China Unicom Seeks 5G Ally to Cope With Buildout

Budgetary pressure and the need to speed up 5G rollout could push China Unicom into closer network-sharing partnerships with other Chinese stakeholders, the company revealed in an earnings announcement today.

A "co-build, co-share" strategy could deliver "material savings" in capital expenditure and operating costs, said Unicom in its presentation about first-half results, promising to "timely disclose once a cooperation agreement is reached."

It is little wonder Unicom is searching for allies. The operator, one of three big Chinese carriers, has just reported a huge 60% fall in free cash flow for the first half of 2019, to 15.8 billion Chinese yuan ($2.3 billion), compared with the year-earlier period. In a presentation published on its website, it blamed that slump partly on a rise in capital expenditure, which nearly doubled year-on-year in the first six months, to about RMB22 billion ($3.1 billion). Its plan is to spend RMB58 billion ($8.3 billion) in total this year, up from RMB44.9 billion ($6.4 billion) in 2018.

A chunk of that spending will go toward the rollout of a next-generation 5G network as Unicom tries to keep up with market leader China Mobile. Unicom now has 17,000 5G basestations deployed in 40 cities and is targeting more than 40,000 by the end of the year. That would still be only a tiny fraction of the 1.35 million 4G basestations it operates in China.

While a full commercial launch, with the introduction of 5G handsets, is planned in some cities for September, investors are not hopeful a sales boom is right around the corner. Unicom's share price has lost a quarter of its value in the last year, falling 1% in Hong Kong earlier today.

Moreover, Unicom's strategy of cutting prices for high-speed data connectivity has already had a nasty impact on sales. Mobile service revenues fell 6.6% in the first half, to RMB78.7 billion ($11.2 billion), even though Unicom picked up another 9.32 million mobile customers to finish with more than 320 million in total. Overall revenues fell 2.8%, to about RMB145 billion ($20.7 billion), while net profit rose 16%, to RMB6.9 billion ($980 million), thanks to cost-cutting activities.

Exactly what "co-build, co-share" could entail is unclear. Along with China Mobile and China Telecom, Unicom has already sold tower assets to China Tower, which raised $6.9 billion during an initial public offering last year. By leasing space on its masts to the service providers, that company today controls about 1.9 million sites as well as 9 million light poles, 3.5 million power poles and 330,000 buildings. It figures prominently in China's 5G plans and its share price has gained 47% in Hong Kong in the last year.

Since 2016, Unicom has also had a cooperation agreement in place with China Telecom to share 4G basestations and optical networks. In September last year, there was speculation that Chinese authorities would engineer a merger of Telecom and Unicom, leaving China with just two giant network operators, to speed up 5G rollout. At the time, merger plans were said to be driven by Chinese government concern about falling behind the US on the rollout of 5G services.

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While talk of a merger has quietened down since then, Chinese operators are clearly feeling a squeeze. "As the upside of data traffic rapidly diminishes, the industry is facing more severe challenges," warned China Mobile last week as it reported a 14.6% year-on-year drop in net profit for the first six months. Its share price has fallen 15% this year. Yet to report first-half figures, China Telecom seems likely to highlight similar challenges when it does.

China Mobile aims to install 50,000 5G basestations in 50 cities and says it will spend no more than RMB166 billion ($23.6 billion) in total capital expenditure this year, down from RMB167.1 billion ($23.8 billion) in 2018. Telecom previously pledged RMB9 billion ($1.3 billion) in 5G spending this year and an overall budget of RMB78 billion ($11.1 billion), up from RMB74.9 billion ($10.7 billion) in 2018.

There is speculation the US campaign against Huawei has piled further pressure onto China's operators. To fortify the Chinese vendor, which faces a loss of business in other markets, China's government may have urged operators to increase their spending on Huawei products. Growing support for "local vendors" was an observation in the last earnings update by Nokia, which said it was reviewing its position in the Chinese market.

Infrastructure sharing is taking off in other parts of the world as telcos struggle to fund the rollout of 5G networks. Vodafone has been leading the charge, announcing partnerships with Orange in Spain, Telefónica in the UK and Telecom Italia in Italy. It plans to spin off its towers into a China Tower equivalent and may sell a stake in this business to another infrastructure investor.

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— Iain Morris, International Editor, Light Reading

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