China Unicom

China Unicom is an investment holding company and through its subsidiaries, is principally engaged in the provision of fixed and mobile communications service, satellite IPLC service, data communications service, network access service, value-added telecom services, system integration service related to information and communications services, as well as the operation of domestic and international communications facilities. The Company conducts its business through the two main segments of fixed line, and mobile business. Its services are available throughout all 31 provinces, municipalities and autonomous regions in China.

China Unicom (CU) is a service provider in China‘s new economy and has the second largest market share of mobile customers in China. CUs stronger rebound in revenue growth or a substantial cut in expenses could lead to a faster than expected turnaround.

Investment summary

5G spectrum allocation – We believe the market is underpricing the 5G CAPEX requirements for CU and a later or lower than anticipated 5G CAPEX cycle would surprise to the upside. The Ministry of Industry and Information Technology (MIIT) announced the 5G spectrum allocation for the Chinese telcos. Overall, allocations were largely in-line with expectations, with CU and CT frequency spectrum right next to each other, suggesting regulators would like continued cooperation as China moves into 5G. Despite concerns of a bad allocation, CM got the largest amount of frequency spectrum allowing it to potentially maintain its dominance in the 5G era.

Telcos hedge against volatility – Despite the tough year for Chinese equities, the telcos have largely outperformed the broader MSCI China index. Given the strong run in 2017, CU underperformed in 2018, returning -17%. Amongst the Chinese telcos, CM remains our top pick in the sector with its strong balance sheet, attractive dividend yield and steady execution.

CU valuations less demanding but prefer CM – While we continue to expect increasingly tough competitive pressures and regulatory risk in 2019, shares in CU has corrected significantly and valuations are very compelling.

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