China Unicom Ltd yesterday posted a 4 per cent increase in its net profit, but the firm's profit margin was largely suppressed by heavy marketing spending and handset subsidies.

The net profit of the Hong Kong, Shanghai and New York listed company - the world's third-largest mobile phone firm in terms of users - rose to 4.39 billion yuan (US$528 million), lower than Merrill Lynch's forecast of 4.45 billion yuan (US$536 million).

The company's total revenue growth jumped 17.3 per cent to 79.332 billion yuan (US$9.5 billion), but its profit margin was squeezed by a 15.3 per cent rise in operating costs, totalling 71.4 billion yuan (US$8.6 billion).

The operating profit in the company's three main business division including global system for mobile communications (GSM), code division multiple access (CDMA), and fixed line all recorded either a loss or a drop in their profits.

Commenting on the company's result, the Chairman Chang Xiaobing said: "Handset subsidies accounted for a major element of the costs in our CDMA business.

"We will centralize the purchase of handsets and eventually scrap handset subsidies to keep costs under control," he added.

In 2004, the company amortized handset cost was 6.12 billion yuan (US$733 million) and the added new handset amortization cost was 6.42 billion yuan (US$773 million).

With regard to the change of the company's procurement policy, Executive Director and Vice-President William Lo said: "The company will centralize national procurement for CDMA handsets through which the cost is expected to drop at least 10 per cent close to current price level of GSM handsets this year."

Analysts are wary that China Unicom has been aggressively expanding its market share in the mainland's wireless landscape, forcing the average revenue per subscriber (APRU) to fall sharply.

The company had a total of 112.081 million cellular subscribers by the end of last year, a year-on-year rise of 22.5 per cent, representing a market share of 35.6 per cent, of which GSM subscribers increased 16.1 per cent to 84.267 million and CDMA subscribers rose 46.8 per cent to 27.814 million subscribers.

But this rapid expansion has not been accompanied by promising returns for the company.

"It is understandable for the company to sacrifice the APRU under severe competition," said Shenyin Wanguo Securities analyst Eugene Law. "But the trade-off can be offset by the relative growth of the customer base."

"The CDMA business would still be the core driving force for the company to make earnings in 2005," said Law, explaining the GSM sector is not competitive enough to fight with its rival China Mobile.

Apart from the loss from its CDMA division, the operating profit of its fixed line division shrank by a remarkable 67 per cent drop to 473 million yuan (US$56.9 million) as a result of falling distance tariff and lowered inter-segment settlement price with continuous capital expenditure driving the rapid growth of depreciation and the amortization cost.

Law agrees with the figure and suggested "the poor result should be not solely blamed by the stiff competition, but with the inadequate cost control by the management."

"The profit growth will be largely depended on the cost-control ability of China Unicom," Law added.

(China Daily March 25, 2005)