The South Korean telecom giant SK Telecom Corp Ltd (SKM) agreed to cut its monthly mobile service rates to aid government in easing inflationary pressure in the country.
Accordingly, SK Telecom rolled out an annual mobile tariff savings plan of KRW 750 billion ($696 million). In the new plan, the company will trim its monthly fees by KRW 1,000 to KRW 11,000 and offer 50 free text messages per month. The new plan will be effective from September.
The new plan also includes a package for smartphone users, whereby they can modify their pricing plan based on voice, data and text message service preferences.
According to the Korea Communications Committee, the move by SK Telecom will help its subscribers save KRW 28,000 annually. The other two major mobile operators KT Corp. (KT) and LG Uplus Corp are expected to move in the same direction and are currently reviewing plans to cut their tariffs. Being a less profitable company among the three major operators, LG Uplus will be affected the most by the rate cuts.
We believe the tariff cuts will have a limited impact on SK Telecom’s revenue. Given the high level of wireless penetration in the Korean market, SK Telecom is pursuing advanced technologies that will enable the delivery of new value-added services. The company is trying to advantage from the growing popularity of smartphones in the mature South Korean markets.
SK Telecom started offering Apple Inc.'s (AAPL) iPhone 4 from mid March and iPad from late April, ending the exclusive hold that its major rival, KT Corp. enjoyed since late 2009. This will likely fuel the company’s revenues and profits, as the strong adoption of smartphones will boost its growth in the wireless market.
In addition to the vast handset offerings, the company is investing heavily in high-speed Wi-Fi and data femtocell to boost network capacity in small areas. Further, SK Telecom plans to roll out more advanced mobile network services –– Long Term Evolution (LTE) services also known as 4G networks –– in order to meet the growing demand for high-speed data services.
SK Telecom plans to invest KRW 1 trillion ($890 million) over three years in smartphone services and mobile software business (i.e. to upgrade Facebook, Google Inc. (GOOG) Maps, and Apple's iTunes in handsets). This will further boost SK Telecom’s presence in the software sector and drive smartphone sales higher. The investments should augur well for the company’s future growth.
While the company’s aggressive smartphone strategy will open up opportunities in wireless data, associated promotional expenses and heavy handset subsidies may drag its earnings in the near future. Further, the company is continuously investing to improve its network visibility. We also remain cautious on intense competition, regulations by the Korean ministry and tariff reductions, which are hurting revenues.
We are currently maintaining our long-term Neutral recommendation on SK Telecom with the Zacks #3 (Hold) Rank.
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