China Unicom Earnings: Remains Our Top China Telco Pick Following Solid Performance

Despite its share price increase over the past six months, in our view, no-moat China Unicom 00762 continues to be undervalued after reporting another strong first-quarter 2023 result. First-quarter services revenue was up 6.1% year on year, EBITDA up 2.8% year on year, and reported net profit was up 11.2% year on year. Despite these strong results, the stock still only trades on a 12-month forward price/earnings ratio of 8.7 times and an enterprise value/EBITDA multiple of 1.1 times using PitchBook consensus estimates.

We see the Chinese telecom service companies as continuing to benefit from the growth of the internet across many facets of life in China including consumer, business, and government. And given security concerns, the telecom service companies seem to be the preferred provider of key basic underlying services and networks in China including mobile, broadband, data centres, and cloud services. Although China Unicom’s industry internet and cloud services year on year growth was still strong at 15% and 40%, respectively, they slowed from the respective 29% and 121% reported over 2022. With strong policy support related to the digital economy and the gradual recovery of the macro economy, China Unicom is still confident in the prospects for the industry internet business and targets over 20% growth for the full year. The first-quarter cloud revenue growth is broadly in line with China Unicom’s target of 39% growth to CNY 50 billion for 2023. First-quarter mobile service revenue increased 4.4% year on year, slightly better than the 3.6% reported in 2022.

We retain our earnings forecasts and our fair value estimate for China Unicom remains HKD 10.50. We make no changes to our no-moat rating for the company, which stems from its returns remaining below weighted cost of capital.