Cautious on China Unicom - Analyst Blog
April 12 2011 - 8:30AM
Zacks
China’s second largest mobile operator, China
Unicom’s (CHU) prime source of revenue is wireless
service. China Unicom focuses on strengthening its position in the
domestic 3G wireless market, launching innovative services, and
bundling fixed-line and mobile offerings to subscribers that will
likely improve its overall revenue and profitability.
3G remains a compelling opportunity and represents the sole
driver of the company’s long-term growth. China Unicom had made
several endeavors to enhance its WCDMA network with respect to its
3G business. The company launched star handset terminals,
innovative tariff plans and advanced mobile Internet services.
China Unicom spent RMB70.19 billion in 2010 to develop its
mobile and broadband business and expects 2011 capital spending to
be RMB 73.80 billion. The cost related to continuous deployment of
3G services and network expansions led to the 60% decline in the
company’s fiscal 2010 earnings. Notably, 2010 was the second
consecutive year when China Unicom's net income dropped more than
50%.
We expect these expenditures for nationwide network deployment
to impact short-term profitability, tighten free cash flow and
impact margins. In addition, high levels of marketing and
promotional expenditures related to the company’s 3G services will
also negatively impact its profitability.
Further, China Unicom operates in a highly competitive domestic
wireless market. The company remains significantly challenged by
aggressive nationwide 3G service rollouts by its peers
China Mobile (CHL) and China Telecom
Corp. (CHA).
Thus, after considering the pros and cons, we remain cautious on
China Unicom with our long-term Neutral recommendation on the
stock. However, for the short term (1–3 months), the stock retains
a Sell rating with the Zacks #4 Rank.
CHINA TELCM-ADR (CHA): Free Stock Analysis Report
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