We are maintaining our long-term Neutral recommendation on
China's second largest mobile operator
) following the second quarter results. The stock retains a Zacks
#3 (Hold) Rank for the short term (1-3 months).
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Despite higher network expansion costs, the company's first half
earnings increased 27.3% from the year-ago period. Revenue also
improved due to rapid growth of the 3G and fixed-line broadband
businesses as well as strong sales of
) iPhones despite losing its exclusive right on the iPhones to
China Telecom Corp
China Unicom will continue to benefit from the ongoing development
strategy that aims to enhance its growth and profitability. The
company expects to generate higher revenues by accelerating
large-scale developments of 3G and fixed-line broadband services.
3G remains a compelling opportunity and represents the single
biggest driver of the company's long-term growth.
The company is focusing more on improving its 3G data surfing
service, and offering cheaper handsets and low cost services to woo
new customers. These efforts are drawing more 3G subscribers,
eventually leading to higher average revenue per user. In the
fixed-line business, the company is poised to benefit from
expansion and speed enhancement of fiber optic service in its
Nevertheless, high levels of marketing and promotional expenditures
would continue to hurt future profitability. The company's
businesses are expected to remain under pressure due to increasing
depreciation and amortization expenses, network, operations and
support expenses, as well as selling expenses for this year and
beyond. We believe these expenses will have an adverse effect on
the company's future profitability, free cash flow and margins.
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
) and China Telecom.