Fitch Ratings: Marketing Costs Offset Korean Telcos' Wireless Growth

SK Telecom Co

20/11/2019 01:00

(The following statement was released by the rating agency)


Fitch Ratings-Seoul/Sydney-November 19: South Korea's accelerating 5G conversion 
has led to a growth in wireless average revenue per user (ARPU) and revenue in 
3Q19, but operating profit has been weighed down by higher handset subsidies 
amid intensifying competition, says Fitch Ratings. However, we expect operating 
profit to gradually improve over the medium term as the high marketing costs in 
the early stage of 5G adoption will be increasingly offset by benefits of 
expansion in the 5G subscriber base.

We expect wireless revenue to continue to grow with increasing 5G uptake and 
data traffic. SK Telecom Co., Ltd (A-/Negative) solidified its position in the 
5G market in 3Q19. It added 1 million subscribers, which brought its 5G 
subscribers to 1.54 million and increased its market share to 44% from 40% in 
2Q19. KT Corporation (A/Stable) expanded its 5G subscriber base to 1.05 million 
in 3Q19 from 0.42 million in 2Q19. SKT's wireless revenue rose by 2.1% qoq in 
3Q19 while that of KT increased by 0.7%. SKT's ARPU increased to KRW31,166 a 
month (2Q19: KRW30,755) and KT's climbed to KRW31,912 (2Q19: KRW31,745).

We believe the increasing popularity of higher-priced 5G tariff plans is likely 
to offset the negative impact of increasing handset subsidies, leading to an 
improvement in the companies' operating profit over the medium term, after weak 
operating profits in 3Q19. Marketing costs of SKT and KT continued to increase 
in 3Q19 by 8% and 23% yoy, respectively, resulting in a flat yoy operating 
profit growth for SKT and a decline of 15% yoy for KT. 

KT's reported marketing costs rose more steeply than SKT's due to its 
conservative accounting approach, as it uses a 20-month average contract period 
compared with SKT's 28 months when amortising these costs.

The two telcos' expanding non-telecom businesses continue to support the 
companies' overall operating cash flows. KT's internet-protocol television 
(IPTV) revenue increased by 14% yoy in 3Q19 and revenue from its content 
segment, which includes the e-commerce business and music streaming business, 
increased by 24% yoy. SKT's IPTV revenue also rose by 14% yoy, as it gained 
subscribers and its e-commerce business, operated via 11Street continued to 
generate operating profits in 3Q19. Non-telecom contribution to revenue should 
increase further, as SKT is acquiring Korea's second-largest cable-TV operator, 
t-broad Co., Ltd. The country's Fair Trade Commission conditionally approved 
SKT's acquisition of t-broad on 8 November 2019 but limited subscription price 
increases to the rate of inflation to protect consumers. The FTC decision is 
pending approval from other Korean authorities. 

Fitch expects SKT's leverage headroom to be limited at its current rating 
despite its growing wireless operation as higher capex will be needed for the 5G 
network upgrade. We forecast its short-term leverage to remain high for the 
rating with FFO adjusted net leverage at around 1.9x (2018: 1.9x), which is 
above 1.8x threshold where we would consider 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 1.3x-1.4x 
over the medium term, providing a sufficient financial buffer to upgrade its 
network to 5G technology without significantly hurting financial 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

Media Relations: Leslie Tan, Singapore, Tel: +65 6796 7234, Email: 
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