China Unicom

China Unicom
(0762.HK / 762 HK)
Smaller size, but potential M&A provides
attractive upside
■ With their abundant growth and a low penetration level, we rate the Chinese
mobile operators with a score of 4 out of a possible 5.
■ There is a greater chance of an industry restructuring and 3G licensing. This
should see new entrants entering the mobile market. On account of this, we
rate Unicom 3 out of 5 on the competitive landscape measure.
■ Whilst Unicom.s focus on profitability is starting to bear fruit, juggling and
allocating limited resources between the two networks will remain
challenging, in our view. We also do not believe that Unicom will be able to
challenge China Mobile.s position or defend its market share against new
entrants. Thus, we give it a lower score of 3 on this category.
■ The mobile tariff has also been declining from aggressive tariff cuts by China
Mobile. The introduction of calling party pays and lower roaming fees should
lower mobile pricing further. This also led Unicom to follow suit. Therefore,
we rate Unicom 2 out of 5 on this measure.
■ Although we expect to see continual improvement in Unicom.s earnings and
ROIC profile, the speed of the turnaround is harder to predict. Therefore, we
rate Unicom 2 on this measure.
■ Unicom is trading at a lower EV/EBITDA multiple than China Mobile and the
regional average. However, EBITDA does not capture the very high capex
that its parent has invested (or its low returns on capital). On a P/E basis,
Unicom is more expensive than China Mobile and the region. Hence, we
give it a low score of 2 out of 5. That said, we believe that its share price
performance should benefit from a potential break-up scenario.