UPDATE 2-China Telecom, Unicom set to narrow 3G gap with iPhone 5

* China Mobile loses out without iPhone contract

* China Mobile leads with 3G user numbers but lags in percentage growth

* China Telecom Q3 net down, lags China Mobile's 1.3 pct rise, Unicom's 27 pct gain

HONG KONG, Oct 29 (Reuters) - China Telecom and China Unicom are set to further narrow the gap in 3G subscribers with bigger rival China Mobile when Apple launches the iPhone 5 in the world's largest smartphone market as early as this quarter.

China Mobile Ltd leads in 3G user numbers, but China Telecom Corp Ltd and China Unicom (Hong Kong) Ltd are ahead in monthly subscriber growth by percentage, according to September data released over the past week, partly because China Mobile's unique 3G network is incompatible with earlier iPhone models.

However, hefty handset subsidies doled out to attract new 3G users will pressure margins, analysts warn. China Telecom, which sealed a deal with Apple Inc in February to sell iPhones, said on Monday that its net profit declined for the third consecutive quarter due to increased subsidy spending.

``In the next three to six months, there is probably going to be an acceleration in 3G subs,'' said Anand Ramachandran, a Hong Kong-based analyst at Barclays. ``The subsidies will potentially impact their cost structure on a recurring basis at least over the next 12-18 months.''

China Telecom, the smallest of China's mobile operators, posted a third-quarter profit drop of 7 percent, lagging China Mobile's 1.3 percent gain and China Unicom's 27 percent rise.

China Unicom, which started selling the iPhone in 2009, introduced earlier this month data plans aimed at enticing its 2G users to upgrade to 3G. The latest packages are seen as the cheapest in the market, analysts said.

China Mobile is the only Chinese carrier without an iPhone contract because of network incompatibility, although the iPhone 5 contains a Qualcomm Inc chip that supports the operator's homegrown TD-SCDMA standard.

Apple, which counts China as its biggest iPhone market after the United States, plans to launch the iPhone 5 in the country in December.

The rising popularity of smartphones made by Samsung Electronics Co Ltd, especially its latest Galaxy S3 model that runs on Google's Inc's Android operating system, also helped spur carriers to capture a bigger 3G user base.

Samsung currently commands the lead in China's smartphone market.

Chinese wireless carriers have also aggressively pushed for 1,000-yuan ($138) smartphones made by local firms such as Huawei Technologies Co Ltd and ZTE Corp to persuade lower end 2G users to switch to 3G.

China Telecom rose 1.3 percent in Hong Kong trading, while China Mobile gained 0.2 percent. China Unicom fell 1.1 percent.


China's 3G users make up less than 20 percent of its mobile subscribers, but analysts expect that percentage to leap to nearly 30 percent by the end of 2013, boosting the earnings growth of carriers that have long relied on cheap voice plans.

China Telecom increased its 3G subscriber base by 5.8 percent in September to 59.7 million, while China Unicom expanded by 5.0 percent to 66.9 million and China Mobile by 4.8 percent to 75.6 million, company data showed.

``They can further lower data tariffs, and they can launch some kind of unlimited data plan, which will be the most powerful tool to ramp up 3G penetration,'' said Marvin Lo, a Hong Kong-based analyst with Mizuho Securities.

Carriers are betting that users will share more photographs and videos on social networking sites, as well as play online games to help boost data usage.

``New Internet applications may trigger more 3G demand,'' Frederick Wong, executive director of Avant Capital Management (Hong Kong) Ltd, a hedge fund that focuses on investing in tech companies.

``If there are more video and photo downloads, that will drive faster wireless adoption. Facebook-like sharing apps may eventually emerge since new-generation users are more focused on entertainment than news feeds.''

So far this year, China Mobile's shares were up more than 10 percent in Hong Kong trading, while China Telecom's stock gained around 4 percent.

Shares in China Unicom have fallen by a quarter because investors had expected more new 3G users to have signed up with the carrier, analysts say.