(CHU) China Unicom Misses on Earnings and Grows Year-Over-Year

China Unicom (CHU), China’s second largest mobile operator, announced fiscal 2011 results with earnings per share of RMB 0.18 ($0.28 per share). The annual earnings missed the Zacks Consensus Estimate by 9 cents but was 2 cents above the year-ago earnings.

Adjusted net income increased 20% year over year to RMB 4.21 billion ($0.65 billion). High costs associated with 3G service deployments and network expansion were compensated by strong revenues.

Revenue & Subscriber

Total revenue (excluding deferred fixed-line upfront connection fee) climbed 22.2% year over year to RMB 209.15 billion ($32.35 billion) but missed the Zacks Consensus Estimate of $33.56 billion. Telecommunication service revenues, comprising roughly 89% of the total revenue, were RMB 185.87 billion ($28.75 billion), up 13.4% from the last year.

Healthy revenue growth was credited to rapid growth of the 3G and fixed-line broadband businesses as well as strong sales of Apple Inc.‘s (AAPL) iPhones. China Unicom nevertheless has lost its exclusive right to distribute iPhones to China Telecom Corp. (CHA) early this month.

Total revenue from the mobile business shot up 41.2% year over year to RMB 126.53 billion ($19.57 billion). A large contributor was the telecommunication service with revenues of RMB 103.31 billion ($15.98 billion), up 25.3% from the prior year. China Unicom added 10.626 million subscribers in the fourth quarter to reach 199.660 million at the year-end.

China Unicom’s 3G business is growing at a faster pace since its introduction in October 2009 and has become the major driver of revenue growth. 3G business telecommunication service revenues jumped 182.3% year over year to RMB 32.74 billion ($5.06 billion) in 2011. The company’s total 3G subscriber base reached 40.019 million at the end of 2011, with 25.959 million new customers added during the year.

Telecommunication service revenue from the GSM business was roughly flat year over year at RMB 70.54 billion ($10.91 billion). Net subscriber additions were 6.275 million to reach 159.641 million at December 31.

Revenue from the fixed-line business was RMB 81.69 billion ($12.63 billion) in 2011. Telecommunications services revenue from the fixed-line business rose 2.4% year over year toRMB 81.63 billion ($12.6 billion) backed by the rapid growth in fixed-line broadband business.

Telecommunications service revenues from the broadband business was RMB 35.23 billion ($5.45 billion) in 2011, up 18.1% from the prior year. China Unicom added 8.427 million customers in the year bringing the total number to 55.651 million.

The local telephone business recorded service revenue of RMB 34.0 billion ($5.2 billion), down 15.2% from the prior year. Erosion in fixed-line subscriber base continues with the loss of approximately 3.784 million customers, bringing the total customer base to 92.851 million.

Expenses

Total expenses crept up 22.1% year over year to RMB 203.57 billion ($31.49 billion) on the back of higher selling expenses, network deployment costs, interconnection charges and depreciation charges. Selling and marketing expenses climbed 21.1% year over year to RMB 28.75 billion ($4.44 billion), mostly due to higher promotional spending on 3G and broadband services.

Liquidity

China Unicom exited the year with cash and cash equivalents of RMB 15.106 billion compared with RMB 22.597 billion last year. Debt-to-capitalization ratio deteriorated to 34.2% from 32% at 2010-end.

China Unicom generated operating cash flows of RMB 66.49 billion ($10.29 billion) in 2011, up 0.2% year over year. Capital expenditure increased 9.2% year over year to RMB 76.66 billion ($11.86 billion).

Dividend

The company will pay a final 2011 dividend of RMB 0.10 per share on June 14 to shareholders of record as of June 6, 2012.

Our Take

We believe China Unicom continues 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 also poised to benefit from the stabilization in the fixed-line business and expansion of fiber optic service in the fixed-line broadband business.

On the flip side, high levels of marketing and promotional expenditures and a precipitous decline in the landline business might hurt profitability going forward. Additionally, increased operating expenses coupled with higher depreciation and amortization will have an adverse effect on the company’s profitability, free cash flow and margins. Further, China Unicom remains significantly challenged by aggressive nationwide 3G service rollouts by its peers, China Mobile (CHL) and China Telecom.

We are maintaining our long-term Neutral recommendation on China Unicom. The stock retains a Zacks #5 (Strong Sell) Rank for the short term (1–3 months).
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