Unicom Spends, But Can It Earn? 联通拟增加开支加强3G业务效果有待观察

By newsdoug on March 23, 2012

Everyone is looking closely at the latest results from China Unicom (HKEx: 762; NYSE: CHU) for signs that China’s second largest mobile carrier has finally put its house in order and can start to generate some excitement, after a dismal 2011 that saw it plagued by mismanagement issues. The results from last year reflect that turmoil, which saw the company fail to gain market share and post weak growth despite being given a big opportunity by the Chinese government to boost its position against its much bigger rival China Mobile (HKEx: 941; NYSE: CHL). Unicom reported its profit rose 14 percent for the year, while revenue was up 22 percent, both below market consensus, especially the profit figure. (English article; results announcement) In fact, the company should be posting much stronger growth as its numbers are coming off a relatively small base, and its 3G network is far superior to China Mobile’s for technological reasons. But the company has failed to capitalize on that technological advantage, with the result that its market share in 3G remained relatively steady in 2011, even as China Mobile’s share declined due to steady gains by the market’s smallest player, China Telecom (HKEx: 728; NYSE: CHA), which embarked on an aggressive marketing campaign for its own 3G network. Based on all the media reports last year, Unicom seemed to suffer from management turmoil throughout many of its major markets, as it tried to fill top positions and consistently underestimated handset demand for certain 3G models, resulting in shortages and lost sales opportunities. Among all the figures and discussion in the latest results, the most interesting seems to be Unicom’s disclosure that its margins will come under continued pressure this year due to high marketing costs, as it tries to improve its 3G network and sign up more subscribers through aggressive promotions including big handset subsidies. It said it expects its 3G business to become profitable during the year, with handset subsidies rising to about 18 percent of 3G revenue. (Chinese article) I’m not opposed to rising marketing costs, as these are largely a one-time spending item that can produce long-term revenue if Unicom can attract more new subscribers and convince them to use its service for years to come. But big spending doesn’t necessarily translate to big revenue gains, and I’m certainly not convinced that Unicom can improve its market position simply by spending more. The company’s past year of poor management is the current standard that the market expects from this company, and it desperately needs to show it can change that to make its new spending binge produce results. Otherwise, 2012 could become just another lost year for Unicom, with expenses rising but little or no growth on the top and bottom lines.

Bottom line: Unicom’s spending boost to build its 3G business in 2012 has less than a 50 percent chance unless the company can clear up its management problems.

Enjoy this blog? Please spread the word :)