(CHU) More Users Join China Unicom in May

China’s second largest mobile operator China Unicom (CHU) added 2.33 million subscribers in May, up 1.32% from the prior month. This takes the company’s total customer base to 179.34 million.

The company’s GSM subscriber base expanded to 157.25 million with the net addition of 0.59 million customers, while its 3G subscriber base increased to 22.09 million with the net addition of 1.74 million in May. However, China Unicom added fewer 3G subscribers in May compared to 1.817 million 3G subscribers in the last month.

Despite the slowdown in new 3G users, the company is confident of expanding its 3G user base beyond its 25 million target for fiscal 2011.

The company’s 3G business is performing well and is expected to sustain the momentum well into the future. 3G remains a compelling opportunity and represents the single biggest driver of the company’s long-term growth. For the full year, capital spending on the 3G network is estimated at RMB 73.80 billion.

We believe China Unicom will continue to make significant progress in expanding economies of scale in 3G, broadband and other businesses that will likely improve its overall revenue and profitability.The company is offering 3G services in collaboration with Research In Motion Limited’s (RIMM) Blackberry phones. Additionally, the company has the exclusive right to distribute Apple Inc.’s (AAPL) iPhone in China.  China Unicom is also in talks with Apple to sell the iPad by the end of 2011.

China Unicom’s 3G and fixed-line broadband businesses have been ramping up since last year. However, these businesses are expected to remain under pressure due to increasing depreciation and amortization expenses; networks, operations and support expenses; as well as selling expenses for the remainder of this year. We believe these expenseswill have an adverse effect on the company’s future profitability, free cash flow and margins.

Further, higher handset subsidies and increased costs related to 3G service deployments will continue to be headwinds for the company. Despite these challenges, we expect China Unicom to benefit from new users this year.

China Unicom is offering handsets at subsidized rates with lower 3G service plans for multi-year contracts to retain existing customers and add new ones. This will weigh on the company’s future overall average revenue per user. Moreover, China Unicom remains significantly challenged by aggressive nationwide 3G service rollouts by its peers, China Mobile (CHL) and China Telecom Corp. (CHA).

We currently have a long-term Neutral rating on China Unicom. The stock retains a Zacks # 3 (Hold) Rank for the short term.

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