China Unicom Thriving on 3G - Analyst Blog
25 November 2011 - 8:30PM
Zacks
China's second largest mobile operator China
Unicom (CHU) added 3.34 million subscribers in October, up
1.77% from the prior month. This takes the company’s total customer
base to 192.38 million.
The company’s GSM subscriber base expanded to 159.23 million
with the net addition of 0.42 million customers, while its 3G
subscriber base increased to 33.15 million with the net addition of
2.92 million. This is the third consecutive month that China Unicom
added more than 2 million 3G users.
China Unicom’s 3G business is growing rapidly, and surpassed its
target of expanding the 3G user base beyond 25 million by the
year-end. The rapid growth has been particularly driven by
Apple Inc.’s (AAPL) iPhone sales. China Unicom
enjoys the exclusive right to distribute iPhone in China since
October 2009. The addition of Apple’s iPad tablet, talks for which
are ongoing, would further draw 3G subscribers, eventually leading
to higher average revenue per user.
Nevertheless, intense competition in the domestic wireless
market, in particular from China Mobile (CHL) and
China Telecom Corp. (CHA), and high levels of
marketing and promotional expenditures related to 3G service
deployments are restricting its future growth.
Coming to the fixed-line business, the company is poised to
benefit from the stabilization and expansion of fiber optic service
in its broadband business. China Unicom added 0.512 million
broadband customers in October bringing the total number to 55.05
million. But the company is experiencing significant declines in
its local access lines due to the impact of the ongoing
fixed-to-mobile substitution. Erosion in the fixed-line subscriber
base continues with approximately 0.278 million customers lost in
October, taking the total number to 94.3 million.
Consequently, 3G and fixed-line broadband businesses are
expected to remain under pressure due to increasing depreciation
and amortization expenses, network, operations and support
expenses, as well as selling expenses for the remainder of the
year. We believe these expenses will have an adverse effect on the
company’s future profitability, free cash flow and margins.
Despite the strength in 3G user growth, we have a long-term
Underperform rating on China Unicom. The stock retains a Zacks #5
Rank (Strong Sell rating) for the short term (1–3 months).
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