China Unicom (600050.SH, 0762.HK, CHU.NYSE), the country’s number two mobile phone carrier, has long lived in the shadow of China Mobile (0941.HK, CHL.NYSE). Now Unicom hopes its 3G services will wrest market share from its rival and also offset the decline of its fixed-line business. Observers aren’t convinced.
"We don’t think 3G has made much of a difference," said Francis Cheung, head of regional telecom research at CLSA in Hong Kong who is negative on the stock. "I think China could skip 3G altogether and go to 4G. 3G could ultimately be a big waste of money."
Soon to be out-of-date technology isn’t Unicom’s only problem. The firm said it will provide 3G services to 335 cities by the end of 2009, up from the previously announced 284, but analysts say it might not have enough base stations to offer adequate coverage. The situation is reminiscent of 2003-2004 when Unicom tried to market its CDMA technology as an upscale offering to its GSM network. The strategy failed to deliver greater market share.
There are other indications the company might not have total faith in its 3G service. Unicom is not giving any 3G subscriber targets or saying whether it will be able to stabilize the drop in its fixed line customers. These factors were part of the reason Macquarie analysts Tim Smart and Bin Liu reduced their 2009 earnings forecast by 3.7% and their target price on the company’s shares from HK$9.80 (US$1.26) to HK$9.65 in a recent report.
It is a puzzling state of affairs, given that Unicom’s 3G offering is based on WCDMA technology, the standard used by many US and European mobile carriers. The company should be able to provide a wider variety of handsets than China Mobile, which employs the domestic 3G standard, TD-SCDMA. Yet Unicom only offers 10 unsubsidized 3G handsets, about half the number of China Mobile.
Unicom is banking on being the only Chinese carrier with Apple’s iPhone to make up for its paucity of handsets, but that may backfire. The Unicom brand is associated with low-quality service and even the high-profile iPhone – which is likely to be expensive, based on how it is priced elsewhere – may not be enough to overcome consumer perceptions. Factor in the thriving gray-market iPhones being used in China (there are said to be over 1 million) and the benefit for Unicom may just not be there.
Into the unknown
"I think they can get some subscribers, but whether it becomes a profitable deal remains to be seen," said a Hong Kong-based telecom analyst who has a sell rating on the stock and wished to remain anonymous.
That prediction will be confirmed in the coming months. "I think everyone is waiting to see the 3G launch on September 28 and whether that will help with subscriber numbers," said Wendy Liu, an analyst at RBS in Hong Kong.