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Telecom services-Competition concerns overblown

May 16, 2014 08:49|May 16, 2014 08:49
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Fear of excessive competition after business suspensions end
Despite the handset distribution bill’s passage, telco stocks currently
underperform the market. As all three telcos will be free from the sequential
business suspensions (March 13-May 19) imposed by the Ministry of Science,
ICT & Future Planning (MSIP), there are fears that intense competition may
return before the law comes into force. Although the telcos may gear up more
aggressive marketing drives in 3Q14 compared to 2Q14 when business was
suspended, the magnitude of competition is unlikely to be as fierce as the
market expects. Even if competition rises, it should be short-lived.

Competition relievers outweigh boosters
In 3Q14, we believe factors that will ease competition for customers will
outweigh stoking aspects. Factors that would boost competition include 1)
customer luring strategies before the handset distribution law takes effect, 2)
demand for mobile number portability (MNP) pent up due to the suspensions
and 3) overlapping market share targets among telcos. But the circumstances
that will help mitigate competition are more significant. 1) Details of the new
law that ensure reasonable subsidy offers and introduce standards to measure
the magnitude of competition will keep in check any telco that ignites a
marketing battle. 2) A player that starts excessive competition will be
disadvantaged in regard to the Korea Communications Commission’s (KCC)
business suspension and the MSIP's spectrum allocation. 3) With new LTE
subscribers’ ARPU being lowered, telcos see less incentive to increase
subsidies. Ex-factory price cuts for handsets of late also reduce the telcos’
subsidy burden.

Profitability to improve from 2Q14; Maintain Overweight
The telcos’ profitability should improve with OPM widening from 5.5% in 1Q14
to 13.3% (excl. KT’s early retirement incentives) in 2Q14 when business was
suspended. Profitability should remain healthy at 12.4% in 3Q14 with
excessive competition held in check and also in 4Q14 with the handset
distribution law taking effect. Shares should advance on eased competition
and better margins. We maintain Overweight on the telecom sector. Tighter
regulation on handset subsidies will have a more favorable impact on firms in
the order of their market position.
*For more, pls refer to the attached file.
*Source: Korea Investment & Securities Co.