If there were no expectations on a potential revamp of telecommunication industry, China Unicom would be considered overvalued at current price although it reported doubled profits for 2007 full year result, however, considering the revaluation of two networks of China Unicom in the case of the restructuring, China Unicom is a good buy at current value. We will address these points below in detail:

RRIOR-RESTRUCTURING

1.      Growth of Number of Subscribers to GSM

Compared with China Mobile, China Unicom has a less competitive ability to acquire new subscribers, since on average GSM added 11.44 million new users per year, while CDMA added 6.218 million new users per year. This amounted to 17.66 new users each year on average for the past six year. Except for the year 2003 when the two networks added similar number of new users, GSM acquired more new users in terms of absolute numbers than CDMA networks which took up an average of 31% of total net additions of subscribers. By the end of 2007, China Unicom has a total of 119.184 million GSM subscribers and 41.097 million CDMA subscribers, equal to 43% of the total 369 million users of China Mobile’s network.

2. Reducing Revenue growth and Steady but moderate sustainable profits growth

China Unicom, the second largest mobile service operator in China, reported a doubled profit in 2007. However, its revenue growth in 2007 was 4.4% and the growth of profit is largely driven by a gain in the derivative component of convertible bonds. Excluding this effect and tax refund on reinvestment, China Unicom’s profit before income tax would be increased by 19.9% from 2006, profit for the year would be RMB7.09 billion, an increase of 14.4% from 2006, while basic earnings per share would reach RMB0.544. As we consider the gains resulting from changes in the fair value of derivative component of convertible does not reflect the performance of the main business streams of China Unicom, it should not be considered as sustainable income sources and thus its effects are excluded from measuring sustainable profits. Comparing with consensus 7.2 billion RMB forecasted by analyst, China Unicom’s sustainable performance was lower than or in line with the forecasts rather than significantly better.

In comparison, China Mobile in 2007 generated RMB356,959 million operating revenues, representing an increase of 20.9%. Although the growth rates of operating revenues have displayed a decreasing trend, reducing from 26.3% p.a. in 2005 to 21.5% p.a. in 2006 and to 20.9% in 2007, the profits from operations and net profits increased 34.7% and 31.9% respectively in 2007, comparing with 23.9% and 28.3% in 2005.

POST-RESTRUCTURING

1.      Revaluation of GSM and CDMA networks after restructuring launches

Investment value of China Unicom comes from the proposed revamp of the industry, as the market takes a positive view towards the effects of such revamp on China Unicom

The two networks, GSM and CDMA of China Unicom are expected to be revalued and priced at fair value when sold to the two fixed-line operators, China Telecom and China Netcom, thus, shareholders are likely to be rewarded with a premium price above the current level.

The market expects improving operating efficiency of China Unicom after the two networks are separated. China Unicom has formally launched its 3G business in Macao, adopting the leading 3G standard CDMA1xEVDO Rev.A. The provided services include WAP, wireless internet, Mobile TV and Internet Download Manager. The ability to operate 3G network is a key to competitiveness after the industry revamp.

2. Current Valuations

China Unicom is having a P/E of 42.8 times, significantly higher than the industry P/E of 19.4 times and sector P/E of 23.7 times. After adjusting for the growth prospects, PEG of 12.4 for China Unicom shows it is comparatively undervalued than the industry level, but higher than the sector. This indicates that if the industry revamp does not occur as expected, the share value will fall.

As we expect the industry restructuring is more likely than less likely to occur in the near future, P/B ratio can be used as good valuation measures. In terms of P/B and P/Tangible Book ratios, China Unicom is undervalued comparing with both the industry and sector value. This indicates that the revaluation of China Unicom’s network will be much higher than the current level.