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China Unicom 2011 Profit Misses Estimates on 3G User Cost

China Unicom Ltd. Chairman Chang Xiaobing
Chang Xiaobing, chairman of China Unicom Ltd. Photographer: Jerome Favre/Bloomberg

China Unicom (Hong Kong) Ltd., the nation’s second-largest mobile-phone company, said it faces rising costs to expand coverage this year as users on its high-speed network increase.

The company will boost capital spending by 30 percent to 100 billion yuan ($16 billion) in 2012, Chief Executive Officer Chang Xiaobing said at a briefing in Hong Kong yesterday. Profit margins “will be under pressure” as marketing and network costs rise, Chief Financial Officer Li Fushen said.

China Unicom reported 2011 profit yesterday that missed analyst estimates on higher marketing costs. The carrier added record numbers of smartphone users each month from October through December, winning customers for mobile data with subsidies on handsets including Apple Inc.’s iPhone. That gave the company 40 million subscribers to its third-generation network at the end of last year, while also boosting costs.

“We remain cautious on China Unicom,” Alen Lin, an analyst at BNP Paribas Securities Asia in Hong Kong, wrote in a report to clients yesterday. “We continue to believe the high cost of driving rapid 3G growth would offset any upside from improved subscriber profile. This is again validated through the poor profitability.”

Lin rates the shares hold and said he couldn’t comment beyond his report when contacted today.

Profit, Revenue Miss

China Unicom rose 0.9 percent to close at HK$13.24 in Hong Kong trading. The stock has declined 19 percent this year, compared with a 12 percent gain for the benchmark Hang Seng Index.

Net income rose 14 percent to 4.23 billion yuan in 2011 from a restated 3.7 billion yuan a year earlier, China Unicom said. That missed the 5.18 billion-yuan average of 20 analyst estimates compiled by Bloomberg.

Revenue rose 22 percent to 209.2 billion yuan, lagging behind the 212.2 billion yuan average of 32 analyst estimates.

Total sales and marketing costs, including handset subsidies for the company’s 3G network, more than doubled to 13.1 billion yuan last year from 6.3 billion yuan, the company said in a statement on its website.

Earnings before interest, taxes, depreciation and amortization as a percentage of revenue shrank to 30.3 percent in 2011 from 34.7 percent a year earlier, the carrier said. The EBITDA margin won’t fall below last year’s level, Li said.

“We need to improve the quality of our network” because the company is seeking to add more 3G users this year than competitors in China, President Lu Yimin said at the conference.

‘Eliminate Blind Spots’

The network investment will “eliminate blind spots in urban areas; extend coverage to developed townships,” the company said in the statement.

“There are more iPhone and smartphone users on the network, so they have to expand capacity, coverage, and improve network quality,” Kelvin Ho, a Hong Kong-based analyst at Yuanta Securities Co., said yesterday. “They have to spend more, or the window of opportunity will be missed.”

The company will offer smartphones costing less than 700 yuan to attract more users, Lu said.

China Unicom, the nation’s first carrier to offer the iPhone with a service contract, has so far been unable to use that advantage to close the gap with market leader China Mobile Ltd. The company’s total wireless user base of 199.7 million at the end of last year was less than one-third of China Mobile’s 649.6 million, according to data the companies released in January.

China Unicom’s 3G subscribers also lagged behind China Mobile’s 51.2 million high-speed network users.

China Unicom lost its exclusivity on subsidized sales of the iPhone with a service contract this month. China Telecom Corp., the nation’s third-largest mobile-phone company, began selling the device on March 9.

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