Top Pick: KT
The author is an analyst of NH Investment & Securities. He can be reached at jaemin.ahn@nhqv.com. -- Ed.
This year, telecom stocks have fared relatively well within a challenging stock market. While they have lost momentum as high-dividend plays amid interest rate hikes in 2H22, we maintain a Positive stance towards the telecom service sector, noting both earnings growth and a turn for the better in the business environment.
The recent fire at a major data center has underscored the importance of telecommunications services in our daily lives. In 2023, telcos are to keep evolving in line with new developments, such as rising demand for IDCs and cloud businesses, net neutrality issue, and investment in content businesses. They are expected to display solid growth in 2023, backed the steady growth of their core 5G network business.
We continue to present KT as our top pick for the telecom service sector. Although its earnings growth stands out among Korea’s three major telcos, its shares remain undervalued. We draw attention to its well-balanced portfolio of telecom and non-telecom businesses, stemming from earnings growth at non-telecom subsidiaries.
I. Business environment turning for the better
The fire at SK C&C’s Pankyo data center on Oct 15 has highlighted the importance of seamless and stable telecommunications networks. Also, the issue of net neutrality has drawn attention in the market after Twitch’s reduction of its maximum video quality and the lawsuit between Netflix and SK Broadband. Upon the end of net neutrality, telcos’ network investment burdens should ease. KT Studio’s investment success with Extraordinary Attorney Woo, the biggest hit drama of the year, has made it easier for the firm to export its content, encouraging telcos to make more aggressive investments in their content domains. As such, business conditions for the telecommunications industry are improving steadily.
II. Demand for IDCs and cloud to expand further
With demand for data center services to rise further going forward, we foresee promising new business opportunities arising for telecom players in the IDC arena. As it generally takes a considerable time to complete construction of data centers, supply is highly likely to fall short of demand. Domestic telcos are drawing on their longstanding experiences in telecom network operations for their IDC ventures. Cloud and IDC businesses are also expected to create strong synergies.
III. Foresee solid earnings growth based on 5G network domains
With 5G forecasted to be the main communications network, the 5G penetration rate is projected to exceed 60% in 2023. Backed by rising 5G penetration rates and normalization of roaming sales, ARPU is to rise steadily in 2023. Subscription-based services promise to drive additional sales growth at telcos. Once having passed the intense 5G competition period, marketing competition has eased considerably. We predict that stable market conditions will sustain through to the launch of 6G services in the late-2020s. Also, as 5G coverage is now available in all major regions of Korea, telcos’ 2023 capex levels should remain similar y-y.
IV. Top pick: KT
We maintain a Positive rating on the telecom service sector for 2023, drawing attention to both earnings growth and a turn for the better in the business environment. We continue to present KT as our sector top pick. Although its earnings growth stands out among Korea’s three major telcos, KT’s shares remain undervalued. We draw attention to its well-balanced portfolio of telecom and non-telecom businesses, stemming from earnings growth at non-telecom subsidiaries.