China Unicom reported nine-month results that continue to show strong revenue growth, but at the expense of margins. We think this strategy makes sense while China Mobile remains tied to its 3G TD-SCDMA network. However, with 4G likely coming in the next few months, this strategy may not continue to work. For now, though, we are maintaining our fair value estimate and moat rating.
Unicom’s revenue grew 18.9% year over year versus our full-year projection of 17.2%. Higher marketing spending has driven faster subscriber growth. The firm’s wireless base jumped 67.7% from the year-ago period to 272.76 million customers, with 40.9% (111.63 million) of those customers on Unicom’s 3G network. This equals 65% of China Mobile’s 3G base, whereas Unicom’s total wireless base is only 36% of China Mobile’s.
Clearly Unicom has benefited from China Mobile’s handicap, but that could be coming to an end, which tempers our enthusiasm for Unicom’s recent success. Unicom is also performing better on the fixed-line side thanks to broadband growth offsetting declines in traditional fixed-line services. Overall, the fixed-line business saw revenue improve 3.8%.
While we like Unicom’s growth, it has been driven by higher marketing costs, which have pushed its EBITDA margin down to 29.1% versus our full-year forecast of 29.8%. As long as the extra spending is pushing subscriber and revenue growth, we think it is worthwhile, but we are a bit concerned regarding what happens when China Mobile launches its 4G service.