China Unicom Q1 Earnings Soar on 3G Adoption

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China Unicom Hong Kong Limited (CHU), China's second largest mobile operator, announced results for first-quarter 2014 with adjusted net income of RMB 3.302 billion ($539.5 million) that surged 73.8% year over year on strong revenue growth and higher adoption of the 3G plan. Earnings per share soared 75% year over year to RMB 0.14 (2 cents).

Revenue & Subscriber

Total revenue (excluding deferred fixed-line upfront connection fee) climbed 8.3% year over year to RMB 76.5 billion ($12.5 billion) in the first quarter. Telecommunication service revenues, comprising roughly 81% of total revenue, were RMB 63.80 billion ($10.4 billion), up 11.8% year over year.

Healthy revenue growth was attributable to rapid growth of the 3G and fixed-line broadband businesses. However, China Unicom no longer has the exclusive right to distribute Apple Inc.’s (AAPL) iPhones to China Telecom Corporation Limited (CHA).

In spite of that, total revenue from the mobile business increased 15.4% year over year to RMB 40.68 billion ($6.7 billion).

Revenues from the fixed-line business increased 5.8% year over year to RMB 22.92 billion ($3.7 billion) given the company’s effort to upgrade its broadband speed, improve service quality and accelerate the development of high speed bundled service.

Telecommunications service revenues from the broadband business were RMB 12.44 billion ($2 billion), up 11.0% from the prior-year quarter. China Unicom added 1.794 million customers during the reported quarter, bringing the total number of broadband users to 66.441 million.

Expenses

Total expenses crept up 5.9% year over year to RMB 72.08 billion ($11.8 billion) due to higher selling expenses, subsidy, interconnection charges and depreciation charges. Selling and marketing expenses increased 21.4% year over year to RMB 12.15 billion ($2 billion) in the first quarter due to higher promotional spending on handsets and applications.

Liquidity

China Unicom exited the first quarter with cash and cash equivalents of RMB 22.463 billion ($3.7billion) compared with RMB 21.51 billion ($3.47 billion) at the end of 2013. Operating cash flow was RMB 18.202 billion ($3 billion) compared with RMB 16.836 billion ($2.7 billion) in the first quarter of 2013.

Our Analysis

China Unicom will continue to benefit from the ongoing development strategy aimed at enhancing growth and profitability. The company expects to generate higher revenues by accelerating large-scale developments of 3G and fixed-line broadband services. The company also wants to enhance data volume growth and improve customer service to achieve a higher profit margin.

China Unicom, which competes with China Mobile Limited (CHL), currently carries a Zacks Rank #5 (Strong Sell).

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