When I closed my last column on Chinese cell phone operator China Unicom (NYSE:CHU), I suggested that anyone buying the stock would need patience. It seems as though the company is validating that notion with its first-half results for 2005.
While the company's performance was not that bad relative to expectations, it wasn't that good in absolute terms. Although operating revenue climbed more than 10% from last year, EBITDA was up only a bit more than 1%, and operating and net profits were down 20% and 19% respectively.
The company's CDMA business, which relies on a technology in which every channel uses the full available spectrum, is the main issue in my mind. Revenue here was up more than 20%, and subscriber growth was about 30%, but average revenue per user (ARPU) fell more than 14%. Making matters worse, the company faced much higher leased-line expense and interconnection charges, transforming the year-ago operating profit into a loss in H1 2005.
China Unicom is trying to focus more on profitability by controlling handset subsidies, but it doesn't seem to be paying off just yet. In the first half of 2005, rival China Mobile (NYSE:CHL) posted not only higher subscriber growth but also better ARPU and profits.
It seems to me that China Unicom's best move now might be selling out to another operator. The company's had issues in driving transition from GSM (Global System for Mobile Communications) to CDMA, and its strong rival is apparently willing to compete aggressively on price when necessary.
Unicom owns two valuable licenses (one for CDMA, one for GSM), and the Chinese government is very likely to limit the number of 3G licenses to just three. Consequently, there is some scarcity value here for companies that wish to enter the Chinese mobile phone space. Landline operators China Telecom (NYSE:CHA) and ChinaNetcom (NYSE:CN) have already expressed interest in a cellular business, and it's possible that foreign players such as Motley Fool Inside Value pick Vodafone (NYSE:VOD) could get involved as well.
It's not a good idea to buy a stock simply because you think it will be bought out. More often than not, you end up owning shares of a company you don't really like, waiting for a buyout that comes at a lower-than-expected price -- if it materializes at all. That said, China Unicom is free-cash-flow positive and still growing its user base. With few other avenues into the Chinese mobile market, Unicom could prove to be worth the attention of aggressive, albeit patient, investors.
We've dialed up further foreign Foolishness:
- China Mobile Still on the Move
- DT's American Dilemma
- Dividend Dandy From Down Under
- No Unity for Unicom
Vodaphone is a Motley Fool Inside Value pick. For more top-drawer stocks at bargain-basement prices, sign up today for a free 30-day trial.
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
