Telcos Set for Share Price Hikes
The author is an analyst of NH Investment & Securities. He can be reached a t jaemin.ahn@nhqv.com. -- Ed.
Following a tepid 2019, 5G effects are to start being seen in earnest this year. Thus, having declined over the past few years, sector OP should finally enter a growth cycle from 2H20.
Telecom service industry set for share price hikes in 2H20
With 5G service effects to start in earnest, the telecom service industry should enter into a full-fledged OP growth cycle from 2H20. Anticipating strong share price rebounds for Korea’s three telcos, we reaffirm our Positive rating on the domestic telecom service industry.
The share prices of telcos, which have failed to act as defensive plays during the Covid-19 crisis, are now turning around in sync with a recent rise in the Kospi. The sector’s 1Q20 results confirm that increases in 5G subscriber numbers translate into higher wireless sales and OP.
Revenue growth to drive telcos’ earnings improvement
The growth potential of Korean telcos is evidenced in their 1Q20 results. Revenue has decreased over the past several years due to stricter regulations (since 2015), including monthly plan rate cuts. Going forward, however, we expect telcos to enjoy revenue and OP growth in line with rising numbers of 5G subscribers. Thanks to 5G, we anticipate from 2H20 a repeat of the ARPU, revenue, and OP improvement witnessed in 2012 in response to the introduction of 4G LTE.
Led by a rise in ARPU on the back of 5G subscriber growth, we expect Korea’s three telcos to book combined 2020 wireless revenue of W23.4tn (+5.3% y-y).
Meanwhile, marketing expenses, having been stable since 4Q19, have decreased as of late on a drop in handset sales amid the Covid-19 crisis. Although we expect to see a temporary strengthening in marketing competition around the releases of both the Galaxy Note 20 in 3Q20 and the iPhone 12 in 4Q20, we do not foresee a return to the irrational competition witnessed last year.
On top of that, we anticipate that favorable earnings momentum will be spurred by: 1) greater content consumption; 2) higher IPTV sales; 3) M&As of pay TV companies; and 4) Netflix-related network neutrality issues.