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SK Telecom is the leading wireless telecom operator in South Korea, providing 3G voice and data services along with "convergence" services such as portals, mobile entertainment, satellite GPS, etc. They also have operations in Vietnam, the US and Mongolia as well as a significant stake in China Unicom.
[edit] Business
Market Cap: $16.8B (US$); Yield: 3.7% Valuation: Intrinsic Value: at least $40. Accumulation Range: $25 or better Risk-assessed Score: 3.10 (12.39% of price) [1]
SK Telecom, as the market leader in wireless (50.5% share), is designated a market-dominating entity and must operate under tighter restrictions than competitors KT Freecell (KTF) and LG. For example, SK's peak usage rate is 11% higher than their competitors. SK's self-posed market share limit of 52.3% ran through the end of 2007 but management has not enumerated their stance going forward.
[edit] Trends and Forces
[edit] Industry Specifics
This industry is heavily capital-intensive, most notably in the following 2 areas:
- Infrastructure - companies must spend massive amounts of capital to build out networks, run cable, etc.
- Market share - customer acquisition costs are high as wireless and broadband services are mainly price-based.
[edit] In fairly Mature Markets
South Korea is a fairly mature wireless market, with nearly 90% market saturation. Growth in the domestic market will have to come from increasing revenue in value-added services as well as getting customers to trade up the technology chain (ie from CDMA to WCDMA, WiBro, etc.) Moreover, The telecom industry is highly regulated in South Korea. Market leaders are required to adhere to more stringent guidelines than their competitors, allegedly to foster competition and consumer benefit. With an incoming, hardliner conservative President, diplomatic tensions with North Korea could ratchet up, leading to cross-border conflict. Finally, the incoming President has also vowed to lower mobile tariffs by 20%+ which has spooked investors away from the stock.
In 2006, the government lifted restrictions on handset subsidies, leading to fierce competition for market share among the three major wireless operators and compressed margins for all. And, corporate governance standards are arguably not as robust as in some Western countries. The S. Korean chaebols have gained some notoriety for not maximizing shareholder value, to put it diplomatically. SK Telecom is part of the SK Group, who has had some issues with corporate malfeasance in the SK Networks subsidiary, leading to fines and jail time for the culprits. SK Telecom leases 66% of their leased lines from SK Networks.
Like most of the chaebol, SK Telecom does engage in non-core activity and non-strategic investment. For example, they own a sizable stake in Posco, the steel company. Unfortunately, the rest of their record doesn't invite favorable comparison with Warren Buffett. Shareholders have to acknowledge that South Korean corporations may not be the most effective stewards of resources.[2]
[edit] Investments in new areas
The S-Fone venture is an interesting prospect, with SK seemingly increasing their share of new adds above their proportion relative to the market (20.6% of new adds vs. 9% market share). Also, Vietnam has a huge under-served population and with the government's blessings, the company has come up to own a 73% stake in the company based there. Management has made no mention of any interference or blockage by the Vietnamese government.
The company also has a sizable investment in CHINA UNICOM (CHU), ostensibly to build a relationship to take advantage of the Chinese market. However, other than the paper gains, little tangible gain has come out of this supposed strategic investment. As rumors have swirled for some time of a break-up of China Unicom, it is unclear what SK Telecom's strategy will be toward entering the Chinese market.
[edit] Competitors
One of their major Telecom compeitors are the KT Corporation in South Korea, is the second largest wireless provider in South Korea. Salient points of their company happen to be:
- Over 90% market share in the fixed-line market
- 44% share in the broadband market.
- 32% market share in the wireless market
- Relatively stable margins and earnings visibility in the near-future
- Fixed-line capacity allows them to target businesses more effectively.
- Flat to negative growth expected in the near-term.
- Seemingly little to no ability to take market share in the wireless market.
- Little to none Overseas Exposure
[edit] References
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