Costs Depress Unicom Profits - Analyst Blog
April 29 2011 - 2:01PM
Zacks
China Unicom (CHU), China's
second largest mobile operator, announced its first quarter 2011
earnings per share of RMB 0.01 (1 cents per share), which missed
the Zacks Consensus Estimate of 5 cents. Earnings per share
plummeted 80% from the year-ago quarter.
Adjusted net income plunged 86% year over year to RMB 166
million ($25.2 million). This massive year-over-year decline in
profitability can be traced back to heavy handset subsidies as well
as high costs associated with 3G service deployments and network
expansion.
Revenue
Total revenue climbed 21% year over year to RMB 49.03 billion
($7.45 billion) in the first quarter, surpassing the Zacks
Consensus Estimate of $6.91 billion. Telecommunication service
revenues were RMB 43.22 billion ($6.57 billion), representing
approximately 88% of total revenue.
Excluding deferred fixed-line upfront connection fees, total
revenue and telecommunication service revenues increased 21.2% and
11.9% year over year, respectively.
Total revenue from the mobile business
shot up 42% year over year to RMB 28.42 billion ($4.32 billion) in
the reported quarter. A large contributor to this was
telecommunication service with revenues of RMB 23.29 billion ($3.54
billion), up 25% from the year-ago quarter. 3G business
telecommunication service revenues were RMB 5.68 billion ($0.86
billion) in the reported quarter.
Excluding deferred fixed-line upfront connection fees, revenue
from the fixed-line business was RMB
20.36 billion ($3.09 billion) and telecommunications service
revenue was RMB 19.92 billion ($3.03 billion). Telecommunications
services revenue from the fixed-line business inched up 0.1% year
over year.
Telecommunications service revenue from the broadband business
was RMB 8.44 billion ($1.28 billion), up 18.4% year over year.
Expenses
Total expenses in the first quarter increased 25.3% year over
year to RMB 48.79 billion ($7.42 billion) due to higher selling
expenses, network deployment costs and depreciation charges.
Selling and marketing expenses rose 19.3% year over year, mostly
due to higher promotional spending on 3G services.
Liquidity
China Unicom exited the first quarter with cash and cash
equivalents of RMB 24.6 billion compared with RMB 8.9 billion in
the year-ago quarter.
Our Analysis
We believe China Unicom will continue to make significant
progress in expanding economies of scale in 3G, broadband and other
businesses 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.
However, the company remains significantly challenged by
aggressive nationwide 3G service rollouts by its peers
China Mobile (CHL) and China Telecom
Corp. (CHA). China Unicom’sGSM average revenue per user
remains under pressure due to aggressive price competition while
the monthly average churn continues to be high.
Further, the companyis aggressively involved in marketing and
promotional activities since the launch of its 3G services,
resulting in higher marketing expenses. Increased expenses coupled
with higher depreciation and amortizations will have an adverse
effect on the company’s profitability, free cash flow and
margins.
Based on the disappointing first quarter profit level as well as
higher costs expectation, we are downgrading our long-term rating
to Underperform on China Unicom with the Zacks #5 (Strong Sell)
Rank.
CHINA TELCM-ADR (CHA): Free Stock Analysis Report
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