China Unicom Profits Spike Ahead of Netcom Merger

The company is set to take over the fixed-line operator China Netcom to create a national full-service telecommunications carrier under Beijing's blueprint to restructure the telecommunications sector.

Unicom will diversify into fixed-line service, competing with China Mobile and China Telecom, and also expand into high-speed third-generation mobile services.

Cutting Into Profits

But analysts said Unicom's aggressive spending plan after the merger was likely to erode its short-term profitability.

Unicom, in which SK Telecom owns a 6.6 percent stake, has said it would spend 100 billion yuan, or US$14.6 billion, in the next two years to fund its wireless infrastructure , with the bulk going to build a 3G network.

It reported net profit for the quarter ending in June of 2.4 billion yuan ($350 million), beating an average forecast of 2.16 billion yuan ($315 million) from four brokerages polled by Reuters Estimates.

That compared with earnings of 170 million yuan ($24.8 million) a year earlier when the company booked an unrealized loss of 1.64 billion yuan ($239 million) from convertible bonds.

Net profit for the quarter doubled to 4.42 billion yuan ($645 million), above a consensus forecast of 4.24 billion yuan ($619 million) from seven analysts. But six- month revenue rose only 4 percent to 35.14 billion yuan ($5.1 billion).

Winning Customers

China Mobile, the biggest wireless carrier, added 22.5 million customers in the second quarter, six times more than Unicom. The two companies gained market share from fixed-line carriers after lowering charges for long-distance domestic calls in March.

China Telecom, the country's biggest fixed-line phone company, said in June that it would pay Unicom 43.8 billion yuan ($6.4 billion) to acquire the Code Division Multiple Access business to enter the mobile-phone market as part of the government's reorganization plan.

Under the plan, Unicom would acquire China Netcom, the second- biggest fixed-line carrier, in a stock-only transaction valued at about 160.7 billion Hong Kong dollars, or $20.6 billion.

Earlier on Monday, Netcom reported a 5 percent drop in first- half net profit to 6.38 billion yuan ($932 million) as mobile substitution continued to erode the profitability of its fixed-line services.

Broadband Growth

But Netcom, the main telecommunications provider in 10 northern China regions, including Beijing, accelerated sales of broadband Internet connections in the first half as the country overtook the United States as the world's largest Web market by users.

"The growth in broadband sales will continue to be quite strong as there is still rising demand for Internet services," Steven Liu, an analyst with the brokerage DBS Vickers in Hong Kong, said before the announcement.

Netcom's broadband services expanded rapidly, with revenue rising 39 percent to 8.86 billion yuan ($1.29 billion), or 22 percent of the total.

The average revenue per user from Unicom's CDMA cellular network fell 10.5 percent in the first half to 51.1 yuan ($7.46) a month amid slower subscriber growth as the management's focus moved toward GSM in light of its forthcoming unloading of its CDMA operation.

Branching Out

Unicom, which has been losing market share to China Mobile, is trying to bolster revenue by expanding value-added services, diversifying from traditional voice business.

Shares in Unicom slid 11.6 percent in the quarter ending in June, compared to a fall of 3.3 percent of the Hang Seng index. The stock rose 4.4 percent on Monday to close at 14.12 Hong Kong dollars ($1.81) before the results were announced. Shares of China Netcom also gained 4.2 percent on Monday.

Unicom added a combined 540,000 users to its two networks in July, bringing its total to 171 million.

Unicom expects to gain a license to operate the most widely used third-generation service as it aims to take the lead in the technology in the world's biggest telecommunications market.

"Based on the nature of Unicom's current business, we will gain the WCDMA license," Zuo Xunsheng, chief executive of China Netcom, said in Hong Kong.

The code-division multiple access technology is one of three standards accepted by China for 3G mobile-phone services.

The technology standard is used by companies including Vodafone Group (NYSE: VOD) and the Hutchison Whampoa unit 3 Group and is more than twice as popular as its closest rival's 3G technology.

"For sure, we expect to be No. 1 in the 3G market," Zuo said. "We expect Chinese consumers will quickly adopt 3G services."