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CHU to Hold Back 4G Roll out Cost

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China Unicom Limited (CHU - Free Report) recently announced its plan to hold back its 4G LTE deployment cost for the year, mainly buoyed by 4G LTE spectrum licenses to be issued by the Ministry of Information Industry (MII) in China by the end of 2013.

At the end of the first nine months of 2012, China Unicom has a cash position of $1945 million and a debt of $216 million. The company also plans to slowdown its 4G LTE deployment goals as the company may require more funds in the upcoming 4G LTE license auction.

In China, 3G service was launched in Aug 2009 by China Mobile Limited (CHL - Free Report) , China Telecom Corp. (CHA - Free Report) and China Unicom. China Unicom offered its 3G service through WCDMA technology while the other two China Mobile and China Telecom delivered 3G service through TD-SCDMA and CDMA standard, respectively.

By the end of 2012, these three telecom companies together gained 247.2 million 3G subscribers out of its total 1.12 billion mobile customers. Such growth in 3G subscribers were well supported by higher adoption of smartphones, which in turn gave rise to increased internet usage and higher ARPU growth.

Besides, availability of popular Apple Inc.’s (AAPL - Free Report) new iPhones 5 and Samsung Galaxy S 3, which support 4GLTE connections, will further accelerate data usage. So taking that into consideration, we believe that MII may start 4G spectrum auction by the end of this year.

World’s largest telecom carrier, China Mobile has already set an annual target to roll out 4G LTE service across 100 cities in China and will also deploy 200,000 base stations by the same period. Moreover, the telecom giant also plans to sell at least 120 million handsets based on TD-SCDMA standard by the end of the third quarter of 2013.

In contrast to this move, China Unicom has not done much regarding its 4G LTE deployment goal. Moreover, we believe that most of company’s cash will be utilized to secure 4G licenses, which in turn will further delay 4G LTE rollouts. So we expect that the company will issue more bonds and senior notes as well as expand its debt position in the upcoming years to finance its 4G LTE service deployments.

Currently, China Unicom has a Zacks Rank #2 (Buy).

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