Morningstar has reduced its fair value estimate for CHINA UNICOM (00762) by 9% to HK$9.6. The research firm maintained its "no moat" rating, citing the company's current return on capital being below its cost of capital. Morningstar also cut its near-term profit forecast for CHINA UNICOM by approximately 15%, partially offset by lower capital expenditure expectations.

In the fourth quarter, CHINA UNICOM's service revenue declined by 1.2%, though this was partly mitigated by improvements in accounts receivable. Consequently, EBITDA grew by 4%, but net profit for the quarter still fell sharply by 49% to 800 million yuan. The drop in service revenue from the core domestic telecommunications business offset growth from the smaller computing and AI segments.

The profit outlook for 2026 appears challenging, with the implementation of a 3% value-added tax increase. Growth in cloud service revenue is projected to slow to 5.2% in 2025, down from 17% in 2024 and over 60% in 2023. Morningstar anticipates CHINA UNICOM's net profit will decrease by 12% in 2026 and does not expect it to recover to the 2025 level of 20.8 billion yuan within the next five years.

Capital expenditure for 2025 declined by 12% to 54.2 billion yuan, and management forecasts a further 8% reduction to 50 billion yuan in 2026. Free cash flow for 2025 increased by 28% to 36 billion yuan, with Morningstar projecting an average annual free cash flow of approximately 34 billion yuan over the next five years.