The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage. NEW YORK ( Trefis) -- China Unicom ( CHU) is the exclusive official carrier of the iPhone in China. With smartphone penetration as low as 15% in the country, the company provides heavy subsidies on the mobile handsets that it sells. The aim is to create a class of mid- and low-end smartphone users and attempt to increase mobile data usage. A provider of both mobile and landline services in China, the company hopes to leverage upon its integrated services offerings and gain competitive advantage. The company faces stiff competition from China Mobile ( CHL) in the mobile services segment and from China Telecom ( CHA) in its mobile and landline segments. The present structure of the company emerged after the restructuring in the Chinese telecom industry in 2008. The company sold off its CDMA business to China Telecom and the remaining company was merged with China Netcom to form China Unicom. See our complete analysis of China Unicom stock here.
Revenues from mobile phone sales have increased from $100 million in 2008 to $1.1 billion in 2010 and to $1.7 billion by mid-2011. This has primarily been due to the company's policy of offering highly subsidized handsets with bundled services. The move has taken its toll on the company's EBITDA margins, which declined from 42% in 2008 to 29% in 2010, and we expect them to fall further. By comparison, China Mobile reported EBITDA margins of 50.7% in 2010. China Unicom has also increased selling and marketing expenses primarily for the promotion of such subsidized handsets. These expenses grew by 9% in 2009 and 14% in 2010, taking down margins with them even lower. Further, since the company set up its mobile division only after the restructuring in 2008, it undertook large scale capital expenditure for its network expansion and enhancement. The revenues relating to such expansion are not yet significant enough to meet the additional expenses incurred. Tariff regulations by the government restrict freedom in terms of pricing of mobile services. These have all added up and led to the decline in the company's profitability. Click here to find out how a company's products impact its stock price at Trefis