Korea’s wireless stocks weak due to earnings concern despite rising Kospi

[Photo by Yonhap]

Shares of wireless carriers in South Korea have underperformed on the lack of growth potential and governance-related uncertainty, while strong tech stocks, such as artificial intelligence and battery have helped the Kospi rise 17 percent this year.

According to the Korea Exchange on Monday, shares of KT Corp. fell by 9.76 percent from the very beginning of the year. It represented a 22 percent decline from its highest point in August. SK telecom Co. and LG Uplus Corp. rose 3.69 percent and 2.17 percent in the same period, respectively. Their earnings were relatively more robust than KT, yet still underperformed the Kospi return of 17.57 percent.

The weak earnings in telecom stocks were derived from their lack of growth potential.

The industry of the fifth-generation (5G) network has slowed growth. According to data released by the Ministry of Science and ICT, the number of new subscriptions in the 5G network has been trending downward since 2022, following the previous three years of increase between 2019 and 2021. New subscriptions fell to 7.14 million in 2022 from 9.06 million in 2021. The number as of April stood at 1.97 million.

The financial data tracker FnGuide Inc. found that the combined net profits of the top three wireless carriers in South Korea soared in 2021 only to start a decline.

SK telecom earned 2.41 trillion won ($1.87 billion) in net profit in 2021. However, this year’s figure is expected to fall to 1.11 trillion won. KT and LG Uplus are also projected to post 12.5 percent and 3.8 percent lower net profits this year compared with 2021. Telecom stocks deliver high share dividends, with more than 5 percent of annual returns, so a slow inflow of new capital in telecom stocks following weaker net profit can lower their share dividends in the long-term prospect.

Chances are that the network sector will face intense competition as the government plans to announce measures aimed at promoting competition among wireless carriers. A rise of a new telecom service provider can hamper profitability for the current three market players.

Market valuations for telecom stocks have fallen in the wake of low growth potentials and the chances of new competitors. SK telecom said its price-to-book ratio (PBR) was below 1 to come at 0.91x. The company’s PBR between 2002 and 2003 was as high as at least 2x. The ratios for KT and LG Uplus came at 0.42x and 0.57x, respectively, suggesting that they also became less attractive to investors.

Market analysts said SK telecom and LG Uplus are more attractive than KT because the latter has suffered ongoing uncertainty involving corporate governance. The long-lasting absence of a chief executive officer has raised concerns over the company’s governance.

The net selling by foreign investors on KT to date was worth 238.3 billion won.