China Unicom Units Inflated Sales for Years, Document Shows

  • Repercussions of fraud unprecedented in company history
  • More than 70 managers punished including dismissals, pay cuts

China United Network Communications Group Co., the state-run phone giant known as Unicom Group, found what it described as an unprecedented degree of falsified revenue, profit and asset figures at units in the northwestern province of Shaanxi, according to an internal document seen by Bloomberg News. Its shares fell in Hong Kong.

Nine out of 10 branches in Shaanxi engaged in organized, cross-departmental faking of financial figures from 2012 to 2016, and more than 70 managers have been disciplined, according to the document, which was dated April 6. Though the document didn’t give a tally of the fraud, Caixin reported it involved 1.8 billion yuan ($261 million) of revenue in the past five years, citing a document and an internal speech by Unicom’s chairman.

China Unicom (Hong Kong) Ltd., the company’s Hong Kong-listed arm, said in a statement that units of its Shaanxi branch were found to have inflated their revenue but the amounts had "relatively small impact" to the company and the figures had already been corrected in its financial statements. Unicom has since strengthened its monitoring measures, it said.

The findings emerged at a time Unicom Group is preparing to sell billions of dollars in shares as part of a government push to attract private capital into state-owned enterprises. The company was among six SOEs picked by the nation’s economic planner last year for a pilot program in mixed-ownership -- China’s preferred term for its privatization campaign.

"This case exposes some of China Unicom’s weaknesses in its corporate governance, but for a company with around 300 billion yuan in annual revenue, irregularities of a couple of billion won’t change its fundamentals," said Steven Liu, an analyst at China Securities International in Hong Kong who has a buy rating on the stock.

Unicom fell 3.2 percent, the most in a month, to close at HK$10.24 on Thursday in Hong Kong. Its Shanghai-listed arm, China United Network Communications Ltd., has been suspended from trading since late March pending further disclosure of its mixed-ownership plan.

Unicom’s Hong Kong-listed arm has posted three years of falling revenue -- 274.2 billion yuan in 2016 -- and two years of declining profits amid intensifying competition and the increased cost of keeping up with market leader China Mobile Ltd. Earnings are expected to recover this year, according to average analyst estimates compiled by Bloomberg.

The document also said:

  • About 17% of the total falsified revenue came from Shaanxi’s Tongchuan and Yulin cities, while the Hanzhong branch falsified more than a third of its revenue
  • Penalties ranged from dismissals to administrative warnings, suspended party membership and salary deductions
  • Managers were punished according to the Communist Party disciplinary guidelines
  • The nature and repercussions of the fraud are unprecedented in Unicom’s history, according to the document

— With assistance by Jing Yang De Morel

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