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Business Insight

China Unicom results show state enterprise reform is for real

New private shareholders are energizing the telecom operator

China Unicom has streamlined and improved productivity by reducing the number of its organizational departments from 27 to 18.   © Reuters

Imagine if a gathering of Hong Kong elites made a plan to reinvigorate HSBC Holdings through giving dominant Chinese internet players Alibaba Group Holding, Tencent Holdings, Baidu and JD.com stakes in the banking company and putting their appointees on its board.

Such an infusion would hold promise of lifting HSBC's stock price by bringing fresh thinking and a younger vision into the board room and help flatten its organizational sprawl to promote innovation. It would create the perception that the bank is serious about the threat of financial technology. It could also propel discussion on the value of truly embracing data analytics to better monetize the millions of data points generated by the bank's customer interactions. The new shareholders would be able to show how the bank could improve the experience of customers using its services, especially online.

If HSBC could get so much out of such relationships, then why not China Unicom? Thanks to a state-supported restructuring announced last August, telecom network operator China United Network Communications Group, parent of Hong Kong-listed China Unicom (Hong Kong), now counts each of the internet companies among its shareholders and each is to take a seat on its board.

Yet most overseas commentators have been dubious about the arrangement, known officially as "mixed ownership reform," suggesting the internet companies were simply squeezed to supply capital by the state and will have no real influence on a debt-ridden state-owned enterprise stuck in its bureaucratic and wasteful ways.

Contrary to the doubters, Unicom is quickly emerging as a poster child for SOE reform, among Beijing's top priorities. The government is aiming at a vast overhaul to improve efficiency and cut waste over the next three years.

Net profit for China Unicom soared to 3.01 billion yuan ($475 million) in the quarter ended March 31, from just 862 million yuan a year earlier. The unit credited the improved results to tightened cost controls, new service offerings and an improved sales culture.

"We will collaborate further with internet companies in the future and step up investment in future growth engines," said Wang Xiaochu, chairman and chief executive, at a press conference in Hong Kong in March.

China Unicom is quickly emerging as a poster child for SOE reform, one of Beijing's top priorities.   © Reuters

Unicom's new stakeholders are bolstering the company's transformation from a clunky state enterprise, with too many underutilized employees and too much unexploited data, into a modern digital powerhouse. The pending board reshuffle at its parent company will give seats to Baidu founder Robin Li; Lu Shan, a senior vice president of Tencent; Liao Jianwen, JD.com's chief strategy officer; and Hu Xiaoming, an Alibaba senior vice president. This high-powered group should help get Unicom thinking more about artificial intelligence, online-to-offline services and innovative distribution channels.

Things are already changing at the company. Unicom has streamlined and improved productivity by reducing the number of organizational departments from 27 to 18. Headquarters staff have been slashed 50%.

Employees have been incentivized by stock grants. Mobile user growth is accelerating, with a net 9.8 million such customers added in the first quarter compared with 2.4 million a year earlier. The company is scaling down its legacy second-generation, or 2G, mobile phone network, freeing up capacity for more advanced services which it is promoting to customers.

Unicom's borrowings were slashed about 60% last year, according to figures in its annual report. With the retirement of high interest debt, finance costs in the first quarter fell by a similar margin. Management felt confident enough to restore the company's annual dividend, which had been suspended in 2016.

With around 430 million customers, a return on capital of 1% and return on equity of under 2%, there is nowhere to go but up for Unicom. Indeed, its ongoing transformation could serve as inspiration for HSBC.

Since December, the London-based bank has counted Ping An Insurance Group, one of the leading forces in financial technology in China, as its second-largest shareholder. HSBC has yet to grant the innovative insurer a board seat, but it should consider the merits of doing so.

Paul Schulte is the founder of emerging markets research group Schulte Research and the Schulte Institute for Financial Innovation and a research fellow at Hong Kong University of Science and Technology. He was previously head of global financial strategy at CCB International Securities.

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