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.
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