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● Unicom recorded total cellular net additions of 1.901 mn in
December, up 10.3% from 1.724 mn added in November. More
importantly, Unicom’s 3G net additions rose yet again to 1.284 mn
in December, up from 1.120 mn in November.
● We believe this was due to the recent launch of the iPhone 4, the
launch the “C”-class packages on 10 December 2010, and the
launch of several attractive but mid-priced (i.e., Rmb1,000-3,000)
W-CDMA smartphone models; this access to the global W-CDMA
handset and equipment chain is in fact Unicom’s key competitive
advantage.
● We note that Unicom tends to underperform as quarterly results
announcements approach, due to an understandable lack of
confidence in cost control. A change in subsidy accounting policy
could reduce this 'results risk’.
● Our OUTPERFORM rating is based on rising revenue share, and
the belief that on current price points and subsidy schemes, each
new customer is actually value accretive.
Unicom 3G net additions rise to 1.3 mn…
Unicom recorded total cellular net additions of 1.901 mn in December,
up 10.3% from 1.724 mn added in November. More importantly,
Unicom’s 3G net additions rose yet again to 1.284 mn in December,
up from 1.120 mn in November, 1.102 mn in October, 1.043 mn in
September and 1.01 mn in August. We believe this was due to the
recent launch of the iPhone 4, the launch the “C”-class packages on
10 December 2010, and the launch of several attractive but midpriced
(i.e., Rmb1,000-3,000) W-CDMA smartphone models; this
access to the global W-CDMA handset and equipment chain is in fact
Unicom’s key competitive advantage versus the other players.
As previously highlighted, Unicom’s 3G subscribers are what we
would define as “medium-heavy” users, with ARPU holding at the
Rmb124/month level in 3Q10, much higher than the Rmb40
generated by Unicom’s 2G subscriber base during the quarter. Thus,
Unicom’s continued growth in 3G subscribers is contributing to betterthan-
expected cellular revenue growth (we had revised up our FY10E
cellular revenue by 1.6%, and our FY11E cellular revenue by 1.3%,
following 3Q10 results on 29 October 2010). The key question is thus
the level of subsidies used to attract these subscribers. Our
calculations suggest at current tariff levels (including the recently
launched “C”-class packages) and given the subsidies available, each
of these 3G subscribers looks to be value-accretive (DCF-enhancing).
Given this dynamics, it is logical for the stock market to focus on
Unicom’s 3G net addition numbers as a leading indicator for revenue
and, given very high operational gearing due to high depreciation
charges, net profit growth.
…and a change in subsidy accounting policies could
reduce headline earnings risks associated with this growth
It will also be interesting to see whether Unicom looks to amend its
accounting policies in the 4Q10 results announcement. At present for
subsidised customers China Unicom immediately expenses the entire
subsidy in the quarter the customer is added, but books revenue as it
is received across the contract period (normally two years, or eight
quarters). It is possible that China Unicom may in future amortise
subsidies over the length of the contract. This change could be
justified on the ‘matching’ principle of accounting, but of course it
would clearly be a much less conservative accounting policy.
We note that Unicom tends to underperform as quarterly results
announcements approach, even if its share price has performed well
during the quarter on the basis of improving 3G net additions. We
believe this is because the market (understandably) lacks confidence
in Unicom’s cost control. The market also comprehends that the very
low net margin means that a small “miss” on EBITDA could result in a
very material “miss” on quarterly net profit.
Of course a change in accounting policies, with no change in cash
flow, has no impact on valuation. However, we expect Unicom to
spend Rmb5.2 bn on subsidies in FY10 and Rmb7.9 bn in FY11, and
resulting net profit of Rmb4.2 bn in FY10 and Rmb6.9 bn in FY11. An
amortisation policy could increase FY10 reported net profit by 44.4%
and FY11 reported net profit by 14.4%. If subsidies in FY10 and FY11
are higher than our forecast, the benefit to reported net profit would of
course be even larger. Such a change in policy might thus reduce the
“results risk” of holding Unicom for shorter-term investors.
Separately, China Unicom’s fixed-line subscriber base contracted by
1.913 mn in December, much higher than the 0.734 mn reduction in
November, as the clean-up/winding down of the Xiaolingtong limited
mobility subscriber base accelerated at year-end.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
● Unicom recorded total cellular net additions of 1.901 mn in
December, up 10.3% from 1.724 mn added in November. More
importantly, Unicom’s 3G net additions rose yet again to 1.284 mn
in December, up from 1.120 mn in November.
● We believe this was due to the recent launch of the iPhone 4, the
launch the “C”-class packages on 10 December 2010, and the
launch of several attractive but mid-priced (i.e., Rmb1,000-3,000)
W-CDMA smartphone models; this access to the global W-CDMA
handset and equipment chain is in fact Unicom’s key competitive
advantage.
● We note that Unicom tends to underperform as quarterly results
announcements approach, due to an understandable lack of
confidence in cost control. A change in subsidy accounting policy
could reduce this 'results risk’.
● Our OUTPERFORM rating is based on rising revenue share, and
the belief that on current price points and subsidy schemes, each
new customer is actually value accretive.
Unicom 3G net additions rise to 1.3 mn…
Unicom recorded total cellular net additions of 1.901 mn in December,
up 10.3% from 1.724 mn added in November. More importantly,
Unicom’s 3G net additions rose yet again to 1.284 mn in December,
up from 1.120 mn in November, 1.102 mn in October, 1.043 mn in
September and 1.01 mn in August. We believe this was due to the
recent launch of the iPhone 4, the launch the “C”-class packages on
10 December 2010, and the launch of several attractive but midpriced
(i.e., Rmb1,000-3,000) W-CDMA smartphone models; this
access to the global W-CDMA handset and equipment chain is in fact
Unicom’s key competitive advantage versus the other players.
As previously highlighted, Unicom’s 3G subscribers are what we
would define as “medium-heavy” users, with ARPU holding at the
Rmb124/month level in 3Q10, much higher than the Rmb40
generated by Unicom’s 2G subscriber base during the quarter. Thus,
Unicom’s continued growth in 3G subscribers is contributing to betterthan-
expected cellular revenue growth (we had revised up our FY10E
cellular revenue by 1.6%, and our FY11E cellular revenue by 1.3%,
following 3Q10 results on 29 October 2010). The key question is thus
the level of subsidies used to attract these subscribers. Our
calculations suggest at current tariff levels (including the recently
launched “C”-class packages) and given the subsidies available, each
of these 3G subscribers looks to be value-accretive (DCF-enhancing).
Given this dynamics, it is logical for the stock market to focus on
Unicom’s 3G net addition numbers as a leading indicator for revenue
and, given very high operational gearing due to high depreciation
charges, net profit growth.
…and a change in subsidy accounting policies could
reduce headline earnings risks associated with this growth
It will also be interesting to see whether Unicom looks to amend its
accounting policies in the 4Q10 results announcement. At present for
subsidised customers China Unicom immediately expenses the entire
subsidy in the quarter the customer is added, but books revenue as it
is received across the contract period (normally two years, or eight
quarters). It is possible that China Unicom may in future amortise
subsidies over the length of the contract. This change could be
justified on the ‘matching’ principle of accounting, but of course it
would clearly be a much less conservative accounting policy.
We note that Unicom tends to underperform as quarterly results
announcements approach, even if its share price has performed well
during the quarter on the basis of improving 3G net additions. We
believe this is because the market (understandably) lacks confidence
in Unicom’s cost control. The market also comprehends that the very
low net margin means that a small “miss” on EBITDA could result in a
very material “miss” on quarterly net profit.
Of course a change in accounting policies, with no change in cash
flow, has no impact on valuation. However, we expect Unicom to
spend Rmb5.2 bn on subsidies in FY10 and Rmb7.9 bn in FY11, and
resulting net profit of Rmb4.2 bn in FY10 and Rmb6.9 bn in FY11. An
amortisation policy could increase FY10 reported net profit by 44.4%
and FY11 reported net profit by 14.4%. If subsidies in FY10 and FY11
are higher than our forecast, the benefit to reported net profit would of
course be even larger. Such a change in policy might thus reduce the
“results risk” of holding Unicom for shorter-term investors.
Separately, China Unicom’s fixed-line subscriber base contracted by
1.913 mn in December, much higher than the 0.734 mn reduction in
November, as the clean-up/winding down of the Xiaolingtong limited
mobility subscriber base accelerated at year-end.
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