while potentially enjoying more management autonomy. Secondly, the company could see an upside from its 28.1% stake in the China Tower Joint venture. China Tower owns 98% of the towers in China and is reportedly looking to go public by 2017. These assets are increasingly attractive to investors, given their stable cash flows and growth potential, and Goldman Sach’s estimates that the company could be worth as much as $47 billion. This could provide an upside for China Unicom.

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