CHA China Telecom Corp Ltd

China Unicom (CHU) announced the results for full-year 2012 with adjusted net income of RMB 7.1 billion ($1.12 billion) that surged 67.9% over the year-earlier period on the back of strong revenue growth and higher adoption of the 3G plan.

Revenue & Subscriber

Total revenue (excluding deferred fixed-line upfront connection fee) climbed 19.0% year over year to RMB 248.9 billion ($38.53 billion) but remained below the Zacks Consensus Estimate of $40.23 billion.

Telecommunication service revenues, comprising roughly 84% of the total revenue, were RMB 210.13 billion ($33.28 billion), up 13% from the year-ago period.

Healthy revenue growth was attributable to rapid growth of the 3G and fixed-line broadband businesses as well as strong sales of Apple Inc.'s (AAPL) iPhones in spite of losing the exclusive right to distribute iPhones to China Telecom Corp. (CHA) last year.

Total revenue from the mobile business increased 30.0% year over year to RMB 164.77 billion ($26.10 billion). A large contributor to the growth was the telecommunication service with revenues of RMB 126.04 billion ($19.96 billion), up 22.0 % year over year. China Unicom added 46,974 million new subscribers to reach 395.1924 million at the end of 2012.

China Unicom’s 3G business is growing at a fast pace since its introduction in Oct 2009 and has become the major driver of revenue growth. 3G business telecommunication service revenues were RMB 59.80 billion ($9.47 billion) in 2012, up 82.6% year over year and accounted for 28.5% of telecommunication service revenues. The company’s total 3G subscriber base reached 76.456 million, with 36.437 million new customers added in 2012.

Telecommunication service revenue from the GSM business fell 6.1% year over year to RMB 66.24 billion ($10.49 billion) due to growing data substitution and stiff competition. Subscriber addition increased 2.0% year over year to 162.856 million at the end of 2012.

Revenue from the fixed-line business inched up 1.9% year over year to RMB 83.28 billion ($13.19 billion). Telecommunications services revenue from the fixed-line business also rose 1.9% year over year to RMB 83.21 billion ($13.18 billion) backed by consistent growth in fixed-line broadband business.

Telecommunications service revenues from the broadband business was RMB 39.37 billion ($6.24 billion), up 11.8% from the year-ago period. China Unicom added 8.218 million customers during the reported year, bringing the total number to 63.869 million.

Expenses

Total expenses crept up 17.6% year over year to RMB 239.41 billion ($37.92 billion) due to higher selling expenses, network deployment costs, interconnection charges and depreciation charges. Selling and marketing expenses increased 21.9% year over year to RMB 35.04 billion ($5.6 billion) in 2012, mostly due to higher promotional spending on handsets and applications.

Liquidity

China Unicom exited 2012 with cash and cash equivalents of RMB 18.25 billion ($2.89 billion) compared with RMB 15.11 billion ($2.34 billion) at the end of fiscal 2011.

Operating cash flow grew 6.2% year over year to RMB 70.620 billion ($11.19 billion) in the reported period.

Our Take

China Unicom will continue to benefit from the ongoing development strategy aimed at enhancing its growth and profitability. The company expects to generate higher revenues by accelerating large-scale developments of 3G and fixed-line broadband services.

Nevertheless, high levels of marketing and promotional expenditures would continue to hurt future profitability. Further, we remain concerned about the precipitous decline in the landline business as well as intense competition in the domestic wireless market, in particular from China Mobile (CHL) and China Telecom.

China Unicom retains a Zacks Rank #4 (Sell).

 
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