More Users Join China Unicom in May - Analyst Blog
June 21 2011 - 9:15AM
Zacks
China's second largest mobile operator China
Unicom (CHU) added 2.33 million subscribers in May, up
1.32% from the prior month. This takes the company’s total customer
base to 179.34 million.
The company’s GSM subscriber base expanded to 157.25 million
with the net addition of 0.59 million customers, while its 3G
subscriber base increased to 22.09 million with the net addition of
1.74 million in May. However, China Unicom added fewer 3G
subscribers in May compared to 1.817 million 3G subscribers in the
last month.
Despite the slowdown in new 3G users, the company is confident
of expanding its 3G user base beyond its 25 million target for
fiscal 2011.
The company’s 3G business is performing well and is expected to
sustain the momentum well into the future. 3G remains a compelling
opportunity and represents the single biggest driver of the
company’s long-term growth. For the full year, capital spending on
the 3G network is estimated at RMB 73.80 billion.
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.The company is offering 3G services in collaboration
with Research In Motion Limited’s (RIMM)
Blackberry phones. Additionally, the company has the exclusive
right to distribute Apple Inc.’s (AAPL) iPhone in
China. China Unicom is also in talks with Apple to sell the
iPad by the end of 2011.
China Unicom’s 3G and fixed-line broadband businesses have been
ramping up since last year. However, these businesses are expected
to remain under pressure due to increasing depreciation and
amortization expenses; networks, operations and support expenses;
as well as selling expenses for the remainder of this year. We
believe these expenseswill have an adverse effect on the company’s
future profitability, free cash flow and margins.
Further, higher handset subsidies and increased costs related to
3G service deployments will continue to be headwinds for the
company. Despite these challenges, we expect China Unicom to
benefit from new users this year.
China Unicom is offering handsets at subsidized rates with lower
3G service plans for multi-year contracts to retain existing
customers and add new ones. This will weigh on the company’s future
overall average revenue per user. Moreover, China Unicom remains
significantly challenged by aggressive nationwide 3G service
rollouts by its peers, China Mobile (CHL) and
China Telecom Corp. (CHA).
We currently have a long-term Neutral rating on China Unicom.
The stock retains a Zacks # 3 (Hold) Rank for the short term.
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