On Sep 4, 2014, we issued an updated research report on China Unicom (Hong Kong) Limited (CHU) – the second largest wireless operator in China. The company posted strong first-quarter 2014 results with both the top and the bottom line improving year over year on strong contribution from its 3G and broadband businesses. However, stiff competition remains detrimental to the company’s growth.
The company also won the LTE-TDD (Time Division Duplex) license in Dec 2013 and subsequently launched the service in Mar 2014. China Unicom currently seeks to focus on the globally accepted FDD (Frequency Division Duplex) technology for its 4G service.
Moreover, the company got a major shot in the arm in Jun 2014 when it got the approval from the Ministry of Industry and Information Technology (MIIT) to conduct a pilot test on FDD and TDD-integrated LTE in 16 different cities across the country. More recently, it made an extension of the trial run to 24 additional cities in China. With Internet penetration still very low, 4G promises a huge opportunity for China Unicom.
At the moment, 3G remains a compelling prospect and represents the single biggest driver of the company’s long-term growth. The 3G subscriber base is growing rapidly, mainly attributable to improving customer retention strategy and enhanced overall customer experience.
Over the years, China Unicom has made several developments to enhance its network. During the first half of 2014, it expanded its 3G/4G base stations by 84,000 to 491,000. Further, the three main telecom service providers of China are setting up an infrastructure joint venture known as China Communications Facilities Services that will allow sharing of basic telecommunication facilities. It will also lower network deployment expenses, thus improving returns.
However, China Unicom continues to operate in a competitive landscape, which keeps its GSM ARPU under pressure due to an aggressive price war. Apart from 3G, the competitive landscape in the Chinese wireless market has also intensified with the distribution of 4G licenses by the Chinese government and key rival China Mobile Limited (CHL) gaining a substantial lead in 4G services.
Additionally, access line loss and high operating expenses can be a drag on its profits. CHU currently carries a Zacks Rank #4 (Sell).
Key Picks from the Sector
Better-ranked stocks within the industry are Telefonica SA (TEF) and Cellcom Israel Ltd. (CEL). Both TEF and CEL currently carry a Zacks Rank #1 (Strong Buy).
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