Report
Dan Baker
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Morningstar | Cancellation of Domestic Data Roaming Fees Jolts China Unicom’s Growth in the 3Q

China Unicom’s third-quarter result was negatively impacted by the cancellation of domestic data roaming fees from July 1 with services revenue growth slowing from 8.3% in first-half 2018 to 2.9% in the third quarter. EBITDA also slowed from 5.2% growth in the first half to 5.1% decline in the third quarter due to the revenue slowdown and a 13% increase in employee expenses associated with the mixed ownership reforms which allow for increased performance-based pay for staff.

We maintain our fair value estimate at HKD 11.40 and USD 14.50. China Unicom remains narrow-moat-rated based on cost advantages with a negative moat trend due to the company’s declining technology advantage as the market moves away from 3G mobile. At these price levels, the company is undervalued and in 4-star territory.

With the mixed ownership reform implemented in the second half of 2017, China Unicom’s employee incentive share scheme includes seemingly high growth targets over the next three years. The three-year target for service revenue growth is 6.5% per year to CNY 301.1 billion by 2020. The pretax profit target is for 68.7% per year growth to CNY 25.4 billion by 2020. The cancellation of domestic roaming fees will make these targets difficult to achieve in our view as they will lead to a year with minimal growth. We forecast services revenue of CNY 287 billion and pretax profit of CNY 22.5 billion by 2020. Indeed, the seemingly random industry price reductions stipulated by the regulator are having a negative impact on operators’ profits and making it harder for the smaller operators to return to earning positive real economic returns. With China Unicom foreshadowing target 5G commercial launch in 2020, we would expect its returns to remain constrained until the heavy 5G investment period ends in 2022.

Beyond that, we expect returns to improve drastically as underlying demand for mobile data services remains very strong and China remains committed to a high tech future which will rely on telecom services.

Despite our view that the three-year incentive targets will be a stretch, mobile customer trends continue to be positive for the company with China Unicom adding 2.6 million mobile customers in September and 25.7 million year-to-date giving it around 26% share of new customer adds this year-to-date, up from 22% in 2017 and 9% over the three years from 2014 to 2016. China Unicom has been slowly gaining mobile market share since mid-2017 with its market share improving to 20.3% from a low of 19.7% over that period. This bodes well for its near-term revenue growth rates relative to the other two operators, although each of the Chinese operators will be negatively impacted by the cancellation of domestic data roaming fees.
Underlying
China Unicom (Hong Kong) Limited

China Unicom (Hong Kong) is an investment holding company. Through its subsidiaries, Co. is a telecommunications operator in China. Co. is engaged in providing mobile voice, fixed-line voice, fixed-line broadband, data communications and other telecommunications services to its customers.Co. is engaged in the provision of cellular and fixed-line voice and related value-added services, broadband and other Internet-related services, information communications technology services, and business and data communications services. The GSM cellular voice, WCDMA cellular voice, TD-LTE cellular voice, LTE FDD cellular voice and related value-added services are referred to as the .mobile business.

Provider
Morningstar
Morningstar

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.

Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.

We have operations in 27 countries.

Analysts
Dan Baker

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