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Sub-par returns persist as regulatory
changes enable alt-nets to expand scale
FNP to trigger competition and network
upgrades; margins to remain pressured,
capex to remain high
Initiate alt-nets LGD, SKB with UW(V) and
KT with N; KT’s valuations supported by
6% dividend yield and KTF stake
The Korean fixed-line industry is crowded, as shown by its
sub-CoE RoE over the past decade. KT, the incumbent,
competes with alt-nets such as SKB, LGD, PWC, and more
than 100 cable operators. RoE has been depressed due to
pricing pressures, excessive marketing costs, and duplicate
network investments. These issues remain; no wonder our
target prices for KT, SKB and LGD imply 2009e price-tobooks
of 0.77x, 0.69x, and 0.82x, respectively.
FNP helps alt-nets gain market share from the
incumbent, but only at a significant cost. We expect all
operators and cable companies to cut prices and offer
attractive subsidies to lure subscribers. This is likely to
depress sector margins. A strong push into IPTV is
operators’ only defence against cable, but network upgrades
are a prerequisite. IPTV will likely keep capex high, and
subscriber migration costs should depress profits further.
We forecast declining and below-consensus earnings for
the sector. Our 2009 net profit estimates for LGD and KT
are c28% and c24% below consensus. Unlike consensus,
SKB is forecast to remain in the red. The estimates and
valuations hinge on our expectation that competition will
escalate following the implementation of fixed number
portability (FNP) from November 2008 and the start of fullbroadcasting
IPTV service from December 2008. We are
Neutral on KT because negatives appear priced in and
because the dividend yield and the value of its KTF stake
support valuations. Merger with SKT is a key risk for SKB;
however, this will have no impact on industry fundamentals.
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