Company Reports

China Unicom reported a broadly in-line first-quarter 2024 result, with service revenue and EBITDA each increasing 3.4% year on year and net profit up 8.9% year on year. Operating profit increased 22.3% year on year, with net profit growth negatively affected by a slightly higher tax rate and lower contribution from other income. The lower other income was caused by the additional reduction in value-added tax that ended in 2024, which reduced the first quarter profit before tax by CNY 450 million and will affect the full year by around CNY 1.7 billion. There was limited additional color with the first-quarter result, but cloud revenue increased 30% year on year, which we see as quite strong, despite the slowdown from the 49% growth generated in the second half of 2023.

China Unicom reported a somewhat disappointing fourth quarter and full-year 2023 result, but its guidance for 2024 was unusually bold. Fourth-quarter services revenue grew 3.8% year on year, which was a slight improvement on the third quarter, but EBITDA declined 6.6% year on year. The main reason given for this was the timing of quarterly bonuses for staff. But even if we look at the full year, the services revenue growth of 5% only drove a 2.2% growth in EBITDA. Full-year net profit growth of 11% looked quite solid, but this was helped by a CNY 2 billion reduction in depreciation and amortization, without which we estimate that 2023 net profit growth would have only been 2%-3%. However, the company guided to stable growth in top-line service revenue in 2024 and another double-digit growth in net profit before tax driven by fundamentals rather than depreciation reduction. The company also guided for capital expenditure to fall to CNY 65 billion in 2024 from CNY 73.9 billion in 2023. We see this reduction as very positive as we had been concerned that the company would continue to increase capex. The company generated free cash flow of CNY 28.5 billion in 2023 and we expect this to rise to about CNY 40 billion in 2024, driven by reduced capex, increased earnings, and a focus on reducing accounts receivable.

China Unicom is one of two original fixed-line telephone companies in China, each with its own traditional territory. It is also the third-largest wireless operator in the country, which had generated the majority of its growth until the past few years when industrial internet (internet data centers, ICT consulting services, and cloud services) has started to drive growth.

China Unicom reported a solid third-quarter result, but revenue and earnings growth were slightly below its peers. Third-quarter services revenue was up 3.5% year on year, with EBITDA down 0.2% year on year and net profit up 3.1% year on year, compared with industry average growth of 7.4%, 6.8% and 5.0%, respectively, based on our estimates. Industrial Internet is one area where China Unicom fell behind its competitors this quarter, growing only 9% year on year compared with 30% for China Mobile and 16% for China Telecom. China Unicom indicated with its first-half result that it was confident in the prospects for the industry internet business and was targeting over 20% growth for the full year, but we believe this target now looks unlikely as it would require a bounce back to 38% growth in the fourth quarter and macro trends are likely working against this. Third-quarter mobile service revenue increased 1.9% year on year, a slight increase from the 1.7% year on year in the second quarter.

China Unicom is one of two original fixed-line telephone companies in China, each with its own traditional territory. It is also the third-largest wireless operator in the country, which had generated the majority of its growth until the past few years when industrial internet (internet data centers, ICT consulting services, and cloud services) has started to drive growth.

China Unicom is one of two main fixed-line telephone companies in China, each with its own traditional territory. It is also the third-largest wireless operator in the country, which had generated the majority of its growth until the past few years when industrial internet (internet data centers, ICT consulting services, and cloud services) has started to drive growth.

China Unicom reported a strong second quarter with growth in all key earnings items accelerating on the first quarter. Second-quarter services revenue was up 6.5% year on year, EBITDA up 5.4% year on year, and reported net profit up 14.4% year on year compared with first-quarter growth of 6.1%, 2.8%, and 11.2%, respectively. Despite these strong results, the stock still only trades on a 12-month forward price/earnings ratio of 7.5 times and an enterprise value/EBITDA multiple of 1.2 times using PitchBook consensus estimates. Although China Unicom’s second-quarter industry internet and cloud services year on year growth was still strong at 18% and 28%, 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 on the prospects for the industry internet business and targets over 20% growth for the full year. China Unicom is also maintaining its 2023 cloud revenue target of 39% growth to CNY 50 billion for 2023. Second-quarter mobile service revenue increased 1.7% year on year, a slowdown from the 4.4% reported in the first quarter and the 3.6% reported in 2022.

Despite its share price increase over the past six months, in our view, no-moat China Unicom 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.

China Unicom is one of two main fixed-line telephone companies in China, each with its own traditional territory. It is also the third-largest wireless operator in the country, which had generated the majority of its growth until the past few years when industrial internet (internet data centers, ICT consulting services, and cloud services) has started to drive growth.

Despite its recent share price increase, in our view, no-moat China Unicom continues to be undervalued after reporting a strong 2022 result. 2022 services revenue was up 7.8%, while EBITDA was up 3% year on year; and reported net profit up 16.5% year on year, with net profit adjusted for one-off accounting changes up 33%. Despite these strong results the stock still only trades on a 12-month forward P/E ratio of 8.9 times and an EV/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 centers and cloud services.

China Unicom is one of two main fixed-line telephone companies in China, each with its own traditional territory. It is also the third-largest wireless operator in the country, which had generated the majority of its growth until the past few years when industrial internet (internet data centers, ICT consulting services, and cloud services) has started to drive growth.

We retain our no-moat ratings for both China Unicom and China Telecom, but we increase our fair value estimates for China Unicom to HKD 10.50 from HKD 9.70 per share previously and for China Telecom to HKD 5.20 from HKD 4.80 per share. This is due to a stronger Chinese yuan. We also retain our narrow moat rating for China Mobile and increase our fair value estimate to HKD 96.30 from HKD 90 per share, also due to a stronger Chinese yuan.

China Unicom is one of two main fixed-line telephone companies in China, each with its own traditional territory. It is also the third-largest wireless operator in the country, which has generated the majority of its growth until the past few years when industrial internet (internet data centers, ICT consulting services, and cloud services) has started to drive growth.

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.

China Unicom is one of two main fixed-line telephone companies in China, each with its own traditional territory. It is also the third-largest wireless operator in the country, which has generated the majority of its growth until the past few years when industrial internet (internet data centers, ICT consulting services, and cloud services) has started to drive growth.

In our view, no-moat China Unicom continues to be extremely undervalued after reporting a strong first-half 2022 result with services revenue up 8.3% year on year, EBITDA up 3.9% year on year and net profit up 19.5% year on year. There was only slight slowdown in the second quarter given second-quarter services revenue was up 6.7% year on year, EBITDA up 2.0% year on year, and net profit was up 18.8% year on year—understandable given lockdowns and economic slowdown. In the first half, industry internet revenue was the main growth driver increasing by 32% year on year to CNY 36.9 billion. Within this category Unicom cloud revenue grew 143% year on year to CNY 18.7 billion and data centre revenue grew 13.3% year on year to CNY 12.4 billion. Unicom’s 143% cloud revenue growth was easily better than Alibaba’s 10% growth reported for the June quarter and we estimate that the telecom companies are benefiting from strong growth from government customers.

China Unicom is one of two main fixed-line telephone companies in China, each with its own traditional territory. It is also the third-largest wireless operator in the country, which has generated the majority of its growth until the past few years when industrial internet (internet data centres, ICT consulting services, and cloud services) has started to drive growth.

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.

China Unicom is one of two main fixed-line telephone companies in China, each with its own traditional territory. It is also the third-largest wireless operator in the country, which has generated the majority of its growth until the past few years when industrial internet (internet data centres, ICT consulting services, and cloud services) has started to drive growth.

In our view, no-moat China Unicom continues to be very undervalued after reporting a strong 2021 result with services revenue up 7.4%, and net profit up 15%. The net profit growth was helped by growth in additional deduction for value added tax reported as part of “other income” which added around CNY 1 billion to profits. Without this item, we estimate profit growth would have been around the same rate as services revenue growth. With the high operational leverage in the telecom business model, we would normally expect 15%-20% underlying profit growth from 7.4% services revenue growth, but cost growth across the board, particularly in network expenses which grew 15%, dampened the underlying profit growth. We suspect the strong growth in industry internet revenue, which is likely lower margin at current scale, is also affecting margins.