China Unicom Profit Beats Estimate as Cheap Phones Cap Costs

China Unicom (Hong Kong) Ltd. (762), the nation’s second-largest mobile-phone company, posted second- quarter profit that beat analysts’ estimates as a range of cheap handsets capped the cost of luring smartphone users.

Net income fell 2 percent to 2.42 billion yuan ($381 million), from a restated 2.47 billion yuan a year earlier, based on figures derived from half-year earnings the Beijing- based company reported today. That compares with the 2.1 billion-yuan median of five analysts’ estimates in a Bloomberg News survey.

Chairman Chang Xiaobing has turned to cheaper smartphones from Chinese suppliers Lenovo Group Ltd. (992), ZTE Corp. (000063) and Huawei Technologies Co. to trim subsidy costs and reduce reliance on Apple Inc. (AAPL)’s iPhone to win new users. Unicom lost exclusivity to offer the iPhone with a service plan in the nation when China Telecom Corp. (728) began selling the device March 9.

“China Unicom reported strong first-half net profit,” Alen Lin, an analyst at BNP Paribas Securities Asia in Hong Kong, said in an e-mail. “We upgraded the stock to a buy at the end of May arguing that the declining subsidy expense ratio would translate into strong profit growth.”

Revenue rose 15 percent to 60.5 billion yuan in the second quarter, beating the median estimate of 60.4 billion yuan in the Bloomberg News survey.

Unicom rose 4 percent to close at HK$13.02 in Hong Kong trading before the announcement. The shares have fallen 20 percent this year, compared with an 9.2 percent gain for the city’s Hang Seng Index.

Handset Subsidies

Handset subsidies in the first half were 3.52 billion yuan, compared with 3.06 billion a year earlier, the company said today. Those subsidies helped the company add 17.5 million 3G users in the period, the company said.

“It looks like the earnings were better than expected because they had lower expenses than people expected as they controlled the handset subsidies,” Michael Meng, a Hong Kong- based analyst with BOCI Research Ltd., said in a phone interview today.

The amount of handset subsidies will increase in the second half, while the subsidies as a proportion of sales will fall, President Lu Yimin said at a press conference in Hong Kong today.

Unicom had 57.5 million 3G subscribers at the end of the second quarter, lagging behind the 67.1 million for market- leader China Mobile Ltd. (941), according to data the companies released last month. The smaller operator had a total mobile customer base of 219.3 million, or 32 percent of China Mobile’s 683.1 million.

Rivals’ Earnings

China Mobile on Aug. 16 posted second-quarter net income that was little changed at 34.4 billion yuan, missing analysts’ estimate of 35.6 billion yuan. The company said costs to subsidize handsets will total 26 billion yuan this year, 30 percent more than it previously projected.

China Telecom’s second-quarter net income fell 10 percent to 4.55 billion yuan, the company reported yesterday. Profit beat analysts’ estimate of 4.4 billion yuan as the introduction of the iPhone lured new customers.

To contact Bloomberg News staff for this story: Edmond Lococo in Beijing at elococo@bloomberg.net

To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net

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