(CHU) China Unicom Adds 3 Million Users

China’s second largest mobile operator China Unicom (CHU) added 3.232 million subscribers in February, up 1.52% from the prior month. This takes the company’s total customer base to 205.97 million.

The company’s GSM subscriber base rose to 160.073 million with the net addition of 0.250 million customers, while its 3G subscriber base increased to 45.894 million with the net addition of 2.83 million in January. China Unicom added more 3G subscribers in February compared to 2.05 million last month.

The company’s 3G business is performing well and the momentum is expected to continue well into the future. 3G remains a compelling opportunity and represents the single biggest driver of the company’s long-term growth.

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 also benefited from being the exclusive distributor of Apple Inc.’s (AAPL) iPhone in China.

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 through this year due to increasing depreciation and amortization expenses; network, operation and support expenses; as well as selling expenses. We believe these expenses will 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 Unicomis 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). Additionally, the company is also on the verge of losing its exclusive right to market iPhone as China Telecom begins distribution of iPhone 4S from March 9, in China.

We currently have a long-term Neutral rating on China Unicom. The stock retains a Zacks #3 (Hold) Rank for the short term (1–3 months).

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