SK Telecom is an attractive opportunity. Its not perfectly right to describe the company's wireless operations as having a moat, SK Telecom has proven its ability to maintain its position in the midst of a fierce price war over the last year or so. In fact, they've managed to add market share in that time period. So why would an entrenched market-leading company be available at such attractive levels? I would put forth that it is a combination of factors:
- The threat of further regulated price cuts
- General anxiety of a US-led slowdown affecting the world economy;
- Historic market discount of the S. Korean stock market.
SK Telecom is truly dominant in the wireless space, despite its regulatory handicap. Its competitors, KTF and LGT, are able to undercut SK on prices and with the MIC easing restrictions on handset subsidies, the industry has seen marketing costs and commissions soar amidst a fierce battle for market share. In this environment, SK Telecom has more than held on to its market share and KT Corp, during last quarter's earnings, signaled a possible retreat from this tactic.
Investors are also probably turned off by SK's lack of strong growth prospects. However, I have never been as focused (obsessed) as analysts on this aspect; after all, it's possible to generate growth that destroys shareholder value. As it is, SK Telecom may be the example that proves the point as I would consider the Helio venture to be a poor opportunity.
The S-Fone venture looks much better, 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). Vietnam has a huge under-served population and it is encouraging that the government there has allowed SK to own a 73% stake in the company. Management has made no mention of any interference or blockage by the Vietnamese government, which is encouraging. And, while the Vietnamese S-Fone venture is not yet cash flow positive, that market is extremely promising. That 84M country has only 25% penetration and S-Fone has impressively increased its market share to nearly 9% in a few years.
The company also has a sizable investment in China Unicom, 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.
SK Telecom is also coming into the tail end of their domestic capex cycle. They've expanded theWDCMA network with HSDPA capability, allowing for faster downloads and are working on HSDUA and WiPro buildouts (for faster uploading and wireless broadband, respectively). This should be beneficially reflected in two ways: 1) higher ARPU and margins as customers upgrade up the technology value chain; 2) increased cash flow as capex comes down.
Investors might even get a synthetic call option on North Korea. If North and South Korea ever reconcile and that market opens up, SK Telecom would be in great position to exploit that new market. Their position may even be better than KT Corporation as laying down line may be more costly, time-consuming and complicated than providing wireless service.
In the end, discounting any foreign market growth (Vietnam, US, China, Mongolia, possible North Korean reconciliation) adding anything to the top or bottom lines, SK Telecom is still the market leader in the one of the world's most advanced wireless societies. My expectations for their non-domestic businesses and their convergence strategy are very low and I am not basing the investment thesis on this.
Basically it is a question of valuation. Their cash flow, operating results and dividends should be stable going forward and the stock is priced such that it's a fairly low-risk proposition.[1]
- ↑ SK Telecom Assesment
