KT's Core Telecom Business Is Solid With Growth From B2B and Cloud Services

South Korea has traditionally displayed many of the factors we like in a telecommunications market. On the wireless side, there are only three national operators with their own networks, and they have behaved rationally, particularly over the past three to four years. On the fixed-line side, competition has been restrained, as there are no major cable operators. However, the regulator can be inconsistent and is too involved in decisions that we think should be left to the market, and the operators have on occasion behaved less rationally. KT is the incumbent fixed-line telecom operator in Korea. The firm is also the largest broadband provider and second-largest wireless telecommunications operator. It has a growing television business and is entering into other businesses, including cloud computing and payment processing. 

We like KT's position in the telecommunications market. After several years of strong competition, the dominant mobile operator, SK Telecom, allowed its market share to fall below 50% during 2015 and it has gradually fallen to around 43% since then, which we see as a sign that mobile market competition may have decreased a bit. The South Korean government has also encouraged reduced marketing expenses several times, which is also helping profitability in the mobile market. 

KT recovered after reporting losses in both 2013 and 2014 and being forced to cut its dividend in 2014 to preserve cash on its stretched balance sheet. It returned to paying a dividend in 2015 and by 2021 was back to a 50% dividend payout ratio. The potential earnings from its less visible real estate portfolio could provide some upside to the company's earnings after the easy cost-cutting is complete. Additional upside could be provided by improving profitability from its fast-growing IPTV business. The IDC and cloud services businesses have been showing strong growth recently and we would expect KT to skew investment toward those over the next few years. The company has also outlined an aggressive investment plan for artificial intelligence.

Business Strategy & Outlook

We give KT a no moat rating based on the company’s low returns as compared with its cost of capital. We would normally expect a three-operator telecom market with mature operators to allow all operators to earn returns above cost of capital due to the efficient scale moat source where new entrants are precluded from market entry due to the very high cost of entering the market and uncertainty around the new entrants building enough scale to be viable. However, we have seen the Korean telecom operators earning average consolidated returns below their costs of capital over the past 10 years, despite enjoying a stable three-player market structure for the whole of this period. We see this as largely a result of 1) The operators being very competitive with each other and 2) The two largest operators, SK Telecom and KT, investing aggressively in no-moat nontraditional telecom businesses.

Given the market share advantages that KT and SKT have in the key mobile, fixed line broadband, and Pay TV markets, we would have expected them to earn at or above cost of capital returns from their telecom assets, but consolidated ROICs have been below WACC. We believe this is largely a function of the companies’ investment in nontelecom businesses such as artificial intelligence, e-commerce, and Metaverse social media. We’ve seen KT and SKT consistently invest in these types of businesses over the past 10 years, with SKT investing in semiconductor manufacturer SK Hynix in 2012, and making a string of acquisitions in security businesses. LG Uplus has far fewer investments outside its core telecom business, which we believe explains why its ROIC does not appear to be significantly lagging the other operators, despite its scale disadvantages.

Another reason for low returns for operators in Korea’s telecom market often cited is the highly competitive culture in Korea, with the most famous example being the extremely competitive schooling and education. It is difficult for us to verify this, but it could help explain why the telecom companies have always competed very hard against each other. 

Despite the Korean government attempting to attract a new, fourth mobile operator at least three times during the period from 2010 to 2020, no new licenses were awarded. Some small companies did make bids for licenses but were rejected by the regulators. Larger international telecom companies were reportedly concerned about the difficulties of entering the market due to cultural and language differences and did not bid for licenses. The Korean market was also already very well served by existing operators and was very competitive. Korean regulators are expected to announce policy changes to allocate 28 GHz mobile network to a new entrant and the government has indicated that it will provide incentives to the newcomer in the form of tax cuts and loans. Given the struggles that new mobile entrants have had to date in Singapore and Japan, and the history of little interest in new licenses in Korea, we do not expect much interest in this license from serious mobile operators. 

KT generates around 60% of its revenue from traditional telecom services and the remainder from nontraditional telecom services such as ICT, data centers, cloud services, robot, blockchain, energy, and real estate. We see these businesses as generally operating in competitive markets where KT has few competitive advantages, except perhaps real estate where it is monetizing telecom real estate that it no longer needs as network equipment gets smaller and it consolidates buildings required for its network. 

China is another three-player telecom market where we have two companies surprisingly without a moat and only one, China Mobile, with a moat. All three operators are controlled by the Chinese government, which has shown a tendency to push telecom prices down to benefit the broader society to the detriment to the telecom operators. China Mobile has been able to maintain returns above cost of capital due to its dominant market share, while the smaller China Unicom and China Telecom have consistently earned returns below cost of capital.

None

Economic Moat

KT Corporation

KT Corp. engages in the provision of integrated telecommunication services. The company operates through the Customer and Marketing businesses. Its services include wire and wireless phones, internet, and other communication. The company was founded on December 20, 1981 and is headquartered in Seongnam-si, South Korea.

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SK Telecom Co., Ltd.

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The fast-track 5G rollout and solid wireless traction should help the Zacks Wireless Non-US industry thrive despite short-term headwinds. TIMB, SKM and KT are well-positioned to make the most of the demand for seamless connectivity solutions.

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KT Corporation (KT) Q4 2023 Earnings Call Transcript

Should Value Investors Buy KT (KT) Stock?

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KT Corporation (NYSE:KT ) Q3 2023 Earnings Conference Call November 7, 2023 1:00 AM ET Company Participants Seung-Hoon Chi - Investor Relations Young-Jin Kim - Chief Financial Officer Conference Call Participants Hoi Jae Kim - Daishin Securities Jisoo Jeong - Meritz Securities Joonsop Kim - KB Securities Seyon Park - Morgan Stanley Young-Jin Kim [Call starts abruptly] Our salary negotiations were reflected in Q4 last year, while we were able to smooth our content sourcing cost this year. In this regard, operating income has increased Y-o-Y in both consolidated and stand-alone basis to continue solid growth.

KT Corporation (KT) Q3 2023 Earnings Call Transcript

KT's positives are that a new CEO is expected to be formally appointed soon and the company did a good job managing costs in Q2. The key negatives relating to KT are that the company's future earnings and dividends could potentially miss expectations. I have a Neutral view of KT Corporation stock as an investment candidate, considering both positives and negatives relating to the stock.

KT Corporation: Consider Both Positives And Negatives

KT Corporation (NYSE:KT ) Q2 2023 Earnings Conference Call August 7, 2023 3:00 AM ET Company Participants Seung-Hoon Chi - Investor Relations Young-Jin Kim - Chief Financial Officer Conference Call Participants Hoi Jae Kim - Daishin Securities Sean Lee - Citigroup Aram Kim - Shinhan Securities Operator [Foreign Language] Good morning and good evening. Thank you all for joining this conference call.

KT Corporation (KT) Q2 2023 Earnings Call Transcript

SEOUL, SOUTH KOREA / ACCESSWIRE / August 7, 2023 / HFR, Inc. (KOSDAQ 230240), the leading ICT solutions provider in Korea, today announced that it will collaborate with KT Corporation (KRX:030200; NYSE:KT), Korea's largest telecommunications service provider, to advance technology development, expand private 5G (P5G) use cases, and support digital transformation (DX) for small to medium-sized enterprises, local governments and public enterprises. The two companies signed a memorandum of understanding (MOU) at KT's Songpa building in Seoul, Korea.

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The shortlisting of potential CEO candidates for KT is expected to be completed in July, but there is the risk of a delay due to political pressures. It is also reasonable to be concerned about the potential changes to KT's dividend policy and corporate strategy under the charge of a new CEO. It will be premature to upgrade KT to a Buy, given that it is still uncertain who will be its new CEO, and when he or she can be appointed.

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KT Corporation (NYSE:KT ) Q1 2023 Earnings Conference Call May 11, 2023 3:00 AM ET Company Participants Seung-Hoon Chi - Investor Relations Officer Young-Jin Kim - Chief Financial Officer Conference Call Participants Jaemin Ahn - NH Investment & Securities Soojin Kim - Mirae Asset Securities Sean Lee - Citigroup Operator [Foreign Language] [Interpreted] Good morning and good evening. Thank you all for joining this conference call.

KT Corporation (KT) Q1 2023 Earnings Call Transcript

SEOUL, South Korea , April 28, 2023 /PRNewswire/ -- KT Corporation (NYSE: KT), South Korea's largest integrated telecom and digital platform service provider, announced that it has filed its Form 20- F Annual Report on April 28, 2023 for the year ended December 31, 2022 with the Securities and Exchange Commission of the United States. The report can be accessed on KT's English website at https://corp.kt.com/eng in the Investors section under Business Report as well as the SEC's Edgar database at http://www.sec.gov/.

KT Corp. Files 2022 Annual Report on Form 20-F

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KT Corp. (KT) appears to have found support after losing some value lately, as indicated by the formation of a hammer chart. In addition to this technical chart pattern, strong agreement among Wall Street analysts in revising earnings estimates higher enhances the stock's potential for a turnaround in the near term.

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KT Corporation (NYSE:KT ) Q3 2022 Results Conference Call November 8, 2022 1:00 AM ET Company Participants Kim Young Jin - CFO Conference Call Participants Hoi Jae Kim - Daishin Securities Joonsop Kim - KB Securities Neale Anderson - HSBC Unidentified Company Representative [Foreign language] Good afternoon. Let's begin KT's Third Quarter 2022 Earnings Presentation.

KT Corporation (KT) Q3 2022 Earnings Call Transcript

The prospects of KT Corporation's telecom business are good, considering the potential uplift in wireless ARPUs from an increase in 5G penetration rate and the introduction of value-added services. KT's non-telecom businesses like media & content and cloud & internet data center stand out for their growth potential.

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News for KT Corporation Stock (KT)