China Unicom Remains Our Top Pick in the Chinese Telecom Sector; Lower FVE to HKD 9.70

No-moat China Unicom remains our top pick in the very undervalued Chinese telecommunications services sector due to its inexpensive valuation. The company reported a solid third-quarter 2022 result with year-on-year services revenue up 6.7% , EBITDA down 2.0% and net profit up 25.4%. This compares with industry third-quarter year-on-year growth of 7.2% for revenue, 1.6% for EBITDA and 5.5% for net profit. China Unicom’s outperformance on net profit after tax growth was helped by its strengthening balance sheet increasing interest income as well as a reduction in depreciation and increased earnings from associates and joint ventures. We reduce our fair value estimate to HKD 9.70 from HKD 10.10 previously due to the weaker Chinese yuan, but this is still about 190% above the current stock price. We make no changes to our no-moat rating for China Unicom, which stems from its returns remaining below WACC. We forecast EBITDA to grow at an average of 1.6% per year over the next five years. Operating income margin is forecast to recover to 4.5% in 2026 from 3.3% in 2021, with its closest comparable, China Telecom, having reported an 8.6% operating margin in 2021.