Time to Focus on Growth Potential of Non-telecom Businesses
The author is an analyst of NH Investment & Securities. They can be reached at jaemin.ahn@nhqv.com. -- Ed.
Moving forward, we expect domestic telcos to focus on non-telecom businesses. In particular, 2021 should be the year when their non-telecom businesses begin to bloom and push up overall EVs.
Telco shares have been struggling
In 2020, telco shares have been struggling. Despite traditionally being defensive in nature, they failed to perform defensively during the steep market plunge caused by Covid-19 in early-2020, and in the following stock market rally, telcos have remained relatively ignored by investors. In other words, despite the onset of the new 5G network era, telco shares have been unable to play market leading roles. This suggests that their main telecom businesses alone can no longer drive earnings growth, leadership in the IT industry, or interest from investors. In particular, given the unique characteristics of the Korean stock market in which growth stocks drive the market, and retail investors represent a high portion of investors, dwindling interest in telcos with a low expected rate of return looks somewhat inevitable.
In order to boost investor sentiment towards the sector, telcos need to expand their non-telecom businesses to secure growth potential. In addition to their main telecom operations, domestic telcos have entered the media, commerce, security, mobility, content, and IT services arenas, and 2021 is expected to be the year when external investment, listing, and governance changes emerge in earnest that highlight these new business interests.
Nearly two years have passed since 5G was introduced in Korea
In Apr 2021, it will be two years since 5G services were first rolled out in Korea. Compared to 4G LTE services, the pace of subscriber growth has been slow for 5G. Having said that, 5G penetration is likely to rise to 18% by end-2020 and 30% by end-2021. We expect 5G subscriber growth to accelerate in 2021, helped by the launch of new 5G-capable smartphone models, including the iPhone 12 and Galaxy S20 FE (a low-end 5G model). The introduction of more affordable 5G pricing plans should also prompt an increasing number of LTE service users to switch to 5G, driving up overall 5G subscriptions.
Frequency re-allotment in 2021
As contract periods for most of 2G~4G frequency blocs allocated to the three domestic telcos are set to expire in 2021, the government is planning large-scale spectrum auctions next year. Given that heavy capex burden and low efficiency have hindered telcos from commencing 5G services utilizing the 28GHz band, we believe a rise in re-allotment costs will impose a serious cost burden on telcos. Currently, the government estimates the total re-allotment price at about W5.5tn, whereas telcos’demand price is forecasted at about W1.6tn. That said, noting the government’s Digital New Deal policy, we believe the government is well aware of the fact that 5G networks are the backbone of the infrastructure for future economic growth. In this regard, we expect the overall price to be set at a level that will encourage network investment by telcos.
Offer SK Telecom as sector top pick
We offer SKT as our sector top pick for 2021. Engaging in a wide range of businesses, SKT’s subsidiaries (including SK Hynix, SK Broadband, T-Broad, WAVVE, 11st, ADT Caps) have shown healthy performances. Governance restructuring centering on SKT is likely to drive up the values of subsidiaries and push up SKT’s share price.