20170112-三星证券-Telecom_Services_OVERWEIGHT__11页_480kb

Sector Update Summary: Telecom Services (OVERWEIGHT)

Core Content

This document provides an analysis of the performance and outlook for the Korean telecom services sector in the fourth quarter of 2016. It includes forecasts for SK Telecom (SKT), KT, and LG Uplus, as well as a comparison with global peers, investment strategy, and key financial metrics.

Main Points

1. 4Q16 Performance Overview

• The combined operating profit of SKT, KT, and LG Uplus fell 1.8% y-y and 25.9% q-q to KRW768.5b.
• SKT likely missed estimates by 9.6%, with its subsidiary SK Planet incurring significant losses due to increased marketing costs.
• KT also missed estimates by 7.0%, attributed to higher labor costs, although it maintained earnings momentum after a one-off profit in 4Q15.
• LG Uplus exceeded estimates by 5.8%, primarily due to recognizing spectrum amortization costs from December 2016 and lower incentive payments compared to 2015.

2. Wireless and Fixed-Line Sales Growth

• Combined wireless and fixed-line sales grew 3.2% y-y and 1.4% q-q in 4Q16.
• Fixed-line ARPUs rebounded due to subscriber additions and reduced competition.
• Wireless sales were driven by increased data usage, not subscriber growth, with LTE users averaging over 5Gb per month.

3. Key Drivers of Earnings Decline

• Marketing costs rose 4.5% q-q due to the absence of Galaxy Note 7-related revenue.
• Spectrum amortization costs increased by KRW49.6b y-y, particularly for SKT and LG Uplus.

4. Investment Strategy

• KT is highlighted as the top near- and medium-term pick due to its attractive 9.6x 2017 P/E ratio following a 12.1% drop in share price since November 2016.
• SKT is also recommended due to expected earnings momentum and corporate governance improvements.
• LG Uplus is advised to be monitored for its 1Q17 performance, as concerns remain around spectrum amortization cost recognition.

5. Valuation Analysis

• KT has a 10.4x 2016E P/E and 9.6x 2017E P/E, with a 26.8% dividend yield.
• SKT has a 13.3x 2016E P/E and 10.8x 2017E P/E, with a 43.9% dividend yield.
• LG Uplus has a 10.8x 2016E P/E and 9.5x 2017E P/E, with a 32.8% dividend yield.
• KT is considered the most attractive among the three, with the lowest P/E ratio and a favorable valuation.

Key Information

4Q16 Financial Highlights

• SKT:
  • Operating profit: KRW346b (missed estimates by 9.6%)
  • Net profit: KRW423b (exceeded estimates by 27.6%)
• KT:
  • Operating profit: KRW246.3b (missed estimates by 7.0%)
  • Net profit: KRW120b (exceeded estimates by 9.3%)
• LG Uplus:
  • Operating profit: KRW176b (exceeded estimates by 5.8%)
  • Net profit: KRW91b (exceeded estimates by 0.4%)

Target Prices

• KT: KRW40,000 (37.9% upside from current price)
• SKT: KRW260,000 (14.3% upside from current price)
• LG Uplus: KRW15,000 (30.4% upside from current price)

Key Trends

• Wireless subscriber growth was 4% y-y, but low ARPUs limited sales contributions.
• Data usage increased, leading to upselling opportunities, especially with LTE unlimited tariff plans.
• Fixed-line broadband continued to grow, while IPTV growth slowed due to bundled product adoption and reduced marketing efforts.

Market Position

• KT is seen as the most undervalued and has the strongest earnings momentum.
• SKT benefits from strong equity-method gains from SK Hynix and a potential restructuring.
• LG Uplus is expected to maintain strong growth, with spectrum amortization costs likely to be offset by sales expansion.

Conclusion

The Korean telecom sector is expected to recover, with KT, SKT, and LG Uplus all showing potential for growth. KT is the top recommendation due to its attractive valuation and strong earnings momentum, followed by SKT and LG Uplus. Investors should monitor LG Uplus's 1Q17 performance for further clarity on its long-term prospects.