China Unicom (HK) Ltd (SEHK:0762) is one of the three major telecommunication companies in China. The company provides a wide range of telecommunications services in China, such as mobile and fixed-line broadband, GSM, fixed line, information and communications technology, data communications and other services. China Unicom is listed on the Hong Kong Stock Exchange and has its America Depositary Receipts (ADR) listed on New York Stock Exchange.

STOCK INFORMATION

1
TICKER SYMBOL: SEHK:0762
MARKET CAP: HK$ 213 Billion (Updated 17 May 2016)
MARKET PRICE / SHARE: HK$ 8.66 (Updated 17 May 2016)
SECTOR: Utility
INDUSTRY: Telecommunications

THE BUSINESS

China Unicom is one of the main telecommunication companies in China. Majority owned by the State-owned enterprise, Unicom Group, the company currently has about 74 million fixed-line subscribers, 72 million fixed-line broadband subscribers and 252 million mobile subscribers.

In 2015, mobile service revenue contributed 51% to its overall revenue while fixed-line services contributed another 33%.

China Unicom Annual Report 2015
China Unicom Annual Report 2015
KEY STATISTICS (FY2015) 

Net Revenue: RMB 277 Billion
Net Income: RMB 10.6 Billion
Total Assets: RMB610.35 Billion
Earnings per Share: RMB 0.33
Dividend per Share: RMB 0.17
Net Income Margin: 3.8%
ROE: 4.6%

KEY OPPORTUNITIES

1. Rise of consumerism
In term of telecommunication reach, China still have a huge runway ahead.

In April 2016, out of China Unicom’s 260 million mobile subscribers, only 64 million are on 4G (grew by over 4 mil in a month!). Additionally, the fixed-line broadband subscribers is only at 74 million. In a country with a population of more than 1 billion and the increasing connected world, internet access might soon be as common as having electricity access.

2. Internet of Things
Moreover, as technology advances, more and more appliances would require the internet to function. The internet-of-things industry is growing rapidly. With more and more usage and demand for internet access, telecommunication services is needed more than ever.

To their credit, China Unicom has been actively exploring key areas in stuff like the Internet of Things, Internet Data Centre, cloud computing, Big Data, Information Technology and smart city, etc. Some of the key industries that the company focused on included healthcare, education, manufacturing, environmental protection, transport and logistics. The possibilities!

3. Co-Operation With Other Big Boys

Recently, China Unicom commenced strategic co-operation with China Telecom Corp in terms of network co-building and co-sharing handsets standardisation and innovative business.

Under the current competitive environment, this could not only help to reduce constructions cost but also rapidly enhance the experience of consumers!

KEY RISKS

1.High cost
China Unicom has been seeing declining margins in its business. Its net margin has dropped from 4.2% in 2014 to just 2.9% in recent months. Due to high tower usage fee, the company is struggling to maintain its profit. Although new tower usage fee are now being negotiated, it is yet to be seen if the company can keep its cost down.

During the year, China Unicom disposed its tower and related assets to China Tower Corporation Limited for a gain before tax of RMB 9.25 billion. The disposal of tower assets was to facilitate the co-building and co-sharing of towers among operators. The end goal was to promote quick and efficient roll-out of a 4G network whilst lowering Capex. Sidenote: China Unicom was a major shareholder of China Tower Corporation Limited.

In any case, it was explicitly mentioned in the Company’s FY2015 presentation that they “expect tower usage to pressure on profit in the short-term“.

2. Size
A more serious risk is the ability of China Unicom to compete with its competitor. China Unicom can be considered the smallest of the three telecommunication companies. With a market capitalisation of more than HK$200 billion, it is still much smaller than China Telecom (HK$300 billion) and China Mobile (HK$ 1.7 trillion). And size and economic of scale can means the life or death for a telco.

China Mobile, with its much larger customer base, has average a net income margin of 16% for the past 2 years. China Telecom, also operates at a higher net income margin of 6.0%. Operationally, we can see that China Unicom might be struggling to keep up due to its smaller operation.

3. Impact of Government policies

For FY2015, the drop in Revenue and correspondingly Net profit was mainly due to:

– Governement policies the likes of Speed upgrade and Tariff Reduction, One-month Mobile Data Carry-over and the replacement of business tax with VAT Reform
– 4G licensing: On one hand, China Unicom had higher 4G subscribers, on the other, their competitive advantage in 3G was fading away, fast.

VALUATION

China Unicom is currently trading around 22 times its earnings and offers a 2.3% dividend yield.

LISTED PEERS

1. China Telecom Corp (HK:0728)
2. China Mobile (HK:0941)

INVESTOR RELATIONS

Investor Relation Material:
Annual Report
Financial Information

Investor Relationship
Mr. Ivan Wong / Ms. Summer Mo / Mr. Billy Tang
Email:
ir@chinaunicom.com.hk
Tel: (852) 2126 2018

TOP SHAREHOLDERS DIRECT INTEREST (31 March 2016)

1. China United Network Communications Group – 75.3%
2. Telefonica SA – 2.79 %
3. Blackrock Inc – 1.12%

FINANCIALS

China Unicom IS

Morningstar – Income Statement

China Unicom BS

Morningstar – Balance Sheet
Other Photo Credit: China Unicom Annual Reports and Presentations

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