China's second-largest mobile phone operator, China Unicom, posted a big jump in its first quarter earnings, helped by robust data demand, but one analyst tells CNBC he prefers the market leader China Mobile.
China Unicom’s quarterly net profit jumped nearly 7 times to $158.55 million from a year ago, largely in line with forecasts of analysts polled by Reuters.
But Neale Anderson, Asia Pacific Telecom & Media Analyst at HSBC, told CNBC Asia’s"Capital Connection", that he is bearish on the stock due to its high valuation, and huge investment in its network. He expects Unicom's net income margins to stay almost flat this year at around 3 percent, from 2 percent in 2011.
Anderson has an "underperform" call on China Unicom, with a one-year target price of HK$8.90, ($1.15) which is around a 40 percent downside from current levels.
Instead, he recommends investors put their money on Unicom's bigger rival, China Mobile .
China Mobile, the world's largest mobile carrier by subscriber base, has been trading at a valuation of 11 times. That's much lower than China Unicom's PE ratio of about 30 times.
"The valuation gap is due to the fact that Chinese mobile carriers adopt different 3G technology," says Anderson.
Unlike China Unicom and No. 3 player China Telecom, China Mobile's homegrown 3G-network is relatively immature, and hence is unable to support certain devices, like Apple’s iphone, but that may change soon.
“China Mobile's 3G technology may reach maturity sooner than many expect. And that could result in a China Mobile inking an iphone deal with Apple in the next 12 months or so," he adds.
Anderson, therefore, has an "outperform" call on China Mobile, with a target price of HK$102. That's represents a 20 percent upside from current levels.