Competitiveness in IPTV Content Strengthening
The author is an analyst of Shinhan Investment Corp. He can be reached at mj1224@shinhan.com. -- Ed.
Initiate coverage with BUY and target price of KRW18,000
We initiate coverage of LG Uplus at BUY for a target price of KRW18,000 and recommend it as our sector top pick. Increase in 5G subscribers and solid earnings from IPTV operations should drive overall growth. Our target price is based on the average EV/EBITDA (4.2x) of 2011-2019, a period of ARPU decline due to regulations on fee plans and intense competition for subscribers. We believe LG Uplus deserves to trade at a premium with ARPU entering an uptrend, but applied the past average in reflection of the current market environment. Holding company LG Corp has been additionally purchasing KRW90bn worth of LG Uplus shares since April 2, creating favorable supply-demand conditions for a share price rally.
2020 operating profit forecast at KRW765.2bn (+11.8% YoY)
LG Uplus is expected to have secured sales of KRW3.38tr (+12% YoY) and operating profit of KRW182.2bn (-10.2%YoY) in 1Q20. Net subscriber additions to 5G services likely stood at 305,000 (+15,000 QoQ), remaining at disappointing levels considering the release of new smartphones such as Galaxy S20. However, marketing spend should have declined QoQ on eased competition.
For 2020, we forecast sales at KRW14.2tr (+11.3% YoY) and operating profit at KRW765.2bn (+11.8% YoY). The company's market share in 5G subscribers is higher than that in total subscribers. Meanwhile, the acquisition of CJ Hello (now LG HelloVision) is expected to boost sales by KRW1.1tr per year and operating profit by KRW10bn per quarter going forward. Considering the time needed to share distribution networks and improve competitiveness with bundled products, we expect operational synergy to become visible from 2H20,.
Strengthening competitiveness in IPTV content
Improvement in content competitiveness is helping LG Uplus expand its presence in the pay TV market. The company's Kid’s World platform for children's content ranks high on consumer preference. In addition, the company has secured a wide variety of differentiated content thanks to the exclusive agreement signed with Netflix in November 2018.
Reinforced competitiveness in content is leading to visible market share gains. The company's total market share increased from 8.4% in 1H15 to 12.4% in 1H19 and IPTV market share (KT Skylife excluded) from 22.5% to 25.6% (+3.1%p). We expect to see steady growth of the company's IPTV business continue on steady addition of new and competitive content.