CHINA UNICOM's 'hell-bent focus' on code division multiple access (CDMA) technology is eroding its fundamentals, says DBS Vickers Securities.
Aggressive subsidies for handsets have hurt cash flow and may lead to a big write-off, it warns.
In a bid to reach its subscriber target of seven million last year, it spent 12 billion yuan (HK$11.3 billion) on handsets - 67 per cent of its CDMA network capital expenditure.
If all handset costs are borne in the same fiscal year, China Unicom could see a net pro-forma loss of 789 million yuan last year, instead of a 5.2 billion yuan profit.It is also concerned over the decline in average revenue per user (arpu) of new CDMA subscribers since the fourth quarter of last year. Arpu soared in the first three quarters amid rising usage, but dropped off in the fourth quarter.
The brokerage currently has a 'fully valued' rating on the stock, with negative implications, while it has a 'buy' recommendation on China Mobile (Hong Kong) for its better earnings visibility and valuation.
It says China Unicom's gearing could end up exceeding 50 per cent this year.
The stock was trading at HK$3.92 on Friday, compared with DBS Vickers Securities' one-year price target of HK$3.70.