China Unicom’s First Quarter 2022 Shows Strong Growth; Remains Very Good Value

In our view, China Unicom continues to be very undervalued after reporting a strong first quarter 2022, with services revenue up 9.8% year on year, operating profit up 27% year on year and net profit up 21% year on year. Industry internet revenue was the main growth driver, increasing 35% year on year to CNY 19.4 billion. Within this category Unicom Cloud revenue grew 114% on year to CNY 9.1 billion and data center revenue grew 14.5% year on year to CNY 6.3 billion. We retain our existing forecasts and our fair value estimate for China Unicom of HKD 10.10. We make no changes to our no-moat rating for China Unicom, which stems from its returns remaining below WACC. Its returns have remained below WACC for each of the past 10 years and we expect this to remain the case in our medium-term forecasts, despite our expectation that returns will improve. We forecast operating income to grow at an average of 10% per year over the next five years, with operating margin forecast to recover from 3.3% in 2021 to 4.2% in 2026. As a reference, its closest comparable, China Telecom, reported an 8.6% operating margin in 2020.