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Analyst Blog

On May 26, 2014, we issued an updated research report on China Unicom Hong Kong Limited (CHU - Analyst Report) – the second largest wireless operator in China. The company posted strong first-quarter 2014 results with both the top and the bottom line improving year over year on strong contribution from its 3G and broadband businesses. CHU currently carries a Zacks Rank #4 (Sell).

The company also won the LTE-TDD (Time Division Duplex) license in Dec 2013 and subsequently launched the service in Mar 2014. China Unicom wants to focus on the globally accepted FDD (Frequency Division Duplex) technology for its 4G service. The company could get a major shot in the arm if it is able to quickly obtain the FDD-LTE license, which according to media reports is expected within the first half of 2014.

China Unicom has achieved a leading position in 3G and integrated innovation, and plans to focus on growth and efficiency over the next few years. 3G remains a compelling opportunity and represents the single biggest driver of the company’s long-term growth. The company exited the first quarter of 2014 with approximately 132.30 million 3G/4G subscribers with mobile revenues contributing around 63.4% to its total service revenue.

China Unicom continues to operate in a competitive landscape, which keeps its GSM ARPU under pressure due to an aggressive price war. Apart from 3G, the competitive landscape in the Chinese wireless market has also intensified with the distribution of 4G licenses by the Chinese government and big rival China Mobile Ltd. (CHL - Snapshot Report) aggressively rolling out its 4G services.

As the company is focused on having a 4G network based on FDD-LTE technology, we believe the investment made by China Unicom on rolling out a TD-LTE based service might not be beneficial in the long run as it could lead to higher capital investment for the carrier.

Key Picks from the Sector

Other better-ranked stocks within the industry are KT Corp. (KT - Snapshot Report) and Kyocera Corp. (KYO - Snapshot Report). KT and KYO currently carry a Zacks Rank #2 (Buy).

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