China Unicom tipped for modest recovery in third quarter
Speculation rife on whether major internet company will become a strategic investor on back of government’s mixed ownership reform programme
China Unicom, the world’s sixth largest mobile network operator by number of subscribers, is expected to show a modest recovery when it reports third-quarter earnings on Friday, analysts said.
That could temper recent speculation on how parent China United Network Communications Group will push forward the government-sanctioned “mixed-ownership reform plan” involving potential strategic investors.
In a filing with the Hong Kong stock exchange on October 10, Unicom said its parent was included in the first batch of state-owned enterprises tasked last month by the National Development and Reform Commission to implement the plan.
The NDRC meeting on September 28 was held more than a month after Unicom posted a record 79.6 per cent fall in interim net profit to 1.43 billion yuan, down from 6.99 billion yuan in the same period last year, due to higher sales and marketing costs as well as network, operations and support expenses.
It was the company’s steepest six-month profit plunge since reporting a 61.8 per cent year on year drop to 2.53 billion yuan in the first half of 2010.
Interim revenue slipped 3.1 per cent to 140.25 billion yuan from 144.68 billion yuan a year earlier.
Bernstein Research estimated that Unicom would post a 1.08 billion yuan net profit in the three months to September, compared with 1.19 billion yuan a year ago.
Third-quarter revenue is predicted to reach 71.74 billion yuan, up from 67.23 billion yuan the previous year.
“Further announcements on reform may improve sentiment on the stock. But fundamentals
are still weak,” said Elaine Lai, an equity analyst at Jefferies. “We think profit recovery for China Unicom will take at least two years.”
Daiwa Capital Markets analyst Ramakrishna Maruvada said in a report that one of the objectives of the mixed-ownership programme was to enhance state-owned enterprises’ operating efficiency and boost their competitiveness.
“We view this development as a positive share price catalyst, even though details remain sketchy for now,” Maruvada said.
The mixed ownership reform plan may entail asset sales to investment funds, employee stock options, the public listing of the whole state-owned enterprise or its core assets, and the introduction of
Speculation has been rife about the potential for China’s three internet giants – Baidu, Alibaba Group and Tencent Holdings – to invest in Unicom. Alibaba owns the South China Morning Post.
Nomura analyst Joel Ying said in a report that China’s telecommunications industry has developed the world’s largest 4G infrastructure, but has failed to establish viable mobile internet services.
“If China Unicom can co-operate with some internet companies, it may be able to accelerate development in businesses such as cloud computing, big data analysis and financial technology,” Ying said.
Bernstein senior analyst Chris Lane, however, said the question for Baidu, Alibaba or Tencent would be what any of them would gain from investing in Unicom.
“Why buy a complicated, high capital expenditure business when you can easily deliver your online services ‘over-the-top’ to your customers. I don’t see how owning Unicom would change anything for them,” Lane said.
Over-the-top (OTT) applications like Netflix on-demand streaming video deliver services over the internet that bypass traditional commercial distribution via telecommunications, cable or satellite network operators.
Unicom’s share price was up 2.81 per cent on Friday to close at HK$9.88.