On Aug 29, 2013 we maintained our Neutral recommendation on
China Unicom Hong Kong Limited
). We expect China Unicom to continue with its robust subscriber
addition in the near term on the expansion of 3G network and
strong sales of iPhone. However, stiff competition and access
line erosion are likely to weigh on the stock. This Beijing-based
communication service provider holds a Zacks Rank #3 (Hold).
China Unicom has enough growth potential thanks to its
expansion into new markets and bundled service offerings. The
company is expected to lead 3G and integrated innovation as well
as focus on operating efficiency over the next few years.
The 3G subscriber base is growing rapidly, attributable to
low-cost premium plans and robust iPhone sales in spite of the
company losing the exclusive distribution right to
China Telecom Corp Limited
). We believe that China Unicom will accomplish its set target of
selling 90 million units of 3G smartphones in 2013, which is
nearly 50% higher than last year.
China Unicom is also using its distinguished approach in
mobile data services to stimulate data demand and consequently
yielding good results. The company continues to focus on capital
investment with 80% of the spending targeted at mobile broadband
and transmission network, and 20% at the development of 3G
infrastructure and IT system.
The company is also expected to grab 4G license, which will be
issued in 2013. With Internet penetration still very low, 4G will
provide a huge opportunity for China Unicom. Though initially
expensive, the rollout of 4G will be accretive to the company's
Despite so many positive developments we prefer to remain on
the sidelines due to certain risks. Most crucial among these is
the cut-throat competitive environment that this company - the
second largest operator in China after
China Mobile Limited
) - operates in.
Moreover, China Unicom's GSM ARPU (average revenue per user)
remains under pressure due to aggressive price competition, while
the monthly average churn remains high. China Unicom is also
facing significant decline in its access line losses due to the
impact of the ongoing fixed-to-mobile substitution.
A foreign telecom company that looks attractive is
SK Telecom Co Ltd.
). The stock has a Zacks Rank #1 (Strong Buy).
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