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Morningstar | China Unicom More Competitive in Mobile but Ceding Fixed Broadband Market Share. See Updated Analyst Note from 24 Feb 2019

China Unicom’s subscriber numbers over 2018 and January 2019 showed trends from recent years continuing of increased competition in the mobile market, but China Mobile dominating the fixed line broadband market largely at the expense of China Unicom. In the three years from 2014 to 2016, post the introduction of 4G, China Unicom only added 9% of total new mobile customers and China Mobile added 67%.  However, over 2017 and 2018, China Unicom increased its share of net adds to 22%, with China Telecom’s share jumping to 38% while China Mobile added only 39%. In January 2019, China Unicom’s share of mobile net adds was 29% with China Telecom at 45% and China Mobile at 26%, showing how the smaller operators have increased competitiveness, at least in terms of mobile customer adds.

The story in the fixed line broadband market is the opposite with China Mobile dominating net customer adds over the past three years. China Mobile only began disclosing fixed line broadband customers in 2016, and between 2016 and 2018, it added 71% of the new fixed line broadband customers in the market with this percentage increasing to 73% in 2018 alone. China Mobile ends January 2019 as the leading fixed broadband operator in terms of customer numbers with 42% of the overall fixed broadband market having overtaken China Unicom in October 2016 and China Telecom in September 2018.

We retain our no-moat rating on China Unicom and our fair value estimate increases to HKD 13 per share and USD 16.60 per ADR from HKD 11.20 per share and USD 14.30 per ADR due to the strengthening Chinese yuan and the 65% jump in China Tower’s share price. This fair value implies a forward P/E of 45 times and a dividend yield of 0.9% making China Unicom’s shares attractive at current levels. We expect the company to grow operating earnings at an average of 20% per year over the next five years.

Given China Mobile entered the broadband market later than the other two operators, its broadband ARPU is lower so we estimate China Telecom still generates the most broadband revenue, with China Mobile second, and China Unicom third. China Unicom, in particular, seems to have focused its attention on the mobile market and is barely competing for new fixed line broadband customers. Given the broadband market in revenue terms is only around 20% of the mobile market, this makes some sense.

We note the mobile subscriber penetration in China is now around 102% and the value of subscriber numbers as a predictor of financial performance is arguably declining given the increase in the numbers of low revenue machine-to-machine customers. The Chinese mobile operators don’t disclose machine-to-machine customer numbers yet but Telstra in Australia disclosed that around 16% of its customer base at end 2018 was machine-to-machine and these customers generated revenue that was around 10% of a traditional postpaid handheld customer. There are also discrepancies between how companies actually count customers. For example, with the January 2015 customer number disclosure, China Unicom changed its definition of a customer to count only those mobile customers generating billable traffic in the past month. As a result its reported mobile customer base declined by 12%. We understand China Mobile uses this method for 4G customers but not 2G and 3G customers which may still therefore be overstated. These sorts of discrepancies highlight why we focus more on revenue, profit and cash flow than customer numbers and metrics derived from customer numbers such as average revenue per user.