China Unicom (NYSE:CHU), the second largest wireless carrier in China, finally launched 4G services in the country last week. It is last among the Chinese carriers to launch 4G, after the government awarded 4G TD-LTE (Time Division-Long Term Evolution) licenses to all carriers in December last year. The carrier is offering 4G services for smartphones as well as data cards. It will be primarily competing with market leader China Mobile (NYSE:CHL) in the 4G market, since smaller rival China Telecom(NYSE:CHA) currently offers only 4G data cards, not 4G services for smartphones. The 4G smartphone market in China is expected to grow more than 1500% year-over-year to 72 million units in 2014.
Even as China Unicom looks to compete in the rapidly expanding 4G market, its biggest challenge this year is likely to be maintaining its 3G momentum. It added more than 42 million 3G subscribers in 2013 with an average monthly increase of about 3.5 million users. With China Mobile aggressively expanding in the 3G and 4G space, continuing at such a pace might be a formidable task for China Unicom.
Our current price estimate for China Unicom is $17, implying a premium of about 35% to the market price.
Mixed 4G Strategy
The Chinese government issued 4G TD-LTE licenses to carriers in December, but has yet to award FDD (Frequency Division Duplex)-LTE licenses. TD-LTE is a relatively unique 4G protocol, as most carriers outside of China use FDD-LTE. Initially, China Unicom was unsure about whether to use the home-grown TD-LTE standard or wait for the government to issue FDD-LTE licenses. Even now, the carrier has chosen to selectively launch 4G services on the TD-LTE standard by building just the required network, and will wait for FDD-LTE licenses to expand further. On the other hand, China Mobile is focusing completely on TD-LTE for its 4G network expansion, and China Telecom informed investors that it will lease TD-LTE infrastructure from rivals in the near term to launch 4G and focus on FDD-LTE to expand its service to smartphones going forward.
As part of its 4G strategy, China Unicom will be unifying its 3G and 4G operations in network construction and user tariffs. This implies that its 4G service plans will be comparable to its 3G offerings. For instance, a China Unicom prepaid plan providing 400 MB of 4G data for a month will cost about RMB 78 ($12.70), which is similar to its 3G data rates. In addition to this, the carrier is offering about 24 handset options to potential subscribers, which are compatible with both its 3G WCDMA as well as 4G TD-LTE networks. These handsets include popular smartphones such as the Samsung S4, Samsung Note 3, Sony Z1 and HTC One Max.
However, there is still a lack of clarity regarding some aspects of the carrier’s strategy, for instance how subscribers will use these new handsets (3G & TD-LTE compatible) with the carrier’s FDD-LTE 4G network in the future. Also, it's unclear whether China Unicom will be keeping its TD-LTE network independent of its future FDD-LTE network. The best possible plan for the carrier to provide seamless 4G connectivity in the long run could be to introduce handsets that are compatible with all three technology standards - WCDMA 3G, TD-LTE 4G and FDD-LTE 4G. However, since such handsets are not in use anywhere else in the world, their production and availability might not be easy in the near term.
Sustaining 3G Momentum Likely To Be Key
Unlike China Telecom, which has recorded declines in net subscribers in the last three months, China Unicom has been fairly successful in holding its ground in the wake of aggressive expansion by China Mobile. This has been possible because of two important factors. Firstly, China Unicom offers the fastest 3G network in China because of its HSPA+ upgrades. It also launched a 42M network last year, referred to as 3.75G by the Chinese media, which offers Internet speeds of up to 42Mbps to its subscribers. Such improvements in its 3G service enabled the carrier to provide a near-4G experience to its existing users and encouraged 2G subscribers of rival networks to transition to its 3G network. Secondly, China Unicom’s focus on low-cost smartphones for 3G subscriber additions also helped the carrier to reduce subsidies and improve its 3G penetration in the country.
Owing to strong gains in 3G subscribers last year, China Unicom’s market share increased from 21.6% in 2012 to about 23% at the end of February 2013. If China Unicom can sustain its 3G momentum this year and attract users to its 4G service, it could give a further boost to the carrier’s market share.
Disclosure: No positions.