China Unicom Posts `Terrible' 54% Drop in Profit as Marketing Costs Rise

China Unicom (Hong Kong) Ltd. posted a steeper-than-estimated 54 percent drop in profit after the country’s only carrier selling Apple Inc.’s iPhone offered more handset discounts and boosted marketing spending.

Second-quarter net income fell to 1.4 billion yuan ($205 million), from 3.05 billion yuan a year earlier, according to figures derived from first-half earnings reported by the company today. China’s second-largest wireless operator was expected to report profit of 1.45 billion yuan, based on the median estimate of six analysts surveyed by Bloomberg News.

Marketing costs to attract customers exceeded estimates, fueling concern that Chairman Chang Xiaobing is failing to capitalize on the iPhone and a 3G wireless network that analysts say is technologically superior to that of the industry leader. China Mobile Ltd., the nation’s largest phone company, and China Telecom Corp. this month delivered profits that exceeded analysts’ projections.

“Terrible numbers,” said Tucker Grinnan, head of Asian telecommunications research for HSBC Securities Asia Ltd. “Shows real execution gap with China Telecom and China Mobile.”

China Unicom’s addition of 4.88 million users in the second quarter was less than a third of the 15.2 million added by China Mobile in the same period, according to Bloomberg calculations of company data released last month. China Unicom had a total of 157 million mobile subscribers at the end of June compared with 554 million for China Mobile.

Unicom fell 2.1 percent to close at HK$10.34 in Hong Kong trading before the announcement. The shares are little changed this year.

Revenue Gains

Revenue rose 8.6 percent to 41.7 billion yuan, beating the average estimate of 40 billion yuan in the Bloomberg survey.

Selling and marketing expenses in the first half jumped 17 percent to 11.3 billion yuan, the company said. Handset subsidies relating to the 3G business amounted to 1.17 billion yuan in the first six months, exceeding the 1.1 billion yuan estimated by UBS AG analyst Wang Jinjin.

“As the company’s 3G business was still at the initial stage of operation, the revenue from the 3G business could not cover 3G network operation and maintenance, asset depreciation and marketing costs,” Unicom’s Chang said in a statement.

In March, Chang said the carrier would raise handset subsidies “appropriately” this year to attract customers willing to pay to surf the Internet and send e-mails with their phones. The company will spend between 3 billion and 5 billion yuan on handset subsidies this year, President Lu Yimin said in Hong Kong today, reiterating the company’s previous guidance.

IPhone 4

Unicom will sell Apple’s iPhone 4 and iPad tablet computer in the second half, Lu said today, without elaborating.

China Unicom has failed to capture all of the nation’s demand for the iPhone by charging higher prices than those at the so-called gray market.

IPhone sales in China’s gray market exceeded 400,000 during the first half of the year, compared with the 500,000 sold by China Unicom, according to estimates last month by Flora Wu, a handset analyst at BDA China Ltd.

China Mobile, the world’s biggest phone carrier by market value, on Aug. 19 posted second-quarter net income that rose 6.8 percent to 32.2 billion yuan, beating analysts’ estimates.

China Telecom, the nation’s biggest fixed-line carrier and third-largest wireless company, yesterday posted second-quarter profit that beat analyst estimates after the company almost doubled the number of users at its mobile-phone unit. Profit rose 22 percent to 4.54 billion yuan.

“There was some hope earnings would turn around faster, but they have yet to turn around as fast some thought,” Wendy Liu, a Hong Kong-based analyst with Royal Bank of Scotland Group Plc, said of Unicom’s earnings. “People will monitor the progress of 3G.”

--Edmond Lococo, Mark Lee. With assistance from Susan Li in Hong Kong. Editors: Young-Sam Cho, Jonathan Annells

To contact the reporters on this story: Edmond Lococo in Beijing at elococo@bloomberg.net; Mark Lee in Hong Kong at wlee37@bloomberg.net.

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