China Unicom Earnings Rise on 3G

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China Unicom (CHU) announced the interim results for the first half of 2013. The company reported earnings per share of RMB 0.22 (4 cents) for the first six months of 2013, representing 57% growth year over year on the back of strong revenue growth and higher adoption of the 3G plan.

For the first half 2013, net income attributable to shareholders was RMB 5.023 billion ($804.7 million) against RMB 2.124 billion ($336.4 million) in the year-ago corresponding period.

Revenue & Subscriber

Total revenue (excluding deferred fixed-line upfront connection fee) climbed 18.6% year over year to RMB 144.3 billion ($23.1 billion).

Telecommunication service revenues, comprising roughly 80% of the total revenue, were RMB 116.48 billion ($18.7 billion), up 13.8% from the year-ago period.

Healthy revenue growth was attributable to rapid growth of the 3G and fixed-line broadband businesses as well as strong sales of Apple Inc.'s (AAPL) iPhones in spite of losing the exclusive right to distribute to China Telecom Corp. (CHA).

Total revenue from the mobile business increased 26.2% year over year to RMB 100.6 billion ($16.1 billion). A large contributor to the growth was the telecommunication service with revenues of RMB 72.85 billion ($11.7 billion), up 20.5 % year over year.

China Unicom’s 3G business is growing at a fast pace since its introduction in Oct 2009 and has become the major driver of revenue growth. 3G business telecommunication service revenues were RMB 40.91 billion ($6.6 billion) in the first half of 2013, up 52.1% year over year and accounted for 56.2% of mobile service revenues. The company’s total 3G subscriber base reached over 100 million, with 73.9 % increase year over year.

Revenue from the fixed-line business rose 4.2% year over year to RMB 43.29 billion ($6.94 billion). Telecommunications services revenue from the fixed-line business also rose 4.2% year over year to RMB 43.25 billion ($6.93 billion) backed by consistent growth in fixed-line broadband business.

Telecommunications service revenues from the broadband business was RMB 22.56 billion ($3.6 billion), up 10.4% from the year-ago period. China Unicom added 4.035 million customers during the reported period, bringing the total number to 62.575 million.

Expenses

Total expenses crept up 17.2% year over year to RMB 137.22 billion ($21.98 billion) due to higher selling expenses, network deployment costs, interconnection charges and depreciation charges. Selling and marketing expenses increased 24.5% year over year to RMB 20.39 billion ($3.3 billion) in the first six months of 2013, mostly due to higher promotional spending on handsets and applications.

Liquidity

China Unicom exited first half 2013 with cash and cash equivalents of RMB 13.4 billion ($2.15 billion) compared with RMB 18.25 billion ($2.89 billion)) at the end of fiscal 2012.

Operating cash flow grew 16.1% year over year to RMB 41.27 billion ($6.6 billion) in the reported period.

Our Take

China Unicom will continue to benefit from the ongoing development strategy aimed at enhancing its growth and profitability. The company expects to generate higher revenues by accelerating large-scale developments of 3G and fixed-line broadband services.

Nevertheless, high levels of marketing and promotional expenditures would continue to hurt future profitability. Further, we remain concerned about the precipitous decline in the landline business as well as intense competition in the domestic wireless market, in particular from China Mobile (CHL) and China Telecom.

China Unicom retains a Zacks Rank #3 (Hold).
 

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