China Unicom issues its third straight profit warning this year

China Unicom, the country’s second-largest wireless network operator, has issued another profit warning to investors ahead of its latest quarterly earnings announcement on Friday.

In a filing to the Hong Kong stock exchange after the close of trading on Tuesday, Unicom estimated that its net profit for the nine months to September 30 was down 80.6 per cent year-on-year to 1.59 billion yuan (HK$1.83 billion).

The operator mainly attributed the sharp decline to an increase in selling and marketing expenses, as well as the addition of tower usage fees, higher energy charges and property rentals.

It pointed out, however, that the shortfall was a “significant improvement” from the 3.36 billion net loss recorded in the second half of last year.

“We think profit recovery for China Unicom will take at least two years,” Elaine Lai, an equity analyst at Jefferies, said recently in a report.

It marked Unicom’s third consecutive profit warning this year.

The company said it had “strived to mitigate its underlying shortcomings with positive business momentum”, while its mobile business “has achieved initial success in overcoming operational challenges.”

The operator said it expected to have reached 262 million mobile subscribers as of September 30, representing a net addition of 9.76 million during the past nine months.The total number of Unicom’s 4G subscribers is estimated to have reached 88.90 million by the end of September.

“For September alone, the net addition of 4G subscribers is expected to reach approximately 6.05 million,” the company said in its filing.

Chris Lane, a senior analyst at Bernstein Research, said on Tuesday that Unicom’s 4G subscriber numbers were good, “but it clearly came at the cost of higher sales and marketing”.

“We are still expecting to see incremental improvement from service revenue when Unicom reports its results on Friday,” Lane said.

Bernstein Research had earlier forecast Unicom’s third quarter net profit to hit 1.08 billion yuan, down from 1.19 billion yuan a year ago. It estimated the operator’s net profit for the nine months to September would be 2.51 billion yuan, compared with 8.18 billion yuan the previous year.

Jefferies’ Lai said in her report that Unicom had lost “high-value subscribers” over the past two years to China Mobile, which was ahead in 4G network development on the mainland.

Unicom said it was committed to driving a gradual turnaround of its business through the execution of its “focus strategies”, innovation and cooperation in network development.

Its focus strategies include accelerating 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.

Chairman and chief executive Wang Xiaochu said in August that the company needed to expedite 4G network construction to keep pace with rivals China Mobile and China Telecom.

Wang added that Unicom has about 30 billion yuan earmarked for 4G network deployment in the second half, which would enable it to have a total of 680,000 4G base stations by the end of this year.

In January, Unicom and China Telecom agreed to an ambitious cooperation deal that aims to lower their capital spending by sharing costs on new rural 4G network deployments.