China Unicom Focus on 3G; 4G LTE in HotSpot Areas Only

ChinaUnicom Focus on 3GChina Unicom believes 3G growth will accelerate in 2013 given major improvements in handsets / smartphones, product offerings, network coverage and branding. The company expects 3G net adds in 2013 to be higher than 2012’s level. Management will focus on increasing mobile scale and quality of customers, and expects high-end subscriber mix to continue to increase.

3G ARPU will continue to decline, especially after the introduction of 3G migration packages for 2G subs in 4Q12. 3G churn rate should also improve as contract subscribers as a percentage of 3G subscribers has increased from 35% in 2012 to 46% in 2013. Chian Unicom does not see room for further reduction in 2G/3G tariffs.

China Unicom 3G infrastructure It has 311,000 3G BTS as of end-2012, all of which were upgraded to HSPA+ capable of offering speed of 21Mbps or even 42Mbps in some areas. The MIIT has approved to use 900MHz for 3G in 21 provinces. China Unicom estimates that the number of BTS required for 900MHz is only one-fourth of that required by 2.1GHz . The company intends to allocate 3.8MHz out of 6MHz in 900MHz band for 3G, which will be mostly focused in rural areas as the benefit of 900MHz is less visible in urban areas.

China Unicom 4G The Management believes 4G capex will be manageable, as 4G rollout will be focused in hotspot areas given the company’s advantage on 3G coverage. China Unicom has already made significant capex in transmissions as part of 3G investment, which can also support 4G, whereas 80% of the company’s 3G BTS can be upgraded to 4G. Like China Telecom, even China Unicom believes 4G is still at least 12 months away. China Unicom has a very clear strategy to upgrade from 3G to 4G.

It is worth noting that China Unicom does not intend to charge OTT service providers, as management believes that OTT services pose both a threat and an opportunity to the company. Specifically, these services can improve 3G user experience, thereby accelerating take-up of 3G and smartphone services.