China Unicom Ltd, the smaller of the country's two mobile operators, lagged forecasts with a meager 1.5 percent rise in quarterly earnings as margins came under pressure, but analysts said growth in the world's top telecom arena would prop it up in 2008.

Unicom, in which SK Telecom Co owns a 6.6 percent stake, also lagged rival China Mobile Ltd, which commands two-thirds of the market and posted a 37 percent leap in quarterly earnings as it continues to outpace Unicom in signing up users.

Both are trying to boost revenue by expanding value-added services, diversifying from traditional voice businesses.

But as market saturation slows the growth of new mobile subscribers in big cities, China's wireless telecom duopoly is slugging it out to sign up lower-paying customers in less-affluent cities and rural areas, whittling down margins.

Still, Unicom's profits would have risen by a larger degree if an accounting gain to reflect the changing value of issued convertible bonds was stripped from last year's first quarter.

"Revenue growth has improved for both GSM and CDMA operations, and if we take out the convertible bond charge, the net profits actually recorded a 10 percent growth. This is a decent set of earnings," ABN AMRO analyst Wendy Liu said. "The average revenue per user (ARPU) decline was within expectations and it's not such a big deal as long as the bottom line grows nicely. Both China Mobile and Unicom are going for low-end rural customers right now."

The mobile operator said its net profits for the first three months totaled 2.02 billion yuan, compared with a marginally revised 1.99 billion yuan a year earlier.

That fell short of a forecasted 2.28 billion yuan - the average of three analysts' forecasts, according to Reuters Estimates.

Partly reflecting its intense battle for subscribers with the much larger China Mobile, Unicom endured a 12.3 percent surge in sales and marketing expenses to 5.09 billion yuan.

Shares in Unicom slid 8.9 percent in the first quarter, compared with a 17.8 percent fall in the benchmark Hang Seng Index.

During the quarter under review, revenues increased 5.7 percent to 25.49 billion yuan.

Reuters

(HK Edition 04/25/2008 page2)