Fitch Ratings: 5G to Deliver Growth to Korean Telcos

SK Telecom Co

04/03/2020 24:35

(The following statement was released by the rating agency)


Fitch Ratings-Seoul-March 03: South Korean telecommunications companies' 
profitability is likely to continue to improve as the high marketing costs 
during the early stage of 5G adoption will be increasingly offset by the 
benefits of larger 5G subscriber bases and easing competition, Fitch Ratings 
says. 

Both SK Telecom Co., Ltd (SKT, A-/Negative) and KT Corporation (A/Stable) added 
5G subscribers in 4Q19 despite the absence of new flag smartphone models. SKT 
continues to lead the 5G market with the addition of 550,000 subscribers, which 
brought its 5G user base to 2.01 million, and KT's 5G subscriber base increased 
by 400,000 to 1.42 million. 5G subscribers accounted for high-single digits of 
the telcos' total smartphone users at end-2019. 

Our expectations for future revenue growth are supported by like-for-like 
wireless average revenue per user (ARPU) increases of 0.6% qoq and 1.8% for SKT 
and KT, respectively, although reported ARPU and revenues were depressed by 
accounting changes related to membership points, which are now deducted from 
revenue rather than treated as expenses.  

 

We expect the increasing popularity of higher-priced 5G tariff plans to offset 
the negative impact of handset subsidies, leading to improvement in the telcos' 
operating profitability over the medium term. The telco's operating margins were 
squeezed in 2019 due to higher marketing costs amid heated competition for 5G 
subscribers. SKT's and KT's marketing costs increased by 5.5% and 18.4%, 
respectively, yoy, which led to declines in operating profit of 8% and 9%, 
respectively. We expect competition to remain moderate in 2020 after the third 
competitor, LG Uplus Co., Ltd, reduced its phone subsidies. The telcos' market 
shares are likely to remain stable in the short term.

SKT and KT have non-telecom businesses that provide revenue diversification and 
support the companies' overall operating cash flows. KT's internet-protocol 
television (IPTV) revenue rose by 11% yoy in 2019 and revenue from its content 
segment, which includes the commerce and music streaming businesses, increased 
by 23%. SKT's IPTV revenue rose by 11% in 2019 as it gained subscribers, and its 
commerce business, operated via 11st, continued to generate operating profits. 

Fitch expects SKT's non-telecom businesses to increase their contribution to 
revenue as SKT will merge its fixed-line subsidiary SK Broadband Co., Ltd (SKB, 
A-/Negative) with the second-largest cable-TV operator in Korea, t-broad 
Co.,Ltd, in April 2020. This will immediately boost SKT's operating profit by 
KRW20 billion- 25 billion. The merger will expand SKT's pay-TV subscriber base, 
which will improve content sourcing power and economies of scale, and allow SKT 
to maintain its position as the third-largest pay-TV operator in Korea. 

SKT's over-the-top platform, Wavve, plans to invest KRW200 billion to produce 
original content to strengthen its market position. KT also launched an 
over-the-top service called Seezn, which offers content and makes AI-based 
recommendations. We expect competition in this area to intensify over the medium 
term. 

SKT's leverage headroom remains limited at its current rating despite the growth 
in its wireless operation as it requires high capex to upgrade its 5G network. 
We forecast its short-term leverage to remain high for the rating, with FFO 
adjusted net leverage at 1.8x-1.9x (2018: 1.9x), compared with the 1.8x 
threshold where we would consider a negative rating action. However, we may 
revise the Outlook on SKT's IDR to Stable from Negative if there is sufficient 
improvement in operating metrics in the next 12 to 18 months, which could be led 
by stronger-than-expected revenue growth from 5G conversion. 

In contrast, KT's FFO adjusted net leverage is likely to stay healthy at around 
1.3x over the medium term, providing a sufficient financial buffer to upgrade 
its network to 5G technology without a significant increase in leverage.

Contact: 

Shelley Jang

Director

+82 2 3278 8370

Fitch Ratings Australia Pty, Korea Branch

9F Kyobo Securities Building

97, Uisadang-daero, Yeoungdeungpo-Gu

Seoul, Korea

Steve Durose

Head of TMT, Asia-Pacific

+61 2 8256 0307

Media Relations: Alanis Ko, Hong Kong, Tel: +852 2263 9953, Email: 
alanis.ko@thefitchgroup.com; Wai Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: 
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