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Will Investing In China Unicom Be Beneficial?

|About: China Unicom (Hong Kong) Limited (CHU)

Summary

The second largest telecom company in the Chinese market China Unicom has been struggling as of late and the company’s subscriber gains are coming in sluggishly at best.

China Unicom’s earnings per share during the third quarter amounted to $0.25 as compared to $0.20 per share in the year ago quarter.

The strengthening of strategic cooperation with NQ Mobile will help China Unicom gain competitive ground and become more robust in the face of fierce competition.

China Unicom has identified 3G/4G services as major growth drivers and has added 84000 3G/4G base stations in the first half of 2014.

Investors should wait for the announcement of the company’s earnings for the first quarter of 2015 before making any decisions.

The second largest telecom company in the Chinese market, China Unicom (NYSE: CHU), has been struggling as of late and the company's subscriber gains are coming in sluggishly at best. The company has carried out trials for its 4G services but they haven't shown positive results. On a standalone basis, the company has been posting fairly impressive performances but it does not remain robust in the face of fierce competition in the Chinese telecom industry. The company's share prices have shown massive fluctuations over the course of the last 5 years which clearly indicates that investor confidence in the company has been shaky at best. Even in the current year, China Unicom's share prices have shown no clear trend but they have been declining over the course of the last three months. China Unicom's shares are currently trading at $13.53 and are expected to go further downwards.

Overview of China Unicom's last reported Financial Performance

China Unicom last reported its earnings back in October. The company reported its financial results for the third quarter of the fiscal year 2014. During the quarter, the Chinese telecom giant reported revenues of $10.7 billion. Revenues fell 14% as compared to $12.4 billion in the year ago quarter. The company's gross profit for the quarter amounted to $3.05 billion, down almost 10% from $3.36 billion in the same quarter of the previous year. The company's top line growth showed double digit declines mainly due to fierce competition and sluggish subscriber gains over the course of the year. Moving downwards, China Unicom's operating income during the third quarter of 2014 amounted to $850 million, an incredible 28% increase from $670 million in the year ago quarter. The company made up for its sluggish subscriber gains by focusing inwards and showing an increased commitment towards enhancing operational efficiency. Net income for China Unicom during the third quarter of 2014 amounted to $628 million. Net incomes for the telecom company grew 26% as compared to $500 million in the same quarter of the previous year. China Unicom was able to translate a worsening of top lines into a marked improvement in their bottom lines by reiterating their focus towards efficiency improvements. A double digit decline in top line growth thus resulted in a greater than proportional improvement in bottom line growth. China Unicom's earnings per share during the quarter amounted to $0.25 as compared to $0.20 per share in the year ago quarter.

China Unicom's deal with NQ Mobile Inc.

It was back in August that China Unicom Limited signed a deal with Chinese mobile internet service provider NQ Mobile Inc. The deal was aimed at the integration and licensing of NQ Mobile's Music Radar technology. The deal was a strengthening of the cooperation between the two companies beyond their mobile app distribution partnership which has been in place since November 2013. The move will allow NQ Mobile to expand its Music Radar technology and achieve its aim of converting it into a solid mobile platform. For China Unicom, the move represents exposure to an almost $10 billion digital music industry in China. The strengthening of strategic cooperation with NQ Mobile will also help China Unicom gain competitive ground and become more robust in the face of fierce competition.

Drivers of China Unicom's Long Term Growth

China Unicom's 3G and broadband businesses have been the major drivers behind the company's growth over the years and the company has held on to them despite facing immense competitive pressure. The company has identified 3G services as being the single largest driver behind the company's long term growth. The 3G subscriber base in China has been growing rapidly and there is still a lot of market share to capture for China Unicom. However, it is vital for the company to become more competitive if it is to take advantage of this massive boom in subscribers. Moreover, 4G services also have great potential in the Chinese market with limited internet penetration currently. China Unicom has identified these growth drivers and has added 84000 3G/4G base stations in the first half of 2014. The company is also part of a major infrastructure initiative by China's three largest telecom companies, which is set to lower network deployment expenditures and increase returns for telecom companies.

Conclusion

China Unicom has been struggling in terms of boosting its subscriber growth, but the company has maintained its focus towards enhancing operational efficiency and has thus generated significant bottom line growth. Moreover, the telecom giant has also made developments towards making itself more competitive. China Unicom has identified the tools it needs for achieving long term growth and is thus actively pursuing the expansion of its 3G/4G services. The company has not managed to gauge the confidence of investors over the course of the last three months but is showing signs of being a potentially worthwhile investment prospect. Investors should wait for the announcement of the company's earnings for the first quarter of 2015 before making any decisions.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.