Consumers Subscribing to 5G Services out of Necessity
The author is an analyst of KB Securities. He can be reached at joonsop.analyst@kbfg.com. -- Ed.
2Q20 earnings top market consensus by 7.2%
The three Korean telcos’ combined 2Q20 OP came in at KRW941.0bn, beating the market consensus of KRW877.0bn (FnGuide) by 7.2%. Performance was driven by stronger-than-expected earnings for wireless businesses (i.e., rise in no. of ARPU and 5G subscribers; drop in marketing costs), an increase in no. of IPTV and broadband internet subscribers and earnings improvement at other business segments.
No. of 5G subscribers up 1.49mn despite social distancing and curbed marketing spending
The telcos increased their no. of 5G subscribers by 1.49mn, with marketing costs totaling KRW1.92tn (+2.5% YoY; standalone): KRW754.0bn for SKT, KRW618.9bn for KT and KRW557.0bn for LGU. Meanwhile, cash costs declined YoY. The no. of 5G subscribers jumped despite social distancing and curbed marketing spending. The telcos did not spend much on marketing probably because, despite complaints over 5G quality, consumers are subscribing to 5G services out of necessity.
Telcos to reduce marketing efforts should no. of 5G subscribers continue to increase by 1.5mn per quarter
If the no. of 5G subscribers continues to increase by 1.5mn per quarter amid no major increases in marketing spending, 5G subscribers will account for 20%, or 10.5mn, of mobile service subscribers by end-2020 vs. the telcos’ forecast of 12mn (5.5mn for SKT, 4.5mn for KT), according to Radio News (May 16). Given the KRW500k subsidy for mobile-phone purchases (for KRW90,000 phone plans) and the price tags of flagship smartphones (Galaxy S20 and Fold 5G at KRW1.35-2.00mn), the telcos are unlikely to significantly increase marketing spending, choosing to focus more on maintaining cost efficiency.
Release of more 5G mobile phones to boost 5G subscriber numbers
The expanding variety of 5G mobile phones is also contributing to the increase in no. of 5G subscribers. Recent trends show a rapid increase in the release and sale of low-priced products; the new Galaxy A51 and A71 are selling at around KRW500,000 (vs. KRW1.3mn for existing 5G products). In addition, prices of previously released premium products are falling (e.g., the price of the Galaxy S10 5G fell from KRW1.2mn to KRW1.0mn). The release of cheaper models and falling premium model prices are attracting consumers to 5G services. 2H20 will see even more low-/mid-end 5G models released.
Positive outlook on Telecom with KT as industry top pick
We maintain a positive outlook on Telecom. In 2H20, stock price catalysts will be growth in B2B 5G services and earnings growth spearheaded by improving wireless service earnings. We favor KT as our industry top pick.