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On Aug 29, 2013 we maintained our Neutral recommendation on China Unicom Hong Kong Limited (CHU - Analyst Report). We expect China Unicom to continue with its robust subscriber addition in the near term on the expansion of 3G network and strong sales of iPhone. However, stiff competition and access line erosion are likely to weigh on the stock. This Beijing-based communication service provider holds a Zacks Rank #3 (Hold).

Why Maintained?

China Unicom has enough growth potential thanks to its expansion into new markets and bundled service offerings. The company is expected to lead 3G and integrated innovation as well as focus on operating efficiency over the next few years.

The 3G subscriber base is growing rapidly, attributable to low-cost premium plans and robust iPhone sales in spite of the company losing the exclusive distribution right to China Telecom Corp Limited (CHA - Snapshot Report). 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.

China Unicom is also using its distinguished approach in mobile data services to stimulate data demand and consequently yielding good results. The company continues to focus on capital investment with 80% of the spending targeted at mobile broadband and transmission network, and 20% at the development of 3G infrastructure and IT system.

The company is also expected to grab 4G license, which will be issued in 2013. With Internet penetration still very low, 4G will provide a huge opportunity for China Unicom. Though initially expensive, the rollout of 4G will be accretive to the company’s future growth.

Despite so many positive developments we prefer to remain on the sidelines due to certain risks. Most crucial among these is the cut-throat competitive environment that this company – the second largest operator in China after China Mobile Limited (CHL - Snapshot Report) – operates in.

Moreover, China Unicom’s GSM ARPU (average revenue per user) remains under pressure due to aggressive price competition, while the monthly average churn remains high. China Unicom is also facing significant decline in its access line losses due to the impact of the ongoing fixed-to-mobile substitution.

Other Stocks

A foreign telecom company that looks attractive is SK Telecom Co Ltd. (SKM - Analyst Report). The stock has a Zacks Rank #1 (Strong Buy).

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