Rising Capital Strains Will Pressure Telecom Margins Further

Key Takeaways

• Slowing domestic growth and legacy business decline force greater reliance on lower-margin offerings, constraining profitability and long-term earnings potential.
  
• Persistent heavy investments and geopolitical risks threaten access to technology and capital, further challenging competitiveness and undermining margins.
  
• Strong growth in advanced digital services, international expansion, and investment in next-generation technologies is driving operational efficiency, margin resilience, and diversified long-term revenue streams.

Catalysts

An investment holding company, provides telecommunications and related value-added services in the People’s Republic of China.

• Despite recent growth in subscribers and revenue, China Unicom faces an increasingly limited pool of new customers due to slowing population growth and urbanization in China, which will likely constrain future revenue expansion and cap long-term ARPU growth.
  
• Even with ongoing international growth and AI-driven innovation, rising geopolitical tensions and the risk of further US-China decoupling threaten China Unicom's access to advanced technology and global capital, undermining its ability to compete and innovate, ultimately impacting long-term earnings potential.
  
• While capital expenditure efficiency has improved for now, the company's heavy and recurring investment needs for 5G, 6G, and digital infrastructure will persist, putting sustained pressure on free cash flow and likely compressing net margins and weakening returns on invested capital over the next decade.
  
• The company's ongoing loss of market share to dominant domestic competitors, especially China Mobile, is likely to continue eroding pricing power and lead to margin compression, with little evidence of improved competitive positioning in high-value segments.
  
• China Unicom's traditional high-margin voice and SMS businesses are in terminal decline as OTT platforms cannibalize legacy service revenues, forcing increased reliance on lower-margin data and cloud offerings and constraining overall profitability and long-term earnings growth.

China Unicom (Hong Kong) Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on China Unicom (Hong Kong) compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming China Unicom (Hong Kong)'s revenue will grow by 1.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 5.3% today to 5.6% in 3 years time.
• The bearish analysts expect earnings to reach CN¥23.1 billion (and earnings per share of CN¥nan) by about June 2028, up from CN¥20.9 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 13.5x on those 2028 earnings, up from 12.3x today. This future PE is lower than the current PE for the US Telecom industry at 14.1x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.69%, as per the Simply Wall St company report.

China Unicom (Hong Kong) Future Earnings Per Share Growth

Risks

• Sustained revenue growth across core telecom, cloud, and data center segments, supported by a 4.6 percent increase in operating revenue and marked expansion of advanced digital services like Unicom Cloud and 5G-A, may positively impact top-line revenue and long-term earnings.
  
• Ongoing leadership in network innovation and digital infrastructure, such as rapid deployment of 5G-A, development of large-scale computing centers, and international network expansion, is enabling higher operational efficiency and coverage, which can improve net margins and reduce capital intensity.
  
• Increasing investment in R&D, AI, and the commercialization of next-generation technologies-including early 6G trials and new AI-powered services-positions China Unicom for long-term competitiveness and creates new value-added revenue streams, supporting earnings and margin resilience.
  
• Rising ARPU among integrated subscribers and a growing base of both consumer and IoT customers, demonstrated by record numbers in mobile, broadband, and industrial IoT connections, underpin long-term subscriber growth and recurring revenue potential.
  
• Enhanced international expansion, with double-digit international revenue growth and an enlarged global service footprint, diversifies geographic revenue sources and reduces dependency on the domestic Chinese market, supporting both revenue stability and future earnings growth.

Valuation

• The assumed bearish price target for China Unicom (Hong Kong) is HK$9.2, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of China Unicom (Hong Kong)'s future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of HK$13.83, and the most bearish reporting a price target of just HK$9.2.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be CN¥415.7 billion, earnings will come to CN¥23.1 billion, and it would be trading on a PE ratio of 13.5x, assuming you use a discount rate of 6.7%.
  
• Given the current share price of HK$9.2, the bearish analyst price target of HK$9.2 is 0.0% higher. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.