China Unicom (Hong Kong) Ltd. (CHU, Financial) (CHUFF, Financial) (HKSE:00762, Financial), the $35 billion Hong-Kong based telecom services company, recently denied a couple of tech titans, Tencent (HKSE:00700) and Alibaba (BABA), were supposedly investing $10 billion in it. While this could limit any share price upside, the company may still be worth the time to understand.
China Unicom, meanwhile, has also provided its first-quarter operating figures (4). The company is expected to provide its official quarterly or semi-annual report in September.
Mobile billing subscribers
In the first quarter, the company’s mobile subscribers climbed 2.8% year over year to 266.3 million from the year prior.
4G subscribers
Impressively, China Unicom’s 4G subscribers more than doubled, a 107% rise year over year, to 122.7 million.
Mobile billing subscribers ARPU
Mobile billing subscribers average revenue per user (ARPU) declined (-)0.4% to 46.9 yuan ($6.98) from the prior-year period.
Mobile handset data traffic
In the first quarter, data traffic climbed 254% to 951.9 billion megabytes.
Valuations
China Unicom is overvalued compared to its peers. According to GuruFocus data, the company had a trailing price-earnings (P/E) ratio of 228 times versus the industry median of 20.7 times, a price-book (P/B) ratio of 1.06 times versus 2.25 times and a price-sales (P/S) ratio of 0.87 times versus 1.5 times.
The company also had a trailing dividend yield of 1.77% with 0% payout ratio. American depository receipt (ADR) shares do not have a dividend yield.
Average 2017 revenue and earnings per share estimates indicated forward multiples of 0.8 times and 44.7 times.
Total returns
According to Morningstar, China Unicom ADR shares have outperformed the broader S&P 500 index so far this year with 27.6% total gains versus the index’s 11.7%.
China Unicom
According to filings, China Unicom was incorporated under the laws of Hong Kong in February of 2000. In connection with the telecommunications industry restructuring initiated by the MIIT (the primary regulatory authority of the Chinese telecommunications industry), the National Development and Reform Commission of the People's Republic of China and the Ministry of Finance, China Unicom merged with China Netcom in 2008 and changed its name to China Unicom (Hong Kong) Ltd.
Following the company’s merger with China Netcom, the company became an operator providing a full range of telecommunications services, including mobile and fixed-line services, in China.
China Unicom has only one segment and has not provided any geographical information.
Meanwhile, the company generated 54% of its revenue in its mobile services, 31% in fixed-line services and 18% in broadband services.
Sales and profits
Over the past three years, China Unicom's average revenue declined (-)2.4%, profits fell (-)60.8% and the average profit margin was 2.8%.
Cash, debt and book value
As of December 2016, China Unicom had 23.6 billion yuan in cash and cash equivalents and 174.5 billion yuan in debt with a debt-equity ratio or 0.77 times versus 0.64 times in the prior-year period. Overall debt climbed by 27.4 billion yuan year over year and equity declined by 3.8 billion yuan.
Of the company’s 614.2 billion yuan in assets, 2.3% were goodwill and intangibles. The book value declined by 1.6% year over year to 227.4 billion yuan.
Cash flow
In 2016, China Unicom’s cash flow from operations declined (-)11.5% year over year to 74.6 billion yuan as profits also fell a magnificent (-)94% in the same period. The company has racked up heavy expenses to market its fourth-generation (4G) mobile network technology, weighing significantly on its bottom line.
Capital expenditures were 98.3 billion yuan, leaving China Unicom with (-)23.7 billion yuan compared with (-)4.16 billion yuan in 2015. Nonetheless, the company still provided 4.07 billion yuan in dividends and took in about 26.95 billion yuan in debt net any repayments and other financing activities.
The cash flow summary
Over the past three years, China Unicom allocated 256.3 billion yuan to capital expenditures, raised 29.7 billion yuan in debt (net repayments), allocated 12.39 billion yuan to dividends and generated (-)9.36 billion yuan in free cash outflows.
Conclusion
By the looks of China Unicom’s first-quarter operating data results, the company has gained more business in its 4G subscribers albeit experiencing lower average revenue per user. In addition to the operating data provided, China Unicom did say its profits for the first quarter jumped 79%.
The company also has a moderately leveraged balance sheet at 0.77 times, while having provided a significant amount of cash to shareholders in recent years despite netting negative free cash flow from its operations.
Applying three-year revenue growth and P/S averages followed by a 20% margin indicated a figure of 6.3 yuan a share or 7.25 Hong Kong dollars (93 cents) versus HK$11.4 at the time of writing.
In summary, China Unicom is a pass.
Disclosure: I do not have shares in any of the companies mentioned.
