China Unicom (CHU - Analyst Report) has announced 2009 results with reported earnings per ADS of 59 cents matching the Zacks Consensus Estimate. However, net income plunged 73% year-over-year to RMB9.56 billion (US$1.4 billion).
This significant year-over-year decline in profitability is partly due to sustained erosion in fixed-line voice revenues. Moreover, the prior year’s net profit was boosted by one-time gains from the sale of the carrier’s CDMA wireless business to rival China Telecom (CHA - Analyst Report) as part of the restructuring of the Chinese telecom sector.
Revenue Break-Down: Fixed Voice Drags Down Sales
Consolidated revenues for 2009 reached RMB153.95 billion (US$22.6 billion), down 3.7% year-over-year due to weak contribution from the fixed-line voice business. Service revenues decreased 2.1% year-over-year to RMB149.59 billion (US$21.9 billion), accounting for 97% of total sales.
Service revenue from the GSM mobile business increased 8.6% year-over-year to RMB69.77 billion (US$10.2 billion). Wireless ARPU (average revenue per user) came in at RMB41.2 (US$6), down 2.4%.
Growth in wireless was offset by a 9.9% annualized decline in fixed-line service revenue that reached RMB79.55 billion (US$11.7 billion). China Unicom’s local fixed telephony business continues to decelerate as a result of frozen tariffs and ongoing fixed-to-mobile substitution. The company is offering converged services to stem the losses in the fixed voice segment.
On a positive note, revenue from the fixed-line broadband service grew 14% year-over-year to RMB23.9 billion (US$3.5 billion), boosted by expansion of application content and increased network speeds.
The company is progressing well with diversification beyond traditional voice services through the expansion of its value-added services (VAS), which are offering important revenue streams. VAS revenues from the mobile business grew 17.3% year-over-year to RMB19.1 billion (US$2.8 billion).
Subscriber Statistics: Mobile & Broadband Lead the Way
At the end of 2009, China Unicom had approximately 147.59 million GSM subscribers with a net addition of 14.2 million customers for the year. Erosion in legacy fixed-line voice subscriber base continues with a loss of approximately 6.75 million customers, bringing the total customer base to 102.82 million. However, broadband subscriber base increased by 8.47 million in 2009 to 38.55 million.
GSM mobile value-added business, including SMS, GPRS and ring-tone services, posted respectable growth in 2009. Cool Ringtone subscriber base increased by 5.1 million to 49.2 million. GPRS business achieved 13.56 million net subscriber additions during 2009 to reach 44.8 million.
CAPEX, Cash Flow & Dividend
Capital expenditure (CAPEX) for 2009 grew 53% year-over-year to RMB112.47 billion (US$16.5 billion) due to higher spending on 3G network build-outs which accounted for 32% of the total spending. The company reported negative free cash flow of RMB54.74 billion (US$8 billion) as a result of increased capital spending. Planned CAPEX for 2010 is RMB73.5 billion (US$10.8 billion).
The Board of Directors proposed a final dividend of RMB0.16 per share for 2009, equating to a payout of approximately RMB3.77 billion (US$550 million). Pending approval by the shareholders at the forthcoming annual general meeting, the dividend is expected to be paid on June 11, 2010.
3G to Drive Growth, but Challenges Ahead
China Unicom made significant progress in expanding its WCDMA technology based 3G services which the carrier launched across 285 Chinese cities in October 2009. The company spent RMB36.4 billion (US$5.3 billion) in 2009 to develop its 3G business and covered 335 cities with 3G user base reaching 2.74 million.
The carrier targets spending RMB23 billion (US$3.4 billion) on 3G in 2010 and capture one-third of the Chinese 3G market by year-end. 3G remains a compelling opportunity and represents the single biggest driver of the company’s long-term growth.
Leveraging its 3G network, China Unicom launched Apple Inc’s (AAPL - Analyst Report) iPhone in mainland China in October 2009. The operator is planning to add Wi-Fi (wireless broadband) function to the iPhone. Lack of Wi-Fi support has hindered the device’s wider market adoption.
China Unicom introduced its customized Android handsets (called “Uphone”) in January 2010 that uses Google's (GOOG - Analyst Report) Android platform. The government-backed Uphone project represents China Unicom’s second biggest opportunity in 3G handsets besides the iPhone.
However, China Unicom plans to ditch Google’s search function on its smartphones, including the Uphones. The move is based on the search engine giant’s recent decision to stop censoring Internet search results in China.
China Unicom’s extended collaboration with Spain’s Telefonica (TEF - Analyst Report) through the US$1 billion cross investment is expected to offer significant technological and operational synergies. Both the companies operate their 3G networks based on the WCDMA technology which will enable them to jointly develop WCDMA based services.
Nevertheless, China Unicom contends with a highly competitive domestic wireless market. The company remains significantly challenged by the aggressive nationwide 3G service roll outs of its peers China Mobile (CHL - Analyst Report) and China Telecom.
Moreover, China Unicom’s 3G business recently suffered a slowdown which is attributable to the carrier’s high-priced 3G service plans and expensive handsets. The company needs to boost 3G application content and promotional spending to remain competitive as its rivals promote 3G services at lower tariffs and higher subsidies.
While we remain bullish on China Unicom’s future growth prospects in 3G wireless, the associated expenditures for nationwide network deployments are likely to impact short-term profitability, tighten free cash flow and impact margins. Moreover, accelerated erosion in the landline voice business may continue to weigh on the top-line. We currently have a Neutral rating on the stock, which reflects our assessments.
