China Unicom Upped to Neutral - Analyst Blog
October 14 2011 - 8:15AM
Zacks
We have upgraded our long-term recommendation from Underperform
to Neutral on China Unicom (CHU) based on strong
3G subscriber additions.
China's second largest mobile operator’s 3G business is
performing well and reached 27 million subscribers at August end.
The growth was primarily driven by Apple Inc.’s
(AAPL) iPhone sales. With this, China Unicom has achieved its
target of expanding its user base beyond 25 million by this
year-end.
Further additions would indicate growth prospects in China
Unicom’s mobile 3G business, and will subsequently result in higher
average revenue per user. We believe China Unicom continues to make
significant progress in expanding economies of scale in 3G,
broadband and other businesses that will likely improve its overall
revenue and profitability.
The company is also poised to benefit from the stabilization in
the fixed-line business and expansion of fiber optic service in the
fixed-line broadband business. China Unicom expects to cover 40
million families with more than 20Mbps broadband access
capabilities by the end of the year.
Coming to the second quarter results, net income declined due to
higher network expansion costs but revenues improved on the back of
strong iPhone sales and increased 3G subscribers.
Although we are encouraged by China Unicom’s future growth
prospects in its 3G wireless market, high levels of marketing and
promotional expenditures and precipitous decline in the landline
business might hurt profitability going forward. Additionally,
China Unicom remains significantly challenged by aggressive
nationwide 3G service rollouts by its peers, China
Mobile (CHL) and China Telecom Corp.
(CHA).
Further, increased operating expenses coupled with higher
depreciation and amortization will have an adverse effect on the
company’s profitability, free cash flow and margins.
The stock has a Zacks #3 (Hold) Rank for the short term.
APPLE INC (AAPL): Free Stock Analysis Report
CHINA TELCM-ADR (CHA): Free Stock Analysis Report
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CHINA UNICOM (CHU): Free Stock Analysis Report
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