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China Unicom Profit Soars

|Includes:AAPL, CHA, CHL, China Unicom (Hong Kong) Limited (CHU)

China Unicom

November 12, 2012 - China Unicom Profit Soars - By Zacks Investment Research

The second largest mobile operator, China Unicom (CHU - Analyst Report) announced the results of the first nine months of 2012 with earnings per share of RMB 0.23 (or 3 cents), up 27.8% from the year-ago period.

Adjusted net income surged 33.3% over the year-earlier period, to RMB 5.6 billion ($0.88 billion), on the back of strong revenue growth and higher adoption of 3G plan.

Revenue & Subscriber

Total revenue (excluding deferred fixed-line upfront connection fee) climbed 18.8% year over year to RMB 185.2 billion ($29.24 billion). Telecommunication service revenues, comprising roughly 84% of the total revenue, were RMB 156.19 billion ($24.7 billion), up 13.3% from the year-ago period.

Healthy revenue growth was owing to rapid growth of the 3G and fixed-line broadband businesses as well as strong sales of Apple Inc.'s (AAPL - Analyst Report) iPhones in spite of losing the exclusive right to distribute iPhones to China Telecom Corp. (CHA - Snapshot Report) last year.

Total revenue from the mobile business increased 22.7% year over year to RMB 122.07 billion ($19.3 billion). A large contributor to the growth was the telecommunication service with revenues of RMB 93.11 billion ($14.7 billion), up 22.7% year over year. China Unicom added 29.827 million new subscribers to reach 229.487 million at the end of the first nine months of 2012.

China Unicom's 3G business is growing at a faster pace since its introduction in October 2009 and has become the major driver of revenue growth. 3G business telecommunication service revenues were RMB 42.72 billion ($6.75 billion) in the first nine months of 2012, and accounted for 45.9% of service revenue from the mobile business. The company's total 3G subscriber base reached 66.863 million, with 26.844 million new customers added during the first three quarters of 2012.

Telecommunication service revenue from the GSM business fell 6.2% year over year to RMB 50.39 billion ($7.96 billion) driven by growing data substitution and stiff competition. Subscriber additions increased by 2.983 million to 162.624 million at the end of the third quarter of 2012.

Revenue from the fixed-line business inched up 1.9% year over year to RMB 62.48 billion ($9.9 billion). Telecommunications services revenue from the fixed-line business also rose 1.9% year over year to RMB 43.35 billion ($6.8 billion) backed by consistent growth in fixed-line broadband business.

Telecommunications service revenues from the broadband business was RMB 29.39 billion ($4.6 billion), up 12.6% from the year-ago period. China Unicom added 7 million customers during the reported period bringing the total number to 62.651 million.

The local telephone business recorded service revenue of RMB 22.38 billion ($3.53 billion), down 14.3% year over year. Erosion in fixed-line voice subscriber base continued with 3.0% decline from the year-ago period, bringing the total customer base to 92.621 million.

Expenses

Total expenses crept up 18.3% year over year to RMB 177.9 billion ($28.3 billion) due to higher selling expenses, network deployment costs, interconnection charges and depreciation charges. Selling and marketing expenses increased 20.4% year over year to RMB 25.38 billion ($4 billion) in the first three quarters of 2012, mostly due to higher promotional spending on handsets and applications.

Liquidity

China Unicom exited the first nine months of fiscal 2012 with cash and cash equivalents of RMB 12.16 billion compared with RMB 15.11 billion in the end of fiscal 2011.

Operating cash flow grew 5.3% year over year to RMB 56.33 billion in the reported period.

Our Take

China Unicom will continue to benefit from the ongoing development strategy aimed at enhancing its growth and profitability. The company expects to generate higher revenues by accelerating large-scale developments of 3G and fixed-line broadband services.

Nevertheless, high levels of marketing and promotional expenditures would continue to hurt future profitability. Further, we remain concerned about the precipitous decline in the landline business as well as intense competition in the domestic wireless market, in particular from China Mobile (CHL - Snapshot Report) and China Telecom.

We are maintaining our long-term Neutral recommendation on China Unicom. The stock retains a Zacks #3 (Hold) Rank for the short term (1-3 months).

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Disclosure: I am long CHL.

Stocks: CHU, AAPL, CHL, CHA