CHU China Unicom Ltd

China's second largest mobile operator China Unicom (CHU) added 2.36 million subscribers in August, up 1.28% from the prior month. This takes the company’s total customer base to 186.1 million.

The company’s GSM subscriber base expanded to 158.23 million with the net addition of 0.23 million customers, while its 3G subscriber base increased to 27.87 million with the net addition of 2.05 million. 3G subscriber addition was higher in August than 1.87 million in July.

With the rise in 3G subscribers, China Unicom has achieved its target of expanding the user base beyond 25 million by this year end. Further additions would indicate growth prospects in China Unicom’s mobile 3G business, and the resultant rise in average revenue per user.

The company’s 3G business is performing well and is expected to sustain the momentum well into the future as the biggest growth driver. 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.

However, China Unicom remains significantly challenged by aggressive nationwide 3G service rollouts by its peers, China Mobile (CHL) and China Telecom Corp. (CHA). Moreover, high levels of marketing and promotional expenditures related to 3G service deployments could hurt profitability. Further, increased operating expenses coupled with higher depreciation and amortization will have an adverse effect on the company’s profitability, free cash flow and margins.

We currently have a long-term Neutral rating on China Unicom. The stock retains a Zacks #3 Rank (Hold) for the short term (1–3 months).

 
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