China Unicom Earnings: Lackluster Quarter but Bold 2024 Guidance

China Unicom reported a somewhat disappointing fourth quarter and full-year 2023 result, but its guidance for 2024 was unusually bold. Fourth-quarter services revenue grew 3.8% year on year, which was a slight improvement on the third quarter, but EBITDA declined 6.6% year on year. The main reason given for this was the timing of quarterly bonuses for staff. But even if we look at the full year, the services revenue growth of 5% only drove a 2.2% growth in EBITDA. Full-year net profit growth of 11% looked quite solid, but this was helped by a CNY 2 billion reduction in depreciation and amortization, without which we estimate that 2023 net profit growth would have only been 2%-3%. However, the company guided to stable growth in top-line service revenue in 2024 and another double-digit growth in net profit before tax driven by fundamentals rather than depreciation reduction. The company also guided for capital expenditure to fall to CNY 65 billion in 2024 from CNY 73.9 billion in 2023. We see this reduction as very positive as we had been concerned that the company would continue to increase capex. The company generated free cash flow of CNY 28.5 billion in 2023 and we expect this to rise to about CNY 40 billion in 2024, driven by reduced capex, increased earnings, and a focus on reducing accounts receivable.