China Unicom devotes billions for network expansion in Shanghai

China Unicom (CHU), the second-largest cellular operator in China, is reportedly investing RMB 20 billion ($2.93 billion) in Shanghai over the next three years to expand and upgrade its network across the city.

The company has entered into an agreement with the Shanghai municipal government to enhance the communication technology and infrastructure in the largest Chinese city by population, which will host World Expo 2010.

The three major Chinese telecom operators, China Mobile (CHL), China Unicom and China Telecom (CHA) are investing heavily in Shanghai to improve the city’s network infrastructure, thereby ensuring the delivery of smooth network coverage for next year’s World Expo. China Mobile plans to invest RMB 15 billion ($2.19 billion) over the next three years while China Telecom will devote RMB 26 billion ($3.8 billion) over the next two years in Shanghai.

Out of the total allocated fund, China Unicom has earmarked RMB 800 million ($117 million) for the deployment of its WCDMA (a widely adopted 3G technology) based 3G wireless network, which will be exclusively used to boost communication services during World Expo 2010.

Additionally, the carrier has also collaborated with China Merchants Bank and China Eastern Airlines (CEA) to develop and promote applications such as mobile payment, mobile banking and mobile airline ticket booking services for the customers in Shanghai.

This strategic investment is expected to yield significant revenue opportunities, and represents a part of China Unicom’s aggressive 3G network roll-out plan in 2009. The company plans to spend RMB 38.7 billion (US$5.6 billion) to deploy its 3G network, covering 284 cities by the end of the current year with 74% penetration of China ’s population.

While we are encouraged by China Unicom’s future growth prospects in the domestic 3G wireless market, the associated expenditures are expected to erode profitability and reduce cash flow and margins in the upcoming reporting periods. That said, we reiterate our Hold recommendation on China Unicom.
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