5G Service Quality Improving
The author is an analyst of NH Investment & Securities. They can be reached at jaemin.ahn@nhqv.com. -- Ed.
5G service quality improving
In Apr 2021, it will become two years since 5G services were first introduced in Korea. Compared to 4G LTE services, the pace of subscriber growth appears slower for 5G services. Having said that, 5G penetration is likely to rise to 18% by end-2020, and to 30% by end-2021. Tending to greater push up ARPUs versus LTE networks, 5G services are driving up overall wireless revenues as well as profitability at telcos.
We expect 5G subscriber growth to accelerate in 2021, helped by the launch of 5G-capable smartphone models, including the iPhone12 and the Galaxy S20 FE (a relatively lower-end 5G model). The introduction of more affordable 5G pricing plans is likely to prompt an increasing number of LTE service users to switch to 5G, in turn driving up overall 5G subscriptions.
Widening indoor 5G coverage also bodes well for 5G subscriber growth. Of note, 5G speeds are currently sized at around 200Mbps, a level that is around 5x higher than the 43Mbps for 4G services.
While telcos engaged in excessive competition to secure early leadership in the 5G market, such competition began to ease in 4Q19. In addition, with telcos’ business portfolios widening to include non-telecom services (including B2B solutions and media, OTT, content, and IDC services), the possibility of margins deterioration stemming from excessive 5G marketing expenses should remain limited for now.
Even amid slower-than-expected ARPU growth, wireless revenue at domestic telcos to be pushed up by subscriber mix improvement
ARPUs to recover in 2021
Even amid rising numbers of 5G subscriptions at three domestic telcos, ARPU figures at telcos are increasing at a slower-than-expected pace. We attribute this gap to the fact that while growth in new mobile phone subscribers remains limited, the number of overall subscribers (including those subscribing to IOT and M2M (machine to machine) services as well as those with second devices) is increasing at a fast rate.
Given such, it has become increasingly challenging to use ARPUs as a major barometer for gauging telcos’ earnings growth. Still, we expect ARPUs at domestic telcos to recover in 2021, helped by the releases of more affordable 5G pricing plans (W40,000~50,000 per month), and upselling strategies targeted at LTE subscribers.
Combined wireless revenue for three Korean telcos to rise 6.0% y-y in 2021
Considering: 1) subscriber mix improvement led by rising numbers of 5G subscriptions; and 2) revenue increase on expanding IOT/M2M subscriptions, we expect the three domestic telcos to book combined 2021 wireless revenue of W23.3tn (+6.0% y-y; SKT: W10.5tn (+5.0% y-y), KT: W7.1tn (+8.1% y-y), LG U+: W5.7tn (+5.2% y-y)).
Marketing expenses: Turning to decline in 2021
Marketing costs stabilizing in 2020We predict that the marketing war between telcos will remain subdued in 2021. Following intense marketing over 2Q19~3Q19 to attract 5G subscribers, the telecom marketing landscape began to loosen up somewhat from 4Q19. Given that telcos have been focusing on non-telecom business expansion (B2B, media, OTT, content, and IDC), chances are slim that marketing expense burden will weigh on telcos’ earnings for now. In detail, marketing expenses at major telcos should remain stable in 2021, as: 1) the impacts of the adoption of new IFRS15 accounting standards in 2018 (under which the incremental costs of obtaining a contract are recognized as an asset and are amortized over the expected contract period) should fade from 2021; and 2) marketing competition began weakening from early-2020. The combined marketing expenses of the three domestic telcos is estimated to rise 1.1% y-y to W7.75tn in 2020 (W2.96tn for SKT, W2.49tn for KT, and W2.31tn for LG U+), and up 2.8% y-y to W7.89tn in 2021 (W2.98tn for SKT, W2.51tn for KT, and W2.41tn for LG U+).
Cash flow to recover gradually
In 2019, cash flow at telcos declined sharply as overall expense burden soared sharply due to heavy 5G network investment upon the commercialization of 5G services and subsequent marketing campaigns to attract 5G service subscribers. That said, we predict their combined cash flow will recover gradually going forward.