EUR 850.00 For Business Accounts Only

Morningstar | SK Telecom Riding on SK Hynix's Memory Strength

SK Telecom's telecom market position is very strong, and we like the free cash flow it generates. However, its capital-allocation decisions leave us underwhelmed. SK Telecom was Korea's first wireless operator, and we believe it has done a great job of maintaining a dominant position. The firm continues to claim just under 50% wireless market share, including the leading position among postpaid contract customers, which provides it with the highest average revenue per user among Korean wireless operators. Historically, Korea has been on the cutting edge of personal technology. Its 90%-plus penetration rate of broadband subscribers is one of the highest in the world. It has also been a speed leader, with fixed-line carriers first offering 100 MB/s speeds in 2006. To tap into the fixed-line market and protect itself from further encroachment by KT into its wireless business, SK Telecom acquired a stake in Hanaro Telecom (now SK Broadband), Korea's second-largest fixed-line operator, in 2008, which it subsequently turned into 100% ownership. While this acquisition immediately increased consolidated revenue, its earnings impact has been limited. To bolster its growth rate, SK Telecom has made several investments in other countries and industries over the years. At best, the firm has a mixed record here. Despite SK Hynix Semiconductor's strong stock price performance (SKT's USD 3.1 billion investment in February 2012 had increased in value by over 100% by June 2018), we remain very disappointed with this acquisition from a strategic perspective. The firm has also been increasing its position in ancillary businesses, such as Internet portals and shopping, as well as financial operations. While we see the potential here, we are not projecting significant success. During 2015, these businesses generated KRW 4.6 trillion in revenue, but at an operating margin of only 1.1%, and slipped back into operating loss territory in 2016 and continued to report losses in 2017 and early 2018. We would prefer SK Telecom to focus more on its core narrow-moat telecom business and return excess cash to shareholders, but this looks unlikely to happen.