One Of China's Biggest Wireless Telecoms Issued A 'Profit Warning'

Seven years ago, China Unicom (Hong Kong) Limited (ADR) CHU solidified a deal with Apple Inc. AAPL to bring iPhones to China.

Over the past 10 years, China Unicom has risen more than 50 percent. However, shorter-term, the telecom service provider has seen much more volatility. Looking at the five-year chart, the stock is down roughly 35 percent. For the year-to-date period, the stock is up 5 percent; however, over the past full year, the stock is down almost 27 percent.

2016's First Quarter: Profit Warning From China Unicom

On Monday, China Unicom circulated a profit warning for the Q1'16.

The document read in part, "In the first quarter of 2016, the Group's operation was on track as planned. Our mobile business has achieved initial success in overcoming operational challenges and the Group expects a net addition of mobil billing subscribers of approximately 6.61 million during the period, successfully turning around the downward trend in mobile subscribers in the past consecutive months."

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However, following the positive notes, the crux of the notice appeared, "The first quarter of 2016, the profit attributebleto the equity shareholders of the Company is expected to be approximately RMB 480 million, down significantly by around 85 percent as compared to the same period of last year mainly because sellign and marketing expenese increased by an expected 16 percent year-on-year, and the addition of tower usage fee, higher energy charges and property rentals, etc. led to an expected 37 percent increase year-on-year in network, operation and support expenses."

Analyst's Take

HSBC Global Research analysts, led by Neale Anderson, summarized the situation, "The key catalyst remains strong operating momentum – at a lower cost."

"Unicom's KPI update in the announcement suggested solid subscriber and top-line trends in the quarter, and we expect this to continue. We believe this should also drive a reduction in the selling expenses that pushed profits down in the first quarter, as the benefits of its more focused wireless network coverage and strategy become more apparent to users."

Subsequently, HSBC cut 2016 estimates by 5.7 percent for EBITDA and 35 percent for net income, but reaffirmed the firm's broadly positive stance on the company, "However, our 2017 estimates are largely unchanged, and we increase our medium-term estiamtes slightly: we expect the costs of Unicom's turnaround to decline as its brand momentum improves."

"Unicom remains our preferred stock in China telecom services," the analysts concluded.

Posted In: HSBC Global ResearchNeale AndersonAnalyst ColorLong IdeasNewsGuidanceEmerging MarketsPrice TargetReiterationMarketsAnalyst RatingsTechTrading Ideas

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