One of my friends and mentors on Wall Street had a saying that I often use myself -- you can't run life's great experiments both ways. This means you can't hedge between two options forever; sometimes you just have to make a choice and go with it.
For China Unicom
Recently announced results for the full-year 2004 were a mix of good news and bad news. While revenue climbed 17% and the company posted subscriber growth of more than 22%, net income was up a measly 4%.
Part of the problem is that in running two separate phone networks, there's not a lot of obvious synergy. While the GSM business is pretty profitable (and boasts three-quarters of the company's subscribers), the CDMA business is not, and management seems highly committed to the CDMA side.
Despite the fact that CDMA does offer higher data speeds, customers have been slow to adopt CDMA because the handsets are more expensive, there are fewer services offered, and the coverage isn't as good.
Making matters worse, China Unicom has pretty feeble margins, return on equity, and dividends in comparison to other Chinese wireless companies such as China Mobile
So, now that I've addressed the bad, on to the good.
Despite the sluggish net income growth, the company has two very valuable assets -- the CDMA license and the GSM license. It would not be at all surprising then to see China Unicom sell its GSM business. The proceeds could then be used to buy its CDMA network (the company presently leases capacity) and/or pay down debt.
In addition to proceeds gained, a sale of the GSM business would allow China Unicom management to focus entirely on the business they seem to prefer anyway. Given that CDMA subscriber growth is much stronger at present for the company (though admittedly growing from a smaller base), that could be seen as a logical move.
In my opinion, China Unicom is best approached from a turnaround angle -- which means careful due diligence and patience are both mandatory. Although China Unicom trades at a premium P/E and the sale of the GSM business would likely hurt earnings in the short run, the company does trade at a modest price-to-book ratio.
While I don't think I'll be investing my own money in this Chinese telco, I wouldn't close the door on the possibility that the company could be much more interesting later on down the line.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
