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Global Top Cat

Top Asian Equities for 2015

By Yiannis G. Mostrous, on Feb. 5, 2015

We also foresee further upside for China Unicom (Hong Kong: 762, NYSE: CHU), the Mainland’s second largest mobile and fixed-line carrier. The stock has rallied about 10 percent since we first highlighted the pick on Oct. 8, 2014. (See A Long-Term Bull in the China Shop.)

An investment in China Unicom represents a bet on fixed-line broadband growth and Beijing’s ongoing effort to reform state-owned enterprises to make them more efficient and competitive.

In Asia’s emerging markets, insufficient infrastructure and higher-cost plans have pushed households toward wireless devices; demand for fixed-line broadband services has lagged.

(Click graph to enlarge.)Broadband Penetration as a Percentage of Asian Households

Among these nations, China has improved this infrastructure by leaps and bounds, which should help to drive demand for fixed-line and wireless broadband connections. Against this backdrop, China Unicom should be able to deliver single-digit revenue growth in this category.

The company generates about 19 percent of its revenue from broadband—and this contribution should increase over time.

China Unicom has also won market share in the wireless market and improved this operation’s profitability. In the third quarter of 2014, the telecom provider grew its earnings by 26.7 percent year over year; we expect this momentum to continue.

Equally important, China Unicom could be the first state-owned telecom that authorities allow to sell 20 percent to 30 percent of its shares to private-sector investors.

With a corresponding proportion of managerial control shifting to the private sector, we would expect the new minority owner to push for improved operational efficiency and pursue smarter growth strategies—for example, migrating more services online.

A more exacting, tuned-in management style and could expand the company’s profit margins to between 15 and 20 percent instead from an uninspiring 5 percent.

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