China Unicom on-a-tear: Barclays

3G revenue growth and ARPU trends continue to disappoint .

Here's from Barclays Research:

The issue we have with China Unicom (CU) is that operational progress keeps falling short of expectations. Subscriber numbers, 3G revenues and margins are our three key watch factors: we need to see better momentum in all three before we revisit our Equal Weight view. We have cut estimates to reflect lower ARPU. We would consider entry points below HK$11 (book value): we maintain book value (HK$11) as a good share price support level. China Mobile (OW) is our top China telco pick.

Operating leverage just not visible as yet. 3G revenue growth and ARPU trends continue to disappoint as CU has focused more on voice versus handset subsidies in the last two quarters. Despite the lower handset subsidies though, EBITDA margins are not expanding. The case for higher operating leverage with growing scale is the crux of CU's investment thesis, and this is just not visible yet.

Cheaper smart-phones and data pricing could drive recovery but execution is key. Recently launched data pricing/packages will drive mass market adoption expectations, especially now that cheaper smart-phones are widely available. That said, 3G ARPU could come under higher pressure as well and given CU's track record, we think investors will want to see more evidence in the numbers before the stock can rerate.

Other challenges into 2013. (1) More aggressive China Mobile (OW) (TD-SCDMA, trial TD-LTE, smart-like 2.5G phones) and China Telecom (EW) (iPhone) make market share grab more difficult. (2) iPhone5: earnings opportunity or challenge? Many of CU's originally contracted iPhone subscribers are likely nearing the end of their contract and looking for another one: associated subsidies will drive new costs but just replace old revenues. Meanwhile, China Telecom is likely looking for its iPhone5 share as well.

Estimate revisions. We cut our EBITDA/EPS estimates by 2.2%/20.8% and 4.4%/19.4% for 2012/13E. Our EPS estimates are 18.9%/14.1% below consensus for 2012/13E.