China Unicom Continues Strong Growth and Remains Inexpensive Despite Share Price Run

Despite its recent share price increase, in our view, no-moat China Unicom 00762 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.

Industry internet revenue was again the main growth driver for China Unicom in 2022, increasing by 28.6% year on year to CNY 70.5 billion. Within this category, Unicom Cloud revenue grew 121% year on year to CNY 36.1 billion. We raise our near-term earnings forecasts but our cash flow forecasts less so, and our fair value estimate for China Unicom remains at HKD 10.50 with a slight weakening in the Chinese yuan since our last update also negatively affecting the fair value movement. We make no changes to our no-moat rating, which stems from China Unicom’s returns remaining below its weighted average cost of capital. We project operating income to grow at an average of 12.3% per year over the next five years, with the operating margin forecast to recover from 3.5% in 2022 to 5.2% in 2027. As a reference, its closest comparable, China Telecom, reported an 8.6% operating margin in 2021.