Deep-dive 2021-6: China Unicom

At 0.33x EV/Sales, China Unicom (762 HK) trades at among the lowest valuation multiple of any telecom operator globally. It's the third-largest telecom operator in China, with exposure towards both wireless and fixed-line services.

However, there are risks as well. The wireless telecom industry is competitive and I don't necessarily think that China Unicom possesses real pricing power to speak of. That said, subscription revenue is recurring and the visibility of earnings is high. In China, the industry is an oligopoly with only three major companies. The regulator has so far been kind to the incumbents.

In 2020, China Unicom achieved an operating margin of 3.7%. The following factors suggest that the operating margin is likely to rise over time:

• China Unicom's 5G capex was front-loaded, with capex and depreciation occurring far ahead of the actual revenue 5G was likely to bring

• Smartphones that support 5G are becoming more ubiquitous and the company is now marketing its 5G plans heavily

• A…