China Unicom Earnings Preview: Steady Growth in Core Business and Standout Cloud Services and 5G Operations

According to Bloomberg consensus expectations and J.P. Morgan's forecast for China Unicom's performance, China Unicom is expected to achieve the following in 2023:

(1) The annual operating revenue is projected to grow to RMB 334.6 billion, a year-on-year increase of 5%; total revenue is estimated to reach RMB 373 billion.

(2) Net profit is anticipated to grow to RMB 18.7 billion, up 11.8% year-on-year, marking the seventh consecutive year of double-digit growth.

(3) Net profit for the fourth quarter is expected to be RMB 1.5 billion, 2% lower than the Bloomberg consensus due mainly to an increase in credit impairment loss in Q3, which temporarily weighs on the performance; however, J.P. Morgan believes that the performance in 2024 will revert to its previous growth rate.

(4) The expected stock price rating for China Unicom is RMB 6.5 per share.

Based on the earnings forecast released by China Unicom's A-share listed subsidiary, further speculation about China Unicom's performance can be made. According to data disclosed by the subsidiary, the company's operating revenue for 2023 is RMB 160 billion, a 5% year-on-year increase, while net profit attributable to the parent company is RMB 8.2 billion, growing 10%. Given that the A-share China Unicom only holds a 43% equity stake in the H-share China Unicom, we can also calculate China Unicom's performance based on this forecast:

(1) Total revenue is expected to grow to RMB 372.6 billion, a 5% year-on-year increase;

(2) Net profit is estimated to grow to RMB 19 billion, a 12% year-on-year increase, marking the seventh consecutive year of double-digit growth;

(3) Operating revenue is expected to reach RMB 335.2 billion, a 5% year-on-year increase.

Overall, calculations based on the subsidiary's disclosed data align closely with major bank forecasts, both indicating strong performance by the company.

In summary, the industry insiders have a positive view of China Unicom's overall financial condition in 2023, as analyzed through reports from various banks. Key reasons include:

(1) Cloud Services: In 2023, China Unicom focused on transforming into an innovative technology company. Its cloud business has seen rapid development. The company accelerated the construction of industrial internet, promoted ubiquitous interconnection among people, machines, and things, empowered industries with its 'Wu Wu Platform', and participated in industrial internet, digital government, smart city construction, and central enterprise digital transformation. By H1 2023, China Unicom's Big Computing had established a "secure digital intelligent cloud" brand image with self-research capabilities, maintaining over 50% market share in the big data sector; its big data security business revenue grew by 178%.

(2) Traditional Services: China Unicom significantly enhanced its network capabilities. In terms of 5G premium networks, the company accumulated more than 20,000 5G industry application projects, covering all 60 major categories of the national economy. For broadband premium networks, China Unicom achieved full gigabit capability in cities, counties, and towns across the country, and realized nationwide coverage in 335 administrative regions.

China Unicom's core businesses include broadband and mobile data services (40.66%), data and internet application revenues (24.89%), communication product sales (10.84%), and other business revenues, with broadband and mobile data services accounting for over 40% of the company's total revenue.

Image ： China Unicom's Business Segment Distribution

(1) In the broadband and mobile data services segment, including mobile communications services and broadband connectivity services, official data shows that by January 2024, China Unicom's "Big Connection" users reached 1.001715 billion, breaking the 1 billion mark for the first time, with 5G package users reaching 263.842 million, a net increase of 4.204 million compared to the previous month. Internet terminal connections reached 505.683 million, demonstrating robust growth potential.

Chart：China Unicom User Base in January 2024

(2) Regarding data and internet application revenues, the most significant growth came from the industrial internet sector.

According to Goldman Sachs' analysis, large telecom companies like China Unicom invested heavily in digital transformation in 2023. China Unicom's financial report showed that in the first three quarters of 2023, its industrial internet business generated revenue of RMB 60.69 billion, accounting for 24.0% of its main operating revenue, up 28% year-on-year. It is forecasted that the cloud business revenue in 2023 may reach RMB 50 billion, up 25% year-on-year, with the industry predicting valuation largely based on the company's ongoing efforts in industrial internet construction during Q4. Furthermore, with the establishment of the National Bureau of Data in Q4, more measures are expected to accelerate the implementation of internet industry services.

As one of the earliest telecom operators to implement data centralization and intensive operations, China Unicom has centralized data from 31 provinces, possessing massive, multi-source, real-time data collection and exchange capabilities. We are optimistic about the company's future development in the data factor market, where, after the gradual improvement of the data factor market construction, the company's vast amount of high-quality data resources could potentially realize better monetization.

Image ： Data and Internet Application Revenue (Unit: Hundred Million Yuan)

(3) Cost and Expense: According to a report by Citibank on March 5, 2024, China Unicom's preliminary performance for the 2023 fiscal year fell below the bank's expectations. The fourth-quarter service operating revenue is expected to be RMB 82.7 billion, 9% lower than the bank's forecast. The primary reason is a substantial increase in credit impairment losses, leading to slower-than-expected short-term earnings growth. In Q3 2023, China Unicom reported a credit impairment loss of RMB 2.67 billion, compared to RMB 1.25 billion in the same period last year. However, the report notes that such impairment losses should not have a sustained negative impact on the company's performance in the future.

We anticipate a favorable trend in China Unicom's overall performance in 2023, with the company continuously driving its digital transformation through its focus on industrial internet services. Based on industry predictions for the company's stock price, it is expected to reach RMB 6.5 per share. Additionally, there is a consensus that China Unicom could maximize its upside potential by increasing dividend distributions or initiating a stock buyback to enhance shareholder returns.

(1) Intensified competition in the telecommunications industry may affect China Unicom's market share and revenue growth.

(2) Uncertainties and unknown technological bottlenecks in the development of the data factor market could pose challenges to China Unicom's digital research and industrial internet service construction.