CHINA UNICOM (CHU)

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Beijing-based China Unicom Limited (China Unicom) provides a wide range of telecommunication services throughout China. With approximately 30% of the total mobile phone users in China, China Unicom is the second largest mobile operators in China behind China Mobile. The company's primary source of revenue is its wireless services, which are based on both the global system for mobile communications (GSM) and code division multiple access (CDMA) technologies. Other telecom services provided by China Unicom include domestic and international long distance and Internet services. As of 2006, revenues from GSM business and CDMA business each accounted for 63% and 29% of total revenue, respectively. Data and internet business, long distance business and sales of telecommunications products totally accounted for 8% of the total revenues. China Unicom is currently the sole provider of CDMA services in China. As of December 31, 2007, the company had 119 million GSM subscribers and 41 million CDMA subscribers.

China Unicom's net income for the third quarter of 2007 increased 114% over the same period of 2006 because of its rapid growth of GSM revenue and cost control. However, the net income still didn't meet the market consensus. The company still faces fierce competition from aggressive GSM pricing offered by China Mobile. It maintains separate GSM and CDMA networks, which dilutes management focus and operating efficiency. CDMA is expected to be Unicom's future growth driver, but high infrastructure and handset costs place it at a disadvantage to China Mobile's GSM service. Unicom's growth potential through CDMA is offset by competitive threats and high costs relative to GSM. However, the company was able to increase its profit margins because of cost controls. Moreover, although its stock price increased significantly due to market speculation, the stock appears fairly valued, considering the possible restructuring in telecom industry in China and its 3G opportunities in China. Thus, we maintain our Hold recommendation.

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