China Unicom Ltd., the world's third-largest mobile phone company by users, had an unexpected drop in fourth-quarter profit as it spent more on marketing and handset subsidies to attract customers.

Net income fell to 390 million yuan (US$47 million) from 430 million yuan a year earlier, according to figures derived by subtracting nine-month profit from full-year figures provided by the company.

Unicom's shares have dropped 11 percent this month on concern that competition from China Mobil and a cordless service offered by fixed-line operators will crimp profit growth. Operating expenses jumped 21 percent last year, driven by higher selling and marketing costs.

"Competitors are using price to compete," said Pauline Dan, who helps manage US$3 billion, including Unicom shares, at Manulife Asset Management Ltd. in Hong Kong. Unicom is "kind of stuck in the middle."

China Telecom Corp. and other fixed-line phone companies offer a cordless service called "Little Smart" in cities, which competes with Unicom and China Mobile's wireless services.

Operating costs rose to 71.4 billion yuan last year from 59.1 billion yuan a year earlier, according to a statement issued by the Shanghai and Hong Kong-listed carrier. Selling and marketing costs surged by a quarter to 18.9 billion yuan.

"Costs were the problem," said chief financial officer (CFO) Tong Jilu at an analysts' briefing in Hong Kong. "We have to get a grip on our handset and network costs."

Fourth-quarter sales increased to 20.13 billion yuan from 18.05 billion yuan a year ago. That beat the median analyst estimate of 19.9 billion yuan in revenue. Unicom said it would pay a 2004 dividend of 0.1 yuan per share.

China Unicom, the smaller of the nation's two mobile phone companies, and China Mobile have boosted sales by expanding networks and slashing rates to add users among the 900 million people in lower-income, rural areas.

Capital spending, which included network costs, would fall to 18.23 billion yuan this year from 18.39 billion yuan in last year, Unicom said.

(Shenzhen Daily March 28, 2005)