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South Korean Telcos Seeing Easing Competition and Better Profitability
A research note from Korea Investment & Securities (KIS) notes that despite sluggish profitability in 2Q08, the three wireless telcos have been outperforming the broader stock market. Positive catalysts for their stock prices were highlighted defensive characteristics amid the slowing domestic economy and eased marketing competition since July. Given some changes in the wireless telecom market conditions, they think it is time to keep an eye on the slowdown in competition going forward.
In 1H08, KoreaÃ's three wireless telcos saw their operating margin (the ratio of operating profit to service sales) fall to 13% due to cutthroat marketing competition. But as they reined in aggressive marketing campaigns entering 2H08, it is expected that the sectorÃ's overall profitability to improve during 2H08.
The three telcos aggressively met their operating guidance in 1H08. In terms of net addition targets, KTF already attracted 495,000 subscribers, 70.7% of its annual target number of 700,000 by July. LG Telecom secured 285,000, 71.3% of the annual target number of 400,000 during the first seven months of 2008.
Performances were outstanding as well for 3G subscriber sign-ups. KTF, which has been carrying out the most aggressive marketing campaigns, had attracted 6.76mn 3G subscribers until July, and thus has only 288,000 subscribers to go per month on average to achieve its year-end target of 8.2mn. Given that KTF attracted over 508,000 3G subscribers per month on average until July, the analysts believe it will easily achieve its target even though it is cutting back on marketing.
However, they expect obvious signs of easing competition will be visible at end-2008 because a large number of lock-in subscribers are expected and a variety of bundled services will be launched in 2H08.
Easing competition will lead to lower marketing costs, better profitability, and then greater shareholdersÃ' return, in their view.
They also expect capex to decline from 2009 and, in turn, free cash flow will grow.
KIS says that the wireless telcos have almost completed executing capex for their 3G services, and given the completion of network setup and slowing 3G migration, the analysts predict the operatorsÃ' overall capex will decline sharply from 2009.
Posted to the site on 4th September 2008