China Unicom (CHU), China’s second largest mobile operator, announced results for the first nine months of 2011 with earnings per share of RMB 0.18 ($0.27 per share), which is flat year over year.
Adjusted net income inched up 0.3% year over year to RMB 4.263 billion ($0.656 billion). High costs associated with 3G service deployments and network expansion were compensated by strong revenues.
Revenue & Subscriber
Total revenue climbed 23.5% year over year to RMB 155.92 billion ($24 billion). Telecommunication service revenues, comprising roughly 89% of the total revenue, were RMB 137.80 billion ($21.2 billion), up 13.2% from the year-ago period.
Healthy revenue growth was credited to strong sales of Apple Inc.‘s (AAPL) iPhones as China Unicom enjoys the exclusive right to distribute the device in China since October 2009.
Total revenue from the mobile business shot up 44.8% year over year to RMB 93.96 billion ($14.46 billion). A large contributor was the telecommunication service with revenues of RMB 75.89 billion ($11.68 billion), up 25.63% from the prior year-period. China Unicom added 21.61 million subscribers in the first nine months to reach 189.034 million.
China Unicom’s 3G business is growing at a faster pace since its introduction in October 2009. 3G business telecommunication service revenues were RMB 22.19 billion ($3.41 billion) in the first nine months of the year. The company’s total 3G subscriber base reached 30.230 million, with 16.170 million new customers added in the first nine months.
Telecommunication service revenue from the GSM business inched up 1% year over year to RMB 53.70 billion ($8.26 billion). Net subscriber additions were 5.438 million to 158.804 million at September 30.
Revenue from the fixed-line business grew 2.2% toRMB 61.29 billion ($9.43 billion). Telecommunications services revenue from the fixed-line business rose 2.3% year over year toRMB 61.24 billion ($9.42 billion) backed by the rapid growth in fixed-line broadband business.
Telecommunications service revenues from the broadband business was RMB 26.09 billion ($4.01 billion), up 18.1% from the year-ago period. In the first nine months of the year, China Unicom added 7.313 million customers bringing the total number to 54.537 million.
The local telephone business recorded service revenue of RMB 26.129 billion ($4.02 billion), down 14.8% from the year-ago period. Erosion in fixed-line subscriber base continues with the loss of approximately 2.060 million customers over the first nine months, bringing the total customer base to 94.575 million.
Expenses
Total expenses climbed 24.3% year over year to RMB 150.271 billion ($23.13 billion) on the back of higher selling expenses, network deployment costs, depreciation charges and inflation rate. Selling and marketing expenses rose 20.6% year over year to RMB 3.524 billion ($0.54 billion), mostly due to higher promotional spending on 3G and broadband services.
Liquidity
At the end of September 30, China Unicom had cash and cash equivalents of RMB 14.778 billion compared with RMB 10.591 billion in the year-ago period.
Our Analysis
China Unicom’s 3G business is performing well and has surpassed its full-year 3G user target of 25 million. The company is also poised to benefit from the stabilization in the fixed-line business and expansion of fiber optic service in the fixed-line broadband business. Hence, China Unicom expects to generate revenuesfaster by accelerating large-scale developments of 3G and fixed-line broadband.
On the other side, high levels of marketing and promotional expenditures and a precipitous decline in the landline business might hurt profitability going forward. Additionally, increased operating expenses coupled with higher depreciation and amortization will have an adverse effect on the company’s profitability, free cash flow and margins.
Further, China Unicom remains significantly challenged by aggressive nationwide 3G service rollouts by its peers, China Mobile (CHL) and China Telecom Corp. (CHA).
We recently upgraded our long-term recommendation from Underperform to Neutral on the stock. The stock retains a Zacks #3 Rank (Hold) for the short term (1-3 months).
