China Unicom announced its 2024 three-quarter report. The company achieved operating income of 290.1 billion yuan in the first three quarters of 2024, an increase of 3% over the previous year, and achieved net profit of 8.3 billion yuan to mother, an increase of 10% over the previous year. Looking at a single quarter, 3Q24 achieved revenue of 92.8 billion yuan, a year-on-year increase of 3.25%, and realized net profit to mother of 2.3 billion yuan, an increase of 7.8% year-on-year, in line with our previous expectations (2.35 billion yuan). The company's profitability has continued to improve in recent years, and net profit has maintained a good growth trend. We are optimistic about the development prospects of the company's digital business and the improvement of operating efficiency, and maintain the A share “increase” /H share “buy” rating.

The network service is developing steadily, and the computing network digital intelligence service expands and increases efficiency

By business, the number of mobile users reached 0.345 billion, the 5G package penetration rate reached 83%, fixed broadband users reached 0.121 billion, and the basic market scale development maintained a good trend. In terms of computing network intelligence, Unicom Cloud's revenue reached 43.86 billion yuan, up 19.5% year on year; in the context of AIDC's accelerated development, the company's data center business revenue reached 19.7 billion yuan, up 6.8% year on year. The company built Wanka intelligent computing centers such as Lingang and Hohhot in Shanghai, and the large-scale computing power center park fully covered the East Digital and Western computing hub nodes. In addition, the cumulative number of customers served by the company's 5G industry virtual private network reached 14013, and the network security business revenue maintained a strong growth trend. According to the company's 3Q24 quarterly report, looking forward to the whole year, the company will maintain steady progress and strive to achieve the performance goals of steady revenue growth and double-digit profit growth.

Operating efficiency continues to improve, and profits are expected to be further released

In terms of profitability and cash flow, the company's ROE increased by 0.22 pct to 5.12% year on year, and net interest rate increased by 0.39 pct to 6.54% year on year, mainly benefiting from improved operating efficiency. In addition, revenue from the disposal of network assets such as cables and batteries increased. In terms of cash flow, the company's net operating cash flow at the end of the third quarter was $58.25 billion, an improvement over the second quarter. In particular, based on a comprehensive assessment of network evolution, equipment updates, etc., the company decided to adjust the depreciation period for 4G wireless related equipment from 7 years to 10 years. The company expects this change to reduce the depreciation of its fixed assets by 1.1-1.2 billion yuan in 2024. Against the backdrop of continuous improvement in operating efficiency and declining depreciation and amortization expenses, we believe that the company's profit is expected to continue its positive growth trend.

Profit is expected to continue to grow, maintaining the “increase” of A shares and the “buy” rating of H shares. We are optimistic about the growth prospects and profitability of the company's industrial digital business. The company's net profit for A-shares in 24-26 is 9.03/9.94/10.88 billion yuan. Referring to the global operator Bloomberg, the average PB for 2024 is expected to be 1.38 times. Considering that the company's current payout rate is lower than the average of comparable companies, A shares will be given 1.2 times the 2024 PB, corresponding to a target price of 6.49 yuan, maintaining the “gain” rating. Due to the influence of US Executive Order 13959, the company's H shares are discounted to a certain extent compared to A shares. Considering the recent increase in the southbound capital shareholding ratio, we believe that H shares are expected to usher in valuation repair opportunities, giving H shares 0.68 times PB in 2024, corresponding to a target price of HK$8.98.

Risk warning: 1) ARPU improvement fell short of our expectations; 2) 5G capital expenditure exceeded our expectations; 3) competition intensified; 4) the company adopted a more conservative dividend policy.