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China's second largest mobile operator China Unicom (CHU - Analyst Report) added 3.232 million subscribers in January, up 1.62% from the prior month. This takes the company’s total customer base to 202.89 million.

The company’s GSM subscriber base rose to 159.823 million with the net addition of 0.182 million customers, while its 3G subscriber base increased to 43.069 million with net addition of 3.05 million in January. China Unicom added less 3G subscribers in November compared to 3.48 million last month.

The company’s 3G business is performing well and the momentum is expected to continue well into the future. 3G remains a compelling opportunity and represents the single biggest driver of the company’s long-term growth.

We believe China Unicom will continue to make significant progress in expanding economies of scale in 3G, broadband and other businesses that will likely improve its overall revenue and profitability. The company is offering 3G services in collaboration with Research In Motion Limited’s BlackBerry phones. Additionally, the company has the exclusive right to distribute Apple Inc.’s (AAPL - Analyst Report) iPhone in China.  

China Unicom’s 3G and fixed-line broadband businesses have been ramping up since last year. However, these businesses are expected to remain under pressure due to increasing depreciation and amortization expenses; network, operation and support expenses; as well as selling expenses for the remainder of this year. We believe these expenses will have an adverse effect on the company’s future profitability, free cash flow and margins.

Further, higher handset subsidies and increased costs related to 3G service deployments will continue to be headwinds for the company. Despite these challenges, we expect China Unicom to benefit from new users this year.

China Unicom is offering handsets at subsidized rates with lower 3G service plans for multi-year contracts to retain existing customers and add new ones. This will weigh on the company’s future overall average revenue per user. Moreover, China Unicom remains significantly challenged by aggressive nationwide 3G service rollouts by its peers China Mobile (CHL - Snapshot Report) and China Telecom Corp. (CHA - Snapshot Report).

We currently have a long-term Neutral rating on China Unicom. The stock retains a Zacks #3 (Hold) Rank for the short term (1–3 months).

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