China's second largest wireless service provider, China Unicom (NYSE:CHU), revealed recently that it added over 3.4 million subscribers in July that took its total tally past 220 million. The demand for 3G-capable smartphones continued to scale up as the carrier saw almost 90% of its net adds come from 3G. For the first half of 2012, China Unicom led the 3G charts with about 17.5 million 3G net adds, as compared to China Mobile's (NYSE:CHL) less than 16 million in the same period. It seems China Unicom is making most of its newly launched high-speed HSPA+ network and the unavailability of Apple's (NASDAQ:AAPL) iPhone on China Mobile's network to close the 3G gap with China Mobile.
With 2G subscriber growth slowing and 3G still in early stages of penetration, there is significant growth potential for China Unicom. We have a $23 price estimate for China Unicom stock, almost 30% ahead of the current market price.
iPhone Helps Unicom To Profit From An Equitable 3G Mix
With close to 670 million subscribers, China Mobile is the largest wireless carrier in the world and has twice as many subscribers as China Unicom. But when it comes to 3G, the difference is not nearly as wide. As of July 2012, China Mobile had 69 million 3G subscribers, only about 13% ahead of China Unicom's 61 million 3G subscribers. Low 3G penetration of around 18% in China is giving smaller wireless carriers such as China Unicom ample opportunity to compete on an even ground with the otherwise dominant China Mobile.
Moreover, the fact that China Mobile runs its 3G network on a proprietary homegrown TD-SCDMA standard has proved to be a big deterrent for the carrier in securing smartphones that are compatible with its network. Even the iPhone, which has already been launched on the other two carriers in China, hasn't made its way to China Mobile yet.
Taking advantage of this, China Unicom has been closing the 3G gap with China Mobile by adding at least an equal number of 3G subscribers every month. In June, China Unicom added more than 3 million 3G subscribers compared to China Mobile's addition of 2.8 million. In July, while China Mobile's 3G net adds slowed to only 1.9 million, China Unicom's strengthened to almost 3.1 million. The iPhone 4S addition in January this year is definitely providing a boost to China Unicom's 3G ambitions, and the carrier is looking to make the most of it before the popular smartphone arrives on China Mobile's network.
ARPU rises as 3G penetration grows
So what happens when the iPhone arrives on China Mobile eventually? The next-generation iPhone will, in all likelihood, have LTE capabilities and currently, China Mobile is the only carrier 'testing' out its TD-LTE network in China. However, it is unlikely that the 4G network will be up and running in a meaningful number of cities across China any time soon. Meanwhile, China Unicom can leverage its recently launched high-speed HSPA+ network to drive the sales of iPhones, in much the same way as AT&T has in the U.S., and maintain its 3G lead. Also, with China poised to become the biggest smartphone market by the year-end, China Unicom stands to benefit from the proliferation of affordable low-end smartphones in the country.
Leading the 3G race is beneficial for China Unicom because most of the growth is coming from data rather than voice, which has reached near-saturation. Adding 3G subscribers is helping China Unicom increase its ARPU levels as 3G smartphone users consume huge amounts of data. For the first quarter of 2012, China Unicom's 3G ARPU was RMB 94, almost three times as much as its 2G ARPU of RMB 35. The higher speed HSPA+ network will help it increase ARPU levels further as subscribers use more data-intensive applications on their phones. Margins will be impacted by the sale of subsidized 3G phones such as the iPhone, but China Unicom is betting on making its money back over the term of the contractual period.
Disclosure: No positions.