9M21 operating results tracking ahead of expectations
China Unicom (CU) released today its 9M21 operating results tracking ahead of expectations. Revenue grew +8.5% yoy in 9M21 (vs. consensus of +7.4% for FY21), driven by industry internet (+25%) and Fixed-line services (+9%). EBITDA margin shrank 1.9ppt yoy to 30.8% in 9M21 (but improved 3.3ppt yoy in 3Q21). EBITDA margin tracks ahead of market expectation of 29.8% for FY21. Net profit rose +19% yoy to RMB12.9bn in 9M21, inline with consensus expectation for FY21.
Mobile ARPU growth continued, but would slow down
CU’s mobile ARPU increased +6.3% yoy to RMB44.3 in 9M21 (RMB43.6 in 3Q21, +1% yoy), already exceeded our forecast of RMB44.1 for FY21. Company ascribed the growth to focus on customer value enhancement, 5G upgrade, and rational market competition. 5G package users reached 137mn in Sep (43% penetration, vs. 23% by end-2020). We expect as 5G penetration increases, mobile ARPU uptrend would slow down.
Robust industry internet growth continued
Industry internet kept its strong growth momentum, with +25% yoy in 9M21 (+29% yoy in 3Q21), helped by rising demand for digital transformation across industries. Industry internet revenue contribution reached 16.7% in 9M21 (from 12.4%/15.5% in 2019/20). We believe the rapid development in this segment will help CU capture growing 2B opportunities in the 5G era. Depreciation increase is kept under control (only +3.3% yoy in 9M21). We expect CU will maintain capex discipline and strengthen profitability.
Revise estimates and trim TP; valuation attractive
CU shares remained flattish YTD (only -1%), underperforming its peers. However, we find its industry internet momentum encouraging. Shares trade at trough valuation of 0.7x 2021E EV/EBITDA, attractive in our view. We revise our estimates for CU, and trim TP to HKD6.8 (DCF, 9.5% WACC/2% perpetual). Maintain BUY.