China's second largest mobile operator China Unicom (CHU - Analyst Report) added 2.12 million subscribers in July, up 1.2% from the prior month. This takes the company’s total customer base to 183.74 million.

The company’s GSM subscriber base expanded to 158 million with the net addition of 0.25 million customers, while its 3G subscriber base increased to 25.82 million with the net addition of 1.87 million in July. 3G subscriber addition was higher in July than 1.86 million in June.

China Unicom is confident of expanding its 3G user base beyond its expected 25 million by the end of the year. We believe this target has already been achieved. Further additions would indicate the outstanding growth prospects in China Unicom’s mobile 3G business, which would lead to increased average revenue per user.

The company’s 3G business is performing well and is expected to sustain the momentum well into the future as the biggest growth driver. For the full year, capital spending on the 3G network is estimated at RMB 73.80 billion.

We believe China Unicom will continue to make significant progress in expanding economies of scale in 3G, broadband and other businesses that will likely improve its overall revenue and profitability. The company is offering 3G services in collaboration with Research In Motion Limited’s (RIMM - Analyst Report) Blackberry phones.

However, China Unicom remains significantly challenged by the aggressive nationwide 3G service rollouts by its peers China Mobile (CHL - Snapshot Report) and China Telecom Corp. (CHA - Snapshot Report). In addition, high levels of marketing and promotional expenditures related to 3G service deployments could hurt profitability. Further, increased operating expenses, coupled with higher depreciation and amortization, will have an adverse effect on the company’s profitability, free cash flow and margins.

Moreover, China Unicom is offering handsets at subsidized rates with lower 3G service plans for multi-year contracts to retain existing customers and add new ones. This will weigh on the company’s future overall average revenue per user and increase operating costs.

We are currently maintaining our long-term "Underperform" rating on China Unicom. The stock retains a Zacks #3 ('Hold') Rank for the short term (1–3 months).