SOE REFORM
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China Unicom

Unicom poised to get private-sector investor, pioneering next stage of China’s SOE reform

Parent China United Network Communications plans to push forward with implementing the central government’s ‘mixed-ownership’ reform plan

PUBLISHED : Wednesday, 05 April, 2017, 11:17am
UPDATED : Thursday, 06 April, 2017, 7:02am

China Unicom, operator of the world’s sixth-largest mobile network by subscribers, is poised to get a strategic private-sector investor, making the company a major test case in the country’s ambitious reform of state-owned enterprises (SOEs).

In a regulatory filing late on Wednesday, Unicom said its parent, China United Network Communications, aims to push forward with implementing the central government’s so-called mixed-ownership reform plan involving investors from the mainland’s private sector.

The company said this “may potentially involve a change in the shareholding structure” of its Shanghai-listed parent.

“As the related plan ... is still under further deliberation, these matters are still subject to substantial uncertainty,” it said.

With a charismatic industry leader at its helm, the country’s second-largest wireless network subscriber base and an aggressive growth strategy, Unicom will likely provide Beijing with a solid reference case for its mixed-ownership scheme for SOEs.

Unicom reported that its total mobile subscribers reached 265.6 million as of February 28, which included 116.1 million 4G users.

Its shares rose 4.4 per cent on Monday before the Ching Ming public holiday in Hong Kong, advancing to a 20-month high of HK$10.86 before trading was halted on Wednesday pending that announcement. It has applied to resume trading from Thursday.

Shares of parent China United Network rose 1.8 per cent to 7.47 yuan in Shanghai on Friday before the market closed for the mainland’s own Qingming public holidays. Trading of its shares was also halted on Wednesday.

In December, the central government said the mixed-ownership scheme is a key breakthrough point for SOE reform, and substantial progress needs to be made in seven industries, including telecommunications.

Unicom had already foreshadowed that move in October last year, when it said that parent China United Network was among the first batch of SOEs selected by the National Development and Reform Commission to implement the central government’s mixed-ownership reform plan.

That started speculation about the potential for China’s three internet giants – Baidu, Alibaba Group Holding and Tencent Holdings – to invest in Unicom. Alibaba is the owner of the South China Morning Post.

If the strategic investor turns out to be one or more of the Chinese internet industry’s Baidu-Alibaba-Tencent triumvirate, “then the market upside could be significant”, Bernstein Research senior analyst Chris Lane said.

“We expect any investment to include at least a portion of new equity, which will be used to reduce debt,” he said.

At the company’s annual financial results press conference in Hong Kong last month, Unicom chairman and chief executive Wang Xiaochu declined to comment on the state of negotiations, but pointed out that the mixed-ownership reform is a key policy initiative of the central government this year.

“The chairman highlighted that the biggest impact [for Unicom] would be in building a more market-oriented set of systems, which include budgeting, appraisal and compensation,” Lane said. “When the compensation systems are aligned with market-driven outcomes then people will follow.”

If Unicom announces a mixed ownership reform decision, Jefferies equity analyst Edison Lee said the focus will be on the deal’s structure and how it can help the operator.

“The most important features in the mixed-ownership reform we would like to see are stock options and freedom to pay, hire and fire,” Lee said.

Unicom last month posted widely expected downbeat earnings for 2016, as Wang burnished investors’ hope for a turnaround this year.

The operator reported a 94 per cent drop in net profit last year to 625 million yuan (US$90.7 million), down from 10.6 billion yuan in 2015, on higher network, marketing support and other operating expenses.

That steep percentage decline was in line with Unicom’s profit warning to investors in January, but the annual profit was below market analysts’ consensus estimate of 896.8 million yuan.

Revenue slipped to 274.2 billion yuan, compared with 277 billion yuan a year earlier. That was on the low side of brokers’ forecast of between 270.5 billion yuan and 287 billion yuan in revenue.

“The worst time for China Unicom has passed,” said Wang.