2nd UPDATE: China Unicom Net Slumps On Phone Subsidies, Depreciation

China Unicom (Hong Kong) Ltd. (CHU) said Thursday its first-half net profit fell 62% from a year earlier, dragged down by handset subsidies for its third-generation mobile business and depreciation expenses related to its 3G network.

Competition in China's telecommunications market has intensified since the government awarded 3G licenses to China Unicom, China Mobile Ltd. and China Telecom Corp. in January 2009. The three carriers are competing to offer attractive handsets and add users for their more expensive 3G services to boost average revenue per user.

"Our profitability will gradually improve with the growth of our 3G business," China Unicom Chief Financial Officer Tong Jilu said at a news briefing.

China Unicom, China's second-largest mobile operator by subscribers after China Mobile, said its net profit for the six months ended June 30 was CNY2.53 billion ($371.4 million), down from CNY6.62 billion.

Revenue rose 7.6% to CNY82.11 billion from CNY76.32 billion, as rising revenue in its mobile business offset a decline in its fixed-line business.

Selling and marketing expenses in the first half were CNY11.34 billion, up 17% from CNY9.66 billion a year earlier. Handset subsidies for the 3G business totaled CNY1.17 billion, after the company said in May it would revamp its 3G tariff plans by including cheaper plans for 3G services and cut upfront payments for all models of Apple Inc.'s iPhone by about CNY1,000.

To further ramp up its 3G business, Tong said the company plans CNY3 billion-5 billion of handset subsidies this year.

China Unicom spent 57.7% of its mobile revenue on marketing expenses including handset subsidies in the first half, but it aims to cut the ratio to below 50% for the full year as the scale of the business grows, Tong said.

Executive Director Lu Yimin said Unicom hopes to offer Apple's iPhone 4 and iPad in China as soon as possible but it has no timetable. He said the company will add more than 10 new 3G handset models in the second half.

"iPhone has been a strong boost for our 3G business. We expect to offer iPhone 4 within this year," said Lu.

A China Unicom official who declined to be named told Dow Jones Newswires this month that the company aims to launch the iPhone 4 and iPad next month, although it was still ironing out details with Apple and didn't have a specific launch date for either product yet.

The average revenue per user for the mobile business--a key gauge for determining telecom operators' long-term growth prospects--rose to CNY42.9 in the first half from CNY41.7 a year earlier, as revenue from 3G users offset an ARPU decline for 2G users.

Its average revenue per 3G user was CNY134 in the first half. The company had no commercial 3G business in the year-earlier period.

Lu said the company is on track to add 10 million 3G mobile users this year and it is confident of maintaining 3G average revenue per user at more than CNY100.

China Unicom, which launched Apple Inc.'s iPhone late last year to boost its 3G mobile business, had the second-highest number of 3G users among China's three big carriers at the end of June. It had 7.56 million 3G users, compared with 7.18 million for China Telecom and 10.46 million for China Mobile.

Net profit excluding the effects of deferred fixed-line upfront connection fees was down 62% at CNY2.4 billion, China Unicom said without giving a year-earlier figure.

Depreciation and amortization expenses were CNY26.64 billion, up 14.1% from CNY23.36 billion a year earlier.

China Unicom merged with fixed-line operator China Netcom Group Corp. (Hong Kong) Ltd. in 2008 under a government plan that revamped the country's telecom industry by cutting the number of operators to three from six.

-By Owen Fletcher and Lorraine Luk, Dow Jones Newswires; 8610 8400 7702; owen.fletcher@dowjones.com

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