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Morningstar | China Unicom's Strong Recovery Hindered by Date Roaming Fee Removal

China Unicom is one of two main fixed-line telephone companies in China, each with its own traditional territory. It is also the second-largest wireless operator in the country, which generates the majority of its growth. The firm's fixed-line business primarily operates in northern China. Traditional fixed-line voice customers have been slowly declining for years. Broadband is a potential growth avenue, but China Mobile's aggressive expansion in the fixed broadband market is causing prices to fall, and China Mobile is taking market share. We have seen signs of turnaround for the mobile business since 2016 with stronger customer and service revenue growth. Negative free cash flow associated with the 3G and 4G network rollouts turned around in 2017 and continued in 2018, with capital expenditures of only CNY 42 billion in 2017 and CNY 45 billion in 2018. Heavy investment saw China Unicom report cumulative negative free cash flow from 2007 to 2016. The company needs to harvest free cash flow over 2017, 2018, and 2019 before 5G network capital expenditure ramps up. After the capital raise in 2017 and IPO of TowerCo in 2018, the company's balance sheet was net cash, putting it in a better position to battle its cashed-up key competitor, China Mobile.On the wireless side itself, China Unicom had a local monopoly on the global WCDMA technology in 3G. Owing to this technology's ubiquitous use worldwide, the costs for its 3G equipment and handsets had the lowest prices, and it had the greatest selection of 3G handsets. It also launched an FDD-LTE network in early 2015. However, China Mobile has been far more aggressive in the 4G mobile market, as its TD LTE technology is more competitive than its 3G technology was. Given that it was about 12-18 months behind China Mobile with its FDD LTE network, China Unicom was losing mobile customers in 2015. Customer growth resumed in 2016 and has continued in 2017 and 2018. We do not expect China Unicom to have the big technology advantage in 4G (or 5G, for that matter) that it had in 3G.