March 16, 2017 1:30 am JST

China Unicom tightens belt as profits plunge

Dividend payout withheld; capital spending slashed by 38%

JOYCE HO, Nikkei staff writer

China Unicom Chairman Wang Xiaochu at a news conference Wednesday.

HONG KONG -- Struggling to gain a foothold in China's fourth-generation (4G) wireless telecommunication markets, Beijing-based China Unicom reported lackluster results on Wednesday and plans to cut back outlays in preparation for its next move.

The state-owned enterprise said its net profits plunged by more than 94% to 625 million yuan ($90.43 million) last year as revenue slipped 1% and operating costs rose 2%. Earnings before interest, taxes, depreciation and amortization, or EBIDTA, skidded 9.1% on the year to 79.5 billion yuan.

Though reversing last year's downtrend, China Unicom's mobile business managed to grow only modestly at 1.7%, with its billing subscriber base trailing that in 2014 at 263.82 million, or 20% of the market. Greater effort to migrate 2G/3G users to the 4G network helped boost its 4G subscriber penetration rate to 39.6%, but it still underperformed the industry average by 17 percentage points. 

China Mobile, the No. 1 player in the market, has been offering 4G services based on the homegrown time-division long-term evolution (TD-LTE) standard since December 2013. Yet China Unicom was granted a license to conduct a hybrid 4G network trial, whereby its network based on the frequency division duplex (FDD) standard could be integrated, only in June 2014.

To catch up in the mobile space, the laggard spent 7.8% more on handset subsidies and 8.4% more in sales and marketing compared to the previous year. Adding to the cost burden was a fivefold jump in usage fees of China Tower, a telecom-infrastructure-sharing joint venture with rivals China Mobile and China Telecom. Having a 28.1% stake in the project, which is seeking an initial public offering, China Unicom attributed the surge in usage fees to the tower's enlarged, but underutilized, network, among other reasons.

The company decided not to pay any dividend for the last fiscal year -- for the first time since 2002 -- and cut capital expenditure for 2017 by 37.6% to 45 billion yuan, of which 18 billion yuan would be devoted to 4G business. 

"Our massive outlays over last two years altogether topped 200 billion yuan, which enables the current network capacity to provide sufficient support for this year's development. We therefore duly dial down our investments," Wang Xiaochu, China Unicom's chairman, told reporters on Wednesday. "More importantly, it is to prepare for the development of 5G technology. We need to set aside some capital for it."

Wang emphasized that the company "won't commit the same mistake" as it did in the runup to the 4G era. Yet he could not specify the sum that China Unicom is planning to put toward 5G development. "5G is still on trial. Firstly, the technology is yet to mature. Secondly, more clarity on spectrum and technology standard is needed from the government. Therefore, [its implementation] will take some time," said Wang.

Apart from getting ready for 5G development, the company is also shifting its focus to the internet of things. "Cloud platform, big data and internet would be one of China Unicom's key developments in the future," said Wang.

"Last year we were still laying the groundwork for cloud and big data businesses, which generated a still modest revenue at around 900 million yuan. But I believe its growth would accelerate," said Wang, hoping that the innovative segment would contribute more to the company as more resources would be devoted to its promotion. 

China's three major internet companies, Baidu, Alibaba Group Holding and Tencent Holdings, were widely speculated to become the new stakeholders of China Unicom, which is participating in the government's "mixed-ownership reform" directive for state-owned enterprises.

Wang said he could not disclose anything beyond the fact that the new ownership plan was being assessed, but emphasized that the central government's commitment to reform was "absolute." 

Following Premier Li Keqiang's call during the annual parliamentary session to lower costs for companies, China Unicom announced on March 6 that it would "substantially reduce" the tariff for internet private line access for small and medium-sized enterprises, as well as the international long-distance call tariff. It will also stop charging mobile handset subscribers domestic long-distance and roaming fees, beginning Oct. 1.

Wang said the initiative would cost the company at least 1.58 billion yuan per quarter due to the loss of roaming services revenue, while the overall impact remains to be seen.

Last week the company's former chief, Chang Xiaobing, was charged with bribery by local prosecutors. He was accused of taking advantage of his various positions, including senior roles at China Telecom and China Unicom, to provide benefits for other parties and accept expensive and illegal gifts. 

Soon after switching his role with Wang, China Telecom's chairman at the time, Chang was reportedly subject to the Communist Party's internal justice system known as "shuanggui" amid President Xi Jinping's anti-graft campaign. A close ally of Jiang Mianheng, son of former President Jiang Zemin, Chang was dismissed from both the party and government last July.

China Unicom's Hong Kong listed-shares traded up 0.1% to 9.56 Hong Kong dollars on Wednesday, and gained 5.87% in value year-to-date.

Asia300

China Unicom (Hong Kong) Ltd.

Hong Kong

Market(Ticker): HKG(762)
Sector:
Industry:
Communications
Major Telecommunications
Market cap(USD): 36,553.5M
Shares: 23,947.1M
Asia300

China Mobile Ltd.

Hong Kong

Market(Ticker): HKG(941)
Sector:
Industry:
Communications
Wireless Telecommunications
Market cap(USD): 226,162M
Shares: 20,475.5M
Asia300

Baidu, Inc.

China

Market(Ticker): NAS(BIDU)
Sector:
Industry:
Technology Services
Internet Software/Services
Market cap(USD): 76,527.1M
Shares: 34.67M
Asia300

Alibaba Group Holding Ltd.

China

Market(Ticker): NYS(BABA)
Sector:
Industry:
Retail Trade
Internet Retail
Market cap(USD): 423,669M
Shares: 2,529.36M
Asia300

Tencent Holdings Ltd.

China

Market(Ticker): HKG(700)
Sector:
Industry:
Technology Services
Internet Software/Services
Market cap(USD): 395,598M
Shares: 9,497.99M

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