TELECOMS: Unicom Becomes Own Top Fan With Big Share Buyback
Bottom line: The latest negative headlines on Unicom and its confusing earnings reflect its broader dysfunction and a lack of investor interest in its stock, though a major new share buyback could provide a good short-term buying opportunity.
I’ve always wondered which investors were fans of China Unicom (HKEx: 762; NYSE: CHU), which based on media and its own earnings reports is easily the most disorganized and dysfunctional of the nation’s big 3 telcos. Now I’m finally learning the answer to that question, with Unicom’s announcement of a major plan to buy back up to 10 percent of its Hong Kong-listed shares. That would equate to a massive $3.6 billion worth of stock, based on the company’s current market value, in what would easily be one of the biggest share buybacks I’ve ever seen.
Unicom announced the plan as its name bubbled around in 2 other negative headlines, one involving a corruption scandal and the other about criticism from national broadcaster CCTV on its widely watched annual Consumer Rights Day program. Neither of these headlines is really that important in the big picture for a company of Unicom’s size and background, but they do reaffirm the general impression that this is not a very exciting company to watch.
Let’s delve right into the headlines, starting with the massive share buyback that was announced just after the company released its latest quarterly and annual results that showed its profit jumped 16 percent even as revenue declined 3 percent. (company announcement) That kind of conflicting signal in its financials has become a hallmark of Unicom over the last 5 years, in sharp contrast to rivals China Mobile (HKEx: 941; NYSE: CHL) and China Telecom (HKEx: 728; NYSE: CHA), which usually report more consistent trends in their results.
But investors barely had time to get confused with Unicom’s latest results before the company issued another announcement with word of its aggressive share buyback plan. (company announcement) The plan is technically just a proposal at this point, but is almost certain to get approval from the company’s state-run parent, which is also its controlling stakeholder.
The company authorized an identical share buyback last year, though the latest announcement didn’t disclose how much of that buyback was actually exercised. If we assume that perhaps half of last year’s buyback was executed, then the latest announcement means that Unicom will have bought back up to 15 percent of its shares by this time next year. That’s a huge number by any standard, and probably testifies to the fact that big institutional investors have little or no interest in this stock.
Unicom’s shares have actually performed reasonably well over the last 12 months, gaining 13 percent over that period. The gains are far less than those for China Mobile, which soared 47 percent last year on big hopes for its new 4G service. But the rise easily outpaced China Telecom, which rose only 2 percent as its subscriber growth stalled.
It’s worth pointing out that Unicom’s aggressive share buyback was probably a major support for the stock last year. Such buybacks are relatively common in the US, though they are usually much smaller, mostly in the $20-$100 million range. By comparison, Unicom’s buyback could technically be worth around $7 billion if it purchased the full 20 percent of the stock it has authorized under its program over the 2-year period.
At the same time, we should quickly mention the latest corruption scandal that is gripping Unicom, which has recently grown to include a top official from telecoms equipment maker ZTE (HKEx: 763; Shenzhen: 000063). (Chinese article) At around the same time, the company was criticized over the weekend in the annual CCTV Consumer Rights program, due to illegal practices at some of its regional offices in implementing a nationally mandated “real name registration” system. (Chinese article)
Neither of these smaller stories looks like major cause of concern, though they do reflect Unicom’s broader state of dysfunction. That would normally lead me to advise staying away from the company’s stock. But in this case this massive new buyback program could ultimately support the shares for at least the next year, and perhaps provide a nice short-term buying opportunity for opportunistic investors.
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