China Unicom Earnings: Slight Acceleration in Revenue and Earnings Growth

China Unicom 00762 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.

We made slight upward adjustments to our earnings forecasts offset by currency weakness, leaving our fair value estimate for China Unicom unchanged at HKD 10.50. We make no changes to our no-moat rating for China Unicom, which stems from its returns remaining below weighted average cost of capital. We forecast operating income to grow at an average of 12.5% per year over the next five years with operating margin forecast to recover from 3.5% in 2022 to 5.0% in 2027. As a reference, its closest comparable, China Telecom, reported an 6.9% operating margin in 2022. Of the Chinese telecom companies, we have China Unicom and China Mobile as 5-star-rated at current prices with China Telecom at 4 stars. We prefer China Unicom based on valuation.