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On Jun 11, we maintained our Neutral recommendation on China Unicom (Hong Kong) Limited (CHU - Analyst Report). The company’s significant progress in expanding economies of scale in 3G, broadband network and other businesses will likely lead to improvements in its overall revenue and earnings. However, certain risk factors are likely to weigh on the stock in the near term. The Beijing-based communication service provider holds a Zacks Rank #2 (Buy).

Why Maintained?

China Unicom has enough growth potential thanks to its expansion into new markets and bundled service offerings. The company is expected to achieve a leading position in 3G and integrated innovation, and focus on its operating efficiency over the next few years. We expect to see higher profitability in 2013, backed by new developments and reforming moves. The company continues to focus on capital investment with 80% of the spending targted at mobile broadband and transmission network, and 20% at the development of 3G infrastructure and IT system.

We believe that China Unicom will accomplish its set target of selling 90 million units of 3G smartphones in 2013, which is nearly 50% higher than last year. The 3G subscriber base is growing rapidly, attributable to more iPhone sales and offering of low-cost premium plans. The company is consistently teaming up with international big brands like Nokia Corporation (NOK - Analyst Report), Research In Motion Limited and Samsung to expand its 3G business that stands as the prime contributor to its revenue growth. These efforts will eventually leading to higher average revenue per user.

Apart from the strength in the wireless division, China Unicom is also fortifying its position in the fixed-line business. The company is poised to benefit from development and enhancement of fiber optic service in its broadband business. Lucrative acquisitions are also aiding the company in gaining major control over the wireline sector in the domestic arena.

Despite these positives, we prefer to stay on the sidelines considering a rise in the monthly average churn stemming from a highly competitive environment, constant declines in local access lines, steep operating expense and a leveraged balance sheet.

Other Stocks

Foreign telecom companies worth taking note of include Nippon Telegraph and Telephone Corporation (NTT - Snapshot Report) and Shenandoah Telecommunications Co. (SHEN - Snapshot Report). Both the stocks carry Zacks Rank #1 (Strong Buy).
 

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