China Unicom

China Unicom’s latest profit warning could mark the bottom before a turnaround

PUBLISHED : Sunday, 31 July, 2016, 3:00pm
UPDATED : Sunday, 31 July, 2016, 10:30pm

When Wang Xiaochu took over as chairman and chief executive at China Unicom in August last year, he was widely expected to shake up the troubled operator’s network development plans and increase focus on 4G mobile expansion.

Analysts said they expected no quick turnaround effort from Wang, who previously led fixed-line network giant China Telecom in rapidly growing its 4G mobile subscriber base.

Their estimation certainly proved true after Unicom announced on Friday its second consecutive profit warning this year.

In a filing with the Hong Kong stock exchange, Unicom said it expected to report an 80 per cent year on year drop in interim net profit.

That would mark the company’s steepest decline in first-half net profit since its shares were listed in Hong Kong in 2000. Its previous record plunge in profit was 61.8 per cent in the first half of 2010.

Unicom said its projected net profit decrease was mainly caused by higher selling and marketing expenses during the first six months of this year.

The operator also cited higher energy charges and property rentals, as well as the payment of lease fees to China Tower Corp, its infrastructure-sharing joint venture with China Mobile, China Telecom and state asset-management firm China Reform Holding.

Jefferies equity analyst Elaine Lai said in a report that Unicom’s estimated second-quarter net profit reached 918 million yuan (HK$1.07 billion), which would be an improvement over its reported net profit of 480 million yuan in the first quarter.

In April, Unicom warned investors about an 85 per cent plunge in net profit for its first-quarter earnings results.

Chairman Wang is likely to once again charm investors with his confidence that the recovery is well underway
Chris Lane, Bernstein

Chris Lane, a senior analyst at Bernstein, said in a report that earnings growth for Unicom was not expected until next year “at the earliest”.

“China Unicom will continue to post earnings declines for the next few quarters, but the worst should be over and momentum is expected to improve,” Lane said. “Chairman Wang is likely to once again charm investors with his confidence that the recovery is well underway, and that growth will return in 2017.”

Wang said in March that the new year would “mark the beginning of the all-around implementation of our focus strategies”. His laundry list of priorities included accelerating its 4G mobile network roll-out across the country, reshaping its brand image, improving customer retention efforts, and helping upgrade more of its 2G and 3G users to 4G.

Lane said former Unicom chairman and chief executive Chang Xiaobing led “a flawed strategy for 4G deployment” at the company, which focused on 3G network expansion. That resulted in a steady loss of subscribers to China Mobile and China Telecom, which were more aggressive in their 4G roll-out.

An industry reshuffle in August had Chang take the helm at China Telecom, while Wang moved to Unicom. In December, the government announced a probe into Chang for alleged corrupt activities during his time at Unicom.

China Mobile, the world’s largest wireless network operator, had 428.5 million 4G users out of its total 837 million subscribers at the end of June.

Unicom had 260.7 million mobile subscribers, of which 72.4 million are 4G users, in the same period, while China Telecom counted 90.1 million 4G users from its mobile user base of 206.9 million.