20151209-美银美林-中国联通-00762.HK-Launching_4G+_strategy_to_drive_turnaround_11页_647kb

China Unicom (CU) 4G+ Strategy and Investment Summary

Core Content Overview

China Unicom (CU) launched its "WO 4G+" brand and strategy on December 8, aiming to enhance its market position through improved 4G network quality, coverage, and service differentiation. The strategy focuses on accelerating 4G deployment, promoting network sharing with China Telecom (CT), and increasing market share in the handset segment. The company also plans to expand its self-owned stores and strengthen its ecosystem partnerships.

Main Points

4G+ Strategy Highlights

• Network Quality & Coverage: CU will accelerate 4G network expansion and implement network sharing with CT to improve coverage and reduce costs.
• Service Differentiation: CU will offer higher data speeds (up to 300Mbps) and improved voice quality through technologies like VoLTE and HDVoice.
• Handset Market Share: CU plans to sell 80 million 4G+ handsets in 2016 with a RMB56bn subsidy, targeting a >40% market share in mid-high-end models.
• Store Expansion: The company aims to increase its self-owned stores from 5,000 to 20,000 by 2017 with unified chain operations.
• Channel Partnerships: CU will leverage its B2B platform, WOego.cn, to drive 150 million handset sales in 2016.

Operational Turnaround in 2016

• The new management is decentralizing sales and marketing functions to empower local teams, which should improve execution and operational performance.
• The report expects:
  • Mobile net adds to turn positive in 2Q16
  • Mobile service revenue to show positive growth in 3Q16
  • Net profit to turn positive in 4Q16 and 2017

Cost Savings from 4G Network Sharing

• CU and CT are forming joint teams to implement network sharing at various levels (HQ, province, city).
• By sharing 4G BTS and enabling roaming, they could save 400K BTS in FY16-17.
• Estimated Capex Savings: RMB60bn in FY16-17
• Estimated Opex Savings: RMB20bn in FY16-17 (from depreciation, tower leasing, and other costs)
• These savings could increase net profit by 12% in FY16 and 33% in FY17

Key Financial Forecasts (Dec 2015)

Valuation Metrics (Dec 2015)

Investment Rationale

• Valuation: At <0.8x P/B and <4x EV/EBITDA, the stock is considered undervalued.
• Turnaround Potential: The 4G+ strategy and decentralization are expected to drive operational improvements in 2016.
• TowerCo Benefits: As the largest beneficiary of the tower spin-off, TowerCo could significantly boost future value.
• Market Position: The company is the second-largest mobile and fixed-line operator in China with a strong subscriber base.

Price Objective

• HK$16 (US$20.65 ADR) based on SOTP valuation, including HK$10.3 for the telco business and HK$5.7 for TowerCo shares.
• Upside Risks: Better-than-expected 3G and 4G adoption, data ARPU growth, and improved tower monetization.
• Downside Risks: Intense competition, ARPU decline, slower mobile data penetration, and higher subscriber churn.

Analyst Certification

• Sydney Zhang, CFA, certifies that the views expressed in this report reflect her personal views and are not influenced by compensation.

Company Sector

• Telecom Services - Wireless/Cellular

Key Financial Metrics

Conclusion

The report maintains a Buy rating on China Unicom due to its low valuation, operational turnaround expectations, and potential value from TowerCo. Despite short-term challenges and investor uncertainty, the report suggests that the stock could outperform once the 4Q results reflect the turnaround and policy clarity improves.