UPDATE: China Unicom 2009 Net Profit Down 73%; Eyes Growth From 3G

China Unicom (Hong Kong) Ltd. (CHU) reported Wednesday its 2009 net profit fell 73% from a year earlier due to hefty start-up costs associated with its third-generation mobile business, missing analysts' estimates.

China Unicom Chief Financial Officer Tong Jilu said the company's future profitability hinges on the growth of its 3G mobile and its broadband Internet business. The telecom operator, which ranks second behind China Mobile Ltd. in terms of subscribers, has been striving to boost its profitability amid rising competition after it sold its code division multiple access mobile business to China Telecom Corp. (CHA) in 2008 and transformed into a nationwide full-service operator offering fixed-line, broadband and mobile services.

Competition in China's telecommunications market has further intensified since the government awarded 3G licenses to China Unicom, China Mobile Ltd. and China Telecom in January 2009. Analysts said higher marketing expenses and rising network depreciation costs will drag down China Unicom's earnings this year and the company's fixed-line business is still under pressure from subscribers switching to mobile phones.

China Unicom said its net profit for the 12 months ended Dec. 31 fell to CNY9.56 billion (US$1.40 billion) from a restated CNY35.40 billion a year earlier. Stripping out impairment losses, disposal gains and amortization of upfront connection fees, the company said its adjusted net profit fell 35% to CNY9.61 billion from CNY14.84 billion a year earlier. Revenue fell 3.7% to CNY153.95 billion from CNY159.79 billion.

The net profit came in lower than the average CNY10.16 billion forecast of 11 analysts polled by Dow Jones Newswires. China Unicom recommended a final dividend of CNY0.16 a share, down from CNY0.20 a year earlier.

Chairman and Chief Executive Chang Xiaobing said the company aims to add more than 10 million 3G subscribers by end 2010. He reiterated the company is targeting an increase in the number of its 3G mobile users by more than 1 million a month and aims to maintain its 3G average revenue per user at more than CNY100.

The company had 4.07 million 3G users at the end of February, but its monthly net addition has been slowing down. The company added 470,000 3G users at the end of February, sharply lower than 853,000 in January and 920,000 in December.

Chang said the company has been adding 3G subscribers slowly in the last few months because it has focused on adding "quality" users that have high data usage. The company expects its capital expenditure this year to amount to CNY73.5 billion, down from CNY112.5 billion in 2009.

Despite launching Apple Inc.'s (AAPL) iconic iPhone in late October to boost its 3G mobile business, China Unicom had the least amount of 3G users among China's three telecom carriers at the end of February. China Telecom said Monday it had more than 5 million 3G users at the end of last month, while China Mobile had 4.28 million 3G users during the same period.

Average revenue per user--a key industry gauge to determine the long-term growth rate of telecom operators--fell to CNY41.6 in 2009 from CNY42.3 a year earlier, the company said.

China Unicom has been keen on offering more 3G handset models to drive its 3G business. Chang said the company is in talks with Research In Motion Ltd. (RIMM) on the launch of Blackberry devices.

President Lu Yimin said the company launched a handset based on Google Inc.'s (GOOG) Android operating system manufactured by Motorola Inc. (MOT) earlier this month, but it decided not to pre-install Google's search function given the U.S. Internet giant's decision to stop censoring its Chinese Web site in defiance of the government.

Asked whether Google's row with the Chinese government will hurt the company's launch of future Android phones Chang said: "We are open to cooperating with any handset makers and companies. But they must obey China's regulations."

Chang said though the company will still focus on its domestic market, he doesn't rule out overseas investments for additional growth opportunities. But he declined to give more details.

His comments came after China Unicom said last month it would be interested in exploring the possibility of an equity investment in Nigerian Telecommunications Ltd. subject to certain conditions being fulfilled.

-By Lorraine Luk, Dow Jones Newswires; 852-2802-7002;lorraine.luk@dowjones.com

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